In re: Darin Davis ( 2019 )

FILED
JAN 31 2019
NOT FOR PUBLICATION
SUSAN M. SPRAUL, CLERK
U.S. BKCY. APP. PANEL
OF THE NINTH CIRCUIT
UNITED STATES BANKRUPTCY APPELLATE PANEL
OF THE NINTH CIRCUIT
In re: BAP Nos. CC-18-1158-FKuTa
CC-18-1163-FKuTa
DARIN DAVIS, (Related appeals)
Debtor. Bk. No. 1:10-bk-17214-VK
ASPHALT PROFESSIONALS, INC., Adv. Pro. 1:10-ap-01354-VK
Appellant,
v. MEMORANDUM*
DARIN DAVIS,
Appellee.
Argued and Submitted on January 24, 2019
at Pasadena, California
Filed – January 31, 2019
Appeal from the United States Bankruptcy Court
for the Central District of California
*
This disposition is not appropriate for publication. Although it may be cited for
whatever persuasive value it may have, see Fed. R. App. P. 32.1, it has no precedential
value, see 9th Cir. BAP Rule 8024-1.
Honorable Victoria S. Kaufman, Bankruptcy Judge, Presiding
Appearances: Ray B. Bowen, Jr. argued on behalf of appellant Asphalt
Professionals, Inc.; Alan Wayne Forsley of Fredman
Lieberman Pearl LLP argued on behalf of appellee Darin
Davis.
Before: FARIS, KURTZ, and TAYLOR, Bankruptcy Judges.
INTRODUCTION
Chapter 71 debtor Darin Davis and creditor Asphalt Professionals,
Inc. (“API”) have been entangled in litigation in state court since 2005.
After two trials in state court and two trials in the bankruptcy court, the
bankruptcy court adjudicated API’s §§ 727(a) and 523(a) claims in favor of
Mr. Davis. API argues on appeal that the bankruptcy court deprived it of
due process, improperly relitigated issues already decided by the state
court, and made erroneous factual findings.
We discern no error and AFFIRM.
1
Unless specified otherwise, all chapter and section references are to the
Bankruptcy Code, 11 U.S.C. §§ 101-1532.
2
FACTUAL BACKGROUND2
A. Mr. Davis’ entities and development projects
1. The Whitman Project
Mr. Davis was a developer of small real estate projects through
various limited liability companies that he formed with other investors. He
personally held a general builder contractor’s license, but his LLCs did not
possess any such license. (The state license board was not authorized to
issue contractor’s licenses to LLCs during the relevant time periods.)
Instead, his LLCs developed projects as “owner-builders,” and he
associated his personal contractor’s license with each project.
Mr. Davis and a partner formed T.O. IX, LLC (“T.O.”) to develop the
“Whitman Project,” which consisted of nine homes in Thousand Oaks,
California. Mr. Davis obtained building permits for the Whitman Project
using his personal contractor’s license number.
API is a general engineering contractor that builds roads, streets, and
sidewalks. T.O. and API entered into a construction subcontract agreement
(“Subcontract”) for work on the Whitman Project. The Subcontract
identified T.O. as the “owner/builder” of the Whitman Project but did not
disclose a contractor’s license number for either T.O. or Mr. Davis. Later, a
2
We borrow from the bankruptcy court’s detailed rulings. We also exercise our
discretion to review the bankruptcy court’s docket, as appropriate. See Woods &
Erickson, LLP v. Leonard (In re AVI, Inc.), 389 B.R. 721, 725 n.2 (9th Cir. BAP 2008).
3
project manager for D&S Homes, Inc. (“D&S Homes”),3 provided API with
Mr. Davis’ contractor’s license number. API did not verify whether T.O.
held a valid contractor’s license.
API was responsible for altering a median on a public roadway. It
was forced to stop work when it discovered a problem with the site plans
that would have resulted in a safety hazard. API then realized that the
original site plan was based on a thirty-three-year-old as-built survey. API
refused to continue work until D&S Homes updated the site plan or paid
API to do so.
In April 2005, D&S Homes told API that it had violated the terms of
the Subcontract and terminated the agreement. T.O. back-charged API
$80,000 for the cost of another subcontractor to complete the street.
2. Licensing violations
In April 2004, the California State License Board (“CSLB”) cited
another of Mr. Davis’ LLCs for work on another development project.
Mr. Davis then learned that the “owner/builder” exception only applied to
projects with four homes or fewer and that a licensed contractor was
required for larger projects.
The Whitman Project included nine homes, and T.O. was an LLC
which, at the time, could not hold a contractor’s license. Mr. Davis
3
D&S Homes owned sixty percent of T.O. It appears that D&S Homes was the
primary point of contact on the Whitman Project.
4
attempted to remedy the licensing issue by forming another company,
Fairland Construction, Inc., to act as T.O.’s management company and
obtain a contractor’s license.
Mr. Davis believed that he had solved the licensing problem; but in
July 2007, CSLB issued citations to T.O. for its lack of a contractor’s license.
