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*

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 8013-1.

UNITED STATES BANKRUPTCY APPELLATE PANEL

OF THE NINTH CIRCUIT

In re: ) BAP No. EC-12-1163-MkDJu

 )

JOHN ERNEST BORSOS and ) Bk. No. 10-53374

CLARE HART BORSOS, )

 ) Adv. No. 11-02183

Debtors. )

_______________________________)

 )

JOHN ERNEST BORSOS, )

 )

Appellant, )

 )

v. ) MEMORANDUM*

 )

UNITED HEALTHCARE WORKERS-WEST,)

 )

Appellee. )

_______________________________)

Argued and Submitted on March 22, 2013

at Sacramento, California

Filed – June 10, 2013

Appeal from the United States Bankruptcy Court

for the Eastern District of California

Honorable Christopher M. Klein, Chief Bankruptcy Judge, Presiding 

Appearances: Daniel M. Siegel of Siegel & Yee argued for

appellant John E. Borsos; Jeffrey B. Demain of

Altshuler Berzon LLP argued for appellee United

Healthcare Workers-West. 

Before: MARKELL, DUNN and JURY, Bankruptcy Judges.

FILED

JUN 10 2013

SUSAN M SPRAUL, CLERK

U.S. BKCY. APP. PANEL

OF THE NINTH CIRCUIT
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1

Unless specified otherwise, all chapter and section

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

All “Civil Rule” references are to the Federal Rules of Civil

Procedure.

2

INTRODUCTION

Before his removal from office on January 27, 2009, John

Borsos (“Borsos”) was an elected officer and employee of United

Healthcare Workers West (“UHW”). A jury verdict rendered in

federal district court found Borsos and others liable for

diverting UHW resources for non-UHW purposes, and on April 12,

2010, the district court entered judgment against Borsos in the

amount of $66,600. Later that same year, in December 2010,

Borsos filed a chapter 71 bankruptcy case. UHW then filed a

nondischargeability complaint against Borsos under § 523(a)(4). 

Based primarily on the district court jury’s findings, the

bankruptcy court held after trial that the district court

judgment debt arose from a fiduciary defalcation excepted from

discharge under § 523(a)(4). Borsos appealed. 

During the pendency of this appeal, the United States

Supreme Court (“Supreme Court”) decided Bullock v. BankChampaign,

N.A., 133 S.Ct. 1754 (2013). In Bullock, the Supreme Court

interpreted § 523(a)(4) defalcation as requiring a specific

subjective state of mind. Bullock’s scienter requirement

effectively abrogated Ninth Circuit law, which formerly did not

require any particular state of mind to except a debt from 

discharge based on a § 523(a)(4) fiduciary defalcation.

Following now-abrogated Ninth Circuit law, the bankruptcy

court did not make any findings regarding Borsos’ state of mind. 
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2There is little dispute over the basic facts relevant to

this appeal. As the bankruptcy court indicated, the real dispute

is over what those facts demonstrate in terms of the

dischargeability of UHW’s judgment against Borsos.

3Some of the facts set forth herein are drawn from Serv.

Employees Int’l Union v. Nat. Union of Healthcare Workers,

598 F.3d 1061 (9th Cir. 2010) (“SEIU v. NUHW”). Others are drawn

from the District Court’s preliminary injunction order, which was

the order on appeal in SEIU v. NUHW.

4

The stated purpose of the transfer was to consolidate all

California long-term healthcare workers who were members of

various local SEIU affiliates into a single local affiliate

dedicated exclusively to long-term healthcare workers. 

3

Consequently, we must VACATE AND REMAND so the bankruptcy court

can make further findings.

