NOT FOR PUBLICATION

UNITED STATES BANKRUPTCY APPELLATE PANEL

OF THE NINTH CIRCUIT

In re:

YORAM TALASAZAN,

Debtor.

BAP No. CC-21-1271-GLS

Bk. No. 1:16-bk-11671-MT

Adv. No. 1:16-ap-01119-MT

MEMORANDUM*

YORAM TALASAZAN,

Appellant,

v.

MOEIR MOUSSIGHI; HANRIT 

MOUSSIGHI; MOEIR & HANRIT 

MOUSSIGHI dba ROLL TEX,

Appellees.

Appeal from the United States Bankruptcy Court

for the Central District of California

Maureen A. Tighe, Bankruptcy Judge, Presiding

Before: GAN, LAFFERTY, and SPRAKER, Bankruptcy Judges.

INTRODUCTION

Appellant and chapter 71 debtor Yoram Talasazan (“Debtor”) and 

Appellees Moeir and Hanrit Moussighi, dba Roll Tex (collectively

“Moussighi”) were partners in a business venture to purchase “fire sales”

* This disposition is not appropriate for publication. Although it may be cited for 

whatever persuasive value it may have, see Fed. R. App. P. 32.1, it has no precedential 

value, see 9th Cir. BAP Rule 8024-1.

1 Unless specified otherwise, all chapter and section references are to the 

Bankruptcy Code, 11 U.S.C. §§ 101-1532.

FILED

DEC 2 2022

SUSAN M. SPRAUL, CLERK

U.S. BKCY. APP. PANEL

OF THE NINTH CIRCUIT
2

of garments for resale to retailers. Moussighi contributed capital, and

Debtor located, purchased, and resold the merchandise. After selling the 

garments, Debtor was to pay 40% of the profits to Moussighi. Debtor did 

not pay Moussighi his share of the profits and, after years of litigation, 

Moussighi obtained a judgment against Debtor in state court (the “State 

Court Judgment”).

Debtor filed a chapter 7 petition, and Moussighi filed an adversary 

proceeding to deny Debtor’s discharge under § 727 and except the debt 

from discharge under § 523. After trial, the bankruptcy court entered 

judgment, denying the § 727 claims, but finding the debt to Moussighi 

nondischargeable under § 523(a)(4) for defalcation while acting in a 

fiduciary capacity. In determining that Debtor committed defalcation, the 

bankruptcy court gave preclusive effect to the State Court Judgment, and it 

relied on both the State Court Judgment and testimony presented in the 

bankruptcy court to find that Debtor had the requisite culpability under 

Bullock v. BankChampaign, N.A., 569 U.S. 267 (2013).

We find no abuse of discretion in the bankruptcy court’s decision to 

admit the State Court Judgment or in its application of issue preclusion to

establish the predicate facts for defalcation. Debtor does not demonstrate 

clear error by the court in determining, based on the evidence at trial, that 

he acted with a culpable state of mind in committing those acts, or in its 

finding that damages were proximately caused by the defalcation. 

Accordingly, we AFFIRM.
3

FACTS2

A. Prepetition Events

Moussighi and Debtor began their business relationship in 2003.

Between 2007 and 2010, they were involved in approximately 40 

transactions under which Debtor located and purchased garments for 

resale using capital contributed by Moussighi. Debtor stored the 

merchandise at a warehouse of a business he owned, Ban-V, Inc. (“Ban-V”),

and arranged sales to retail customers. Pursuant to their agreement, 

Moussighi was to receive 40% of the profits, and Debtor and Ban-V would 

receive the remaining 60%. Some of the transactions also involved David 

Lahiji, the cousin of Debtor’s wife, who was also in the business of 

liquidating close-out merchandise. Moussighi contended that Debtor did 

not allocate profits as required by the agreement. Debtor claimed that he 

did not profit on the resale of merchandise, and Moussighi was obligated 

to share in the losses and expenses of those unprofitable deals.

