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FILED

AUG 19 2014

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NOT FOR PUBLICATION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. AZ-13-1461-KiTaPa

)

ROSIRA A. CORREIA-SASSER, ) Bk. No. 2:10-17877-RJH

)

Debtor. ) Adv. No. 2:10-1632-RJH

 )

)

ROSIRA a. CORREIA-SASSER, )

)

Appellant, ) 

)

v. ) M E M O R A N D U M1

)

JOHN ROGONE and JASON ROGONE, )

individuals and successor )

co-trustees of the ALFREDO )

CORREIA AND MARY F. CORREIA )

TRUST, )

)

Appellees. )

______________________________)

Submitted Without Oral Argument

on July 25, 20142

Filed - August 19, 2014

Appeal from the United States Bankruptcy Court

for the District of Arizona

Honorable Randolph J. Haines, Bankruptcy Judge, Presiding

 

Appearances: Appellant Rosira Correia-Sasser pro se on brief;

G. Lee Henman, Jr., of Henman Law Firm, P.C. on

brief for appellees, John Rogone and Jason Rogone. 

 

1 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.

2 In an order entered on April 4, 2014, the Panel determined

this matter was suitable for disposition without oral argument. 

Fed. R. Bankr. P. 8012; 9th Cir. BAP R. 8012-1.
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Before: KIRSCHER, TAYLOR and PAPPAS, Bankruptcy Judges.

Appellant, chapter 73 debtor Rosira Correia-Sasser

("Debtor"), appeals a judgment determining that a debt arising

from a California judgment was excepted from discharge under 

§ 523(a)(4) and that a debt arising from an Arizona judgment was

excepted from discharge under § 523(a)(4) and (a)(6). We AFFIRM.

I. FACTUAL BACKGROUND AND PROCEDURAL HISTORY

A. Events leading up to the California litigation 

Alfredo Correia, Debtor's father, died in 1989 and left

certain assets in a trust dated October 26, 1989 (the "Trust").

Debtor's sons, Jason Rogone, John Rogone (now Bing Bada Bing) and

James Shaw, are the Trust beneficiaries. At all relevant times,

Debtor was the trustee of the Trust. By its terms, the Trust was

to end in 2005, when James Shaw reached twenty-five years of age.

The Trust provided that upon Mr. Correia’s death, Debtor

would receive title to two parcels of real property located in the

Point Loma area of San Diego (together, the "Lots"). Lot 12,

which contained a home, was left to Debtor "free of trust." 

Lot 11, which was adjacent to Lot 12, was vacant. Lot 11 was left

to Debtor "as trustee for the benefit of John Rogone, Jason Rogone

and James Shaw."

In 1991, Debtor, individually and as trustee of the Trust,

contributed the Lots to a limited partnership known as Point Loma

Properties LLP (the "Developer") for a value of $620,000 for the

3 Unless specified otherwise, all chapter, code and rule

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

the Federal Rules of Bankruptcy Procedure, Rules 1001-9037. The

Federal Rules of Civil Procedure are referred to as “Civil Rules.”

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purpose of building a condominium project.4 Debtor, individually

and as trustee of the Trust, became a limited partner in the

limited partnership owning the condominium project. She and the

Trust were each given an equal interest in the partnership valued

at $310,000, for a total of $620,000. She and the Trust received

a cash liquidating distribution on the formation of the limited

partnership in the amount of $420,000, less a six percent broker

commission on the value of the property contributed to the

partnership, i.e., six percent of $620,000. The net cash

liquidating distribution on formation, thus, amounted to

$383,513.95 [$420,000 less six percent of $620,000]. The $200,000

remaining from initial capital contribution was to be paid either

as a liquidating distribution or as liquidation proceeds as

specified in the limited partnership agreement. As security for

her investment, Debtor obtained deeds of trust on the homes of

other partners of the Developers; the California state court found

such deeds of trust "illusory." 

Debtor did not distribute any portion of the cash liquidating

distribution on formation to the Trust, but kept all $383,513.95

for herself, effectively shifting the entire risk of the

investment to the Trust and its beneficiaries. Although under the

limited partnership agreement the Lots were each assigned a value

of $310,000 (or a 50/50 split), Debtor testified that she

allocated the cash liquidating distribution on formation to

4 Initially, Debtor’s transaction with the Developers

involved a sale of the two lots, but the transaction evolved into

a partnership wherein one group of partners contributed cash and

Debtor, on behalf of herself and the Trust, contributed the two

lots.

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herself because she had been advised by her father and her real

estate agent that Lot 11 (the Trust's lot) was worth only one

quarter of the value of Lot 12 (her lot). Debtor further

testified that at the time she entered into the transaction with

the limited partnership, she thought it was "very fair" that she

receive two-thirds of the $620,000 (the nearly $400,000 in cash)

and the Trust beneficiaries receive one-third (the $200,000

investment risk).

