National Gold Exchange Inc v. Stern

OCR transcription for search; preserved printed pages are authoritative

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Main Document

FOR PUBLICATION

CLERN, U.S. BANKAUPTCY COURT
CENTRAL DISTRICT OF CALIFORNIA
Deputy Clerk

ee aes

ENTERED
FEB 23 2008

KRUPTCY SOURT
LS ORE eee FORNIA
Deputy Cle

ERK ;
CENTRAL DISTR:

BY.

UNITED STATES BANKRUPTCY COURT

CENTRAL DISTRICT OF CALIFORNIA

In re
LEE STERN AND JACQUELINE STERN,

Debtor.

NATIONAL GOLD EXCHANGE, INC.
Plaintiff,

VS.

LEE STERN

Defendant.

GAINESVILLE COIN, INC.
Plaintiff,

VS.

LEE STERN

Defendant.

Case No. 8:07-12462-TA
Chapter 7
Adv. No. 8:07-01386-TA

Adv. No. 8:07-01387-TA

STATEMENT OF DECISION AFTER
TRIAL

Date: February 17, 2009
Time: 10:00 a.m.
Place: 5B

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This case requires the Court to determine whether the obligations owed by the
debtor/defendant to plaintiffs for certain rare coins delivered into his custody, but never
paid for, are non-dischargeable as provided in 11 U.S.C. §§ 523(a)(4) or (a)(6). The
Court will also address certain alternative theories such as actual fraud under 11 U.S.C.
§ 523(a)(2)(A) which, although not raised in the complaint, were obliquely raised in
argument at trial. This case requires an evaluation of what constitutes “willful and
malicious” injury in the commercial context under current Ninth Circuit standards. This
case also requires the Court to explore the arcane practices of rare coin dealers who
sometimes sell or deliver product between themselves “on memo,” as that concept may
affect whether the relationship between these parties became “fiduciary” in nature
within the meaning of 11 U.S.C. § 523(a){4).

An order was entered October 14, 2008 adopting the Joint Pre-Trial Stipulation
of the parties, which narrowed the issues for trial. A trial on these consolidated actions
was held February 17, 2009. All proffered Exhibits were entered into evidence at trial,
those being Exhibits “1” through “12” for the plaintiffs and “A” through “E” for the
debtor/defendant. There was objection to the purported second pages of Exhibits “3”
and “4” (invoices) as defendant denied receiving these which apparently contained
terms and conditions, but these were nevertheless received into evidence over
objection that no proper foundation had been laid. Direct testimony from the witnesses
was received by declaration, while cross examination and re-direct were heard live at
trial. The Court has carefully considered the trial briefs of the parties, the testimony and
the exhibits. The Court took the matter under submission after trial and renders now its

Statement of Decision containing its findings of fact and conclusions of law as required

under Feb. R. BANKR. P. 7052.

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The facts, with a few notable exceptions, are not substantially in dispute.

A. Findings of Fact

Plaintiffs are professional dealers of long standing in, among other things, rare
coins. Their stores are located in Florida but plaintiffs advertise to the trade nationwide.
Defendant/debtor Lee Stern (“debtor”), a California resident, has been in the rare coin
business since about 1990; he is what is commonly referred to as a “vest pocket dealer”
in that he maintains no retail store but keeps a limited inventory in his home. Debtor did
business under the trade name “Rare Coins & Gold.” He trades with other dealers and
over the internet, and occasionally will make a retail sale to collectors. Debtor had been
a customer of plaintiff National Gold Exchange, Inc. (“NGE”) for about 10-15 years.
Most of his transactions were through an NGE salesman, Tom Paine, who has worked
for NGE since the early 1990s. Until the transactions at issue in this case in late 2006,
all transactions were previously concluded satisfactorily and without apparent incident.
The evidence is unclear as to how long debtor/defendant may have been a customer of
University Coins, now known as Gainesville Coins (“GC”); however, there is a familial
connection in that the owners of GC are also the nephews of the owners of NGE.

Debtor's troubles apparently began when he was contacted by “cold call” in late
2004 by one Bruce Fox. Mr. Fox reportedly inquired about the possibility of doing
business with the debtor in the procurement and purchase of rare coins. The debtor
met Fox on or about October 7, 2004 and was told that Fox had a number of wealthy
retail clients in southern California who were interested in acquiring certain categories
of rare coins. Apparently, Fox enjoyed some degree of credibility by virtue of having

authored an acclaimed book on “Waiking Liberty” half dollars. Debtor began doing

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business with Fox on small trades which, in the early years, were apparently concluded
satisfactorily. These included coins placed with Fox “on memo,” which meant (at least
to the debtor's understanding) that possession could be delivered to the inquiring dealer
with the expectation that he would, in turn, show it to a customer in order to determine
whether a sale can be made.

