Court Opinion

ID: 899596
Source: CourtListenerOpinion
Date Created: 2013-06-11 00:00:15.971513+00
Date Added: 2024-06-11T12:40:22.458367
License: Public Domain

FILED
 1                                                          JUN 10 2013
                                                        SUSAN M SPRAUL, CLERK
 2                                                        U.S. BKCY. APP. PANEL
                                                          OF THE NINTH CIRCUIT
 3                  UNITED STATES BANKRUPTCY APPELLATE PANEL
 4                            OF THE NINTH CIRCUIT
 5   In re:                         )     BAP No.    EC-12-1163-MkDJu
                                    )
 6   JOHN ERNEST BORSOS and         )     Bk. No.    10-53374
     CLARE HART BORSOS,             )
 7                                  )     Adv. No.   11-02183
                    Debtors.        )
 8   _______________________________)
                                    )
 9   JOHN ERNEST BORSOS,            )
                                    )
10                  Appellant,      )
                                    )
11   v.                             )     MEMORANDUM*
                                    )
12   UNITED HEALTHCARE WORKERS-WEST,)
                                    )
13                  Appellee.       )
     _______________________________)
14
                     Argued and Submitted on March 22, 2013
15                          at Sacramento, California
16                           Filed – June 10, 2013
17             Appeal from the United States Bankruptcy Court
                   for the Eastern District of California
18
     Honorable Christopher M. Klein, Chief Bankruptcy Judge, Presiding
19
20   Appearances:     Daniel M. Siegel of Siegel & Yee argued for
                      appellant John E. Borsos; Jeffrey B. Demain of
21                    Altshuler Berzon LLP argued for appellee United
                      Healthcare Workers-West.
22
23
     Before:   MARKELL, DUNN and JURY, Bankruptcy Judges.
24
25
26        *
           This disposition is not appropriate for publication.
27   Although it may be cited for whatever persuasive value it may
     have (see Fed. R. App. P. 32.1), it has no precedential value.
28   See 9th Cir. BAP Rule 8013-1.
 1                               INTRODUCTION
 2        Before his removal from office on January 27, 2009, John
 3   Borsos (“Borsos”) was an elected officer and employee of United
 4   Healthcare Workers West (“UHW”).       A jury verdict rendered in
 5   federal district court found Borsos and others liable for
 6   diverting UHW resources for non-UHW purposes, and on April 12,
 7   2010, the district court entered judgment against Borsos in the
 8   amount of $66,600.   Later that same year, in December 2010,
 9   Borsos filed a chapter 71 bankruptcy case.      UHW then filed a
10   nondischargeability complaint against Borsos under § 523(a)(4).
11   Based primarily on the district court jury’s findings, the
12   bankruptcy court held after trial that the district court
13   judgment debt arose from a fiduciary defalcation excepted from
14   discharge under § 523(a)(4).   Borsos appealed.
15        During the pendency of this appeal, the United States
16   Supreme Court (“Supreme Court”) decided Bullock v. BankChampaign,
17   N.A., 133 S.Ct. 1754 (2013).   In Bullock, the Supreme Court
18   interpreted § 523(a)(4) defalcation as requiring a specific
19   subjective state of mind.   Bullock’s scienter requirement
20   effectively abrogated Ninth Circuit law, which formerly did not
21   require any particular state of mind to except a debt from
22   discharge based on a § 523(a)(4) fiduciary defalcation.
23        Following now-abrogated Ninth Circuit law, the bankruptcy
24   court did not make any findings regarding Borsos’ state of mind.
25
26        1
           Unless specified otherwise, all chapter and section
27   references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532.
     All “Civil Rule” references are to the Federal Rules of Civil
28   Procedure.

