The following is a case update written by the Hon. Meredith Jury (U.S. Bankruptcy Judge, C.D. CA., Ret.), analyzing a recent decision of interest:
In a recently published opinion, the United States Bankruptcy Appellate Panel for the Ninth Circuit (the BAP) held that the findings necessarily made by the Oregon state court in issuing a judgment for financial elder abuse against a debtor had issue preclusive effect in a nondischargeability proceeding brought in the bankruptcy court under § 523(a)(4) of the Bankruptcy Code (the Code), specifically as to larceny and embezzlement. Peltier v Van Loo Fiduciary Services, LLC (In re Peltier), 2022 WL 4181728 (9th Cir BAP Sept. 12, 2022).
To view the opinion, click here.
Van Loo Fiduciary Services LLC was the court-appointed conservator for debtor Kristine Peltier’s mother Leah Hudson and the personal representative of the estate for her father Jon Hudson. In 2020 Van Loo filed a complaint in the Oregon state court for financial elder abuse, unjust enrichment, and breach of fiduciary duty against Kristine and other family members. The complaint alleged that while the Hudsons were in declining mental and physical health, the defendants misused the Hudsons’ funds, credit and assets to benefit themselves and that Kristine specifically accomplished this by abusing powers of attorney that the Hudsons had given her. After the Peltiers did not respond to the complaint, the Oregon court held a default prove up hearing and granted judgment against Kristine for elder abuse in a sum exceeding $1 million. The state court did not enter any detailed findings or conclusions.
The Peltiers filed a chapter 7 bankruptcy, seeking to discharge the Van Loo judgment. Van Loo filed a nondischargeability complaint against Kristine, alleging the elder abuse judgment was excepted from discharge under Code §§ 523(a)(2), (4) and (6). Van Loo filed a summary judgment motion, asserting that by application of issue preclusion the judgment was nondischargeable under all three subsections. The bankruptcy court rejected the arguments under §§ 523(a)(2) and (a)(6) but ruled that the judgment was excepted from discharge under § 523(a)(4). It explained that the debt arose from either fraud or defalcation while acting in a fiduciary capacity, concluding that Kristine was such a fiduciary based on the powers of attorney and that the state court must have found defalcation.
Kristine appealed to the BAP, which affirmed the judgment was nondischargeable but based on larceny and embezzlement, not breach of fiduciary duty.
In its Standards of Review, the BAP cited the well-known standard that an appellate court may affirm on any ground supported by the record. It took that to heart in deciding this matter. It then recited the elements for application of issue preclusion under Oregon law: (1) the issue is identical; (2) the issue was actually litigated and was essential to a final decision on the merits in the prior proceeding; (3) the party to be precluded had a full and fair opportunity to be heard; (4) the party to be precluded was a party or in privity with a party to the prior proceeding; and (5) the prior proceeding was the type of proceeding to which the court will give preclusive effect. It observed that under Oregon law, a default judgment may have preclusive effect. It also noted that although the lack of findings and conclusions in the state court record could make reliance on issue preclusion more difficult, that absence was not an automatic bar to its application. Under Oregon law, a judgment has issue preclusive effect as to all issues that the court expressly decided or were necessary to the court’s judgment. Therefore, its analysis turned on whether a judgment for financial elder abuse under the Oregon statute necessarily decided the elements needed for § 523(a)(4) nondischargeability.
Oregon courts have recognized that four elements must be found for financial abuse of an elderly person: (1) a taking or appropriation (2) of money or property (3) that belongs to an elderly person, and (4) the taking must be wrongful. The BAP recognized that none of these elements satisfied the first part of subsection (a)(4), that Kristine committed fraud or defalcation while acting as the Hudsons’ fiduciary because the existence of fiduciary capacity was not a required finding for the judgment. But subsection (a)(4) also makes larceny or embezzlement grounds for nondischargeability and an examination of the elements of those torts demonstrated that the Oregon court necessarily made the needed findings.
The elements of embezzlement are (1) property rightfully in the possession of a nonowners; (2) the nonowner appropriated the property to a use other than which it was entrusted; and (3) circumstances indicating fraud. The elements of larceny are similar except instead of the nonowner rightfully holding the property, that perpetrator stole the property that it had no right to possess. Under federal law, finding these necessary elements implicates an intent to wrongfully appropriate the property, satisfying the scienter requirement. The BAP then compared those necessary elements to the requirements of the Oregon statute for elder abuse recited above and found them to be identical. It therefore concluded that the issues actually litigated for elder abuse were the same as those needed for larceny and embezzlement. The judgment for nondischargeability was affirmed on that ground.
This case is a good reminder of several things. First, that a judgment can be supported by any argument found in the record, even if different than the reasoning of the trial court. I did not inspect the briefs filed with the BAP to determine if the alternative grounds were asserted by Van Loo, but any appellate court can – and often does – go beyond the briefs to find arguments in support of affirmance. Second, if a practitioner is trying to give issue preclusive effect to a state court judgment under the part of § 523(a)(4) that relies on fraud or defalcation while acting in a fiduciary capacity, both the fiduciary capacity element and the existence of an express or statutory trust with an identifiable trust res must be demonstrated by the evidence. Third, where money is taken from a vulnerable person, do not shy away from asserting larceny or embezzlement when money or property has been misappropriated.
This review was written by the Hon. Meredith Jury (U.S. Bankruptcy Judge, C.D. CA., Ret.), a member of the ad hoc group of the Business Law Section of the California Lawyers Association. Thomson Reuters holds the copyright to these materials and has permitted the Insolvency Law Committee to reprint them. This material may not be further transmitted without the consent of Thomson Reuters.