Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-canb-4_14-ap-04115/USCOURTS-canb-4_14-ap-04115-0/pdf.json

Parties Involved:
John Stirton
Plaintiff
Bonita Investments, LLC
Plaintiff
Matthew Thomas Castro
Defendant
Matt Castro
Defendant
Bay Valley Realty
Defendant
BV Property Management
Defendant

Document Text:

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 UNITED STATES BANKRUPTCY COURT

 NORTHERN DISTRICT OF CALIFORNIA

 OAKLAND DIVISION

In re: Case No. 14-42018 RLE

Chapter 7

MATTHEW THOMAS CASTRO, 

Debtor. 

____________________________/

JOHN STIRTON and

BONITA INVESTMENTS, LLC, Adv. Proc. No. 14-4115 RLE

Plaintiffs, 

v. 

MATTHEW THOMAS CASTRO, aka

MATT CASTRO, dba BAY VALLEY

REALTY, aka BV PROPERTY 

MANAGEMENT,

Defendant.

____________________________/

MEMORANDUM DECISION AFTER TRIAL

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The following constitutes the

Memorandum Decision of the Court.

Signed October 7, 2016

______________________________________________

Roger L. Efremsky

U.S. Bankruptcy Judge

Entered on Docket 

October 07, 2016

EDWARD J. EMMONS, CLERK 

U.S. BANKRUPTCY COURT 

NORTHERN DISTRICT OF CALIFORNIA

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On August 18, 2014, John Stirton (“Stirton”) and Bonita

Investments, LLC (“Bonita” and, together with Stirton,

“Plaintiffs”) timely filed a Complaint against defendant Matthew

Castro (“Castro”), seeking a non-dischargeable judgment pursuant

to Bankruptcy Code §§ 523(a)(2)(A), (a)(4) and/or (a)(6). This

court held a trial on the Complaint over a four-day period

between October 13, 2015, and October 16, 2015. At the

conclusion of trial, the court requested post-trial briefs from

the parties. The post-trial briefs were filed on February 1,

2016. Plaintiffs followed up their post-trial brief with an

Errata on February 3, 2016. Thereafter, the matter was taken

under submission. This Memorandum Decision constitutes this

court's findings of fact and conclusions of law under Fed. R.

Bankr.P. 7052.1

II. Factual Background 

As an initial matter, this section is intentionally brief

and general. The brevity is made necessary by Stirton’s failure

(on behalf of Plaintiffs): (1) to establish a coherent timeline

of events; (2) to recall the events that underlie the complaint

in this case; and (3) to testify consistently regarding various

events.2 While Castro’s testimony suffered from similar defects,

1 The following abbreviations will be used: “Tr.” indicates

the trial transcript; “Exh.” indicates exhibit. 

2The court expressed its frustration with Stirton’s

inability to recall events and/or testify consistently on various

occasions. See, e.g., Tr. Day 1 at 59:5-15 (“So, Mr. Stirton, .

. . I’m going to admonish you in your testimony. If you're not

sure you understand your attorney's question or anybody's

question to you, make sure you understand the question before you

answer it. Also, if you're not sure and you want to think about

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his deficiecies are less meaningful as he did not have the burden

of proof at trial. Grogan v. Garner, 498 U.S. 279, 291 (1991).

John Stirton

Stirton is highly educated, with an undergraduate degree in

psychology, and a minor in mathematics from the University of

California Davis. After approximately twelve years working in

the electronics and telecommunications industry, he went back to

school and earned a degree in mathematics from San Jose State

University. Tr. Day 1 at 6:13-7:9. His work experience was

primarily in telecommunications and consisted largely of test

engineering, designing fixtures, product testing and helping in

product development and programming. Tr. Day 1 at 7:10-8:16. 

While Stirton himself has no background in real estate, finance,

or law, his wife is a legal secretary who, at the time of trial,

had been working as such for over 25 years. Tr. Day 1 at 8:17-

it, take your time and think about it. But when you come back and

you answer a question one way and then later on, because maybe

you've flipped a page or two and you look at it differently, you

change your testimony, not only does it affect your credibility,

but it makes it very difficult to follow the case”); see also,

Tr. Day 1 at 61:7-10 (“We’re talking about these documents, not

something that might look like it. So that [sic] if you’re not

sure about this, it’s very critical that you just simply say, I’m

not sure”); Tr. Day 1 at 72:11-23 (Court: “[I’m] not clear in my

mind that you were clear. And what’s really critical here that I

have to get at is what representations, if any, that Mr. Castro

made to you versus something you may have assumed that was not

specifically represented to you.” Stirton: “The representation

would have been that he was getting much greater returns from

this investment and that he - - .” Court: “What investment? 

Specifically, what investment?” Stirton: “That would have been –

that’s a good question, because I’m not really clear on what the

investment was”); Tr. Day 1 at 128:25-129:5 (“[T]he story is

changing. . . . [F]rankly, I find Mr. Stirton’s recollection to

be very poor and it’s not easy to follow the story.”)

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9:21. 

Prior to meeting Castro, Stirton had invested over $100,000

with an investment counselor named Gregory Hannah (“Hannah”).3

Tr. Day 1 at 10:6-20. When the market declined in 2008 and 2009,

however, Stirton withdrew his funds from the investments he had

with Hannah. Tr. Day 1 at 11:3-7; 150:1-3. At some point

subsequently, Hannah informed Stirton that Castro was “flipping”

houses for profit and Hannah suggested that Stirton meet with

Castro. Tr. Day 1 at 10:22-11:4. Stirton then contacted Castro

to express his interest in investing in flipping projects. Tr.

Day 1 at 11:5-7; 11:24-12:8; Tr. Day 3 at 57:23-25. 

Matthew Castro

Castro holds an undergraduate degree in Business Management

from St. Mary’s College of California. Tr. Day 3 at 49:3-7. 

Along with working as an account manager and sales person for

Alameda Electrical Distributors, Castro is an employee and owner

of his sole proprietorship, Bay Valley Realty (“Bay Valley”) and

a 51% partner in Bay Valley Property Management. Tr. Day 3 at

49:10-50:9.