Mr. Mark Feld, debtor's expert witness, testified that it is common among rare
coin dealers to deliver possession of selected coins without advance payment to a
fellow dealer in order to facilitate the second dealer's ability to show the coin(s) to a
third party, who might be another dealer or perhaps a consumer. Many customers have
“want lists” on file with dealers specifying select coins needed for a collection. Thus
dealers are always searching for a source to fill their customer's “want list.” It is usual
that dealer B will not reveal the identity of his customer to dealer A as this is valuable
proprietary information. Instead of a consumer, sometimes there will be any number of
intermediary dealers C, D and so on in the effort to make ultimately a match between
buyer and seller. It is expected that possession of merchandise between dealers will be
allowed for some weeks or even months before either return of the coin(s) or payment
is expected by dealer A or by intervening dealers in the chain. Presumably, if a sale is
made then proceeds will be remitted by the buyer and then by each dealer in the chain
in reverse order, less a profit, until the original price is remitted ultimately to dealer A. If
the sale is not made then the coin(s) are returned in like fashion. The transaction
generally described above is referred to as a sale “on memo.” As Mr. Feld admitted,

there can be variants to “on memo” transactions and each dealer is free to impose his

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own unique terms.’ For example, plaintiffs contend that their terms were that debtor
could only show the coins to customers but not release possession until payment was
remitted to plaintiffs. “On memo” transactions facilitate trade in rare coins as
intervening dealers in the chain are not obligated to place their own money at risk in the
effort to find an end buyer, and dealers are able to keep their customers’ identity secret.
What such transactions all share, of course, is a high degree of trust between dealers
that eventuaily either the coin will be returned or the price paid.

In some cases coins delivered “on memo” would be returned unsold by Fox to
debtor without incident. Debtor testified that by late 2005 Fox began running an open
account with debtor in that he did not necessarily pay for each coin by separate check,
but instead would pay more occasionally against a balance that might represent the
price of several coins. A few of these checks tendered by Fox were returned for
insufficient funds. At first, Fox would make the checks good, often accompanied by
excuses based on ill health or other reasons. In June 2006, however, debtor began
requiring Fox to make direct deposits in lieu of checks on new purchases. This
approach did not necessarily improve the overall situation in that it became even more
difficult for debtor to correlate payments against any particular outstanding coin sale.
Moreover, Fox began obtaining progressively more valuable coins from the debtor and
debtor admits that he was providing the inventory faster than Fox was paying, causing
cash flow problems. Further, Fox began asking for an even longer time to sell
“memoed” coins with a variety of what debtor at the time thought were plausible

excuses. Debtor acquiesced because he believed Fox based on his track record, and

' For this reason the Court does not make findings as to “trade usage” which might help
interpret the agreement of the parties. Ca. Com. Code § 1303(a){2)(c).

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because debtor was trying to expand his business. In retrospect, debtor admits that he
was being “set up” by Fox.

Debtor's belief, however naive in retrospect, was not totally without grounds.
During the critical periods in or before November 2006, Fox did return at least five
valuable coins which had been out “on memo” fram debtor for an extended period, in
addition to at least one which had in turn been obtained by debtor “on memo” from
NGE, a $6100 1852D gold Liberty.

The subject transactions are represented by Exhibits “1” through “7” and “12”
dated between September 22, 2006 and December 12, 2006. The invoices describe in
aggregate 21 rare coins with a range in individual price value between $1,265 and
$220,000. In each case the respective plaintiff shipped one or more rare coins to
debtor by certified or registered mail upon defendant's order at or near the dates of the
respective invoices. Each was admittedly an “on memo” transaction between dealers,
although this characterization does not explicitly appear in any of the writings. In each
case the respective invoice was included in the box or carton containing the coin(s) but
no other document or agreement between the parties appears in the evidence. There
was a conflict in the evidence as to the GC invoices, Exhibits “3” and “4,” concerning
whether the second page of each invoice, containing terms and conditions of the sale,
were including in the mailings. Mr. Corey Maita testified that it was he who made the
sales to debtor and that it was GC’s policy to print these terms on the reverse side of all
GC invoices, although he could not remember specifically if he was the one who
actually printed or placed the subject invoices into the boxes with the coins. Debtor
denied receiving these printed terms with the mailing of the GC coins; indeed, debtor

produced exhibits "D” and “E" which appear to be the originals of Exhibits “3” and “4”,

