Court Opinion

ID: 9373910
Source: CourtListenerOpinion
Date Created: 2023-02-22 16:10:27.530812+00
Date Added: 2024-06-11T17:16:49.320167
License: Public Domain

FILED
                                                                                   DEC 5 2022
                          NOT FOR PUBLICATION                                 SUSAN M. SPRAUL, CLERK
                                                                                 U.S. BKCY. APP. PANEL
                                                                                 OF THE NINTH CIRCUIT
           UNITED STATES BANKRUPTCY APPELLATE PANEL
                     OF THE NINTH CIRCUIT

 In re:                                              BAP No. CC-22-1028-GTS
 MA KAZAZ,
                      Debtor.                        Bk. No. 6:20-bk-13807-SC

 NEXTGEAR CAPITAL, INC.,        Adv. No. 6:20-ap-01153-SC
                  Appellant,
 v.                             MEMORANDUM*
 MA KAZAZ; HOWARD B. GROBSTEIN,
 Chapter 7 Trustee,
                  Appellees.

               Appeal from the United States Bankruptcy Court
                      for the Central District of California
                Scott C. Clarkson, Bankruptcy Judge, Presiding

Before: GAN, TAYLOR, and SPRAKER, Bankruptcy Judges.

                                 INTRODUCTION

       Appellant NextGear Capital, Inc. (“NextGear”) appeals the

bankruptcy court’s order entering judgment in favor of chapter 71 debtor

       *
         This disposition is not appropriate for publication. Although it may be cited for
whatever persuasive value it may have, see Fed. R. App. P. 32.1, it has no precedential
value, see 9th Cir. BAP Rule 8024-1.
       1 Unless specified otherwise, all chapter and section references are to the

Bankruptcy Code, 11 U.S.C. §§ 101–1532, all “Rule” references are to the Federal Rules
of Bankruptcy Procedure, all “Civil Rule” references are to the Federal Rules of Civil
Procedure, and all “LBR” references are to the Local Bankruptcy Rules for the Central
District of California Bankruptcy Court.
Ma Kazaz (“Debtor”) on NextGear’s claims for nondischargeability. After

trial, the bankruptcy court determined that NextGear failed to prove its

claims under § 523(a)(2), (a)(4), and (a)(6). On appeal, NextGear argues that

the court erred by finding no evidence for nondischargeability and by

denying NextGear’s request to read Debtor’s deposition testimony into the

record.

     We are troubled by the circumstantial evidence of fraud in this case;

it is apparent that Debtor or others close to Debtor engaged in wrongdoing.

But NextGear bears the burden of proving the elements of its claims. The

bankruptcy court properly evaluated the evidence produced by NextGear

and concluded that it did not establish the requisite elements of

nondischargeability. Our review of the bankruptcy court’s factual findings

is limited to whether the court clearly erred, and although the bankruptcy

court made overbroad pronouncements of law, NextGear has not

demonstrated reversible error. We AFFIRM.

                                  FACTS

A.   Prepetition Events

     NextGear is a finance company that provides credit line floor

financing for independent automobile dealers. In September 2019,

NextGear began a lending relationship with Kar Max, a California

corporation owned by Debtor. Kar Max executed a promissory note (“Loan

Agreement”) under which NextGear would make credit advances to Kar

Max for the purchase of motor vehicles. Kar Max granted NextGear a

                                      2
security interest on all its assets, including all vehicles and inventory, and

all of Kar Max’s accounts, documents, and records. NextGear perfected its

security interest by filing a UCC-1 financing statement. Debtor also signed

a personal guaranty of Kar Max’s obligation, and a power of attorney on

behalf of Kar Max and in favor of NextGear.

      Between September 24, 2019, and December 2, 2019, Kar Max

purchased twenty-nine vehicles using credit advances from NextGear.

Pursuant to the Loan Agreement, NextGear held the titles to each vehicle,

and it released the titles upon Kar Max’s sale of each vehicle. Kar Max used

NextGear’s online dealer portal to indicate sales of vehicles and initiate

electronic payments. NextGear’s process was to release each title upon

receipt of a payment corresponding to a sale of that vehicle, or if requested

by Kar Max in connection with a financed purchase.

      According to NextGear, between November 27, 2019, and December

3, 2019, Kar Max made seventeen payments totaling $735,770.56 for

twenty-six vehicles which it purportedly sold. In response to the online

payments, NextGear released the titles to the vehicles. However, the initial

payment was not honored by Kar Max’s bank due to insufficient funds,

and NextGear asserts that it received notice from Kar Max’s bank that stop

payment orders were requested by Kar Max on all seventeen payments.

