in re: james larry saccheri and judith anne saccheri, 9th cir. bap (2012)

7/25/2019 In re: James Larry Saccheri and Judith Anne Saccheri, 9th Cir. BAP (2012)

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* Thi s di sposi t i on i s not appr opr i at e f or publ i cat i on.Al t hough i t may be ci t ed f or what ever per suasi ve val ue i t mayhave ( see Fed. R. App. P. 32. 1) , i t has no pr ecedent i al val ue.See 9t h Ci r . BAP Rul e 8013- 1.

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UNI TED STATES BANKRUPTCY APPELLATE PANEL

OF THE NI NTH CI RCUI TI n r e: ) BAP No. 12- 1269- J uKi D

)J AMES LARRY SACCHERI and ) Bk. No. 09- 17721J UDI TH ANNE SACCHERI , )

) Adv. No. 09- 1273Debt or s. )

______________________________)J AMES LARRY SACCHERI , )

)Appel l ant , )

)

v. ) M E M O R A N D U M*

)ST. LAWRENCE VALLEY DAI RY; )J UDI TH ANNE SACCHERI , )

)Appel l ees. )

______________________________)

Ar gued and Submi t t ed on Oct ober 19, 2012at Sacr ament o, Cal i f or ni a

Fi l ed - November 1, 2012

Appeal f r om t he Uni t ed St at es Bankrupt cy Cour tf or t he Easter n Di str i ct of Cal i f or ni a

Honor abl e Ri char d T. For d, Bankrupt cy J udge, Pr esi di ng_____________________________________

Appear ances: Appel l ant J ames Lar r y Saccher i ar gued pr o se;J ef f Rei ch, Esq. ar gued f or appel l ee St . Lawr enceVal l ey Dai r y.____________________________________

Bef ore: J URY, KI RSCHER, and DUNN Bankr upt cy J udges.

FILED

NOV 01 2012

SUSAN M SPRAUL, CLERKU.S. BKCY. APP. PANELOF THE NINTH CIRCUIT


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1 Unl ess other wi se i ndi cat ed, al l chapt er and sect i onr ef erences ar e t o t he Bankr upt cy Code, 11 U. S. C. 101- 1532, andRul e r ef er ences ar e t o t he Feder al Rul es of Bankrupt cy

Procedur e.2 Saccher i r esi gned f r om t he Cal i f or ni a St at e Bar i n Apr i l

2001 wi t h charges pendi ng.

3 Mont gomery was al so a f armer and r eal est ate i nvest or . Het est i f i ed that he owned appr oxi mat el y 135 i ncome pr oper t i esconsi st i ng of si ngl e f ami l y r esi dences, commer ci al bui l di ngs andapart ment bui l di ngs. Mont gomery i nvest ed $480, 000 i n t he Dai r y.

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Chapt er 71 debt or , J ames Lar r y Saccher i ( Saccher i or

Debt or ) , appeal s f r om t he bankrupt cy cour t s j udgment i n f avor

of appel l ee, St . Lawr ence Val l ey Dai r y, I nc. ( t he Dai r y) ,

f i ndi ng t hat hi s debt i n t he amount of $492, 006. 67 pl usat t or neys f ees of $59, 382. 50 and cost s of $2, 737. 50 was

nondi schar geabl e under 523( a) ( 2) ( A) and ( 4) .

We AFFI RM t he bankrupt cy cour t s deci si on f i ndi ng t hat t he

debt was nondi schar geabl e under 523( a) ( 2) ( A) and

( a) ( 4) ( embezzl ement ) , except f or t he awar d of at t or neys f ees

whi ch we REVERSE. We r emand t hi s pr oceedi ng t o t he bankrupt cy

cour t f or ent r y of j udgment consi st ent wi t h t hi s di sposi t i on.

I. FACTS

A. Prepetition Events

Saccher i , an at t or ney, 2 appr oached hi s f r i ends and cl i ent s

t o i nvest i n a dai r y f ar m l ocat ed i n Chat eaugay, New Yor k. One

of t he i nvest or s, Mi chael J . Mont gomer y ( Mont gomer y) , was a

di st ant f ami l y member of Saccher i and Saccher i s cl i ent f oral most t went y years. 3 The ot her i nvest or s, J ames and J oan

Kozera, had known Saccher i si nce gr ade school and were al so


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4 Ther e wer e ot her i nvest or s as wel l . Saccher i t est i f i edt hat hi s si st er , J ani ce, and her husband i nvest ed $20, 000. Ther ecor d al so shows t hat Dr . Lee i nvest ed i n t he Dai r y. Dr . Lee sshares were bought back f or $50, 000 ( 500 shares at $100 a shar e) .

5 Saccher i di sput es t he bankrupt cy cour t s f act ual f i ndi ngt hat hi s sal ary was $30, 000. As noted bel ow, we do not f i nd anyof t he cour t s f actual f i ndi ngs cl ear l y er r oneous.

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f or mer cl i ent s. 4 Mont gomer y and t he Kozer as di d not want t o

i nvest i n t he Dai r y i f l oans wer e i nvol ved.

Fr om Sept ember 4, 2003 unt i l November 24, 2003, Saccher i

was t he sol e of f i cer and di r ect or of t he Dai r y. On November 24,2003, Mont gomery became t he secr etary/ t r easurer . On Apr i l 12,

2004, at t he Dai r y s f i r st annual meet i ng of shar ehol der s and

di r ect ors, Mont gomery, J ames Kozer a, J oan Kozer a and Saccher i

wer e el ect ed t o t he boar d of di r ect or s. Saccher i was el ect ed

pr esi dent , Mont gomer y was el ect ed secret ar y/ t r easurer ,

Mr . Kozer a was el ected vi ce- pr esi dent and Mr s. Kozer a was a

di r ect or . The of f i cer s and di r ect or s r emai ned t he same unt i l

December 27, 2007.

At al l t i mes, Saccher i had cont r ol of t he Dai r y s bank

account s and he al one kept t he company s books and prepared t he

f i nanci al st at ement s. Over t i me, Saccher i began t aki ng

subst ant i al sums of money f r om t he Dai r y i n t he f or m of l oans

wi t hout boar d appr oval and whi ch f ar exceeded hi s annualcompensat i on of $30, 000. 5 These l oans wer e capi t al i zed as

ot her asset s on t he Dai r y s bal ance sheet wi t h a l i ne i t em

ent i t l ed Nor t h Count r y Tr ust or NC Tr ust .

I n 2007, Mont gomer y became awar e t hat he had si gned paper s

f or an unaut hor i zed secur ed l oan ar r anged by Saccher i i n t he


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amount of $350, 000 f r om Yankee Far m Cr edi t t o t he Dai r y.

Mont gomer y recei ved a l et t er f r om t he bank st at i ng t hat t he

pr oper t y t axes were not bei ng pai d on t he pr opert y i n New Yor k,

whi ch was a requi r ement of t he l oan.Al so i n 2007, Mont gomer y f ur t her l ear ned about Saccher i s

sel f - deal i ngs and conceal ment of t he f i nanci al condi t i on of t he

Dai r y t hr ough hi s t r ust at t or ney, Paul Franco, who had r evi ewed

t he Dai r y s recor ds. Saccher i s sel f - deal i ngs i ncl uded, among

ot her t hi ngs, obt ai ni ng t he unaut hor i zed secur ed l oan f r om

Yankee Far m Cr edi t and hi s use of t he Dai r y s money t o pay

personal expenses, i ncl udi ng payment s on hi s house and f or

heal t h i nsur ance. Mont gomer y al so l ear ned f r om hi s t r ust

at t orney that he had personal l y guarant eed t he $350, 000 Yankee

Far m Cr edi t l oan by si gni ng a document wi t hout r eadi ng i t .

Mont gomer y cal l ed a meet i ng at Mr . Fr anco s of f i ce. The

Kozeras, Mont gomer y, Saccher i and ot her s at t ended. Af t er t hey

l ef t t he meet i ng, t he boar d member s r eal i zed t hat Saccher i al onewas pr epar i ng t he f i nanci al st atement s and doi ng t he bookkeepi ng

f or t he Dai r y. They agr eed t hat a CPA shoul d be hi r ed. At a

subsequent meet i ng, af t er Saccher i f ai l ed t o br i ng i n an

account ant , Saccher i r esi gned.

Subsequent l y, Mr s. Kozer a and Mr . Ezel l , t he CPA, di scussed

money goi ng i n and out of t he Dai r y s bank account t o other bank

account s t he board member s knew not hi ng about . They di scovered

t hat Saccher i had wr i t t en checks f r om t he Dai r y t o pay back

f unds t o the Pal mi r a Marando Tr ust , whi ch was mai nt ai ned f or

Mont gomery s gr andmother . Saccher i had t aken f unds f r omt he


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6 Saccher i admi t t ed t hat he wr ot e t went y- ei ght checks t o t hePal mi r a Mar ando Tr ust t ot al i ng $81, 525.

