Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caed-2_07-cv-00447/USCOURTS-caed-2_07-cv-00447-1/pdf.json

Nature of Suit Code: 422
Nature of Suit: Bankruptcy Appeals Rule 28 USC 158
Cause of Action: 28:0158 Notice of Appeal re Bankruptcy Matter (BAP)

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UNITED STATES DISTRICT COURT

EASTERN DISTRICT OF CALIFORNIA

In re: No. 2:07-cv-00447-MCE

LAWRENCE E. ORMSBY and 

CINDY J. ORMSBY,

Debtors.

MEMORANDUM AND ORDER

LAWRENCE E. ORMSBY,

Appellant,

v.

FIRST AMERICAN TITLE COMPANY

OF NEVADA, a Nevada

Corporation,

Appellee.

----oo0oo----

Appellant Lawrence E. Ormsby (“Debtor”) appeals the

Bankruptcy Court’s granting of summary judgment in favor of First

American Title Company of Nevada (“Creditor”). The Bankruptcy

Court ruled that the Nevada state court judgment against Debtor

and in favor of Creditor was non-dischargeable under 11 U.S.C.

§ 523(a)(4). For the reasons set forth below, the Bankruptcy

Court’s decision is affirmed.

Case 2:07-cv-00447-MCE Document 37 Filed 02/26/08 Page 1 of 13
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BACKGROUND

Creditor is a title company that is engaged in the business

of providing escrow services and title insurance for real

property transactions. Debtor is the owner of Inter-County Title

Company of Nevada (“Inter-County”). Inter-County is a Nevada

Corporation which commenced business as an escrow and title agent

in Nevada in May of 2000.

The official public records for transactions affecting real

property in Washoe County, Nevada are maintained by the county

recorder. These records date back to the mid-1800s and reflect

deeds, deeds of trust, mortgages, judgments, and other documents

concerning real property in Washoe County. The Washoe County

Recorder organizes the various documents by creating a

grantor/grantee index, which is available for public examination.

The process of examining the title of a specific tract of

land by reviewing the grantor/grantee index is a cumbersome and

time-consuming operation. To streamline the title search

process, title companies create base files, subdivision files,

and preliminary title reports, which are in turn used as an aid

for examining and insuring title. These documents are

accumulated by title companies to show covenants, conditions,

restrictions, easements, and other encumbrances affecting real

property. Title companies also compile documents in the form of

title plants, which constitute a separate method of assembling

recorded information based on the location of the property, and

which offer search capabilities far beyond the grantor/grantee

index available at the county recorder. 

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Both methods provide for considerably more efficient title

searches which a title company must perform in preparing

insurance policies.

In Washoe County, title companies use title plants covering

four separate periods of time: 1901 to 1964, 1965 to 1978, 1979

to 1999, and 2000 to the present. These plants are leased to

various subscribers, who are not free to transfer, sell, assign,

or allow others to access the plants. Creditor had a one-seventh

ownership interest in the 1979 to 1999 title plant and leased the

other plant data.

In the spring of 2000, Creditor was in possession of the

three title plants covering the 1900s, in microfiche format, and

kept them in a non-public area for use only by Creditor. In

addition, Creditor compiled a substantial number of base files,

subdivision files, and preliminary title reports. While these

documents were made available to customers and occasionally other

title companies, Creditor considered most of these records were

private and proprietary.

Joseph McCaffrey was hired by Creditor in June of 1994 to

head Creditor’s commercial title business. In this capacity,

McCaffrey had access to all of Creditor’s records and title plant

microfiche, and used them on a regular basis in the conduct of

his business with Creditor. McCaffrey understood that these were

not public records but were private and proprietary to Creditor.

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In early 2000, Debtor prepared Inter-County to begin

operations in Washoe County. Although Debtor purchased the

rights to the title plant for 2000 forward, there is no

indication that Debtor purchased access to the title plants

covering the 1900s. In the spring of 2000, Debtor began

soliciting employees of Creditor and another title company to

work at Inter-County. McCaffrey was one of the employees Debtor

solicited. McCaffrey and Debtor discussed the importance of the

title plants to a new title company, and the plants’ potential to

make a new company competitive. Debtor hired McCaffrey and paid

him a $7,000 signing bonus.