                                        2
 1   Consequently, we must VACATE AND REMAND so the bankruptcy court
 2   can make further findings.
 3                                 FACTS2
 4        This appeal is one skirmish in a larger battle between the
 5   Service Employees International Union (“SEIU”) and the former
 6   management of UHW.   SEIU is a large international labor union,
 7   and UHW has been a local SEIU affiliate since the 1930's.3
 8        Over the last several years, SEIU and former UHW management
 9   (“Former UHW Management”) have increasingly disagreed on various
10   policy and organizational matters.     These disagreements
11   ultimately came to a head in January 2009, when Former UHW
12   Management refused to cooperate with the SEIU-ordered transfer of
13   65,000 UHW members to a different local SEIU affiliate.4
14        That refusal to cooperate was the impetus for SEIU’s
15   appointment of a trusteeship on January 27, 2009, to take over
16   the management of all of UHW’s affairs.    The transition of
17   control to the trusteeship did not occur in a peaceful or orderly
18   manner.   As Former UHW Management left their offices upon being
19
20        2
           There is little dispute over the basic facts relevant to
     this appeal. As the bankruptcy court indicated, the real dispute
21
     is over what those facts demonstrate in terms of the
22   dischargeability of UHW’s judgment against Borsos.
          3
23         Some of the facts set forth herein are drawn from Serv.
     Employees Int’l Union v. Nat. Union of Healthcare Workers,
24   598 F.3d 1061 (9th Cir. 2010) (“SEIU v. NUHW”). Others are drawn
     from the District Court’s preliminary injunction order, which was
25
     the order on appeal in SEIU v. NUHW.
26        4
           The stated purpose of the transfer was to consolidate all
27   California long-term healthcare workers who were members of
     various local SEIU affiliates into a single local affiliate
28   dedicated exclusively to long-term healthcare workers.

                                      3
 1   relieved of their duties, UHW stewards and rank-and-file UHW
 2   members barricaded themselves in the union offices to protest and
 3   resist the trusteeship.   As a net result of this transition, key
 4   union records and other union assets were misplaced, removed
 5   and/or destroyed.
 6        The day after the appointment of the trusteeship, Former UHW
 7   Management took the next step in their campaign to resist SEIU’s
 8   initiatives, and SEIU took the next step in its campaign to quell
 9   that resistance.    Former UHW Management formally resigned their
10   membership in UHW and announced the formation of a rival union
11   known as the National Union of Healthcare Workers (“NUHW”).
12   Meanwhile, SEIU filed a complaint (“District Court Complaint”)
13   against Former UHW Management and NUHW in the United States
14   District Court for the Northern District of California (Case
15   No. C-09-00404).    That complaint stated claims for the following
16   relief: (1) injunctive relief, (2) breach of fiduciary duty under
17   the Employee Retirement Income Security Act (“ERISA”), (3) breach
18   of fiduciary duty under the Labor-Management Reporting and
19   Disclosure Act of 1959 ("LMRDA"), (4) breach of contract,
20   (5) breach of fiduciary duty under California law, (6) specific
21   recovery of certain materials (including records, data, notes,
22   blueprints, etc.) allegedly wrongfully taken from UHW, and
23   (7) misappropriation of trade secrets under California law.
24        While the District Court Complaint covered much ground, by
25   the time the trial was completed and the matter submitted to the
26   jury for decision, the focus of the litigation had been
27   significantly refined.    In relevant part, the final charge to the
28   jury (“Jury Instructions”) instructed the jury to determine the

                                       4
 1   liability of the individual defendants, all Former UHW
 2   Management, for “diversion of resources” and “salary and
 3   benefits” during January 2009, up until the time they were
 4   removed from or resigned their positions as UHW officials.
 5        The Jury Instructions directed the jury to impose
 6   diversion of resources liability to the extent each defendant
 7   used UHW-resources for non-UHW purposes, measured by the value of
 8   the resources diverted.   See Jury Instructions (April 6, 2010) at
 9   10:2-7.
10        In addition, the Jury Instructions directed the jury to
11   impose salary and benefits liability to the extent each defendant
12   was in breach of his or her fiduciary duties during January 2009.
13   In imposing salary and benefits liability, the Jury Instructions
14   in essence called upon the jury to ascertain what proportion of
15   each defendant’s January 2009 work time was diverted to non-UHW
16   purposes and to assess damages equal to the value of the diverted
17   work time, using each defendant’s January 2009 salary and
18   benefits as a measure.    See Jury Instructions (April 6, 2010) at
19   9:18-27; see also id. at 6:18-7:27 (identifying the fiduciary
20   duties the defendants owed to UHW).
21        Based on the Jury Instructions, the jury rendered a verdict
22   finding many of the individual defendants, including Borsos,
23   liable for diversion of resources and for salary and benefits.
24   However, the jury’s verdict and the Jury Instructions indicate
25   that the jury was not required to consider, and did not consider,
26   the mental state of any of the defendants in diverting UHW
27   resources and work time to non-UHW purposes.
28        The jury found Borsos individually liable in the amount of

