Hays et al v. Ransbury et al

OCR transcription for search; preserved printed pages are authoritative

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FILED

NOT FOR PUBLICATION) «ENTERED

UNITED STATES BANKRUPTCY COURT

ro

CENTRAL DISTRICT OF CALIFORNIA

peprty Cterk

RIVERSIDE DIVISION ()
Case No. 6:06-bk-10790-PC

In re:

MICHAEL C. RANSBURY and

TERI L. RANSBURY, Adversary No. 6:06-ap-01212-PC

8 Debtors.

Chapter 7

GREGORY HAYS and
10 | GRACE HAYS, MEMORANDUM DECISION
il Plaintiffs,
12 |v. Date: March 3, 2009
Time: 9:30 a.m.
Place: United States Bankruptcy Court
Courtroom # 304
3240 Twelfth Street
Riverside, CA 92501

13 | MICHAEL C. RANSBURY and
TERI L. RANSBURY,

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Defendants.

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'° Defendants, Michael C. Ransbury and Teri L. Ransbury (collectively, “the Ransburys”)
" seek a summary judgment against Plaintiffs, Gregory Hays and Grace Hays (collectively, “the
" Hayses”) dismissing the Hays’ causes of action under 11 U.S.C. § 523(a)(2)(A), (ay(4), and
9 (a)(6). The court, having considered the pleadings, evidentiary record, and arguments of counsel,
°° makes the following findings of fact and conclusions of law’ pursuant to F.R.Civ.P. 52(a)(1), as
. incorporated into FRBP 7052 and applied to adversary proceedings in bankruptcy cases.

23

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¥ The court also adopts and incorporates by reference into this Memorandum Decision the
Defendants’ Statement of Undisputed Facts and Conclusions of Law in Support of Motion for
6 | Summary Judgment, or in the Alternative for an Adjudication of Undisputed Facts, except
Conclusions of Law Nos. 6, 7, 8 and 9. To the extent that any finding of fact is construed to be a
27 | conclusion of law, it is hereby adopted as such. To the extent that any conclusion of law is
construed to be a finding of fact, it is hereby adopted as such.

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I. STATEMENT OF FACTS
On April 13, 2006, the Ransburys filed their voluntary petition under chapter 7 of the
Bankruptcy Code.’ At that time, there was a lawsuit pending between the Hayses and the

Ransburys in Case No. GIC 841 800, styled Hays v. Ransbury, ef. al, in the Superior Court of

California, County of San Diego. The Hayses had filed a second amended complaint in the state
court action on August 25, 2005, alleging causes of action for negligence, negligence per se,
fraud, breach of fiduciary duty, breach of contract, breach of implied warranties, strict liability,
negligent misrepresentation, and attorney’s fees. According to the complaint, the Hayses entered
into a contract with the Ransburys for the purchase of certain real property and improvements
located at 2520 Reche Road, Fallbrook, California, for the sum of $643,000. The Hayses alleged
that the Ransburys made several misrepresentations to the Hayses at the time the property was
sold regarding the condition of the property. The Hayses alleged that they discovered after taking
possession “significant structural defects, illegal and hazardous living spaces, illegal and
hazardous stair assemblies, illegal and hazardous electrical installations, illegal and hazardous
plumbing installations, defective and failing interior and exterior floor installations, leaks at the
windows, leaks at the roof surfaces, uneven floor systems, site flooding, defective and failing
exterior siding, mold, soil settlement, leaking and misaligned doors, cracking drywall, inadequate
weather resistence, non-conforming cabinets, leaking pond and illegally modified drainage
system.” The Hayses also alleged that the subject property became uninhabitable and that
Gregory Hays developed a tumor as a proximate result of alleged mold contamination.

On April 26, 2006, the Hayses filed a motion seeking relief from the automatic stay to

proceed with the state court litigation. The Ransburys filed written opposition to the motion

2 Unless otherwise indicated, all “Code,” “chapter” and “section” references are to the
Bankruptcy Code, 11 U.S.C. §§ 101-1330 after its amendment by the Bankruptcy Abuse and
Consumer Prevention Act of 2005, Pub. L. 109-8, 119 Stat. 23 (2005). “Rule” references are to
the Federal Rules of Bankruptcy Procedure (“F.R.Civ.P.”), which make applicable certain
Federal Rules of Civil Procedure (“FRBP”).