In September 2011, Moussighi filed suit in the Los Angeles Superior 

Court against Debtor, Lahiji, and others, alleging: (1) breach of contract, 

(2) open book account, (3) account stated, (4) unjust enrichment, (5) fraud, 

(6) conspiracy to defraud, (7) negligent misrepresentation, (8) conversion, 

(9) breach of implied covenant of good faith and fair dealing, (10) assault, 

2 We exercise our discretion to take judicial notice of documents electronically 

filed in the bankruptcy case and adversary proceeding. See Atwood v. Chase Manhattan 

Mortg. Co. (In re Atwood), 293 B.R. 227, 233 n.9 (9th Cir. BAP 2003).
4

(11) battery, (12) intentional infliction of emotional distress, and (13) money 

due on dishonored checks.

Debtor filed a cross-complaint against Moussighi, and Lahiji filed a 

cross-complaint against Debtor and Moussighi. After trial, the state court 

entered judgment against Debtor and in favor of Moussighi on his claims 

for breach of contract, open book account, account stated, unjust 

enrichment, negligent misrepresentation, and dishonored checks. The state 

court denied Lahiji and Debtor relief on their cross-complaints.

On August 5, 2014, the state court entered final judgment in the total 

amount of $1,269,497.50, consisting of $779,841 in damages, $16,595.21 in 

costs, and $473,061.29 in prejudgment interest. The damages were based on 

documents created by Debtor which showed that he sold merchandise but 

did not share proceeds with Moussighi or Lahiji, and on Moussighi’s 

records which reflected the amounts due under the agreements.

The state court described the business relationship and the specific 

transactions in its statement of decision (“SOD”). It found that Debtor and 

Moussighi had a contract, known as the “Y-Agreement,” which Debtor 

breached by failing to pay Moussighi his share of sale proceeds and by 

cutting off Moussighi’s access to Ban-V’s warehouse and key documents, 

falsifying documents, and repeatedly issuing bad checks from an account 

which he knew had insufficient funds. The state court also determined that 

Debtor, Moussighi, and Lahiji had a contract, known as the “YDAgreement” or “Greenwest Deal,” which Debtor also breached by failing to 
5

share sale proceeds. The court found that, while the merchandise was in 

Debtor’s possession and under his exclusive control, Debtor lost or sold 

544,000 pieces. Debtor presented false invoices to Moussighi and never 

paid him his share of the proceeds. The state court further determined that 

Debtor made several false statements of material fact which constituted 

negligent misrepresentations.3

B. The Bankruptcy and Adversary Proceeding

In June 2016, Debtor filed a chapter 7 petition. Moussighi filed an 

adversary complaint seeking to hold the judgment debt nondischargeable

under § 523(a)(2)(A), (a)(2)(B), and (a)(4).4 After Debtor filed a motion to 

dismiss, the bankruptcy court dismissed the § 523(a)(2)(B) claim and ruled 

that the § 523(a)(4) action could proceed solely on allegations of fraud or 

defalcation while acting in a fiduciary capacity.

Moussighi and Debtor then filed cross-motions for summary 

judgment. Although they disagreed about the meaning of the state court’s 

ruling, both parties argued that issue preclusion was applicable, and each 

party filed a request for judicial notice of the SOD and the State Court 

Judgment. 

3 The state court additionally found Debtor and his wife, Noga Talasazan, not 

credible based on their evasive and contradictory testimony and Debtor’s failure to 

adequately explain evidence presented against him.

4 Moussighi also sought to deny Debtor’s discharge under § 727. After trial, the 

bankruptcy court denied the § 727 claims, and that portion of the ruling is not at issue in 

this appeal. 
6

Moussighi argued that the findings in the SOD established Debtor’s 

fraud. Conversely, Debtor argued that the state court did not grant relief on 

the fraud claim and he was therefore entitled to summary judgment on 

both the § 523(a)(2)(A) claim and the § 523(a)(4) claim for fraud while 

acting in a fiduciary capacity. Debtor also argued that defalcation was not 

at issue in the state court action and Moussighi could not establish Debtor’s 

culpable state of mind which was necessary to prove defalcation under 

§ 523(a)(4). 