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t r ust i n hi s rol e as t r ust ee. 6 They al so di scover ed t hat

Saccher i had wr i t t en unaut hor i zed checks t ot al i ng $152, 400. 44

f r om t he Dai r y t o t he Tr enhai l e Est at e. At an Apr i l 1, 2008,

shar ehol der meet i ng, when Saccher i was asked why he t ook t hemoney f r om t he Dai r y, Saccher i r epl i ed t hat he was i n debt f r om

hi s decl i ni ng l aw pr act i ce 1995 t o 2000. Then f r om 2000 t o 2004

he st at ed t hat he accumul at ed even more personal consumer debt .

On J une 25, 2008, t he par t i es ent er ed i nt o a set t l ement and

r el ease agr eement ( Set t l ement Agr eement ) whereby t hey set t l ed

t he cl ai ms f or $375, 000. I n connect i on wi t h t he Set t l ement

Agr eement , Saccher i si gned an unsecur ed pr omi ssory note f or

$299, 000 and a second not e f or $76, 000 whi ch was secured by a

deed of t r ust on Saccher i s f ami l y home. Under t he t er ms of t he

set t l ement , i f Saccher i was not i n def aul t , t he Dai r y agr eed not

t o pur sue any act i on at l aw or equi t y agai nst hi m. The

Set t l ement Agr eement cont ai ned an at t orneys f ees cl ause whi ch

st at ed t hat t he l osi ng par t y shal l pay the pr evai l i ng par t y ar easonabl e sum f or at t or neys f ees i ncur r ed i n br i ngi ng an

act i on f or t he pur pose of enf or ci ng t hi s Set t l ement Agr eement or

pur sui ng a br each t her eof .

Saccher i made onl y a f ew payment s on the not es bef ore

def aul t i ng.

B. Bankruptcy Events

On August 12, 2009, Saccher i and hi s wi f e J udi t h f i l ed a

j oi nt chapt er 7 pet i t i on. I n Schedul e D, debt or s l i st ed t he


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Dai r y as havi ng a secur ed debt i n t he amount of $75, 597 agai nst

t hei r r esi dence. I n Schedul e F, debt or s l i st ed t he Dai r y as

havi ng an unsecured debt i n t he amount of $297, 416.

The Adversary Proceeding

On November 9, 2009, t he Dai r y f i l ed a nondi schar geabi l i t y

compl ai nt agai nst Debt or f or an unl i qui dat ed amount . On

J une 25, 2010, t he Dai r y f i l ed a t hi r d amended compl ai nt

( TAC) . The TAC al l eged f our cl ai ms f or r el i ef , wi t h t he f i r st

t hr ee cl ai ms asser t ed agai nst Debt or and t he f our t h cl ai m

asser t ed agai nst J udi t h. The f i r st and second cl ai ms f or r el i ef

were based on 523( a) ( 4) and al l eged t hat Debt or had commi t t ed

f r aud or def al cat i on whi l e act i ng i n a f i duci ar y capaci t y and

embezzl ement . The t hi r d cl ai m f or r el i ef , based on

523( a) ( 2) ( A) , al l eged t hat Debt or had obt ai ned money and goods

by f al se pr et enses, f al se r epr esent at i on and act ual f r aud. The

f act s under l yi ng each of t he cl ai ms f or r el i ef wer e essent i al l y

t he same and rel ated t o t he numerous unaut hor i zed l oans Debt orhad t aken f r om t he Dai r y and hi s conceal ment of t hose l oans

f r omt he ot her boar d members.

The f our t h cl ai m f or r el i ef , asser t ed agai nst J udi t h onl y,

was based on 523( a) ( 6) . The bankr upt cy cour t di smi ssed t he

cl ai m agai nst J udi t h on summar y j udgment .

On Apr i l 6, 2011, t he bankrupt cy cour t hel d a f i nal pr e-

t r i al hear i ng and bi f ur cat ed t he t r i al i nt o l i abi l i t y and damage

phases. The cour t set a t r i al f or t he l i abi l i t y phase on May 9

and 10, 2011. At t he concl usi on of t he t r i al t he mat t er was

submi t t ed t o al l ow f or f ur t her f i ndi ngs and br i ef s.

On J une 29, 2011, t he bankrupt cy cour t i ssued i t s f i ndi ngs


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of f act and concl usi ons of l aw. The bankrupt cy cour t f ound t hat

t he Dai r y had pr oven al l t he el ement s f or embezzl ement under

523( a) ( 4) , f or def al cat i on whi l e act i ng as f i duci ar y under

523( a) ( 4) and f or f r aud under 523( a) ( 2) ( A) . Based on t heseconcl usi ons, t he cour t f ound t hat t he debt i n an unspeci f i ed

amount was nondi schargeabl e.

On J ul y 18, 2011, t he Dai r y f i l ed a f our t h amended

compl ai nt whi ch r est at ed i t s TAC and added a f i f t h cl ai m f or

r el i ef r equest i ng a decl ar at i on t hat J udi t h s communi t y pr oper t y

i nt er est was l i abl e f or t he nondi schar geabl e debt at t r i but ed t o

her spouse.

The damage phase proceeded t o t r i al on November 29 and 30,

and December 1, 2011. On Apr i l 6, 2012, t he bankr upt cy cour t

i ssued addi t i onal f i ndi ngs of f act and concl usi ons of l aw. I n a

f or t y- f our l i ne i t em char t whi ch l i st ed var i ous checks and

t r ansact i ons, cer t ai n amount s wer e char ged agai nst Saccher i ,

cr edi t ed or di sal l owed. The cour t addr essed each of t he i t ems,ul t i matel y f i ndi ng t he t ot al nondi schar geabl e amount was

$399, 131. 35. The cour t al so f ound t hat t he Dai r y, as t he

pr evai l i ng par t y, was ent i t l ed t o i t s at t or neys f ees and cost s

under t he t er ms of t he Set t l ement Agr eement . I n i t s concl usi ons

of l aw, t he bankrupt cy cour t f ound t hat J udi t h s communi t y

asset s wer e l i abl e f or t he damages. Al so, due t o Debt or s

f r audul ent conduct , t he bankrupt cy cour t appl i ed t he doct r i ne of

uncl ean hands and f ound Debt or was not ent i t l ed t o t he benef i t

of doubt on t he i ssues of damages. The bankr upt cy cour t noted

t hat Debt or had decei ved peopl e who had t r ust ed hi m over a

subst ant i al per i od of t i me.


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The Dai r y t hen submi t t ed i t s appl i cat i on f or at t or neys

f ees and cost s seeki ng $59, 382. 50 i n f ees and $2, 737. 50 i n cost s

f or a t ot al of $62, 120. The Dai r y at t ached det ai l ed t i me

r ecor ds t o t he appl i cat i on.On May 2, 2012, Debt or f i l ed an opposi t i on t o t he f ee

appl i cat i on. Rel yi ng on I t ul e v. Met l ease, I nc. ( I n r e I t ul e) ,

114 B. R. 206, 213 ( 9t h Ci r . BAP 1990) ; Gr ove v. Ful wi l er

( I n r e Ful wi l er ) , 624 F. 2d 908, 910 ( 9t h Ci r . 1980) ; and

AT&T Uni ver sal Car d Ser vs. v. Bonni f i el d ( I n r e Bonni f i el d) ,

154 B. R. 743, 745 ( Bankr . N. D. Cal . 1993) , Debt or ar gued t hat

t he at t orneys f ees and cost s shoul d not be awarded because t he

at t or neys f ees provi si on i n t he Set t l ement Agr eement was

condi t i oned on an act i on that was br ought f or t he pur pose of

enf orci ng t he agr eement or pur sui ng a br each t hereof . Debt or

asser t ed t hat t he Dai r y was not seeki ng t o enf or ce t he

Set t l ement Agr eement or t he not es i n t he adver sary, i nst ead

choosi ng t o l i t i gat e i ssues r el at ed t o f r aud, not cont r act .Debt or al so obj ected t o t he amount of f ees r equest ed because

t hey were unr easonabl e.

I n r epl y, t he Dai r y ar gued t hat t he adver sary was si mpl y

t he enf orcement of t he subj ect Set t l ement Agr eement . I n such

mat t er s, at t or ney[ s] f ees ar e per mi ssi bl e. The Dai r y, ci t i ng

Tr ansought v. J ohnson, 931 F. 2d 1505 ( 11t h Ci r . 1991) , asser t ed

t he gener al r ul e t hat at t or neys f ees ar e pr oper l y awar ded t o a

credi t or pr evai l i ng on a bankr upt cy cl ai m i f t her e exi st s a

st at ut e or val i d cont r act aut hor i zi ng t he f ees.