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1 | stating that the state court action did not “frame a basis for exception of a debt from discharge

2 | under federal law,” and therefore, the Ranburys would be forced to re-litigate the causes of action
3 | in the event a complaint for nondischargeability was filed in the bankruptcy court. After a

4 | hearing on May 8, 2006, the court granted relief from the stay to permit the Hayses to proceed

5 | with the state court litigation to judgment. On June 2, 2006, an Order Granting Motion for Relief

6 | from the Automatic Stay (“Stay Order”) was entered which provided, in pertinent part:

7 “Moving parties may proceed in the above referenced proceedings in the Superior Court
of the State of Californian [sic], County of San Diego against Debtors and all other
8 defendants. However, any judgment or finding of the Superior Court as to the Debtors,
including calculation of any damages, as to the Debtors, Michael C. Ransbury and Teri L.
9 Ransbury only, shall not be binding nor shall they have any collateral estoppel effect in
any manner or proceeding before a United States Bankruptcy Court of competent
10 jurisdiction, including the calculation of any claim or the amount thereof in any adversary
complaint whether under 11 U.S.C. 523 or 11 U.S.C. 727.”
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On July 17, 2006, the Hayses filed a complaint in this adversary proceeding against the
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Ransburys seeking a determination that the claims made the basis of the pending state court
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action are nondischargeable under 11 U.S.C. §§ 523(a)(2), (a)(4), and (a)(6). Attached to the
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Hays’ adversary complaint were the following exhibits:
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a. California Residential Purchase Agreement and Joint Escrow Instructions between
16 the Hayses and the Ransburys dated August 22, 2003;
17 b. Real Estate Transfer Disclosure Statement dated August 25, 2003; and
18 c. Second Amended Complaint for Monetary and Punitive Damages for Negligence,
Negligence Per Se, Fraud, Breach of Fiduciary Duty, Breach of Contract, Breach
19 of Implied Warranties, Strict Liability, Negligent Misrepresentation and
Attorneys’ Fees filed in Case No. GIC 841800, styled Hayes v. Ransbury, ef a/., in
20 the Superior Court of California, County of San Diego, on August 25, 2005.

21 | The Ransburys filed an answer to the adversary complaint on August 18, 2006. At the time, the
22 | state court action remained pending between the parties.

23 On June 26, 2006, the state court action between the Hayses and the Ransburys was tried
24 | before a jury. On July 6, 2006, a mistrial was declared. On December 5, 2006, a second trial of
25 | the state court action was commenced without a jury. Trial was concluded on January 3, 2007,
26 | and the matter was taken under submission.

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On January 17, 2007, a Decision was filed in the state court action containing detailed
findings of fact and conclusions of law by the state court with respect to the causes of action
alleged by the Hayses against the Ransburys. In its Decision, the state court determined, in
pertinent part, that:

a, “With regard to the claims of fraud, the Court finds that the Defendants did not
intentionally misrepresent the condition of the house. There is no evidence that

the Defendants suffered flooding during the time they occupied the house. . .
there is no evidence that the Defendants were aware the water would cause
damage to the house.”

b. “The Defendants disclosed a year round stream.”

c. “The absence of permitted plans, combined with the testimony of the Defendant

that he made changes to the plans with the assistance of Ms. O’Brien, defeats the
Plaintiff's burden of proof that Mr. Ransbury intentionally constructed the house
in violation of the plans. Further, the house passed all building inspections and
that reinforced Mr. Ransbury’s state of mind that the house was in compliance
with all plans and codes.”

d. “With respect to the square footage, the Court finds the representation of 3,000
square feet in the MLS came from Susan Marsh [not the Ransburys]... the
misrepresentation would have been of the existence of a ‘bonus room.’ There was
no testimony explaining what a bonus room was or how that differed from attic
storage that had been finished and looked like a room.”

e. “With respect to a misrepresentation of used beams, Exhibits 504 and 505 indicate
that Ms. O’Brien approved the use of used beams.”

f. “Therefore, the Court concludes that the Plaintiffs have failed in their burden of
proving any intentional misrepresentations by either of the Defendants.”

The state court also determined that (a) the doctrine of implied warranty did not apply; (b) the
Hays’ negligence cause of action need not be addressed because damages were not established;
and (c) the Hayses failed to prove that the Ransburys made any negligent misrepresentations.
The Ransburys were awarded attorney’s fees in the amount of $195,666.50 incurred in defending
the Hays’ claims. A Judgment was entered for the Ransburys on February 15, 2007. The Hayses
appealed.