B. The state court litigation
In September 2005, API sued T.O., Mr. Davis, and others in state
court (the “State Court Action”) for breach of contract, foreclosure on a
mechanic’s lien, fraud, conspiracy, and quantum meruit.
C. Mr. Davis’ bankruptcy case
In June 2010, before API’s claims went to trial in the State Court
Action, Mr. Davis filed a chapter 7 petition. API filed a timely adversary
complaint seeking a denial of Mr. Davis’ discharge under §§ 727(a)(2)(A),
(a)(2)(B), and (a)(4), and a determination that the debt arising from the
Subcontract was nondischargeable under § 523(a)(2)(A).
With regard to § 727, API alleged that Mr. Davis made false and
misleading statements concerning his assets in his bankruptcy schedules
and statement of financial affairs, including the value and ownership of
real property and his involvement and investment in various corporate
entities.
With regard to § 523, API asserted that Mr. Davis made false and
misleading representations and omissions to deceive and induce API to
5
enter into the Subcontract. It claimed that, had it known that T.O. was not a
licensed contractor or that the site plan was inaccurate, it would not have
entered into the Subcontract.
In September 2010, the bankruptcy court granted API relief from the
automatic stay to allow it to litigate its claims in the State Court Action and
potentially establish a basis for issue preclusion.
D. The state court trials and appeals
The state court trifurcated the State Court Action into Phase One
(breach of contract, foreclosure on a mechanic’s lien, and quantum meruit),
Phase Two (alter ego), and Phase Three (fraud and punitive damages). The
state court held a bench trial as to Phase One and entered a judgment
(“Phase One Judgment”) in favor of API in October 2010. It held that:
(a) plaintiff did everything it was supposed to do under the
contract; (b) plaintiff did nothing wrong in their [sic] dealings
with the defendants . . . [and] (h) the withholding of payments
due the plaintiff under the contract by defendants was not done
in good faith[.]
It awarded API $318,000 in damages and $1.65 million in attorneys’ fees.
T.O. appealed the award of fees. The Court of Appeal affirmed.
The state court next tried the alter ego issues in Phase Two. In
December 2011, the state court ruled that T.O. failed to disclose to API the
entities involved in the Subcontract and that T.O. failed to disclose that it
was not a licensed contractor. It also found that T.O., D&S Homes, and
6
others were alter egos of Mr. Davis and were jointly and severally liable to
API.
The state court entered judgment in favor of API (“Phase Two
Judgment”). Mr. Davis and T.O. appealed the Phase Two Judgment, but
the Court of Appeal affirmed in all relevant respects.
In 2013, API filed an acknowledgment that Mr. Davis and others had
paid in full the Phase One Judgment and associated attorneys’ fees.
E. API’s proof of claim
In January 2011, API filed a proof of claim totaling $3 million. The
bankruptcy court disallowed the $1.9 million that had been paid on the
Phase One Judgment but allowed the remaining $1.1 million pending the
outcome of Phase Three in the State Court Action.
F. The § 727(a) trial
In September 2014, the bankruptcy court bifurcated the § 727 claims
from the § 523 claims. The next month, it stayed litigation of the § 523
claims pending the outcome of Phase Three in the State Court Action.
In December 2014, the court held a trial on API’s § 727(a) claims
(“§ 727 Trial”). Several aspects of the trial are contested in this appeal.
During Mr. Davis’ cross-examination testimony, his counsel referred
to Exhibit G, which was apparently D&S Homes’ balance sheet for 2007.
API’s counsel objected, but Mr. Davis’ counsel argued that Exhibit G could
be used to refresh Mr. Davis’ recollection. The court allowed the
7
questioning, and counsel never tried to move Exhibit G into evidence.
API argued that § 727(a)(2) applied to the prepetition issuance of
999,000 shares of stock in D&S Homes (valued at $1 per share) to the Leon
Family Trust (“Leon Trust”) to satisfy (in part) an outstanding debt. As a
result, the equity interests of Mr. Davis and other existing shareholders
were diluted; Mr. Davis’ interest in D&S Homes decreased from twenty-
eight percent to 0.03 percent. API produced D&S Homes minutes showing
that the board approved the issuance of the shares at a meeting on
September 10, 2009. However, Mr. Davis testified that the board had
intended that the issuance occur in January 2008. (The date is important
because § 727(a)(2)(A) only applies to transactions in the year preceding the
bankruptcy filing.)
Another issue concerned the disposition of real property located on
Valerio Street in Canoga Park, California (the “Valerio Street Property”).
The property was purchased by Canoga Commercial, LLC (“Canoga”) in
2008. Mr. Davis was the sole member of Canoga. Shortly before Mr. Davis
filed his petition, Canoga borrowed approximately $70,000 from Mr. Davis’
mother, secured by a deed of trust on the Valerio Street Property.
Postpetition, Canoga borrowed an additional $600,000 from other lenders,
also secured by the Valerio Street Property; it later sold the property for
$775,000 and used the sale proceeds to pay some of its debts.