Notwithstanding the factual findings of the state court, Debtor

claimed that genuine issues of material fact existed about whether he 

misappropriated merchandise or proceeds. He supported his motion with 

a declaration from Lahiji which stated, contrary to his testimony in state 

court, that Debtor did not have custody or control over much of the 

merchandise at issue and that Moussighi took and sold the merchandise 

that Debtor did possess.

On the § 523(a)(2)(A) claim, the bankruptcy court denied Moussighi’s 

motion and granted summary judgment in favor of Debtor. Applying issue 

preclusion, the bankruptcy court held that because the state court found in 

favor of Debtor on the state law fraud claim, which was identical to fraud 

for nondischargeability purposes under § 523(a)(2)(A), Moussighi was 

precluded from relitigating the issue of Debtor’s fraud.

Regarding the § 523(a)(4) claim, the bankruptcy court denied 

Moussighi’s motion because he failed to include any argument or cite any 
7

law regarding fraud or defalcation while acting in a fiduciary capacity. The 

bankruptcy court also denied Debtor’s motion for summary judgment on 

the § 523(a)(4) claim because, although the state court decided the issue of 

fraud, defalcation includes conduct that does not meet the standard of 

fraud. Consequently, the only nondischargeability issue remaining for trial 

was whether the debt was obtained by Debtor’s defalcation while acting in 

a fiduciary capacity.

C. The Trial and the Court’s Ruling

The bankruptcy court commenced a five-day trial in September 2019. 

Prior to trial, Debtor filed a motion in limine seeking to exclude all 

documents pertaining to the state court action. He argued that the State 

Court Judgment was obtained by fraud upon the court and should be set 

aside because Lahiji gave false testimony in state court. Debtor claimed that 

Moussighi promised he would not pursue Lahiji for any money he owed if 

Lahiji would fully cooperate with his attorneys. Debtor suggested that 

Moussighi’s attorneys perpetrated fraud by directing Lahiji to make false 

statements in state court, including that Debtor had misappropriated or 

stolen merchandise. Debtor supported his motion with a declaration from 

Lahiji which stated that he was coerced by Moussighi into providing much 

of the damaging testimony in the state court action.

The bankruptcy court denied Debtor’s motion in limine and admitted 

the state court documents. The court reasoned that the issue was raised too 

late as a matter of California issue preclusion law and further determined 
8

that “there’s no convincing evidence that an officer of the court was 

involved in perjury, other than a vague statement by a relative of the 

[Debtor], who admits to being a perjurer for financial gain.”

The court found no reason to believe Lahiji’s new testimony since he

had previously perjured himself. It noted that the state court relied on 

documentary evidence and Debtor’s testimony in rendering its decision 

and did not appear to rely much on Lahiji’s testimony. The bankruptcy 

court dismissed the allegation that Lahiji was coerced and instead 

concluded that he apparently decided he would do better currying favor 

with one side over the other and later changed his mind. The parties in the 

state court action had ample opportunity to cross-examine Lahiji and the 

state court had an opportunity to evaluate his credibility.

At trial, Debtor presented expert testimony of Dr. Robert Manning 

Wilford V, a licensed clinical psychologist, who opined that due to Debtor’s 

reading disorder, combined-type ADHD, social anxiety disorder, dyslexia, 

and dysgraphia, Debtor was unable to recall events or put them in 

chronological order. Dr. Wilford believed that Debtor should not write 

paper records and he would have difficulty answering questions and 

forming agreements. Dr. Wilford also opined that testifying in court would 

be difficult for Debtor, that he would look like a “whack job,” appear 

inconsistent, and “probably look like he’s fibbing a little bit because he’s 

trying to cover [for his illness].”
9

In testifying about the business transactions with Moussighi and 

Lahiji, Debtor largely contradicted the factual findings of the state court.