On May 7, 2012, t he bankr upt cy cour t i ssued f ur t her

f i ndi ngs of f act and concl usi ons of l aw. The cour t f ound t hat


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t he amount of damages l i st ed as $399, 131. 35 was i ncor r ect . The

bankr upt cy cour t noted t hat t he cor r ect amount of damages was

$492, 006. 57. Ci t i ng Fl ei shmann Di st i l l i ng Cor p. v. Mai er

Br ewi ng Co. , 386 U. S. 714, 717 ( 1967) , t he bankr upt cy cour tnot ed t hat at t or neys f ees are not or di nar i l y recover abl e i n t he

absence of a st at ut e or enf or ceabl e cont r act pr ovi di ng f or such

f ees. The cour t concl uded t hat t he Set t l ement Agr eement cl ear l y

pr ovi ded f or al l owance of at t or neys f ees. The cour t al so

observed t hat Cal . Code Ci v. P. 1021 pr ovi ded f or at t or neys

f ees by agr eement , expr ess or i mpl i ed. I n t he end, t he

bankr upt cy cour t deci ded t hat t he r equest ed f ees were r easonabl e

and awar ded t hem i n f ul l .

On May 7, 2012, t he bankr upt cy cour t f i l ed t he j udgment

f i ndi ng $492, 006. 57 pl us at t or neys f ees of $59, 382. 50 and cost s

of $2, 737. 50 nondi schar geabl e under 523( a) ( 2) ( A) and ( 4) . On

May 8, 2012, t he bankr upt cy cour t ent ered t he j udgment . Debt or

t i mel y f i l ed a not i ce of appeal .II. JURISDICTION

The bankrupt cy cour t had j ur i sdi ct i on over t hi s proceedi ng

under 28 U. S. C. 1334 and 157( b) ( 2) ( I ) . We have j ur i sdi ct i on

under 28 U. S. C. 158.

III. ISSUES

A. Whet her t he bankr upt cy cour t er r ed i n concl udi ng t hat

t he Dai r y pr oved t he el ement s f or nondi schar geabi l i t y under

523( a) ( 2) ( A) ;

B. Whet her t he bankr upt cy cour t er r ed i n concl udi ng t hat

t he Dai r y pr oved t he el ement s f or embezzl ement under

523( a) ( 4) ;


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7 Debt or l i st s t went y- one i ssues f or pur poses of t hi sappeal . The maj or i t y of t he i ssues per t ai n t o t he bankrupt cycour t s f act ual f i ndi ngs, most of whi ch r el at e t o t he cour t scal cul at i on of damages. We addr ess Debt or s f act ual er r or sar guments bel ow.

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C. Whet her t he bankr upt cy cour t er r ed i n f i ndi ng t hat

Debt or was a f i duci ar y wi t hi n t he meani ng of 523( a) ( 4) ;

D. Whet her t he bankr upt cy cour t er r ed i n i t s cal cul at i on

of damages; andE. Whet her t he bankr upt cy cour t er r ed i n awar di ng t he

Dai r y i t s at t or neys f ees. 7

IV. STANDARDS OF REVIEW

I n t he cont ext of an appeal f r om a nondi schar geabi l i t y

j udgment , we r evi ew t he bankr upt cy cour t s f i ndi ngs of f act

under t he cl ear l y er r oneous st andar d and i t s concl usi ons of l aw

de novo. Honkanen v. Hopper ( I n r e Honkanen) , 446 B. R. 373, 382

( 9t h Ci r . BAP 2011) . However , t he ul t i mat e quest i on of whet her

a par t i cul ar debt i s di schar geabl e i s a mi xed quest i on of f act

and l aw t hat we r evi ew de novo. I d. ; see al so Sear l es v. Ri l ey

( I n r e Sear l es) , 317 B. R. 368, 373 ( 9t h Ci r . BAP 2004) ( st at i ng

t hat mi xed quest i ons ar e revi ewed de novo when t hey r equi r e the

cour t t o consi der l egal concept s and exer ci se j udgment aboutval ues ani mat i ng l egal pr i nci pl es. ) .

The det er mi nat i on of j ust i f i abl e r el i ance [ under

523( a) ( 2) ( A) ] i s a quest i on of f act subj ect t o t he cl ear l y

err oneous st andard of r evi ew. Eugene Par ks Law Corp. Def i ned

Benef i t Pensi on Pl an v. Ki r sh ( I n r e Ki r sh) , 973 F. 2d 1454, 1456

( 9t h Ci r . 1992) ( per cur i am) .

The bankrupt cy cour t s f act ual f i ndi ngs r egar di ng t he


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amount of damages ar e al so r evi ewed under a cl ear l y err oneous

st andar d. Lundel l v. Ul r i ch ( I n r e Ul r i ch) , 236 B. R. 720, 723

( 9t h Ci r . BAP 1999) .

A bankrupt cy cour t s f act ual f i ndi ngs ar e cl ear l y er r oneousi f t hey ar e i l l ogi cal , i mpl ausi bl e, or wi t hout suppor t f r om

i nf er ences that may be dr awn f r om t he r ecor d. Uni t ed St at es v.

Hi nkson, 585 F. 3d 1247, 125961 ( 9t h Ci r . 2009) ( en banc) . I t

i s wel l set t l ed t hat r evi ew under t he cl ear l y er r oneous

standar d i s s i gni f i cant l y def er ent i al , r equi r i ng a def i ni t e

and f i r m convi ct i on t hat a mi st ake has been commi t t ed.

Concr et e Pi pe & Pr ods. of Cal . , I nc. v. Const r . Labor er s Pensi on

Tr ust f or So. Cal . , 508 U. S. 602, 622 ( 1993) . We ar e r equi r ed

t o uphol d any det er mi nat i on of t he bankrupt cy cour t t hat f al l s

wi t hi n a br oad r ange of per mi ssi bl e concl usi ons. Coot er & Gel l

v. Har t mar x Cor p. , 496 U. S. 384, 400 ( 1990) .

The i ssue of whet her a r el at i onshi p i s f i duci ar y wi t hi n

t he meani ng of 532( a) ( 4) i s a quest i on of l aw, Runni on v.Pedr azzi ni ( I n r e Pedr azzi ni ) , 644 F. 2d 756, 758 ( 9t h Ci r .

1981) , whi ch we r evi ew de novo. Ragsdal e v. Hal l er , 780 F. 2d

794 ( 9t h Ci r . 1986) .

We r evi ew t he bankrupt cy cour t s evi dent i ar y rul i ngs f or

abuse of di scret i on. See J ohnson v. Nei l son ( I n r e Sl at ki n) ,

525 F. 3d 805, 811 ( 9t h Ci r . 2008) . We al so r evi ew f or abuse of

di scr et i on t he bankrupt cy cour t s awar d of pr ej udgment i nt er est ,

but r evi ew de novo whether an award of pr ej udgment i nt erest i s

aut hor i zed under st at e or f eder al l aw. I d. at 820.

Under t he abuse of di scr et i on st andar d of r evi ew, we f i r st

det er mi ne de novo whet her t he [ bankrupt cy] cour t i dent i f i ed t he


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cor r ect l egal r ul e t o appl y t o t he r el i ef r equest ed. Hi nkson,

585 F. 3d at 1262. And i f t he bankrupt cy cour t i dent i f i ed t he

cor r ect l egal r ul e, we then det er mi ne under t he cl ear l y

er r oneous st andar d whet her i t s f act ual f i ndi ngs and i t sappl i cat i on of t he f act s t o t he r el evant l aw wer e i l l ogi cal ,

i mpl ausi bl e, or wi t hout suppor t i n i nf er ences t hat may be dr awn

f r om t he f acts i n t he r ecor d. I d.

Awar ds of at t or ney[ s ] f ees are gener al l y revi ewed f or an

abuse of di scr et i on. However , we onl y ar r i ve at di scr et i onar y

r evi ew i f we ar e sat i sf i ed t hat t he cor r ect l egal st andar d was

appl i ed and t hat none of t he [ bankrupt cy cour t s] f i ndi ngs of

f act wer e cl ear l y er r oneous. We r evi ew quest i ons of l aw de

novo. Ri ckl ey v. Cnt y. of L. A. , 654 F. 3d 950, 953 ( 9t h Ci r .

2011) . To t he ext ent t he i ssue i s whet her Cal i f or ni a l aw al l ows

t he awar d of at t or neys f ees, our r evi ew i s de novo. Fry v.

Di nan ( I n r e Di nan) , 448 B. R. 775, 783 ( 9t h Ci r . BAP 2011) .

V. DISCUSSION

On appeal , Debt or ar gues t hat t he bankrupt cy cour t er r ed i n

concl udi ng t hat t he debt owed t o t he Dai r y was nondi schar geabl e

under 523( a) ( 2) ( A) and ( 4) due to mi st akes of f act and l aw.

