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FILED

JUL 02 2015

SUSAN M. SPRAUL, CLERK

U.S. BKCY. APP. PANEL

OF THE NINTH CIRCUIT

NOT FOR PUBLICATION

UNITED STATES BANKRUPTCY APPELLATE PANEL

OF THE NINTH CIRCUIT

In re: ) BAP No. EC-14-1155-KuPaJu

)

KENNETH ROBERT THORNE, ) Bk. No. 12-35545

)

Debtor. ) Adv. No. 13-02001

______________________________)

)

KENNETH ROBERT THORNE, )

)

Appellant, )

)

v. ) MEMORANDUM*

)

SHIRLEY ANDRE; JOSEPH ANDRE, )

)

Appellees. )

______________________________)

Argued and Submitted on May 14, 2015

at Sacramento, California

Filed – July 2, 2015

Appeal from the United States Bankruptcy Court

for the Eastern District of California

Honorable Christopher M. Klein, Chief Bankruptcy Judge, Presiding

 

Appearances: Kenrick Young argued for appellant Kenneth Robert

Thorne; Summer D. Haro of Goodman & Associates

argued for appellees Shirley Andre and Joseph

Andre.

 

Before: KURTZ, PAPPAS and JURY, Bankruptcy Judges.

Memorandum by Judge Kurtz

Concurrence by Judge Jury

*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.
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INTRODUCTION

Kenneth Robert Thorne appeals from a judgment excepting from

discharge under 11 U.S.C. § 523(a)(2)(A) and (a)(4)1 roughly $1.2

million in debt he owes to Shirley Andre and her son Joseph.2

The bankruptcy court correctly determined that most of Thorne’s

debt flowed from his fraudulent conduct. However, on this

record, the bankruptcy court did not correctly except from

discharge certain loan payments Thorne allegedly misappropriated.

The court also erred when it ordered disgorgement of, and

declared nondischargeable, all of the loan origination fees that

Thorne received for the three loans the Andres partially funded. 

Instead, the court should have pro-rated the disgorgement. The

Andres had no entitlement to the origination fees beyond their

share based on the proportion of the loans they funded.

Accordingly, we AFFIRM the bankruptcy court’s

nondischargeability judgment, except for the following: (1) the

portion of the judgment related to $94,903.67 in allegedly

misappropriated loan payments; and (2) the portion of the

judgment related to $14,343.08 in loan origination fees, which

were beyond the Andres’ proportional share. As to those limited

portions of the judgment, we REVERSE.

1Unless specified otherwise, all chapter and section

references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532, and

all "Rule" references are to the Federal Rules of Bankruptcy

Procedure, Rules 1001-9037. All "Civil Rule" references are to

the Federal Rules of Bankruptcy Procedure.

2For the sake of clarity, we refer to Shirley and Joseph by

their first names. No disrespect is intended.

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FACTS

For the most part, Thorne has not challenged on appeal the

bankruptcy court’s findings of fact, so we have drawn much of our

factual recitation from the bankruptcy court’s oral ruling

rendered on March 21, 2014. The court’s findings also are

consistent with the joint statement of undisputed facts the

parties submitted to the court at the time of their pretrial

conference.

Shirley met Thorne in 1995, while she was renovating a

residence she owned so that she could rent it. After Shirley and

Thorne became acquainted, Thorne, a licensed real estate broker,

ended up managing the rental property on Shirley’s behalf. Over

the next several years, with the assistance of Thorne, Shirley

purchased and sold a number of properties – perhaps as many as

thirty transactions in total. Once Shirley added a property to

her real estate portfolio, Thorne typically served as her

property manager.

In this way, between 1995 and 2009, Thorne became a close

business confidant of Shirley’s, on whom Shirley relied for both

real estate and general financial advice. Shirley trusted Thorne

completely. In 2006, Joseph also began engaging in real estate

transactions with Thorne’s assistance. Around the same time, the

real estate market began to deteriorate. In fact, the market

deteriorated to such an extent that many of Shirley’s real estate

investments were overencumbered and were not producing sufficient

revenue to carry their debt burden. As a result, Shirley began

losing the properties, either surrendering them, selling them or

losing them to foreclosure.

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This gravely concerned Shirley because she was counting on

her real estate investments to fund her retirement. She

approached Thorne, expressed her concerns regarding her real

estate investments and expressed a desire to liquidate her

investment portfolio in an attempt to stem the tide of losses. 

In response, Thorne suggested that, instead of liquidating her

portfolio, Shirley could address what he perceived as a cash flow

problem by becoming a hard money lender – making short term loans

at higher interest rates than those charged by banks and other

lending institutions.3

With Thorne’s assistance, both Shirley and Joseph became

hard money lenders. Thorne acted as a loan broker and identified

a prospective borrower named George Popescu, whom he recommended

to Shirley and Joseph. In total, Shirley funded four loans for

Popescu, with Joseph participating as an additional lender in one

of these four loan transactions.4 Before Shirley and Joseph

funded these loans, Thorne represented that the loans would be

fully secured – secured by real estate collateral that had

3Whereas Shirley and the bankruptcy court characterized

Thorne’s suggestions as advice given to a client by a licensed

real estate professional, Thorne characterized his suggestions as

if they were merely brainstorming between sophisticated

colleagues both engaged in their own separate real estate

investment endeavors. Both the history of services Thorne

provided to the Andres and the compensation he earned from

providing those services – particularly the loan origination fees

he collected upon the closing of the hard money loans – support

the court’s characterization.

4Popescu fully repaid one of these four loans. While the

specifics of the three loans not repaid are material to our

analysis, the specifics of the fourth loan are not further

discussed in this decision.