Debtor testified that he paid Moussighi his share of the proceeds on the 

first 38 deals and, regarding the “Greenwest Deal,” Debtor stated that 

Lahiji and Moussighi took possession of the merchandise. He claimed that 

Moussighi always had access to Ban-V’s warehouse and records, and he 

was there almost every day. Debtor disputed the state court’s finding that 

544,000 pieces of merchandise disappeared or were sold by Debtor without 

payment to Moussighi. Debtor claimed that he always intended to pay 

Moussighi and just needed more time.

Following trial, the bankruptcy court entered written findings of fact 

and conclusions of law, holding the judgment debt nondischargeable for

defalcation while acting in a fiduciary capacity under § 523(a)(4).

The bankruptcy court applied issue preclusion and determined that 

whether Debtor committed the actions necessary for defalcation was 

litigated and decided by the state court. The bankruptcy court relied on 

state court findings, as well as testimony and documents presented in the 

bankruptcy court, to determine that Debtor had a culpable state of mind 

under the holding of Bullock.

The bankruptcy court reasoned that the damages awarded by the 

state court resulted from transactions which were all part of the joint 

venture, and those damages were part of the course of conduct described 

by the court as a breach of fiduciary duty. It entered a nondischargeable 
10

judgment in favor of Moussighi for $779,841 plus interest. Debtor timely 

appealed.

JURISDICTION

The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334 and 

157(b)(2)(I). We have jurisdiction under 28 U.S.C. § 158.

ISSUES

Did the bankruptcy court err by admitting the SOD and State Court 

Judgment and by giving them preclusive effect?

Did the bankruptcy court err by finding the judgment debt 

nondischargeable for defalcation while acting in a fiduciary capacity under 

§ 523(a)(4)?

STANDARDS OF REVIEW

We review the bankruptcy court’s evidentiary rulings for abuse of 

discretion. Am. Express Travel Related Servs. Co. v. Vinhnee (In re Vinhnee), 

336 B.R. 437, 442 (9th Cir. BAP 2005). We do not disturb those rulings 

absent prejudice and a timely objection. Price v. Kramer, 200 F.3d 1237, 1252 

& n.17 (9th Cir. 2002).

We review de novo the bankruptcy court’s determination that issue 

preclusion was available. Plyam v. Precision Dev., LLC (In re Plyam), 530 B.R. 

456, 461 (9th Cir. BAP 2015). Under de novo review, we give no deference 

to the bankruptcy court’s decision. Francis v. Wallace (In re Francis), 505 B.R. 

914, 917 (9th Cir. BAP 2014).
11 

“If issue preclusion was available, we then review the bankruptcy 

court’s application of issue preclusion for an abuse of discretion.” In re 

Plyam, 530 B.R. at 461. A bankruptcy court abuses its discretion if it bases a 

decision on an incorrect legal rule, or if its application of the law was 

illogical, implausible, or without support in inferences that may be drawn 

from the facts in the record. United States v. Hinkson, 585 F.3d 1247, 1261-62 

& n.21 (9th Cir.2009) (en banc).

The ultimate question of whether a claim is nondischargeable is a 

mixed question of law and fact, which we review de novo. Carillo v. Su (In 

re Su), 290 F.3d 1140, 1142 (9th Cir. 2002). However, when the appellant 

challenges the bankruptcy court’s factual findings, we review those 

findings for clear error. Id. Factual findings are clearly erroneous if they are 

illogical, implausible, or without support in the record. Retz v. Samson (In re 

Retz), 606 F.3d 1189, 1196 (9th Cir. 2010). “Where there are two permissible 

views of the evidence, the factfinder’s choice between them cannot be 

clearly erroneous.” Anderson v. City of Bessemer City, 470 U.S. 564, 574 

(1985). 