On February 26, 2007, the Ransburys filed a motion pursuant to F.R.Civ.P. 60(6)(1), as
incorporated into FRBP 9024, seeking relief from the Stay Order and requesting that the Stay

Order be amended to permit the state court judgment to have preclusive effect in the pending

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adversary proceeding between the parties. On March 22, 2007, the Hayses filed written
opposition to the motion. After a hearing on April 5, 2007, the court granted the Ransburys’
motion. On May 3, 2007, an Order Granting Debtors’ Motion to Amend Order Granting Motion
for Relief from Stay (“Amended Order”) was entered which stated, in pertinent part:

“(Because the Movant/Debtors participated in the underlying State Court Proceedings

(San Diego Superior Court case # GIC 841800) the [Stay Order] is hereby amended and

modified such that the principles of issue preclusion shall be applicable to the decisions

affecting the Movants/Debtors in the pending State Court Proceedings.”
The Hayses did not appeal the Amended Order, seek a reconsideration of the Amended Order
under FRBP 9023, nor relief from the Amended Order under FRBP 9024.

On December 23, 2008, the state court’s judgment was affirmed by the California Court
of Appeals, Fourth Appellate District, Division One. In its written decision, the appellate court
found with respect to Hays’ intentional! and negligent misrepresentation claims against the
Ransburys that the trial court’s “findings were within the issues framed by the pleadings, and
support the judgment... .”

On January 20, 2009, the Ransburys filed their motion in this adversary proceeding
seeking a summary judgment on the Hays’ claims under §§ 523(a)(2)(A), (a)(4), and (a)(6). The
Ransburys allege the state court judgment against the Hayses is a final judgment adjudicating the
merits of all claims that were asserted, and could have been asserted, by the Hayses arising out of
the same transaction or occurrence made the basis of the adversary complaint, and therefore, the
state court judgment must be given preclusive effect so the Ransburys are not forced to re-litigate
issues that have already been resolved in their favor.

On February 10, 2009, the Hayses filed a written response opposing the motion on several
grounds. First, the Hayses argue that the doctrines of issue and claim preclusion are discretionary
and ask the court not to apply these doctrines in order to avoid injustice. Second, the Hayses
argue that issue preclusion does not apply because the Ransburys failed to establish that their

causes of action were actually litigated in the state court proceeding. Third, the Hayses assert

that issue preclusion should not be applied because the Hayses did not have an adequate

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1 | opportunity or incentive to pursue all causes of action in the state court proceeding. Finally, the
2 | Hayses argue that they relied to their detriment on the language of the Stay Order, and therefore,
3 | the Ransburys should not be permitted to benefit from issue preclusion at this time under the
4 | doctrine of judicial estoppel. On February 26, 2009, the Ransburys filed evidentiary objections
5 |to the declaration of Grace Hays and a reply to Hays’ opposition.’ At a hearing on March 3,
6 | 2009, the court considered the pleadings, summary judgment evidence, and arguments of
7 | counsel, continued the matter pending a decision on or before March 27, 2009, and took the

8 | matter under submission.

9 I]. DISCUSSION
10 This court has jurisdiction over this adversary proceeding pursuant to 28 U.S.C. §$§
11 |157(b) and 1334(b). This matter is a core proceeding under 28 U.S.C. § 157(b)(2)(A), @), and
12 |(O). Venue is appropriate in this court. 28 U.S.C. § 1409(a). To prevail under 11 U.S.C. 8
13 | 523(a)(2)(A), (a)(4), or (a)(6), the plaintiff must establish the allegations of the complaint by a
14 | preponderance of the evidence. Grogan v. Garner, 498 U.S. 279, 291 (1991). Objections to the

15 | dischargeability of a debt are to be literally and strictly construed against the objector and

16 | liberally construed in favor of the debtor. Quarre v. Saylor (In re Saylor), 108 F.3d 219, 221 (9th

17 | Cir, 1997).

18 | A. Summary Judgment Standard.

19 Summary judgment is appropriate “if the pleadings, the discovery and disclosure

20 | materials on file, and any affidavits show that there is no genuine issue as to any material fact and

1 | that the movant is entitled to judgment as a matter of law.” F.R.Civ.P. 56(c). “The purpose of

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¥ Movants’ Evidentiary Objections to the Declaration of Grace Hays and Movants’ Reply to
Plaintiffs Opposition to Motion for Summary Judgment on Claims Under [sic] U.S.C. Sections
§23(a)(2)(A), (a)(2)(B) [sic] and (a)(6), or in the Alternative, for an Adjudication of Undisputed
Facts were filed and served less than 10 days prior to the hearing in violation of LBR 7056-1(d).
26 | Because the papers were untimely, the court overruled Ransburys’ evidentiary objections at the
hearing and has not considered the reply in adjudicating the merits of the motion.