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respectively, but no printing appears on their reverse sides, which are blank.
Accordingly, the Court finds that the printed terms as appear on the purported reverse
sides of Exhibits “3” and “4” were not included with the mailings to debtor. With the one
exception described below, if any additional terms were imposed orally over the
telephone as part of these transactions, this does not appear in the evidence. With
respect to the 1921 MS63 $20 gold piece, a particularly expensive item at $220,000
[Exhibit “6”], Mr. Mark Yaffe, an owner and officer of NGE, testified that he was
consulted about this transaction by his salesman, Mr. Paine, apparently in the middle of
the debtor’s telephone order. Mr. Yaffe testified he overheard Mr. Paine on the
telephone telling debtor to the effect that this coin was not to leave debtor's possession
absent payment to NGE. Debtor denies that any such restriction was ever
communicated to him. Significantly, no testimony was offered from Mr. Paine, although
he apparently is still in the employ of NGE. Accordingly, the Court finds that no such
oral terms were included in the transaction.

On each of the NGE invoices, Exhibits “5” through “7,” there appears fine print at
the bottom which reads, in pertinent part: “Buyer shail not sell, pledge or otherwise
dispose of merchandise until paid for in full...” Below this appears a block for signature
and dating, presumably by the receiving customer. Similar language appears on the
alleged reverse of the GC invoices, Exhibits “3" and “4,” i.e. “Buyer hereby agrees that it
shall at no circumstance sell, pledge or otherwise dispose of any merchandise
indentified on the reverse hereto unless the same is paid for in full...” The signature
blocks on both the NGE and GC invoices are, in any event, unsigned. If any previous
invoice sent by NGE or GC to debtor over the 10 or more years of their relationship was

ever signed, this does not appear in the evidence. No similar language appears at all

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on the University Coin invoices, Exhibits “1” and “2.” The value of the subject coins
delivered on memo as described was in aggregate $404,125.

Debtor, upon receipt of each of the subject coins, transferred possession to Fox
“on memo” with the expectation that Fox would seli them to one or more of Fox's
alleged customers. If any invoice or written agreement existed between Fox and the
debtor, it was not produced in evidence. Of course, as the reader by now expects, Fox
neither paid for nor returned any of the subject coins. Indeed, apparently Fox neither
paid for nor returned a substantial portion of debtor's own inventory which had been
placed with him “on memo” as well, leaving debtor in a desperate financial predicament.
Debtor tendered his own checks in the sum of $15,000 dated 12/21/06 and $3800
dated 12/26/06 to NGE in partial payment for the subject invoices but these were
returned for insufficient funds [Exhibit “8"}. During this same period apparently Fox
tendered insufficient fund checks to debtor as well, although if there was a direct “cause
and effect” between Fox's NSF checks and the debtor's, that connection was not
explained in the evidence. There was apparently a continuing exchange of e-mails
between the debtor and Fox until as late as December 28, 2006, and even some partial
payments from Fox into January 2007. Fox, at some point shortly thereafter,
absconded and left debtor without either the coins or the money to face the increasingly
angry demands of creditors, including plaintiffs.

Eventually, with the assistance of the FBI and other police agencies, NGE
tracked down some of the coins to Mississippi where they were in the possession of
one Jack Lee, who purportedly held them as a pledge against a loan made by him to
Fox. NGE’s litigation against Lee was settled on terms that involved a return of one or

more of the subject coins and others as well, but on terms that resulted in substantial

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damage to NGE. The details of the accounting were not provided in the evidence but
Mr. Yaffe testified that NGE paid out in settlement as much again as the subject invoice
amounts to obtain recovery of its own coins. Apparently, GC was unable to recover any
of its merchandise. Debtor's Chapter 7 bankruptcy was filed August 10, 2007 and

these adversary proceedings were timely commenced November 8, 2007.

B. Conclusions of Law
1. 11 U.S.C. § 523(a)(4): Fraud or Defalcation While Acting

in a Fiduciary Capacity, Embezzlement or Larceny

Plaintiffs proceed under 11 U.S.C. § 523(a)(4) which excepts from discharge
debts “for fraud or defalcation while acting in a fiduciary capacity, embezzlement or
larceny.” However, plaintiffs never explain how it is that debtor was acting in a
“fiduciary capacity” in these transactions. It is important to note that the fiduciary
capacity spoken of in § 523(a)(4) applies only to technical or express trusts, not trusts

ex maleficio that may be imposed as a legal remedy for the very act of wrongdoing out

of which the contested debt arose. Lewis v. Short (In re Short), 818 F.2d 693, 695 (9""
Cir. 1987); Windsor v. Librandi (in re Librandi), 183 B.R. 379, 382 (Bankr. M.D. Pa.
1995). Therefore, resulting or constructive trusts do not create the requisite fiduciary
relationship. Short, 818 F.2d at 695. In order for the debt to be actionable for non-
dischargeability, the debtor must have been a trustee before the alleged wrong and
without reference thereto; the debtor must have already been a trustee before the debt
was created. Davis v. Aetna Acceptance Co., 293 U.S. 328, 333, 55 S. Ct. 151, 153-54

(1934).