The parties also argued about Mr. Davis’ representations and
8
omissions as to his interests in his various companies and their assets. API
attempted to establish that Mr. Davis misrepresented the value of his
business interests (as “$0.00” in his initial schedules and “unknown” in his
amended schedules) and failed to disclose the sale of the Valerio Street
Property.
Additionally, Mr. Davis did not disclose his prepetition sale of real
property in Arizona (the “Arizona Property”). He only amended his
statement of financial affairs to disclose the sale after API questioned him
about the sale at his deposition.
G. The § 727 decision and judgment
On December 5, 2014, the bankruptcy court issued its decision in
Mr. Davis’ favor on all § 727(a) claims.
1. Prepetition transfers
As to prepetition transfers under § 727(a)(2)(A), the bankruptcy court
held that API failed to show that Mr. Davis transferred, removed, or
destroyed property of the debtor when D&S Homes issued stock to the
Leon Trust. The court also rejected API’s argument that the dilution was
intended to hinder, delay, or defraud creditors, instead finding that
Mr. Davis had guaranteed the loan from the Leon Trust and that reducing
D&S Homes’ debt reduced Mr. Davis’ exposure on his guaranty.
The court was unconvinced that the transfer of the Valerio Street
Property was relevant to § 727(a)(2)(A), because the property belonged to
9
Canoga, not Mr. Davis. The court also found that Mr. Davis did not have
an intent to hinder, delay, or defraud creditors, because the proceeds of the
loan were used to pay off a prior loan to Canoga.
2. Postpetition transfers
As to postpetition transfers under § 727(a)(2)(B), the bankruptcy
court held that the postpetition deeds of trust and the 2014 sale of Canoga’s
Valerio Street Property did not implicate estate property. Even though
Mr. Davis held a 100 percent interest in Canoga, the court held that “in
light of all of the circumstances,” Mr. Davis did not intend to hinder, delay
or defraud his creditors.
3. False oath
Regarding API’s claim of false oath under § 727(a)(4), the bankruptcy
court ruled that Mr. Davis did not make false statements; and even if he
did, they were not made knowingly and fraudulently.
The court found that Mr. Davis did not misrepresent the value of his
interest in his business entities. The court held that API did not present any
evidence that his valuations were false or prove that Mr. Davis had a
fraudulent intent.
The court also found that API failed to prove a false oath arising from
Mr. Davis’ nondisclosure of the prepetition dilution of his equity interest in
D&S Homes. It said that Mr. Davis thought that the stock issuance was
intended to have taken place in 2008: “As a result, Debtor believed he did
10
not have to disclose the dilution.” The court found that API failed to
demonstrate “that the omission was intentional, as opposed to a mistake.”
The bankruptcy court found that Mr. Davis did not conceal the sale of
the Arizona Property. Although he initially did not disclose the sale or the
proceeds, he disclosed the sale two months prior to the final meeting of
creditors. The court also found that Mr. Davis lacked the requisite intent.
In conclusion, the court ruled that API established inconsistencies
and omissions, but “such mistakes and omissions, without additional facts
that would specifically show the required intent, do[ ] not warrant a denial
of Debtor’s discharge under § 727.” The bankruptcy court entered
judgment in favor of Mr. Davis (the “§ 727 Judgment”).4
H. The § 523(a) trial
Seven years after the petition date, Phase Three of the State Court
Action had still not gone to trial. In 2017, the bankruptcy court informed
the parties that it would no longer stay the adversary proceeding. It held a
trial on API’s § 523(a) claims (“§ 523 Trial”) in April 2018.
The court heard testimony from Mr. Davis, as well as Jeffrey Ludlow,
(API’s president and CEO), Matthew Ludlow (API’s vice-president of
operations), and Michael Poles (API’s expert witness on construction and
4
API immediately appealed the § 727 Judgment. However, the BAP motions
panel determined that the judgment was interlocutory because it did not dispose of the
entire adversary proceeding and dismissed the appeal.
11
contracting). In general, Mr. Davis maintained that he did not misrepresent
the Whitman Project or his entities and did not know about any problems
with the survey. Conversely, the Ludlows testified that API would not
have entered into the Subcontract had they known that T.O. was operating
as an unlicensed contractor or that the site plans were incorrect.
Mr. Poles testified that it was his opinion that Mr. Davis had acted
fraudulently and had a fraudulent intent. The court allowed his testimony
over objection but said that it would consider what weight to give that
testimony.
Mr. Poles further opined that it was normal and customary for API to
not question T.O.’s license status. He stated that a subcontractor that
questioned the general contractor’s license would not get the job.
I. The § 523 decision and judgment
The bankruptcy court ruled in Mr. Davis’ favor, concluding that API
had failed to establish any element of the § 523(a)(2)(A) claim.
1. False representation, omission, or deceptive conduct
The bankruptcy court ruled that API did not present sufficient
evidence that Mr. Davis’ omission regarding T.O.’s license status was
fraudulent. It found that: Mr. Davis never communicated directly with API
regarding the status of T.O.’s license; the parties agreed at trial that, under
California law at the time of the Subcontract, an LLC could not hold a
contractor’s license in California; Mr. Davis believed that T.O. could
12
lawfully operate as an owner-builder; API had an opportunity to verify
T.O.’s license status independently but chose not to; and the Ludlows’
testimony that API would not have entered into the Subcontract had they
known T.O. was unlicensed was not credible.