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summary judgment is to avoid unnecessary trials when there is no dispute as to the [material]

facts before the court.” Nw. Motorcycle Ass’n v. U.S. Dep’t of Agric., 18 F.3d 1468, 1471 (9th

Cir. 1994). Under Rule 56(c), the moving party bears the initial burden to establish that there are

no genuine issues of material fact to be decided at trial. Celotex Corp, v. Catrett, 477 U.S. 317,

322-23 (1986); Anderson v, Liberty Lobby, Inc., 477 U.S. 242, 248-50 (1986). “A ‘material fact’

is one that is relevant to an element of a claim or defense and whose existence might affect the
outcome of the suit. The materiality of a fact is thus determined by the substantive law

governing the claim or defense.” T.W. Elec. Serv. v. Pac, Elec, Contractors Ass’n, 809 F.2d 626,

630 (9th Cir. 1987). Genuine issues of material fact are those “factual issues that make a
difference to the potential outcome and ‘that properly can be resolved only by a finder of fact

because they may reasonably be resolved in favor of either party.” Svob. v. Bryan (In re Bryan),

261 B.R. 240, 243 (9th Cir. BAP 2001) (quoting Anderson, 477 U.S. at 250).

Where the nonmoving party bears the burden of proof on a specific claim or defense at
trial, the moving party may move for summary judgment based solely on the “pleadings,
depositions, answers to interrogatories, and admissions on file.” Celotex Corp., 477 USS. at 324,
There is no requirement “that the moving party support its motion with affidavits or other similar
materials negating the opponent’s claim.” Id. at 323 (emphasis in original). The burden then
shifts to the nonmoving party to produce “significantly probative evidence” of specific facts

showing there is a genuine issue of material fact requiring a trial. T.W. Elec. Serv., 809 F.2d at

630 (citing F.R.Civ.P. 56(e)). The nonmoving party cannot “withstand a motion for summary
judgment merely by making allegations; rather, the party opposing the motion must go beyond its
pleadings and designate specific facts by use of affidavits, depositions, admissions, or answers to

interrogatories showing there is a genuine issue for trial.” In re Ikon Office Solutions, Inc., Sec.

Lit., 277 F.3d 658, 666 (3d Cir. 2002). If the nonmoving party fails to establish a triable issue on
an essential element of its case and upon which it will bear the burden of proof at trial, the

moving party is entitled to judgment as a matter of law. Celotex Corp., 477 U.S. at 322-23.

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B. Issue Preclusion.
Collateral estoppel, or issue preclusion, applies to nondischargeability proceedings in

bankruptey court. Grogan, 498 U.S. at 284 n.11; Cal-Micro, Inc. v. Cantrell (In re Cantrell}, 329

F.3d 1119, 1123 (9th Cir. 2003); Khaligh v. Hadaegh (In re Khaligh), 338 B.R. 817, 824 (9th Cir.
BAP 2006). Bankruptcy courts have discretion to apply collateral estoppel, or issue preclusion,

in dischargeability proceedings. Lopez v. Emergency Serv. Restoration, Inc. (In re Lopez), 367

B.R. 99, 107 (9th Cir. BAP 2007). Issue preclusion prevents a party from relitigating an issue

that the party has actually litigated and lost in a prior proceeding. See R.T.C. v. Keating, 186

F.3d 1110, 1114 (9th Cir. 1999); Roussos v. Michaelides (In re Roussos), 251 B.R. 86, 92 (9th

Cir. BAP 2000). Issue preclusion serves to protect litigants from multiple lawsuits, conserve
judicial resources, and encourage reliance on adjudication by reducing the likelihood of

inconsistent decisions. Allen v. McCurry, 449 U.S. 90, 94 (1980); see Lopez, 367 B.R. at 104

(“The doctrine is intended to avoid inconsistent judgments and the related misadventures

associated with giving a party a second bite at the apple.”). See generally, C. Klein, et. al.,

Principles of Preclusion and Estoppel in Bankruptcy Cases, 79 Am. Bankr. L.J. 839, 852-58
(2005).

