In re Alle, 2:20-cv-11116-MCS

• Decision Date: 19 July 2021
• Docket Number: Bankruptcy 2:13-bk-38801-SK,2:20-cv-11116-MCS
• Parties: IN RE JOHN EMIL ALLE, Debtor. v. EARL E. GALES, JR., et al., Appellees. JOHN EMIL ALLE, Appellant, Adversary No. 2:14-ap-01146-SK
• Court: U.S. District Court — Central District of California

IN RE JOHN EMIL ALLE, Debtor.

JOHN EMIL ALLE, Appellant, v. EARL E. GALES, JR., et al., Appellees.

Adversary No. 2:14-ap-01146-SK

No. 2:20-cv-11116-MCS

Bankruptcy No. 2:13-bk-38801-SK

United States District Court, C.D. California

July 19, 2021

ORDER AFFIRMING BANKRUPTCY COURT'S ORDERS

MARK C. SCARSI, UNITED STATES DISTRICT JUDGE.

Appellant John Emil Alle appeals the Bankruptcy Court's Judgment entered on December 3, 2020 in favor of the Appellees. Alle also appeals from the Bankruptcy Court's Order Granting Appellees' Motion For Order Permitting Trial by Zoom Video Technology entered on August 25, 2020 (the “Zoom Trial Order”) and (2) the Order Denying Motion For Order Allowing Defendant to Argue, At Trial, All Elements of Every Cause of Action in the First Amended Complaint (the “Mandate Order”) entered on February 27, 2019. For the following reasons, the Court AFFIRMS the decisions of the Bankruptcy Court.

I. BACKGROUND

On December 5, 2013, John Emil Alle, debtor and Appellant here filed a chapter 7 petition. In re Alle, 13-38801-SK (Bankr. C.D. Cal.). On March 7, 2014, Earl Gales, Jr., Starla Gales, Robert Oppenheim, and Lois Oppenheim, plaintiffs in the adversary proceeding and Appellees here, filed a complaint against Alle alleging three claims: 1) Defalcation under 11 U.S.C. § 523(a)(4), 2) Fraud under § 523(a)(2)(A), and 3) Embezzlement under § 523(a)(4). Gales et al. v. Alle (In re Alle), Adv. Proc. No 2:14-ap-01446-SK (Bankr. C.D. Cal.). The adversary action is based upon the below facts.

The Appellees and Alle formed Shadow Mountain Properties, LLC (“SMP”) in January 2006. (Appellees' Excerpts of Record, Tab 5 at 00047 (AER 5:47), ECF No. 13-1.)^[1] The purpose of SMP was to purchase and operate a rental property in Palm Desert, CA. (Id.) SMP purchased the Property from the Humiston Family Trust for the sum of $1, 600, 000.00. (Id.) The Appellees contributed $800, 000 and Humiston took back a deed of trust in the amount of $800, 000 for the remainder. (Id.)

Over the next several years, frustration between the parties developed, as Alle failed to provide requested operating reports and bank statements to the Appellees. (See AER Tab 4; Tab 11.) SMP also fell behind on payments on the deed of trust, and on August 19, 2011, Humiston instituted a non-judicial foreclosure process by recording a Notice of Default listing the default and the requisite reinstatement amount at that time of $12, 478.33. (AER 5:47.) Although Alle knew of this action, and was in loan modification negotiations with Humiston, Appellees were unaware of the dire financial situation. (AER 5:49.) Alle's negotiations failed, and the foreclosure sale took place on December 22, 2011, with Humiston submitting a winning bid in the amount of $842, 737.25. (AER 5:48-50.) Alle, notwithstanding his duties as Managing Member of SMP, did not notify Appellees that Humiston foreclosed on the property. (AER 11:147; 7:94.) For the next four months, despite the foreclosure, Alle continued to represent to Appellees that he was controlling SMP and attempting to rectify the financial woes. (See generally AER Tab 5; Tab 41.)

On November 9, 2012, Appellees filed a complaint against Alle in Los Angeles County Superior Court. (AER 34:510). On December 5, 2013, four days before the state action was to go to trial, Alle filed a chapter 7 petition. (Id.) On March 7, 2014, Appellees filed a nondischargeability complaint, initiating the adversary proceeding. (Id.)

In their adversary proceeding, the Appellees seek a determination that their claims against Alle were not dischargeable under Section 523 for fraudulent representations and omissions, fraud or defalcation while acting as a fiduciary, and embezzlement. (AER 39:602-12.) In September 2016, the bankruptcy court held a hearing on the Appellees' Motion for Summary Judgment resulting in a 40-page ruling granting the Appellees' claims for defalcation while acting in a fiduciary capacity and embezzlement (the “MSJ Ruling”). (See AER Tab 34.) Additionally, the bankruptcy court determined that Alle embezzled $94, 473.64 in funds from Shadow Mountain between May 2009 and December 2011. (See AER 34:506-09.) The bankruptcy court entered judgment against Alle for $800, 000.00, plus attorneys' fees and costs (the “Initial Judgment”). (See AER Tab 33.)