The court additionally ruled that Mr. Davis’ omissions regarding the
site plan were not fraudulent. It found credible his testimony that he did
not know the age of the survey or understand its importance. It noted that
API could have discussed the age of the as-built survey with T.O.’s
architect but did not do so.
The bankruptcy court also found that API did not prove that
Mr. Davis engaged in deceptive conduct because he did not act in any way
to give API the impression that T.O. had a contractor’s license.
2. Knowledge of falsity or intent to deceive
The bankruptcy court found that API did not establish that Mr. Davis
knew that nondisclosure of T.O.’s license status was wrongful. The court
credited Mr. Davis’ testimony that he believed it was unnecessary for T.O.
to have a contractor’s license because the Whitman Project was being built
by an “owner/builder,” and his personal contractor’s license would suffice.
Moreover, the court found that API did not prove that Mr. Davis’
omission of T.O.’s status was motivated by an intent to deceive API. The
court rejected API’s use of expert testimony to establish Mr. Davis’ intent.
The court held that API also did not establish that Mr. Davis knew
13
that his nondisclosure of the age of the as-built survey was wrongful.
3. Justifiable reliance
Finally, the bankruptcy court held that API’s reliance regarding
T.O.’s license was not justifiable because it ignored numerous red flags and
its witnesses’ testimony was not credible. It held that the Ludlows were
sophisticated, experienced construction professionals who reviewed the
Subcontract at length and accepted the Subcontract even though it did not
identify a contractor’s license for either T.O. or Mr. Davis.
The bankruptcy court again found Mr. Poles’ testimony not credible,
where he testified that a subcontractor would risk losing its bid if it
questioned the license status of its general contractor. Mr. Poles and
Matthew Ludlow admitted that anyone could inquire with CSLB to verify
the status of a contractor’s license without alerting the general contractor.
The bankruptcy court entered a judgment in favor of Mr. Davis
(“§ 523 Judgment”). API timely appealed from the § 523 Judgment and the
§ 727 Judgment.
JURISDICTION
The bankruptcy court had jurisdiction pursuant to 28 U.S.C. §§ 1334and 157(b)(2)(I) and (J). We have jurisdiction under 28 U.S.C. § 158.
ISSUES
(1) Whether the bankruptcy court erred in holding that API did not
carry its burden of proof under §§ 727(a)(2)(A), (a)(2)(B), and (a)(4) to deny
14
Mr. Davis his discharge.
(2) Whether the bankruptcy court erred in holding that API did not
carry its burden of proof under § 523(a)(2) to deny discharge of its claim.
STANDARDS OF REVIEW
In an action for denial of discharge under § 727, we review: (1) the
bankruptcy court’s legal conclusions de novo, (2) factual findings for clear
error, and (3) mixed questions of law and fact de novo. Searles v. Riley (In re
Searles), 317 B.R. 368, 373 (9th Cir. BAP 2004), aff’d, 212 F. App’x 589 (9th
Cir. 2006) (citing Murray v. Bammer (In re Bammer), 131 F.3d 788, 791-92 (9th
Cir. 1997) (en banc)).
When reviewing a bankruptcy court’s determination of an exception
to discharge claim under § 523, we review its findings of fact for clear error
and its conclusions of law de novo. See Oney v. Weinberg (In re Weinberg),
410 B.R. 19, 28 (9th Cir. BAP 2009). ”Whether a requisite element of a
§ 523(a)(2)(A) claim is present is a factual determination reviewed for clear
error.” Tallant v. Kaufman (In re Tallant), 218 B.R. 58, 63 (9th Cir. BAP 1998)
(citing Anastas v. Am. Sav. Bank (In re Anastas), 94 F.3d 1280, 1283 (9th Cir.
1996)).
“De novo review requires that we consider a matter anew, as if no
decision had been made previously.” Francis v. Wallace (In re Francis), 505
B.R. 914, 917 (9th Cir. BAP 2014) (citations omitted).
The bankruptcy court’s determinations concerning the debtor’s intent
15
are factual matters reviewed for clear error. Beauchamp v. Hoose (In re
Beauchamp), 236 B.R. 727, 729 (9th Cir. BAP 1999). We give especially great
deference to the bankruptcy court’s determinations of witnesses’
credibility. Anderson v. City of Bessemer City, 470 U.S. 564, 575 (1985) (stating
that only the trial court “can be aware of variations in demeanor and tone
of voice that bear so heavily on the listener’s understanding of and belief in
what is said”).
Factual findings are clearly erroneous if they are illogical,
implausible, or without support in the record. Retz v. Samson (In re Retz),
606 F.3d 1189, 1196 (9th Cir. 2010). “To be clearly erroneous, a decision
must strike us as more than just maybe or probably wrong; it must . . .
strike us as wrong with the force of a five-week-old, unrefrigerated dead
fish.” Sepulveda v. Adams (In re Sepulveda), BAP No. CC-16-1226-FLKu, 2017
WL 1505216, at *4 (9th Cir. BAP Apr. 26, 2017) (quoting Papio Keno Club,
Inc. v. City of Papillion (In re Papio Keno Club, Inc.), 262 F.3d 725, 729 (8th Cir.