In determining the effect of a state court judgment, federal courts must apply that state’s
collateral estoppel principles as a matter of full faith and credit. See Lopez, 367 B.R. at 105
(“The Full Faith and Credit Act requires that federal courts give state court judgments the same
preclusive effect those judgments would enjoy under the law of the state in which the judgment
was rendered.”). For collateral estoppel to apply under California law, the issue sought to be
precluded must be identical to that decided in a former proceeding, and the issue must have been
actually litigated and necessarily decided in the former proceeding. Id. at 104. Furthermore, the
decision in the former proceeding must be final and on the merits; and the party against whom
preclusion is sought must be the same as, or in privity with, the party to the former proceeding.

Id.

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1 1C. Judicial Estoppel.

The Hayses seek to invoke the doctrine of judicial estoppel as a defense to Ransburys’

motion for summary judgment. Judicial estoppel is an equitable doctrine invoked by the court to

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prevent fraud and abuse of the judicial process. See Mortis v. California, 966 F.2d 448, 453 (9th

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Cir. 1991), cert. denied, 506 U.S. 831 (1992). Judicial estoppel precludes a party from gaining

6 | an advantage by asserting one position, and then later seeking an advantage by taking a clearly

~~]

inconsistent position. See New Hampshire v. Maine, 532 U.S. 742, 749 (2001); Hamilton v.

8 | State Farm Fire & Cas. Co., 270 F.3d 778, 782 (9th Cir. 2001). Judicial estoppel also applies out

9 | of “general consideration[s] of the orderly administration of justice and regard for the dignity of

358

10 | judicial proceedings,’ and to ‘protect against a litigant playing fast and loose with the courts.

11 | Hamilton, 270 F.3d at 782 (quoting Russell v. Rolfs, 893 F.2d 1033, 1037 (9th Cir. 1990)). The

12 | court considers three factors to determine whether to apply judicial estoppel:

13 First, a party’s later position must be ‘clearly inconsistent’ with its earlier position.
Second, courts regularly inquire whether the party has succeeded in persuading a court to

14 accept that party’s earlier position, so that judicial acceptance of an inconsistent position
in a later proceeding would create ‘the perception that either the first or the second court

15 was misled,’ Absent success in a prior proceeding, a party’s later inconsistent position
introduces no ‘risk of inconsistent court determinations,’ and thus no threat to judicial

16 integrity. A third consideration is whether the party seeking to assert an inconsistent

position would derive an unfair advantage or impose an unfair detriment on the opposing
17 party if not estopped.

18 | Hamilton, 270 F.3d at 782-83 (quoting New Hampshire, 532 U.S. at 750-31 (internal citations

19 | omitted)). “The Ninth Circuit requires that the inconsistent position have been ‘accepted’ by the

20 | first court.” Associated Vintage Group v. Sims (In re Associated Vintage Group. Inc.), 283 B.R.

21 | 549, 566 (9" Cir. BAP 2002) (quoting Hamilton, 270 F.3d at 783). “The focus of reliance is

22 | shifted from the opposing party to the court, which is, in effect, the victim.” Associated Vintage
23 | Group, 283 B.R. at 566. The meaning of “acceptance” in the bankruptcy context is construed
24 | broadly “to protect the integrity of the bankruptcy process.” See Hamilton, 270 B.R. at 785.

25 The Hayses point to the inconsistent position taken by the Ransburys with respect to the
26 | language included in the Stay Order, but this issue was already litigated by the parties at the

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| | hearing to amend the Stay Order and there is no evidence that the bankruptcy court was misled
2 | by the change in the Ransburys’ position when the Amended Order was entered on May 3, 2007.
3 | On February 26, 2007, the Ransburys filed a motion pursuant to F.R.Civ.P. 60(b)(1), as

=

incorporated into FRBP 9024, seeking relief from the Stay Order and requesting that the Stay
Order be amended to permit the state court judgment to have preclusive effect in the pending
adversary proceeding between the parties. The Hayses had appealed the judgment. The
Ransburys filed the motion while the state court judgment was on appeal. In the motion, the

Ransburys argued:

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“Respondents were recently successful in Superior Court in an action filed by Movants
against Respondents and others. The Superior Court action involved a full and complete
10 trial and involved the same facts as alleged in the Nondischargeability Proceeding. Since
Respondents were successful, collateral estoppel prevents Movants from proceeding in
1] this case. However, there is [ a Stay Order] that states collateral estoppel does not apply.
Movants filed a Nondischargeability Complaint. Circumstances have changed such that
12 the [Stay Order] should be amended.”