Consequently, none of the payments were processed.

                                       3
      NextGear declared the note in default on December 4, 2019, but it

was unable to immediately locate the vehicles allegedly sold by Kar Max.2

Kar Max did not repay the amounts advanced under the Loan Agreement,

and NextGear filed suit in state court.

B.    The Adversary Complaint and Trial

      After Debtor filed a chapter 7 petition in May 2020, NextGear filed an

adversary complaint seeking a nondischargeable judgment under

§ 523(a)(2), (4), and (6), for the amounts due under the Loan Agreement.

      NextGear alleged that Debtor engaged in a fraudulent scheme and

had no intention of repaying the advances made by NextGear. It asserted

that Debtor sold the vehicles, intentionally placed the stop payment orders,

and retained the proceeds for his own benefit. NextGear claimed that

Debtor had sole control over Kar Max’s proceeds and, instead of paying

those proceeds to NextGear, embezzled the funds. Finally, NextGear

asserted that Debtor’s misappropriation of the proceeds constituted a

willful and malicious injury.

      The bankruptcy court conducted a one-day trial on February 10, 2022.

NextGear called three witnesses: notary Sylvia Garkow, Chase Bank

representative Jaime Cuevas, and Eric Stephens, a portfolio manager for

NextGear. Ms. Garkow testified that she notarized Debtor’s signature on

the power of attorney. 3 Mr. Cuevas explained the Kar Max bank account

      2
          NextGear ultimately located and repossessed one vehicle.
      3
          The other loan documents were not notarized, but appear to be electronically
                                             4
transactions involving stop payment orders and returns of payments for

insufficient funds. He also testified that Debtor had signatory authority on

Kar Max’s bank account and that Debtor added his brother, Marouf Kazaz,

as an authorized signer in July 2018 but later removed that authority.

      The bankruptcy court questioned Mr. Cuevas about whether the stop

payment orders could be correlated to specific payments made by Kar

Max, but neither the witness nor NextGear’s counsel could establish a

connection.4

      Mr. Stephens then testified generally about NextGear’s business

practices and specifically about his interactions with Debtor, the Loan

Agreement, and NextGear’s transactions with Kar Max. Regarding the

Loan Agreement, Mr. Stephens could not verify that Debtor electronically

signed on behalf of Kar Max. But he stated that in September 2019, he met

with Debtor at Kar Max’s location, obtained his identification, and

explained how the loan process would work.

      Mr. Stephens testified that after NextGear declared a default on

December 3, 2019, he returned to Kar Max’s location but found no vehicles

signed by Debtor on behalf of Kar Max.
      4 After questioning Mr. Cuevas and engaging in a colloquy with NextGear’s

counsel, the court asked:
      THE COURT: But you don’t have any evidence that those stop payments
      reflected anything to do with checks provided to NextGear?
      COUNSEL: No.
      THE COURT: With respect to this testimony?
      COUNSEL: Not with this witness.

                                         5
on the lot. He requested Kar Max’s business records but was unable to

obtain them from Marouf Kazaz or the landlord of the property. The office

where Kar Max had operated was empty, and a new dealership had taken

over the property.

      After examining the witnesses, counsel for NextGear proposed to

read excerpts from Debtor’s deposition transcript into the record. The

bankruptcy court confirmed with NextGear’s attorney that the transcript

had been lodged with the court, but that NextGear did not designate

specific portions which it sought to introduce as evidence or serve the

marked transcript on Debtor, and it did not include the transcript on its

exhibit list.

      Debtor objected to admission of the transcript and argued that he

was never provided with a copy of the deposition transcript or given the

opportunity to read and sign it. The bankruptcy court then asked counsel

for NextGear: “Did you give the deponent a copy of this written transcript

with both your questions and his answers, and give him an opportunity to

review . . . his answers and make any changes? Did you do that?” Counsel

for NextGear replied, “I don’t believe so, your Honor,” and, after further

discussion, acknowledged that he did not have proof that the transcript

was delivered to Debtor or his counsel. The court denied NextGear’s

request to read portions of the transcript into the record.

      After the court’s ruling, NextGear stated that it had no other

witnesses. Debtor did not call any witnesses and closed his case.

                                       6
C. The Court’s Ruling and NextGear’s Motion for Reconsideration

      At the conclusion of trial, the bankruptcy court questioned

NextGear’s attorney about what evidence had been produced to establish a

misrepresentation as part of its § 523(a)(2)(A) claim. After counsel asserted

that the misrepresentations were the payments made to obtain a release of

the vehicle titles, the court replied:

       The misrepresentation has to occur at the time he entered into
       the contract . . . . The misrepresentation or the omission has to
       take place when he signed the contract, not later on when he
       failed to pay, or sent an insufficient fund check. This action
       that you have sued him on is for liability of a promissory note
       and security agreement that he originally signed. For you to
       prevail on a 523(a)(2)(A) action, you need to demonstrate to
       me a misrepresentation that was made to induce your client to
       enter into the agreement, not later activities. That may come
       under 523(a)(6), but it certainly doesn’t come under
       523(a)(2)(A).

