Keeton v. Flanagan (In re Flanagan)
| Decision Date | 26 February 2014 |
| Parties | In re: STEPHEN FLANAGAN and CHARLOTTE FLANAGAN, Debtors. ROBERT KEETON, Appellant/Cross-Appellee, v. STEPHEN FLANAGAN, Appellee/Cross-Appellant. |
| Court | U.S. Bankruptcy Appellate Panel, Ninth Circuit |
NOT FOR PUBLICATION
MEMORANDUM*Argued and Submitted on January 24, 2014
at Las Vegas, Nevada
Appeal from the United States Bankruptcy Court
for the District of Nevada
Appearances: Jeffrey J. Jarvi of Law Offices of Jeffrey J. Jarvi argued for appellant/cross-appellee Robert Keeton; Kevin Darby of The Darby Law Practice argued for appellee/cross-appellant Stephen Flanagan.
Before: TAYLOR, JURY, and KIRSCHER, Bankruptcy Judges.
Appellant/Cross-Appellee Robert Keeton ("Keeton") commenced an adversary proceeding against Debtor and Appellee/Cross-Appellant Stephen Flanagan1 ("Flanagan"), seeking a nondischargeability determination under § 523(a)(2)(A), (a)(4), (a)(6), and (a)(19).2 The claims, in part, were based on Flanagan's alleged violations of the Alaska Unfair Trade Practices and Consumer Protection Act ("UTPA") and the Alaska Securities Act ("Securities Act").
After a two day trial, the bankruptcy court granted judgment ("Judgment") in Keeton's favor based on false pretenses under § 523(a)(2)(A) and embezzlement under § 523(a)(4). It determined, however, that Keeton failed to prove Flanagan's violation of the UTPA or the Securities Act, and thus it denied the § 523(a)(6) and (a)(19) claims.
Keeton appeals from the bankruptcy court's determination that Flanagan did not violate the UTPA or Securities Act; its denial of stay relief to proceed in an existing Alaska state court action; and its denial of his post-trial motion for prejudgment interest and attorney's fees and costs under Alaska law.
Flanagan cross-appeals from the bankruptcy court's nondischargeability determinations under § 523(a)(2)(A) and (a)(4). He also contends that the bankruptcy court committed reversible error when it ordered him, mid-trial, to turn over all documents that he reviewed in preparation for trial to opposing counsel.
For the reasons explained below, we AFFIRM the bankruptcy court, except as to its § 523(a)(4) determination and its denial of attorney's fees and costs under Alaska law. We REVERSE the Judgment as to the § 523(a)(4) claim. Further, we REVERSE that portion of the bankruptcy court's order denying fees and costs and REMAND solely on that issue for further proceedings consistent with this decision.
Keeton and Flanagan are former military and either currently or intermittently served as pilots for the same major airline.
In 2005, Flanagan - through his company GPS Development, LLC - began plans to develop a mixed-use residential and commercial redevelopment project ("Redevelopment Project") in a suburb of Minneapolis, Minnesota. Keeton dabbled in real estate and, in 2006, became acquainted with another airline pilot, Michael Hill ("Hill"), who represented himself as a loan broker and eventually mentioned the Redevelopment Project.
Hill informed Keeton that he secured approval for a $20 million loan ("$20M Loan"), but that the loan was contingent on the procurement of bank guarantees; the guarantees, in turn, were predicated on an advanced origination fee of 1% or $200,000. As Keeton later learned, the "lender" was joint venture partnersUltima Group II, LLC and Florida Institute of Applied Technology (jointly hereafter, "FIAT"). Hill then asked Keeton if he could provide Flanagan with the $200,000 origination fee.
Whether driven by altruism or financial motives, Keeton agreed to provide Flanagan with $200,000 (the "Funds"). The transaction was memorialized in a letter ("Agreement") dated June 25, 2007, addressed to Keeton, and signed by Flanagan. The Agreement, which identified FIAT as the lender, provided that Keeton would supply the Funds and that the Funds would be held in escrow until Flanagan obtained the bank guarantees (and, presumably, the $20M Loan) or returned to Keeton if the bank guarantees were not obtained. Other terms included: repayment of the "loan" from a first or second draw of financing, estimated to occur after approximately six or seven weeks; a 5% monthly return; and a guaranteed minimum return of $20,000 for the first 60 days, until repayment of the principal.
Keeton attempted to take some protective measures. He sought and obtained an assignment of a second mortgage held by Flanagan and his wife; the second mortgage encumbered real property located at or near the site of the Redevelopment Project. Prior to the assignment, he verified the value of the real property with an appraiser retained by Flanagan. At Keeton's insistence, the parties also entered into an escrow agreement with a Minneapolis title company; the latter acted as the escrow agent and handled the exchange of the Funds and recordation of the second mortgage assignment.