13 | On March 22, 2007, the Hayses filed written opposition to the motion, stating:

14 “Certainly, had Debtors desired the benefit of collateral estoppel at the time of the
motion, they could have advised the Court that they would accept an order which

15 provided for collateral estoppel. They did not. Having now chosen to fully litigate the
matter and finding that the result was beneficial to them, they wish to now come back for

16 a “second bite at the apple.” Because all parties contemplated and understood the
potential ramifications of the [Stay Order] at the time that it was entered, there should be

1? no modification [of] the [Stay Order] under Rule 60(b).”

18 | After a hearing on April 5, 2007, the court granted the Ransburys’ motion. The Amended Order

19 | entered on May 3, 2007, stated, in pertinent part:

20 “(B]ecause the Movant/Debtors participated in the underlying State Court Proceedings
(San Diego Superior Court case # GIC 841800) the [Stay Order] is hereby amended and
21 modified such that the principles of issue preclusion shall be applicable to the decisions
affecting the Movants/Debtors in the pending State Court Proceedings.”
22
The Hayses did not appeal the Amended Order, seek a reconsideration of the Amended Order
23
under FRBP 9023, nor relief from the Amended Order under FRBP 9024.
24
The Hayses claim that they relied to their detriment on the language of the Stay Order
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and, as a result, did not have an incentive to fully litigate the merits of their claims against the
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Ransburys in the state court action. However, the summary judgment evidence establishes that
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the Hayses pursued the Ransburys through two trials in the state court. After the first trial before
a jury ended in a mistrial, the Hayses waived their right to a jury trial and a court reporter. Grace
Hays admits in her declaration in opposition to Ransburys’ motion for summary judgment that:

“In a effort to save money and resources, | hired — what J later found to be — an

incompetent attorney who went to trial ill-prepared, e.g., without proper experts,

destructive testing, or investigative discovery.”
The Ransburys did not derive unfair advantage simply because they actively defended themselves
against the Hays’ claims at trial.

The Hayses further claim that they have new evidence to present that was not available to
them at the time they tried the state court action. However, Grace Hays admits in her declaration
that she waited until affer the trial to assemble “a new team of experts who obtained additional
evidence” to support claims that had already been adjudicated between the parties. There is no
showing that this “additional evidence” is “newly discovered,” i.e., admissible and credible
evidence of facts that were in existence at the time of the original trial and would have made a
difference in the outcome of the litigation, but could not have been discovered by the Hayses
through the exercise of due diligence in time to move for a new trial. More importantly, the state
appellate court specifically rejected the Hays’ request to consider additional evidence on appeal
pursuant to CCP § 909, stating that “[b]ecause the judgment can be affirmed without
consideration of Plaintiffs’ proffered evidence, and in fact the proffered evidence is solely
directed at undermining the judgment, we reject Plaintiffs’ request under section 909.”

Based on a consideration of the three factors set forth in New Hampshire, the court

declines to apply the doctrine of judicial estoppel to limit the preclusive effect of the state court
judgment between the parties. To apply judicial estoppel to the facts of this case would increase,
rather than decrease, the risk of inconsistent decisions.

D. Section 523({a)(2)(A).

Section 523(a)(2)(A) excepts from discharge in bankruptcy “any debt for money,

property, services, or an extension, renewal, or refinancing of credit to the extent obtained by

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false pretenses, a false representation, or actual fraud.” 11 U.S.C. § 523(a)(2)(A). To establish
that a debt is nondischargeable under § 523(a)(2)(A), the plaintiff must show by a preponderance
of the evidence that (a) debtor made a representation; (b) at the time, debtor knew the
representation was false; (c) debtor made the representation with the intention and purpose of
deceiving the creditor; (d) the creditor justifiably relied on the debtor’s representation, and (e) the
creditor sustained the alleged loss and damage as the proximate result of such representation.

Diamond v. Kolcum (In re Diamond), 285 F.3d 822, 827 (9th Cir. 2002); Turtle Rock Meadows

Homeowners Ass’n v. Slyman (In re Slyman), 234 F.3d 1081, 1085 (9th Cir. 2000).