2001)). If two views of the evidence are possible, the trial judge’s choice
between them cannot be clearly erroneous. Anderson, 470 U.S. at 573-75.
DISCUSSION
A. The bankruptcy court did not err in holding that API failed to
establish the mental state required by §§ 727(a)(2)(A), (a)(2)(B),
(a)(4), and 523(a)(2).
We find no clear error in the bankruptcy court’s determination that
16
Mr. Davis lacked the requisite intent under §§ 727(a)(2), (a)(4), or 523(a)(2).
Therefore, all of API’s other non-procedural arguments are
inconsequential.
Mental state is an element of all three of the statutes API relies upon.
Section 727(a)(2) provides that the debtor is entitled to a discharge unless:
(2) the debtor, with intent to hinder, delay, or defraud a
creditor or an officer of the estate charged with custody of
property under this title, has transferred, removed, destroyed,
mutilated, or concealed, or has permitted to be transferred,
removed, destroyed, mutilated, or concealed –
(A) property of the debtor, within one year before the
date of the filing of the petition; or
(B) property of the estate, after the date of the filing of the
petition[.]
§ 727(a)(2) (emphasis added). “A party seeking denial of discharge under
§ 727(a)(2) must prove two things: ‘(1) a disposition of property, such as
transfer or concealment, and (2) a subjective intent on the debtor’s part to
hinder, delay or defraud a creditor through the act [of] disposing of the
property.’” In re Retz, 606 F.3d at 1200 (emphasis added) (quoting Hughes v.
Lawson (In re Lawson), 122 F.3d 1237, 1240 (9th Cir. 1997)).
Section 727(a)(4)(A) provides for denial of discharge if “the debtor
knowingly and fraudulently, in or in connection with the case . . . made a
false oath or account[.]” § 727(a)(4)(A) (emphasis added). “To prevail on [a
17
§ 727(a)(4)(A)] claim, a plaintiff must show, by a preponderance of the
evidence, that: ‘(1) the debtor made a false oath in connection with the case;
(2) the oath related to a material fact; (3) the oath was made knowingly;
and (4) the oath was made fraudulently.’” In re Retz, 606 F.3d at 1197(emphases added) (quoting Roberts v. Erhard (In re Roberts), 331 B.R. 876,
882 (9th Cir. BAP 2005)).
Section 523(a)(2)(A) excepts from discharge debts resulting from
“false pretenses, a false representation, or actual fraud, other than a
statement respecting the debtor’s or an insider’s financial condition.” A
creditor seeking to except a debt from discharge based on fraud bears the
burden of establishing each of five elements: (1) misrepresentation,
fraudulent omission or deceptive conduct; (2) knowledge of the falsity or
deceptiveness of such representation(s) or omission(s); (3) an intent to
deceive; (4) justifiable reliance by the creditor on the representations or
conduct; and (5) damage to the creditor proximately caused by its reliance
on such representation(s) or conduct. See Ghomeshi v. Sabban (In re Sabban),
600 F.3d 1219, 1222 (9th Cir. 2010); In re Weinberg, 410 B.R. at 35.
API has failed to demonstrate that any of the court’s findings about
Mr. Davis’ mental state were clearly erroneous.
API says that Mr. Davis fraudulently transferred or concealed
property under § 727(a)(2), including D&S Homes’ shares and the Valerio
Street Property. As to § 727(a)(4), API contends that Mr. Davis had
18
fraudulent intent when he made false oaths concerning his possession of
financial documents, his valuation of his assets in his bankruptcy
documents, the dilution of D&S Homes’ shares, and various other
properties and entities. The bankruptcy court properly rejected each of
these arguments.
In the first place, the bankruptcy court correctly found that API did
not even prove that all of these statements were false. For example, API
says that Mr. Davis uttered a false oath when he stated, in a discovery
response, that he had no financial statements for D&S Homes, but he
produced Exhibit G at trial. But Mr. Davis’ attorney represented that he
had received Exhibit G only recently, and API offered no contrary
evidence. Similarly, API argues that Mr. Davis lied when he valued his
interest in his business entities at zero or unknown, but API offered no
evidence that any of these entities had any value.
More importantly, the bankruptcy court did not commit clear error
when it found that Mr. Davis lacked the required intention and knowledge
under § 727. The court weighed Mr. Davis’ denials against the
circumstantial evidence offered by API and found Mr. Davis’ testimony
more persuasive.
Similarly, the bankruptcy court did not clearly err when it found that
Mr. Davis lacked knowledge of falsity and intent to deceive under
§ 523(a)(2). The bankruptcy court considered the testimony of Mr. Davis,
19
the Ludlows, and Mr. Poles and found that Mr. Davis did not know that
the nondisclosure of T.O.’s license status was wrongful, did not have an
intent to deceive API, and did not have reason to believe that the as-built
survey was unreliable. We again find no clear error in the bankruptcy
court’s factual determinations as to Mr. Davis’ knowledge and intent.