Bay Valley was first established in 2005 and, at the time of

trial, Castro was the broker and had one broker associate and

3Stirton testified that he met Hannah when Hannah was a

speaker at a technical professional job search group that Stirton

was a member of. Tr. Day 1 at 148:3-8. Stirton says he found

Hannah to be credible, but never personally verified any of

Hannah’s credentials; instead, relying on the fact that Hannah

had “certificates,” had been “doing investments for a long time,”

“had the degree on the wall and, you know, he was authorized --

he was dealer [sic] -- or an investment broker for Transamerica

Corporation,” and “there was a wide range of people who I met who

had testified to his authenticity.” Tr. Day 1 at 148:9-149:3.

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three licensed realtors working for him. Tr. Day 3 at 50:10-

51:12. Between 2010 and 2015, Castro estimates that Bay Valley

had done an estimated 300 flipping projects with Castro acting as

the broker.4 Tr. Day 3 at 51:16-21; 54:2-4. 

Stirton’s Flipping Projects Via Bay Valley 

Between 2010 and 2012, Stirton, through his LLC, Bonita,5

invested in three flipping projects via Bay Valley. Tr. Day 1 at

12:11-15. Stirton was “hands off” in the flipping projects and

admits to doing very little due diligence on his own, instead

deferring to Castro and Bay Valley’s expertise in real estate. 

Tr. Day 1 at 15:4-23; 152:17-25; 164:22-165:17. 

In the preliminary discussions with Castro regarding these

flipping projects, Stirton said that Castro told him the return

on investment would be in the 20-30% range. Tr. Day 1 at 16:25-

17:5. While Stirton only realized a return of somewhere between

2% and 22% on each of the three flipping projects, he testified

4Castro and Stirton both testified that the way that these

flipping projects were structured was that Bay Valley’s licensed

realtors (through their respective individual LLCs) would

purchase a property and investors would work directly with the

LLC to fund and complete the flip of the property. Castro had no

ownership interest in Bay Valley’s realtors’ LLCs and his role in

these flipping projects was simply to act as the broker for the

seller once the property was ready to be re-sold. Tr. Day 1 at

15:4-16:7; pp. 157-162, generally; Tr. Day 3 at 52:2-54:7. 

Castro did, however, receive funds on top of his commission as a

broker if he brought in his own investors. Tr. Day 3 at 54:8-11. 

5Stirton testified that at or around the time of the first

flip, Castro told him that a LLC was necessary to protect Stirton

from personal liability from any lawsuits brought as a result of

the flipping project. Stirton also testified that Castro

assisted Stirton in forming Bonita. Tr. Day 1 at 22:5-19. 

Castro denies that he provided any such advice or assistance. 

Tr. Day 2 at 142:9-14. 

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that the actual returns gave credibility to the flipping projects

undertaken by Bay Valley and its realtors and that, as a result,

Stirton had a lot of confidence in Castro.6 Tr. Day 1 at 23:25-

24:10. 

James Wolfe and Revenue Generation Technologies

At some point in late-2009 or early-2010, Castro’s home was

going into foreclosure and he was introduced to a woman named

Lori Arzamendi (“Arzamendi”)7 who referred Castro to a company

called Home Support Group (“HSG”). Tr. Day 2 at 128:14-129:4;

Tr. Day 3 at 62:21-22. HSG was described as an entity that

endeavored to assist underwater homeowners by modifying their

existing loans, or by purchasing the property and leasing it back

to the homeowner for a period of time until the homeowner was in

a position to repurchase the property (the “HSG Model”). Tr. Day

3 at 61:3-62:20. Although the HSG Model was unsuccessful in

Castro’s case, and he ultimately lost his house to foreclosure,

he became and remained friendly with Arzamendi. Tr. Day 2 at

132:8-133:16; Tr. Day 3 at 66:8-14; 67:23-68:5. 

Castro testified that in the latter part of 2012, Arzamendi

told Castro that she wanted him to meet a gentleman named James

6Interestingly, Stirton acknowledged that he knew that

Castro’s projections for a 30% return were unlikely. Tr. Day 1

at 24:4-8 (“The information that was given to me seemed valid and

appropriate, and [Castro] seemed to hold up on his word, that his

projections were correct in every case. I mean, outside the fact

that we were never going to make 30 percent on a number of those,

or I didn’t foresee us doing that[.]”).

7Castro was introduced to Arzamendi by Leo Montoya, a man

described by Castro as a “mentor” who had worked for the FBI for

35 years prior to retiring. Tr. Day 2 at 134:21-24.

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Wolfe (“Wolfe”), who was also allegedly involved with HSG. Tr.

Day 3 at 68:6-9; 69:22-70:2. Castro testified that Arzamendi

spoke very highly of Wolfe, allegedly representing to Castro that

Wolfe seemed to be a good businessman, had “contacts”, went to

Michigan State, was part of the Magic Johnson Foundation, served

in the Gulf War, and considered Colin Powell to be a mentor. Tr.

Day 3 at 68:16-69:1. 

Castro testified that he met with Wolfe multiple times in

early to mid-2013. During these meetings, Castro learned about

Wolfe’s company, Revenue Generation Technologies (“RGT”) and

about various aspects of RGT’s business from Wolfe and from

others Castro met at the meetings. Castro recalled being very

impressed with Wolfe and his operation and being left with the

impression that RGT had experienced success in its various

endeavors.8 Tr. Day 3 at 70-89, generally. Castro testified

that at some point during the course of these meetings, he came

to understand that Wolfe wanted Castro to help find investors to

invest capital in RGT. Tr. Day 3 at 82:21-83:21; 88:11-14.

/ / / /

/ / / /

/ / / /

/ / / /

8While Castro recited various aspects of RGT’s alleged

business, it was clear that he understood very little, if

anything, about any of it, including whether RGT made money, and

if so, how. Instead, it appeared to the court that Castro was

more impressed at the appearance of legitimacy portrayed by

Wolfe’s office and the alleged contacts. 

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The “Investments”9 at Issue

Stirton testified that in early 2013, he was holding funds

in Bonita’s bank account from the three flipping projects with

Bay Valley and from the sale of his residence. Tr. Day 1 at

21:23-22:3. Stirton wanted to invest the funds so he and a

colleague started looking for properties to flip on their own. 

They were unsuccessful, however, as the market had started to

recover and prices on real properties were trending upward. Tr.

Day 1 at 20:17-21:22.