In anticipation of his employment for Debtor and InterCounty, and while he still had access to his office at Creditor,

McCaffrey began downloading and emailing Creditor’s base files,

subdivision files, preliminary title reports, and other business

records. While having his expenses paid by Debtor, McCaffrey

appropriated the 1900s title plants from Creditor, with the

encouragement, cooperation, and assistance of Debtor. McCaffrey

gave the microfiche files to Debtor, who sent them out to a nonlocal copy service for duplication.

Inter-County then used these appropriated title plants in

searching titles and issuing policies until their return was

compelled by court order. From May 2000 to August 2002, InterCounty handled approximately 3,000 escrows. The estimated

average cost savings realized by Inter-County’s use of the plants

was about $50 per transaction, resulting in a total savings of an

estimated $150,000.

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In 2002, Creditor filed an action against Debtor in the

Second Judicial District Court of the State of Nevada in and for

the County of Washoe. Before trial, Creditor settled with

McCaffrey for $15,000 and his agreement to testify against

Debtor. After a bench trial covering ten days, the court issued

Findings of Fact and Conclusions of Law. In addition to setting

forth the facts as stated above, the court determined that Debtor

encouraged, assisted, and cooperated with McCaffrey in

misappropriating the title plants from Creditor, and used those

plants to conduct title searches for the purposes of issuing

title insurance.

The court further found that Inter-County converted for its

own use the base files, subdivision files, and preliminary title

reports of Creditor to assist in the opening of its business and

to provide title insurance to customers. The Nevada court found

that, in using the title plants and files, Debtor acted

maliciously, in that Debtor’s conduct was willful, wanton, and

reckless. 

The court imposed compensatory damages in favor of Creditor,

based on the measure of a reasonable royalty for a misappropriator’s

unauthorized disclosure or use of a trade secret, in the amount

of $141,500. The court also awarded Creditor punitive damages in

the amount of $283,000 based on evidence of willfulness in

Debtor’s cooperation with McCaffrey to in the taking, copying and

surreptitiously returning the title plants and files. The Nevada

court also awarded pre-judgment interest of $47,593.83 (on the

compensatory damages), and later, attorney fees of $223,159.50

(pursuant to NRS 600A.060(3)) and costs of $36,821.83.

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Debtor subsequently filed for Chapter 7 bankruptcy

protection in the Bankruptcy Court for the Eastern District of

California, Sacramento Division. On October 25, 2005, Creditor

filed a complaint with the Bankruptcy Court to establish that the

judgment owed it by Debtor was non-dischargeable under 11 U.S.C.

§ 523(a)(4) and (a)(6). On May 18, 2006, Creditor filed for

Summary Judgment, which was granted by the court on November 17,

2006. Debtor filed for reconsideration on November 22, 2006,

which was denied by the court on January 30, 2007. Debtor filed

an appeal to the Bankruptcy Appellate Panel, which was followed

by Creditor’s filing of an election to transfer the appeal to

this Court on February 22, 2007.

STANDARD OF REVIEW

An appellant may petition the district court for review of a

bankruptcy court’s decision. Fed. R. Bankr. P. 8013. The

applicable standard of review is identical to that employed by

circuit courts of appeal in reviewing district court decisions. 

See Heritage Ford v. Baroff (In re Baroff), 105 F.3d 439, 441

(9th Cir. 1997). Legal conclusions are renewed on a de novo

basis, and factual determinations are assessed pursuant to a

“clearly erroneous” standard. Murray v. Bammer (In re Bammer),

131 F.3d 788, 792 (9th Cir. 1997) (en banc).

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Findings of fact are “clearly erroneous” only if the

reviewing court is “left with the definite and firm conviction

that a mistake has been committed.” In re Marquam Inv. Corp.,

942 F.2d 1462, 1466 (9th Cir. 1991) (quoting United States v.

United States Gypsum Co., 333 U.S. 364, 395 (1948)). The

appellant has the burden of proof in convincing the reviewing

court that such error has been committed, and the reviewing court

should not reverse simply because another decision could have

been reached. In re Windsor Indus., Inc., 459 F. Supp. 270, 275

(N.D. Tex. 1978).