FACTS2

This appeal is one skirmish in a larger battle between the

Service Employees International Union (“SEIU”) and the former

management of UHW. SEIU is a large international labor union,

and UHW has been a local SEIU affiliate since the 1930's.3

Over the last several years, SEIU and former UHW management

(“Former UHW Management”) have increasingly disagreed on various

policy and organizational matters. These disagreements

ultimately came to a head in January 2009, when Former UHW

Management refused to cooperate with the SEIU-ordered transfer of

65,000 UHW members to a different local SEIU affiliate.4

That refusal to cooperate was the impetus for SEIU’s 

appointment of a trusteeship on January 27, 2009, to take over

the management of all of UHW’s affairs. The transition of

control to the trusteeship did not occur in a peaceful or orderly

manner. As Former UHW Management left their offices upon being
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4

relieved of their duties, UHW stewards and rank-and-file UHW

members barricaded themselves in the union offices to protest and

resist the trusteeship. As a net result of this transition, key

union records and other union assets were misplaced, removed

and/or destroyed.

The day after the appointment of the trusteeship, Former UHW

Management took the next step in their campaign to resist SEIU’s

initiatives, and SEIU took the next step in its campaign to quell

that resistance. Former UHW Management formally resigned their

membership in UHW and announced the formation of a rival union

known as the National Union of Healthcare Workers (“NUHW”). 

Meanwhile, SEIU filed a complaint (“District Court Complaint”)

against Former UHW Management and NUHW in the United States

District Court for the Northern District of California (Case

No. C-09-00404). That complaint stated claims for the following

relief: (1) injunctive relief, (2) breach of fiduciary duty under

the Employee Retirement Income Security Act (“ERISA”), (3) breach

of fiduciary duty under the Labor-Management Reporting and

Disclosure Act of 1959 ("LMRDA"), (4) breach of contract,

(5) breach of fiduciary duty under California law, (6) specific

recovery of certain materials (including records, data, notes,

blueprints, etc.) allegedly wrongfully taken from UHW, and

(7) misappropriation of trade secrets under California law.

While the District Court Complaint covered much ground, by

the time the trial was completed and the matter submitted to the

jury for decision, the focus of the litigation had been

significantly refined. In relevant part, the final charge to the

jury (“Jury Instructions”) instructed the jury to determine the
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liability of the individual defendants, all Former UHW

Management, for “diversion of resources” and “salary and

benefits” during January 2009, up until the time they were

removed from or resigned their positions as UHW officials.

The Jury Instructions directed the jury to impose

diversion of resources liability to the extent each defendant

used UHW-resources for non-UHW purposes, measured by the value of

the resources diverted. See Jury Instructions (April 6, 2010) at

10:2-7.

In addition, the Jury Instructions directed the jury to

impose salary and benefits liability to the extent each defendant

was in breach of his or her fiduciary duties during January 2009. 

In imposing salary and benefits liability, the Jury Instructions

in essence called upon the jury to ascertain what proportion of

each defendant’s January 2009 work time was diverted to non-UHW

purposes and to assess damages equal to the value of the diverted

work time, using each defendant’s January 2009 salary and

benefits as a measure. See Jury Instructions (April 6, 2010) at

9:18-27; see also id. at 6:18-7:27 (identifying the fiduciary

duties the defendants owed to UHW).

Based on the Jury Instructions, the jury rendered a verdict

finding many of the individual defendants, including Borsos,

liable for diversion of resources and for salary and benefits. 

However, the jury’s verdict and the Jury Instructions indicate

that the jury was not required to consider, and did not consider,

the mental state of any of the defendants in diverting UHW

resources and work time to non-UHW purposes. 

The jury found Borsos individually liable in the amount of
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The district court’s judgment was entered pursuant to Civil

Rule 54(b). The ERISA claim for relief was not tried at the same

time as all of the other claims for relief, and the district

court stated in its Civil Rule 54(b) judgment that the ERISA

claim would be resolved sometime later. 

6

$60,000 for diversion of resources liability and in the amount of

$6,600 for salary and benefits liability, for a total liability

in the amount of $66,600. On April 12, 2010, the district court

entered judgment against Borsos in that amount based on the

jury’s verdict.5

Borsos thereafter filed his chapter 7 bankruptcy on

December 22, 2010. In his Schedule D of secured creditors,

Borsos listed SEIU and UHW jointly as creditors holding a secured

claim against his residence based on an abstract of judgment they

recorded in October 2010. 

On March 15, 2011, UHW filed a nondischargeability complaint

against Borsos, alleging that the district court judgment against

Borsos constituted “‘a debt . . . for . . . defalcation while

acting in a fiduciary capacity’ within the meaning of 11 U.S.C.