When the Developer failed to develop the Lots and distribute

the $200,000 plus interest, Debtor sued the Developer. In her

individual capacity, she settled that suit for $60,000. Debtor 

kept all of the settlement proceeds until John and Jason brought

suit against her, after which she distributed $10,000 to each of

her sons, but kept $30,000 for herself. Ultimately, Debtor was

ordered by the California state court to pay the remaining $30,000

in settlement proceeds to the Trust.

B. The California litigation and judgment 

In 2004, John and Jason filed suit against Debtor in

California state court for breach of fiduciary duty and other

claims. In 2006, the California state court found that while

acting in her capacity as trustee, Debtor committed multiple

breaches of her fiduciary duty by: (1) investing her children's

money in a highly speculative and risky investment; (2) taking the

entire cash distribution and placing the investment risk solely on

the Trust; (3) failing to provide annual accountings; (4) failing

to give the Trust beneficiaries access to Trust records; and

(5) failing to distribute the remaining Trust property upon its 

termination in 2005. Debtor was removed as trustee. 

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While the California state court found that Debtor's

"inexperience, misunderstanding and misguided realtor reliance

[were] not defenses to her breach of fiduciary duty," it also

determined that allocating the entire risk of the investment to

the Trust while taking the cash for herself was "a pure conflict"

and that the transaction she entered into "was not a prudent

investment." It also found in support of mitigating damages under

CAL. PROBATE CODE § 16440(b)5 that Debtor had acted "reasonably, and

in good faith under the circumstances known to [her]" and that her

actions "were not intentional or an attempt to take her children's

inheritance." The California state court finally found that

Debtor was clearly taken advantage of by other partners of the

Developers, their attorneys and her realtor. Punitive damages

were denied. 

An amended judgment for $383,244.646 plus $4,647.60 for costs

was entered in March 2007 ("California Judgment"). Debtor did not

appeal. John and Jason registered the California Judgment in

Arizona in August 2007 and recorded the California Judgment in the

Maricopa County Recorder’s Office in Arizona in October 2007. 

C. The Arizona litigation 

While the California litigation was pending, Debtor and her

5 CAL. PROBATE CODE § 16440(b) provides:

If the trustee has acted reasonably and in good faith under

the circumstances as known to the trustee, the court, in its

discretion, may excuse the trustee in whole or in part from

liability under subdivision (a) if it would be equitable to

do so.

6 The original $414,003 judgment was reduced due to the

partial satisfaction of $30,758.36 from the Developer suit

settlement proceeds.

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current husband were busy working with legal counsel to transfer

Debtor's assets to protect her from any potential adverse

judgment. In October 2007, John and Jason sued Debtor, her

husband and others in Arizona state court alleging that various

asset transfers violated Arizona's Uniform Fraudulent Transfer

Act. The complaint asserted that during the pendency of the

California litigation, Debtor recognized she was not likely to

prevail and, before the conclusion of that case, she and her

husband transferred virtually all of Debtor's assets in an attempt

to hide them from her sons. Specifically, John and Jason claimed

that Debtor made the transfers with the intent to hinder, delay or

defraud them in the collection of the California Judgment. 

An advisory jury found for John and Jason in July 2009. 

Prior to the entry of any judgment, the Arizona state court issued

a Minute Entry Ruling on October 8, 2009 (the "2009 Minute Entry")

in relation to John and Jason's post-trial motion for attorney's

fees. The Arizona state court found that Debtor was liable for

John and Jason's fees under ARS §§ 12-349 and 12-350.7 A judgment

was eventually entered in November 2009 and amended in December

2009, nunc pro tunc. The Arizona state court determined that

Debtor and her husband transferred assets with the intent to

hinder, delay or defraud Debtor's sons in the collection of the

7 ARS § 12-349 permits the court to assess attorney's fees

against a party who brings or defends a claim without substantial

justification – in other words – frivolous claims or defenses. A

claim is "without substantial justification" if it constitutes

harassment, is groundless and is not made in good faith. ARS

§ 12-350 provides that the court must set forth specific reasons

for an award under ARS § 12-349 and lists the factors the court

may consider to make that determination.

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California Judgment.8 It further found that Debtor and her

husband were aware of the substantial likelihood that Debtor would

not be successful in the California litigation and had the intent

to hide her assets from her sons by transferring them. Debtor and

her husband were found to have defended the case in bad faith.

Accordingly, Debtor's sons were awarded $121,950 in attorney's

fees and $3,137.21 in costs. The Arizona state court also ordered

that certain properties be sold and the net proceeds applied to

satisfy the California Judgment. 

As explained below, post-judgment motions were considered,

matters were appealed, and the Arizona judgment was ultimately

amended two more times. 

D. The nondischargeability action

Debtor filed a chapter 7 bankruptcy case on June 8, 2010.

John and Jason filed a complaint seeking to except the California

Judgment from discharge under § 523(a)(4) and to except the first

amended Arizona judgment from discharge under § 523(a)(6). 