Hr’g Tr. (Feb. 10, 2022) at 137:23-138:15.

      The bankruptcy court then orally ruled that NextGear did not prove

its claims for nondischargeability. The court held that NextGear failed to

present any evidence of a fraudulent misrepresentation or deceptive

conduct by Debtor at the time the financing was obtained. The court

reasoned that NextGear did not present evidence that Debtor actually

signed the agreement on behalf of Kar Max, or that the stop payment

orders and notices of insufficient funds were correlated with specific

payments made by Kar Max.

                                         7
      The court further held that NextGear did not present evidence that

Debtor initiated the payments or stop payment orders with an intent to

obtain the titles, stating: “I have no evidence that [Debtor] did it. Anyone

with the passwords, I suspect, could have gotten in. But I have no evidence

today that he did that.” And the court determined that NextGear failed to

present evidence that Debtor knew the representations were false or that he

had an intent to deceive. It noted that the focus must be on the totality of

the circumstances and whether they create the overall impression of a

deceitful debtor, but stated: “Again, I could speculate. I could postulate. I

could—But I can’t find evidence for that, and that’s not the role that we

take.” The court also determined that NextGear did not present evidence of

justifiable reliance on—or damages proximately caused by—Debtor’s

conduct. The evidence merely supported activities undertaken by Kar Max.

      Regarding § 523(a)(4), the court held that, although Kar Max may

have held the vehicles in trust, NextGear did not prove that Debtor was

acting in a fiduciary capacity. NextGear did not present evidence of larceny

or embezzlement because it did not establish that Debtor took property

belonging to NextGear. The court reasoned that NextGear failed to show

that Debtor took the proceeds or even that Kar Max was no longer in

possession of the vehicles or proceeds, stating: “That’s the problem with

the evidence that I have in front of me, which is the only thing I can operate

on. I don’t know how [Debtor] stole, defalcated, took the money. You told

                                       8
me that Kar Max somehow benefitted, but you haven’t connected the

dots.”

       Finally, the court ruled that NextGear did not prove its claim under

§ 523(a)(6) because it presented no evidence to establish that Debtor acted

willfully and maliciously or committed a wrongful act.

       On February 16, 2022, the bankruptcy court issued an order entering

judgment in favor of Debtor. The order incorporated the court’s oral

rulings and further supplemented its reasoning. In addition to its stated

reasons for denying NextGear’s use of the deposition transcript, the court

cited NextGear’s failure to comply with LBR 7030-1(b), which sets forth the

requirements for offering deposition testimony as evidence.5 The court also

reiterated that, with respect to deceptive conduct by Debtor, NextGear did

       5
          LBR 7030-1(b) provides:
        Unless otherwise ordered by the court, each party intending to offer any
evidence by way of deposition testimony pursuant to F. R. Civ. P. 32 and F. R. Evid. 803
or 804 must:
        (1) Lodge the original deposition transcript and a copy pursuant to this rule with
the clerk at least 7 days before the hearing or trial at which it is to be offered;
        (2) Identify on the copy of the transcript the testimony the party intends to offer
by bracketing in the margins the questions and answers that the party intends to offer at
trial. The opposing party must likewise countermark any testimony that it plans to
offer. The parties must agree between themselves on a separate color to be used by each
party which must be used consistently by that party for all depositions marked in the
case;
        (3) Mark objections to the proffered evidence of the other party in the margins of
the deposition by briefly stating the ground for the objection; and
         (4) Serve and file notice of the portions of the deposition marked or
countermarked by stating the pages and lines so marked, objections made, and the
grounds indicated therefor. The notice must be served and filed within 7 days after the
party has marked, countermarked, or objects to the deposition evidence.
                                            9
not establish a sufficient link between the non-sufficient funds and stop

payment charges on Kar Max’s bank account and the payments made to

NextGear. As to whether Debtor initiated the payments and stop payment

orders, the court noted that NextGear elicited testimony that Debtor’s

brother was an authorized signer on the Kar Max account, but it failed to

provide evidence of when he was removed from the account.