Things ultimately did not go as planned. Upon confirmation that the second mortgage assignment was recorded, the titlecompany wired the Funds to Flanagan, who, in turn, wired the Funds to FIAT. Once the Funds were transferred to FIAT, they were placed into a risky investment platform that offered incredible (even outlandish) payouts tied to the investment contribution, such as an 80-to-1 leveraged payout. The investment, unsurprisingly, did not pay out and Flanagan lost the Funds. He then failed to repay Keeton the $200,000.
In 2008, a senior secured lender foreclosed on Keeton's real property collateral; the foreclosure yielded nothing for Keeton.3 Several months later, Keeton sued Flanagan in Alaska state court and asserted claims based on alleged violations of the UTPA and the Securities Act. The case proceeded over three years and was scheduled for a bench trial on August 1, 2011. But just three weeks before trial, Flanagan filed his bankruptcy. Keeton's adversary proceeding followed shortly thereafter; the amended adversary complaint sought a nondischargeability determination of the $200,000 based on: false pretenses and false representation under § 523(a)(2)(A); embezzlement under § 523(a)(4); conversion under § 523(a)(6); violation of the UTPA under § 523(a)(6); and violation of the Securities Act under § 523(a)(19).
Keeton also moved for stay relief to allow trial to proceed in the Alaska state court action. The bankruptcy court denied this motion.
On January 17 and 18, 2013, the bankruptcy court held a two-day trial in the nondischargeability action; both Keeton and Flanagan testified. The bankruptcy court subsequently entered the Judgment and its findings of fact and conclusions of law. It determined that Keeton's claim was nondischargeable based on false pretenses under § 523(a)(2)(A) and embezzlement under § 523(a)(4); it denied all of Keeton's other claims.
Keeton appeals from the Judgment and Flanagan cross-appeals. Keeton also appeals from the denial of his post-trial motion for prejudgment interest and attorney's fees and costs under Alaska law.
The bankruptcy court had jurisdiction pursuant to 28 U.S.C. §§ 1334 and 157(b)(2)(I). We have jurisdiction under 28 U.S.C. § 158.
Keeton contends that the bankruptcy court committed reversible error as follows: (A) not awarding treble damages under the UTPA after determining that Flanagan engaged in false pretenses and embezzlement; (B) denying relief under the Securities Act; (C) not "remanding" the Securities Act claim to the Alaska state court for adjudication of that claim; and (D) denying his post-trial motion for add-ons of prejudgment interest and attorney's fees and costs under Alaska law.
Flanagan, in turn, asserts that the bankruptcy court committed reversible error as to the following: (A) determining that Keeton's claim was excepted from discharge based on false pretenses under § 523(a)(2)(A); (B) determining that Keeton'sclaim was excepted from discharge based on embezzlement under § 523(a)(4); and (C) ordering him to turn over to Keeton's counsel, during trial, all materials that he reviewed in preparation for trial.
Whether a claim is excepted from discharge presents mixed issues of law and fact, which we review de novo. Oney v. Weinberg (In re Weinberg), 410 B.R. 19, 28 (9th Cir. BAP 2009), aff'd, 407 F. App'x 176 (9th Cir. 2010). We also review de novo issues of statutory construction. B-Real, LLC v. Chaussee (In re Chaussee), 399 B.R. 225, 229 (9th Cir. BAP 2008). Under de novo review, we consider a matter anew, as if it had not been heard before, and as if no decision had been previously rendered. Id.
Pure questions of fact and the bankruptcy court's underlying factual findings are reviewed for clear error. Deitz v. Ford (In re Deitz), 469 B.R. 11, 24-25 (9th Cir. BAP 2012); de la Salle v. U.S. Bank, N.A. (In re de la Salle), 461 B.R. 593, 601 (9th Cir. BAP 2011); In re Weinberg, 410 B.R. at 28.
We review the following determinations for an abuse of discretion: denial of stay relief, an award of prejudgment interest, and a determination on attorney's fees. See Gruntz v. Cnty of L.A. (In re Gruntz), 202 F.3d 1074, 1084 n.9 (9th Cir. 2000) (); In re Weinberg, 410 B.R. at 37 (prejudgment interest award); Bertola v. N. Wisc. Produce Co. (In re Bertola), 317 B.R. 95, 99 (9th Cir. BAP 2004) (attorney's fees).
Review of an abuse of discretion determination involves atwo-pronged test; first, we determine de novo whether the bankruptcy court identified the correct legal rule for application. See United States v. Hinkson, 585 F.3d 1247, 1261-62 (9th Cir. 2009) (en banc). If not, then the bankruptcy court necessarily abused its discretion. See id. at 1262. Otherwise, we next review whether the bankruptcy court's application of the correct legal rule was clearly erroneous; we will affirm unless its findings were illogical, implausible, or without support in inferences that...
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