1. The Arizona litigation continues 

In the meantime, the Arizona litigation continued. After

considering various motions to alter or amend judgment or for a

new trial, the Arizona state court entered another amended

judgment on November 19, 2010, nunc pro tunc to the original

November 2009 judgment (the "Second Amended Arizona Judgment"). 

Among other things, Debtor had sought relief from the attorney's

8 The Arizona state court found that Debtor's counsel were

never informed by Debtor of, or had any knowledge of, her intent

to hinder, delay or defraud her sons in the collection on their

judgment or that counsel defended the case with the primary or

sole purpose to hinder, delay or defraud the sons.

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fee award, contending that the Arizona state court failed to make

the requisite findings to support it. The Arizona state court

disagreed, referring to the 2009 Minute Entry wherein it made the

required findings. Debtor's motion for a new trial on the

attorney's fees was denied. 

Notably, after Debtor sought relief from the attorney's fee

award, the Arizona state court entered a "Ruling" on February 24,

2010, which appears to be the Memorandum in support of the Second

Amended Arizona Judgment and a supplement to the 2009 Minute Entry

(the "2010 Minute Entry"). The 2010 Minute Entry was drafted by

the court, as opposed to the Second Amended Arizona Judgment,

which was drafted by John and Jason's counsel. These facts become

important later. The 2010 Minute Entry set forth the same

findings made in the Second Amended Arizona Judgment as to the

attorney's fee award under ARS § 12-349 and the court's denial to

reconsider that issue. It also noted that Debtor had admitted at

trial "that she transferred Arizona property during the pendency

of the California litigation to insulate herself and her assets

from suit," which the Arizona state court found to be an admission

under the UFTA. 

In January 2011, Debtor cross-appealed from portions of the

Second Amended Arizona Judgment, including the determination that

she had defended the case in bad faith, that resulted in the

monetary sanction of attorney's fees. 

2. Motion for summary judgment and ruling 

In March 2011, John and Jason moved for summary judgment on

their nondischargeability complaint ("MSJ"). In short, they

argued that issue preclusion applied to both the California

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Judgment and the Second Amended Arizona Judgment.

The bankruptcy court granted the MSJ. Applying the Ninth

Circuit's pre-Bullock9 standard, the court reasoned that Debtor's

breach of fiduciary duty, even if innocent, satisfied the

requirement for a defalcation under § 523(a)(4) and therefore the

California Judgment was nondischargeable. As for the Second

Amended Arizona Judgment, the bankruptcy court determined that

Debtor's actions established a willful and malicious injury under

§ 523(a)(6). The Arizona state court found she acted wrongfully

when she voluntarily and intentionally transferred her property

and property interests, the transfers were made with the actual

intent to hinder, delay or defraud her sons, and her actions

injured her sons in their attempt to collect on the California

Judgment. Therefore, the Second Amended Arizona Judgment was a

debt incurred due to Debtor's willful and malicious injury and was

nondischargeable under § 523(a)(6).

3. Debtor's motion to stay entry of judgment 

In November 2011, Debtor moved to stay entry of the

nondischargeability judgment pending a ruling by the Arizona state

court. Apparently, the language in the Second Amended Arizona

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

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. & Exch. Comm'n.

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

innocent failure to account for trust property could constitute a

defalcation. See id. (citing Blyler v. Hemmeter (In re Hemmeter),

242 F.3d 1186, 1190-91 (9th Cir. 2001)). Bullock, however,

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

decisions did not recognize that for purposes of § 523(a)(4), a

"defalcation" includes a scienter or "state of mind" component. 

See Pemstein v. Pemstein (In re Pemstein), 492 B.R. 274, 278 (9th

Cir. BAP 2013)(recognizing Bullock and the abrogation of the Ninth

Circuit's previous intent standard).

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Judgment, which the bankruptcy court had relied upon for its

ruling, was being reviewed by the Arizona state court for possible

"fraud upon the court" committed by John and Jason's counsel who

drafted it. The Arizona Court of Appeals had suspended the appeal

of the Second Amended Arizona Judgment and revested jurisdiction

in the trial court for the purpose of permitting Debtor to file a

motion to set the judgment aside. Debtor filed that motion, which

was pending. 

No order was entered on the motion to stay entry of the

nondischargeability judgment, but the bankruptcy court informally

agreed to not enter it pending the outcome of the Arizona

litigation. 

4. The third amended Arizona judgment 

About eighteen months later, the Arizona state court issued a

third amended judgment (the "Third Amended Arizona Judgment") on

May 1, 2013, nunc pro tunc to the original November 2009 judgment. 

It replaced and superceded the Second Amended Arizona Judgment

because that judgment "contained multiple, material and

surreptitiously added provisions not authorized by any prior court

ruling[.]" The Third Amended Arizona Judgment, however, and

contrary to statements made by Debtor's counsel at the later trial

before the bankruptcy court, expressly incorporated the findings

set forth in the 2010 Minute Entry, which incorporated similar

findings made in the 2009 Minute Entry. The Arizona state court

maintained its ruling that Debtor had defended the fraudulent

transfer claims in bad faith and, therefore, she was still liable

for the attorney's fee award for the reasons stated in the 2010

Minute Entry. 

