In re Theodore E. Honkanen And Marcella J. Honkanen

• Decision Date: 16 February 2011
• Docket Number: Adversary No. 08–02469.,Bankruptcy No. 08–26680.,BAP No. EC 10–1102–ZJuMk.
• Citation: 11 Cal. Daily Op. Serv. 2857,446 B.R. 373,2011 Daily Journal D.A.R. 3358
• Parties: In re Theodore E. HONKANEN and Marcella J. Honkanen, Debtors.Marcella J. Honkanen, Appellant,v.J. Michael Hopper, in his capacity as Chapter 7 Trustee for Susan J. Archer, Respondant.
• Court: U.S. Bankruptcy Appellate Panel, Ninth Circuit

446 B.R. 373

11 Cal. Daily Op. Serv. 2857

2011 Daily Journal D.A.R. 3358

In re Theodore E. HONKANEN and Marcella J. Honkanen, Debtors.Marcella J. Honkanen, Appellant,

v.J. Michael Hopper, in his capacity as Chapter 7 Trustee for Susan J. Archer, Respondant.

BAP No. EC 10–1102–ZJuMk.

Bankruptcy No. 08–26680.

Adversary No. 08–02469.

United States Bankruptcy Appellate Panel of the Ninth Circuit.

Argued and Submitted Nov. 18, 2010.Decided Feb. 16, 2011.

Gregory Joseph Hughes, Esquire appeared for appellant Marcella J. Honkanen.J. Russell Cunningham appeared for appellee J. Michael Hopper.Before: ZIVE,¹ JURY, and MARKELL, Bankruptcy Judges.

OPINION

ZIVE, Bankruptcy Judge.

OVERVIEW

Marcella Honkanen (“Honkanen”) appeals a memorandum decision holding her liable for fraud while acting in a fiduciary capacity under 11 U.S.C. § 523(a)(4).² Honkanen raises three issues on appeal: 1) whether the bankruptcy court erred in determining that the “fiduciary capacity” requirement of 11 U.S.C. § 523(a)(4) was satisfied, 2) whether the bankruptcy court erred in determining that the requirements for application of the doctrine of issue preclusion were satisfied, and 3) whether Appellee J. Michael Hopper (“Hopper”) carried his burden of proving that Honkanen committed fraud. We conclude the fiduciary capacity requirement of § 523(a)(4) was not satisfied. Further, we decide that issue preclusion was not properly applied because fraud was not necessarily decided in the state court action and, therefore, Hopper did not prove Honkanen committed fraud. We REVERSE the bankruptcy court's decision.

FACTS

Honkanen filed a Chapter 7 bankruptcy petition May 21, 2008, in the Eastern District of California. Creditor Susan Archer (“Archer”) commenced an adversary proceeding on August 22, 2008, to determine the dischargeability of a state court judgment rendered in her favor and against Honkanen after a jury trial. The complaint alleged a claim for relief solely under § 523(a)(4). As the basis for her dischargeability claim, Archer relied upon the doctrine of issue preclusion, or collateral estoppel, predicated upon a state court jury verdict. Archer contended the California state court jury found Honkanen had intentionally breached her fiduciary duty to Archer by making misrepresentations and concealing information while acting in a fiduciary capacity.

Honkanen had acted as Archer's real estate broker in a transaction in which Archer attempted to purchase real property from a third party. After the transaction was not consummated, Archer sued Honkanen in state court accusing Honkanen of performing her real estate licensee duties negligently and of intentionally breaching her fiduciary duty to Archer. The alleged breach consisted of Honkanen making intentional misrepresentations to Archer concerning the real estate purchase agreement and the insufficiency of Archer's performance, in addition to failing to disclose the deficiency in Archer's performance.

In the state court suit, Archer also accused Honkanen of breaching her fiduciary duty of loyalty to Archer, the buyer, by acting in the interest of the seller rather than in Archer's interest. Archer asserted Honkanen had falsely informed the seller that Archer could not satisfy the financing requirements for the purchase and that Archer was in breach of the sale agreement. While the jury instructions did not include an instruction about any intentional tort committed by Honkanen against Archer, the jury awarded Archer damages in the amount of $356,000 for negligent and intentional breach of Honkanen's fiduciary duty to Archer.

In her answer to the nondischargeability complaint, Honkanen admitted she was a real estate broker licensed by the state of California, that she served as the real estate agent and broker for Archer as the buyer in the transaction, that the jury found Honkanen breached her fiduciary duty to Archer, that her breach was both negligent and intentional, and that her breach was a substantial factor in causing harm to Archer in the amount of $356,000. Honkanen denied, however, that the jury verdict was nondischargeable under § 523(a)(4).

At trial, Archer's Chapter 7 trustee, Hopper, intervened as the plaintiff because he had succeeded to Archer's claim against Honkanen. ³ The only evidence admitted at trial was the original state court complaint, the state court judgment, and the state court jury instructions. The bankruptcy court rendered its memorandum decision on September 3, 2009. It held that the issues raised in the state court action were actually litigated and necessarily decided when the state court jury returned a verdict of intentional breach of fiduciary duty, that the requirements of § 523(a)(4) were met, and that the state court judgment was nondischargeable.

The bankruptcy court found the state court had previously determined that Honkanen owed Archer a fiduciary duty, that the Ninth Circuit in Bugna v. McArthur (In re Bugna), 33 F.3d 1054, 1057 (9th Cir.1994), held that a real estate agent was a fiduciary within the narrow meaning of § 523(a)(4), that Archer's intentional breach of that duty injured the plaintiff and that the resulting damages were therefore nondischargeable.