Debt or al l eges numer ous f act ual er r or s, cont endi ng t hat t he

bankrupt cy cour t i mpr oper l y f ound t he el ement of j ust i f i abl e

r el i ance was met under 523( a) ( 2) ( A) and char ged or f ai l ed t o

gi ve hi m cr edi t f or cer t ai n amount s when i t cal cul at ed t he

damage award. Debt or al so asser t s t hat he was not a f i duci ary

wi t hi n t he meani ng of 523( a) ( 4) . Fi nal l y, Debt or cont ends

t hat t he bankrupt cy cour t er r ed i n awar di ng at t or neys f ees t o

t he Dai r y because the i ssues l i t i gat ed i n t he adver sar y


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8 BAP Rul e 8006- 1 pr ovi des: The excer pt s of t he r ecor dshal l i ncl ude t he t r anscr i pt s necessar y f or adequat e r evi ew i nl i ght of t he st andar d of r evi ew t o be appl i ed t o t he i ssuesbef or e t he Panel . The Panel i s requi r ed t o consi der onl y t hosepor t i ons of t he t r anscr i pt i ncl uded i n t he excer pt s of t he r ecor d. . . .

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pr oceedi ng f el l out si de t he scope of t he at t or neys f ee cl ause

i n t he Set t l ement Agr eement .

Bef or e addr essi ng Debt or s cont ent i ons of l aw, we addr ess

hi s asser t ed f act ual er r or s whi ch ar e l i st ed under hi s i ssues onappeal . As appel l ant , Debt or had t he r esponsi bi l i t y t o f i l e an

adequate recor d, and the bur den of showi ng that t he bankr upt cy

cour t s f i ndi ngs of f act ar e cl ear l y er r oneous. [ Debt or ] shoul d

know t hat an at t empt t o r ever se t he t r i al cour t s f i ndi ngs of

f act wi l l r equi r e t he ent i r e r ecor d r el i ed upon by the t r i al

cour t be suppl i ed f or r evi ew. Kr i t t v. Kr i t t ( I n r e Kr i t t ) ,

190 B. R. 382, 387 ( 9t h Ci r . BAP 1995) ( ci t i ng Bur khar t v. FDI C

( I n r e Bur khar t ) , 84 B. R. 658, 660- 61 ( 9t h Ci r . BAP 1988) ) .

Debt or has pr ovi ded us wi t h onl y sel ect por t i ons of t he

r el evant t r anscri pt s. Mor eover , Debt or r ef er s t o t r i al exhi bi t s

whi ch ar e ost ensi bl y i ncl uded under Tab Y; however , t he

documents under Tab Y do not have exhi bi t numbers on them,

maki ng i t near l y i mpossi bl e f or us t o mat ch t he exhi bi t s wi t ht est i mony. To compound t he pr obl em, i t does not appear t hat

Debt or i ncl uded al l t he exhi bi t s f r om t r i al i n t he r ecor d. Due

t o t he i ncompl et e r ecor d, ef f ect i ve appel l at e r evi ew of f act ual

er r or s under t he cl ear l y er r oneous st andar d wi l l be di f f i cul t i f

not i mpossi bl e. 8

The set t l ed r ul e on t r anscri pt s i n par t i cul ar i s t hat


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9 J ames Kozer a t est i f i ed t hat t he di r ect or s al l owed t hi ssal ar y al t hough i t was never di scussed. Kozer a al so t est i f i edt hat t hi s sal ar y had not changed. Hr g Tr . at 152, 162- 63,5/ 9/ 11. Mont gomery t est i f i ed t hat he r emembered Debt or s annualcompensat i on as $32, 000. Hr g Tr . at 91, 5/ 9/ 11.

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f ai l ur e t o pr ovi de a suf f i ci ent t r anscr i pt may, but need not ,

r esul t i n di smi ssal or summar y af f i r mance and t hat t he appel l at e

cour t has di scr et i on t o di sr egar d t he def ect and deci de t he

appeal on t he mer i t s. Kyl e v. Dye ( I n r e Kyl e) , 317 B. R. 390,393- 94 ( 9t h Ci r . BAP 2004) , af f d, 170 Fed. Appx. 457 ( 9t h Ci r .

2006) . Havi ng obt ai ned t he par t i al t r anscr i pt s and some

exhi bi t s, al t hough unnumber ed, we exer ci se our di scr et i on t o

r evi ew Debt or s al l eged f act ual er r or s on t he mer i t s.

We f i r st observe t hat Debt or f ai l ed t o mat ch t he maj or i t y

of t he asser t ed f act ual er r or s wi t h any of t he el ement s under

523( a) ( 2) ( A) or ( a) ( 4) . I ndeed, t he onl y el ement Debt or

di scusses i n hi s br i ef per t ai ni ng t o 523( a) ( 2) ( A) i s

j ust i f i abl e r el i ance, whi ch we address bel ow. Fr om what we can

t el l , some of t he f act ual er r or s al l eged r el at e t o t he nat ur e

and extent of Debt or s f r audul ent conduct .

Speci f i cal l y, Debt or cont ends t hat t he bankrupt cy cour t

er r oneousl y f ound hi s compensat i on was $30, 000 per year9

when het est i f i ed t hat hi s compensat i on package was l at er modi f i ed wi t h

boar d appr oval t o i ncl ude management f ees, heal t h i nsurance, and

ot her expenses. Hr g Tr . at 315- 17, 5/ 10/ 11. However , t he

bankrupt cy cour t di d not bel i eve Debt or s t est i mony r egar di ng

hi s modi f i ed compensat i on package and t here was no wr i t t en

evi dence t o suppor t hi s t est i mony.

Debt or al so takes i ssue wi t h t he bankrupt cy cour t s f act ual


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f i ndi ng t hat Mont gomery and t he ot her di r ectors were not aware

of t he $350, 000 l oan between t he Dai r y and Yankee Farm Cr edi t

unt i l 2007. The r ecord shows t her e were numer ous document s

per t ai ni ng to t he l oan, i ncl udi ng a guar ant ee by Mont gomer y,t hat Mont gomery si gned. Mont gomery t est i f i ed t hat he di d not

r ead or under st and the document at i on that he si gned aut hor i zi ng

t he $350, 000 l oan and di d not l ear n about i t unt i l he r ecei ved

t he l et t er f r om Yankee Far m Cr edi t t hat t he t axes wer e not bei ng

pai d on t he pr opert y. Debt or cont ends t hat Mont gomery s

t est i mony shoul d not have been bel i eved because Mont gomer y was

an educat ed man and exper i enced buyer of r eal est ate. Debt or

mai nt ai ns t hat Mont gomer y s t est i mony i s beyond the r eal m of

possi bi l i t y.

The r ecor d shows t hat t he bankrupt cy cour t f ound ot her wi se

based on t he r el at i onshi p between Debt or and Mont gomery.

Mont gomer y t est i f i ed t hat he t r ust ed Debt or and t hat he di d not

r ead l egal paper s, i nst ead r ef er r i ng t hem t o Debt or , hi sat t orney f or t went y years. The cour t f ound Mont gomery s

t est i mony bel i evabl e. The bankrupt cy cour t al so bel i eved t he

t est i mony of t he Kozer as t hat t hey di d not know about t he l oan

and woul d never have aut hor i zed i t .

On t hi s r ecor d we cannot say t hat t he cour t s f act ual

f i ndi ngs i n connect i on wi t h t he boar d s di scover y of t he Yankee

Far m Cr edi t l oan ar e i l l ogi cal , i mpl ausi bl e, or wi t hout suppor t

f r om i nf er ences dr awn f r om t he r ecor d. Hi nkson, 585 F. 3d at

1259- 61. I n addi t i on, f i ndi ngs based on det er mi nat i ons

r egar di ng t he cr edi bi l i t y of wi t nesses demand[ ] even gr eat er

def er ence t o t he t r i al cour t s f i ndi ngs; f or onl y t he t r i al


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10 I n addi t i on, t he recor d shows t hat Debt or was notaut hor i zed t o bor r ow $152, 504. 44 f r om t he Dai r y t o repay moni eshe had t aken f r om t he Tr enhai l e Est at e. Al t hough Debt ort est i f i ed t hat he was aut hor i zed t o bor r ow t he money f or t her epayment t o t he Tr enhai l e Est at e, t he bankrupt cy cour t di d notf i nd hi s t est i mony bel i evabl e nor was t her e any document at i on t osuppor t hi s cont ent i ons.

