Business Law

In re Pietro Cimino, 2021 WL 4593375 (9th Cir. B.A.P. Oct. 6, 2021),

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Summary

In In re Pietro Cimino, 2021 WL 4593375 (9th Cir. B.A.P. Oct. 6, 2021), the United States Bankruptcy Appellate Panel of the Ninth Circuit (BAP), affirmed the bankruptcy court’s ruling, which applied issue preclusion to a state court judgment to grant summary judgment in a non-dischargeability claim under Section 523(a)(2)(A) and (a)(6).  In an unpublished opinion, the BAP also affirmed that elder abuse under Nevada law constitutes a willful and malicious injury, at least on the facts here.

A copy of Pietro Cimino can be found here: click here.

FACTS

On June 3, 2019, Mr. Indelicato (Creditor) filed a complaint in Nevada State Court against Mr. Cimino (Debtor), his wholly owned company Castle Rock Holdings LLC, and others.  The Complaint was based on several claims, including fraud and elder abuse.

Mr. Indelicato claimed that Mr. Cimino fraudulently induced him to transfer real property assets into an alleged joint venture and later fraudulently converted $80,000 with no intent to benefit Mr. Indelicato.

Because Mr. Indelicato was in his 80’s, he requested and received a preferential trial setting in state court.  Prior to trial, Castle Rock filed a chapter 11 bankruptcy petition, but relief from stay was obtained by Mr. Indelicato. Thereafter, Mr. Cimino filed a personal bankruptcy petition, and Mr. Indelicato again obtained relief from stay to allow the trial proceeding in state court to continue.

On December 5, 2019, a jury trial commenced, and on December 30, 2019, the jury reached a verdict in favor of Mr. Indelicato, finding fraud and conversion which constituted elder abuse. The state court awarded: 1) monetary damages flowing from the conversion; 2) attorney fees; 3) costs; 4) punitive damages; and 5) doubled monetary damages.

Mr. Indelicato timely filed a nondischargeability suit in the bankruptcy court asking the court to declare the judgment non-dischargeable under §§ 523 (a)(2), (4) and (6) and moved for summary judgment, using the state court verdict and issue preclusion.  Mr. Cimino untimely opposed the motion for summary judgment and the court, after hearing, rejected the opposition and granted the motion under § 523 (a)(2) and (6).  Mr. Cimino timely appealed.

REASONING

The BAP affirmed the bankruptcy court’s order, confirming that a bankruptcy court may “grant summary judgment in a dischargeability proceeding based on the issue preclusive effect of a state court judgment.”  For the bankruptcy court to use issue preclusion, the party asserting it must prove all the criteria for its application by “introducing a record sufficient to reveal the controlling facts and the exact issue litigated in the first suit.” Kelly v Okoye (In re Kelly), 182 B.R. 255, 258 (9th Cir. BAP 1995).

The BAP explained that this matter is governed by Nevada’s state law on issue preclusion, which requires “four elements to be established: First, the issue decided in the prior litigation must be identical to the issue presented in the current action; second, the initial ruling must have been on the merits and have become final; third, the party against whom the judgment is asserted must have been a party or in privity with a party to the prior litigation; and finally, the issue must be actually and necessarily litigated. Five Star Cap. Corp., 194 P.3d at 713.”

Mr. Cimino claimed two errors by the bankruptcy court: 1) allowing the state court’s trial to go forward by lifting the automatic stay; and 2) failing to grant his motion for a second trial due to the application of claim preclusion.  The BAP found that none of these allegations justified reversal.

The BAP noted that the relief from stay order became final and non-appealable well before appeal from the summary judgment, so the Panel “must and does assume that stay relief was appropriately granted.”

Then, the BAP analyzed the arguments relating to issue preclusion and emphasized that “the record supports that the second, third, and in part, the fourth elements of issue preclusion (were) not in question” here.

Thereafter, the BAP discussed the first element of issue preclusion to determine whether the issues litigated in state court are identical to those litigated in the bankruptcy court. Issue preclusion requires a comparison of the issues presented in the bankruptcy case and in the state court action. Here, the bankruptcy court held that “the judgment constituted a nondischargeable debt under § 523(a)(2)(A) (fraud) and § 523(a)(6), which exempts from discharge a debt arising as a result of ‘willful and malicious injury by the debtor to another entity or to the property of another entity.’”

As to § 523 (a)(2)(A), Mr. Cimino argued that the bankruptcy court erred in granting summary judgment based on issue preclusion claiming that he should have been allowed a second trial.  Appellant’s arguments failed.