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5. The motion to amend the MSJ ruling

In light of the Third Amended Arizona Judgment and the

issuance of Bullock, Debtor moved to amend the bankruptcy court's

ruling on the MSJ under Civil Rule 59(a). Debtor contended that

the findings in the Third Amended Arizona Judgment failed to

support a § 523(a)(6) claim for two reasons. First, the judgment

contained no findings that the fraudulent transfers were done with

the actual intent to hinder, delay or defraud Debtor's sons, only

that they were "fraudulent and of no force and effect." Second,

the only monetary relief granted to Debtor's sons was the

attorney's fees. She noted that the judgment stated only that

Debtor had defended the matter in "bad faith," and that finding,

standing alone, was insufficient to establish a willful and

malicious injury under § 523(a)(6). 

Debtor also argued that the California Judgment did not

support a defalcation under § 523(a)(4). She asserted that the

California state court's findings that Debtor's breach was not

intentional or an attempt to take her children's inheritance, and

that she had acted reasonably and in good faith under the

circumstances, were insufficient to meet the heightened intent

standard under Bullock. John and Jason opposed Debtor's motion.

The bankruptcy court granted Debtor's motion to amend and

ordered a limited trial on the application of Bullock to her

intent. Although not expressly stated in its minute entry, Debtor

would also be allowed to present evidence as to her intent when

she made the property transfers during the California litigation. 

However, the bankruptcy court's decision to allow that evidence

was "without prejudice" and subject to the court later concluding

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after trial that issue preclusion did in fact apply to the Arizona

state court's findings on the matter. 

6. The trial and bankruptcy court's ruling

The bankruptcy court held a trial on the issues of Debtor's

intent as a fiduciary under Bullock and her intent with respect to

the fraudulent transfers made during the California litigation. 

Debtor and Jason testified. After summation by the parties, the

bankruptcy court announced its findings and conclusions on the

record, ruling that the California Judgment was excepted from

discharge under § 523(a)(4) and that the Third Amended Arizona

Judgment for John and Jason's attorney's fees was excepted from

discharge under § 523(a)(4) and (a)(6). A judgment consistent

with the court's oral ruling was entered on September 11, 2013. 

This timely appeal followed. 

II. JURISDICTION

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

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

III. ISSUES

1. Did the bankruptcy court err in determining the California 

Judgment was excepted from discharge under § 523(a)(4)?

2. Did the bankruptcy court err in determining the Third Amended 

Arizona Judgment was excepted from discharge under § 523(a)(4) and

(a)(6)?

IV. STANDARDS OF REVIEW

In reviewing a bankruptcy court's nondischargeability

determination, we review its findings of fact for clear error and

its conclusions of law de novo. Oney v. Weinberg

(In re Weinberg), 410 B.R. 19, 28 (9th Cir. BAP 2009). However,

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the ultimate question of whether a particular debt is

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

de novo. See Honkanen v. Hopper (In re Honkanen), 446 B.R. 373,

382 (9th Cir. BAP 2011). The availability of issue preclusion is

a question of law we review de novo. Wolfe v. Jacobson

(In re Jacobson), 676 F.3d 1193, 1198 (9th Cir. 2012). If issue

preclusion is available, the decision to apply it is reviewed for

abuse of discretion. Lopez v. Emergency Serv. Restoration, Inc.

(In re Lopez), 367 B.R. 99, 103 (9th Cir. BAP 2007). A bankruptcy

court abuses its discretion if it applies an incorrect legal

standard or its factual findings are illogical, implausible or

without support from evidence in the record. TrafficSchool.com v.

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

V. DISCUSSION

A. The bankruptcy court did not err when it determined that the

California Judgment was excepted from discharge under

§ 523(a)(4).

A debt is excepted from discharge under § 523(a)(4) where

"1) an express trust existed, 2) the debt was caused by fraud or

defalcation, and 3) the debtor acted as a fiduciary to the

creditor at the time the debt was created." Mele v. Mele

(In re Mele), 501 B.R. 357, 363 (9th Cir. BAP 2013)(quoting Otto

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

party must prove these elements by a preponderance of the

evidence. Lovell v. Stanifer (In re Stanifer), 236 B.R. 709, 713

(9th Cir. BAP 1999).

In California, "[t]he five elements required to create an

express trust are (1) a competent trustor, (2) trust intent,

(3) trust property, (4) trust purpose, and (5) a beneficiary." 

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Keitel v. Heubel, 103 Cal.App.4th 324, 337 (2002). Although a

copy of the Trust was not offered in the record, no one disputes

its existence. Debtor also admitted that she was the trustee of

the Trust, which no one disputes is a "fiduciary" within the

meaning of § 523(a)(4), at the time the California debt was

created. Therefore, the only issue the bankruptcy court had to

resolve is whether the California Judgment was caused by a

defalcation.