In late May of 2013, Stirton met with Castro multiple times

and expressed his interest in additional flipping projects or

real estate investments. Tr. Day 1 at 24:11-29:12. Stirton

testified that during the course of these meetings, Castro told

Stirton that the market had changed and that there were no longer

flipping opportunities, but that Castro had recently been

introduced to Wolfe and RGT, and that RGT was a new company and

“investment model” that Castro had been looking into. Tr. Day 1

at 176:1-7; Tr. Day 2 at 5:10-6:2. Stirton further testified

that Castro told Stirton about Wolfe’s alleged connections,

shared his impressions of Wolfe, provided a copy of Wolfe’s

LinkedIn bio and told Stirton that Wolfe was claiming that RGT

9The court uses the term “investment” very loosely to

describe the transactions at issue in the Complaint and only does

so because that is how the parties described them. The testimony

and evidence was clear, however, that the transactions were

nothing more than unsecured loans. See, e.g., Tr. Day 2 at

193:10-196:18; Tr. Day 3 at 11:12-16:20 (Castro’s confusion

regarding whether the transactions were capital investments or

loans and ultimate acknowledgment that “investments” were, in

fact, loans). 

-8-

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was getting returns of over 18% on its investments.10 Tr. Day 1

at 49:21-50:9; 99:3-11; Tr. Day 2 at 6:3-11. Stirton testified

that he told Castro that the RGT “investment model” seemed risky

and that he could not afford to lose his investment. Tr. Day 1

at 76:5-14. Castro testified that in response, he told Stirton

to perform his own due diligence and not to invest if he did not

feel comfortable. Tr. Day 4 at 13:20-14:12; 50:7-20. 

Stirton testified that he attempted to research Wolfe and

RGT via Google and LinkedIn, but was unable to find much

information. Tr. Day 1 at 99:18-100:16; 174:2-4. Stirton

admitted that he never met Wolfe and never asked to meet Wolfe,

but acknowledged that “it might have been a good idea.” Tr. Day

1 at 86:20-87:2. Castro testified that Stirton never asked him

to get any additional information from RGT or Wolfe regarding

potential investments, never asked whether Castro had looked at

profit and loss statements, and never asked if Castro had

received any literature or written documents from RGT. Tr. Day 3

at 125:14-22. 

Despite having virtually no facts about Wolfe and RGT and

10At trial, Stirton admitted that Castro never represented

that he had done any independent investigation of Wolfe or RGT

and never actually vouched for RGT, but Stirton got the

impression that Castro was vouching for Wolfe and RGT because

Castro had “met with the people and knew the people.” Tr. Day 1

at 174:23-175:9; 183:19-184:24. Stirton also acknowledged that

Castro never represented that he was personally getting any

returns from RGT and that Stirton understood that Castro had not

personally invested in RGT, allegedly because he did not have the

funds to do so. Tr. Day 2 at 6:13-21. 

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only the vaguest grasp of the investments Castro had described11,

Stirton agreed to cause Bonita to make an investment.12 

Stirton testified that instead of Bonita investing directly

with RGT, however, Castro proposed, and Stirton agreed, to invest

indirectly through Castro’s Nevada limited liability company,

Source Solutions Group, LLC (“SSG”)13. Tr. Day 1 at 67:14-69:10;

185:21-23. In essence, SSG would act as a “middleman,”

collecting funds from Bonita and others14, and transferring those

11Tr. Day 1 at pp. 29-52; 65-75, generally (Stirton’s

inconsistent and incomplete understanding of the various

investment models described by Castro). 

12Stirton testified that he ultimately decided to invest

because “I wanted to continue, you know, to have a relationship

with Mr. Castro based on the past investment. That I had a great

deal of confidence and trust in him and that I thought it was a,

you know, a credible idea in general, although I -– it occurs to

me in my testimony I’m unclear on the specifics, on the overall

concept of the idea of this package it sounded okay, and his

assurances that it would -- it was solid, you know.” Tr. Day 1

at 75:9-20. Stirton’s true motivation was revealed, however,

when he testified, “In fact, this [investment] was a way to reach

a level of investment with [Castro] that he [sic] could possibly

do something like a flip with in the long run.” Tr. Day 1 at

77:24-78:2. 

13Castro testified that when he originally formed SSG, he

was working with HSG in an attempt to assist other underwater

homeowners in keeping their homes and intended to deposit any

commissions received as a result of services performed for HSG,

in SSG’s account. He further testified that when he formed SSG,

he did so in Nevada because he believed it would result in tax

advantages and thought he could also use SSG for other business

ventures in the future. Tr. Day 2 at 147:1-148:16; 151:16-152:6;

158:14-159:7; 162:5-163:6; Tr. Day 3 at 131:18-132:5. Castro was

aided in forming and running SSG by an entity called Corporate

Nevada. Tr. Day 3 at 125-131, generally. 

14Stirton testified that prior to transferring any funds to

SSG, Castro told Stirton that Castro had other clients that were

also investing with RGT on similar terms. However, Stirton

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funds to RGT. Then, based on an agreement between RGT on the one

hand, and SSG on the other, RGT would pay a return on investment

to SSG15 and, via a separate agreement between SSG and Bonita,

SSG would pay a smaller return on investment to Bonita. See

generally, Tr. Day 1 at 74:13-75:8; 85:1-13; 186:5-187:11. 

Stirton testified that the transactions were structured this way

because Castro was brokering the investment deals with his

personal contacts and therefore, was going to get a higher rate

of return on the investments.16 Tr. Day 1 at 85:1-9. 

On June 11, 2013, Stirton caused Bonita to wire $100,000 to

SSG’s bank account. Pl. Exh. 7. Two days later, on June 13,

2013, Stirton caused Bonita to wire an additional $25,000 to

SSG’s bank account, for a total investment of $125,000 (the

“First Investment”). Pl. Exh. 7; Tr. Day 1 at 93:9-24. The

testified that Castro never provided the names and number of any

such investors. Importantly, it does not appear that Stirton

ever specifically asked for this information. Tr. Day 1 at

116:20-118:1; 119:8-11; Tr. Day 2 at 190:11-13. Castro denied

that he ever represented to Stirton that there were any other

investors and testified that when Stirton transferred funds to

SSG, Castro intended to find more investors. Tr. Day 2 at 190:5-

15; Tr. Day 3 at 135:23-136:1.