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sufficient equity to cover the full amount of the loan. Thorne

further expressed certainty that Popescu could and would repay

these loans.

With respect to most of Popescu’s real property collateral,

Thorne did not disclose to Shirley or Joseph the existence or

amount of the senior deeds of trust held against the property,

which secured millions of dollars in senior debt, even though he

was aware of the senior debt from preliminary title reports he

received. Nor did Thorne disclose the extent of his own loans to

Popescu. Shirley passed on to Joseph whatever information she

received from Thorne regarding Popescu and the collateral.

The first loan Shirley funded was secured by real property

located on Fair Oaks Boulevard in Carmichael, California. Joseph

also participated in this transaction. The money that Shirley

and Joseph lent against the Fair Oaks property was part of a loan

modification. Thorne and another woman named Victoria Neutra

already had lent Popescu $450,000, which loan was modified by way

of Shirley and Joseph’s additional advances. In exchange for a

pro-rata interest in a modified note and deed of trust on the

Fair Oaks property, Shirley lent Popescu $125,000 and Joseph lent

Popescu $55,000. The principal amount of the modified note was

$630,000, with each lender receiving a proportional ownership

interest in the modified note based on the amount of money they

lent.5 Thorne received out of escrow $7,200 as an origination

fee for brokering the modified Fair Oaks loan.

5The lenders’ respective proportional interests in the

modified Fair Oaks note were as follows: Thorne (43.65%); Neutra

(27.78%); Shirley (19.84%); Joseph (8.73%).

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The second loan Shirley funded was secured by real property

located on Patton Avenue in Citrus Heights, California. 

Shirley’s loan secured by the Patton property was part of an

original loan transaction pursuant to which Shirley lent Popescu

$75,000 and Thorne lent Popescu $55,000. Shirley and Thorne each

received a proportional ownership interest in the note based on

the amount of money they lent.6 Thorne received out of escrow

$5,200 as an origination fee for brokering the Patton loan.

The third loan Shirley funded was secured by real property

located on Eschinger Road in Elk Grove, California. Shirley’s

loan secured by the Eschinger property was part of an original

loan transaction pursuant to which Thorne lent Popescu $125,000,

Shirley lent Popescu $25,000 and a woman by the name of Olga

Chiang lent Popescu $50,000. The principal amount of the

Eschinger note was $200,000, with each lender receiving a

proportional ownership interest in the Eschinger note based on

the amount of money they lent.7 Thorne received out of escrow

$8,000 as an origination fee for the Eschinger loan.

When Popescu fell behind on his loan payments, Thorne at

first told Shirley that Popescu likely was just busy and forgot

to pay. At some later point, in 2008, it became clear that

Popescu was struggling to timely make his loan payments, but

Thorne remained optimistic regarding repayment of the Popescu

6The lenders’ respective proportional interests in the

Patton note were as follows: Shirley (57.69%); Thorne (42.31%).

7The lenders’ respective proportional interests in the

Eschinger note were as follows: Thorne (62.5%); Chiang (25%);

Shirley (12.5%).

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loans, and Thorne expressed his optimism to Shirley. In reality,

in 2009 and 2010, Popescu lost many of his properties to

foreclosure, including the collateral for the loans Shirley and

Joseph had participated in. Even though Thorne recorded requests

entitling him to notice in the event notices of default were

recorded against the collateral by senior lienholders, Thorne

never advised either Shirley or Joseph that the senior

lienholders had commenced foreclosure proceedings against the

collateral. Shirley did not learn of the foreclosures until

January 2011, when she went to the county recorder’s office in an

attempt to ascertain the status of the collateral securing her

loans to Popescu. At that time, she learned the full extent of

senior debt that had encumbered the collateral as well as the

fact that the senior lenders had foreclosed on each of the

parcels of real property collateral, thereby extinguishing her

and Joseph’s rights as junior lienholders.

In September 2011, the Andres commenced a state court action

against Thorne and Popescu for, among other things, fraud and

breach of fiduciary duty. In 2012, Thorne commenced a chapter 13

bankruptcy case, which was converted to chapter 7 later that same

year. In January 2013, the Andres filed their

nondischargeability action against Thorne. After holding a

trial, the bankruptcy court found in favor of the Andres on their

claims for relief under § 523(a)(2)(A) and (a)(4). Thorne timely

appealed.

JURISDICTION

The bankruptcy court had jurisdiction pursuant to 28 U.S.C.

§§ 1334 and 157(b)(2)(I). We have jurisdiction under 28 U.S.C.

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§ 158.

ISSUE

Did the bankruptcy court correctly determine that Thorne’s

indebtedness to Shirley and Joseph was nondischargeable under

§ 523(a)(2)(A) and (a)(4)?

STANDARDS OF REVIEW

We review de novo the bankruptcy court’s legal conclusions,

and we review for clear error its factual findings as to whether

the requisite nondischargeability elements are present. Tallant

v. Kaufman (In re Tallant), 218 B.R. 58, 63 (9th Cir. BAP 1998). 

Findings of fact are clearly erroneous only 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).

DISCUSSION

To except a debt from discharge under § 523(a)(2)(A), a

creditor must prove by a preponderance of the evidence the

following elements:

(1) the debtor made [false] representations;

(2) that at the time he knew they were false;

(3) that he made them with the intention and purpose of

deceiving the creditor;

(4) that the creditor relied on such representations;

[and]

(5) that the creditor sustained the alleged loss and

damage as the proximate result of the

misrepresentations having been made.