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j udge can be awar e of t he var i at i ons i n demeanor and t one of

voi ce t hat bear so heavi l y on t he l i st ener s under st andi ng of

and bel i ef i n what i s sai d. Ander son v. Ci t y of Bessemer Ci t y,

N. C. , 470 U. S. 564, 575 ( 1985) .We al so poi nt out t hat t he out come of t hi s appeal does not

st and or f al l on t hese al l eged f act ual er r or s r egar di ng Debt or s

f r aud. The r ecor d shows Debt or commi t t ed mul t i pl e f r auds by

wr i t i ng unaut hor i zed checks on t he Dai r y s bank account f or hi s

per sonal use none of whi ch were evi denced by i ndependent

di r ect or appr oval , boar d aut hor i zat i on, or any di r ect or s

meet i ng mi nut es. Debt or admi t t ed hi s l i abi l i t y on many of t hese

unaut hor i zed t r ansact i ons: he admi t t ed t o bor r owi ng $81, 525

f r om t he Dai r y t o repay moni es t hat he had t aken f r om t he

Pal mi r a Marando Trust , 10 t o t aki ng unaut hor i zed ATM char ges of

$61, 444. 63 ( wi t h an of f set of $1, 531. 48) , t o maki ng payment s on

hi s home t ot al i ng $34, 418. 52, and he di d not di sput e char ges

agai nst hi m f or t he 2004 checks t ot al i ng $60, 530. 78, t he 2005checks t ot al i ng $72, 300, t he 2006 checks t ot al i ng $42, 850, and

t he 2007 checks tot al i ng $44, 625. Thus, t her e i s ampl e evi dence

t o show Debt or engaged i n f r aud and a cont i nui ng cour se of

decept i ve conduct .

Debt or asser t s numer ous f act ual er r or s wi t h r espect t o t he

bankrupt cy cour t s cal cul at i on of damages. Agai n, t he r ecor d


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11 The bankr upt cy cour t f ound there was no cl ear evi dencet o suppor t Debt or s cont ent i on t hat he shoul d r ecei ve $10, 000cr edi t f or t he pur chase of t he Dai r y s st ock. The bankrupt cycour t al so r equest ed document at i on showi ng t hat Debt or wasent i t l ed t o a cr edi t of t he di vi dends t hat he r ecei ved on st ock

t hat he never val i dl y pur chased. The r ecor d shows that Debt ornever poi nt ed t o any document at i on r egar di ng t hi s cr edi t . Wi t hr espect t o t he char ges f or Dr . Lee, t he r ecor d shows t hat Debt ornever expl ai ned why Dr . Lee woul d l oan money t o t he Dai r y nordi d he pr ovi de any document at i on t o support such a l oan.Li kewi se, wi t h Debt or s r emai ni ng chal l enges t o t he bankrupt cycour t s f act ual f i ndi ngs on damages, Debt or poi nt s t o nodocument s i n t he r ecor d t hat woul d support hi s t est i mony orasser t ed er r or s on appeal .

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r eveal s t hat Debt or submi t t ed no cor por at e mi nut es or ot her

wr i t i ngs concl usi vel y est abl i shi ng t hat he had obt ai ned

aut hor i zat i on f r om any di r ect or or t he boar d f or t he

t r ansact i ons i nvol ved i n t hi s appeal .11

The l ack ofdocument at i on made i t di f f i cul t f or t he bankrupt cy cour t t o

eval uate the numer ous al l eged char ges and cr edi t s and cal cul at e

t he damages wi t h any t ype of pr eci si on.

Wher e a def endant by hi s own wr ong has prevent ed amor e pr eci se comput at i on . . . [ t he f act f i nder ] maymake a j ust and r easonabl e est i mat e of t he damagebased on r el evant dat a, and r ender i t s ver di ctaccor di ngl y. Any ot her r ul e woul d enabl e t he

wr ongdoer t o pr of i t by hi s wr ongdoi ng at t he expenseof hi s vi ct i m. I t woul d be an i nducement t o makewr ongdoi ng so ef f ect i ve and compl ete i n every case ast o pr ecl ude any r ecover y, by r ender i ng t he measure ofdamages uncer t ai n.

I n r e Ul r i ch, 236 B. R. at 723. I n t he end, Debt or s f i nanci al

machi nat i ons coupl ed wi t h t he l ack of document at i on were a maj or

pr obl em f or hi m, especi al l y i n l i ght of t he f act t hat he was an

at t orney who had pr act i ced l aw f or decades. The bankr upt cycour t f ound [ b] y educat i on and by pr of essi onal exper i ence as an


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12 Gener al l y, t he appl i cat i on of t he equi t abl e doct r i ne ofuncl ean hands i s wi t hi n t he di scret i on of t he t r i al cour t and i sr evi ewed f or abuse of t hat di scr et i on. See Tr ansWor l d Ai r l i nes,I nc. v. Am. Coupon Exch. , I nc. , 913 F. 2d 676, 694 ( 9t h Ci r .

( cont i nued. . . )

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at t orney, Def endant was wel l aware t hat he shoul d document

ever yt hi ng, especi al l y when i nvol ved i n sel f - deal i ng ef f or t s, he

di d not .

Wi t hout concl usi ve document at i on, t he bankr upt cy cour t wasnot compel l ed t o bel i eve Debt or s sel f - ser vi ng t est i mony, whi ch

i n most i nst ances, t he cour t di d not f i nd cr edi bl e. We do not

di st ur b t he qui nt essent i al l y f act ual det er mi nat i on of

credi bi l i t y i n t he absence of cl ear er r or . Uni t ed St at es v.

Lummi I ndi an Tr i be, 841 F. 2d 317, 319 ( 9t h Ci r . 1988) . Debt or

has poi nt ed t o no evi dence i n t he r ecor d t hat suggest s t he

bankrupt cy cour t s assessment s of wi t ness cr edi bi l i t y wer e so

bl at ant l y wr ong as t o r equi r e r ever sal .

Moreover , under t he doct r i ne of uncl ean hands, Debt or must

come i nt o cour t wi t h cl ean hands or he wi l l be deni ed r el i ef ,

r egar dl ess of t he mer i t s of hi s cl ai m. Pr eci si on I nst r ument

Mf g. Co. v. Aut o. Mai nt . Mach. Co. , 324 U. S. 806, 81415 ( 1945) ;

Republ i c Mol di ng Cor p. v. B. W. Phot o Ut i l s. , 319 F. 2d 347, 350( 9t h Ci r . 1963) ( pl ai nt i f f s uncl ean hands wei gh i n t he

equi t abl e bal ance t hat under l i es the desi gn of a r emedy) . Her e,

t he bankrupt cy cour t appl i ed t he doct r i ne of uncl ean hands

f i ndi ng t hat Debt or was not ent i t l ed t o the benef i t of doubt

r egar di ng t he char ges or cr edi t s wi t h r espect t o t he cal cul at i on

of t he damages because he had decei ved peopl e who had t r ust ed

hi m over a subst ant i al per i od of t i me. 12


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12( . . . cont i nued)1990) . Debt or does not r ai se any i ssue wi t h r espect t o t hecour t s appl i cat i on of t he doct r i ne on appeal . Nonet hel ess, wement i on t he cour t s appl i cat i on of t he doct r i ne because i tcl ear l y rel at es t o t he cour t s cr edi bi l i t y assessment of Debt or st est i mony on damages. Fi ndi ngs based on determi nat i ons r egardi ngt he cr edi bi l i t y of wi t nesses demand[ ] even gr eat er def er ence t ot he t r i al cour t s f i ndi ngs . . . . Ander son, 470 U. S. at 575.

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On t hi s r ecor d, we concl ude t hat t he bankrupt cy cour t s

f act ual f i ndi ngs Debt or chal l enges on appeal f el l wi t hi n t he

br oad r ange of per mi ssi bl e concl usi ons. Coot er & Gel l , 496 U. S.

at 400. Ther ef or e, t he bankrupt cy cour t s f act ual f i ndi ngs wer enot cl ear l y er r oneous.

A. Debtors Liability Under 523(a)(2)(A)

To est abl i sh t hat a debt i s nondi schar geabl e under

523( a) ( 2) ( A) , a cr edi t or must est abl i sh f i ve el ement s:

( 1) mi sr epr esent at i on, f r audul ent omi ssi on or decept i ve conduct

by the debt or ; ( 2) knowl edge of t he f al si t y or decept i veness of

t he st at ement or conduct ; ( 3) an i nt ent t o decei ve;

( 4) j ust i f i abl e r el i ance by t he credi t or on t he debt or s

st at ement or conduct ; and (5) damage t o t he cr edi t or pr oxi mat el y

caused by i t s r el i ance on t he debt or s s t at ement or conduct .

