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ORDERED PUBLISHED

UNITED STATES BANKRUPTCY APPELLATE PANEL

OF THE NINTH CIRCUIT

In re: ) BAP No. CC-14-1362-TaDPa

)

YURI PLYAM and NATALIA PLYAM, ) Bk. No. 2:13-bk-15020-BB

)

Debtors. ) Adv. No. 2:13-ap-01558-BB

______________________________)

)

YURI PLYAM; NATALIA PLYAM, )

)

Appellants, )

)

v. ) O P I N I O N

)

PRECISION DEVELOPMENT, LLC, )

)

Appellee. )

 )

Argued and Submitted on January 22, 2015

at Pasadena, California

Filed - May 5, 2015

Appeal from the United States Bankruptcy Court

for the Central District of California

Honorable Sheri Bluebond, Chief Bankruptcy Judge, Presiding

 

Appearances: Dennis P. Riley of Mesisca Riley & Kreitenberg,

LLP argued for appellants Yuri Plyam and Natalia

Plyam; Leo Daniel Plotkin of Levy, Small & Lallas

argued for appellee Precision Development, LLC.

 

Before: TAYLOR, DUNN, and PAPPAS, Bankruptcy Judges.

FILED

MAY 05 2015

SUSAN M. SPRAUL, CLERK

U.S. BKCY. APP. PANEL

OF THE NINTH CIRCUIT
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TAYLOR, Bankruptcy Judge:

Debtors Yuri Plyam and Natalia Plyam appeal from the

bankruptcy court’s summary judgment excepting a state court

judgment from discharge pursuant to § 523(a)(4)1 and (a)(6), as

to Yuri,2 and pursuant to § 523(a)(6), as to Natalia.

The bankruptcy court granted summary judgment based on

issue preclusion and the state court judgment’s award of actual

and punitive damages for breach of fiduciary duty. We determine

that the bankruptcy court erred as the state court judgment did

not include a finding equivalent to willfulness as required for

§ 523(a)(6) nondischargeability, notwithstanding its award of

punitive damages under California Civil Code § 3294. The state

court judgment also failed to establish the existence of an

express or technical trust as required for § 523(a)(4)

nondischargeability.

As a result, we VACATE the judgment and REMAND to the

bankruptcy court for further proceedings consistent with this

opinion.

BACKGROUND

In 2005, Yuri formed Precision Development, LLC, a Nevada

limited liability company (“Precision”), for the purpose of

developing residential real property in Southern California. 

Initially, he was its sole member and manager.

1 Unless otherwise indicated, all chapter and section

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

2 We refer to the parties hereafter by their first names

for sake of clarity; we intend no disrespect.

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Precision obtained significant investment capital from

Clare Bronfman and Sara Bronfman (jointly, the “Bronfmans”). 

According to the Bronfmans, they eventually invested

approximately $26.3 million.

Between 2005 and 2007, Precision acquired numerous parcels

of real property. Yuri’s separate business entity oversaw their

development; it did not go well. Precision’s funds ran out in

2007 before it successfully completed development of or sold any

of the properties.

Precision’s operating agreement provided that it would hold

title to all real property acquired with Precision funds. The

Debtors, however, caused Precision to deed them three parcels of

real property (the “Transferred Properties”). And once they

acquired title, the Debtors alleged ownership of the Transferred

Properties in loan documents and used the Transferred Properties

as collateral for construction loans. The Debtors later also

transferred a fourth property from Yuri’s business entity to

Precision and then from Precision to their family trust.

Eventually, the Bronfmans discovered Precision’s dire

state; few of its developments were close to completion. 

Indeed, some remained vacant land. The only projects with

significant development were the Transferred Properties. And,

the Debtors lost even the Transferred Properties to foreclosure

by their construction lender.

The Bronfmans attempted to remedy the situation. They

subsequently obtained control of Precision and caused it to sue

the Debtors in California state court. The complaint alleged

that the Debtors misused Precision funds and diverted its

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assets.

Following an 18-day trial, a jury entered a special verdict

finding that “Yuri Plyam or Natasha [sic] Plyam” breached their

fiduciary duties to Precision and that “Yuri or Natasha [sic]

Plyam” acted with malice, oppression, or fraud. The jury

awarded $10,100,000 in general damages and $200,000 in punitive

damages (the “State Court Judgment”). The Debtors appealed to

the California court of appeal, which affirmed the State Court

Judgment. See Precision Dev., LLC v. Plyam, 2013 WL 5801759

(Cal. Ct. App. Oct. 29, 2013). The State Court Judgment is now

final.

The Debtors responded with a chapter 7 bankruptcy, and

Precision then commenced an adversary proceeding seeking to

except the State Court Judgment from discharge pursuant to

§ 523(a)(4) (for fraud or defalcation) and (a)(6).3 It

subsequently moved for summary judgment or, in the alternative,

partial summary judgment. It based its motion solely on the

State Court Judgment’s alleged issue preclusive effect.

The Debtors opposed. They defended against the § 523(a)(4)

claim by arguing that Natalia never owed a fiduciary duty to

Precision and that Yuri was not a fiduciary during the time of

the alleged acts of defalcation. On the § 523(a)(6) claim, they

3 In the adversary complaint, Precision also sought

nondischargeability under § 523(a)(2)(A). As relevant to this

appeal, it obtained summary judgment only as to the § 523(a)(4)

and (a)(6) claims. The bankruptcy court dismissed with

prejudice the § 523(a)(2)(A) claim against both of the Debtors,

the § 523(a)(4) claim for defalcation against Natalia, and the

§ 523(a)(4) claim for embezzlement and/or larceny against both

of the Debtors. No appeal was taken from those decisions.