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

2010)(quoting Am. Express Travel Related Servs. Co. v. Hashemi

(In re Hashemi), 104 F.3d 1122, 1125 (9th Cir. 1996)). At one

time, the Ninth Circuit also required the creditor to prove that

the debtor benefitted from the fraud. In re Sabban, 600 F.3d at

1222. However, in light of the Supreme Court’s decision in 

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Cohen v. de la Cruz, 523 U.S. 213, 223 (1998), the Ninth Circuit

now only requires that the liability arise or flow from the

fraud. No direct or indirect benefit is required. Id.; Gomeshi

v. Sabban (In re Sabban), 384 B.R. 1, 7-8 (9th Cir. BAP 2008)

aff'd, 600 F.3d 1219 (“Because [the debtor’s liability] did not

arise or flow from Debtor's fraudulent conduct, the bankruptcy

court correctly held that section 523(a)(2)(A) did not apply to

that debt.”). 

Whether the debtor’s liability arose or flowed from the

fraud is, in essence, an inquiry into proximate cause. See

In re Sabban, 600 F.3d at 1223. Proximate cause is a question of

fact reviewed under the clearly erroneous standard. See

In re Tallant, 218 B.R. at 63.

Thorne on appeal has not disputed that the Andres suffered

losses as a result of their lending money to Popescu, but Thorne

in essence claims that these losses were not proximately caused

by any fraudulent conduct on his part. In part, Thorne contends

that the bankruptcy court wrongly faulted him for not

anticipating in 2006, and warning the Andres regarding, the 2007

world financial markets collapse. Thorne further contends that

the Andres admitted at trial that they did not consider material

whether senior liens existed on the property. Thorne also

contends that any statements he made (or any failure to disclose)

regarding Popescu’s financial health constituted oral

representations regarding the borrower’s financial condition,

which are not covered by either § 523(a)(2)(A) or (B).

Even if we were to rule in favor of Thorne on each of these

contentions, this would not establish that the bankruptcy court

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committed reversible error in its § 523(a)(2)(A) ruling. 

Thorne’s contentions largely ignore the key misrepresentation on

which the court’s § 523(a)(2)(A) ruling was based: that there was

sufficient equity in the real property collateral such that the

Andres’ loans would be fully secured. The bankruptcy court’s

ruling repeatedly referenced Thorne’s statements that there was

sufficient equity in the real property collateral, thereby

emphasizing the critical role Thorne’s representations regarding

equity played. See Tr. Trans. (March 21, 2014) at 10:22-11:11,

13:15-17, 14:6-10, 15:22-16:6, 17:7-11.

In its § 523(a)(2)(A) ruling, the bankruptcy court found

that Thorne knew that his representations regarding equity were

false, that he knowingly made these misrepresentations to the

Andres, that he thereby induced the Andres to lend money to

Popescu, that the Andres’ reliance on these representations was

justifiable and that the Andres suffered damages as a proximate

result thereof. For the most part, Thorne does not challenge

these findings. We typically accept as correct findings the

appellant has not challenged on appeal. See Sachan v. Huh

(In re Huh), 506 B.R. 257, 272 (9th Cir. BAP 2014) (en banc); see

also Affordable Housing Dev. Corp. v. Fresno, 433 F.3d 1182, 1193

(9th Cir. 2006) (stating that appellate court ordinarily will not

consider matters “not specifically and distinctly argued in

appellant's opening brief.”).

The closest Thorne comes to challenging these findings is by

arguing that his representations regarding there being equity in

the collateral were mere opinions regarding the value of the real

property. In support of this argument, Thorne relies on a

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statement taken out of context from Loomas v. Evans

(In re Evans), 181 B.R. 508, 512 (Bankr. S.D. Cal. 1995), which

provides as follows: “A representation of value generally is

merely a statement of opinion and, as such, it ‘does not support

a fraud claim either under common law or under the Bankruptcy

Code.’” Id. (quoting Mortg. Guar. Ins. Corp. v. Pascucci

(In re Pascucci), 90 B.R. 438, 444 (Bankr. C.D. Cal. 1988)). 

However, In re Evans does not support Thorne’s argument. 

In re Evans went on to hold that Evans’ false statements

regarding the value of certain real property were sufficient to

support a claim for nondischargeability under § 523(a)(2)(A). 

Id. at 512-13. In so holding, In re Evans explained that

valuation opinions are actionable fraud under California law and

under § 523(a)(2)(A) when the debtor makes such statements of

value knowing them to be false, or with reckless indifference to

the truth of those statements, for the purpose of inducing the

creditor to act in reliance upon those statements. Id.; see also

Rubin v. West (In re Rubin), 875 F.2d 755, 759 (9th Cir. 1989). 

This is precisely what the bankruptcy court found happened here. 

Consequently, we reject Thorne’s argument that his statements

regarding equity in the collateral were non-actionable opinions

regarding value.

Thorne’s more general argument regarding the bankruptcy

court’s fraud findings – that the damages the Andres suffered

cannot be attributed to any fraud on his part – at bottom calls

into question the bankruptcy court’s proximate cause findings. 

Accordingly, we will look at the bankruptcy court’s damages award

to consider whether those damages arose or flowed from Thorne’s

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fraud. In re Sabban, 384 B.R. at 7-8. 

The bankruptcy court awarded the Andres $487,796.23 in

compensatory damages, which consisted of all of the principal

owed and interest accrued on the Popescu loans (based on the

agreed-upon interest rate specified in the notes), minus a credit

for interest payments the Andres received.8 Permitting the

Andres to recover their contracted-for rate of interest is an

appropriate measure of their fraud damages under California law. 