      On February 24, 2022, NextGear filed a motion for a new trial, to alter

or amend the judgment, or for relief from the judgment, pursuant to Civil

Rules 59 and 60(b)(3), made applicable by Rules 9023 and 9024 (the

“Reconsideration Motion”). NextGear argued that Debtor and his counsel

misled the court by claiming that they did not receive the deposition

transcript. It attached a declaration from the court reporting company that

arranged Debtor’s deposition which evidenced that Debtor’s counsel was

emailed a copy of the transcript and that he confirmed receipt of the

transcript in a telephone conversation. NextGear argued that exclusion of

the deposition transcript prevented it from fully and fairly presenting its

case and claimed that the transcript would establish: (1) facts about Debtor

and his business; (2) that Debtor had sole control over Kar Max; (3) that

Debtor was the sole signer on the Kar Max bank account; and (4) that

Debtor destroyed Kar Max’s business records. It also maintained that

excluding the transcript was an overly harsh sanction for its failure to

comply with LBR 7030-1.

                                      10
       On March 4, 2022, the bankruptcy court denied the Reconsideration

Motion. NextGear timely appealed.

                                   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.

                                        ISSUES

       Did the bankruptcy court err by finding that NextGear failed to

establish nondischargeability under § 523(a)(2), (a)(4), or (a)(6)?

       Did the bankruptcy court err by excluding Debtor’s deposition

transcript as evidence?

                            STANDARDS OF REVIEW

       The ultimate question of whether a claim is nondischargeable is a

mixed question of law and fact, which we review de novo. Carillo v. Su (In

re Su), 290 F.3d 1140, 1142 (9th Cir. 2002). However, when the appellant

challenges the bankruptcy court’s factual findings, we review those

findings for clear error. 6 Id.

       6
         NextGear describes its issues on appeal as: “Whether Appellant made a prima
facie case that Appellee’s debt to Appellant should be excepted from discharge” under
§ 523(a)(2)(A), (4), & (6). Although the bankruptcy court ruled that there was no
evidence to prove the nondischargeability claims, it entered its findings of fact and
conclusions of law on the record at the conclusion of the trial, pursuant to Civil Rule
52(a), made applicable by Rule 7052. And even if Debtor had made a motion for a
directed verdict at the close of NextGear’s case, which is appropriately considered a
motion for judgment based on partial findings under Civil Rule 52(c), see Kuan v. Lund
(In re Lund), 202 B.R. 127, 129 (9th Cir. BAP 1996), and even if the court had ruled on
such a motion, we would still review the court’s decision for clear error. Id. at 130 (“On
a motion under [Civil Rule 52(c)], ‘[t]he judge is the trier of fact and may weigh and
                                            11
       Factual findings are clearly erroneous if they are illogical,

implausible, or without support in the record. Retz v. Samson (In re Retz),

606 F.3d 1189, 1196 (9th Cir. 2010). “Where there are two permissible views

of the evidence, the factfinder’s choice between them cannot be clearly

erroneous.” Anderson v. City of Bessemer City, 470 U.S. 564, 574 (1985).

       A bankruptcy court’s decision to exclude deposition testimony is an

evidentiary ruling which we review for abuse of discretion. See Nationwide

Life Ins., Co. v. Richards, 541 F.3d 903, 909 (9th Cir. 2008). To reverse an

evidentiary ruling, we must conclude both that there was an abuse of

discretion and that the error was prejudicial. Van Zandt v. Mbunda (In re

Mbunda), 484 B.R. 344, 351 (9th Cir. BAP 2012), aff’d, 604 F. App’x 552 (9th

Cir. 2015). A bankruptcy court abuses its discretion if it applies an incorrect

legal standard or its factual findings are illogical, implausible, or without

support in the record. TrafficSchool.com v. Edriver, Inc., 653 F.3d 820, 832 (9th

Cir. 2011).

consider the evidence and sustain defendant’s motion though plaintiff’s evidence
establishes a prima facie case that would have precluded a directed verdict for
defendant in a jury case.’” (quoting Stone v. Millstein, 804 F.2d 1434, 1437 (9th Cir.
1986))); Prado v. Stearman (In re Stearman), 256 B.R. 788, 791-92 (9th Cir. BAP 2000) (“We
review a finding made under Rule 7052(c) for clear error . . . [T]he focus is not on
whether [creditor] made a prima facie case with respect to [debtor’s] (alleged) intent to
deceive, for even if she had, the court could have still ruled on [debtor’s] motion as it
did. Instead, the focus concerns the court’s dispositive finding of the fact that [debtor]
lacked the intent to deceive.”).
                                            12
                                DISCUSSION

A.    The Bankruptcy Court Did Not Clearly Err by Finding Insufficient
      Evidence to Establish Nondischargeability.

      We disagree with the bankruptcy court’s ruling that NextGear

presented no evidence to prove nondischargeability; the record clearly

contains circumstantial evidence of Debtor’s wrongful conduct. But we

reverse the bankruptcy court’s factual findings only if they are clearly

erroneous, and we do not substitute our judgment for that of the

bankruptcy court. See Legal Serv. Bureau, Inc. v. Orange Cnty. Bail Bonds, Inc.