We “give singular deference to a trial court’s judgments about 

the credibility of witnesses. That is proper . . . because the various cues that 

bear so heavily on the listener’s understanding of and belief in what is said 

are lost on an appellate court later sifting through a paper record.” Cooper 

v. Harris, 137 S. Ct. 1455, 1474 (2017) (cleaned up). “We may affirm on any 
12

ground fairly supported by the record.” Jimenez v. ARCPE 1, LLP (In re 

Jimenez), 613 B.R. 537, 543 (9th Cir. BAP 2020) (citation omitted).

DISCUSSION

On appeal, Debtor argues that the bankruptcy court erred by 

admitting the State Court Judgment and SOD and giving them preclusive 

effect. He also argues that the court erred by finding that Debtor committed 

defalcation with the requisite culpable state of mind. He suggests the 

bankruptcy court did not appropriately consider expert testimony and it 

erred by determining that damages awarded by the state court were 

proximately caused by the defalcation.

A. The Bankruptcy Court Did Not Abuse Its Discretion by Admitting 

the State Court Judgment and SOD.

Debtor argues that the bankruptcy court should have excluded the 

State Court Judgment and SOD because Lahiji was coerced into providing 

false testimony by Moussighi and his attorneys. We find no abuse of 

discretion.

We agree with the bankruptcy court that a motion to set aside the 

State Court Judgment for fraud on the court should have been timely made 

in the state court action and, for purposes of issue preclusion, the State 

Court Judgment was final. Debtor was aware of the alleged fraud at the 

time of his motion for summary judgment but did not raise the issue. 

Instead, he filed a request for judicial notice asking the court to consider 

the SOD and State Court Judgment for their preclusive effect.
13

In arguing the motion in limine, Debtor’s counsel stated: “we only 

learned about this in preparation for the motion for summary 

judgment . . . . We didn’t bring the issue up because we were hopeful that 

we would be prevailing on summary judgment.” Hr’g Tr. (Sept. 12, 2019) at 

15:1-8. Debtor does not explain, nor do we discern, how he was prejudiced 

by admission of the State Court Judgment and SOD for purposes of issue 

preclusion, when he asked the court to consider the documents for their 

preclusive effect after discovering the alleged fraud on the state court.

We also agree with the bankruptcy court that Debtor did not 

sufficiently demonstrate that an officer of the court was involved in 

perjury. The only evidence of fraud on the court was Lahiji’s own vague 

statement, which the bankruptcy court found not credible. We find no 

error in the court’s evaluation of Lahiji’s declaration and no abuse of 

discretion in its decision to admit the State Court Judgment and SOD for 

purposes of issue preclusion.

B. Legal Standards Governing Issue Preclusion

The doctrine of issue preclusion applies to actions to except debts 

from discharge under § 523(a). Grogan v. Garner, 498 U.S. 279, 284 n.11 

(1991). In applying issue preclusion, the bankruptcy court “must give to a 

state-court judgment the same preclusive effect as would be given that 

judgment under the law of the State in which the judgment was rendered.”

Migra v. Warren City Sch. Dist. Bd. of Educ., 465 U.S. 75, 81 (1984). The party 

asserting issue preclusion bears the burden of establishing the threshold 
14

elements. Harmon v. Kobrin (In re Harmon), 250 F.3d 1240, 1245 (9th Cir. 

2001).

To determine the issue preclusive effect of the California judgment, 

we apply California’s issue preclusion law, which requires:

(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; 

and (5) the party against whom preclusion is sought was the 

same as, or in privity with, the party to the former proceeding.