15The promissory note between RGT and SSG was dated June 10,

2013 (although allegedly not signed until June 12, 2013), and

provided for a principal investment of between $100,000 and

$300,000, and a return of between $100,000 and $500,000, with

interest at the rate of 50% for a period of 180-days (the

“RGT/SSG Promissory Note”). The RGT/SSG Promissory Note also

contained a personal guarantee by Wolfe in the event that RGT

failed to pay SSG as promised. Pl. Exh. 8. 

16Castro denied this and testified that he “figured that

[Stirton] would be more comfortable funneling [the funds] into

something of mine because of what we had in terms of our

relationship, rather than sending it directly to someone that was

new, that we just didn’t know much of.” Tr. Day 3 at 135:8-20.

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funds were subsequently transferred from SSG’s bank account to

RGT.17 Tr. Day 3 at 45:6-15; 136:18-138:8; Def. Exh. O. 

In July of 2013, Stirton caused Bonita to wire an additional

$50,000 to SSG’s bank account (the “Second Investment”). Tr. Day

1 at 82:4-17; 93:2-8; Pl. Exh. 10(1). Castro testified that the

funds were intended to go to an entity called Labyrinth

Technologies for the development of securities market-predicting

software that RGT was interested in leasing.18 Tr. Day 2 at

204:11-14; Tr. Day 3 at 151:13-152:4; 154:16-22. While the

evidence at trial was clear that the $50,000 was transferred out

of SSG’s account, it was never established where the funds

actually went.19 

17$220,000 was the total amount actually transferred to RGT.

$125,000 of that amount were the funds invested by Stirton and

$95,000 of that amount were funds provided by an individual named

Richard Wright. Tr. Day 3 at 139:17-22. 

18Castro testified that after the First Investment, Stirton

contacted Castro and said that Bonita had an additional $50,000

to invest. Castro testified that he shared the Labyrinth

investment opportunity and Stirton indicated his intent to

invest. Tr. Day 3 at 156:2-157:1. Initially, Stirton testified

that he was not told that Bonita would be investing in Labyrinth

and assumed that the additional $50,000 was to go to the First

Investment, and not a different/new investment. Later in his

testimony, he acknowledged that he may have been told that the

Second Investment was going to Labyrinth and he may have simply

assumed the funds were going to RGT. Tr. Day 1 at 82:9-17; 88:1-

90:4; 98:25-99:2; Tr. Day 2 at 10:1-10; 11:4-12:20. 

19Castro testified that a woman named Alma Perez was

Labyrinth’s principal and that Labyrinth did not have an account,

thus Wolfe (who was “working in conjunction with Alma Perez”)

instructed Castro to send the funds to an entity called Forex

Capital Markets. Castro further testified that he believed that

the funds ultimately went from Forex to an entity called ATC

Brokers, who was “communicating with” Labyrinth. Tr. Day 2 at

pp. 208-214, generally; 218:6-219:6; Tr. Day 3 at 45:16-22;

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At Stirton’s request, the First Investment and Second

Investment were memorialized by two separate promissory notes,

both dated July 17, 2013, and executed by Castro on behalf of SSG

on one hand, and Stirton, on behalf of Bonita, on the other (the

“Promissory Notes”).20 Pl. Exhs. 6, 7 and 9; Tr. Day 1 at 82:24-

83:1; Tr. Day 2 at 15:6-20; 17:17-25. The Promissory Note

documenting the First Investment provided for a return of 15-20%,

payable 180 days following the date of the note.21 Pl. Exh. 6. 

The Promissory Note documenting the Second Investment provided

for a return of 5-10%, payable 90 days following the date of the

Promissory Note. Pl. Exh. 9. Stirton testified that he read

through the Promissory Notes prior to signing them, but that “a

lot of this seemed like language that I didn’t get, to be

honest,” and “at the time – well, I thought they were, I mean,

ridiculous. . . . I thought they were not written as well as

155:2-12; Tr. Day 4 at 44:3-45:7; Pl. Exh. 13. While a copy of

an email from Castro directing Corporate Nevada to transfer the

funds to Forex was introduced at trial, no cancelled check was

ever produced to show that the funds were received by Forex and

nothing was produced to indicate that ATC Brokers ever held the

funds. See generally, Tr. Day 3 at pp. 189-195; pp. 202-03; Tr.

Day 4 at pp. 29-32; Pl. Exh. 13(1)-(3). 

20The Promissory Notes were modeled after the RGT/SSG

Promissory Note. Tr. Day 2 at 36:2-6; Pl. Exh. 8. An important

difference, however, is that the RGT/SSG Promissory Note

specifically provided that Wolfe personally guaranteed the debt

to SSG. Pl. Exh. 8. The Promissory Notes between SSG and Bonita

contained no personal guaranty by Castro. Pl. Exhs. 6 and 9. 

Stirton admitted at trial that he was able to review the RGT/SSG

Promissory Note prior to causing Bonita to transfer funds to SSG. 

Tr. Day 2 at 28:15-25. 

21Stirton testified that despite the terms of the Promissory

Note, he wasn’t actually expecting a rate of return in the 15-20%

range. Tr. Day 1 at 84:1-18.

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might be done[, but I signed them because] I received assurance

from [Castro] that this was valid.” Tr. Day 1 at 86:5-8; Tr. Day

2 at 37:10-19. 

Castro testified that in November 2013, he began calling and

exchanging emails with Wolfe regarding the status of the First

Investment. He further testified that Wolfe’s lack of

responsiveness led Castro to suspect that there were going to be

issues with repayment. Tr. Day 3 at 170:17-171:6. Wolfe

allegedly assured Castro that everything was fine. Tr. Day 3 at

171:7-172:2. Unfortunately, things were not fine and despite

informal attempts by Castro to collect, RGT and Wolfe never paid

the RGT/SSG Promissory Note. Tr. Day 3 at pp. 173-185; Def. Exh.

V. As a result, SSG was unable to repay the First Investment. 

Castro also testified that at some point, he contacted Alma

Perez about the status of the Second Investment and was told by

Perez that it had lost money.22 Thereafter, Castro requested

that ATC Brokers transfer what was left of the $50,000 back to

SSG’s account. Tr. Day 3 at 45:23-46:2; Tr. Day 4 at 58:20-59:2. 