§ 523(a)(4). . . .” Complaint (Mar. 15, 2011) at ¶ 14.

Both sides filed cross-motions for summary judgment, which

the bankruptcy court denied. Instead, the bankruptcy court held

a one-day trial on February 13, 2012. By stipulation of the

parties, trial was limited to the presentation of materials from

the record in the district court litigation. On March 15, 2012,

the bankruptcy court orally recited its findings of fact and

conclusions of law into the record.

Among its key findings, the bankruptcy court stated the

district court jury had found that Borsos had used UHW resources
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6The full text of 29 U.S.C. § 501(a) provides:

(a) Duties of officers; exculpatory provisions and

resolutions void

The officers, agents, shop stewards, and other

representatives of a labor organization occupy

positions of trust in relation to such organization and

its members as a group. It is, therefore, the duty of

each such person, taking into account the special

problems and functions of a labor organization, to hold

its money and property solely for the benefit of the

organization and its members and to manage, invest, and

expend the same in accordance with its constitution and

bylaws and any resolutions of the governing bodies

adopted thereunder, to refrain from dealing with such

organization as an adverse party or in behalf of an

adverse party in any matter connected with his duties

and from holding or acquiring any pecuniary or personal

interest which conflicts with the interests of such

organization, and to account to the organization for

any profit received by him in whatever capacity in

connection with transactions conducted by him or under

(continued...)

7

and funds “in ways that were not appropriate” in the process of

resisting SEIU’s appointment of a trusteeship over UHW’s affairs. 

The bankruptcy court also stated the district court jury found

Borsos liable in the amount of $60,000 for diversion of resources

and $6,600 for salary and benefits.

The bankruptcy court held that a trust existed for purposes 

of § 523(a)(4) and that Borsos was fiduciary of that trust. The

court ruled: (1) that under LMRDA, codified at 29 U.S.C. § 501,

UHW’s “money and property” were property of a technical trust

created by statute without reference to and before the occurrence

of any particular wrongdoing; (2) that Borsos and the other

individual defendants in the district court action were trustees

of that trust; and (3) that 29 U.S.C. § 501(a)6 imposed on Borsos
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(...continued)

his direction on behalf of the organization. A general

exculpatory provision in the constitution and bylaws of

such a labor organization or a general exculpatory

resolution of a governing body purporting to relieve

any such person of liability for breach of the duties

declared by this section shall be void as against

public policy.

8

and the other individual defendants certain fiduciary duties with

respect to that trust, including in relevant part the following

duties:

[T]o hold its money and property solely for the benefit

of the organization and its members; and to manage,

invest and expend the same in accordance with its

constitution and bylaws . . . and any resolution of the

governing bodies adopted [thereunder] . . . .

Trial Tr. (Mar. 15, 2012) at 9:19-23.

The bankruptcy court also determined that, under the

doctrine of issue preclusion, it would not revisit the district

court jury’s findings. The court indicated that it was relying

upon the jury verdict and Jury Instructions in concluding that

the district court judgment should be excepted from discharge

under § 523(a)(4).

Finally, the bankruptcy court ruled that the conduct for

which the jury found Borsos liable constituted defalcation for

purposes of the nondischargeability statute. However, in making

its defalcation ruling, the court did not make any findings as to

Borsos’ state of mind when he diverted his work time and other

UHW resources to non-UHW purposes.

On March 16, 2012, the bankruptcy court entered its

nondischargeability judgment, and Borsos filed his notice of

appeal from that judgment on March 21, 2012.
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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 ruling that the district

court jury’s liability findings established a debt based on

defalcation for purposes of § 523(a)(4)?

STANDARDS OF REVIEW

On appeal from a nondischargeability judgment, we review the

bankruptcy court's findings of fact under the clearly erroneous

standard and its conclusions of law de novo. See Honkanen v.

Hopper (In re Honkanen), 446 B.R. 373, 382 (9th Cir. BAP 2011). 