The bankruptcy court's judgment was entered on March 26, 2010. Honkanen filed her notice of appeal March 24, 2010. The premature notice of appeal is deemed to have been filed on the same day as the entry of judgment, pursuant to Fed. R. Bankr.P. 8002(a).

JURISDICTION

The bankruptcy court had jurisdiction pursuant to 28 U.S.C. § 1334(b) over this core proceeding under 28 U.S.C. § 157(b)(2)(I). We have jurisdiction under 28 U.S.C. § 158(b).

STANDARD OF REVIEW

The court of appeals and the bankruptcy appellate panel (“BAP”) review a bankruptcy court's findings of fact under the clearly erroneous standard and its conclusions of law de novo. Canatella v. Towers (In re Alcala), 918 F.2d 99, 103 (9th Cir.1990) ( citing Bank of Honolulu v. Anderson (In re Anderson), 833 F.2d 834, 836 (9th Cir.1987)); Fed. R. Bankr.P. 8013. Decisions on issue preclusion are reviewed de novo. Littlejohn v. United States, 321 F.3d 915, 919 (9th Cir.2003). The issue of dischargeability of a debt is a mixed question of fact and law that is reviewed de novo. Miller v. United States, 363 F.3d 999, 1004 (9th Cir.2004) ( citing Diamond v. Kolcum (In re Diamond), 285 F.3d 822, 826 (9th Cir.2002)).

DISCUSSION

A. The Bankruptcy Court Erred When it Determined that § 523(a)(4)'s Fiduciary Capacity Requirement Had Been Met.

Section 523(a)(4) excepts from discharge debts that arise from “fraud or defalcation while acting in a fiduciary capacity....” To prevail on a nondischargeability claim under § 523(a)(4) the plaintiff must prove not only the debtor's fraud or defalcation, but also that the debtor was acting in a fiduciary capacity when the debtor committed the fraud or defalcation. See In re Teichman, 774 F.2d 1395, 1398 (9th Cir.1985); and In re Bugna, 33 F.3d at 1057.

The broad definition of fiduciary under nonbankruptcy law—a relationship involving trust, confidence, and good faith—is inapplicable in the dischargeability context. Cal–Micro, Inc. v. Cantrell (In re Cantrell), 329 F.3d 1119, 1125 (9th Cir.2003); ⁴ Lewis v. Short (In re Short), 818 F.2d 693, 695 (9th Cir.1987); Ragsdale v. Haller, 780 F.2d 794, 796 (9th Cir.1986); Woosley v. Edwards (In re Woosley), 117 B.R. 524, 529 (9th Cir. BAP 1990). For purposes of § 523(a)(4), the Ninth Circuit has adopted a narrow definition of “fiduciary.” ⁵ To fit within § 523(a)(4), the fiduciary relationship must be one arising from an express ⁶ or technical ⁷ trust that was imposed before, and without reference to, the wrongdoing that caused the debt as opposed to a trust ex maleficio, constructively imposed because of the act of wrongdoing from which the debt arose. Ragsdale, 780 F.2d at 796; Cantrell, 329 F.3d at 1125 ( citing Lewis v. Scott (In re Lewis), 97 F.3d 1182, 1185 (9th Cir.1996)).

While the scope of the term “fiduciary capacity” is a question of federal law, the Ninth Circuit has considered state law to ascertain whether the requisite trust relationship exists. Ragsdale, 780 F.2d at 796; In re Cantrell, 329 F.3d at 1125; and In re Woosley, 117 B.R. at 529. For a trust relationship under § 523(a)(4) to be established, the applicable state law must clearly define fiduciary duties and identify trust property. See Runnion v. Pedrazzini (In re Pedrazzini), 644 F.2d 756, 759 (9th Cir.1981). Trusts arising as remedial devices to breaches of implied or express contracts—such as resulting or constructive trusts—are excluded, while statutory trusts that bear the hallmarks of an express trust are not.⁸ Id.; 4 Collier on Bankruptcy 523.10[1][d] (Alan N. Resnick & Henry J. Sommer eds., 16th ed. 2010). The mere fact that state law puts two parties in a fiduciary-like relationship does not necessarily mean it is a fiduciary relationship within 11 U.S.C. § 523(a)(4). See generally Pedrazzini, 644 F.2d at 759.

The Ninth Circuit Bankruptcy Appellate Panel has opined in three § 523(a)(4) cases involving a real estate licensee: Woosley, 117 B.R. 524, Evans v. Pollard (In re Evans), 161 B.R. 474 (9th Cir. BAP 1993), and Rettig v. Peters (In re Peters), 191 B.R. 411 (9th Cir. BAP 1996).

In Woosley and Peters, 117 B.R. at 529, 191 B.R. at 419, the BAP reasoned that debtor's real estate license carried with it fiduciary obligations to his principals under California law when carrying out licensed activities. The BAP held that the fiduciary obligations accompanying a real estate licensee's licensed activities are within the purview of “fiduciary capacity” required by § 523(a)(4).

The BAP distinguished Woosley in Evans, 161 B.R. at 478. That panel questioned whether a real estate broker's general fiduciary obligations of undivided service and loyalty in the absence of an identifiable trust res are sufficient to establish fiduciary capacity for purposes of § 523(a)(4). It held...