Of the $50,000 Second Investment, however, only approximately

$36,000 was returned to SSG. Tr. Day 3 at 46:6-8. Subsequently,

22Castro testified that Alma Perez explained that there had

been a “computer glitch” and she forgot to turn off a “signal”

and, as a result, $14,000 of the $50,000 Second Investment had

been lost. The court has no idea what this means and it is clear

that Castro did not know, either. Tr. Day 2 at 217:7-16. Castro

testified that he has never received an accounting from

Labyrinth, ATC or anyone else showing definitively what happened

to the $50,000. Tr. Day 3 at 30:8-25. At trial, Plaintiffs’

counsel surmised that Alma Perez may have taken the $14,000 as a

fee or commission, but there was no evidence presented to support

that theory. Tr. Day 4 at 34:3-37:4. 

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Castro caused SSG to transfer approximately $32,000 from SSG’s

account to Bonita’s account. Pl. Exh. 17(2)-(3); Tr. Day 3 at

46:9-13. Castro testified that the $4,000 difference between the

$36,000 returned to SSG by ATC Brokers and the $32,000 SSG

ultimately paid to Bonita was the result of Corporate Nevada

paying renewal fees and past-due fees on SSG’s behalf, and

reimbursing Bay Valley Realty for funds it had previously

advanced to SSG.23 Tr. Day 3 at 46:14-47:11. Castro further

testified that he attempted to return the remaining $4,000 to

Bonita, but never did. Tr. Day 3 at 47:13-48:15. 

As of the date of trial, Bonita had not been repaid any of

the $125,000 First Investment and had only been repaid $32,000 of

the $50,000 Second Investment. 

III. Non-Dischargability, in General

The central purpose of the Bankruptcy Code is to permit a

deserving debtor to make peace with creditors and obtain a fresh

start, free of pre-existing debt. Grogan v. Garner, 498 U.S. 279

(1991). The bankruptcy discharge provides this fresh start. 

Because an exception to discharge impairs a debtor’s fresh start,

however, the limits on dischargability of debts contained in

section 523 are construed strictly against creditors and in favor

of debtors. Ghomeshi v. Sabban (In re Sabban), 384 B.R. 1, 5

(9th Cir. BAP 2008) (citing Klapp v. Landsman (In re Klapp), 706

23Castro testified that it was his understanding that

Corporate Nevada had authorization to automatically deduct fees

from any available funds in SSG’s account. Tr. Day 3 at 131:4-

17. He further testified that he didn’t realize that Corporate

Nevada was going to be taking funds out of the $36,000 that was

returned by ATC Brokers to SSG, to pay SSG’s outstanding

obligations. Tr. Day 3 at 47:3-16. 

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F.2d 998, 999 (9th Cir. 1983); Snoke v. Riso (In re Riso), 978

F.2d 1151, 1154 (9th Cir. 1992); Beaupied v. Chang (In re Chang),

163 F.3d 1138, 1140 (9th Cir. 1998)). While a central purpose of

bankruptcy is to allow an honest but unfortunate debtor a fresh

start, however, “a dishonest debtor . . . will not benefit from

his wrongdoing.” Apte v. Japra (In re Apte), 96 F.3d 1319, 1322

(9th Cir. 1996) (citing Grogan v. Garner, 498 U.S. at 286-87). 

In an action to determine the dischargability of a debt

under Bankruptcy Code § 523(a), plaintiff has the burden of

proving all elements of the claim for relief asserted by a

preponderance of the evidence. Grogan v. Garner, 498 U.S. at

291. 

IV. Section 523(a) Threshold Question

Bankruptcy Code § 523(a) provides that “A discharge under

section 727 . . . of this title does not discharge an individual

from any debt... .” 11 U.S.C. § 523(a). A “debt” is defined as

a “liability on a claim.” 11 U.S.C. § 101(12). A “claim” is a

“right to payment. . . .” 11 U.S.C. § 101(5). A “right to

payment” is “nothing more nor less than an enforceable

obligation.” Johnson v. Home State Bank, 501 U.S. 78, 83 (1991)

(citation omitted). Inherent in, and underlying § 523(a) is the

assumption that in order for a debt to be determined to be

nondischargable as to a debtor, the debt must be enforceable

against that debtor. Here, the court finds that neither the

First Investment nor the Second Investment are enforceable

against Castro. 

As an initial matter, the court acknowledges that the

Promissory Notes themselves are not entirely clear regarding

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whether the obligor was SSG, Castro, or both. However, it

becomes evident that SSG was intended to be the sole obligor on

the Promissory Notes when viewed in light of the parties’

actions, the history of the parties’ previous transactions and

Stirton’s testimony at trial. 

First, Bonita wired the funds for the First Investment and

Second Investment to SSG’s bank account; not to Castro’s

individual account. 

Second, the Promissory Notes were modeled after the RGT/SSG

Promissory Note, with the critical distinction that the

Promissory Notes did not contain a personal guarantee by Castro. 

Stirton admits to having seen the RGT/SSG Promissory Note that

contained Wolfe’s personal guarantee before making the First

Investment. He also admits to having read the Promissory Notes. 

Yet, he never requested that the Promissory Notes be amended to

include a personal guarantee by Castro. If he really believed

that Castro was personally liable or intended to be personally

liable on the First and Second Investments, it seems apparent

that he would have requested such an amendment. 

Third, Stirton testified that he formed Bonita at Castro’s

suggestion, and ran his investments through Bonita as a way of

shielding himself from personal liability. It is not credible

that Stirton believed that Castro was not using his own limited 

liability company to shield himself from liability while advising

Stirton to do the same thing. 

Fourth, none of the previous flipping projects Stirton had

participated in were structured between individuals; instead they

were all structured between Bonita and the respective LLCs of Bay

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Valley’s realtors. Thus the historical pattern contradicts the

theory that the First Investment and Second Investment were with

Castro individually. 

Fifth, Stirton testified at trial that he understood that

the First Investment and the Second Investment and the Promissory

Notes were between Bonita and SSG. See Tr. Day 1 at 67:14-69:10;

185:21-23; Tr. Day 2 at 15:6-20; 17:17-25; Pl. Exh. 4. 

Finally, the court notes that SSG is a Nevada limited

liability company. As a general proposition, under Nevada law,

unless otherwise provided in the articles of incorporation or a

signed agreement, “no member or manager of any limited-liability

company formed under the laws of [Nevada] is individually liable

for the debts or liabilities of the company.” Nev. Rev. Stat.