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For purposes of § 523(a)(4) the definition of “fiduciary” is narrowly construed.
Although the definition of “fiduciary” for purposes of § 523(a)(4) is a question of federal
law, the court looks to state law, including statutes, for guidance on what circumstances
create an express trust. Ragsdale v. Haller, 780 F.2d 794 (9" Cir. 1986); Angelle v.
Reed (Matter of Angelle), 610 F.2d 1335 (5" Cir. 1980); Rhode Island Lottery Comm. v.
Cairone (in re Cairone), 12 B.R. 60 (Bankr. R.I. 1981). The applicable state law that
creates the fiduciary relationship must clearly outline the duties and identify the
separate and identifiable trust property. Nahman v. Jacks (In re Jacks), 243 B.R. 385,
393 (Bankr. C.D. Cal. 1999); Cadlerock v. Becas (In re Becas), No. 06-11069-A-7, 2007
WL 1592070 at *3 (Bankr. E.D. Cal. May 31, 2007); 4 Collier on Bankruptcy
{ 523.10(1)(d) (15" Ed. Rev. 2007). A broad definition of “fiduciary” is inapplicable in
the dischargeability context. Evans v. Pollard (In re Evans), 161 B.R. 474, 477 (9" Cir.
BAP 1993). Thus, ordinary commercial relationships, even ones that may involve
elements of trust and confidence, are outside the reach of § 523(a)(4). Leeb v. Guy (in
re Guy), 101 B.R. 961, 983-84 (Bankr. N.D. Ind. 1988). For example, where a debtor
general contractor diverts funds from a certain construction project in favor of others,
this did not necessarily make him a “fiduciary” for purposes of § 523(a)(4).
Lumbermens Mutual Casualty Co. v. Snellgrove (in re Sneligrove), 15 B.R. 149, 150
(Bankr. S.D. Fla. 1981). Nor as to her surety did a debtor's responsibility to remit
hunting license proceeds to the state make her a fiduciary. Auto Owners Ins. Co. v.
Littell (in re Littell), 109 B.R. 874, 880-81 (Bankr. N.D. Ind. 1989). Neither a floor plan
financing relationship between debtor and creditor nor an insurance agent's
indebtedness for premiums paid created a trust relationship of the kind mentioned in §

523(a)(4). Ford Motor Credit Co. v. Talcott (In re Talcott), 29 B.R. 874 (Bankr. D. Kan.

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1983); Great American Ins. Co. v. Storms (Matter of Storms), 28 B.R. 761 (Bankr. E.D.
N.C. 1983); In re Turner, No. 01-11301, 2003 WL 23838108, at *8 (Bankr. D. Kan. May
30, 2003). Similarly, without more specific requirements, the status of bailee or partner
does not create a fiduciary relationship within the meaning of § 523(a)(4). Moore v.
Holman (in re Holman), 42 B.R. 848, 851 (Bankr. E.D. Mo. 1984); Huhman v. Braudis
(in re Braudis), 86 B.R. 1001, 1004 (Bankr. W.D. Mo. 1988).

When the Court interprets state statutes to determine whether the requisite
fiduciary relationship is created, certain elements are pivotal. Is the purported fiduciary
required to maintain a segregated account? Matter of Angelle, 610 F.2d at 1340;
Murphy & Robinson Investment Co. v. Cross (Matter of Cross), 666 F.2d 873, 881 (5"
Cir. 1982). Does the statute create the basic elements of a trust, including the definition
of a res and are the fiduciary’s duties spelled out? Nahman, 243 B.R. at 393; Runnion
v. Pedrazzini (In re Pedrazzini), 644 F.2d 756, 759 (9" Cir. 1981). No statute has been
cited to the Court which might bear upon whether a fiduciary relationship was created in
the circumstances of this case; indeed, both sides acknowledge that the industry is
entirely unregulated. More importantly, the pivotal elements (i.e. requirement of a
separate account, definition of duties, etc.) appear entirely lacking.