See Ambassador Hotel Co., Ltd. v. Wei-Chuan Inv., 189 F.3d 1017,

1032-33 (9th Cir. 1999)(stating that fraud plaintiff is entitled

under California law to recover benefit-of-the-bargain damages

based on defendant-fiduciary’s fraud), partially overruled on

other grounds by, Dura Pharms., Inc. v. Broudo, 544 U.S. 336,

342-45 (2005); Roussos v. Michaelides (In re Roussos), 251 B.R.

86, 93 (9th Cir. BAP 2000) aff'd, 33 F. App'x 365 (9th Cir. 2002)

(same).

The bankruptcy court also awarded the Andres $178,396.23,

which was a doubling of Shirley’s damages from the Patton and

Eschinger loans pursuant to Cal. Welf. & Inst. Code § 15610.30

8These damages included: (1) principal and interest on the

Fair Oaks loan in the amount of $309,400 ($180,000 principal,

plus 12% interest in the amount of $156,600, less aggregate

interest payments received of $27,200); (2) principal and

interest on the Patton loan in the amount of $132,688 ($75,000

principal, plus 13% interest in the amount of $67,437.50, less

aggregate interest payments received of 9,749.60); and

(3) principal and interest on the Eschinger loan in the amount of

$45,708 ($25,000 principal, plus 14% interest in the amount of

$23,625.03, less aggregate interest payments of $2,916.70).

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and Cal. Prob. Code § 859.9 The Welfare and Institutions Code

statute provides in relevant part:

(a) “Financial abuse” of an elder or dependent adult

occurs when a person or entity does any of the

following:

(1) Takes, secretes, appropriates, obtains, or retains

real or personal property of an elder or dependent

adult for a wrongful use or with intent to defraud, or

both.

Cal. Welf. & Inst. Code § 15610.30(a)(1) (emphasis added). In

turn, the Probate Code statute provides:

If a court finds that a person has in bad faith

wrongfully taken, concealed, or disposed of property

belonging to a conservatee, a minor, an elder, a

dependent adult, a trust, or the estate of a decedent,

or has taken, concealed, or disposed of the property by

the use of undue influence in bad faith or through the

commission of elder or dependent adult financial abuse,

as defined in Section 15610.30 of the Welfare and

Institutions Code, the person shall be liable for twice

the value of the property recovered by an action under

this part.

Cal. Prob. Code § 859 (emphasis added).

The bankruptcy court also awarded $400,000 in punitive

damages based on California’s exemplary damages statute, which

provides in relevant part: 

(a) In an action for the breach of an obligation not

arising from contract, where it is proven by clear and

convincing evidence that the defendant has been guilty

of oppression, fraud, or malice, the plaintiff, in

addition to the actual damages, may recover damages for

the sake of example and by way of punishing the

defendant.

* * *

9The $178,396.23 is the sum of $132,688 in principal and

interest lost in connection with the Patton loan and the $45,708

in principal and interest lost in connection with the Eschinger

loan.

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c) As used in this section, the following definitions

shall apply:

* * *

(3) “Fraud” means an intentional misrepresentation,

deceit, or concealment of a material fact known to the

defendant with the intention on the part of the

defendant of thereby depriving a person of property or

legal rights or otherwise causing injury.

Cal. Civ. Code § 3294(a) & (c)(3) (emphasis added).

In light of the bankruptcy court’s fraud findings and the

applicable California statutes, the above referenced types of

damages patently arose or flowed from Thorne’s fraud. See

In re Sabban, 600 F.3d at 1223; see also Cohen, 523 U.S. at 216

(affirming bankruptcy court judgment excepting from discharge

punitive damages premised on fraud). More to the point, as to

each of these types of damages, we cannot say that the bankruptcy

court’s proximate cause findings were illogical, implausible or

without support in the record. See In re Retz, 606 F.3d at 1196.

The remaining damages that the bankruptcy court awarded

consisted of two distinct sums of money that the court ordered

Thorne to disgorge on two distinct grounds. The bankruptcy

court’s disgorgement awards necessitate a closer examination in

order to ascertain whether they were premised on Thorne’s fraud. 

We will separately consider each sum the court ordered disgorged.

The first sum the court ordered Thorne to disgorge consisted

of loan origination fees in the aggregate amount of $20,400,

which Thorne received for brokering the Fair Oaks, Patton and

Eschinger loans. While the court did not explicitly state the

basis for ordering disgorgement of the loan origination fees, our

review of the record convinces us that the bankruptcy court

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adopted the grounds for disgorgement posited by the Andres in

their trial brief, which was premised on Thorne’s fraud. As the

Andres stated in their trial brief: 

Thorne only received those fees because he convinced

Shirley and Joseph to provide the loans. If Shirley

and Joseph had known all the material facts about those

loans, as Thorne was obligated to tell them, e.g. that

the properties' liens exceeded their value, and that

their value had not been verified, then they would not

have provided those loans.

Plf. Tr. Brf. (Feb. 4, 2014) at 27:14-18.

The legal authority cited by the Andres also implicates

Thorne’s fraud. Of particular note is the Andres’ citation to

Ward v. Taggart, 51 Cal. 2d 736 (1959). In Ward, a real estate

broker named Taggart defrauded the plaintiffs during the course

of a real estate sales transaction and thereby obtained roughly

$72,000 in profit. Id. at 739-40. On appeal from a judgment in

favor of the plaintiffs, the California Supreme Court affirmed

the $72,000 award against Taggart. In so ruling, the Ward court

noted that Taggart did not have any fiduciary or even agency

relationship with the plaintiffs. Id. at 741. Nonetheless,

based on Taggart’s fraud, the Ward court held that Taggart’s

disgorgement of the $72,000 in profit could be affirmed under

unjust enrichment principles. Id. at 741-42. In so holding,

Ward stated:

Even though Taggert [sic] was not plaintiff's agent,

the public policy of this state does not permit one to

“take advantage of his own wrong.” [A]nd the law

provides a quasi-contractual remedy to prevent one from

being unjustly enriched at the expense of another. 