                                       5
 1   $60,000 for diversion of resources liability and in the amount of
 2   $6,600 for salary and benefits liability, for a total liability
 3   in the amount of $66,600.   On April 12, 2010, the district court
 4   entered judgment against Borsos in that amount based on the
 5   jury’s verdict.5
 6        Borsos thereafter filed his chapter 7 bankruptcy on
 7   December 22, 2010.    In his Schedule D of secured creditors,
 8   Borsos listed SEIU and UHW jointly as creditors holding a secured
 9   claim against his residence based on an abstract of judgment they
10   recorded in October 2010.
11        On March 15, 2011, UHW filed a nondischargeability complaint
12   against Borsos, alleging that the district court judgment against
13   Borsos constituted “‘a debt . . . for . . . defalcation while
14   acting in a fiduciary capacity’ within the meaning of 11 U.S.C.
15   § 523(a)(4). . . .”   Complaint (Mar. 15, 2011) at ¶ 14.
16        Both sides filed cross-motions for summary judgment, which
17   the bankruptcy court denied.   Instead, the bankruptcy court held
18   a one-day trial on February 13, 2012.   By stipulation of the
19   parties, trial was limited to the presentation of materials from
20   the record in the district court litigation.   On March 15, 2012,
21   the bankruptcy court orally recited its findings of fact and
22   conclusions of law into the record.
23        Among its key findings, the bankruptcy court stated the
24   district court jury had found that Borsos had used UHW resources
25
          5
26         The district court’s judgment was entered pursuant to Civil
     Rule 54(b). The ERISA claim for relief was not tried at the same
27   time as all of the other claims for relief, and the district
     court stated in its Civil Rule 54(b) judgment that the ERISA
28   claim would be resolved sometime later.

                                       6
 1   and funds “in ways that were not appropriate” in the process of
 2   resisting SEIU’s appointment of a trusteeship over UHW’s affairs.
 3   The bankruptcy court also stated the district court jury found
 4   Borsos liable in the amount of $60,000 for diversion of resources
 5   and $6,600 for salary and benefits.
 6        The bankruptcy court held that a trust existed for purposes
 7   of § 523(a)(4) and that Borsos was fiduciary of that trust.   The
 8   court ruled: (1) that under LMRDA, codified at 29 U.S.C. § 501,
 9   UHW’s “money and property” were property of a technical trust
10   created by statute without reference to and before the occurrence
11   of any particular wrongdoing; (2) that Borsos and the other
12   individual defendants in the district court action were trustees
13   of that trust; and (3) that 29 U.S.C. § 501(a)6 imposed on Borsos
14
          6
15         The full text of 29 U.S.C. § 501(a) provides:

16        (a) Duties of officers; exculpatory provisions and
          resolutions void
17
          The officers, agents, shop stewards, and other
18        representatives of a labor organization occupy
19        positions of trust in relation to such organization and
          its members as a group. It is, therefore, the duty of
20        each such person, taking into account the special
          problems and functions of a labor organization, to hold
21        its money and property solely for the benefit of the
          organization and its members and to manage, invest, and
22
          expend the same in accordance with its constitution and
23        bylaws and any resolutions of the governing bodies
          adopted thereunder, to refrain from dealing with such
24        organization as an adverse party or in behalf of an
          adverse party in any matter connected with his duties
25        and from holding or acquiring any pecuniary or personal
26        interest which conflicts with the interests of such
          organization, and to account to the organization for
27        any profit received by him in whatever capacity in
          connection with transactions conducted by him or under
28                                                       (continued...)