(In re Orange Cnty. Bail Bonds, Inc.), 638 B.R. 137, 149 (9th Cir. BAP 2022).

NextGear has not demonstrated that the bankruptcy court’s finding—that

NextGear failed to establish the elements of its claims—is illogical,

implausible, or without support in the record.

      1.    Section 523(a)(2)(A)

      To prevail on a nondischargeability claim under § 523(a)(2)(A),

NextGear had to prove, by a preponderance of the evidence:

(1) misrepresentation, fraudulent omission, or deceptive conduct by

Debtor; (2) knowledge of the falsity or deceptiveness of his statement or

conduct; (3) an intent to deceive; (4) justifiable reliance on Debtor’s

statement or conduct; and (5) damage proximately caused by its reliance on

the statement or conduct. Turtle Rock Meadows Homeowners Ass’n v. Slyman

(In re Slyman), 234 F.3d 1319, 1323 (9th Cir. 1996). A fraudulent omission of

a material fact may constitute a false representation if the debtor is under a

                                       13
duty to disclose. Apte v. Japra, M.D., F.A.C.C., Inc. (In re Apte), 96 F.3d 1319,

1323 (9th Cir. 1996). In such cases, reliance and causation are established

and need not be separately proven. Id.; see also Citibank (South Dakota), N.A.

v. Eashai (In re Eashai), 87 F.3d 1082, 1089 (9th Cir. 1996)).

      “[A] promise made with a positive intent not to perform or without a

present intent to perform satisfies § 523(a)(2)(A).” Rubin v. West (In re

Rubin), 875 F.2d 755, 759 (9th Cir. 1989). Additionally, a promise can be

fraudulent “where the promisor knew or should have known of his

prospective inability to perform.” McCrary v. Barrack (In re Barrack), 217

B.R. 598, 606 (9th Cir. BAP 1996) (citation omitted). In determining whether

a debtor had no intention to perform, the bankruptcy court may look to all

surrounding facts and circumstances. Id. at 607.

      NextGear does not allege a fraudulent omission by Debtor; it argues

that Debtor made affirmative misrepresentations by entering the payments

on behalf of Kar Max with the intent to place stop payment orders.

      In rejecting NextGear’s argument, the bankruptcy court held that the

misrepresentation or omission had to occur when Debtor signed the

contract, not when he later failed to pay. But, under the type of revolving

credit line at issue here, nondischargeability claims are not limited to

misrepresentations made at the inception of the agreement. Subsequent

credit advances may be nondischargeable if they are made in justifiable

reliance upon a debtor’s subsequent misrepresentations, fraudulent

omissions, or deceptive conduct. For example, if the payments increased

                                        14
available credit by reducing the outstanding balance, thereby inducing

NextGear to make further advances, or if the payments induced NextGear

to release vehicle titles, NextGear may have a cognizable claim under

§ 523(a)(2)(A) if it can prove resulting damage.

      We agree with the bankruptcy court that NextGear did not prove

fraud at the time of the Loan Agreement.7 Notwithstanding the bankruptcy

court’s overly restrictive pronouncement of law, we also agree that

NextGear failed to prove a claim for damages resulting from Debtor’s

alleged fraud in making the payments.

      The debt NextGear seeks to make nondischargeable is Kar Max’s full

contractual obligation, which Debtor guaranteed. Advances made prior to

November 27, 2019, when Debtor purportedly made the first fraudulent

payment, could not have been obtained by that fraud. See New Falls Corp. v.

Boyajian (In re Boyajian), 367 B.R. 138, 147 (9th Cir. BAP 2007) (“For

purposes of § 523(a)(2), . . . the timing of the fraud and the elements to

prove fraud focus on the time when the lender made the extension of credit

      7
        On appeal, NextGear suggests that because the Loan Agreement included
Borrower’s representations that payments would be made from an account with
immediately available funds sufficient to cover electronic payments—and Debtor
signed the Loan Agreement as president of Kar Max—he made express representations
of good funds at loan inception. NextGear did not present evidence of Debtor’s intent to
defraud at the time of the Loan Agreement, and it did not prove that Debtor was
making representations in his individual capacity by signing on behalf of Kar Max.
Moreover, in the bankruptcy court and on appeal, NextGear argues that Debtor made
misrepresentations by making payments with the intent to place stop payment orders
after NextGear released the titles.
                                          15
to the Debtor.” (cleaned up)); see also Reingold v. Shaffer (In re Reingold), BAP

Nos. CC-12-1112-PaDKi, CC-12-1141-PaDKi, 2013 WL 1136546, at *5 (9th

Cir. BAP Mar. 19, 2013) (“misrepresentations made by a debtor to a creditor

after the credit has been extended have no effect upon the discharge of the

debt.”) (citations omitted)); 4 COLLIER ON BANKRUPTCY ¶ 523.08 [1] (Alan N.

