Richard Houng v. Tatung Co , 636 F. App'x 396 ( 2016 )

NOT FOR PUBLICATION FILED
UNITED STATES COURT OF APPEALS JAN 11 2016
MOLLY C. DWYER, CLERK
U.S. COURT OF APPEALS
FOR THE NINTH CIRCUIT
In re: RICHARD YIN-CHING HOUNG, No. 13-56656
AKA Richard Houng,
D.C. No. 8:12-cv-01341-MMM
Debtor,
______________________________ MEMORANDUM*
RICHARD YIN-CHING HOUNG,
Appellant,
v.
TATUNG COMPANY, LTD, a Taiwan
limited company,
Appellee.
Appeal from the United States District Court
for the Central District of California
Margaret M. Morrow, District Judge, Presiding
Argued and Submitted November 3, 2015
Pasadena, California
Before: SCHROEDER, PREGERSON, and FRIEDLAND, Circuit Judges.
Richard Houng appeals the district court’s affirmance of the bankruptcy
*
This disposition is not appropriate for publication and is not precedent
except as provided by 9th Cir. R. 36-3.
court’s holding that his debt to Tatung Company, Ltd. (“Tatung”) is
nondischargeable under 11 U.S.C. § 523(a)(4). Specifically, Houng argues that
the fiduciary duty that arises from California’s common law trust fund doctrine—
which the bankruptcy court, pursuant to preclusive findings1 made by an arbitrator
in a separate proceeding, found Houng had violated—does not establish a
“fiduciary” relationship within the meaning of § 523(a)(4) and thus is insufficient
to trigger nondischargeability. We disagree with Houng and affirm. 2
Section 523(a)(4) “provides that debts that arise from ‘fraud or defalcation
while [the debtor was] acting in a fiduciary capacity, embezzlement or larceny,’ are
nondischargeable.” Ragsdale v. Haller, 780 F.2d 794, 795-96 (9th Cir. 1986)
(alteration in original) (quoting 11 U.S.C. § 523(a)(4)).3 Whether someone is a
1
Houng argues that the bankruptcy court erred in giving preclusive effect to the
arbitrator’s findings regarding breach of fiduciary duty. At oral argument,
Houng’s counsel acknowledged that Houng’s briefing was “deficient” for failing to
adequately cite to the record and abandoned Houng’s challenge to the preclusion
ruling because of that deficiency. Counsel later in oral argument suggested a
desire to withdraw the abandonment, but never offered to supplement the excerpts
of record or briefing. We conclude that, whether abandoned or not, Houng’s
inadequately supported issue preclusion arguments fail. See First Card v. Hunt
(In re Hunt), 238 F.3d 1098, 1105 (9th Cir. 2001).
2
Because we affirm on § 523(a)(4) grounds, we need not address Tatung’s
alternative bases for affirmance.
3
“Defalcation” is defined as the “misappropriation of trust funds or money held in
any fiduciary capacity; [or] [the] failure to properly account for such funds.”
Lewis v. Scott (In re Lewis), 97 F.3d 1182, 1186 (9th Cir. 1996) (second alteration
2
“fiduciary” for purposes of § 523(a)(4) is a question of federal law. Id. at 796.
We have “adopted a narrow definition of ‘fiduciary’ for purposes of § 523(a)(4)”
as a type of relationship “arising from an express or technical trust that was
imposed before and without reference to the wrongdoing that caused the debt.”
Cal-Micro, Inc. v. Cantrell (In re Cantrell), 329 F.3d 1119, 1125 (9th Cir. 2003)
(quoting Lewis v. Scott (In re Lewis), 97 F.3d 1182, 1185 (9th Cir. 1996)).
Although the definition of “fiduciary” is a matter of federal law, “state law is to be
consulted to determine when a trust in this strict sense exists.” Ragsdale, 780
F.2d at 796. If state law does not “clearly and expressly impose trust-like
obligations on a party,” courts “will not assume that such duties exist and will not
find that there was a fiduciary relationship.” 4 Collier on Bankruptcy, ¶ 523.10
(Alan N. Resnick & Henry J. Sommer eds., 16th ed.).