Accordingly, because API failed to establish the requisite elements of
knowledge and intent, the bankruptcy court did not err in rejecting API’s
§§ 727(a)(2), (a)(4), and 523(a)(2) claims.
B. The bankruptcy court correctly followed the law of issue
preclusion.
API correctly points out that issue preclusion (formerly known as
collateral estoppel) applies in proceedings under §§ 727 and 523. It argues
that the bankruptcy court improperly ignored the state court’s findings and
that these findings were binding on the bankruptcy court. API’s reliance on
the state court findings is misplaced.
Issue preclusion prevents relitigation of all “issues of fact or law that
were actually litigated and necessarily decided” in a prior proceeding,
regardless of the claim to which they relate. Segal v. Am. Tel. & Tel. Co., 606
F.2d 842, 845 (9th Cir. 1979). California law governs the preclusive effect of
the state court’s judgment. See Harmon v. Kobrin (In re Harmon), 250 F.3d
1240, 1245 (9th Cir. 2001); see also 28 U.S.C. § 1738 (federal courts must give
“full faith and credit” to state court judgments).
20
In California, application of issue preclusion requires that: (1) the
issue sought to be precluded from relitigation is identical to that decided in
a former proceeding; (2) the issue was actually litigated in the former
proceeding; (3) the issue was necessarily decided in the former proceeding;
(4) the decision in the former proceeding is final and on the merits; and
(5) the party against whom preclusion is sought was the same as, or in
privity with, the party to the former proceeding. Lucido v. Super. Ct., 51 Cal.
3d 335, 341 (1990). Additionally, California courts may give preclusive
effect to a judgment “only if application of preclusion furthers the public
policies underlying the doctrine.” In re Harmon, 250 F.3d at 1245 (citing
Lucido, 51 Cal. 3d at 342-43).
California law recognizes that courts always have discretion to deny
preclusive effect to any judgment: “In California, issue preclusion is not
applied automatically or rigidly, and courts are permitted to decline to give
issue preclusive effect to prior judgments in deference of countervailing
considerations of fairness.” Lopez v. Emergency Serv. Restoration, Inc. (In re
Lopez), 367 B.R. 99, 108 (9th Cir. BAP 2007) (citations omitted). Therefore,
API’s repetitive claim that the bankruptcy court was “bound” by the state
court’s findings is false.
Further, API merely assumes that issue preclusion applies and
neglects to address the individual elements. It fails to establish that the
issues in the State Court Action were identical to the issues before the
21
bankruptcy court. It is clear that none of the state court’s findings as to
breach of contract or alter ego cover the fraudulent intent required by
§§ 727 or 523; indeed, the fraud claims were scheduled to be tried in Phase
Three. Although the state court was harshly critical of Mr. Davis’ conduct,
it made no finding sufficiently precise to preclude litigation of the intent
and knowledge issues under §§ 727 and 523.
Similarly, API fails to show that the state court necessarily decided
the issues to be precluded. It contends that the state court found fraud for
the purposes of determining Mr. Davis’ alter ego status. But alter ego is a
remedy, not a substantive claim. Leek v. Cooper, 194 Cal. App. 4th 399, 418-
19 (2011) (“A claim based upon an alter ego theory is not itself a claim for
substantive relief. It is a procedural device by which courts will disregard
the corporate entity in order to hold the alter ego individual liable on the
obligations of the corporation.”). As such, the alter ego determination
under California law involves a weighing of factors. See GEC US 1 LLC v.
Frontier Renewables, LLC, No. 16-CV-1276 YGR, 2017 WL 605070, at *5 (N.D.
Cal. Feb. 15, 2017) (listing eighteen nonexclusive factors); Greenspan v.
LADT, LLC, 191 Cal. App. 4th 486, 513 (2010) (“No single factor is
determinative, and instead a court must examine all the circumstances to
determine whether to apply the doctrine.”). An alter ego holding does not
require fraud: “In the state of California fraud is not required in order to
invoke the alter ego theory.” Sequoia Prop. & Equip. Ltd. P’ship v. United
22
States, No. CV-F 97-5044 OWW SMS, 1998 WL 471643, at *3 (E.D. Cal. May
13, 1998) (citing U.S. Fire Ins. Co. v. Nat’l Union Fire Ins. Co. of Pitt., 107 Cal.
App. 3d 456, 470 (1980)). Stated simply, the state court did not necessarily
have to decide fraud issues in either Phase One or Phase Two.
Instead, API appears to argue that the bankruptcy court was
prohibited from making any adverse findings against API, because the
state court found during Phase One that API “did everything it was
supposed to do under the contract” and “did nothing wrong in their
dealings with the defendants.” These general Phase One findings pertain to
breach of contract, foreclosure on mechanic’s lien, and quantum meruit,
but not fraud. A blanket statement that API performed under the
Subcontract and did “nothing wrong” in the context of breach of contract
does not relate to the elements of fraud under § 523(a)(2)(A).