Alle then appealed the Initial Judgment to the BAP in the appeal designated as Alle v. Gales (In re Alle), No. CC-16-1412 (B.A.P. 9th Cir. 2016). The BAP affirmed in part and reversed in part the Initial Judgment and remanded the matter for further proceedings. (AER 37:582.) The BAP found that the bankruptcy court's findings were inadequate to support the ultimate conclusion that there was a defalcation. Specifically, the BAP opined that the bankruptcy court needed to make a sufficient finding that Alle's state of mind satisfied the applicable standard or an explicit finding that Alle's conduct caused the Appellees' damages. (AER 37:571.) The BAP further found that the bankruptcy court did not make sufficient findings to support the amount of damages awarded. (AER 37:580.)

After the remand by the BAP, Alle filed a motion seeking to set aside all of the bankruptcy court's prior determinations made in connection with its ruling on the MSJ and require the Appellees to prove every element of their complaint anew (the “Mandate Relief Motion”). (AER 40:654.) In response to this motion, the bankruptcy court ruled against Alle-finding its prior determinations were binding and the issues to be litigated at trial consisted of both the issues designated for remand by the BAP and the issues for which the bankruptcy court did not grant partial summary adjudication. (AER 38:590-600.) Further, the bankruptcy court found no valid exception to the law of the case doctrine and that the mandate rule applied, and accordingly entered the Mandate Order. (AER 4:35-36.)

On August 25, 2020, in light of the ongoing COVID-19 pandemic, the bankruptcy court entered an order that the action would proceed to a remote trial. (AER Tab 3.) At the hearing on the motion, the bankruptcy court stated that:

based on the current pandemic, the district court's recent general orders that closed the district court because of the surging cases, the bankruptcy court's recent general order that closed the courthouse because of the surge in cases, it stands for all of these reasons stated, the Court find that there is good cause and compelling circumstances and exercises its discretion under FRCP 43(a) to order that this trial will proceed remotely.

(AER 46:1183.) The trial took place October 29-30, 2020. (AER 4:34.) But Alle elected not to participate in the trial, with both Alle and his counsel filing court-ordered declarations indicating an understanding of the consequences of not participating in the trial. (AER Tab 21; Tab 22.)

On December 3, 2020, after the remote trial and post-trial motion practice, the bankruptcy court entered the Judgment in favor of the Appellees in the amount of $1, 377, 563.46 as to Mr. and Mrs. Gales and $740, 606.77 as to Mr. and Mrs. Oppenheim. (AER 2:25-26.) This appeal followed.

II. QUESTIONS PRESENTED ON APPEAL^[2]

1. Whether the Bankruptcy Court abused its discretion by entering the Zoom Trial Order?

2. Whether the Bankruptcy Court committed error by entering the Mandate Order?

3. Whether the Bankruptcy Court erred by entering the Judgment under 11 U.S.C. § 523(a)?

II. STANDARD OF REVIEW

“Findings of fact of the bankruptcy court are reviewed for clear error, and conclusions of law are reviewed de novo. Mixed questions of law and fact are reviewed de novo.” Harkey v. Grobstein (In re Point Ctr. Fin., Inc.), 957 F.3d 990, 995 (9th Cir. 2020) (citations omitted). The bankruptcy court's “findings of fact are accorded considerable deference and are only clearly erroneous if we are left with a definite and firm conviction a mistake has been committed.” Nichols v. Marana Stockyard & Livestock Mkt., Inc. (In re Nichols), 618 B.R. 1, 5 (9th Cir. B.A.P. 2020). A reviewing court may affirm a bankruptcy court's decision “on any ground fairly supported by the record.” In re Warren, 568 F.3d 1113, 1116 (9th Cir. 2009).

III. DISCUSSION

Alle presents thirteen issues on appeal, which can be interpreted as falling within three separate categories of error: first, the bankruptcy court erred by ordering the trial to proceed by Zoom, second, the bankruptcy court erred by not requiring Appellees to prove every element of their claims at trial, and third, the bankruptcy court erred by granting judgment against Alle. (Opening Br. 1-2, ECF No. 10.) The Court addresses each issue in turn.

A. Holding the Trial by Remote Technology Was Permissible

First Alle appeals the bankruptcy court's issuance of the Zoom Trial Order, arguing that the court abused its discretion in ordering the parties to proceed to a trial conducted via Zoom. (Opening Br. 10.) In support of this general allegation of error, Alle argues several reasons for why the bankruptcy court erred. Alle claims that the bankruptcy court could not have determined the credibility of remotely testifying witnesses and a Zoom trial restricts the party's ability to communicate with his attorney. (Id. 9, 10.) Also, because testimony would not occur in the open courtroom, there is the risk that a witness would improperly rely on documents during his or her testimony, be impermissibly coached by a person outside of the view of the camera during trial, or even communicate via text or email with the attorney without the court's knowledge. (Id.) Alle also argues that a “Zoom trial (compared to a routine court hearing) deprived Appellant of the constitutional right to confront witnesses, due process of law and effective counsel.” (Id. 11.) He...