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generally contested the sufficiency of evidence and argued, in

particular, that triable issues of fact existed as to the

justification or excuse for their actions in relation to the

Transferred Properties and the later transfer of the fourth

property to their family trust. The Debtors also argued that

the State Court Judgment’s punitive damages award did not

satisfy the elements for § 523(a)(6) nondischargeability.

Following arguments at the hearing, the bankruptcy court

relied on issue preclusion and granted summary judgment in part

and denied it in part. It determined that Natalia did not owe a

fiduciary duty; thus, it granted summary judgment against her

only under § 523(a)(6). As to Yuri, it granted summary judgment

on both the § 523(a)(4) and (a)(6) claims.

The bankruptcy court subsequently entered a judgment

excepting the State Court Judgment, in the total amount of

$10,497,843.24, from discharge. The Debtors 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.

§ 158.

ISSUE

Did the bankruptcy court err in granting summary judgment

to Precision by giving issue preclusive effect to the State

Court Judgment as to the § 523(a)(4) and (a)(6)

nondischargeability claims?

STANDARDS OF REVIEW

We review de novo the bankruptcy court’s decisions to grant

summary judgment and to except a debt from discharge under

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§ 523(a)(4) and (a)(6). See Boyajian v. New Falls Corp. (In re

Boyajian), 564 F.3d 1088, 1090 (9th Cir. 2009); Black v. Bonnie

Springs Family Ltd. P’ship (In re Black), 487 B.R. 202, 210 (9th

Cir. BAP 2013); see also Carrillo v. Su (In re Su), 290 F.3d

1140, 1142 (9th Cir. 2002) (nondischargeability presents mixed

issues of law and fact and is reviewed de novo).

We also review de novo the bankruptcy court’s determination

that issue preclusion was available. In re Black, 487 B.R. at

210. If issue preclusion was available, we then review the

bankruptcy court’s application of issue preclusion for an abuse

of discretion. Id. A bankruptcy court abuses its discretion if

it applies the wrong legal standard, misapplies the correct

legal standard, or if its factual findings are illogical,

implausible, or without support in inferences that may be drawn

from the facts in the record. See TrafficSchool.com, Inc. v.

Edriver Inc., 653 F.3d 820, 832 (9th Cir. 2011) (citing United

States v. Hinkson, 585 F.3d 1247, 1262 (9th Cir. 2009) (en

banc)).

DISCUSSION

Summary judgment is appropriate where the movant shows that

there is no genuine dispute of material fact and the movant is

entitled to judgment as a matter of law. Fed. R. Civ. P. 56(a)

(applicable in adversary proceedings under Rule 7056). The

bankruptcy court must view the evidence in the light most

favorable to the non-moving party when determining whether

genuine disputes of material fact exist and whether the movant

is entitled to judgment as a matter of law. See Fresno Motors,

LLC v. Mercedes Benz USA, LLC, 771 F.3d 1119, 1125 (9th Cir.

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2014). And, it must draw all justifiable inferences in favor of

the non-moving party. See id. (citing Anderson v. Liberty

Lobby, Inc., 477 U.S. 242, 255 (1986)).

A bankruptcy court may rely on the issue preclusive effect

of an existing state court judgment as the basis for granting

summary judgment. See Khaligh v. Hadaegh (In re Khaligh), 338

B.R. 817, 831-32 (9th Cir. BAP 2006). In so doing, the

bankruptcy court must apply the forum state’s law of issue

preclusion. Harmon v. Kobrin (In re Harmon), 250 F.3d 1240,

1245 (9th Cir. 2001); see also 28 U.S.C. § 1738 (federal courts

must give “full faith and credit” to state court judgments). 

Thus, we apply California preclusion law.

In California, application of issue preclusion requires

that: (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. 

Lucido v. Super. Ct., 51 Cal. 3d 335, 341 (1990). California

further places an additional limitation on issue preclusion:

courts may give preclusive effect to a judgment “only if

application of preclusion furthers the public policies

underlying the doctrine.” In re Harmon, 250 F.3d at 1245

(citing Lucido, 51 Cal. 3d at 342-43); see also In re Khaligh,

338 B.R. at 824–25.

The party asserting preclusion bears the burden of

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establishing the threshold requirements. In re Harmon, 250 F.3d

at 1245. This means providing “a record sufficient to reveal

the controlling facts and pinpoint the exact issues litigated in

the prior action.” Kelly v. Okoye (In re Kelly), 182 B.R. 255,

258 (9th Cir. BAP 1995), aff’d, 100 F.3d 110 (9th Cir. 1996). 

Ultimately, “[a]ny reasonable doubt as to what was decided by a

prior judgment should be resolved against allowing the [issue

preclusive] effect.” Id.

The Debtors do not challenge the bankruptcy court’s

determination that the State Court Judgment is final and against

the Debtors. Consequently, we do not review this determination

on appeal.

A. The bankruptcy court erred in granting summary judgment to

Precision on its § 523(a)(6) claim based on the issue

preclusive effect of the State Court Judgment.

1. Exceptional circumstances justify our review of the

propriety of issue preclusion as to both Yuri and

Natalia.

Yuri and Natalia filed a joint opening brief on appeal that

requests de novo review of the availability of issue preclusion

in connection with the § 523(a)(6) judgment, but named only

Natalia when discussing this portion of the summary judgment. 

Precision, thus, argues that Yuri did not specifically challenge

the § 523(a)(6) judgment against him and that he cannot obtain

relief from that portion of the summary judgment on appeal. We

acknowledge that a technical waiver exists. Nonetheless, based

on the circumstances of this case and the nature of our ultimate

conclusion, we determine that exceptional circumstances exist,

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and we exercise our discretion and extend review as to Yuri as

well. See Mano-Y&M, Ltd. v. Field (In re Mortg. Store, Inc.),

773 F.3d 990, 998 (9th Cir. 2014) (appellate court may exercise

discretion to consider waived issues based on exceptional

circumstances).