In re Plyam, 530 B.R. at 462 (citing Lucido v. Super. Ct., 51 Cal. 3d 335, 341 

(1990)). The court must additionally assess “whether imposition of issue 

preclusion in the particular setting would be fair and consistent with sound 

public policy.” Khaligh v. Hadaegh (In re Khaligh), 338 B.R. 817, 824-25 (9th 

Cir. BAP 2006) (citing Lucido, 51 Cal. 3d at 341-43), aff’d, 506 F.3d 956 (9th 

Cir. 2007).

Debtor does not dispute that the State Court Judgment was a final 

judgment on the merits between the same parties. He argues that whether 

his conduct constituted defalcation and whether he had the requisite 

mental state were not at issue in the state court action and were neither 

“actually litigated” nor “necessarily decided.”
15

C. The Bankruptcy Court Did Not Abuse Its Discretion by Giving the 

State Court Judgment Preclusive Effect.

To determine whether the bankruptcy court properly applied issue 

preclusion, we compare the elements required to establish liability in the 

state court action with the elements required for nondischargeability based 

on defalcation under § 523(a)(4).

Section 523(a)(4) excepts from discharge any debt “for fraud or 

defalcation while acting in a fiduciary capacity . . . .”5 Whether a debtor is a 

fiduciary and whether his actions constitute defalcation are governed by 

federal law. Mele v. Mele (In re Mele), 501 B.R. 357, 363 (9th Cir. BAP 2013). 

“We consult state law to determine whether the requisite trust relationship 

exists.” Id. (citing Cal-Micro, Inc. v. Cantrell (In re Cantrell), 329 F.3d 1119, 

1125 (9th Cir. 2003)).

To establish liability under this provision, a creditor must prove: 

(1) there is an express trust; (2) the debt is created by fraud or defalcation; 

and (3) the debtor acted as a fiduciary to the creditor when the debt was 

created. Otto v. Niles (In re Niles), 106 F.3d 1456, 1459 (9th Cir. 1997), 

abrogated on other grounds by Bullock, 569 U.S. at 274. Debtor does not 

dispute the existence of an express trust or that he was a fiduciary at the 

time the debt was created.6 Thus, the first and third elements are satisfied.

5 Section 523(a)(4) also excepts from discharge debts for embezzlement or 

larceny. The bankruptcy court dismissed Moussighi’s claims for embezzlement or 

larceny, and our review in this appeal is limited to defalcation.

6 Debtor admits that his contractual agreements with Moussighi formed a joint 
16

“Defalcation” is the misappropriation of trust funds or money held in 

any fiduciary capacity. In re Lewis, 97 F.3d at 1186. Defalcation also includes 

a fiduciary’s failure to account for money or property that has been 

entrusted to him. Pemstein v. Pemstein (In re Pemstein), 492 B.R. 274, 282 (9th 

Cir. BAP 2013); see also Bullock, 569 U.S. at 275 (“‘Defalcation’ . . . can 

encompass a breach of fiduciary obligation that involves neither 

conversion, nor taking and carrying away another’s property, nor falsity.”). 

Once a creditor has demonstrated that the debtor is a fiduciary and has 

been entrusted with funds, the burden shifts to the debtor to fully account 

for all funds received. In re Niles, 106 F.3d at 1462.

Additionally, defalcation requires a “culpable state of mind . . . 

involving knowledge of, or gross recklessness in respect to, the improper 

nature of the relevant fiduciary behavior.” Bullock, 569 U.S. at 269. The 

bankruptcy court must find that the debtor’s conduct involved: (1) bad 

faith, moral turpitude, or other immoral conduct; or (2) an intentional 

wrong. Id. at 273. “We include as intentional not only conduct that the 

fiduciary knows is improper but . . . [w]here actual knowledge of 

wrongdoing is lacking, we consider conduct as equivalent if the fiduciary 

‘consciously disregards’ (or is willfully blind to) ‘a substantial and 

venture. Under California law, parties to a joint venture have the same fiduciary 

responsibilities as partners and are fiduciaries for purposes of § 523(a)(4). Aubrey v. 