Tur t l e Rock Meadows Homeowner s Ass n v. Sl yman ( I n r e Sl yman) ,

234 F. 3d 1081, 1085 ( 9t h Ci r . 2000) . The Dai r y had t he bur den

of pr ovi ng t he var i ous el ement s by a pr eponderance of t heevi dence. I d. The bur den of showi ng somethi ng by a

pr eponder ance of t he evi dence, . . . si mpl y requi r es t he

t r i er of f act t o bel i eve t hat t he exi st ence of a f act i s mor e

pr obabl e than i t s nonexi st ence bef or e [he] may f i nd i n f avor of

t he par t y who has t he bur den t o persuade the [ j udge] of t he


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f act s exi st ence. Concrete Pi pe & Pr ods. of Cal . , I nc. ,

508 U. S. at 622.

Debtors Fraud

As descr i bed above, Debt or s decept i ve conduct amount ed t omul t i pl e f r auds, some of whi ch he admi t t ed.

Knowledge and Intent to Deceive

Debt or does not i dent i f y er r or s of f act or l aw wi t h any

degr ee of speci f i ci t y r egardi ng t he el ement s of knowl edge and

i nt ent t o decei ve. Rather , Debt or makes a bl anket st atement

t hat t he bankrupt cy cour t s concl usi on t hat Debt or was l i abl e

under 523( a) ( 2) ( A) was er r oneous. To t he ext ent Debt or s

assi gnment of er r or i s di r ect ed at t he knowl edge and i nt ent t o

decei ve el ement s, we r ej ect i t .

Debt or s knowl edge and i nt ent t o decei ve may be i nf err ed by

ci r cumst ant i al evi dence and f r om Debt or s conduct . Edel son v.

Comm r , 829 F. 2d 828, 832 ( 9t h Ci r . 1987) ( A cour t may i nf er

f r audul ent i nt ent f r om var i ous ki nds of ci r cumst ant i alevi dence. ) ; Donal dson v. Hayes ( I n r e Or t enzo Hayes) , 315 B. R.

579, 587 (Bankr . C. D. Cal . 2004) ( Knowl edge may be pr oven by

ci r cumst ant i al evi dence and i nf er r ed f r om t he debt or s cour se of

conduct . ) .

Here, t he bankr upt cy cour t f ound numerous t r ansact i ons by

t he Debt or wi t h t he Dai r y were unaut hor i zed by t he boar d. The

cour t f ur t her f ound t hat dur i ng Debt or s t enur e as pr esi dent , he

pr epar ed al l of t he f i nanci al books and r ecor ds of t he Dai r y,

had cont r ol of t he checkbooks, and conceal ed t he unaut hor i zed

l oans under t he NC Tr ust . I n addi t i on, t he bankrupt cy cour t

obser ved that Debt or had been an at t orney f or over t went y years,


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and as an exper i enced at t or ney, he woul d have known t he

i mpor t ance of document i ng f i nanci al ar r angement s wi t h ot her s.

Yet , Debt or di d not document any of t he l oans he al l egedl y

recei ved f rom pl ai nt i f f .These f act ual f i ndi ngs ar e not i ndependent of each ot her

but show a cont i nui ng pat t er n of wr ongf ul conduct . Ther ef or e,

t he bankrupt cy cour t coul d r easonabl y i nf er t hat Debt or had

knowl edge of hi s decept i ve conduct and t he i nt ent t o decei ve.

The Directors Justifiable Reliance

Debt or ar gues t hat t he bankrupt cy cour t er r ed i n f i ndi ng

t hat t he Kozer as and Mont gomer y j ust i f i abl y rel i ed on Debt or s

mi sr epr esent at i ons and/ or decept i ve conduct . The bankrupt cy

cour t f ound t hat t he di r ect or s had no r eason not t o bel i eve

Debt or . The cour t pr oper l y consi dered t hat Debt or had been both

t he Kozer as and Mont gomery s at t orney f or years and t hei r

t r ust ed f r i end. See I n r e Ki r sch, 973 F. 2d at 1458 ( I n

consi der i ng whet her r el i ance i s j ust i f i abl e, t he cour t must t akei nt o account t he knowl edge and r el at i onshi p of t he par t i es. ) .

I n addi t i on, t he bankrupt cy cour t f ound t hat t he f i nanci al

document s al l l ooked good as t hey were made t o conceal t he

money t hat Debt or had been t aki ng t hr ough t he l i ne i t emon t he

bal ance sheet showi ng hi s al l eged l oans as ot her asset s

under what he cal l ed Nort h Count r y Trust or NC Trust . The

NC Trust supposedl y hel d money that t he Dai r y had not expended,

but i t act ual l y ref l ect ed t he money Debt or had t aken f r om t he

Dai r y i n unaut hor i zed l oans.

Debt or cont ends t he bankrupt cy cour t er r ed i n f i ndi ng t hat

t he Dai r y j ust i f i abl y rel i ed on hi s mi sr epr esent at i ons because


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13 Si nce t he gr avamen of t he Dai r y s compl ai nt i s based onf r aud, Cal i f or ni a s t hr ee year st at ut e of l i mi t at i on under Cal .Code Ci v. P. 338 woul d appl y.

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t he st at ut e of l i mi t at i ons on t he Dai r y s f r aud cl ai ms had

expi r ed by J une 30, 2007. 13 Debt or ar gues t hat by J une 30, 2004,

when Mont gomery had f i ni shed si gni ng al l t he l oan document s, t he

Dai r y knew or shoul d have known or shoul d have di scovered t hef act s on whi ch t he Dai r y bases i t cl ai ms f or r el i ef .

We ar e not per suaded by Debt or s s t at ut e of l i mi t at i ons

def ense. Fi r st , t he onl y pl ace we see t he st at ut e of

l i mi t at i ons ment i oned i s i n Debt or s answer t o t he TAC. I t does

not appear f r om t he r ecor d t hat Debt or ar gued t he i ssue at t r i al

i n t he bankrupt cy cour t . See Bar nes v. Bel i ce ( I n r e Bel i ce) ,

461 B. R. 564, 569 n. 4 ( 9t h Ci r . BAP 2011) ( hol di ng t hat

argument s not r ai sed i n t he bankr upt cy cour t can be deemed

wai ved f or appeal pur poses) .

Second, under Cal i f or ni a l aw, t he Dai r y s cause of act i on

f or f r aud di d not accr ue[ ] unt i l t he di scover y . . . of t he

f act s const i t ut i ng t he f r aud or mi st ake. Cal . Code Ci v. P.

338( d) . As not ed above, t he bankrupt cy cour t bel i evedMont gomer y that he di d not l ear n of t he Debt or s f r aud unt i l

2007 when he r ecei ved t he l et t er f r om Yankee Far m Cr edi t st at i ng

t hat t he pr oper t y taxes were not bei ng pai d on t he pr oper t y i n

New Yor k.

Thi r d, Debt or l i mi t s t he di scover y of hi s f r aud as

r el at i ng onl y t o t he unaut hor i zed $350, 000 Yankee Far m Cr edi t

l oan. However , Debt or obt ai ned numerous ot her unaut hor i zed

l oans f r om t he Dai r y whi ch t he recor d shows wer e di scover ed by


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t he Kozeras and Mont gomery onl y af t er t he CPA t hey hi r ed

exami ned t he Dai r y s books and r ecor ds.

For t hese reasons, we concl ude t hat t he bankrupt cy cour t s

f i ndi ng on t he j ust i f i abl e r el i ance el ement was not cl ear l yerr oneous.

Damages

As not ed, t he r ecor d suppor t s t he bankrupt cy cour t s

f act ual f i ndi ngs r egar di ng an awar d of damages. We di scuss t he

bankrupt cy cour t s awar d of pr ej udgment i nt er est and at t or neys

f ees i n f ur t her det ai l bel ow.

I n sum, on t he r ecor d pr ovi ded, we di scer n no er r or wi t h

t he bankrupt cy cour t s concl usi on t hat t he Dai r y had pr oved al l

t he el ement s f or 523( a) ( 2) ( A) by a pr eponder ance of t he

evi dence.

B. Debtors Liability Under Section 523(a)(4)

Sect i on 523( a) ( 4) pr ohi bi t s t he di schar ge of debt s f or

f r aud or def al cat i on whi l e act i ng i n a f i duci ar y capaci t y,embezzl ement , or l arceny.

The el ement s f or embezzl ement ar e ( 1) proper t y r i ght f ul l y

i n t he possessi on of a nonowner ; ( 2) nonowner s appr opr i at i on of

t he pr oper t y t o a use ot her t han t hat f or whi ch i t was

ent r ust ed; and ( 3) ci r cumst ances i ndi cat i ng f r aud. Tr ansamer i ca

Commer ci al Fi n. Cor p. v. Li t t l et on ( I n r e Li t t l et on) , 942 F. 2d

551, 555 ( 9t h Ci r . 1991) . Agai n, Debt or does not addr ess er r or s

of f act or l aw speci f i cal l y rel at ed t o t hese el ement s i n hi s

br i ef s .