Section 2224 of the Civil Code provides that one “who

gains a thing by fraud * * * or other wrongful act, is

unless he has some other and better right thereto, an

involuntary trustee of the thing gained, for the

benefit of the person who would otherwise have had it.”

As a real estate broker, Taggart had the duty to be

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honest and truthful in his dealings. The evidence is

clearly sufficient to support a finding that Taggart

violated this duty. Through fraudulent

misrepresentations he received money that plaintiffs

would otherwise have had. Thus, Taggart is an

involuntary trustee for the benefit of plaintiffs on

the secret profit of $1,000 per acre that he made from

his dealings with them.

Id. at 741. (footnote and citations omitted) (emphasis added).

On the one hand, Ward establishes that at least some of the

loan origination fees flowed from Thorne’s fraud and could be

ordered disgorged under California law. On the other hand, the

emphasized portions of the quote from Ward also establish an

inherent limitation on that disgorgement. To the extent the

Andres had no entitlement or claim to the origination fees, there

was no basis for the bankruptcy court to award the fees to the

Andres. In the parlance of Ward, Thorne in that instance would

have had “an other and better right thereto” and the Andres would

not “otherwise have had [the fees].”

There is nothing in the record suggesting any grounds for

awarding the Andres the full amount of the loan originations fees

for all three loans, which the Andres only partially funded. 

Instead, the Andres’ entitlement to the fees necessarily was

limited to a pro-rata share based on the proportion of their

funding of the loans in relation to the total amount loaned by

all of the loan participants. The Andres’ pro-rata share of the

fees should have been $6,056.92.10 Consequently, the bankruptcy

10 Shirley and Joseph’s pro-rata share of the origination

fees from the Fair Oaks loan ($2,057.04), plus Shirley’s pro-rata

share of the origination fees from the Patton loan ($2,999.88),

plus Shirley’s pro-rata share of the origination fees from the

(continued...)

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court erred to the extent of $14,343.08 – the extent to which its

judgment included an award based on the origination fees in

excess of $6,056.92.11 

The bankruptcy court also ordered Thorne to disgorge 

$95,417 in loan payments he received from Popescu. However, the

basis for disgorgement of the $95,417 was completely different

than the basis for disgorgement of the loan origination fees. 

The Andres asserted that Thorne did not adequately account for

these loan payments. According to the Andres, he should have

paid the full $95,417 to them, or at least adequately explained

what happened to the rest of these payments. The Andres

calculated the loan payments to be disgorged as follows: 

[Popescu’s payments to Thorne

for] Fair Oaks Loan: $94,500

Paid to Shirley: $18,850

Paid to Joseph: $7,800

Unaccounted for: $67,850

[Popescu’s payments to Thorne

for] Patton Avenue Loan: $16,900

Paid to Shirley: $9,749.60

Unaccounted for: $7,150.40

[Popescu’s payments to Thorne

for] Eschinger Loan: $23,333.30

Paid to Shirley: $2,916.70

Unaccounted for: $20,416.60

Total Unaccounted For Funds: $95,417

Plf. Tr. Brf. (Feb. 4, 2014) at 26:22-27:6. The evidence at

10(...continued)

Eschinger loan ($1,000).

11Aggregate origination fees from the three loan

transactions ($20,400), less the aggregate amount of Shirley and

Joseph’s pro-rata share ($6,056.92).

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trial supported the Andres calculations.12

According to the bankruptcy court, disgorgement of the

$95,417 was appropriate because Thorne failed to provide

contemporaneous regular accountings to the Andres, commingled

funds, and never adequately explained the disposition of the

$95,417. In short, the record establishes that the court based

the disgorgement of the $95,417 on Thorne’s alleged

misappropriation or failure to adequately account for Popescu’s

loan payments, rather than on Thorne’s fraud. Indeed, on this

record, we don’t see any evidence that would have enabled the

court to correctly find that Thorne’s liability for the $95,417

flowed from Thorne’s fraud.

As a result, § 523(a)(2)(A) was not appropriate grounds for

the nondischargeability of the $95,417 in disgorged loan payments

because Thorne’s fraud did not proximately cause that liability. 

Thus, we must consider whether the nondischargeability of the

$95,417 was correctly founded on § 523(a)(4), which was the only

other grounds for nondischargeability the court relied upon.13

Under § 523(a)(4), debts for fraud or defalcation while

12Thorne offered a summary of loan payments as an exhibit at

trial, and the summary was admitted into evidence without

objection. With one minor exception – a $513 payment to Joseph –

the summary is consistent with the Andres’ calculations, at least

with respect to the amount of payments Thorne received from

Popsecu and the amount of payments Thorne disbursed to the

Andres.

13Because the other aspects of the bankruptcy court’s

nondischargeability judgment were adequately supported by the

court’s § 523(a)(2)(A) ruling, we decline to consider § 523(a)(4)

except as necessary to determine whether there were adequate

nondischargeability grounds for the $95,417.

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acting in a fiduciary capacity are nondischargeable. While the

terms “defalcation” and “fiduciary capacity” might have broader

meanings under nonbankruptcy law, these terms are defined

narrowly for nondischargeability purposes. See Bullock v.

