In re: HARLAN J. RATLIFF and THERESA L. RATLIFF, AKA Ratliff Farms, LLC v. Cochise Agricultural Properties, LLC;

* This disposition is not appropriate for publication and is not precedent
except as provided by 9th Cir. R. 36-3.
NOT FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
In re: HARLAN J. RATLIFF and
THERESA L. RATLIFF, AKA Ratliff
Farms, LLC,
Debtors,
HARLAN J. RATLIFF and THERESA L.
RATLIFF,
Appellants/Cross-Appellees,
v.
COCHISE AGRICULTURAL
PROPERTIES, LLC; et al.,
Appellees/Cross-Appellants.
Nos. 10-60051 and 10-60053
BAP No. 10-1011
MEMORANDUM*
Appeal from the Ninth Circuit
Bankruptcy Appellate Panel
Pappas, Dunn, and Jury, Bankruptcy Judges, Presiding
Argued and Submitted March 26, 2012
Tucson, Arizona
FILED
AUG 01 2012
MOLLY C. DWYER, CLERK
U.S. COURT OF APPEALS

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Before: McKEOWN, CLIFTON, and BYBEE, Circuit Judges.
Harlan (“Jeff”) and Theresa Ratliff (“the Ratliffs”) entered into a business
venture, Cochise Agricultural Properties (“CAP”), with their close friends Todd
Campbell and Stephanie McRae (“the Campbells”) in which they improved a
parcel of land that the Ratliffs had previously purchased and then resold it. CAP’s
operating agreement recited that the parties made equal capital contributions and
had equal participation percentages. The agreement further provided that all
distributions were to be used first to pay off any capital contribution, and then
divided equally according to the parties’ participation percentages (i.e., 50/50).
The property, which was originally purchased in February 2004 for $427,539, was
officially transferred to CAP in June 2005 and then sold to N.K. of Casa Grande,
LLC (“NK”) in October 2005 for $3.52 million. The NK contract provided for an
initial payment of $1.1 million, which was used to pay off an underlying loan, with
the balance payable over five years.
Meanwhile, the Ratliffs took a personal loan from Wells Fargo, which was
guaranteed first by a deed of trust on the land and later by the NK note, with the
consent of the Campbells and CAP. The Ratliffs subsequently defaulted on the
Wells Fargo loan. When the first principal payment from NK was distributed to
CAP, Jeff Ratliff, on behalf of CAP, used the proceeds to pay off the Wells Fargo

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loan, over the protests of the Campbells. Mr. Ratliff then split only the balance of
the payment with the Campbells.
The bankruptcy court found that the Ratliffs’ initial contribution to CAP was
the equity in the land, approximately $38,000, and that the parties intended to form
an equal partnership. The bankruptcy court entered judgment for the Campbells
and ordered the Ratliffs to pay approximately $178,000 (half of the proceeds from
NK used to pay off Wells Fargo), plus fees and costs. The court further found that
this was a willful and malicious conversion and that it constituted defalcation by a
fiduciary, and was therefore nondischargeable under 11 U.S.C. § 523(a)(4) and
(a)(6). The BAP affirmed in part, including the finding of conversion, but reversed
the bankruptcy court’s finding regarding defalcation under § 523(a)(4). The
Ratliffs appeal the BAP’s decision affirming the bankruptcy court; the Campbells
cross-appeal the decision reversing the bankruptcy court. We have jurisdiction
under 28 U.S.C. § 158(d)(1), and we affirm in part and reverse in part.
I
The Ratliffs first contend that the bankruptcy court erred as a matter of law
and fact in determining that the parties made equal capital contributions to CAP.
They allege that the bankruptcy court improperly (1) relied on extrinsic evidence to
find that the couples intended for an equal division of the proceeds of the NK sale,

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(2) equated the Ratliffs’ capital contribution with the tax basis of the farm, and (3)
disregarded the “highly probative” and “dispositive” evidence of value provided by
the actual, contemporaneous sale of the property.
1. The Ratliffs argue that the operating agreement is not susceptible to
the interpretation that all distributions were to be made equally. See Brown &
Bain, P.A. v. O’Quinn, 518 F.3d 1037, 1040 (9th Cir. 2008) (explaining that a
court will only consider extrinsic evidence if the contract as written is “reasonably
susceptible” to the interpretation offered by the evidence’s proponent). The
bankruptcy court did not interpret the contract in this way, however; instead, it
found that the initial capital contributions of the two couples were equivalent and,
therefore, the distributions, as per the agreement, were to be equal. In making this
determination, the bankruptcy court did not err in using the earlier purchase price
as a benchmark for the land’s fair market value, especially in light of the strong
evidence that the parties intended an equal partnership.
2. The Ratliffs contend that “[t]he bankruptcy court erred as a matter of
law by using the tax basis[, and not the fair market value,] of the farm to determine
the amount of the Ratliffs’ contribution.” The bankruptcy court did not simply
equate the Ratliffs’ tax basis in the farm with their capital contribution. Instead,
the bankruptcy court correctly used the purchase price of the property as a starting