Here, the Debtors share an attorney and filed a joint

appellate brief, which squarely challenges the bankruptcy

court’s § 523(a)(6) determination. Our de novo review and

resulting conclusion is based on a strictly legal point. While

the Debtors do not argue this point directly as to Yuri in their

opening brief, they do argue in their discussion of § 523(a)(4)

that the State Court Judgment did not necessarily decide that

Yuri acted with gross recklessness, a less culpable state of

mind than that required for § 523(a)(6) willfulness. We, thus,

determine that vacating the judgment solely as to Natalia would

be manifestly unjust.

Section 523(a)(6) excepts from discharge debts arising from

a debtor’s “willful and malicious” injury to another person or

to the property of another. Barboza v. New Form, Inc. (In re

Barboza), 545 F.3d 702, 706 (9th Cir. 2008). The “willful” and

“malicious” requirements are conjunctive and subject to separate

analysis.4 Id.; In re Su, 290 F.3d at 1146-47.

4 A “malicious” injury requires: “(1) a wrongful act,

(2) done intentionally, (3) which necessarily causes injury, and

(4) is done without just cause or excuse.” Petralia v. Jercich

(In re Jercich), 238 F.3d 1202, 1209 (9th Cir. 2001). The

Debtors do not challenge the bankruptcy court’s application of

issue preclusion as to § 523(a)(6) maliciousness. As a result,

that issue is deemed waived. See Padgett v. Wright, 587 F.3d

983, 985 n.2 (9th Cir. 2009).

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2. The State Court Judgment did not satisfy the element

of willful injury as required for § 523(a)(6)

nondischargeability.

Under § 523(a)(6), the willful injury requirement speaks to

the state of mind necessary for nondischargeability. An

exacting requirement, it is satisfied when a debtor harbors

“either a subjective intent to harm, or a subjective belief that

harm is substantially certain.” In re Su, 290 F.3d at 1144; see

also In re Jercich, 238 F.3d at 1208. The injury must be

deliberate or intentional, “not merely a deliberate or

intentional act that leads to injury.” Kawaauhau v. Geiger, 523

U.S. 57, 61 (1998) (emphasis in original). Thus, “debts arising

from recklessly or negligently inflicted injuries do not fall

within the compass of § 523(a)(6).” Id. at 64.

The terms “willful” and “malicious,” first appearing in the

Bankruptcy Act of 1898,5 seemingly derive in some measure from

the common law concepts of malice in fact and malice in law,

respectively.

California, for example, defines malice in law as an

“intent to do a wrongful act, established either by proof or

presumption of law . . . from the intentional doing of the act

without justification or excuse or mitigating circumstances.” 

In re V.V., 51 Cal. 4th 1020, 1028 (2011) (citing Davis v.

Hearst, 160 Cal. 143 (1911); Cal. Penal Code §§ 7(4), 450(e);

1 Witkin & Epstein, Cal. Criminal Law § 11) (internal quotation

marks omitted); see also Tinker v. Colwell, 193 U.S. 473, 485-86

5 30 Stat. 544, ch. II § 17(2) (1898) (repealed 1978).

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(1904) (“Malice, in common acceptation, means ill will against a

person, but in its legal sense it means a wrongful act, done

intentionally, without just cause or excuse.” (emphasis added)

(quoting Bromage v. Prosser, 4 Barn. & Cress. 247, 107 Eng. Rep.

1051 (K.B. 1825) (internal quotation marks omitted)), superseded

by statute, Pub. L. No. 95-598, 92 Stat. 2549 (1978); Maynard v.

Fireman’s Fund Ins. Co., 34 Cal. 48, 53 (1867) (same). Thus,

malice in law squares cleanly with § 523(a)(6) maliciousness.

In contrast, malice in fact is defined as “a state of mind

arising from hatred or ill-will, evidencing a willingness to

vex, annoy, or injure another person.” Davis v. Hearst, 160

Cal. at 160 (emphasis added); In re V.V., 51 Cal. 4th at 1028

(“Malice in fact — defined as ‘a wish to vex, annoy, or injure’

. . . — consists of actual ill will or intent to injure.”)

(emphasis added).

This background, highlights two points critical to any

§ 523(a)(6) willfulness determination. First, by holding that

the requisite state of mind was an actual intent to injure (or

substantial certainty regarding injury), the Supreme Court in

Geiger effectively adopted a narrow construction and the most

blameworthy state of mind included within the common

understanding of malice in fact. As relevant here, under

California law, the general definition of malice in fact

encompasses less reprehensible states of mind.

Second, as the Supreme Court clarified in Geiger,

recklessly inflicted injuries do not satisfy the § 523(a)(6)

willfulness requirement. See 523 U.S. at 61-62. This

necessarily includes all degrees of reckless conduct, whether

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arising from recklessness simple, heightened, or gross; conduct

that is reckless merely requires an intent to act, rather than

an intent to cause injury as required under Geiger. See H.R.

Rep. 95-595, at 365 (1977) (“‘Willful’ means deliberate or

intentional. To the extent that Tinker v. Colwell, 193 U.S. 473

[1904], held that a looser standard is intended, and to the

extent that other cases have relied on Tinker to apply a

‘reckless disregard’ standard, they are overruled.”) (emphasis

added); Restatement (Second) of Torts § 500 cmt. f (1965). But

see Bullock v. BankChampaign, N.A., 133 S. Ct. 1754, 1757 (2013)

(holding that, for the purposes of § 523(a)(4), the state of

mind for “defalcation” includes gross recklessness).