ANALYSIS

In determining the non-dischargeability of the Nevada state

court judgment against Debtor, the Bankruptcy Court considered

the “larceny” provision of 11 U.S.C. § 523(a)(4) and the “willful

and malicious injury” provision of subsection (a)(6). The court

concluded that subsection (a)(4) barred the Debtor from

discharging the debt in bankruptcy. On review, this Court

analyzes de novo the applicability of both subsections.

As for the factual basis for its findings, the Bankruptcy

Court adopted the findings of the state court and incorporated

them into the record. This Court concludes that neither the

factual determinations of the state court, nor their adoption by

the Bankruptcy Court, are clearly erroneous. Therefore, the

state court decision provides the factual basis for the inquiry

here.

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However, this Court does not give preclusive effect to the

state court judgment in determining the applicability of the

larceny or willful and malicious injury terms of the bankruptcy

code. “The preclusive effect of a state court judgment in a

subsequent federal lawsuit generally is determined by the full

faith and credit statute, which provides that state judicial

proceedings ‘shall have the same full faith and credit in every

court within the United States ... as they have by law or usage

in the courts of such State ... from which they are taken.’” In

re Nourbakhsh, 67 F.3d 798, 800 (9th Cir. 1995) (citing 28 U.S.C.

§ 1738). The preclusive effect of a state court judgment rests

upon the preclusion law of the state in which the judgment was

issued. Nourbakhsh, 67 F.3d at 800. Per Nevada state law for a

party to be precluded from litigating a previously addressed

issue, “(1) the issue decided in the prior litigation must be

identical to the issue presented in the current action; (2) the

initial ruling must have been on the merits and have become

final; and (3) the party against whom the judgment is asserted

must have been a party in privity with a party to the prior

litigation.” Kahn v. Morse & Mowbray, 117 P.3d 227, 235 (Nev.

2005).

The issue here is whether the judgment against Debtor is

dischargeable in bankruptcy, which turns on the federal

definitions of larceny and willful and malicious injury, as used

in 11 U.S.C. § 523(a). In its decision against Debtor, the

Nevada court did not consider larceny as such, but termed its

conclusions of Debtor’s actions as misappropriation and

conversion. 

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The court did specifically describe Debtor’s conduct as willful

and malicious, but did not make any findings of the subjective

intent of Debtor with respect to Creditor, which must be shown to

support the exception to discharge provided in 11 U.S.C.

523(a)(6). In re Jercich, 238 F.3d 1202, 1208 (9th Cir. 2001). 

As one would expect, the state court addressed the claims before

it and this determination did not include all the requisite

elements of dischargeability. Therefore, this Court cannot rely

solely on the conclusions of the state court judgment in

determining the status of Creditor’s claim. Therefore, this

Court must address those elements and apply the facts and

relevant conclusions of the state court to the issues at hand.

1. Larceny

Subsection (a)(4) of 11 U.S.C. § 523 states that bankruptcy

protection under section 727 of the title does not discharge an

individual debtor from any debt “for fraud or defalcation while

acting in a fiduciary capacity, embezzlement, or larceny.” 

Creditor makes no claim that Debtor was acting in a fiduciary

capacity, nor claims that embezzlement occurred. Therefore, the

focus of the inquiry is on the term “larceny.”

There exists some confusion and seemingly contradictory

authority as to whether larceny requires a finding of fraud,

including the requisite misrepresentations, reliance thereon, and

damages. Significant authority indicates that fraud is not a

necessary component of larceny. 

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“For purposes of section 523(a)(4), a bankruptcy court is not

bound by the state law definition of larceny but, rather, may

follow federal common law, which defines larceny as a ‘felonious

taking of another’s personal property with intent to convert it

or deprive the owner of same.’” 4 Collier on Bankruptcy

§ 523.10(2) (15th ed. rev. 2007). The Judiciary Committee House

Report on the Bankruptcy Reform Act of 1978 explains that the

intent of section 523(a)(4) is to include “conversion under which

the debtor willfully and maliciously intends to borrow property,”

even without an intent to inflict injury. H.R. Rep. No. 95-595,

at 364 (1977). The United States Supreme Court has stated that a

judgment for damages awarded under state law against a debtor who

has committed larceny “is clearly a claim which is

nondischargeable in bankruptcy.” Ohio v. Kovacs, 469 U.S. 274,

279 (1985). Finally, Debtor points to no authority whereby the

elements of fraud are actually applied to an analysis of larceny

in a bankruptcy proceeding.