However, the ultimate question of whether a particular debt is

dischargeable is a mixed question of fact and law that we review

de novo. Id.; see also Searles v. Riley (In re Searles),

317 B.R. 368, 373 (9th Cir. BAP 2004) (stating that mixed

questions are reviewed de novo when they require the court “to

consider legal concepts and exercise judgment about values

animating legal principles.”).

DISCUSSION

Borsos assigns error to two distinct aspects of the

bankruptcy court’s nondischargeability determination. Most

relevant for our purposes, Borsos contends on appeal that the

conduct for which the jury found him liable did not qualify as

defalcation under § 523(a)(4), so the bankruptcy court should not

have found § 523(a)(4)’s defalcation requirement satisfied. 

Borsos also contends on appeal that 29 U.S.C. § 501 did not
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7In light of our holding on the defalcation issue, we need

not and will not address the fiduciary capacity issue. 

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impose upon him the type of fiduciary capacity covered by

§ 523(a)(4).7

In Borsos’ view, the district court jury’s liability

findings simply don’t add up to defalcation under § 523(a)(4). 

In order to address Borsos’ defalcation argument, we must

consider what constitutes defalcation under § 523(a)(4). In

terms of conduct, defalcation can occur for purposes of

§ 523(a)(4) if the fiduciary either misappropriated trust assets

or failed to account for them. See Blyler v. Hemmeter

(In re Hemmeter), 242 F.3d 1186, 1190 (9th Cir. 2001) (citing

Lewis v. Scott (In re Lewis), 97 F.3d 1182, 1186 (9th Cir.

1996)). In turn, a fiduciary misappropriates trust assets if he

uses them for an improper purpose in light of the trust’s terms. 

See Lovell v. Stanifer (In re Stanifer), 236 B.R. 709, 719 (9th

Cir. BAP 1999); see also OXFORD ENGLISH DICTIONARY (defining a

misappropriation in relevant part as an "[a]ppropriation of

(something) for a wrong use . . . .”). 

As set forth in the facts section, supra, all of the

district court jury’s liability findings against Borsos were

based on Borsos’ diversion of his work time and other UHW

resources for non-UHW purposes. This conduct squarely falls

within the definition of misappropriation, which in turn

satisfies the conduct component of § 523(a)(4)’s defalcation

requirement.

But our examination of Borsos’ defalcation argument does not
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end there because the Supreme Court recently held that

§ 523(a)(4)’s defalcation requirement consists not only of a

conduct component but also of a scienter component. See Bullock,

133 S.Ct. at 1759-60. As the Court stated its holding:

[W]here the conduct at issue does not involve bad

faith, moral turpitude, or other immoral conduct, the

term requires an intentional wrong. We include as

intentional not only conduct that the fiduciary knows

is improper but also reckless conduct of the kind that

the criminal law often treats as the equivalent. Thus,

we include reckless conduct of the kind set forth in

the Model Penal Code. Where 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 American Law Institute, Model Penal Code

§ 2.02(2)(c), p. 226 (1985)).

As a result, in order to qualify as a § 523(a)(4)

defalcation, debtors must have acted either with knowledge that

their conduct would constitute a breach of their fiduciary duty,

or with conscious disregard or willful blindness to “a

substantial and unjustifiable risk” that their conduct would

constitute a breach of their fiduciary duty. Id. at 1759. 

Prior to Bullock, the rule in the Ninth Circuit was that no

particular state of mind was required to satisfy § 523(a)(4)’s

defalcation requirement. See Sherman v. Sec. and Exch. Comm'n

(In re Sherman), 658 F.3d 1009, 1017-18 (9th Cir. 2011). Indeed,

even an innocent failure to account for trust property could

constitute a defalcation. See id. (citing In re Hemmeter,

242 F.3d at 1190–91). Bullock, however, has overruled

In re Sherman and In re Hemmeter to the extent those two

decisions did not recognize that § 523(a)(4)’s defalcation
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The bankruptcy court’s omission makes perfect sense. At

the time of its ruling, Bullock was not yet before the Supreme

Court, and In re Sherman and In re Hemmeter did not require the

bankruptcy court to make any findings regarding Borsos’ mental

state.