California courts adhere to the “trust fund doctrine,” pursuant to which “all
of the assets of a corporation, immediately upon becoming insolvent, become a
trust fund for the benefit of all [of the corporation’s] creditors[].”4 Berg & Berg
Enter., LLC v. Boyle, 100 Cal. Rptr. 3d 875, 893 (Cal. Ct. App. 2009). In Berg,
in original) (quoting Black’s Law Dictionary 417 (6th ed. 1990)). Houng does not
dispute that the arbitrator’s factual findings satisfy the defalcation element.
4
Consistent with the choice of law clause in their Product Supply Agreement, the
parties agree that California law is to be consulted to determine whether a trust was
created when Westinghouse became insolvent.
3
the court held that the duties directors owe to creditors upon insolvency are
generally limited to “avoidance of actions that divert, dissipate, or unduly risk
corporate assets that might otherwise be used to pay creditors[’] claims,” by
“divert[ing] assets of the corporation for the benefit of insiders or preferred
creditors.” Id. at 893-94.5
We agree with Tatung that the duties created by the trust fund doctrine
satisfy the criteria for a “fiduciary” relationship for purposes of
nondischargeability under § 523(a)(4). The trust fund doctrine “clearly and
expressly impose[s] trust-like obligations” on the controllers of an insolvent entity.
4 Collier on Bankruptcy, ¶ 523.10. Because the duties arise at insolvency, see
Berg, 100 Cal. Rptr. 3d at 893, and require the avoidance of “divert[ing],
dissipat[ing], or unduly risk[ing] corporate assets,” id. at 894, the fiduciary
relationship exists “prior to any wrongdoing” and “without reference to [the
wrong],” as required by § 523(a)(4). Ragsdale, 780 F.2d at 796. This is in
contrast to a trust “ex maleficio,” i.e., a trust that arises “by operation of law upon
5
The district court considered but rejected the possibility that the trust fund
doctrine has been preempted by the California Corporations Code. See In re
Houng, 499 B.R. 751, 767 n.50 (C.D. Cal. 2013) (citing Pac. Scene v. Penasquitos,
Inc., 758 P.2d 1182 (Cal. 1988) (In Bank) and concluding that, at least for purposes
of the dischargeability inquiry, the doctrine has not been preempted). Houng has
waived any argument that the district court erred in this determination by not
raising the issue on appeal.
4
a wrongful act,” that we have held is outside of § 523(a)(4)’s purview. Blyler v.
Hemmeter (In re Hemmeter), 242 F.3d 1186, 1189-90 (9th Cir. 2001).
With regard to whether the trust doctrine creates an “express or technical”
trust, “[m]ost courts . . . recognize that the ‘technical’ or ‘express’ trust
requirement [for nondischargeability] is not limited to trusts that arise by virtue of
a formal trust agreement, but includes relationships in which trust-type obligations
are imposed pursuant to statute or common law.” LSP Inv. P’ship v. Bennett (In
re Bennett), 989 F.2d 779, 784-85 (5th Cir. 1993); see also, e.g., Lovell v. Stanifer
(In re Stanifer), 236 B.R. 709, 714 (BAP 9th Cir. 1999). Indeed, decades ago our
court recognized that qualifying as a “fiduciary” for nondischargeability purposes
does not require formalistically satisfying the technical requirements of specific
categories of trusts. Runnion v. Pedrazzini (In re Pedrazzini), 644 F.2d 756, 758
n.2 (9th Cir. 1981). Instead, in analyzing whether certain California statutory law
could satisfy the precursor to § 523(a)(4), we held that “[t]he precise manner in
which a trust is created . . . is of little importance. Rather, the focus should be on
whether true fiduciary responsibilities have been imposed.” Id. We held that the
“core requirements” for determining whether the requisite “trust-like obligations”
are imposed, “are that the relationship exhibit characteristics of the traditional trust
relationship, and that the fiduciary duties be created before the act of wrongdoing
and not as a result of the act of wrongdoing.” Id. at 758-59. We have continued
5
to apply these same standards to determine whether a trust is sufficient to create a