Ann. § 86.371 (West 2016). Members or managers may incur

liability for the debts or liabilities of a Nevada LLC, however,

if “alter ego” liability is established. See Webb v. Shull, 270

P. 3d 1266, (Nev. 2012) (“We . . . assume, without deciding, that

the [alter ego] statute applies[.]”); Montgomery v. eTreppid

Technologies, LLC, 548 F.Supp.2d 1175, 1180–81 (D.Nev.2008)

(recognizing that federal and state courts have consistently

applied to LLCs corporate laws for piercing the corporate veil

under the alter ego doctrine); In re Giampietro, 317 B.R. 841,

845–46 (Bankr.D.Nev.2004) (recognizing that whether the alter

ego/corporate veil doctrine applies to LLCs in Nevada is a

question of first impression). 

To establish alter ego liability in Nevada, the following

elements must be proved: (1) the LLC must be influenced and

governed by the person asserted to be its alter ego; (2) there

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must be such a unity of interest and ownership that one is

inseparable from the other, and (3) the facts must be such that

adherence to the fiction of separate entity would, under the

circumstances, sanction a fraud or promote injustice.24 In re

Giampietro, 317 B.R. at 848. Unfortunately, in preparing for and

conducting the trial, Plaintiffs assumed that Castro was

personally liable and failed to even pursue, let alone prove, an

alter ego theory of liability. 

For all the foregoing reasons, the court finds that

Plaintiffs failed to carry their burden of proving by a

preponderance of the evidence that Castro was personally liable

for the debts created by the First Investment and Second

Investment. As a result, the court finds that § 523(a) does not

apply and the debts owed to Plaintiffs as a result of the First

Investment and Second Investment are dischargable.

 V. Section 523(a)(2)(A)

Assuming solely for the sake of argument and completeness of

the record that the debts owed to Plaintiffs are debts owed by

Castro personally, the court turns next to Plaintiffs’ argument

that the debts are nondischargable as debts obtained by “false

pretenses, a false representation, or actual fraud[.]” 11 U.S.C.

§ 523(a)(2)(A). In the Ninth Circuit, the terms “false

pretenses” and “false representation” have the same meaning in §

523(a)(2)(A) as the term “actual fraud” and do not provide an

24To the extent that California law is the relevant law to

determine alter ego liability, it is similar in all material

respects to Nevada’s. See, Cal. Corp. Code § 17703.04(a) and (b)

(West 2016); Walsh v. Kindred Healthcare, 789 F. Supp 2nd 1073,

1082 (N.D. Cal. 2011). 

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independent basis for finding a debt nondischargeable. See

Mandalay Resort Group v. Miller (In re Miller), 310 B.R. 185,

199-202 (Bankr. C.D. Cal. 2004) (analyzing the history of the use

of these terms in bankruptcy law); See also, Schneider v. Jagar

(In re Jagar), 2015 WL 4327902, *4 (Bankr. N.D. Cal., July 15,

2015) (citing In re Miller with approval). 

To demonstrate that a debt is nondischargable under §

523(a)(2)(A), Plaintiffs must establish by a preponderance of the

evidence: (1) misrepresentation, fraudulent omission or deceptive

conduct by Castro; (2) Castro’s knowledge of the falsity or

deceptiveness of his statement or conduct; (3) Castro’s intent to

deceive; (4) justifiable reliance by Plaintiffs on Castro’s

statement or conduct; and (5) damage to Plaintiffs proximately

caused by their reliance on Castro’s statement or conduct.25

Ghomeshi v. Sabban (In re Sabban), 600 F.3d 1219, 1222 (9th

Cir. 2010) (citations omitted); Oney v. Weinberg (In re

Weinberg), 410 B.R. 19, 35 (9th Cir. BAP 2009) (citations

omitted). A claim may also arise from the concealment or

intentional non-disclosure of material facts. In re Jagar, 2015

25Following the trial in the matter, but prior to the

issuance of this Memorandum Decision, the Supreme Court issued

its decision in Husky Int’l Elecs., Inc. v. Ritz, 2016 WL 2842452

(U.S., May 16, 2016), holding that despite the limited definition

given by lower courts, the term “actual fraud,” as used in 11

U.S.C. § 523(a)(2)(A) encompasses fraudulent conveyance schemes,

even when those schemes do not involve a false representation. 

This court interprets the Husky Int’l Elecs., Inc. holding to

simply expand the scope of acts that support a finding that a

debt is nondischargable under § 523(a)(2)(A) to include

fraudulent conveyance schemes. Because no fraudulent conveyance

scheme has been asserted and no evidence of such a scheme was

produced at trial, the court finds Husky Int’l Elecs., Inc. to

have limited, if any, relevance here. 

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WL 4327902 at *3 (citations omitted). Castro’s knowledge and

intent to deceive may be inferred by circumstantial evidence and

from his conduct. Tallant v. Kaufman (In re Tallant), 218 B.R.

58, 66 (9th Cir. BAP 1998). A claim under § 523(a)(2)(A)

requires Plaintiffs to prove that the critical misrepresentation,

concealment or non-disclosure that they relied upon existed at or

before the moment in time when Plaintiffs transferred the First

Investment and Second Investment funds to Castro. In re Jagar, 

2015 WL 4327902 at *3 (citing, Reingold v. Shaffer (In re

Reingold), 2013 WL 1136546, *5 (9th Cir. BAP, March 19, 2013);

New Falls Corp. v. Boyajian (In re Boyajian), 367 B.R. 138 (9th

Cir. BAP 2007)). 

Here, Plaintiffs did not come close to proving any of the

elements of the § 523(a)(2)(A) cause of action by a preponderance

of the evidence. Of critical importance, Plaintiffs were unable

to articulate any misrepresentations (knowing or otherwise),

fraudulent omissions, or deceptive conduct by Castro when the

First Investment and Second Investment were made. When

questioned on the topic, it became clear that Stirton relied

solely on his own assumptions about what background information

Castro had, what the investments were, how they would work, and

their chances for success. See Tr. Day 1 at pp. 176-184,

generally; Tr. Day 2 at pp. 40-49, generally. And when

specifically questioned by the court regarding what information

Castro knew at or before the time of the First Investment and

Second Investment that, had he disclosed, would have caused

Stirton or Bonita not to make the investments, Stirton simply

testified, “I can’t say that there’s specific information.” Tr.