The bankrupt cy cour t f ound t hat t he Dai r y s money was

r i ght f ul l y i n t he possessi on of Debt or , but t hen he


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appr opr i at ed i t t o hi s own use by spendi ng i t or payi ng hi s

bi l l s and obl i gat i ons whi ch was not known or aut hor i zed by the

Pl ai nt i f f s . . . and i t was done wi t h a f r audul ent i nt ent . The

r ecor d ampl y suppor t s t he bankrupt cy cour t s f i ndi ngs of f actand concl usi ons of l aw r egardi ng t he el ement s f or embezzl ement .

Ther ef or e, we do not di st urb t he cour t s deci si on on appeal .

To prevai l on a cl ai m ar i si ng f r om f r aud or def al cat i on

whi l e act i ng i n a f i duci ar y capaci t y, t he credi t or must pr ove

not onl y the debt or s f r aud or def al cat i on, but al so t hat t he

debt or was act i ng i n a f i duci ar y capaci t y when t he debt or

commi t t ed t he f r aud or def al cat i on. Ci t i ng t he Fi f t h Ci r cui t

case of Moreno v. Ashwort h ( I n r e Moreno) , 892 F. 2d 417 ( 5t h

Ci r . 1990) , t he bankrupt cy cour t f ound Debt or was act i ng as a

f i duci ar y because he was t he pr esi dent of a pr i vat e cor por at i on

ent r ust ed wi t h f unds f or a par t i cul ar pur pose. On appeal ,

Debt or mai nt ai ns t hat he was not a f i duci ar y f or pur poses of

523( a) ( 4) ci t i ng Cal - Mi cro, I nc. v. Cant r el l ( I n r e Cant r el l ) ,329 F. 3d 1119, 1125- 1128 ( 9t h Ci r . 2003) . We agr ee t hat t he

hol di ng i n Cant r el l appl i es t o t hese f act s.

I n Cant r el l , t he Ni nt h Ci r cui t r ei t er at ed t hat t he t er m

f i duci ar y i s const r ued nar r owl y f or pur poses of 523( a) ( 4) .

I d. at 1125. Under t hi s nar r ow const r uct i on, t he f i duci ar y

r el at i onshi p must ar i se f r om an expr ess or t echni cal t r ust . I d.

( The br oad, gener al def i ni t i on of f i duci ar ya r el at i onshi p

i nvol vi ng conf i dence, t r ust and good f ai t hi s i nappl i cabl e i n

t he di schar geabi l i t y cont ext . ) ( ci t i ng Ragsdal e v. Hal l er

( I n r e Hal l er ) , 780 F. 2d 794, 796 ( 9t h Ci r . 1986) ) .

Bankrupt cy cour t s l ook t o st at e l aw t o det er mi ne whet her an


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expr ess t r ust r el at i onshi p exi st s. I n r e Cant r el l , 329 F. 3d at

1125. Under Cal i f or ni a cor por at i ons l aw, cor por at e of f i cer s and

di r ect or s ar e not f i duci ar i es wi t hi n t he meani ng of 523( a) ( 4) .

I d. at 1127. The Cant r el l cour t expl ai ned, al t hough of f i cer sand di r ect or s [ under Cal i f or ni a l aw] ar e i mbued wi t h t he

f i duci ar y dut i es of an agent and cer t ai n dut i es of a t r ust ee,

t hey ar e not t r ust ees wi t h r espect t o cor por at e asset s. I d. at

1126 ( emphasi s added) . Cant r el l r el i ed on Bai nbr i dge v. St oner ,

106 P. 2d 423 ( Cal . 1940) , whi ch expl i ci t l y hel d t hat t he

r el at i onshi p i n Cal i f or ni a bet ween a di r ect or on t he one hand

and t he cor por at i on and i t s shar ehol der s on t he ot her hand,

st r i ct l y speaki ng, was one of agency and not t r ust .

I n r e Cant r el l , 329 F. 3d at 1126 ( ci t i ng Bai nbr i dge, 106 P. 2d at

426) .

The Dai r y r ecogni zes t hat Cal i f or ni a l aw dr aws a

di st i nct i on bet ween t he f i duci ar y dut i es of cor por at e of f i cer s

and di r ect or s who ar e vi ewed as agent s and t he f i duci ar y dut i esof a t r ust ee. Nonet hel ess, t he Dai r y ar gues t hat Debt or was a

t r ust ee because he was ent r ust ed wi t h t he bank account s of t he

Dai r y and had vi r t ual l y unl i mi t ed sway over t hem. We are not

per suaded. I n t he Fi f t h Ci r cui t case of I n r e Mor eno, t he

debt or , an of f i cer , di d not di sput e t hat he was a f i duci ar y

under Texas l aw whi ch i s i napposi t e t o Cal i f or ni a l aw.

I n r e Moreno, 892 F. 2d at 421. Moreover , al t hough Debt or was i n

a rel at i onshi p wi t h t he boar d member s t hat i nvol ved conf i dence,

t r ust and good f ai t h, t hi s gener al def i ni t i on of f i duci ar y i s

i nappl i cabl e i n t he di schar geabi l i t y cont ext . Accor di ngl y, we

concl ude that t he bankrupt cy cour t er r ed i n f i ndi ng t hat Debt or


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14 Al t hough Debt or cont ends t hat t here was no t est i mony t osuppor t how t he Dai r y cal cul at ed t he i nt er est on t he not es, t hi sargument cannot f orm a basi s f or r eversal on appeal when we donot have t he compl et e t r anscr i pt s i n t he recor d.

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was a f i duci ar y wi t hi n t he meani ng of 523( a) ( 4) .

However , because t he cour t s embezzl ement f i ndi ng was

cor r ect , t he bankrupt cy cour t s concl usi on t hat t he damages wer e

nondi schar geabl e under 523( a) ( 4) wi l l not be di st ur bed onappeal .

C. Other Damages

Prejudgment Interest

Debt or asser t s t hat t he bankrupt cy cour t er r ed i n char gi ng

hi m f or i nt er est i n t he amount of $47, 464. 22 on t he pr omi ssory

not es on t wo gr ounds: f i r st , Debt or mai nt ai ns t hat t her e was no

t est i mony t o suppor t how t he Dai r y cal cul at ed t he i nt er est on

t he notes and second, Debt or ar gues t hat t he not es f or m a par t

of t he Set t l ement Agr eement and r el ease and t he Dai r y di d not

st at e a cl ai m f or br each of t he Set t l ement Agr eement i n t he

adver sar y pr oceedi ng, i nst ead pur sui ng cl ai ms based on f r aud.

I n i t s f i ndi ngs, t he bankr upt cy cour t not ed t hat i t was

r el uct ant t o awar d t he i nt er est cl ai ms as set f or t h i n t heSet t l ement Agr eement and t wo pr omi ssory notes but t hat t here was

no ot her way t o compensate t he Dai r y f or i t s l oss of pr oper t y

and money except by al l owi ng i nt er est . The cour t f ur t her f ound

t hat si nce no ot her i nt er est cal cul at i ons wer e of f er ed by ei t her

par t y, i t seems r easonabl e t o al l ow t he i nt er est t hat t he

par t i es agr eed upon i n t he [ not es] . 14

The awar d of prej udgment i nter est i n nondi schar geabi l i t y


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pr oceedi ngs i s aut hor i zed under Cohen v. de l a Cr uz, 523 U. S.

213, 223 ( 1998) , where the Uni t ed St ates Supr eme Cour t concl uded

t hat t he t ext of 523( a) ( 2) ( A) encompasses any l i abi l i t y

ar i si ng f r om money, pr oper t y, et c. , t hat i s f r audul ent l yobt ai ned, i ncl udi ng t r ebl e damages, at t or ney s f ees and ot her

r el i ef t hat may exceed t he val ue obt ai ned by the debt or .

I n awar di ng pr ej udgment i nt er est , t he bankrupt cy cour t di d

not speci f i cal l y st at e what l aw i t was appl yi ng when i t awar ded

t he pr ej udgment i nt er est . Under f eder al l aw, cour t s may al l ow

pr ej udgment i nt er est even though a gover ni ng st at ut e i s s i l ent

r egar di ng such i nt er est . Frank Musi c Cor p. v.

Met r oGol dwynMayer , I nc. , 886 F. 2d 1545, 1550 ( 9t h Ci r . 1989) ,

cer t . deni ed, 494 U. S. 1017 ( 1990) . [ T]he award of pr ej udgment

i nt er est i n a case under f eder al l aw i s a mat t er l ef t t o t he

sound di scr et i on of t he t r i al cour t . Awar ds of pr ej udgment

i nt er est ar e gover ned by consi der at i ons of f ai r ness and ar e

awarded when i t i s necessary t o make t he wr onged par t y whol e. Acequi a I nc. v. Cl i nt on ( I n r e Acequi a, I nc. ) , 34 F. 3d 800 ( 9t h

Ci r . 1994) ( det er mi ni ng t hat an awar d of pr ej udgment i nt er est i n

a 548( a) case i s l ef t t o t he sound di scret i on of t he t r i al

court and i s awarded when necessary t o make the wr onged par t y

whol e) .