C. The bankruptcy court did not err in allowing Mr. Davis to refresh
his recollection with Exhibit G.
API argues that the bankruptcy court erred in allowing Mr. Davis to
refresh his recollection with Exhibit G during the § 727 Trial.
“Under Federal Rule of Evidence 612, a witness may use a writing to
refresh his or her recollection only if (1) the witness requires refreshment,
and (2) the writing actually refreshes the witness’s memory.” United States
v. Carey, 589 F.3d 187, 190 (5th Cir. 2009). “[T]he admissibility of testimony
accompanied by a Rule 612 refreshment does not depend upon the source
23
of the writing, the identity of the writing’s author, or the truth of the
writing’s contents, for ‘[i]t is hornbook law that any writing may be used to
refresh the recollection of a witness.’” Id. at 191 (citation omitted). The
Ninth Circuit agrees that “[t]he federal rule recognizes few if any
limitations upon the kind of material that may be used to refresh
recollection . . . .” Johnston v. Earle, 313 F.2d 686, 688 (9th Cir. 1962).
API argues that Mr. Davis could not use Exhibit G to refresh his
memory because it must have been a fabricated document, there was
handwriting on the document, and there was no foundation as to the
handwriting. But “even inadmissible evidence may be used to refresh a
witness’s recollection.” Fraser v. Goodale, 342 F.3d 1032, 1037 (9th Cir. 2003)
(citations omitted). Even assuming the document was fabricated (and API
did not prove that it was), the bankruptcy court did not admit its contents
or the handwritten notes; it only allowed Mr. Davis to use the document to
refresh his recollection as to how he valued his business entities.
API further complains that it was “unable to properly prepare” and
was “surprised” when the bankruptcy court permitted Mr. Davis to utilize
Exhibit G. It contends that Mr. Davis did not produce Exhibit G during
discovery and testified that he had no financial documents. At trial,
Mr. Davis’ counsel explained that he had just recently received the
document from a third party. Further, API’s claim of “surprise” is
disingenuous: Mr. Davis had included Exhibit G in his list of trial exhibits,
24
and the parties stipulated before trial that they had exchanged copies of all
exhibits.5 As the bankruptcy court pointed out, if API had any concern
about Exhibit G, it should have sought to exclude Exhibit G through a
pretrial motion in limine. It failed to do so. The bankruptcy court did not
deny API due process.6
D. The bankruptcy court did not err in proceeding with the § 523 Trial
before the state court adjudicated Phase Three.
API argues that the bankruptcy court’s decision to terminate the stay
of the adversary proceeding and try the § 523 claims without waiting for
the state court was erroneous and violated its constitutional rights.
But API did not object to, and in fact acquiesced in, the court’s
decision to proceed. Shortly before the court lifted the stay in April 2017,
API filed a status report indicating that it would be ready for trial “[e]ither
at the conclusion of pending State Court Fraud litigation or earlier at the
5
At oral argument, API’s counsel insisted that he had never seen Exhibit G
before trial and was not given a chance to examine it. The record shows otherwise. The
parties’ Second Amended Joint Pretrial Stipulation and Order filed on November 7,
2014 (drafted by API) provides, “Attached is a list of exhibits intended to be offered at
the trial by the Plaintiff and the Defendant . . . . The parties have exchanged copies of all
exhibits.” Under “Defendant’s Exhibits,” the seventh exhibit listed “The D&S Homes
balance sheet dated December 31, 2007.” This exhibit corresponds with the Exhibit G
used at the § 727 Trial.
6
We reject Mr. Davis’ argument that API waived its challenge to Exhibit G when
it failed to object before the trial court. Although API initially objected only on the bases
of hearsay and lack of foundation, it later renewed its objection, eventually arguing that
it was improper to use Exhibit G to refresh Mr. Davis’ recollection.
25
direction of the Bankruptcy Court.” (Emphasis added.) It summarized the
delays in the State Court Action and concluded, “[API] respectfully
requests that the trial of the instant adversary proceeding immediately
follow trial in Phase III of the State Court Action referenced above, or that
the Court in its discretion schedule trial of this matter at an earlier date.”
(Emphasis added.) API waived any objection to the bankruptcy court
proceeding with the § 523 Trial.
API additionally misunderstands the law. It argues that the
bankruptcy court infringed its Seventh Amendment right to a jury trial,
because the state court would have held a jury trial but the bankruptcy
court did not.
API is patently mistaken. In Hashemi v. American Express Travel Related
Services Co. (In re Hashemi), 104 F.3d 1122 (9th Cir. 1996), as amended (Jan. 24,
1997), the Ninth Circuit held in a § 523(a)(2)(A) case that “[a]ctions to
determine the nondischargeability of debts . . . are equitable in nature. . . .