A defalcation has two elements: a breach of fiduciary duty

and wrongful intent. A breach of fiduciary duty is satisfied

either by misappropriating trust assets or by failing to account

for such assets. In re Hemmeter, 242 F.3d at 1190 (citing Lewis

v. Scott (In re Lewis), 97 F.3d 1182, 1186 (9th Cir. 1996)). A

"defalcation" can occur for purposes of § 523(a)(4) if the

fiduciary either misappropriated trust assets or failed to account

for them. See id.

"Wrongful intent" requires a culpable state of mind

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

improper nature of the relevant fiduciary behavior." Bullock,

133 S.Ct. at 1757. Reckless conduct qualifies as the equivalent

of "actual knowledge of wrongdoing." Id. at 1759. A fiduciary's

conduct is sufficiently reckless "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. (quotation marks omitted).

The bankruptcy court found that Debtor's conduct in failing

to allocate, without justification, any of the $383,513.95 in sale

proceeds and placing the entire risk of the limited partnership

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investment on the Trust was, at minimum, a willful blindness to a

substantial and unjustifiable risk that would violate her

fiduciary duties to the Trust:

To me the most significant fact in this case is not so

much how the sales price was allocated between the two

lots, but rather how the down payment was allocated

between the two lots. And there is no testimony that

Ms. Correia relied on the advice of anyone else that she

was acting properly or authorized to allocate all of the

cash down payment to her own benefit while allocating an

investment in, frankly, either a deferred debt secured by

a deed of trust or, as it turned out, a limited

partnership interest to the trust, to Lot 11. Nor did I

even hear from Ms. Correia any explanation or

justification for that allocation, that is allocating all

of the down payment to herself instead of, as she

contended, well, it should have been allocated – that is

the sale price should have been allocated three quarters

perhaps to Lot 12 and one quarter to Lot 11. She didn't

even provide any justification for similarly allocating

the down payment. That is where I find that, by taking

all of the cash for herself and leaving the trust with a

limited partnership interest, she acted at a minimum with

willful blindness to her fiduciary duties to the Trust. 

Willfully blind to the substantial risk of the limited

partnership investment. 

Again, it doesn't really matter how much she thought that

risk was, there's absolutely no justification for putting

all of that risk, however much it might be, on the trust

while taking none for herself and instead taking all of

the cash. That's where I find that she acted recklessly

within the meaning of the standard adopted by Bullock. 

Trial Tr. (Sept. 9, 2013) 120:6-121:7. 

Debtor contends the bankruptcy court erred by failing to give

preclusive effect to the California state court's findings that

she acted reasonably and in good faith, and that her actions were

not intentional or an attempt to harm her children. 

The doctrine of issue preclusion applies in bankruptcy

dischargeability proceedings to preclude the relitigation of state

court findings relevant to dischargeability. Grogan v. Garner,

498 U.S. 279, 285 n.11 (1991); T & D Moravits & Co. v. Munton

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(In re Munton), 352 B.R. 707 (9th Cir. BAP 2006). The party

asserting issue preclusion has the burden to prove each required

element. Kendall v. Visa U.S.A., Inc., 518 F.3d 1042, 1050-51

(9th Cir. 2008). Any reasonable doubt regarding what the prior

court decided is resolved against applying issue preclusion. 

In re Honkanen, 446 B.R. at 382. 

For issue preclusion to apply to the California Judgment, 

the California state court must have made findings that Debtor

engaged in a "defalcation" within the meaning of § 523(a)(4).10

These findings must have been actually litigated and necessary to

the California Judgment. The other requirements of issue

preclusion are satisfied because the issues in each proceeding are

the same (breach of fiduciary duty and damages), the parties are

the same, and the California Judgment is final. 

To establish a breach of fiduciary duty in California,

plaintiff must show the existence of a fiduciary relationship, its

breach, and damage proximately caused by that breach. Oasis W.

Realty, LLC v. Goldman, 51 Cal.4th 811, 820 (2011). No particular

scienter element is required. The California state court's

language of "lack of prudence" and "acted reasonably" implies a

negligence standard was applied in Debtor's case and not the

subjective knowingly or reckless standard required by Bullock. 

10 In California, the party asserting issue preclusion must

establish the following five elements: (1) the issue sought to be

precluded from relitigation must be identical to that decided in a

former proceeding; (2) this issue must have been actually

litigated in the former proceeding; (3) it must have been

necessarily decided in the former proceeding; (4) the decision in

the former proceeding must be final and on the merits; and (5) the

party against whom preclusion is sought must be the same as, or in

privity with, the party to the former proceeding. Lucido v.

Super. Ct., 51 Cal.3d 335, 341 (1990)(en banc).

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Thus, whether a "defalcation" occurred for purposes of § 523(a)(4)

involves a different legal standard than the breach of fiduciary

duty found by the California state court. Therefore, whether

Debtor's conduct rose to the level of a "defalcation" under

Bullock was never actually litigated or necessarily decided in the

prior action. 