Thomas (In re Aubrey), 111 B.R. 268, 275 (9th Cir. BAP 1990) (citing Lewis v. Short (In re 

Short), 818 F.2d 693, 695 (9th Cir. 1987); Ragsdale v. Haller, 780 F.2d 794, 796-97 (9th Cir. 

1986)).
17

unjustifiable risk’ that his conduct will turn out to violate a fiduciary duty.” 

Id. at 273-74.

The state court action did not include a claim for defalcation, but use 

of the term “defalcation” is not required; “it is necessary only that the prior 

decision establish facts necessary to except the debt from discharge under 

section 523.” In re Pemstein, 492 B.R. at 283 n.19 (cleaned up); see also Lucido, 

51 Cal. 3d at 342 (“The ‘identical issue’ requirement addresses whether 

‘identical factual allegations’ are at stake in the two proceedings, not 

whether the ultimate issues or dispositions are the same.”). “An issue is 

actually litigated when it is properly raised, by the pleadings or otherwise, 

and is submitted for determination, and is determined.” Wabakken v. Cal. 

Dep't of Corr. & Rehab., 801 F.3d 1143, 1148 (9th Cir. 2015) (cleaned up). The 

“necessarily decided” element requires that the issue is not “‘entirely 

unnecessary’ to the judgment in the initial proceeding.” Samara v. Matar, 5 

Cal. 5th 322, 327 (2018) (quoting Lucido, 51 Cal. 3d at 342).

The state court determined that Debtor breached the contracts by 

failing to pay Moussighi his share of proceeds from the sales of 

merchandise. And it determined that while merchandise was in Debtor’s 

possession and under his control, 544,000 pieces disappeared or were sold 

by Debtor without payment to Moussighi. These factual findings were

necessary to the state court’s ruling on the breach of contract claim and 

were “actually litigated.” The facts required to prove the breach of contract 

action—that Debtor sold merchandise but failed to pay Moussighi under 
18

the contracts—are identical to the facts required to prove defalcation—that 

Debtor either misappropriated or failed to account for the inventory or 

proceeds. Accordingly, the bankruptcy court properly applied issue 

preclusion to determine that Debtor committed the acts necessary to a 

claim for defalcation.

But we agree with Debtor that issue preclusion was not available to 

establish his culpable mental state. The state court made many factual 

findings which demonstrate Debtor’s recklessness, if not actual intent, but 

those findings were entirely unnecessary to the causes of action which the 

state court decided in favor of Moussighi.

Negligent misrepresentation requires that the defendant have no 

reasonable grounds for believing his misrepresentation to be true; it does 

not require a culpability standard equivalent to actual intent or 

recklessness.7 The requirement that a defendant have no reasonable ground 

for believing the misrepresentation is an objective standard akin to 

negligence. It is not equivalent to the subjective scienter requirement for 

7 The elements of a negligent misrepresentation claim under California law are: 

(1) the misrepresentation of a material fact; (2) without reasonable ground for believing 

it to be true; (3) with intent to induce another’s reliance; (4) justifiable reliance on the 

misrepresentation; and (5) damages. Small v. Fritz Cos., 30 Cal. 4th 167, 174 (2003); Fox v. 

Pollack, 181 Cal. App. 3d 954, 962 (1986). “The tort of negligent misrepresentation does 

not require scienter or intent to defraud.” Small, 30 Cal. 4th at 173. “In contrast to fraud, 

negligent misrepresentation does not require knowledge of falsity. A defendant who 

makes false statements ‘honestly believing that they are true, but without reasonable 

ground for such belief, . . . may be liable for negligent misrepresentation.’” Apollo Cap. 

Fund LLC v. Roth Cap. Partners, LLC, 158 Cal. App. 4th 226, 243 (2007) (quoting Bily v. 