The BAP reviewed the five elements required, which are: 1) false representation, 2) defendant’s knowledge that the representation is false, 3) defendant intended to induce plaintiff’s reliance, 4) justifiable reliance, 5) damages. 

The BAP compared those elements to the jury instructions in the state court case and found that they were consistent with the instructions and that the jury “made each of the findings required for a determination of fraud under § 523(a)(2)(A).”

Subsequently, the BAP discussed § 523(a)(6) and stated that “in connection with § 523(a)(6), the statute requires that the debtor commit a tort or a tort-like statutory violation.  Here, the jury’s finding of conversion satisfies the requirement of an improper or unlawful act.”  However, the difficult determination is whether the conduct is willful and malicious because “[t]he ‘willful’ injury and ‘malicious’ injury requirements of § 523(a)(6) are separate and distinct.”

Thus, the BAP explained the concepts of “willful” and “malicious” separately by affirming that “willful injury requirement is met only when the debtor has a subjective motive to inflict injury or when the debtor believes that injury is substantially certain to result from his own conduct.” Carrillo v. Su (In re Su), 290 F.3d 1140, 1142 (9th Cir. 2002).” And “‘A ‘malicious’ injury involves ‘(1) a wrongful act, (2) done intentionally, (3) which necessarily causes injury, and (4) is done without just cause or excuse.'” Id. at 1146-47 (quoting Petralia v. Jercich (In re Jercich), 238 F.3d 1202, 1209 (9th Cir. 2001)).”

 Then, the BAP went over the jury instructions in which “the jury was not required to find a state of mind akin to willfulness or malice when it found that Mr. Cimino converted Mr. Indelicato’s assets.” Based on the aforementioned, the BAP found that the concept of willful and malicious is not consistent with the jury instructions regarding conversion, since the latter may occur even when someone is acting in good faith.  

However, the court’s conversion determination was coupled with a determination that the conversion constituted elder abuse, and the acts of conversion were also coupled with a fraud judgment based on the same facts. “These additional findings support application of issue preclusion as to the § 523(a)(6) claim. First, the ’elder abuse’ jury instruction reads as follows:

Jury Instruction No. _____ (NRS 41.1395- Liability)

Nevada’s legislature passed a law prohibiting exploitation of an older person.

 To establish liability for exploitation of Plaintiff, you must find that:

1) Plaintiff was over 60 years of age when he was exploited and suffered a loss of money or property; and

2) Plaintiff was exploited by a defendant.

‘Exploited’ means any act taken by a person who has the trust and confidence of an older person to:

 1. Obtain control, through deception, intimidation, or undue influence, over the money, assets, or property of the older person with the intention of permanently depriving the older person of the ownership, use, benefit, or possession of that person’s money, assets, or property; or

 2. Convert money, assets, or property of the older person with the intention of permanently depriving the older person of the ownership, use, benefit, or possession of that person’s money, assets, or property.

 See also, NRS 41.1395(1) & (4)(b),(d).”

Therefore, the application of those instructions will require the jury to find: 1) intent to exploit; and 2) recklessness, oppression, fraud or malice, in order to satisfy the malice requirement.

Moreover, as to willful, the statute requires intentional exploitation through the conversion of an elder’s assets.  This is satisfied too, since the state court found conversion “coupled with application of the elder abuse multiplier and the award of attorneys’ fees required a determination equivalent to willfulness under § 523(a)(6).”

Based on the foregoing, the BAP affirmed the bankruptcy court’s ruling and determined that “once a § 523(a)(6) nondischargeability is established, all damages that flow from the underlying claims are non-dischargeable.”

AUTHOR’S COMMENTARY

It is well known that the Erie Doctrine applies to issue preclusion, in which the federal court must use the substantive law of the state in which the court is located.   That is what happened here.   The bankruptcy court applied Nevada issue preclusion rule to determine whether elder abuse and actual fraud issues were properly and fully litigated in state court.

The BAP found that adjudicating claims of actual fraud and elder abuse in state court under Nevada law is sufficient to establish the elements of § 523(a)(6) which are “willful” and “malicious” injury to the property of another.

Such ruling shows that the court interpreted the elements of Nevada law of issue preclusion in a broad manner, which opens the door to wondering whether such interpretation is in conformity with Nevada courts’ interpretation of such language, or the latter’s interpretation is more conservative.

These materials were written by Boshra Khoder, an Associate Attorney at Koletsky Mancini Feldman & Morrow.  Editorial contributions were provided by Summer Shaw of Shaw & Hanover, PC, in Palm Desert, California (ss@shaw.law). 


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