Nevertheless, in mitigating the beneficiaries' damages under

CAL. PROBATE CODE § 16440(b), the California state court found that

Debtor had "acted reasonably and in good faith under the

circumstances known to [her]." Thus, intent findings were made

for the purpose of assessing damages. Debtor contends the

bankruptcy court was required to give preclusive effect to these

"favorable" intent findings and could not make its own findings on

that issue. We disagree. On this record, it is not clear whether

these findings pertain to just Debtor's decision on the failed

investment, which the California state court focused heavily on

and tied to unscrupulous third parties, to Debtor's failure to

provide accountings or access to Trust records, or to all of her

breaches of fiduciary duty, including her act of "pure conflict"

in keeping the sale proceeds for herself while allocating 100% of

the investment risk to the Trust. Thus, it is not clear which

breach or breaches were necessary to the California Judgment, and

it cannot support a finding that Debtor did not commit a

defalcation.

We further conclude the California state court's findings

that Debtor's actions "were not intentional or an attempt to take

her children's inheritance" were entirely unnecessary to the

California Judgment. Under California law, an issue has been

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"necessarily decided" if it is not "entirely unnecessary" to the

judgment in the initial proceeding. Zevnik v. Super. Ct.,

159 Cal.App.4th 76, 83 (2008)(citing Lucido, 51 Cal.3d at 342). 

See also Yates v. United States, 354 U.S. 298, 336 (1957)(issue

preclusion "makes conclusive in subsequent proceeding only

determinations of fact . . . that were essential to the

decision"). Ultimately, these findings were unnecessary to the

court's determination on damages, because its findings of Debtor's

"reasonable" and "good faith" conduct were sufficient to support

its decision to mitigate damages under CAL. PROBATE CODE § 16440(b). 

As a result, the bankruptcy court did not have to give these

additional and unnecessary findings preclusive effect.

Because the California Judgment had no preclusive effect as

to Debtor's intent for purposes of § 523(a)(4), the bankruptcy

court was free to make its own findings to determine whether it

was excepted from discharge. The bankruptcy court found the most

significant breach of Debtor's fiduciary duty was how she

allocated the cash liquidating distribution on formation between

her and the Trust. No one advised Debtor that allocating the

entire cash distribution to herself, while allocating only the

limited partnership interest and the $200,000 remaining capital

account to the Trust, was proper. Further, Debtor provided no

explanation or justification for that allocation, or for her

failure to allocate the cash distribution in accordance with the

values she placed on the Lots. By taking all of the cash for

herself and leaving the Trust with only a limited partnership

interest and a $200,000 remaining capital account, Debtor, at

minimum, was willfully blind to a substantial and unjustifiable

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risk that her conduct would violate her fiduciary duties. This

conduct is what led the bankruptcy court to conclude that Debtor

had acted recklessly within the meaning of Bullock. 

We see no clear error in the bankruptcy court's findings. 

Accordingly, it did not err in determining the California Judgment

was excepted from discharge under § 523(a)(4).

B. The bankruptcy court did not err when it determined that the

Third Amended Arizona Judgment was excepted from discharge

under § 523(a)(6) and (a)(4).

Section 523(a)(6) excepts from discharge debts "for willful

and malicious injury by the debtor to another entity or to the

property of another entity." Both willfulness and maliciousness

must be proven to apply § 523(a)(6). Ormsby v. First Am. Title

Co. of Nev. (In re Ormsby), 591 F.3d 1199, 1206 (9th Cir. 2010). 

"A 'willful' injury is a 'deliberate or intentional injury, not

merely a deliberate or intentional act that leads to injury.'" 

Barboza v. New Form, Inc. (In re Barboza), 545 F.3d 702, 706 (9th

Cir. 2008)(quoting Kawaauhau v. Geiger, 523 U.S. 57, 61 (1998)

(emphasis in original)). At a minimum, willful requires "a

deliberate act with knowledge that the act is substantially

certain to cause injury." Petralia v. Jercich (In re Jercich),

238 F.3d 1202, 1208 (9th Cir. 2001). In other words, a debtor's

act is "willful" only if he or she actually intended to cause

injury or actually believed that injury was substantially certain

to occur. Carrillo v. Su (In re Su), 290 F.3d 1140, 1144-45 (9th

Cir. 2002). 

Proving a "malicious" injury requires a showing that the

debtor (1) committed a wrongful act, (2) done intentionally,

(3) which necessarily causes injury, and (4) was done without just

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cause or excuse. Id. at 1146-47. 

After hearing no testimony from Debtor attempting to justify

why she engaged in the fraudulent transfers of her assets during

the California litigation, the bankruptcy court decided the

Arizona state court's finding that Debtor defended the fraudulent

transfer action in bad faith would be given preclusive effect:

As to the Arizona litigation, there is a finding which is

entitled to res judicata effect that she defended the

fraudulent transfer action in bad faith. At a minimum,

that means as a matter of law it's a given that she had

no bona fide defense to the claim that the transfer of

her assets was made with actual intent to hinder, delay,

and [sic] defraud creditors. And before me today the

only evidence is that the only creditors she had were her

children. 