While it is clear that a real estate agent, attorney, joint venturer, or a partner’, is
a fiduciary under circumstances involving their principal's or partnership's property
within the meaning of 11 U.S.C. § 523(a)(4), it is far less clear whether coin dealers are

“fiduciaries” with respect to each other. NGE argues that the fine print appearing at the

2 See e.g. Ragsdale v. Haller, 780 F. 2d 794, 796 (9"" Cir. 1986) [partners in California are
fiduciaries]; Lewis v. Short (In re Short), 818 F.2d at 696 [joint venturer is a fiduciary]; in
re Banks, 225 B.R.738 (Bankr. C.D. Cal. 1998) aff'd 263 F. 3d 862 [attorney's knowing
failure to remit proceeds of judgment a breach of fiduciary duty]; In re Bugna, 33 F. 3d
1054, 1057 (9" Cir 1994) [real estate broker a fiduciary].

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bottom of the NGE invoices, which purports to require that the debtor not transfer or
“dispose of” the coins until paid for, created an express trust or fiduciary relationship.
However, there is no convincing evidence that this “boilerplate” was ever agreed to by
debtor, or was even taken seriously by NGE in the ten+ years of the parties’
relationship. While it is true, certainly, that NGE was free to impose its own unique
terms as a condition of sale different from what might be “industry standard” concerning
“on memo” transactions, testified to by industry expert Mark Feld, there is no persuasive
evidence that these unique terms were made known to debtor as part of the subject
transactions. The very fact that a signature line appears at the bottom of the invoices,

which remained unsigned although the goods were shipped, strongly suggests that
these terms were “after the fact” or apart from the “real terms.” Rather, the Court is
persuaded that “on memo” transactions implied that the debtor would possibly, or even
likely, be forwarding the coin for inspection to parties unknown, and thus loss of
possession before payment became an inherent risk in the transaction.

But even if these terms were included, the Court is not convinced that such
language is sufficient to have made a “fiduciary” out of the debtor. Mere contract jargon
does not necessarily create a “fiduciary” relationship, even though the word “trust” may
be used’; rather, it is the substance and character of the debt relationship and not its
form that determines whether a fiduciary relationship exists. See Ford Motor Credit Co.
v. Gallaudet (In re Gallaudet), 46 B.R. 918, 925 (Bankr. D. Vt. 1985); In re Littell, 109
B.R. at 880. Language similar to that used in this case has been held not to create the

requisite “fiduciary” relationship. Becas, 2007 WL 1592070 at *2 [language that debtor

3 In our case there is not even a reference to the word “trust” and so any inference of a
fiduciary relationship is even more strained.

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would not “attempt to sell ...or otherwise dispose of” the finance company’s collateral
was held not to create the requisite fiduciary relationship]; Bryant v. Kinyon, 127 Mich.
152, 86 N.W. 531 (Mich. 1901) [language that title would not pass until all of the
consideration was paid for product delivered not sufficient to create a “fiduciary debt”
within former section]. In sum, the Court sees no meaningful difference between debtor
and any customer who receives trade credit, sells his supplier's merchandise before
paying for it, and then files a bankruptcy petition.* This happens to some extent in
almost every business bankruptcy, and individual business debtors who have enjoyed
trade credit are certainly not, with respect to their unpaid suppliers, all “fiduciaries”
within the meaning of 11 U.S.C. § 523(a)(4). This conclusion must be even more
obvious with respect to GC who cannot even establish that debtor ever saw any such
proposed terms as part of the subject transactions.

It is also rather obvious that this case does not involve “larceny” or
“embezzlement,” as are also separate bases for non-dischargeability under 11 U.S.C.
§ 523(a)(4). “Embezzlement” within the meaning of § 523(a)(4) requires three
elements: (1) property rightfully in the possession of the nonowner debtor; (2) the
nonowners’ misappropriation of the proprerty to a use other than that for which it was
entrusted; and (3) circumstances indicating fraud. /n re Littleton, 942 F.2d 551, 555 (9

Cir. 1991); Lin v. Ehrle (in re Ehrie), 189 B.R. 771 (9" Cir. BAP 1995); Giiner v. Licalsi,

“ Our case is distinguished from other cases such as where a specific requirement that
proceeds of product/collateral be placed into a segregated account and be remitted to
creditor, gave rise to the requisite “fiduciary” relationship. See e.g. in re Eisner, 35 B.R.
86 (Bankr. N.D. Ohio 1983). Compare Matter of Wise, 6 B.R. 867, 871 (Bankr. M.D.
Fla.)[funds from sale of creditor's product were kept in separate account but debtor was
allowed to write checks against it so long as he also came up with his regular weekly
payment owed the creditor. This was not the requisite “fiduciary” relationship but merely
one of consignor/consignee].