Resnick & Henry J. Sommer, eds. 16th ed. rev. 2020) (“If the property or

services were obtained before the making of any false representation,

subsequent misrepresentations will have no effect on dischargeability.”).

      It is possible that advances made after November 27, 2019, were

obtained by fraud. But NextGear did not argue in the bankruptcy court or

on appeal that it was induced to make subsequent advances by the

allegedly fraudulent payments. Additionally, the record appears to

indicate that NextGear made advances exceeding the credit limit prior to

the November 27, 2019 payment.

      Furthermore, while it may be possible that fraudulent payments

induced NextGear to release the vehicle titles, NextGear does not articulate

how releasing the titles caused it any damage. Sales of the vehicles would

be effective between Kar Max and buyers even if NextGear withheld the

titles. See Brasher’s Cascade Auto Auction v. Valley Auto Sales & Leasing, 119

Cal. App. 4th 1038, 1063-64 (2004). Similarly, NextGear’s security interests

were not contingent on holding the titles because the vehicles were Kar

Max’s inventory, and thus, the validity and perfection of NextGear’s

security interests was exclusively controlled by the California Commercial

                                       16
Code. See Cal. Veh. Code § 5907; Simon v. Chrysler Credit Corp. (In re

Babaeian Transp. Co.), 206 B.R. 536, 545 (Bankr. C.D. Cal. 1997).

      Whether or not NextGear released the titles, its security interests

would continue in sale proceeds, and would ordinarily continue in the

vehicles unless they were sold to “buyers in the ordinary course of

business.” See Cal. Com. Code §§ 9315; 9320(a). NextGear did not prove

that Kar Max sold the vehicles or that its security interests did not continue

in the vehicles notwithstanding the purported sales. And it failed to show

that Kar Max was not in possession of proceeds which would be subject to

its security interests.

      Though the record contains circumstantial evidence that Debtor or

someone close to Debtor may have engaged in fraud, we do not find the

bankruptcy court’s factual findings illogical, implausible, or without

support in the record. The court did not clearly err by denying relief under

§ 523(a)(2)(A).

      2.     Section 523(a)(4)

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

defalcation while acting in a fiduciary capacity, embezzlement, or larceny.”

NextGear does not allege fraud or defalcation by a fiduciary; it alleges that

Debtor committed embezzlement or larceny.

      Embezzlement for purposes of § 523(a)(4) is governed by federal law.

First Del. Life Ins. Co. v. Wada (In re Wada), 210 B.R. 572, 576 (9th Cir. BAP

1997). Embezzlement is defined as “the fraudulent appropriation of
                                       17
property by a person to whom such property has been [e]ntrusted or into

whose hands it has lawfully come.” Id. (citation omitted). Embezzlement

“requires a showing of wrongful intent.” Bullock v. BankChampaign, N.A.,

569 U.S. 267, 274 (2013).

      To prevail on a claim for embezzlement, a creditor must prove:

(1) the property was rightfully in the possession of a non-owner; (2) the

non-owner appropriated the property to a use other than which it was

entrusted; and (3) circumstances indicating fraud. Transamerica Com. Fin.

Corp. v. Littleton (In re Littleton), 942 F.2d 551, 555 (9th Cir. 1991).

      Larceny is the “felonious taking of another’s personal property with

intent to convert it or deprive the owner of the same.” Ormsby v. First Am.

Title Co. of Nev. (In re Ormsby), 591 F.3d 1199, 1205 (9th Cir. 2010) (citation

omitted). Essentially, the difference between embezzlement and larceny is

whether the defendant initially had the right to possess the property. See

Peltier v. Van Loo Fiduciary Servs., LLC (In re Peltier), 643 B.R. 349, 360 (9th

Cir. BAP 2022).

      NextGear argues that Debtor committed either embezzlement or

larceny by inducing it to release titles and failing to repay the credit

advances. It suggests that Debtor then either received payment from

buyers or fraudulently transferred the vehicles to third parties.