She had the opportunity in testimony here to provide any

justification she may have had as to either why that

transfer was made in good faith, made for some reason

other than with actual intent to hinder, delay, or

defraud creditors, namely her children, or to put on any

defense – any justification as to why she had a bona fide

defense to that argument, and she did not come forward

with any. In fact, all we really heard about why the

transfer occurred at all was that it was originally

advised that it made sense to put her husband's rental

properties in an LLC. No testimony as to why she was

advised that her own property should go into an LLC.

Consequently, the only conclusion that can be drawn from

the judgment, coupled with the lack of any other

justification for it in her testimony today, is that it

was made with the intent to keep her assets from her

creditors and that constitutes willful and malicious

injury under § 523(a)(6). 

. . .

Consequently, I find and conclude that on the testimony

the attorney's fees incurred in the Arizona litigation are

also non-dischargeable pursuant to § 523(a)(6). 

Trial Tr. (Sept. 9, 2013) 121:8-122:6; 122:13-15. 

Debtor argues the Arizona state court made no findings that

her conduct was willful or malicious and the bankruptcy court was

limited to the finding in the Third Amended Arizona Judgment that

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she litigated the case in "bad faith." Debtor argues that a bad

faith finding is insufficient to satisfy a claim for a willful and

malicious injury under § 523(a)(6). She further argues the

bankruptcy court erred in determining the debt for the attorney's

fees was excepted from discharge under § 523(a)(6) because the

transfers did not result in any monetary damage to her sons. We

disagree with all of Debtor's arguments. 

The elements of a state court action are rarely identical to

those for proving a willful and malicious injury. However, issue

preclusion will apply if the facts established by the state court

judgment establishes that a debtor's violation of the UFTA was a

willful and malicious injury. We conclude the findings made by

the Arizona state court established both the willful and malicious

prongs for purposes of nondischargeability under § 523(a)(6). 

A judgment for "actual" fraudulent transfer can satisfy the

elements for a willful and malicious injury. In re Fairgrieves,

426 B.R. 748, 758 (Bankr. N.D. Ill. 2010)(judgment for "actual"

fraudulent transfer can demonstrate a willful and malicious injury

under § 523(a)(6)). See Vazquez v. AAA Blueprint & Digital

Reprographics (In re Vazquez), 2013 WL 6571693, at *4-6 (9th Cir.

BAP Dec. 13, 2013)(affirming bankruptcy court's ruling that

creditor's judgment for actual fraudulent transfer under CAL. CIV.

CODE § 3439.04(a)(1) satisfied the elements for a willful and

malicious injury under § 523(a)(6), so issue preclusion was

properly applied).

Although the Third Amended Arizona Judgment had eliminated

the "intent" language previously stated in the Second Amended

Arizona Judgment — i.e., that Debtor transferred her assets "with

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the intent to hinder, delay or defraud Plaintiffs" — the Third

Amended Arizona Judgment incorporated the findings made in the

2010 Minute Entry, which also incorporated and supplemented the

findings made in the 2009 Minute Entry. The 2010 Minute Entry

found that "Rose's own admission at trial that she transferred the

Arizona property during the pendency of the California litigation

to insulate herself and assets from suit was an admission under

the UFTA." The 2009 Minute Entry states:

[T]he Court finds by a preponderance of the evidence that

Rosira Correia and John Sasser transferred assets with

the intent to hinder, delay or defraud Plaintiffs. 

. . .

Defendants Rosira Correia and John K. Sasser defended the

case in bad faith. They transferred assets intending to

hinder, delay or defraud Plaintiffs. They tried to hide

her assets from Plaintiffs and then denied that was their

intent. 

Thus, the Third Amended Arizona Judgment established that Debtor

engaged in an "actual" fraudulent transfer.

In addition, the Arizona state court's finding that Debtor

defended the fraudulent transfer action in bad faith only further

establishes a willful and malicious injury within the meaning of 

§ 523(a)(6). As the bankruptcy court properly concluded, as a

matter of law, because the Arizona state court found Debtor liable

for John and Jason's attorney's fees under ARS § 12-349, clearly

Debtor had no bona fide defense to the claim that the transfers of

her assets were made with the actual intent to hinder, delay or

defraud her sons and that the transfers were made with the intent

to keep her assets from them. And, contrary to Debtor's

contention, the bankruptcy court was not limited only to the

Arizona state court's finding of "bad faith." In support of the

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fee award under ARS § 12-349, the Arizona state court set forth

its complete findings in the 2009 Minute Entry (incorporated in

the 2010 Minute Entry, which was incorporated into the Third

Amended Arizona Judgment), which states: "The Court finds that

Defendants' defense constituted harassment, was groundless, was

not made in good faith and was solely or primarily for delay." 