12

requirement included a scienter component. As such, we are not

required to follow them. See Deitz v. Ford (In re Deitz),

469 B.R. 11, 23 (9th Cir. BAP 2012) (Ninth Circuit case not

binding precedent when it has been effectively superseded by an

intervening Supreme Court decision containing reasoning "clearly

irreconcilable" with prior Ninth Circuit decision). 

In excepting from discharge the district court judgment

debt, the bankruptcy court explicitly ruled that Borsos’ conduct

constituted defalcation under § 523(a)(4). But in making that

ruling, the bankruptcy court did not make any findings regarding

Borsos’ mental state.8 Civil Rule 52(a) applies in adversary

proceedings and requires bankruptcy courts to make factual

findings in support of their decisions. When the bankruptcy

court does not provide complete findings, we may vacate and

remand for further findings. See First Yorkshire Holdings, Inc. 

v. Pacifica L 22, LLC. (In re First Yorkshire Holdings, Inc.),

470 B.R. 864, 871 (9th Cir. BAP 2012). 

Notwithstanding the above, we are not obligated to vacate

and remand for further findings if the record otherwise provides

us with a complete understanding of the issues appealed. See id.

(citing Simeonoff v. Hiner, 249 F.3d 883, 891 (9th Cir. 2001)). 

We also need not remand if we reasonably can infer from the

court’s findings other facts that would suffice to support the

court’s decision. See Brock v. Big Bear Market No. 3, 825 F.2d
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1381, 1384 (9th Cir. 1987). Nonetheless, we must vacate and

remand here because we cannot ascertain with any certainty

Borsos’ mental state either from the bankruptcy court record or

from the bankruptcy court’s findings.

Put another way, when the bankruptcy court does not apply

the correct legal standard, remand still may be unnecessary if

the record is complete and the outcome of the case is beyond

doubt upon our application of the correct legal standard. See

Hopkins v. Asset Acceptance LLC (In re Salgado–Nava), 473 B.R.

911, 922 (9th Cir. BAP 2012) (citing Wharf v. Burlington N.R.R.

Co., 60 F.3d 631, 637 (9th Cir. 1995)). Here, however, the

outcome regarding Borsos’ state of mind is not beyond doubt. 

There are facts in the record from which the bankruptcy court

arguably could have inferred that Borsos diverted UHW’s resources

without the culpable state of mind Bullock requires.

For instance, Borsos claimed at trial and on appeal that,

when Former UHW Management were still in charge of UHW, they

passed a resolution authorizing Borsos to take the actions that

the district court jury later found him liable for. Therefore,

Borsos reasoned, he did not commit § 523(a)(4) defalcation. 

While we agree with the bankruptcy court’s conclusion that Borsos

cannot use his authorization argument to collaterally attack the

jury’s finding that Borsos diverted UHW resources, the jury made

no findings regarding Borsos’ mental state. Thus, the bankruptcy

court arguably could have inferred that, to the extent Borsos

believed he had been duly authorized by Former UHW Management, he

did not divert UHW resources either knowing that he was breaching

his fiduciary duty or in reckless disregard of that duty. On the
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other hand, the bankruptcy court also might have reasonably

inferred the opposite result from the same facts: that Borsos did

not really believe that he was duly authorized to use UHW

resources for the purposes of undermining SEIU’s initiatives and

starting up a rival union.

In the final analysis, what the bankruptcy court ultimately

finds on remand regarding Borsos’ mental state likely will hinge

in part on the bankruptcy court’s assessment of Borsos’

credibility. See generally Hernandez v. New York, 500 U.S. 352,

364 (1991) (noting that findings regarding a person’s state of

mind largely turn on the court’s assessment of credibility);

Batson v. Kentucky, 476 U.S. 79, 98 & n. 21 (1986) (same). 

Accordingly, the bankruptcy court may find it appropriate on

remand to reopen the record to permit the presentation of

additional evidence, including but not necessarily limited to the

presentation of testimony from Borsos.

CONCLUSION

For the reasons set forth above, we VACATE the bankruptcy

court’s judgment, and we REMAND so the bankruptcy court can make

further findings.