                                     7
 1   and the other individual defendants certain fiduciary duties with
 2   respect to that trust, including in relevant part the following
 3   duties:
 4        [T]o hold its money and property solely for the benefit
          of the organization and its members; and to manage,
 5        invest and expend the same in accordance with its
          constitution and bylaws . . . and any resolution of the
 6        governing bodies adopted [thereunder] . . . .
 7   Trial Tr. (Mar. 15, 2012) at 9:19-23.
 8        The bankruptcy court also determined that, under the
 9   doctrine of issue preclusion, it would not revisit the district
10   court jury’s findings.   The court indicated that it was relying
11   upon the jury verdict and Jury Instructions in concluding that
12   the district court judgment should be excepted from discharge
13   under § 523(a)(4).
14        Finally, the bankruptcy court ruled that the conduct for
15   which the jury found Borsos liable constituted defalcation for
16   purposes of the nondischargeability statute.   However, in making
17   its defalcation ruling, the court did not make any findings as to
18   Borsos’ state of mind when he diverted his work time and other
19   UHW resources to non-UHW purposes.
20        On March 16, 2012, the bankruptcy court entered its
21   nondischargeability judgment, and Borsos filed his notice of
22   appeal from that judgment on March 21, 2012.
23
          6
24         (...continued)
          his direction on behalf of the organization. A general
25        exculpatory provision in the constitution and bylaws of
26        such a labor organization or a general exculpatory
          resolution of a governing body purporting to relieve
27        any such person of liability for breach of the duties
          declared by this section shall be void as against
28        public policy.

                                      8
 1                               JURISDICTION
 2        The bankruptcy court had jurisdiction pursuant to 28 U.S.C.
 3   §§ 1334 and 157(b)(2)(I).   We have jurisdiction under 28 U.S.C.
 4   § 158.
 5                                    ISSUE
 6        Did the bankruptcy court err in ruling that the district
 7   court jury’s liability findings established a debt based on
 8   defalcation for purposes of § 523(a)(4)?
 9                           STANDARDS OF REVIEW
10        On appeal from a nondischargeability judgment, we review the
11   bankruptcy court's findings of fact under the clearly erroneous
12   standard and its conclusions of law de novo.   See Honkanen v.
13   Hopper (In re Honkanen), 446 B.R. 373, 382 (9th Cir. BAP 2011).
14   However, the ultimate question of whether a particular debt is
15   dischargeable is a mixed question of fact and law that we review
16   de novo.   Id.; see also Searles v. Riley (In re Searles),
17   317 B.R. 368, 373 (9th Cir. BAP 2004) (stating that mixed
18   questions are reviewed de novo when they require the court “to
19   consider legal concepts and exercise judgment about values
20   animating legal principles.”).
21                                DISCUSSION
22        Borsos assigns error to two distinct aspects of the
23   bankruptcy court’s nondischargeability determination.   Most
24   relevant for our purposes, Borsos contends on appeal that the
25   conduct for which the jury found him liable did not qualify as
26   defalcation under § 523(a)(4), so the bankruptcy court should not
27   have found § 523(a)(4)’s defalcation requirement satisfied.
28   Borsos also contends on appeal that 29 U.S.C. § 501 did not