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Day 2 at 48:13-49:14; See also, Tr. Day 1 at pp. 181-182. As a

result, the court was left with the distinct impression that

Stirton failed to ask any questions at all. Ultimately,

Stirton’s laissez-faire attitude and complete lack of curiosity

about where the $175,000 would be going ensured that Castro never

had to make any representations, true or otherwise. Stirton

appears to have relied solely and blindly on the success of the

previous flipping transactions, apparently in an attempt to

remain in Castro’s good graces so that he would be offered

flipping opportunities in the future. Because Plaintiffs were

unable to articulate any misrepresentations, fraudulent omissions

and/or deceptive conduct by Castro at or before the First

Investment and Second Investment, the entire cause of action must

fail.26 

VI. Section 523(a)(4)

Again, assuming solely for the sake of argument and

completeness of the record that the debts owed to Plaintiffs are

debts owed by Castro personally, the court turns next to

Plaintiffs’ argument that the debts owed by Castro are

nondischargable as debts that arose from “fraud or defalcation

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

11 U.S.C. § 523(a)(4).

/ / / /

26The court notes that the remainder of the required §

523(a)(2)(A) elements are premised on the existence of a

misrepresentation, fraudulent omission or deceptive conduct. 

Because Plaintiffs failed to establish this threshold element,

Plaintiffs also necessarily failed to establish the remaining

elements. 

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a. Fraud or Defalcation While Acting in a Fiduciary

Capacity

To prevail on a nondischargability claim under this section,

Plaintiffs must prove not only Castro’s fraud or defalcation, but

also that Castro was a fiduciary to Plaintiffs when he committed

the fraud or defalcation. Utnehmer v. Crull (In re Utnehmer),

499 B.R. 705 (9th Cir. BAP 2013) (citing Otto v. Niles (In re

Niles), 106 F.3d 1456, 1459 (9th Cir. 1997)); Honkanen v. Hopper

(In re Honkanen), 446 B.R. 373, 378 (9th Cir. BAP 2011)

(citations omitted). 

Under non-bankruptcy law, the definition of “fiduciary” is a

broad one, involving trust, confidence and good faith. Ragsdale

v. Haller, 780 F.2d 794, 796 (9th Cir. 1986) (citations omitted). 

That broad definition, however, is inapplicable in the

nondischargability context. Id. For purposes of § 523(a)(4),

the Ninth Circuit has adopted a narrow definition of “fiduciary”

as a relationship “arising from an express or technical trust

that was imposed before, and without reference to, the wrongdoing

that caused the debt[.]” In re Honkanen, 446 B.R. at 378-79. 

While the scope of the term “fiduciary capacity” is a

question of federal law, the Ninth Circuit considers state law to

ascertain whether the requisite trust relationship exists. In re

Honkanen, 446 B.R. at 379 (citations omitted). “For a trust

relationship under § 523(a)(4) to be established, the applicable

state law must clearly define fiduciary duties and identify trust

property. . . . The mere fact that state law puts two parties in

a fiduciary-like relationship does not necessarily mean it is a

fiduciary relationship within 11 U.S.C. § 523(a)(4).” In re

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Honkanen, 446 B.R. at 379 (internal citations omitted). If state

law does not “clearly and expressly impose trust-like obligations

on a party, courts will not assume that such duties exist and

will not find that there was a fiduciary relationship.” Houng v.

Tatung Co., Ltd. (In re Houng) 2016 WL 145841, *1 (9th Cir., Jan.

11, 2016) (internal citations omitted); Double Bogey, L.P. v.

Enea, 794 F.3d 1047, 1050 (9th Cir. 2015) (citations omitted).

Here, Plaintiffs first argue that a fiduciary relationship

existed between Plaintiffs and Castro because Castro testified

that it did. This argument is nonsense. Castro was clearly not

qualified to testify as to whether his relationship with

Plaintiffs satisfied the legal definition of “fiduciary.” 

Further, even if he were qualified to testify in this manner,

Castro’s testimony that Stirton trusted him and had confidence in

him falls well short of the legal definition. 

Plaintiffs next argue that a fiduciary relationship existed

between Plaintiffs and Castro by virtue of Castro’s real estate

license. This allegations misstates the law and the facts. 

In California, a real estate licensee does not meet the

fiduciary capacity requirement of § 523(a)(4) solely based on his

status as a real estate licensee. In re Honkanen, 446 B.R. at

381. Instead, fiduciary obligations only attach when a licensee

is carrying out “licensed activities.” In re Briles, 228 B.R.

462, 467 (Bankr. S.D. Cal. 1998); In re Rodriguez, 196 B.R. 537,

542 (N.D. Cal. 1996). As relevant here, “licensed activities”

include “solicit[ing] borrowers or lenders for or negotiat[ing]

loans or collect[ing] payments or perform[ing] services for

borrowers or lenders or note owners in connection with loans

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secured directly or collaterally by liens on real property[.]” 

Cal. Bus. & Prof. Code § 10131(d) (emphasis added). Castro was

not carrying out “licensed activities” as defined by Cal. Bus. &

Prof. Code § 10131(d) because the First Investment and Second

Investment were not secured by (or proposed to be secured by) any

liens on real property. In fact, despite knowing very little

about the investments, Stirton acknowledges that he did know that

they were not intended to be nor were they actually secured by

liens on real property. Tr. Day 1 at 185:14-188:7. Thus,

Castro’s activities do not fall within the scope of “licensed

activities” under California law, no fiduciary relationship

existed between Plaintiffs and Castro. As a result, this cause

of action fails. 

b. Embezzlement

Federal law controls the definition of embezzlement for

purposes of § 523(a)(4). First Delaware Life Ins. Co. v. Wada

(In re Wada), 210 B.R. 572, 576 (9th Cir. BAP 1997) (citations

omitted). Embezzlement is defined as the “fraudulent

appropriation of property by a person to whom such property has

been [e]ntrusted or into whose hands it has lawfully come.” 

Transamerica Commercial Financial Corp. v. Littleton (In re

Littleton), 942 F.2d 551, 555 (9th Cir. 1991) (citing Moore v.