Here, the State Court Judgment provided two possible bases

for the application of issue preclusion: the findings in the

punitive damages award and the determination of breach of

fiduciary duty under state law. Neither basis supported an

application of issue preclusion on the issue of § 523(a)(6)

willfulness.

3. The punitive damages award was an insufficient basis

for issue preclusion.6

The jury’s punitive damages award against both of the

Debtors was based on a disjunctive finding of malice,

oppression, or fraud. The “malice, oppression or fraud” finding

6 The Debtors make much of the fact that the jury finding

was made in the alternative; that is, Yuri or Natalia. But, as

the bankruptcy court noted, the punitive damages award was

entered against both of the Debtors, which necessarily required

a finding of malice, oppression, or fraud against each

individual.

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arises from California Civil Code § 3294 (“CC § 3294”), which

provides for the recovery of punitive damages in non-contract

breach civil cases. Each finding supplies an independent basis

for a punitive damages award under CC § 3294. See Coll. Hosp.

Inc. v. Super. Ct., 8 Cal. 4th 704, 721 (1994).

Civil Code § 3294 provides statutory definitions of these

terms.7 “Malice” is defined as either: (1) conduct that the

defendant intends to cause injury to the plaintiff (“Intentional

Malice”); or (2) despicable conduct carried on by the defendant

with a willful and conscious disregard of the rights or safety

of others (“Despicable Malice”). Cal. Civ. Code § 3294(c)(1).8

“Oppression” means “despicable conduct that subjects a person to

cruel and unjust hardship in conscious disregard of that

person’s rights.” Id. § 3294(c)(2). And, “fraud” refers to “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.” Id. § 3294(c)(3).

7 Although enacted in 1872, CC § 3294 remained largely

unaltered until amendment in 1980. Civil Code § 3294 was

previously amended in 1901 (deemed unconstitutional and void in

Lewis v. Dunne, 134 Cal. 291 (1901)) and 1905.

Prior to 1980, although the statute required a finding of

malice, oppression, or fraud to recover punitive damages, it did

not expressly define those categories. The 1980 amendment added

the statutory definitions.

8 In 1987, the California legislature amended CC § 3294

and added the “despicable” adjective to the type of conduct

necessary for Despicable Malice and oppression. It also

qualified Despicable Malice with the requirement that a

defendant willfully and consciously disregard the rights or

safety of another.

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Only Intentional Malice, see Brandstetter v. Derebery (In

re Derebery), 324 B.R. 349, 356 (Bankr. C.D. Cal. 2005), and

fraud expressly require an intent to cause injury. As a result,

only those findings satisfy the § 523(a)(6) willfulness

requirement for the purposes of issue preclusion. Conversely,

Despicable Malice and oppression, which arise from acts in

conscious disregard of another’s rights or safety, fail to

satisfy the requisite state of mind for § 523(a)(6) willfulness. 

As discussed in further detail below, conscious disregard is

akin to recklessness.

a. A punitive damages award under California law can

be based on acts in conscious disregard.

As defined by the California Supreme Court, a person acts

with a conscious disregard of another’s rights or safety when he

is aware of the probable dangerous consequences of his conduct

and he willfully and deliberately fails to avoid those

consequences. Taylor v. Super. Ct., 24 Cal. 3d 890, 895-96

(1979); see also Jud. Council of Cal. Civ. Jury Instruction

(CACI) 3940, 3941; Cal. Civ. Jury Instructions (BAJI) 14.71,

14.72.1.

The conscious disregard requirement found in CC § 3294

appears to track the Taylor decision. In Taylor, the California

Supreme Court examined whether the act of driving while

intoxicated constituted malice for the purposes of a CC § 3294

punitive damages award. Previously, some California courts held

that reckless conduct did not establish malice as required for a

punitive damages award. See G.D. Searle & Co. v. Super. Ct., 49

Cal. App. 3d 22 (1975); see also Ebaugh v. Rabkin, 22 Cal. App.

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3d 891, 896 (1972); Gombos v. Ashe, 158 Cal. App. 2d 517 (1958). 

Contra Nolin v. Nat’l Convenience Stores, Inc., 95 Cal. App. 3d

279, 285-88 (1979) (gross recklessness supported punitive

damages award under CC § 3294). In an earlier case, the

California Supreme Court, however, used the term “reckless

misconduct” in dicta. See Donnelly v. S. Pac. Co., 18 Cal. 2d

863, 869-70 (1941).

The Taylor court held that “a conscious disregard of the

safety of others [could] constitute malice within the meaning of

[CC § 3294].” 24 Cal. 3d at 895. It also stated that to the

extent Gombos v. Ashe was inconsistent with its holding, that

case was disapproved. Id. at 900. Gombos previously held that

drunk driving, while reckless, wrongful, and illegal, did not

constitute malice within the meaning of CC § 3294. 158 Cal.

App. 2d at 527. The Taylor court never expressly excluded

recklessness as a basis for an award of punitive damages; it

thus kept the door open to punitive damages based on a state of

mind other than actual intent to injure.

Within a year of the Taylor decision, CC § 3294 was amended

to require conscious disregard with respect to Despicable Malice

and oppression. In so amending the statute, the California

legislature included the two types of malice that exist

currently: Intentional Malice and Despicable Malice. Clearly,

it did not intend to include two identical forms of malice in

the statutory definition. Thus, conscious disregard begins to

take shape as a state of mind less malicious than an intent to

injure.

///

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i. Conscious disregard is the equivalent of

reckless conduct.