                                        9
 1   impose upon him the type of fiduciary capacity covered by
 2   § 523(a)(4).7
 3        In Borsos’ view, the district court jury’s liability
 4   findings simply don’t add up to defalcation under § 523(a)(4).
 5   In order to address Borsos’ defalcation argument, we must
 6   consider what constitutes defalcation under § 523(a)(4).         In
 7   terms of conduct, defalcation can occur for purposes of
 8   § 523(a)(4) if the fiduciary either misappropriated trust assets
 9   or failed to account for them.    See Blyler v. Hemmeter
10   (In re Hemmeter), 242 F.3d 1186, 1190 (9th Cir. 2001) (citing
11   Lewis v. Scott (In re Lewis), 97 F.3d 1182, 1186 (9th Cir.
12   1996)).   In turn, a fiduciary misappropriates trust assets if he
13   uses them for an improper purpose in light of the trust’s terms.
14   See Lovell v. Stanifer (In re Stanifer), 236 B.R. 709, 719 (9th
15   Cir. BAP 1999); see also OXFORD ENGLISH DICTIONARY (defining a
16   misappropriation in relevant part as an "[a]ppropriation of
17   (something) for a wrong use . . . .”).
18        As set forth in the facts section, supra, all of the
19   district court jury’s liability findings against Borsos were
20   based on Borsos’ diversion of his work time and other UHW
21   resources for non-UHW purposes.    This conduct squarely falls
22   within the definition of misappropriation, which in turn
23   satisfies the conduct component of § 523(a)(4)’s defalcation
24   requirement.
25        But our examination of Borsos’ defalcation argument does not
26
27
          7
           In light of our holding on the defalcation issue, we need
28   not and will not address the fiduciary capacity issue.

                                       10
 1   end there because the Supreme Court recently held that
 2   § 523(a)(4)’s defalcation requirement consists not only of a
 3   conduct component but also of a scienter component.   See Bullock,
 4   133 S.Ct. at 1759-60.   As the Court stated its holding:
 5        [W]here the conduct at issue does not involve bad
          faith, moral turpitude, or other immoral conduct, the
 6        term requires an intentional wrong. We include as
          intentional not only conduct that the fiduciary knows
 7        is improper but also reckless conduct of the kind that
          the criminal law often treats as the equivalent. Thus,
 8        we include reckless conduct of the kind set forth in
          the Model Penal Code. Where actual knowledge of
 9        wrongdoing is lacking, we consider conduct as
          equivalent if the fiduciary “consciously disregards”
10        (or is willfully blind to) “a substantial and
          unjustifiable risk” that his conduct will turn out to
11        violate a fiduciary duty.
12   Id. at 1759 (quoting American Law Institute, Model Penal Code
13   § 2.02(2)(c), p. 226 (1985)).
14        As a result, in order to qualify as a § 523(a)(4)
15   defalcation, debtors must have acted either with knowledge that
16   their conduct would constitute a breach of their fiduciary duty,
17   or with conscious disregard or willful blindness to “a
18   substantial and unjustifiable risk” that their conduct would
19   constitute a breach of their fiduciary duty.   Id. at 1759.
20        Prior to Bullock, the rule in the Ninth Circuit was that no
21   particular state of mind was required to satisfy § 523(a)(4)’s
22   defalcation requirement.    See Sherman v. Sec. and Exch. Comm'n
23   (In re Sherman), 658 F.3d 1009, 1017-18 (9th Cir. 2011).     Indeed,
24   even an innocent failure to account for trust property could
25   constitute a defalcation.   See id. (citing In re Hemmeter,
26   242 F.3d at 1190–91).   Bullock, however, has overruled
27   In re Sherman and In re Hemmeter to the extent those two
28   decisions did not recognize that § 523(a)(4)’s defalcation