Arthur Young & Co., 3 Cal. 4th 370, 407 (1992)).
19

defalcation which requires “knowledge of” or “gross recklessness in 

respect to, the improper nature of the relevant fiduciary behavior.” See 

Apollo Cap. Fund LLC, 158 Cal. App. 4th at 240-43 (discussing the difference 

between fraud and negligent misrepresentation); see also Petersen v. Allstate 

Indem. Co., 281 F.R.D. 413, 417 (C.D. Cal. 2012) (“an allegation of negligent 

misrepresentation suggests only that the defendant failed to use reasonable

care—an objective standard”). None of the other claims decided by the 

state court in Moussighi’s favor depend on Debtor’s state of mind.

Because the State Court Judgment did not necessarily decide the 

issue of Debtor’s culpable state of mind, the bankruptcy court was required

to make its own factual finding. While the court’s finding of culpability 

improperly relied in part on the State Court Judgment, it was also based on 

the evidence adduced at trial.

D. The Bankruptcy Court Did Not Clearly Err by Finding that Debtor 

Had a Culpable Mental State.

In the nondischargeability trial, the bankruptcy court considered 

additional evidence related to Debtor’s intent and knowledge. After 

considering Debtor’s testimony and his explanations of the documentary 

evidence, the court concluded that Debtor was reckless and did not take his 

fiduciary responsibilities seriously. The court found Debtor’s testimony to 

be contradictory about whether he intended to pay Moussighi, and further 

reasoned that, though Debtor was clearly distressed at the rupture of his 

relationship with Moussighi, “an honest belief that he could pay it back 
20

eventually and a sincere desire to pay the funds back is not the same as the 

recklessness and dishonesty he showed at the time he took the money and 

operated the business.”

The court weighed the documentary evidence and testimony from 

Debtor’s employee, Soraya Khalilipour, which confirmed that Debtor had 

control over the business and that his accounting records were “loose.” The 

court determined that most of Debtor’s testimony about his business 

practices and dealings with Moussighi contradicted the SOD. Instead of 

providing evidence that he did not consciously disregard a substantial and 

unjustifiable risk that his conduct would violate his fiduciary duties, 

Debtor blamed Moussighi and others for the loss of inventory—defenses 

considered and rejected by the state court.

Debtor does not directly dispute the court’s finding of culpability and 

instead argues that it failed to properly consider the expert testimony of

Dr. Wilford. The bankruptcy court clearly considered the expert opinion

but found it: (1) unpersuasive and improper as it related to the state court 

action; (2) exaggerated with respect to Debtor’s testimony at trial; and 

(3) presented primarily to impeach the state court’s findings. The 

bankruptcy court cited specific examples of Debtor’s ability to recall and 

smoothly deliver testimony on direct examination while exhibiting an 

acute lack of recall when it came to remembering adverse details. And like 

the state court, the bankruptcy court found Debtor not credible.
21

The court’s finding that Debtor acted with the requisite culpability is 

supported by evidence in the record, and Debtor has not demonstrated 

clear error.

E. The Bankruptcy Court did not Err by Determining the Damages 

Awarded Under the State Court Judgment to be Nondischargeable.

The bankruptcy court limited its nondischargeable judgment to 

amounts awarded by the state court for breach of contract. It determined 

that the damages awarded for Debtor’s contractual breaches resulted from 

the same conduct which the court described as a breach of fiduciary duty.

Debtor argues that a breach of fiduciary duty was not decided by the 

state court and damages for breach of contract are not the same as those 

proximately caused by defalcation. In this case, we disagree.

The contracts which Debtor breached were part of a continuing joint 

venture. As discussed above, the conduct which constituted Debtor’s 

breach of contract also constituted the factual basis for defalcation while 

acting in a fiduciary capacity. Thus, the damages awarded by the state 

court for breach of contract were proximately caused by Debtor’s 

defalcation, and the bankruptcy court did not err by holding the debt 

nondischargeable.

CONCLUSION

Based on the foregoing, we AFFIRM the bankruptcy court’s 

judgment.