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No. 05-3374, 2008 WL 552470 at *2 (F.Supp.2d. February 27, 2008). The second and
third elements both are missing. The question of whether the debtor used the coins for
a purpose other than intended is very much an open question, particularly considering
the “on memo” nature of the transactions and given the fact that there is no evidence
that there was any meeting of minds over the “boilerplate” language as appears on the
bottom of NGE’s invoices.® Further, even giving the plaintiffs the benefit of the doubt
over the “on memo” nature of the transactions, there is no evidence that any
circumstances indicating fraud are present.°

“Larceny” is defined under federal common law as a taking of another's property
with fraudulent intent to deprive him of it permanently. State v. Sokol (in re Sokol), 170
B.R. 556, 560 (Bankr. S.D.N.Y. 1994); See Black’s Law Dictionary 896 (8™ ed. 2004).
There is no persuasive evidence that when ordering coins in these transactions the
debtor had any nefarious intent to misappropriate them. Rather, the Court is convinced
that debtor had every honest intention to pay for them, or return them to plaintiffs if he
were unable to effect a sale, as he had done previously, but became unable to so do as

a victim of Mr. Fox’s depredations.

2. 11 U.S.C. § 523(a)(6): Willful and Malicious Injury to Property
Plaintiffs proceed alternatively under 11 U.S.C. § 523(a)(6), arguing that debtor

wilifully and maliciously injured the plaintiffs’ property (i.e. the coins sold and delivered

5 Of course, this is even more obvious as to GC since even this language is absent.

§ The Court is aware that plaintiffs have injected issues of “fraud” into their argument
concerning debtor's continued orders for rare coins from plaintiffs to be re-delivered to Mr.
Fox at a time when Fox's payment history was already spotty. But at most this amounted
to negligence, not an intentional deceit. The Court strongly doubts that this in any event
amounts to the “fraudulent circumstances” spoken of in the case law.

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to debtor, but not paid for). Plaintiffs argue that the debtor’s unauthorized transfer of
possession of the coins to Mr. Fox before paying for them was tantamount to a
conversion and, therefore, resulting damages became non-dischargeable. However,
this is an over-simplification. The “willful” and “malicious” elements of § 523(a){6) are
stated in the conjunctive, which means that both elements must be proven; therefore,
what may be technical conversion under some state law is not necessarily sufficient
under § 523(a)(6). See e.g. Ericson State Bank v. Conner (Matter of Conner), 59 B.R.
594, 596 (Bankr. W.D. Mo. 1986).

Plaintiffs cite impulsoria del Territorio Sur S.A. v. Cecchini (In re Cecchini), 780
F.2d 1440 (9"" Cir. 1986). Decided 23 years ago, Cecchini held that for purposes of
§ 523(a)(6), “willful and malicious” means a wrongful act (such as conversion) done
intentionally, which necessarily produces harm and is without just cause or excuse even
absent proof of a specific intent to injure. /d. at 1443 Plaintiffs’ problem is that the law
in this area has substantially evolved and Cecchini has been implicitly overruled in the
Ninth Circuit. See in re Tsurukawa, 287 B.R. 515, 525 n.11 (9" Cir. BAP 2002).

In Kawaauhau v. Geiger (In re Geiger), 523 U.S. 57, 60, 118 S. Ct. 974 (1998)
the United States Supreme Court clarified the meaning of 11 U.S.C. § 532(a)(6) as
confined to intentional torts. In contrast to earlier cases, the Geiger court made clear
that for § 523(a)(6) to apply the actor must intend the consequences of the act, not
simply the act itself, and held definitively that “debts arising from recklessly or

negligently inflicted injuries do not fall within the compass of § 523(a)(6).” Geiger, 523

U.S. at 60. This ruling clarified that the mental state of the debtor was critical,
overturning authorities such as Cecchini. After Geiger, the Ninth Circuit decided

Petralia v. Jercich (In re Jercich), 238 F.3d 1202 (9" Cir. 2001), cert denied, 533 U.S.