BankChampaign, N.A., 133 S.Ct. 1754, 1759 (2013) (holding that

defalcation as used in § 523(a)(4) requires a showing of bad

faith, moral turpitude, or other immoral conduct, or a culpable

state of mind equivalent to intentional wrongdoing or criminally

reckless misconduct); Cal–Micro, Inc. v. Cantrell

(In re Cantrell), 329 F.3d 1119, 1125 (9th Cir. 2003) (holding

that the broad definition of a fiduciary – anyone in whom a

special trust and confidence has been reposed – does not apply to

§ 523(a)(4)). The narrow construction of these terms is

consistent with the dictate that exceptions to discharge should

be narrowly construed. Snoke v. Riso (In re Riso), 978 F.2d

1151, 1154 (9th Cir. 1992); see also Bullock, 133 S. Ct. at

1760-61 (stating that exceptions to discharge "should be confined

to those plainly expressed.").

The applicable, narrow definition of the term “fiduciary

capacity” requires the creditor to demonstrate the existence of

an express or technical trust that was created before and without

reference to the wrongdoing from which the liability arose. 

In re Cantrell, 329 F.3d at 1125. Additionally, when the

§ 523(a)(4) claim rests on a trust imposed by statute, the

statute must clearly identify both the fiduciary’s duties and the

trust’s property. Honkanen v. Hopper (In re Honkanen), 446 B.R.

373, 379 (9th Cir. BAP 2011); Evans v. Pollard (In re Evans),

161 B.R. 474, 477-78 (9th Cir. BAP 1993). 

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The $95,417 in loan payments that the bankruptcy court here

ordered Thorne to disgorge were subject to a statutory trust

pursuant to Cal. Bus. & Prof. Code § 10145, before and without

reference to Thorne’s alleged misappropriation and/or failure to

account for these funds. Generally speaking, Cal. Bus. & Prof.

Code § 10145 requires real estate brokers, when they accept funds

belonging to others in connection with a real estate loan

transaction, to immediately do one of the following: (1) place

them in escrow, (2) place them in the hands of their principal,

or (3) place them in a trust fund account maintained by the

broker. Cal. Bus. & Prof. Code § 10145; see also Cal. Bus. &

Prof. Code § 10131.

In addition, the statute describes other duties of the

fiduciary that arise when he or she accepts such funds. For

instance, subsection (g) of the statute requires the broker to

“maintain a separate record of the receipt and disposition” of

such funds. Cal. Bus. & Prof. Code § 10145(g). Both the Ninth

Circuit Court of Appeals and this panel have opined that this

statute creates a statutory trust and imposes fiduciary

obligations on real estate brokers of the type covered by

§ 523(a)(4). See Otto v. Niles (In re Niles), 106 F.3d 1456,

1459 (9th Cir. 1997); In re Evans, 161 B.R. at 478.

Here, the bankruptcy court faulted Thorne for failing to

provide the Andres with routine periodic accountings, commingling

Popescu’s loan payments with other funds, and never adequately

explaining the ultimate disposition of the $95,417. We have no

issue with the first two findings, but we are perplexed by the

third finding, on which the nondischargeability of Thorne’s

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disgorgement liability necessarily hinges. Unless there was some

amount of the $95,417 that Thorne either misappropriated or never

adequately explained how it was disposed of, we cannot agree with

the bankruptcy court that Thorne’s disgorgement liability was

nondischargeable under § 523(a)(4). See Blyler, et al. v.

Hemmeter (In re Hemmeter), 242 F.3d 1186, 1190-91 (9th Cir.

2001). 

While not on all fours, In re Hemmeter is instructive. In

In re Hemmeter, pension plan participants commenced a

nondischargeability action against the debtor, alleging that

losses suffered by the plans were nondischargeable under

§ 523(a)(4). Id. at 1189. The employee plan participants

further alleged that the plan losses resulted from the debtor's

investment of plan funds in the stock of the employer company

that had established the pension plans. Id. at 1191. In

affirming the bankruptcy court's Civil Rule 12(b)(6) dismissal, 

In re Hemmeter explained that the plans specifically authorized

plan fiduciaries to invest plan funds in the employer company's

stock. Id. Thus, In re Hemmeter stands for the proposition that

§ 523(a)(4) is not implicated when the fiduciary uses trust funds

in a manner the trust explicitly authorized. Id.; see also

Restatement (Third) of Trusts § 78, comments c(2) and c(3) (2007)

(permitting trustee to engage in self-dealing transactions or

other prohibited transactions when the trust terms authorize such

transactions or the trust beneficiaries consent to such

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transactions).14

In this appeal, there is evidence in the record that the

Andres consented to the disposition of the $95,417 in the manner

Thorne actually disbursed those funds. The notes themselves

(which the Andres approved as to form) stated that the Andres

held only partial ownership interests in the notes and thereby

indicated that the Andres held only a pro rata right to loan

payments equal to the percentage of their partial ownership

interests. In turn, the escrow instructions for the Patton loan

transaction and the Eschinger loan transaction explicitly

referenced pro rata distribution of loan/interest payments.15 As

for the Fair Oaks loan, in a fax letter to the escrow company

dated May 7, 2007, (roughly five months after the closing of the

Fair Oaks loan transaction) Shirley expressed her general

satisfaction with the manner in which Thorne had been

14In interpreting California trust law, California courts

generally follow the Restatement (Third) of Trusts. In re Estate

of Giraldin, 55 Cal. 4th 1058, 1072 (2012); see also Uzyel v.