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point for an estimate of the farm’s fair market value. See I.R.C. § 1012(a) (“In
general[, ] [t]he basis of property shall be the cost of such property . . . .”); Black’s
Law Dictionary 1691 (9th ed. 2009) (defining “fair market value” as “[t]he price
that a seller is willing to accept and a buyer is willing to pay on the open market
and in an arm’s-length transaction”).
3. The Ratliffs argue that the bankruptcy “court for no good reason
disregarded CAP’s almost immediate sale of the farm, and $677,000 in irrigation
equipment, for $3,520,000 in a transaction that met the conditions of fair market
value.” According to the Ratliffs, the actual sale price of the farm one month after
it was transferred was “highly probative” of the farm’s value and should have been
considered by the bankruptcy court.
An actual sale between a willing buyer and a willing seller is strong
evidence of fair market value. Morrissey v. Comm’r of Internal Revenue, 243 F.3d
1145, 1147–48 (9th Cir. 2001). The bankruptcy court considered the sale price,
but found this evidence to be less persuasive than other evidence in the record,
including intervening improvements to the land made possible by the Campbells’
contribution. Because the land was substantially different at the time it was
contributed to CAP than when it was sold a month later, the bankruptcy court did

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not err in rejecting the later sale price as evidence of the fair market value at the
time the land was contributed.
II
Next, the Ratliffs argue that the bankruptcy court erred in finding that the
Ratliffs converted CAP’s funds, thus rendering the debt nondischargeable. See 11
U.S.C. § 523(a)(6). As of August 16, 2006, until it was paid off, the Wells Fargo
loan was in default. Pursuant to the pledge agreement executed between the parties
and Wells Fargo, after a default Wells Fargo had a right to “[c]ollect any of the
Collateral.” Thus, because Wells Fargo had a superior right to the funds, the
Campbells did not have a right to immediate possession to the funds that were
instead paid to Wells Fargo. The payment to Wells Fargo could not serve as the
basis for a conversion claim. See Focal Point, Inc. v. U-Haul Co. of Ariz., Inc.,
746 P.2d 488, 489 (Ariz. Ct. App. 1986) (“[Conversion is the] ‘intentional exercise
of dominion or control over a chattel which so seriously interferes with the right of
another to control it that the actor may justly be required to pay the other the full
value of the chattel.’” (quoting Restatement (Second) of Torts § 222(A)(1))). The
BAP erred in finding otherwise. Because the Ratliffs are not liable for conversion
of the portion of the NK proceeds paid to Wells Fargo, the judgment debt in

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1 These figures are taken from the Bankruptcy Court's December 7, 2009
order, at 13, and are recited again in the BAP's October 13, 2010 order, at 7.
However, in footnote 6 on page 14 of the Bankruptcy Court's order, N.K.’s first
payment is listed as only $437,168.94, rather than $479,754.20. With the record
before us, we cannot determine the reason for the discrepancy but note the issue for
further proceedings on remand. The precise amount does not affect our reasoning.
What is significant is that there was money remaining from the NK proceeds after
the payment to Wells Fargo.
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connection with those funds is not nondischargeable pursuant to 11 U.S.C
§523(a)(6).
Not all of the funds received from NK were paid to Wells Fargo, however.
The first installment received from NK was $479,754.20, but Wells Fargo was paid
only $358,902.89, leaving a balance of approximately $120,000. 1 Jeff Ratliff split
that money, paying half to the Campbells and keeping half for himself and his
wife. But at that point the Ratliffs owed the Campbells for the portion of the NK
proceeds that should have gone to the Campbells but was paid to Wells Fargo
instead, under the pledge agreement, to satisfy the debt owed to Wells Fargo by the
Ratliffs. The portion of the NK payment retained by the Ratliffs could be the
subject of a conversion claim in favor of the Campbells and thus support a finding
of nondischargeability for a portion of the judgment debt previously held by the
bankruptcy court to be nondischargeable.
We remand for further proceedings.

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III
The Campbells cross-appeal the BAP’s finding that the debt was not
nondischargeable under 11 U.S.C. § 523(a)(4), “for fraud or defalcation while
acting in a fiduciary capacity.” Because we find that, for the portion of the NK
proceeds that were paid to Wells Fargo, Wells Fargo had a superior right to the
funds, it was not a breach of any fiduciary duty to honor that claim.
For the portion of the NK proceeds that may be the subject of a conversion
claim in favor of the Campbells, we affirm the BAP’s finding that the “type of
relationship required for non-dischargeability purposes under § 523(a)(4) did not
exist” between the Ratliffs and the Campbells. See Otto v. Niles (In re Niles), 106
F.3d 1456, 1459 (9th Cir. 1997) (“A debt is nondischargeable under 11 U.S.C.
§ 523(a)(4) where 1) an express trust existed, 2) the debt was caused by fraud or
defalcation, and 3) the debtor acted as a fiduciary to the creditor at the time the
debt was created.” (internal quotation marks omitted)). It is not clear, under
Arizona law, that Jeff Ratliff had a fiduciary duty to the Campbells. See Ariz. Rev.
Stat. § 29-681 (containing no express fiduciary duty requirement); see also Snoke
v. Riso (In re Riso), 978 F2d 1151, 1154 (9th Cir. 1992) (“[E]xceptions to
discharge should be strictly construed against an objecting creditor and in favor of
the debtor.”).

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AFFIRMED, in part; REVERSED, in part, and REMANDED. Each party to
bear its own costs and attorney’s fees.

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