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930, 121 S. Ct. 2552 (2001). In Jercich the court held that § 523(a)(6)’s willful injury
requirement was met “when it is shown either that the debtor had a subjective motive to
inflict the injury or that the debtor believed that injury was substantially certain to occur
as a result of his conduct.” /d. at 1208 (emphasis added). Jercich also clarified that 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.” /d. at 1209
The most recent Ninth Circuit authority to discuss the “willful and malicious”
standard for purposes of 11 U.S.C. § 523(a)(6) is Carrillo v. Su (in re Su), 290 F.3d
1140 ( 9" Cir. 2002). In Su, the debtor drove a van at an unlawfully high rate of speed
through a San Francisco intersection nearly five seconds after the light had turned red.
The debtor crashed into a car that was lawfully in the intersection and careened into
Carrillo, severely injuring her. The jury found that the debtor’s conduct “...was wanton,
willful and malicious and such acts were intentionally done with reckless disregard of
the consequences necessarily producing permanent injury and harm to plaintiff, without
just cause or excuse.” /d. at 1141. A judgment was awarded to Ms. Carrillo for
economic and non-economic damages and a Chapter 7 bankruptcy of the debtor
ensued. The bankruptcy court held that the debt was non-dischargeable relying on
Miller v. J.D. Abrams, Inc. (in re Miller), 156 F.3d 598, 606 (5" Cir. 1998) which had
held that acts were “willful and malicious” when the debtor possesses “either an
objective substantial certainty of harm or a subjective motive to cause harm.” The

bankruptcy court held that when Su drove through the crowded intersection there was

by an “objective standard a substantial certainty” of harm. Su, 290 F.3d at 1142. After
the bankruptcy court’s decision in Su, the Jercich case was decided, which suggested

that the substantial certainty of harm had to be judged on a subjective basis, i.e. what

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did the debtor believe. On this basis the BAP in Su reversed, holding that the
bankruptcy court’s objective standard was inconsistent with Jercich.

On appeal, the Ninth Circuit in Su provided further guidance, framing the issue
thusly: “The question presented on appeal is whether a finding of ‘willful and malicious
injury’ must be based on the debtor's subjective knowledge or intent or whether such a
finding can be predicated upon an objective evaluation of the debtor's conduct.” The
Ninth Circuit resolved the question by holding: "We hold that § 523(a)(6)’s willful injury
requirement is met only when the debtor has a subjective motive to inflict injury or when
the debtor believes that injury is substantially certain to result from his own conduct.” Id.
at 1142 (emphasis added). “The subjective standard precludes application of
§ 523(a)(6)’s nondischargeability provision short of the debtor's actual knowledge that
harm to the creditor was substantially certain.” /d. at 1146.

Applying the Su standard to our case, plaintiffs would have to have proven that
the debtor either intended to injure plaintiffs by giving over possession of the coins to
Fox, or that debtor must have understood that damage was substantially certain to have
occurred. Su, 290 F.3d at 1146, n. 6. There is not the slightest suggestion in the
evidence that debtor intended to injure plaintiffs. On the contrary, the evidence
suggests that the parties had a long-term and mutually profitable arrangement up until
that point. Debtor would have had every incentive to see that things turned out well and
that plaintiffs were made whole so as to avoid the considerable trouble and
embarrassment that actually resulted. That he was unable to do so cannot be said to
have been the product of any design on his part. Nor can it be said that the actual
result was necessarily a certain one. Apparently, Fox had from time to time made good

on his promises and had returned several high-priced items in the few months

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immediately preceding the transactions at issue. Therefore, debtor was at least
reasonable, albeit somewhat naive, in believing that the last round of transactions
involving the subject coins would have a favorable outcome. See Becas, 2007 WL
1592070 at *3-4. For similar reasons the debtor's acts cannot be construed as being
“malicious” since, although it might be argued that the transfer of the coins to Fox
before they were paid for could be a “wrongful act,” it cannot be said that this would
necessarily have caused injury; nor can it be said that it was done without just cause or
excuse. Su, 290 F.3d at 1146-47; Jercich, 238 F.3d at 1209; Becas, 2007 WL 1592070
at *3-4.

Plaintiffs also cite In re Manser, 99 B.R. 434, 435 (9"" Cir. BAP 1986) for the
proposition that debt arising from a conversion may be non-dischargeable under 11
U.S.C. § 523(a)(6). Beyond a superficial similarity on the facts, Manser is entirely
inapposite. First, Manser relies on Cecchini and was decided before Geiger, Su or
Jercich. Therefore, it cannot be regarded as any current authority on the willful and
malicious elements of § 523(a)(6). Second, on closer analysis, it must be seen that
Manser is a fundamentally different case. In Manser, the debtor operated a craft retail
store. The debtor signed consignment agreements with artists that required the debtor
to remit to them proceeds of their merchandise after deduction of sales tax and an
agreed percentage as a fee to the debtor. When financial difficulty arose the debtor
instead used the proceeds for his own use and benefit. Under those facts, the BAP
held that the debtor had wrongfully and intentionally converted the monies and the
resulting debt was accordingly non-dischargeable. /d. at 436.