The court will give preclusive effect to the Judgment entered in Case No. GIC 841800,

styled Hays v. Ransbury, et. a/, in the Superior Court of California, County of San Diego, on

February 15, 2007. The essential elements of issue preclusion under state law are present in this
case. The Hayses and the Ransburys were parties to the prior state court action. The issues
litigated in the state court, which form the basis for Hays’ § 523(a)(2)(A), (a)(4), and (a)(6)
claims against the Ransburys in this proceeding, involved the Ransburys’ liability, if any, to the
Hayses for alleged fraud and other causes of action based upon or arising out of the sale by the
Ransburys to the Hayses of the real property and improvements located at 2520 Reche Road,
Fallbrook, California, for the sum of $643,000. The factual issues were identical to the issues
presented in this adversary proceeding. The Hayses and the Ransburys actively participated in
the state court action, and had a full and fair opportunity to litigate these issues in the prior
action. The Hayses lost in the prior state court action. The judgment entered by the state court
after a trial on the merits is a fina! judgment that was affirmed on appeal. The state court
judgment against the Hayses is a final judgment adjudicating the merits of all claims that were
asserted, and could have been asserted, by the Hayses against the Ransburys arising out of the
same transaction or occurrence made the basis of the adversary complaint.

In its Decision dated January 17, 2007, the state court made specific findings concerning

the Hays’ fraud claim against the Ransburys, concluding that the Hayses “failed in their burden

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of proving any intentional misrepresentations by cither of the” Ransburys. The Judgment of the
state court entered on February 15, 2007, not only stated that the Hayses would take nothing on
account of their claims against the Ransburys, but awarded the Ransburys the sum of
$195,666.50 in attorneys fees incurred in defending the complaint. Because the Hayses are
unable to establish a triable issue on any essential element of their § 523(a)(2)(A) claim, the
Ransburys are entitled to judgment as a matter of law.
E. Sections 523(a)(4) & (a\(6).

Section 523(a)(4) states that a discharge in bankruptcy “does not discharge an individual
debtor from any debt for fraud or defalcation while acting in a fiduciary capacity... .” 11 U.S.C
§ 523(a)(4). A debt is nondischargeable under § 523(a)(4) where (a) an express trust exists; (b)
the debt was caused by fraud or defalcation, and (c) the debtor acted as a fiduciary to the creditor

at the time the debt was created. Otto v. Niles (In re Niles), 106 F.3d 1456, 1459 (9th Cir. 1997},

citing Klingman v. Levinson, 831 F.2d 1292, 1295 (7th Cir. 1987). Whether a relationship 1s a

“fiduciary” one within the meaning of § 523(a)(4) is a question of federal law. Mills v. Gergely

(In re Gergely), 110 F.3d 1448, 1450 (9th Cir. 1997); Lewis v. Scott (In re Lewis), 97 F.3d 1182,

1185 (9th Cir. 1996).
The Ninth Circuit has adopted a narrow definition of “fiduciary” for purposes of §
523(a)(4):
“(TJhe fiduciary relationship must be one arising from an express or technical
trust that was imposed before and without reference to the wrongdoing that caused
the debt.”
Cantrell, 329 F.3d at 1125 (quoting Lewis, 97 F.3d at 1185). “Defalcation” is defined by the

Ninth Circuit as the “misappropriation of trust funds or money held in any fiduciary capacity; [or

the] failure to properly account for such funds.” Banks v. Gill Distribution Centers, Inc. (In re

Banks), 263 F.3d 862, 870 (9th Cir. 2001); Lewis, 97 F.3d at 1186 (quoting Black’s Law

Dictionary 417 (6" ed. 1990)). No degree of culpability need be shown in the Ninth Circuit to

make a debt nondischargeable as a defalcation under § 523(a)(4). An individual may be liable

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for defalcation without having the intent to defraud. Lewis, 97 F.3d at 1187.

Section 523(a)(6) excepts from discharge debts resulting from “willful and malicious
injury by the debtor to another entity or to the property of another entity.” 11 U.S.C. § 523(a}(6).
A “deliberate or intentional injury” is required before § 523(a)(6) will render a debt
nondischargeable. See Kawaaukau v. Geiger, 523 U.S. 57, 61 (1998) (stating that

nondischargeability under § 523(a)(6) “takes a deliberate or intentional injury, not merely a
deliberate or intentional act that leads to injury”). Section 523(a)(6) requires separate findings on
the issues of “willful” and “malicious.” The “willful” injury requirement of § 523(a)(6) is met
“when it is shown either that the debtor had a subjective motive to inflict injury or that the debtor
believed that injury was substantially certain to occur as a result of his conduct.” Carrillo v. Su