With the Arizona state court's finding of actual intent, it

follows that Debtor intended to cause injury to her sons or

believed that injury was substantially certain to occur as a

result of her transferring virtually all of her assets during the

California litigation to prevent her sons from executing on what

became the eventual California Judgment. Thus, a "willful" injury

was established. 

A "malicious" injury was also established. A wrongful act is

self-evident given the nature of Debtor's conduct in transferring

her assets for the purpose of hindering her sons’ collection

efforts. By finding her liable for actual fraudulent transfers,

the Arizona state court also necessarily found that Debtor's acts

were intentional. Her wrongful actions, as evidenced by the

attorney's fee award under ARS § 12-349, necessarily caused her

sons injury; they were forced to incur attorney's fees by having

to file an action to undo the transfers in hopes of collecting on

the California Judgment. See Suarez v. Barrett (In re Suarez),

400 B.R. 732, 739-740 (9th Cir. BAP 2009)("injury" can include

litigation expenses; no underlying compensatory judgment is

necessary for an award of attorney's fees to be nondischargeable). 

Finally, as also evidenced by the attorney's fee award, Debtor's

actions were done without just cause or excuse. As the Arizona

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state court found, her defense to the fraudulent transfer claims

was without substantial justification. The bankruptcy court even

offered Debtor the opportunity to provide any good faith reasons

for the transfers; she offered none. 

The doctrine of issue preclusion prohibits relitigation of

issues adjudicated by the Arizona state court. In re Lopez,

367 B.R. at 104. Under Arizona law, issue preclusion applies

"when an issue was actually litigated in a previous proceeding,

there was a full and fair opportunity to litigate the issue,

resolution of the issue was essential to the decision, a valid and

final decision on the merits was entered, and there is common

identity of parties." Hullett v. Cousin, 63 P.3d 1029, 1034-35

(Ariz. 2003)(en banc). 

All of the foregoing elements are satisfied in this case. 

The factual issues relevant to Debtor's willful and malicious

injury under § 523(a)(6) were actually litigated by the Arizona

state court. Second, the record reflects that Debtor, who was

represented by counsel, had a full and fair opportunity to, and

did, litigate the fraudulent transfer claims and the attorney's

fees under ARS § 12-349. Third, that Debtor tried to hide her

assets and defended subsequent litigation in bad faith by denying

her intent were essential to the Arizona state court's finding in

the Third Amended Arizona Judgment that John and Jason were

entitled to attorney's fees under ARS § 12-349. Fourth, a valid

and final judgment on the merits was entered on May 1, 2013, nunc

pro tunc, to the original judgment entered on November 24, 2009. 

Finally, the parties were the same. Accordingly, the bankruptcy

court did not err in giving preclusive effect to the Arizona state

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court's findings supporting its conclusion that the Third Amended

Arizona Judgment for the statutory attorney's fees is a debt for a

willful and malicious injury. 

The bankruptcy court also determined the debt for the

attorney's fees was nondischargeable under § 523(a)(4) as a direct

consequence of John and Jason's attempt to satisfy the California

Judgment:

In addition, however, I believe their non-dischargeability

stands on an independent ground. I believe those

attorney's fees are also predictable consequences of the

underlying actions and consequently are part of the debt

determined to be non-dischargeable in the California

actions. They are like the damages or I think in the case

it was treble damages in Cohen versus Del La Cruz, the

Supreme Court holding. They are by her own actions,

intentional consequences of the underlying action that

rendered the breach of her fiduciary duty nondischargeable under § 523(a)(4). And consequently I

believe the attorney's fees in the Arizona litigation are

also non-dischargeable under § 523(a)(4). 

 

Trial Tr. (Sept. 9, 2013) 122:16-123:2. In her statement of

issues presented in her opening brief, Debtor questioned the

bankruptcy court's decision that the attorney's fee award was

nondischargeable under § 523(a)(4) because her sons did not seek

such relief. However, nowhere in her brief did Debtor provide any

more argument or authority on the matter. As a result, this issue

has been abandoned. City of Emeryville v. Robinson, 621 F.3d

1251, 1262 n.10 (9th Cir. 2010)(appellate court in this circuit

"will not review issues which are not argued specifically and

distinctly in a party's opening brief."). 

In any event, we see no error in the bankruptcy court's

decision. The attorney's fees awarded in the Third Amended

Arizona Judgment are nondischargeable because they flowed from

Debtor's nondischargeable conduct under § 523(a)(4). See Cohen v.

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de la Cruz, 523 U.S. 213, 223 (1998)(nondischargeable debt can

include attorney's fees and costs incurred as a result of debtor's

nondischargeable fraudulent conduct; applying § 523(a)(2) but

reading it in pari materia with other nondischargeability

sections, including § 523(a)(4) and (a)(6)); In re Suarez,

400 B.R. at 738-39 (applying § 523(a)(6)). 

Accordingly, the bankruptcy court did not err in determining

the Third Amended Arizona Judgment was excepted from discharge

under § 523(a)(4) and (a)(6). 

VI. CONCLUSION

For the foregoing reasons, we AFFIRM.

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