Where a debt t hat i s f ound t o be nondi schargeabl e ar ose

under st at e l aw, t he awar d of pr ej udgment i nt er est on t hat debt

i s al so gover ned by st at e l aw. Ot t o v. Ni l es ( I n r e Ni l es) ,

106 F. 3d 1456, 1463 ( 9t h Ci r . 1997) . Under Cal i f or ni a l aw, t he

cour t may awar d pr ej udgment i nt er est i n act i ons ot her t han

cont r act i n i t s di scret i on. Cal . Ci v. Code 3288 ( I n an


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15 Cal i f or ni a l aw al so pr ovi des t hat pr ej udgment i nt er est i sa mat t er of r i ght wher e t her e i s a vest ed r i ght t o r ecoverdamages cer t ai n as of a par t i cul ar day. Cal . Ci vi l Code 3287( a) . [ T] he cer t ai nt y r equi r ement of [ Ci vi l Code] sect i on3287, subdi vi si on ( a) has been r educed t o t wo t est s: ( 1) whet hert he debtor knows t he amount owed or ( 2) whet her t he debtor woul d

be abl e t o comput e t he damages. Fi r eman s Fund I ns. Co. v.Al l st at e I ns. Co. , 234 Cal . App. 3d 1154, 1173 ( Cal . Ct . App.1991) . I t i s equal l y possi bl e t hat t he bankrupt cy cour t wasawar di ng pr ej udgment i nt er est as a mat t er of r i ght r at her t han byexer ci si ng i t s di scr et i on. Af t er al l , t he par t i es had l i qui dat edt he amount of damages owed i n t he Set t l ement Agreement . The f actt hat t he amount may have l ater i ncr eased due t o char ges, cr edi t sor di sal l owances di d not make t he amount of t he damages l esscer t ai n.

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act i on f or t he br each of an obl i gat i on not ar i si ng f r om

cont r act , and i n ever y case of oppr essi on, f r aud, or mal i ce,

i nt er est may be gi ven, i n t he di scret i on of t he j ur y. ) . 15

Her e, t he par t i es ent er ed i nt o a Set t l ement Agr eement onJ une 25, 2008, agr eei ng t hat t he Di ar y s cl ai m agai nst Debt or

was $375, 000. Si nce t hat t i me and act ual l y wel l bef or e t he

Debt or has had possessi on and use of t he Dai r y s money. Thus,

t he under l yi ng pur pose j ust i f yi ng an awar d of pr ej udgment

i nt er est i s pr esent compensat i on t o t he Dai r y f or i t s l oss of

t he use of i t s money t hat Debt or l oaned hi msel f wi t hout

aut hor i zat i on. Addi t i onal l y, because t he par t i es di d not of f er

any ot her i nt er est cal cul at i ons, t he bankrupt cy cour t f ound i t

r easonabl e t o use t he i nt er est r at e agr eed t o by t he par t i es

i n t he pr omi ssory notes. See Bl au v. Lehman, 368 U. S. 403, 414

( 1962) ( [ I ] nt er est i s not r ecover ed accor di ng t o a r i gi d t heor y

of compensat i on f or money wi t hhel d, but i s gi ven i n r esponse t o

consi der at i ons of f ai r ness) . Wi t hout cont r ar y evi dence, t hebankr upt cy cour t pr oper l y exer ci sed i t s di scret i on by sel ect i ng


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16 I f t he t r i al cour t had sel ect ed t he Cal i f or ni a J udgmentr ate of i nt erest of 10%, t he award woul d have been much hi gher .

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t he r at e of i nt er est set f or t h i n t he pr omi ssor y not es. 16

Accor di ngl y, we concl ude that t he bankrupt cy cour t di d not abuse

i t s di scr et i on i n awar di ng t he Dai r y pr ej udgment i nt er est .

Attorneys Fees and Costs

Debt or cont ends t hat t he bankrupt cy cour t er r ed i n awar di ng

t he Dai r y at t or neys f ees i n t hi s pr oceedi ng because t he i ssues

l i t i gated wer e based on f r aud and nondi schar geabi l i t y and t hus

not wi t hi n t he scope of t he at t or neys f ee pr ovi si on i n t he

Set t l ement Agreement . We agr ee.

At t orneys f ees may be awarded and decl ared

nondi schar geabl e i n an act i on t o det er mi ne di schar geabi l i t y of

debt . Cohen, 523 U. S. at 223. However , bef or e at t or neys f ees

are awarded, t wo r equi r ement s must be met : ( 1) an under l yi ng

cont r act or nonbankrupt cy l aw must pr ovi de a r i ght t o recover

at t or neys f ees, and ( 2) t he i ssues l i t i gat ed i n t he

di schar geabi l i t y act i on must f al l wi t hi n t he scope of t he

cont r act ual or st at ut or y at t or neys f ees pr ovi si on. SeeI n r e Di nan, 448 B. R. at 785 ( 9t h Ci r . BAP 2011) ( under Cohen,

t he det er mi nat i ve quest i on f or awar di ng at t or neys f ees i s

whet her t he cr edi t or woul d be abl e t o r ecover t he f ee out si de of

bankrupt cy under st at e or f eder al l aw) .

The Dai r y cont ends t hat t he awar d of at t or neys f ees was

appr opr i at e and ci t es t he El event h Ci r cui t case Tr ansout h,

931 F. 2d 1505, whi ch, i n t ur n, ci t ed Fl ei shmann Di st i l l i ng

Cor p. , 386 U. S. at 717, i n suppor t of i t s posi t i on. These cases


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si mpl y st and f or t he pr oposi t i on t hat at t or neys f ees ar e

pr oper l y awar ded t o a cr edi t or pr evai l i ng on a bankrupt cy cl ai m

i f t her e exi st s a st at ut e or val i d cont r act t hat aut hor i zes t he

f ees. However , t hese cases do not addr ess t he r emai ni ngquest i on f or t he awar d of at t or neys f ees i n nondi schar geabi l i t y

act i ons: whet her t he i ssues l i t i gat ed i n t he di schar geabi l i t y

act i on f al l wi t hi n t he scope of t he cont r act ual or st at ut or y

at t or neys f ees pr ovi si on.

I n t he bankrupt cy cour t , t he Dai r y asser t ed t hat t he

pr esent i ssue bef or e t he cour t i s si mpl y t he enf or cement of t he

subj ect Set t l ement Agr eement . I n such mat t er s, at t or ney s f ees

ar e per mi ssi bl e. The Dai r y di st i ngui shed t he cases of

I n r e Ful wi l er , 624 F. 2d 908, and I n r e Bonni f i el d, 154 B. R.

743, cont endi ng t hat i n t hose cases di schar geabi l i t y was at

i ssue and not t he enf orcement of a Set t l ement Agr eement .

Exact l y. The Dai r y s cl ai ms i n t he nondi schar geabi l i t y

pr oceedi ng were not br ought t o enf orce the t erms of t heagr eement or t o pur sue a br each. The Dai r y di d not pl ead t hat

Debt or was l i abl e under t he Set t l ement Agr eement nor di d i t

l i t i gate t hat Debt or had br eached t he agr eement . Rat her , t he

act i on pur sued the remedy of nondi schar geabi l i t y based on the

t or t cl ai ms of f r aud, br each of f i duci ar y dut y and embezzl ement

f or pur poses of 523( a) ( 2) ( A) and ( a) ( 4) . Mor eover , t he

at t orneys f ees cl ause was i n an agr eement t hat was not even i n

exi st ence at t he t i me the act s whi ch l ed t o nondi schar geabi l i t y

occur r ed. The adver sar y pr oceedi ng concerned t hose act s, not

t he Set t l ement Agr eement . Ther ef or e, t he at t or neys f ee cl ause

i n t he agr eement was i nappl i cabl e t o t he cl ai ms l i t i gat ed.


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Accor di ngl y, we concl ude t hat t he bankrupt cy cour t er r ed i n

awar di ng t he at t or neys f ees.

VI. CONCLUSION

For t he reasons st at ed, we AFFI RM t he bankrupt cy cour t sdeci si on f i ndi ng t hat t he debt was nondi schar geabl e under

523( a) ( 2) and ( a) ( 4) ( embezzl ement ) , except f or t he awar d of

at t orneys f ees whi ch we REVERSE. We r emand t hi s pr oceedi ng t o

t he bankrupt cy cour t t o ent er a j udgment consi st ent wi t h t hi s

di sposi t i on.

in re: james larry saccheri and judith anne saccheri, 9th cir. bap (2012)

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