                                      11
 1   requirement included a scienter component.   As such, we are not
 2   required to follow them.   See Deitz v. Ford (In re Deitz),
 3   469 B.R. 11, 23 (9th Cir. BAP 2012) (Ninth Circuit case not
 4   binding precedent when it has been effectively superseded by an
 5   intervening Supreme Court decision containing reasoning "clearly
 6   irreconcilable" with prior Ninth Circuit decision).
 7        In excepting from discharge the district court judgment
 8   debt, the bankruptcy court explicitly ruled that Borsos’ conduct
 9   constituted defalcation under § 523(a)(4).   But in making that
10   ruling, the bankruptcy court did not make any findings regarding
11   Borsos’ mental state.8   Civil Rule 52(a) applies in adversary
12   proceedings and requires bankruptcy courts to make factual
13   findings in support of their decisions.   When the bankruptcy
14   court does not provide complete findings, we may vacate and
15   remand for further findings.   See First Yorkshire Holdings, Inc.
16   v. Pacifica L 22, LLC. (In re First Yorkshire Holdings, Inc.),
17   470 B.R. 864, 871 (9th Cir. BAP 2012).
18        Notwithstanding the above, we are not obligated to vacate
19   and remand for further findings if the record otherwise provides
20   us with a complete understanding of the issues appealed.   See id.
21   (citing Simeonoff v. Hiner, 249 F.3d 883, 891 (9th Cir. 2001)).
22   We also need not remand if we reasonably can infer from the
23   court’s findings other facts that would suffice to support the
24   court’s decision.   See Brock v. Big Bear Market No. 3, 825 F.2d
25
          8
26         The bankruptcy court’s omission makes perfect sense. At
     the time of its ruling, Bullock was not yet before the Supreme
27   Court, and In re Sherman and In re Hemmeter did not require the
     bankruptcy court to make any findings regarding Borsos’ mental
28   state.

                                     12
 1   1381, 1384 (9th Cir. 1987).   Nonetheless, we must vacate and
 2   remand here because we cannot ascertain with any certainty
 3   Borsos’ mental state either from the bankruptcy court record or
 4   from the bankruptcy court’s findings.
 5        Put another way, when the bankruptcy court does not apply
 6   the correct legal standard, remand still may be unnecessary if
 7   the record is complete and the outcome of the case is beyond
 8   doubt upon our application of the correct legal standard.    See
 9   Hopkins v. Asset Acceptance LLC (In re Salgado–Nava), 473 B.R.
10   911, 922 (9th Cir. BAP 2012) (citing Wharf v. Burlington N.R.R.
11   Co., 60 F.3d 631, 637 (9th Cir. 1995)).   Here, however, the
12   outcome regarding Borsos’ state of mind is not beyond doubt.
13   There are facts in the record from which the bankruptcy court
14   arguably could have inferred that Borsos diverted UHW’s resources
15   without the culpable state of mind Bullock requires.
16        For instance, Borsos claimed at trial and on appeal that,
17   when Former UHW Management were still in charge of UHW, they
18   passed a resolution authorizing Borsos to take the actions that
19   the district court jury later found him liable for.    Therefore,
20   Borsos reasoned, he did not commit § 523(a)(4) defalcation.
21   While we agree with the bankruptcy court’s conclusion that Borsos
22   cannot use his authorization argument to collaterally attack the
23   jury’s finding that Borsos diverted UHW resources, the jury made
24   no findings regarding Borsos’ mental state.   Thus, the bankruptcy
25   court arguably could have inferred that, to the extent Borsos
26   believed he had been duly authorized by Former UHW Management, he
27   did not divert UHW resources either knowing that he was breaching
28   his fiduciary duty or in reckless disregard of that duty.    On the

                                     13
 1   other hand, the bankruptcy court also might have reasonably
 2   inferred the opposite result from the same facts: that Borsos did
 3   not really believe that he was duly authorized to use UHW
 4   resources for the purposes of undermining SEIU’s initiatives and
 5   starting up a rival union.
 6        In the final analysis, what the bankruptcy court ultimately
 7   finds on remand regarding Borsos’ mental state likely will hinge
 8   in part on the bankruptcy court’s assessment of Borsos’
 9   credibility.   See generally Hernandez v. New York, 500 U.S. 352,
10   364 (1991) (noting that findings regarding a person’s state of
11   mind largely turn on the court’s assessment of credibility);
12   Batson v. Kentucky, 476 U.S. 79, 98 & n. 21 (1986) (same).
13   Accordingly, the bankruptcy court may find it appropriate on
14   remand to reopen the record to permit the presentation of
15   additional evidence, including but not necessarily limited to the
16   presentation of testimony from Borsos.
17                                CONCLUSION
18        For the reasons set forth above, we VACATE the bankruptcy
19   court’s judgment, and we REMAND so the bankruptcy court can make
20   further findings.
21
22
23
24
25
26
27
28

                                      14