In the continuum of states of mind supporting a judgment

based on tort, recklessness rests between negligence, requiring

no intent, and intentional misconduct, requiring both a

deliberate act and the desire to cause the consequences of the

act. In Donnelly v. S. Pac. Co., 18 Cal. 2d 863 (1941), the

California Supreme Court considered whether existing law

precluded a personal injury action based on negligence. It

examined the contours of negligence and intentional torts and

identified the existence of a third, intermediary category of

tort law: “[a] tort having some of the characteristics of both

negligence and willfulness occur[ed] when a person with no

intent to cause harm intentionally perform[ed] an act so

unreasonable and dangerous that he kn[ew], or should [have]

know[n], it [was] highly probable that harm [would] result.” 

Id. at 869 (emphasis added). Noting the various terms employed

by the courts to describe this category of tort, it adopted with

approval the term “wanton and reckless misconduct.” Id.

This type of tort, the California Supreme Court explained,

“involve[d] no intention, as [did] willful misconduct, to do

harm, and i[t] differ[ed] from negligence in that it . . .

involve[d] an intention to perform an act that the actor [knew],

or should [have] know[n], [would] very probably cause harm.” 

Id. Importantly, it recognized that “wanton and reckless

misconduct” was more closely akin to willful misconduct than to

negligence and, “[t]hus, it justifie[d] an award of punitive

damages.” Id. at 869-70.

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The Donnelly court’s analysis on this point is dicta, but

it is also consistent with the Restatement of Torts discussion

of reckless conduct.9 The Restatement explains that one type of

recklessness involves the situation where a person knows, or has

reason to know (based on an objective person standard),10 of

facts creating a high degree of risk of physical harm to

another, and deliberately proceeds to act, or fails to act, in

conscious disregard of, or indifference to, that risk. 

Restatement (Second) of Torts § 500 cmt. a (1965) (emphasis

added).11 The person must know (or have reason to know of) the

facts creating an unreasonable risk. Id.

The critical difference between intentional and reckless

misconduct is the necessary state of mind; for conduct to be

reckless, the person must intend the reckless act but need not

intend to cause the resulting harm. Id., cmt. f. To establish

recklessness, it is sufficient that the person realizes (or

should realize) the “strong probability that harm may result,

even though he hopes or even expects that his conduct will prove

harmless.” Id. But, a strong probability is not equivalent to

9 We refer to the Restatement (Second) of Torts, in

deference to the Supreme Court’s discussion of the Restatement

Second in Geiger and the Ninth Circuit’s decisions in In re

Jercich and In re Su. The Restatement (Third) of Torts:

Liability for Phys. & Emot. Harm §§ 1 (Intent) (2010) and 2

(Recklessness) (2010) do not contain substantive differences

that change our analysis.

10 See Restatement (Second) of Torts § 12(1) (1965).

11 The Restatement Second also points out a second type of

reckless conduct: where the person knows (or has reason to know)

of the facts but does not realize or appreciate the high degree

of risk involved, although a reasonable man in his position

would do so. Restatement (Second) of Torts § 500 cmt. a (1965).

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substantial certainty. See id. (“[A] strong probability is a

different thing from the substantial certainty without which he

cannot be said to intend the harm in which his act results.”);

id. § 8A cmt. b. Thus, “[a]s the probability that [injurious]

consequences will follow decreases, and becomes less than

substantial certainty, the [person’s] conduct loses the

character of intent, and becomes mere recklessness.” Id. § 8A

cmt. b.

Comparing the explanations of reckless conduct provided by

the Donnelly court and the Restatement of Torts with the

definition of conscious disregard, it becomes clear that

conscious disregard proceeds from reckless conduct. The common

factor between conscious disregard and reckless conduct is the

accompanying state of mind; both require solely an intent to act

and the focus lies there, rather than on an intent to cause the

consequences of the act as required by Geiger. Degrees of

recklessness may exist; but, again, whether recklessness is

heightened or gross, it is insufficient for a determination of

§ 523(a)(6) willfulness.

In defining conscious disregard, the California Supreme

Court in Taylor employed a description consistent with reckless

conduct. As stated, acting with a conscious disregard within

the meaning of CC § 3294 requires: (1) being aware of the

probable dangerous consequences of one’s own conduct; and

(2) willfully and deliberately failing to avoid those

consequences. Taylor, 24 Cal. 3d at 895-96.

First, to be aware of probable dangerous consequences, a

person must first know or have reason to know of the facts

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giving rise to a high degree of risk of harm to another. 

Knowledge of such facts is an essential element of recklessness. 

See Restatement (Second) of Torts § 500 cmt. a.

Second, whether consequences are “dangerous” relates to the

character of a person’s unreasonable conduct and the necessarily

high degree of risk that serious harm will result from that

conduct. See id., cmts. a, c.

Third, the probability factor of dangerous consequences

also relates to reckless conduct. See id., cmt. a. Even a

strong probability that consequences may result, however, is not

equivalent to substantial certainty for the purposes of intent. 

See id., cmt. f; id. § 8A cmt. b. In this context, probable

means more likely than not, while substantial certainty requires

near certainty.

Fourth, the terms “willfully” and “deliberately” mean only

that the person failed, by design, to avoid the consequences of

his wrongful act. His intent is focused on the act of being

unsuccessful in preventing potential bad consequences, rather

than on the actual consequences of his act. See id. § 500

cmt. b (“Conduct cannot be in reckless disregard of the safety

of others unless the act or omission is itself intended[.]”).

The Supreme Court’s decision in Bullock, although involving

a different exception to discharge and federal common law rather

than California state law, also strengthens the connection

between conscious disregard and recklessness. There, the

Supreme Court held that the term “defalcation,” within the

meaning of § 523(a)(4), included a state of mind involving gross

recklessness with respect to improper fiduciary behavior. 133

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S. Ct. at 1757. In doing so, it concluded that “[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 unjustifiable risk’ that

his conduct will turn out to violate a fiduciary duty.” Id. at

1759 (quoting Model Penal Code § 2.02(2)(c) (1985)) (emphasis

added).