But that is not our case. There are no similar agreements defining the parties’

relationship as in Manser. Even if the “boilerplate” were included as sale terms, a

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dubious proposition, as discussed above, there is no specific provision that proceeds
must be segregated and remitted in kind as in Manser. Further, unlike Manser, there
were no proceeds at all in this case. Had debtor actually received any proceeds from
Mr. Fox for any of the coins in question, it might be arguable whether he should have
had a parallel duty to remit them to plaintiffs and not to use the proceeds for other

purposes as in Manser. But unlike Manser, debtor never had this opportunity as he

was left without either coins or money by Mr. Fox's devices. In sum, the Court is not

persuaded that Manser has any applicability at all to our case.

3. 11 U.S.C. § 523(a}(2)(A): Actual Fraud

A theory of actual fraud based on 11 U.S.C. § 523(a)(2)(A) does not appear in
the complaint. Nevertheless, some argument was offered in plaintiffs’ closing that fraud
was present in this case which might serve as a basis for a judgment of non-
dischargeability. It was left unclear from the context whether the “fraud” spoken of by
plaintiffs was that referred to in § 523(a)(2)(A) or as referenced in § 523{a)(4) as part of
the “fraud or defalcation while acting in a fiduciary capacity.” If the latter, it is unavailing
inasmuch as the Court finds that there was no “fiduciary capacity.” But even if the
former source is the basis for the reference, it need not detain us very long.

Plaintiff argues that debtor knew as of about June 2006 when he switched to
direct deposit for remittances from Fox, that Fox was untrustworthy based on a few
bounced checks and slow payment record, yet debtor continued to order coins from
plaintiffs with the intention of forwarding them “on memo” to Fox. Plaintiffs argue that
this was a material fact that should have been disclosed and had it been disclosed,

plaintiffs would never have agreed to ship the coins to debtor. The problem with this

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theory is that it is not supported in the evidence and relies entirely on hindsight. Debtor
testified that as of June 2006 he continued to repose confidence in Fox, and apparently
believed (however naively in retrospect) that the relatively few mishaps were adequately
explained. There is at least some evidence, such as Fox's return of at least five
expensive coins that had been outstanding “on memo” for an extended period after this
date, which support the reasonableness of this belief. Plaintiffs bear the burden of
proving that the debter was aware of circumstances so material at the time of incurring
the credit to plaintiffs which would have, in the absence of disclosure, rendered the
transaction fraudulent. P & S X-Ray Co., Inc. v. Dawes (In re Dawes), 189 B.R. 714
(Bankr. N.D. Ill. 1995). Deliberate nondisclosure may be just as culpable as intentional
misrepresentation. Wheeling Wholesale Grocery Co. v. Piccolomini (in re Piccolomini),
87 B.R. 385 (Bankr. W.D. Pa. 1988); SunTrust Bank v. Brandon (in re Brandon), 297
B.R. 308 (Bankr. S.D. Ga. 2002). But the facts have to be judged not in hindsight but
as the debtor saw them in September through November 2006, when these
transactions occurred. There is little or no evidence than any nondisclosure was
material, deliberate or malevolent on debtor's part; instead, at that time debtor still
believed that Fox was a valuable even if tardy customer, and as Mr. Feld’s expert
testimony made clear, coin dealers are not expected to reveal their customer's identity
to potential competitors. Plaintiffs fail their burden of proof.

Plaintiffs also point to the fact that by December 28, 2006, with the exchange of
emails to GC only an hour after debtor's hostile email memo to Fox [Exhibits “10” and
“41"], the debtor clearly knew that Fox could not be trusted, yet he still did not divulge
details to GC. But by this time the damage had already been done and all coins had

already been shipped both to debtor and on to Fox. Therefore, there is no causal

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1 | connection between this event and the damage suffered.
2
3 C. Conclusion
4 For the reasons stated, the Court finds that the debts which are the subject of
° these adversary proceedings are dischargeable in bankruptcy and that plaintiffs have
° not made a case under any of 11 U.S.C. §§ 523(a)(2)(A), (a)(4) or (a)(6). Judgment will
’ therefore be entered in favor of the debtor on all claims for relief. Counsel for debtor
will prepare a form of judgment consistent with this Statement of Decision.
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8 Dated: F; EB 23 2009 Bel CUS
14 Hon Theodor C. Albert
UNITED STATES BANKRUPTCY JUDGE
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In re:
CHAPTER:

Debtor(s). CASE NUMBER:

NOTE TO USERS OF THIS FORM:
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2) The title of the judgment or order and all service information must be filled in by the party lodging the order.
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ill. TO BE SERVED BY THE LODGING PARTY: Within 72 hours after receipt of a copy of this judgment or order which bears
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January 2009 F 9021-1.1