“fiduciary” relationship within the meaning of § 523(a)(4). See In re Hemmeter,
242 F.3d at 1189-90; Ragsale, 780 F.2d at 796.
Accordingly, in more recent cases, we have looked to state common law in
applying the trust requirement of § 523(a)(4), without strict regard to whether the
trust created by common law was “express” or “technical.” See Ragsdale, 780
F.2d at 797; In re Lewis, 97 F.3d at 1186; Lewis v. Short (In re Short), 818 F.2d
693, 695 (9th Cir. 1987). Here, because California’s common law trust fund
doctrine imposes “true fiduciary responsibilities” prior to “the act of wrongdoing
and not as a result of the act of wrongdoing,” In re Pedrazzini, 644 F.2d at 758,
758 n.2, the “express or technical” trust requirement for nondischargeability is
satisfied.
Our recent decision in Double Bogey, L.P. v. Enea, 794 F.3d 1047 (9th Cir.
2015), is not to the contrary. Although we suggested in dicta in Double Bogey
that “[c]ommon-law doctrines . . . rarely impose the trust-like obligations sufficient
to create a fiduciary relationship under Section 523(a)(4),” id. at 1051, we did not
foreclose the possibility of common law doctrines from ever satisfying § 523(a)(4).
To the extent that Double Bogey could be read to indicate that common law
doctrines must heighten preexisting statutory duties in order to satisfy § 523(a)(4),
see id., we do not interpret our discussion there as creating such a general
6
requirement. Although the cases cited in Double Bogey—Ragsdale, In re Lewis,
and In re Short—all referenced state statutes, each of those cases located the
necessary trust relationship in case law, not in statutory law. Those cases all
arrived at their holdings that a § 523(a)(4) trust obligation existed in spite of the
lack of statutory law creating the necessary fiduciary relationship—basing their
determinations instead on the state common law of partnership. See, e.g.,
Ragsdale, 780 F.2d at 796 (rejecting the argument that California statutes created a
trust sufficient for § 523(a)(4), but then finding § 523(a)(4) satisfied because
“California courts . . . have raised the duties of partners beyond those required by
the literal wording of [the statute]”).6 These cases give no reason, and Double
Bogey suggests none, for tethering the meaning of “fiduciary” under § 523(a)(4) to
state statutory law that itself cannot satisfy that provision’s requirements. We
therefore read the language from Double Bogey as saying nothing more than cases
like In re Pedrazzini, Ragsdale, and In re Hemmeter have long held—that for a
fiduciary relationship to satisfy § 523(a)(4), it must exhibit characteristics of a
6
Although In re Short stated that “the Washington statute and case law make clear
that Short was a fiduciary within the meaning of section 523(a)(4),” 818 F.2d at
695, the Washington statute was “identical” to the California statute at issue in
Ragsdale—which we found to be a trust ex maleficio and thus outside of §
523(a)(4)’s purview. Ragsdale, 780 F.2d at 796. As in Ragsdale, it was only
state common law that gave rise to the requisite fiduciary relationship in In re
Short. See 818 F.2d at 695. Thus, whatever statutory duties existed under
Washington law were insufficient to support our ultimate holding.
7
traditional trust relationship and must arise prior to the wrongdoing at issue. See
In re Pedrazzini, 644 F.2d at 758-59, 758 n.2; Ragsdale, 780 F.2d at 796; In re
Hemmeter, 242 F.3d at 1189-90.
Our conclusion in this regard is consistent with the vast majority of prior
bankruptcy court decisions, which have held that duties created by the trust fund
doctrine create a fiduciary relationship sufficient to trigger nondischargeability
under to § 523(a)(4). See, e.g., Oney v. Weinberg (In re Weinberg), 410 B.R. 19,
28-29 (BAP 9th Cir. 2009); Nahman v. Jacks (In re Jacks), 266 B.R. 728, 737
(BAP 9th Cir. 2001); Flegel v. Burt & Assocs., P.C. (In re Kallmeyer), 242 B.R.
492, 496 (BAP 9th Cir. 1999) (addressing Oregon’s parallel trust fund doctrine).
We have reviewed Houng’s arguments to the contrary and find them
unpersuasive.
AFFIRMED.
8