Per the state court judgment, Debtor encouraged, cooperated,

and assisted in the misappropriation of the title plants from

Creditor. Debtor had knowledge of and acquiesced in the theft

and conversion of the title plants. Debtor sent the microfiche

title plants to a non-local copy service. Debtor’s title company

converted to its own use Creditor’s proprietary base files,

subdivision files, and preliminary title reports to assist it in

the opening of their business. This Court concludes that these

facts, in conjunction with the remainder of the state court

findings, amounts to the “felonious taking of [Creditor’s]

personal property with intent to convert it” by Debtor. 

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Therefore, section 523(a)(4) works to bar the bankruptcy

discharge of Debtor’s obligation to Creditor.

2. Willful and Malicious Injury

Subsection (a)(6) of 11 U.S.C. § 523 states that bankruptcy

protection under section 727 of the title does not discharge an

individual debtor from any debt “for willful and malicious injury

by the debtor to another entity or to the property of another

entity.” In Geiger, the United States Supreme Court held that

“debts arising from recklessly or negligently inflicted injuries

do not fall within the compass of § 523(a)(6).” Kawaauhau v.

Geiger, 523 U.S. 57, 64 (1998). The Ninth Circuit has held that

“under Geiger, the willful injury requirement of § 523(a)(6) is

met when it is shown either that the debtor had a subjective

motive to inflict the injury or that the debtor believed that

injury was substantially certain to occur as a result of his

conduct.” Jercich, 238 F.3d at 1208 (emphasis in original). It

is not enough, therefore, that Debtor caused injury to Creditor

by the theft of the title plants and other proprietary files. It

must be shown that Debtor intended to injure Creditor or that

Debtor knew his actions were substantially certain to injure

Creditor. Id. In determining the subjective intent or knowledge

of Debtor, this Court need not “simply take the debtor’s word for

his state of mind.” In re Su, 290 F.3d 1140, 1146 (9th Cir.

2002). Rather, this Court “may consider circumstantial evidence

that tends to establish what the debtor must have actually known

when taking the injury-producing action.” Id.

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Debtor necessarily knew the value of title plants and other

title documents in saving title research time and expense in the

handling of escrows. It is also substantially certain that

Debtor knew of the availability of the title plants and the cost

of legally accessing them. In fact, Debtor purchased the title

plant data covering the year 2000 and forward from the operator

of the Washoe County title plants, and further inquired about the

1979 to 1999 plant. It is therefore highly likely that Debtor

was aware of Creditor’s ownership interest in the 1979 to 1999

title plant and that his use of a misappropriated copy of that

plant would serve to deprive Creditor of revenue, and thus injure

Creditor. Further, Debtor must also have known that the

conversion by Debtor’s title company of Creditor’s proprietary

base files, subdivision files, and preliminary title reports to

assist in the opening of its business as a competitor to Creditor

would result in injury to Creditor. Therefore, this Court finds

that Debtor must have actually known and believed that injury to

Creditor was substantially certain to occur from Debtor’s illicit

theft and conversion of the title plants and other title

documents from Creditor.

A court must not conflate the “willful” and “malicious”

prongs of a section 523(a)(6) analysis. Su, 290 F.3d at 1147. 

“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.’” Jercich, 238 F.3d at 1209.

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Debtor’s active involvement in the misappropriation of the

title plants and other title documents from Creditor constitutes

a wrongful act. The state court found that Debtor’s denial of

involvement with the misappropriation of the title plants was not

credible, but that Debtor acted willfully and wantonly, and

therefore intentionally. Injury to Creditor was determined by

the state court based on evidence of the average time and expense

savings per escrow multiplied by the number of escrows that

Debtor’s title company completed. Finally, Debtor offers no just

cause or excuse for his actions, nor do the facts suggest a basis

on which any justification might be found. Therefore, this Court

holds that Debtor’s actions, in addition to being willful, were

also malicious, and thus that section 523(a)(6) works to bar the

bankruptcy discharge of Debtor’s obligation to Creditor.

CONCLUSION

For the reasons set forth above, the decision of the

Bankruptcy Court is AFFIRMED.

IT IS SO ORDERED.

Dated: February 25, 2008

_____________________________

MORRISON C. ENGLAND, JR.

UNITED STATES DISTRICT JUDGE

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