In sum, conscious disregard within the meaning of CC § 3294

is consistent with reckless conduct as discussed by California

cases, the Restatement of Torts, and Bullock.

ii. California statutory authority and case law

otherwise support that conscious disregard

proceeds from reckless conduct.

A statutory analogue lends significant support to the

determination that conscious disregard arises from reckless

conduct. California law provides for enhanced remedies in cases

of elder abuse. See Cal. Welf. & Inst. Code § 15657. In order

to claim these enhanced statutory remedies, a defendant must be

found guilty of recklessness, oppression, fraud, or malice in

the commission of abuse. See id. For the purposes of an elder

abuse act claim, recklessness is defined as “a ‘deliberate

disregard’ of the ‘high degree of probability’ that an injury

will occur.” Delaney v. Baker, 20 Cal. 4th 23, 31 (1999)

(citing Cal. Civ. Jury Instructions (BAJI) 12.77, defining

“recklessness” for intentional infliction of emotional distress;

Restatement (Second) of Torts § 500)). Thus, recklessness

“rises to the level of a conscious choice of a course of action

. . . with knowledge of the serious danger to others involved in

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it.” Id. at 31-32 (citing Restatement (Second) of Torts § 500

cmt. g).

The descriptions of recklessness for the purpose of an

elder abuse claim and conscious disregard within the meaning of

CC § 3294 are substantively similar. Indeed, the California

Supreme Court has held that a plaintiff alleging an elder abuse

claim must allege conduct “essentially equivalent” to conduct

necessary to support a CC § 3294 punitive damages award. See

Covenant Care, Inc. v. Super. Ct., 32 Cal. 4th 771, 789 (2004). 

It, thus, implicitly recognized that an award of CC § 3294

punitive damages can be based on reckless conduct.

Moreover, various California courts have recognized the

availability of CC § 3294 punitive damages for nonintentional

torts when the offensive conduct is a conscious disregard of the

rights or safety of others. See Peterson v. Super. Ct., 31 Cal.

3d 147, 158 (1982) (“Nonintentional torts may [] form the basis

for punitive damages when the conduct constitutes conscious

disregard of the rights or safety of others.”); Potter v.

Firestone Tire & Rubber Co., 6 Cal. 4th 965, 1004 (1993)

(“[P]unitive damages sometimes may be assessed in unintentional

tort actions under [CC §] 3294.”). Nonintentional torts,

including those predicated on reckless conduct, require only an

intent to act. See, e.g., Peterson, 31 Cal. 3d at 158-59

(Punitive damages are available to punish “[n]onintentional

conduct . . . when a party intentionally performs an act from

which he knows, or should know, it is highly probable that harm

will result.”) (emphasis added).

///

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iii. That “willful” is an additional requirement

for Despicable Malice does not change the

outcome of the analysis.

As stated, Despicable Malice is defined as despicable

conduct done willfully and in conscious disregard of the rights

or safety of another; oppression, notably, requires only a

conscious disregard. Cal. Civ. Code § 3294(c)(1)-(2). The

additional “willful” requirement in Despicable Malice, however,

does not change the outcome of the analysis.

In the context of CC § 3294, the term “willful” refers only

to the deliberate conduct committed by a person in a despicable

manner. The statute, thus, employs the dictionary definition of

“willful.” See Geiger, 523 U.S. at 61 n.3 (noting that Black’s

Law Dictionary defined “willful” as “voluntary” or

“intentional”). There is no indication that “willful” refers to

a subjective intent to injure or a subjective belief that injury

is substantially certain to result. And, this interpretation

makes practical sense; to read the statute otherwise would

render the inclusion of Intentional Malice in CC § 3294

superfluous.

b. Determining that conscious disregard is

insufficient to satisfy the § 523(a)(6)

willfulness requirement is consistent with

existing precedent.

Construing conscious disregard as a form of reckless

conduct is consistent with Geiger and its progeny, including the

Ninth Circuit’s decisions in In re Jercich and In re Su. As the

Supreme Court recognized in Geiger, expanding § 523(a)(6) to

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include reckless conduct “would obviate the need for

§ 523(a)(9), which specifically exempts ‘debts for death or

personal injury caused by the debtor’s operation of a motor

vehicle if such operation was unlawful because the debtor was

intoxicated from using alcohol, a drug, or another substance.’” 

Geiger, 523 U.S. at 62 (quoting 11 U.S.C. § 523(a)(9)).

Yet, the availability of punitive damages for injuries

caused while driving intoxicated was exactly the issue before

the California Supreme Court in Taylor. It was this issue that

caused the California Supreme Court to determine that conscious

disregard could constitute malice. Not long after, the

California legislature codified the inclusion of conscious

disregard into CC § 3294.

We cannot reconcile the rationale supplied by the Supreme

Court in Geiger in regards to § 523(a)(9) with the factual

circumstances giving rise to the conscious disregard standard in

Taylor. Thus, consistent with Geiger, we must reject the

attempt to give issue preclusive effect to findings based on

conscious disregard in the context of § 523(a)(6) willfulness. 

As recognized in Geiger, a determination to the contrary would

render superfluous § 523(a)(9) in nondischargeability

proceedings.

c. Despicable conduct, as also required for

Despicable Malice and oppression, is based on an

objective person standard.

In addition to conscious disregard, both Despicable Malice

and oppression require conduct that is despicable. Cal. Civ.

Code § 3294(c)(1)-(2). Conduct is despicable when it is so

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vile, base, contemptible, miserable, wretched, or loathsome that

ordinary decent people would look down upon and despise it. 