(In re Su), 290 F.3d 1140, 1144 (9th Cir. 2002) (quoting Petralia v. Jercich (In re Jercich), 238

F.3d 1202, 1208 (9th Cir.), cert. denied, 533 U.S. 930 (2001)). A “malicious injury” involves
“(1) a wrongful act, (2) done intentionally, (3) which necessarily causes injury, and (4) is done
without just cause or excuse.” Id. at 1146-47 (quoting Jercich, 238 F.3d at 1209). See, e.g.,
Diamond v. Koleum (In re Diamond), 285 F.3d 822, 829 (9th Cir, 2002) (holding that a state

court jury finding that the debtors “intentionally caused injury” to the creditor “without just

cause” was entitled to preclusive effect for purposes of § 523(a)(6)); Murray v. Bammer (In re

Bammer), 131 F.3d 788, 791 (9th Cir. 1997) (en banc) (stating that malice under § 523(a)(6)
“does not require a showing of biblical malice, i.e., personal hatred, spite or ill-will”).

In response to the Ransburys’ motion, the Hayses had the burden to produce significantly
probative evidence on each element of their claims under § 523(a)(4) and (a)(6) upon which they
would bear the burden of proof at trial. Because the Hayses have not established a triable issue
on the essential elements of their claims § 523(a)(4) and (a)(6), the Ransburys are entitled to
judgment as a matter of law.

CONCLUSION

There being no genuine issue as to any material fact for trial, the court finds that the

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Ransburys are entitled to a summary judgment denying the relief requested by the Hayses under
§§ 523(a)(2)(A), (a)(4), and (a)(6) as a matter of law.

A separate order and judgment wi i ith this opinion.

Dated: March 23, 2009

. CARROLL
United States Bankruptcy Judge

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In re:
CHAPTER:

Debtor(s). CASE NUMBER:

NOTE TO USERS OF THIS FORM:
1) Attach this form to the last page of a proposed Order or Judgment. Do not file as a separate document.
2) The title of the judgment or order and all service information must be filled in by the party lodging the order.
3) Category I. below: The United States trustee and case trustee (if any) will always be in this category.
4) Category I. below: List ONLY addresses for debtor (and attorney), movant (or attorney} and person/entity (or attorney) who filed
an opposition to the requested relief. DO NOT list an address if person/entity is listed in category I.

NOTICE OF ENTERED ORDER AND SERVICE LIST

Notice is given by the court that a judgment or order entitled (specify) MEMORANDUM DECISION
_was entered on the date indicated as “Entered” on the first page of this judgment or order and will be served in the manner
indicated below:

|. SERVED BY THE COURT VIA NOTICE OF ELECTRONIC FILING (“NEF”) - Pursuant to controlling General Order(s) and
Local Bankruptcy Rule(s), the foregoing document was served on the following person(s) by the court via NEF and hyperlink to
the judgment or order, As of__3/23/09 _ the following person(s) are currently on the Electronic Mail Notice List for this
bankruptcy case or adversary proceeding to receive NEF transmission at the email address(es) indicated below.

Paul J Leeds reisinge@higgslaw.com

(1 Service information continued on attached page

Il. SERVED BY THE COURT VIA U.S. MAIL: A copy of this notice and a true copy of this judgment or order was sent by
United States Mail, first class, postage prepaid, to the following person(s) and/or entity(ies) at the address(es) indicated below:

$4 Service information continued on attached page

lll. TO BE SERVED BY THE LODGING PARTY: Within 72 hours after receipt of a copy of this judgment or order which bears
an “Entered” stamp, the party lodging the judgment or order will serve a complete copy bearing an “Entered” stamp by U.S.
Mail, overnight mail, facsimile transmission or email and file a proof of service of the entered order on the following person(s)
and/or entity(ies) at the address(es), facsimile transmission number(s), and/or email address(es) indicated below:

(J Service information continued on attached page

This form is mandatory. It has been approved for use by the United States Bankruptcy Court for the Central District of California.

January 2009 F 9021-1.1

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in re:
CHAPTER:

Debtor(s). CASE NUMBER:

ADDITIONAL SERVICE INFORMATION (if needed):

U.S. MAIL

Jarnes E Chodzko
PO Box 235647
Encinitas, CA 92023

David B Lally
26895 Aliso Creek Rd Ste B663
Aliso Viejo, CA 92656

This form is mandatory. it has been approved for use by the United States Bankruptcy Court for the Central District of California.

January 2009 F 9021 -1 1