Kadisha, 188 Cal. App. 4th 866, 905 (2010) (following § 78 of the

restatement).

15At trial, Shirley’s counsel offered the Patton escrow

instructions into evidence as plaintiffs’ exhibit 23, and the

bankruptcy court admitted those instructions into evidence

without objection and for all purposes. Nonetheless, Shirley

later claimed during her testimony that, even though her

signature on the escrow instructions looks like her signature,

she did not recall seeing or signing the Patton escrow

instructions, and she suspected that her signature on that

document was a forgery. Even if we assume the truth of Shirley’s

forgery claim, the Patton escrow instructions are cumulative of

the other evidence referenced above establishing that Shirley

knew that she held only a partial ownership interest in the Fair

Oaks, Patton and Eschinger loans and that she only expected a pro

rata share of interest payments made on those loans.

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distributing the Fair Oaks loan payments. Indeed, in this

letter, Shirley indicates that she and Joseph expected (and were

receiving) a specific amount – $1,250 for her and $550 for Joseph

– as their respective shares of the monthly Fair Oaks loan

payments.

Moreover, we have found no evidence in the record indicating

that, before litigation between the parties commenced, either

Shirley or Joseph were entitled to or claimed a right to monthly

loan payments in excess of the pro rata amounts. We understand

that the Andres are now arguing that, in light of Thorne’s

fiduciary status, he had a duty to give the Andres’ interests

complete and absolute priority over his own self-interest and,

hence, he should have paid to them the entire $95,417 -- the

entire amount of Popescu’s payments on these three loans. 

However, we reject this argument as meritless because, as set

forth above, the evidence in the record establishes that the

Andres consented to the pro rata distribution of these loan

payments, and there is no contrary evidence.

We also understand the Andres’ alternate argument: that

Thorne “must have received” additional payments from Popescu for

the Fair Oaks, Patton and Eschinger loans, and because Thorne (in

breach of his fiduciary duties) never disclosed any loan payments

beyond the $95,417, the Andres at a minimum should be entitled to

recover the entire $95,417. However, there is a fatal defect in

this argument. It presumes, without any supporting evidence,

that Thorne actually received additional payments from Popescu

for the Fair Oaks, Patton and Eschinger loans. The evidence in

the record only supports the existence of the $95,417 in payments

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on those loans. There is no evidence in the record of any

additional payments on those specific loans above and beyond the

$95,417. Consequently, the Andres’ argument regarding additional

loan payments (in the absence of any evidence of such payments)

runs afoul of In re Niles, 106 F.3d at 1462, which in relevant

part held that a creditor asserting a claim under § 523(a)(4) for

misappropriation or failure to account for trust funds has the

burden of proof to establish in the first instance that such

funds were entrusted to the debtor. As stated in In re Niles:

We conclude that Otto satisfied her burden of proof by

establishing that Niles was a fiduciary to whom funds

had been entrusted. The burden then shifted to Niles

to account fully for all funds received by her for

Otto's benefit, by persuading the trier of fact that

she complied with her fiduciary duties with respect to

all questioned transactions. 

Id. 

In sum, neither the law nor the evidence in the record

supports the bankruptcy court’s ruling that Thorne’s disgorgement

liability for the $95,417 should be excepted from discharge under 

§ 523(a)(4). We therefore must REVERSE the bankruptcy court’s

nondischargeability ruling with respect to most of the $95,417

because neither § 523(a)(2)(A) nor § 523(a)(4) adequately support

that ruling. We say “most of the $95,417" because there is one

minor exception to this reversal. Thorne admitted in his summary

of payments that he was attempting to give himself credit for

$513.33 paid to Joseph by the escrow company rather than by him.

Thorne has not offered any reason why he should receive credit

for a payment from escrow when the proper subject of the

accounting was amounts he received and amounts he disbursed for

the Fair Oaks, Patton and Eschinger loans. Therefore, in the

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final analysis, our partial reversal effectively reduces the

amount of the bankruptcy court’s nondischargeability judgment by

$94,903.67 ($95,417, less $513.33).

There is another $5,000 that Thorne received from Popescu in

or around September 2008. The way Thorne received and disbursed

the $5,000 is problematic. By that point in time, Popescu

apparently was in default on most or all of his loans. According

to Thorne’s testimony and a letter Thorne wrote to a group of

between eight and ten “investors” dated September 22, 2008,

Popsecu paid Thorne the $5,000 as “a sign of good faith” to his

lenders that he was not going to walk away from his debt

obligations. Thorne in turn parceled out the $5,000 between

himself and Popescu’s other lenders supposedly based on how much

in aggregate each lender lent, rather than attributing the $5,000

to any particular loan. Thorne himself retained a little less

than half of the $5,000 and the Andres received $100 each.

If Thorne had disbursed the $95,417 in this manner, our

holding regarding the $95,417 very well might have been

different. However, there is no indication that the Andres

included the $5,000 in their calculation of the $95,417 Pospecu

paid on the Fair Oaks, Patton and Eshinger loans. Nor is there

any such indication in the documentary evidence the parties

submitted. More importantly, there is no indication that the

bankruptcy court made any rulings regarding the $5,000. The

bankruptcy court’s ruling applied only to the $95,417, as

calculated by the Andres. If the Andres desired additional or

amended findings, or an increase in the nondischargeability

judgment by $5,000, they could have requested those items from

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the bankruptcy court or could have filed their own appeal. 

Because they did not do so, the bankruptcy court’s treatment (or

non-treatment) of the $5,000 is beyond the scope of this appeal. 

