BAP Clarifies Limits of Issue Preclusion in Nondischargeability Cases: In re Kim

The following is a case review written by Joseph Boufadel, a partner at Salvato Boufadel LLP, analyzing a recent decision of interest, Kim v. Kim (In re Kim), 2025 Bankr. LEXIS 3265 (B.A.P. 9th Cir. Dec. 17, 2025).

Summary

The Bankruptcy Appellate Panel for the Ninth Circuit reversed the bankruptcy court’s order granting summary judgment based on the issue preclusive effect of a state court judgment on nondischargeable claims for two main reasons. First, issue preclusion did not apply to a California state court judgment for conversion that relied upon state court discovery admissions because such admissions cannot be used in subsequent proceedings under California law. Second, and separately, a judgment for conversion that awards punitive damages is not necessarily issue-preclusive in a subsequent proceeding as actually litigated or necessarily decided for purposes of intent for nondischargeable claims.  

To view the unpublished memorandum, please click here.

Facts

In 2015, creditor filed a California state court action for conversion against the debtor, alleging that the debtor wrongfully withheld sales commissions. In the ensuing litigation, the state court entered a discovery order deeming admitted certain discovery admissions of fact, including the allegations in the state court complaint, and the fact that the debtor converted creditor’s monies and that such conversion was “intentional, malicious, wanton and fraudulent.”

In 2017, after a bench trial where the debtor did not participate, the state court entered a judgment for conversion and awarded punitive damages in light of the prior ruling on discovery admissions. The state court did not issue an independent statement of decision.

Seven years later, the debtor filed a chapter 7 petition. Creditor commenced an adversary proceeding seeking to have the state court judgment declared nondischargeable under Bankruptcy Code §§ 523(a)(4) and (a)(6).

On summary judgment, the bankruptcy court ruled in favor of the creditor, finding that the state court judgment established the debtor’s liability based on the doctrine of issue preclusion. The debtor appealed the order granting summary judgment to the BAP.

The BAP reversed and remanded, finding that the elements of issue preclusion had not been met. 

Reasoning

For a state court judgment to have issue-preclusive effect in federal court, it must satisfy the following elements of issue preclusion under California law:

(1) the issue sought to be precluded from relitigation is identical to that decided in a former proceeding; (2) the issue was actually litigated in the former proceeding; (3) the issue was necessarily decided in the former proceeding; (4) the decision in the former proceeding is final and on the merits; (5) the party against whom preclusion is sought was the same as, or in privity with, the party to the former proceeding; and (6) application of issue preclusion furthers California’s public policies.

The BAP held that the state court judgment satisfied several of the elements of issue preclusion, but that the creditor failed to demonstrate that issues in state court were identical to the issues in the adversary proceeding (element 1) and that the issues relevant to nondischargeability were actually litigated and necessarily decided (elements 2 and 3).

The state court judgment standing alone was insufficient because it was based on discovery admissions, and the BAP explained that these admissions were not “actually litigated” or “necessarily decided” as the rule requires. Because the elements of conversion under California law do not require intent to find the debtor liable, those admissions relating to intent were unnecessary and could not support application of issue preclusion to satisfy the intent requirements under Bankruptcy Code §§ 523(a)(4) and (a)(6).

Importantly, the discovery admissions also could not be used for purposes of applying issue preclusion under California law, which prohibits discovery admissions from being used against a party in any proceeding other than the one in which the admissions are made. See, California Code Civil Procedure § 2033.410(b) (“[A]ny admission made by a party under this section is binding only on that party and is made for the purpose of the pending action only. It is not an admission by that party for any other purpose, and it shall not be used in any manner against that party in any other proceeding.”). Therefore, use of the state court discovery admissions in the subsequent adversary proceeding would violate California law and hinder, rather than further, public policy (element 6).

The BAP further explained that while intent is relevant for purposes of awarding punitive damages, such an award under California law may arise from either malice, oppression, or fraud. California Civil Code § 3294 (statutorily defining “malice,” “oppression,” and “fraud”). While the state court judgment awarded punitive damages, it did not specify the basis for the award. To have preclusive effect for purposes of wrongful intent for embezzlement under § 523(a)(4) or willful intent to cause harm under § 523(a)(6), a punitive damages award must be explicitly based on intentional malice or fraud. Despicable malice—as permitted in the definition of “malice” under Civil Code § 3294(c)—and “oppression” are insufficient. Accord, In re Plyam, 530 B.R. 456, 464-65 (B.A.P. 9th Cir. 2015).  As the state court did not specify the basis for the punitive damages award, the BAP concluded that the intent element required for the nondischargeable claims under Bankruptcy Code §§ 523(a)(4) and (a)(6) could not have been “necessarily decided” for purposes of issue preclusion. Accordingly, the BAP reversed the order granting summary judgment and remanded the adversary for further proceedings.

Author’s Commentary

For practitioners litigating nondischargeability proceedings, the BAP’s opinion provides useful practice points and reminders regarding the limitations of issue preclusion in bankruptcy court:

• State court discovery admissions are statutorily barred from being used as an admission in a subsequent nondischargeability action.

• A judgment based on conversion is not ipso facto a nondischargeable judgment under Bankruptcy Code § 523(a)(6). A judgment for conversion does not necessarily require a finding of intent.

• If punitive damages are awarded in a state court judgment, the record must clearly demonstrate that the state court made a finding of fraud or intentional malice as the basis for the punitive damages award. A finding of “oppression” or “malice” are insufficient and an award of punitive damages on this basis will not suffice to invoke issue preclusion on the element of intent under Bankruptcy Code §§ 523(a)(4) or (a)(6).

These materials were written by ILC member Joseph Boufadel of Salvato Boufadel LLP in Los Angeles and Irvine, California (Jboufadel@salvatoboufadel.com) with editorial contributions provided by Jessica Bagdanov of BG Law in Woodland Hills, California (jbagdanov@bg.law) and the Hon. (ret.) Meredith A. Jury.

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