      NextGear fails to identify any property belonging to NextGear which

Debtor wrongfully took. The funds advanced under the Loan Agreement

and the vehicles that Kar Max purchased belonged to Kar Max, not

                                         18
NextGear. The vehicles were subject to NextGear’s security interest and

Kar Max had contractual obligations regarding disposition of the vehicles

which it apparently breached, but NextGear does not explain why that

constitutes embezzlement or larceny by Debtor. In other words, NextGear

does not identify any of its property that was entrusted to Debtor, and it

does not demonstrate that Debtor wrongfully appropriated it.

      NextGear argues that under California law, “a lien constitutes a

property interest which may be converted.” Farmers Ins. Exchange v. Zerin,

53 Cal. App. 4th 445, 451 (1997). Consequently, “one who wrongfully

withholds personal property from one who is entitled to it under a security

agreement may be liable for conversion.” Thiara v. Spycher Bros. (In re

Thiara), 285 B.R. 420, 428 (9th Cir. BAP 2002). The record does not establish

that Debtor withheld the vehicles or sale proceeds, or even that the vehicles

were actually sold. And as discussed above, NextGear failed to show that

its security interests did not continue in the vehicles and proceeds if the

vehicles were sold. The bankruptcy court did not clearly err by

determining that NextGear failed to prove nondischargeability under

§ 523(a)(4).

      3.       Section 523(a)(6)

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

and malicious injuries to an entity or its property. In re Ormsby, 591 F.3d at

1206. The willfulness and malice elements are legally distinct and require

separate consideration. In re Su, 290 F.3d at 1146-47.

                                      19
      Under § 523(a)(6), a debt arises from a “willful” injury when the

debtor subjectively intended to cause injury to the creditor or subjectively

believed that injury was substantially certain to occur. In re Ormsby, 591

F.3d at 1206. A debt arises from a “malicious” injury when it is based on:

“(1) a wrongful act, (2) done intentionally, (3) which necessarily causes

injury, and (4) is done without just cause or excuse.” Id. at 1207 (quoting

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

      According to NextGear, Debtor caused willful and malicious injury

by taking possession of NextGear’s collateral and refusing to turn over the

vehicles after default. It argues that Debtor converted the vehicles, and

conversion under state law can support nondischargeability under

§ 523(a)(6).

      But again, NextGear did not prove that Debtor had possession of the

vehicles or that he refused to turn them over upon default. NextGear

merely elicited testimony that its representative did not see the vehicles at

Kar Max’s lot on December 3, 2019. While this is circumstantial evidence of

potential wrongdoing by someone associated with Kar Max, it is not

conclusive of Debtor’s wrongdoing.

      Moreover, conversion under California law decides only that a

defendant has engaged in wrongful dominion over a plaintiff’s property; it

does not decide that a defendant caused “willful and malicious” injury.

Peklar v. Ikerd (In re Peklar), 260 F.3d 1035, 1039 (9th Cir. 2001). To prevail on

a § 523(a)(6) claim based on conversion under California law, NextGear

                                         20
had to “first establish that a conversion has occurred under California law,

and second that the conversion is willful and malicious.” Comcast of L.A.,

Inc. v. Sandoval (In re Sandoval), 341 B.R. 282, 295 (Bankr. C.D. Cal. 2006); see

also In re Thiara, 285 B.R. at 429 (“Even though a conversion occurred,

[creditor] still had to prove that Debtor converted the proceeds with

‘wrongful intent.’”).

      The bankruptcy court determined that NextGear did not present

sufficient evidence to establish either that Debtor committed a wrongful

act, or that he had the requisite subjective state of mind to make his

conduct willful and malicious. The court’s finding was not clearly

erroneous.

B.    The Bankruptcy Court did not Abuse its Discretion by Precluding
      Deposition Testimony.

      Pursuant to Civil Rule 32(a), made applicable by Rule 7032, all or part

of a transcript may be used against a party if: (1) the party was present or

represented at the deposition, (2) the transcript is used to the extent it

would be admissible under the Federal Rules of Evidence if the deponent

were present, and (3) its use is allowed by Civil Rule 32(a)(2) through (8).

Civil Rule 32(a)(3) provides that an adverse party may use the deposition

of a party “for any purpose.”

      Bankruptcy courts “enjoy significant discretion in deciding whether

to admit party deposition transcripts used by the adverse party.” Tejeda v.

Velasquez (In re Tejeda), BAP No. CC-18-1227-SFL, 2019 WL 1212354, at *6

                                       21
(9th Cir. BAP Mar. 12, 2019) (citing Nationwide Life Ins. Co., 541 F.3d at 914;

Mark IV Props., Inc. v. Club Dev. & Mgmt. Corp., 12 B.R. 854, 859 (Bankr. S.D.