United States, 160 U.S. 268, 269 (1885)). In the

nondischargability context, embezzlement requires proof by a

preponderance of the evidence of: (1) property rightfully in the

possession of a nonowner; (2) the nonowner’s appropriation of the

property to a use other than that for which it was entrusted; and

(3) circumstances indicating fraud. In re Littleton, 942 F.2d at

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555 (citations omitted). It does not require the existence of a

fiduciary relationship. In re Littleton, 942 F.2d at 555

(citations omitted). 

Here, there was clearly no embezzlement of the $125,000

First Investment as the evidence at trial showed that: (1)

Plaintiffs gave Castro the funds for the purpose of investing in

RGT; and (2) Castro actually did transfer the funds to RGT. 

Thus, as to the First Investment, there was no proof of

misappropriation of funds and the cause of action for

embezzlement fails.

Regarding the $50,000 Second Investment, the court

acknowledges that the circumstances surrounding this investment

are bizarre and that Castro’s story regarding where the funds

went, why, and what happened to them, is fairly unbelievable. 

Having said that, it was Plaintiffs’ burden to prove embezzlement

and they failed. 

First, as to the initial transfer of the $50,000 from SSG’s

account to Forex Capital Markets, it is clear from Stirton’s

testimony that while he transferred the funds to SSG willingly,

he had no understanding at all of what the $50,000 was to be used

for. He apparently made little, if any, inquiry prior to

transferring the funds to SSG’s account and, at trial, could not

testify consistently regarding what he thought he was causing

Bonita to invest in. Stirton presented no written agreement

regarding the ultimate destination for the $50,000 and the

promissory note documenting the Second Investment (which was

prepared at Stirton’s request and reviewed by him before he

signed it), was similarly silent regarding the anticipated use

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for the funds. Plaintiffs can hardly complain that the funds

were used for something other than the intended purpose when

there was no understanding of or agreement (written or otherwise)

about the intended purpose. Thus, Plaintiffs failed to sustain

their burden to show misappropriation by a preponderance of the

evidence. 

Plaintiffs also failed to sustain their burden to show

circumstances indicating fraud by a preponderance of the

evidence. As articulated at trial, the court was left with the

impression that Castro was enamored with Wolfe and the appearance

of Wolfe and RGT’s legitimacy and the prospect of healthy returns

on investment. Put simply, he appears to have been a shill for

Wolfe’s apparently-fraudulent activity. But there is no evidence

that he actually participated in the fraud or even knew about it

until well after the fact.

Plaintiffs also argue rather vaguely that Castro’s failure

to trace the $50,000 supports a finding of embezzlement. 

Plaintiffs apparently want the court to conclude that because it

is unclear where the funds went, Castro must have committed some

wrongdoing sufficient to support nondischargability. 

Unfortunately for Plaintiffs, that is not the way the law works. 

The burden was on Plaintiffs to prove all of the elements of this

cause of action. Plaintiffs cited, and the court can find, no

case law that dictates otherwise. Plaintiffs could have

subpoenaed bank records and witnesses in an attempt to prove that

Castro had misappropriated all or a portion of the $50,000. They

failed to do so. Because Plaintiffs failed to prove

embezzlement, the cause of action must fail. 

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Finally, the fact that $36,000 of the $50,000 was returned

to SSG’s account and $32,000 of that amount was subsequently

returned to Bonita requires the court to consider whether Castro

“embezzled” the approximately $4,000 that he failed to return to

Bonita. The court finds that he did not.

The record shows that when Castro learned that $14,000 of

the $50,000 had been lost, he requested that the remaining

$36,000 be returned. The $36,000 was returned to SSG’s account

and Castro instructed Corporate Nevada to forward those funds to

Bonita. Ultimately, however, only $32,000 was transferred to

Bonita as Castro testified that Corporate Nevada had taken $4,000

to pay outstanding fees owed by SSG and to reimburse Bay Valley

Realty for funds it had previously advanced to SSG. Castro

testified that it was his understanding that Corporate Nevada had

authorization to automatically deduct fees from any available

funds in SSG’s account. He further testified that he did not

realize that Corporate Nevada would be taking funds out of the

$36,000. Finally, he testified that he tried to return the

outstanding $4,000. All of this testimony went unchallenged. 

Thus, while the first two elements for embezzlement were arguably

satisfied, the requirement to show circumstances indicating

fraud, was not. Again, Plaintiffs could have challenged this

testimony. They could have called witnesses from Corporate

Nevada. They could have produced the agreement between Corporate

Nevada and SSG. They did not. As a result, they failed to meet

their burden of proving embezzlement by a preponderance of the

evidence. 

/ / / / 

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c. Larceny 

Federal law also controls the definition of larceny for

purposes of § 523(a)(4). Ormsby v. First American Title Company

of Nevada (In re Ormbsby), 591 F.3d 1199, 1205 (9th Cir. 2010).

Larceny is defined as a “felonious taking of another’s personal

property with intent to convert it or deprive the owner of the

same.” Id. (citations omitted). Larceny is distinguished from

embezzlement in that the original taking of the property was

unlawful. In re Quinones, 537 B.R. 942, 950 (Bankr. N.D. Cal.

2015) (citing In re Montes, 177 B.R. 325, 332 (Bankr. C.D. Cal.

1994)). 

Here, there was no unlawful taking of Plaintiffs’ property. 

Plaintiffs gave the First Investment and Second Investment funds

to SSG and/or Castro freely. Thus, Plaintiffs have not and

cannot establish larceny by a preponderance of the evidence. 

VII. Section 523(a)(6)

In their Post-Trial Brief, Plaintiffs effectively dismissed

or withdrew the § 523(a)(6) cause of action, acknowledging that

it is “unnecessary and untenable.” As a result, the court will

not address the cause of action. 

VIII. Conclusion

For all of the foregoing reasons, the court finds that

Plaintiffs failed to carry their burden of proving by a

preponderance of the evidence that: (1) Castro was personally

liable to Plaintiffs on the First Investment and Second

Investment; (2) the debts resulting from the First Investment and

Second Investment were debts obtained by false pretenses, a false

representation or actual fraud as required by § 523(a)(2)(A); and

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(3) the debts resulting from the First Investment and Second

Investment were debts that arose from fraud or defalcation while

acting in a fiduciary capacity, embezzlement, or larceny as

required by § 523(a)(4). As a result, the debts resulting from

the First Investment and Second Investment are dischargable. 

Judgment shall be entered in favor of Defendant. 

 * * * End of Memorandum Decision * * *

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Court Service List

No Court Service Required

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