Coll. Hosp. Inc., 8 Cal. 4th at 725 (describing despicable as

circumstances that are “base,” “vile,” or “contemptible.”); Jud.

Council of Cal. Civ. Jury Instruction (CACI) 3940, 3941; Cal.

Civ. Jury Instructions (BAJI) 14.71, 14.72.1.

Whether conduct is despicable is measured by an objective

person standard. See In re Derebery, 324 B.R. at 356. But, an

objective, reasonable person standard is not allowed in the

§ 523(a)(6) willfulness analysis. See In re Su, 290 F.3d at

1145 (“By its very terms, the objective standard disregards the

particular debtor’s state of mind and considers whether an

objective, reasonable person would have known that the actions

in question were substantially certain to injure the

creditor.”). Thus, a punitive damages award based on Despicable

Malice or oppression does not establish the subjective intent

required for § 523(a)(6) willfulness.

d. The disjunctive findings in the punitive damages

award included Despicable Malice and oppression.

Here, the CC § 3294 findings in the punitive damages award

were stated in the disjunctive: that Yuri and Natalia each acted

with malice or oppression or fraud. On this record, we cannot

ascertain the exact basis for the jury’s findings. Because the

punitive damages award may have been based only on a finding of

Despicable Malice or oppression, issue preclusion was

unavailable on the issue of § 523(a)(6) willfulness.

To be clear, our holding does not eviscerate a bankruptcy

court’s ability or opportunity to apply issue preclusion to a

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state court jury’s findings pursuant to CC § 3294. To the

extent the findings are clearly and solely based on a finding of

Intentional Malice, fraud, or both, such findings are sufficient

to meet the willfulness requirement of § 523(a)(6). And, of

course, a state court judgment based on an intentional tort may

independently satisfy the § 523(a)(6) willfulness requirement.

But, to the extent that CC § 3294 findings are stated in

the disjunctive or based on Despicable Malice or oppression or

both, those findings prevent the use of issue preclusion as to

§ 523(a)(6) willfulness. Even then, however, those particular

findings are not without value to a creditor seeking

nondischargeability under § 523(a)(6). The creditor is still

entitled to seek issue preclusion on other issues based on

findings of Despicable Malice or oppression, including the

maliciousness requirement of § 523(a)(6). Under those

circumstances, the bankruptcy court need only try the singular

issue of the debtor’s intent for the purposes of § 523(a)(6)

willfulness; that is, whether the debtor subjectively intended

to cause injury or was substantially certain that injury would

follow. It need not retry the entire state court case a second

time.

4. The breach of fiduciary duty determination under

California law was an insufficient basis for issue

preclusion on the issue of § 523(a)(6) willfulness.

In California, the elements for a breach of fiduciary duty

are the existence of a fiduciary relationship, breach of that

fiduciary duty, and damages. Oasis W. Realty, LLC v. Goldman,

51 Cal. 4th 811, 820 (2011). There is no particular scienter

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requirement, let alone a requirement of a subjective intent to

injure. See Correia-Sasser v. Rogone (In re Correia-Sasser),

2014 WL 4090837, at *8 (9th Cir. BAP Aug. 19, 2014). As a

result, without more, a judgment for breach of fiduciary duty

under California law cannot support a willfulness determination

under § 523(a)(6).

B. The bankruptcy court erred in granting summary judgment to

Precision on its § 523(a)(4) claim against Yuri based on

the issue preclusive effect of the State Court Judgment.

Section 523(a)(4) excepts from discharge debts for fraud or

defalcation while acting in a fiduciary capacity. Whether a

debtor is a fiduciary for the purposes of § 523(a)(4) is a

question of federal law. Lewis v. Scott (In re Lewis), 97 F.3d

1182, 1185 (9th Cir. 1996). The definition is construed

narrowly, requiring that the fiduciary relationship arise from

an express or technical trust that was imposed prior to the

wrongdoing that caused the debt. Ragsdale v. Haller, 780 F.2d

794, 796 (9th Cir. 1986) (“The broad, general definition of

fiduciary—a relationship involving confidence, trust and good

faith—is inapplicable in the dischargeability context.”); see

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

1997).

1. Express or technical trust

State law determines whether the requisite trust

relationship exists. See In re Lewis, 97 F.3d at 1185; Mele v.

Mele (In re Mele), 501 B.R. 357, 365 (9th Cir. BAP 2013). The

Debtors argue that here an express trust did not exist because

the elements for a trust were not satisfied under California

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law. They maintain that, at best, the 2005 operating agreement

required that Yuri hold the properties in trust for Precision;

but, because Yuri was the sole member of Precision from 2005 to

2008, the duty to hold the properties in trust was effectively a

duty to himself.

In response, Precision argues that the Debtors ignore

Yuri’s status as its manager, which independently established

fiduciary duties owed to the company. In any event, it contends

that, based on the 2008 amendment, the Bronfmans’ membership

interests in Precision were deemed issued as of the date of the

2005 operating agreement. And, it argues that pursuant to

former California Corporations Code § 17153, a manager of a

limited liability company is subject to the same fiduciary

duties as a partner in a partnership; thus, by extension and

pursuant to Ragsdale, a manager is a trustee of the limited

liability company.

Something that neither party addresses is that Precision is

a Nevada limited liability company. Pursuant to the 2005

operating agreement, Precision was organized under the laws of

Nevada. Former California Corporations Code § 17450(a),12 in

effect at the time of the underlying events and the state court

action, established that: “[t]he laws of the state . . . under

which a foreign limited liability company is organized shall

govern its organization and internal affairs and the liability

and authority of its managers and members.” Emphasis added.

The 2008 amendment to the Precision operating agreement

12 The new version, California Corporations Code

§ 17708.01, provides for the same.