Bankruptcy litigants therefore have no Seventh Amendment right to a jury
trial in dischargeability proceedings.” Id. at 1124 (citations omitted). “[A]
bankruptcy litigant waives his right to a jury trial in proceedings ‘vital to
the bankruptcy process of allowance and disallowance of . . . claims.’” Id. at
1125 (quoting Benedor Corp. v. Conejo Enters., Inc. (In re Conejo Enters., Inc.),
96 F.3d 346, 354 n. 6 (9th Cir. 1996)). Accordingly, the § 523 claims were not
subject to the Seventh Amendment or state law guaranteeing a jury trial.
26
This argument also rests on an unstated premise that is false. The
implicit premise is that if there are overlapping proceedings in the state
court and the bankruptcy court, and a party has a right to a jury trial in the
state court but not in the bankruptcy court, the Seventh Amendment
requires the bankruptcy court to stay its hand until the state court
proceeding is complete. API cites no authority for this proposition, and we
are aware of none.
Additionally, API complains that the court violated its due process
rights when it sua sponte reversed its decision to stay the adversary
proceeding. But the bankruptcy court always retains the power to control
its own docket. See Mediterranean Enters., Inc. v. Ssangyong Corp., 708 F.2d
1458, 1465 (9th Cir. 1983) (“The trial court possesses the inherent power to
control its own docket and calendar.”). It may “find it is efficient for its
own docket and the fairest course for the parties to enter a stay of an action
before it[.]” Id. (quoting Leyva v. Certified Grocers of Cal., Ltd., 593 F.2d 857,
863 (9th Cir. 1979)). Conversely, a stay is not warranted if its imposition is
inefficient or unfair to a party.
In this case, by the time the bankruptcy court decided to proceed
with the § 523 Trial, seven years had passed since the petition date in 2010,
and over two years had passed since the bankruptcy court issued the § 727
27
Judgment in 2014.7 The bankruptcy court was within its discretion to avoid
any further delay in the adjudication of the remaining claims.
E. The bankruptcy court did not err in finding Mr. Davis credible and
finding API’s witnesses not credible.
API argues that the bankruptcy court erred in determining the
credibility of the witnesses. It contends that Mr. Davis cannot be credible
because he lied by failing to disclose assets, and the court threatened to
sanction him for failing to comply with court orders. Conversely, it argues
that the Ludlows and Mr. Poles were completely believable.
We afford the bankruptcy court great deference in its determinations
of witness credibility. As the United States Supreme Court explained, when
evaluating factual findings, “we give singular deference to a trial court’s
judgments about the credibility of witnesses. That is proper, we have
explained, because the various cues that ‘bear so heavily on the listener’s
understanding of and belief in what is said’ are lost on an appellate court
later sifting through a paper record.” Cooper v. Harris, 137 S. Ct. 1455, 1474
(2017) (citations omitted). It has further instructed that an attack on
credibility determinations rarely succeeds, because “when a trial judge’s
finding is based on his decision to credit the testimony of one of two or
more witnesses, each of whom has told a coherent and facially plausible
story that is not contradicted by extrinsic evidence, that finding, if not
7
Mr. Davis represents that Phase Three is still pending in the State Court Action.
28
internally inconsistent, can virtually never be clear error.” Anderson, 470
U.S. at 575; see Fed. R. Civ. P. 52(a)(6) (incorporated by Fed. R. Bankr. P.
7052).
In the present case, the bankruptcy court was presented with
conflicting testimony by Mr. Davis and API’s witnesses. The bankruptcy
court judged Mr. Davis’ testimony to be credible, but did not believe API’s
witnesses. We cannot disturb these credibility findings.
F. The bankruptcy court did not err in rejecting API’s expert witness’
testimony.
Finally, API contends that the bankruptcy court impermissibly
discounted Mr. Poles’ expert testimony. It argues that the bankruptcy court
violated API’s due process rights and improperly acted as an expert
witness to counter Mr. Poles.
API’s argument is nonsensical. The court properly performed its duty
as the gatekeeper of the record and the finder of fact. It correctly rejected
Mr. Poles’ expert opinion regarding Mr. Davis’ intent and mental state.
Nothing in the record suggests that Mr. Poles had any “scientific, technical,
or other specialized knowledge [that would] help the trier of fact” peer into
Mr. Davis’ mind and ascertain his subjective intentions. See Fed. R. Evid.
702.
Additionally, a court is not obligated to blindly accept expert
testimony, even if uncontroverted. The Ninth Circuit has acknowledged
29
that “[e]xpert testimony . . . is not conclusive upon the trier of fact, even
though unimpeached and uncontradicted, since the trier may apply his
own experience or knowledge in determining how far to follow the
expressed opinion.” Sec.-First Nat’l Bank of L.A. v. Lutz, 322 F.2d 348, 355
(9th Cir. 1963) (emphasis added); see Wilbur-Ellis Co. v. M/V Captayannis
“S”, 451 F.2d 973, 974 (9th Cir. 1971) (following Supreme Court dictate that
“the court is not bound to accept uncontroverted testimony at face value if
it is improbable, unreasonable or otherwise questionable”).
In short, the bankruptcy court did not err when it did not credit
Mr. Poles’ expert opinions.
CONCLUSION
The bankruptcy court did not err. We AFFIRM.
30