The only other argument we must address concerns Thorne’s

statute of limitations defense. Thorne claimed in both the

bankruptcy court and in his opening appeal brief that the Andres

had knowledge of the facts underlying Thorne’s fraud in 2007, so

the applicable three-year limitations period for fraud actions

ran before the Andres filed either their 2011 state court action

or their 2013 nondischargeability action.

Thorne relies upon the three year limitations period for

fraud set forth in Cal. Civ. Proc. Code § 338(d), but this

statute also provides that a fraud cause of action does not 

accrue until the aggrieved party discovers the facts constituting

the fraud. Thorne claims that, in 2007, the Andres had actual

knowledge of sufficient facts for the fraud cause of action to

accrue at that time. However, the bankruptcy court disagreed

with Thorne on this point. The court specifically found that the

Andres did not discover the facts constituting the fraud until

sometime in 2011, after Shirley visited the county recorder’s

office and learned that some or all of her real property

collateral had been lost to foreclosure.

Thorne simply has not persuaded us that the bankruptcy

court’s findings regarding the Andres’ discovery of the fraud

were illogical, implausible or without support in the record. 

Accordingly, Thorne’s statute of limitations argument fails

because we have no grounds to overturn the bankruptcy court’s

discovery-related findings.

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CONCLUSION

For the reasons set forth above, we AFFIRM the bankruptcy

court’s nondischargeability judgment, except for the following: 

(1) the portion of the judgment related to $94,903.67 in

allegedly misappropriated loan payments; and (2) the portion of

the judgment related to $14,343.08 in loan origination fees,

which were beyond the Andres' proportional share. As to those

limited portions of the judgment, we REVERSE.

Concurrence begins on next page.

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JURY, Bankruptcy Judge, concurring:

I concur with the result reached by the majority of the

Panel in affirming the liability for most of the awarded damages

under § 523(a)(2)(A). I join in their decision that all the

damages awarded by the bankruptcy judge except for the sum of

$95,417 are proper. I also agree that the $95,417 sum may not be

awarded as damages under either § 523(a)(2)(A) or (a)(4). 

However, the bankruptcy court awarded all the other damages under

both § 523(a)(2)(A) and (a)(4). My colleagues have chosen to

affirm under § 523(a)(2)(A) and therefore not address the

§ 523(a)(4) conclusions at all (see footnote 13). Because I

disagree with the analysis by which the bankruptcy court reached

§ 523(a)(4) liability, I write separately on that issue. 

Our case law is clear that a mere breach of fiduciary duty,

even if the breach is tortious and intentional as now required by

Bullock v. BankChampaign, N.A., 133 S. Ct. 1754, 1759 (2013), is

insufficient to establish liability under § 523(a)(4). “In

general, a statutory fiduciary is considered a fiduciary for the

purposes of § 523(a)(4) if the statute: (1)defines the trust res;

(2) identifies the fiduciary’s fund management duties; and

(3) imposes obligations on the fiduciary prior to the alleged

wrongdoing.” Blyer v. Hemmeter (In re Hemmeter), 242 F.3d 1186,

1190 (9th Cir. 2001). Moreover, to fit within § 523(a)(4), the

fiduciary relationship must be one arising from an express or

technical trust that was imposed before the wrongdoing occurred. 

Honkanen v. Hopper (In re Honkanen), 446 B.R. 373, 379 (9th Cir.

BAP 2011). Under California law, an express trust requires five

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elements: (1) present intent to create a trust, (2) trustee,

(3) trust property, (4) a proper legal purpose, and (5) a

beneficiary. Id. at n. 6. A technical trust under California

law is one “arising from the relation of attorney, executor, or

guardian, and not to debts due by a bankrupt in the character of

an agent, factor, commission merchant, and the like.” Id. at n.7

(citing Royal Indemn. Co. v. Sherman, 124 Cal.App.2d 512, 269

P.2d 123, 125 (Cal. Ct. App. (1954)). 

In order for the bankruptcy court here to find liability for

the loans made by the Andres to Popescu based on § 523(a)(4), it

needed to not only find a breach of a fiduciary duty that met the

intentional wrongdoing standard established by Bullock, something

the court went at great lengths to do1, but also to find an

express or technical trust with a res. This the court did not

do. Instead, it elevated the fiduciary duty of a licensed broker

to his clients to a level to create § 523(a)(4) liability, in

direct contradiction of the holding of Honkanen, where this Panel

held that the fiduciary relationship of a real estate licensee

was insufficient to create such liability because there was no

express or statutory trust and no trust res. In re Honkanen,

446 B.R. at 381. 

At the conclusion of the hearing where the court announced

1“Under Section 523(a)(4), the fiduciary nature of the loan

broker that was created in 2006 and the hard money loans is a

palatable and important fiduciary relationship. It’s a fiduciary

relationship of a professional. It’s a fiduciary relationship

that was violated in far more dramatic and material manners than

the rather technical violation that a non-professional fiduciary

made in [Bullock] that caused intentional conduct.” See Hr’g Tr.

27:25-28:7 (March 21, 2014).

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its oral ruling, the court was asked by the attorney for Thorne

“what is the res under 523(a)(4)?” The court responded that the

res was all of the loan funds, “all funds involved in the entire

loan transactions.”2 The court made no finding of a trust

relationship. It identified no property entrusted to Thorne by

the Andres which were misused or not accounted for by Thorne. In

sum, it did not find a trust res.

Without a trust res, there is no § 523(a)(4) liability. The

record does not establish this alternative ground for

nondischargeable liability.

2Hr’g Tr. 32:7-8 (March 21, 2014).

3