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states that: “[n]otwithstanding a conflict of [l]aws, the

operating agreement may be enforced in the Courts of the State

of California and or in the Courts of the State of New York,

including the Federal District Courts of California and/or New

York.” Enforcing the operating agreement in a California or New

York court, however, does not alter the law under which the

agreement arose or by which it is governed. Thus, it appears

that, for the purposes of § 523(a)(4), we look to Nevada law to

determine whether an express or technical trust existed such

that Yuri was a fiduciary to Precision.

a. An express trust did not exist.

Under Nevada law, an express trust requires that:

(1) “[t]he settlor properly manifest[] an intention to create a

trust; and [(2)] [t]here is trust property . . . .” Nev. Rev.

Stat. § 163.003. There are various methods to create a trust,

including a declaration by the owner of property that he or she

holds the property as trustee or a transfer of property by the

owner during his or her lifetime to another person as trustee. 

Id. § 163.002. Nevada also permits the creation of a business

trust. See Nev. Rev. Stat. §§ 88A.010-88A.930 (2003). To

create a business trust, a party must file with the Nevada

secretary of state a certificate of trust. See id. § 88A.210

(2005).

Here, there is no indication that an express trust existed. 

Neither the 2005 operating agreement nor the 2008 amendment

satisfied the requirements for an express trust. Nor is there

anything else in the record that suggests the creation of an

express trust during the time that Yuri was manager of

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Precision. Similarly, nothing in the record before us evidences

the creation of a business trust. Thus, the next issue is

whether a technical trust existed under Nevada law.

b. On this record, we cannot determine whether a

technical trust existed.

Nevada law does not define a technical trust. In the

absence of a definition under state law, we construe a technical

trust as one imposed by law. See In re Mele, 501 B.R. at 365;

see also Teamsters Local 533 v. Schultz (In re Schultz), 46 B.R.

880, 885 (Bankr. D. Nev. 1985) (“[A technical] trust . . . may

arise by operation of a state statute which imposes trust-like

obligations on those entering into certain kinds of

contracts.”).

Our review of the Nevada Revised Statutes (“NRS”) reflects

that a Nevada limited liability company does not necessarily

involve a trust relationship between a manager or member and the

limited liability company. One exception — NRS § 86.391 —

provides that “[a] member holds as trustee for the company

specific property stated in the articles of organization or

operating agreement as contributed by the member, but which was

not so contributed.” Nev. Rev. Stat. § 86.391(2) (emphasis

added). And, NRS § 86.311 establishes that “[r]eal and personal

property owned or purchased by a company must be held and owned,

and conveyance made, in the name of the company.”

Unlike California, Nevada does not have a statute equating

the fiduciary duties of a manager in a limited liability company

context to those of a partner in a partnership. Therefore,

duties under partnership law are irrelevant. Instead, Nevada

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law establishes that, in addition to a limited liability

company’s articles of organization, the operating agreement, if

any,13 is central to defining the contours of the fiduciary

relationship. And, parties to an operating agreement have

significant latitude in expanding or limiting fiduciary duties. 

See Nev. Rev. Stat. § 86.286 (2013).

Here, the 2005 operating agreement does not expressly

establish the existence or the non-existence of fiduciary duties

owed to Precision by its manager. Nor does it provide that Yuri

contributed any property to the company, the only manner in

which Nevada law expressly creates a fiduciary duty to a limited

liability company. See Nev. Rev. Stat. § 86.391(2). The

operating agreement, however, provides that “[n]o real or other

property of the LLC shall be deemed to be owned by any Member

individually, but shall be owned by and title shall be vested

solely in the LLC.” While that provision and NRS § 86.311

created duties owed to Precision, we cannot determine whether

either appropriately relates to a technical trust, rather than

to a constructive or resulting trust. The latter trusts, of

course, are insufficient to support § 523(a)(4)

nondischargeability. See Ragsdale, 780 F.2d at 796.

Other documents and evidence may also exist that fill the

lacuna here; for example, Precision’s articles of organization,

required to create a limited liability company under Nevada law. 

See Nev. Rev. Stat. § 86.151(1)(a) (2003). Such document may or

13 In Nevada, “[a] limited-liability company may, but is

not required to, adopt an operating agreement.” Nev. Rev. Stat.

§ 86.286.

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may not establish that a trust relationship existed between Yuri

and Precision. These determinations, however, must be made by

the bankruptcy court, rather than the Panel, in the first

instance.

On this record, we cannot conclude that, as a matter of

law, a technical trust existed under Nevada law. The bankruptcy

court, thus, abused its discretion in giving preclusive effect

to the State Court Judgment on the issue of whether there

existed a fiduciary relationship in relation to a technical

trust for the purposes of § 523(a)(4) nondischargeability.14

C. Judgment amount excepted from discharge

Finally, the Debtors argue that the bankruptcy court was

required to conduct a separate inquiry into the measure of

damages attributable to the specific tortious conduct at issue

in the state court action. They contend that there were

multiple breaches of fiduciary duty alleged and to the extent

any of the breaches do not constitute a breach under federal

law, any damages flowing from such breach are dischargeable. 

They also contend that only a damages judgment for fraud is

subject to issue preclusion without further analysis by the

bankruptcy court.

Based on our conclusions on both the § 523(a)(6) and (a)(4)

issues, we need not address this argument on appeal.

CONCLUSION

Given the unavailability of issue preclusion, the

bankruptcy court erred in granting summary judgment in favor of

14 Given our conclusion, we do not address the other issues

related to the § 523(a)(4) nondischargeability judgment.

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Precision based on the preclusive effects of the State Court

Judgment. Therefore, we VACATE the summary judgment and REMAND

to the bankruptcy court for further proceedings consistent with

this opinion.

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