Cal. 1981); Hub v. Sun Valley Co., 682 F.2d 776, 778 (9th Cir. 1982)). The

bankruptcy court is in the best position to decide whether to admit a prior

deposition because “the underlying objective is efficiency at trial without

jeopardizing accurate fact finding.” Sun Valley Co., 682 F.2d at 778. Thus, if

the court applies the correct legal standards, “we will not normally

substitute our judgment on the admissibility of a prior deposition.” Id.

      NextGear argues the bankruptcy court erred by refusing to admit the

deposition testimony because Debtor’s counsel falsely represented that

Debtor was never given the opportunity to read or sign the transcript. It

maintains that by excluding the testimony, the bankruptcy court prevented

it from establishing Debtor’s fraudulent conduct, and without the

transcript, it was unable to present its case against Debtor fully and fairly.

We disagree.

      The bankruptcy court did not abuse its discretion by excluding the

transcript at trial. Given NextGear’s admitted noncompliance with LBR

7031-1(b), and the unresolved question about whether Debtor received the

transcript, the court properly exercised its discretion to exclude the

deposition transcript in favor of live testimony. See, e.g., C. Wright & A.

Miller, 8A FEDERAL PRACTICE AND PROCEDURE, CIVIL, § 2142 (3d ed. 2022)

(describing the “long-established principle that testimony by deposition is

less desirable than oral testimony”); 7 James W. Moore et al., MOORE’S

                                       22
FEDERAL PRACTICE, CIVIL §32.02[1][a] (2022) (discussing the “strong

preference of Anglo-American courts for live testimony”); Napier v. Bossard,

102 F.2d 467, 469 (2d Cir. 1939) (Learned Hand, J.) (“The deposition has

always been, and still is, treated as a substitute, a second-best, not to be

used when the original is at hand.”).

      It its Reconsideration Motion, NextGear provided evidence that

Debtor’s counsel misinformed the court at trial; Debtor did receive a copy

of the transcript. In denying the Reconsideration Motion, the court held

that, notwithstanding Debtor’s false statement about receipt of the

transcript, it would have excluded the transcript based on NextGear’s

noncompliance with LBR 7031-1(b), and NextGear’s failure to lodge a

transcript that satisfied Civil Rule 30(e)(2).8

      On appeal, NextGear argues that the bankruptcy court abused its

discretion by excluding the transcript as a sanction for its failure to comply

with technical provisions of the local bankruptcy rules.

      “The bankruptcy court has broad discretion to apply its local rules

strictly or to overlook any transgressions.” Nunez v. Nunez (In re Nunez),

196 B.R. 150, 157 (9th Cir. BAP 1996); see also Qualls v. Blue Cross of Cal., Inc.,

22 F.3d 839, 842 n.2 (9th Cir. 1994) (“Only in rare cases will we question the

exercise of discretion in connection with application of the local rules.”).

      8 Civil Rule 30(e)(2) requires the deposition officer to provide a certification
prescribed by Civil Rule 30(f)(1), indicate whether the deponent requested a review of
the transcript, and if so, attach any changes made by the deponent. The transcript
lodged by NextGear did not include a certification by the deposition officer.
                                           23
       But when the court sanctions a party based on a failure to comply

with local rules, its discretion is narrow, and must meet strict criteria.

Zambrano v. City of Tustin, 885 F.2d 1473, 1477 (9th Cir. 1989) (requiring

sanctions for violation of local rules to be: (1) consistent with governing

statutes and court rules; (2) necessary for the court to conduct its business;

and (3) closely connected to the need to preserve the integrity of the court’s

docket.) Sanctions based on local rule violations also require a level of

culpability higher than mere negligence. See Olomi v. Tukhi (In re Tukhi), 568

B.R. 107, 112 (9th Cir. BAP 2017).

       In denying the Reconsideration Motion, the bankruptcy court

explained that its decision to exclude the transcript was based on

NextGear’s failure to comply with LBR 7030-1 and its repeated and

continued failures to follow applicable local rules and court orders

throughout the case. It concluded that even if the exclusion of the transcript

was case-dispositive, the factors enumerated in Malone v. U.S. Postal Serv.,

833 F.2d 128, 130 (9th Cir. 1987) 9 warranted the sanction.

       NextGear has not demonstrated that the court abused its discretion

by excluding the deposition transcript, but even if it did, we do not reverse

       9
         In Malone, the Ninth Circuit held that dismissal for failure to comply with court
orders required evaluation of five factors: “(1) the public’s interest in expeditious
resolution of litigation; (2) the court’s need to manage its docket; (3) the risk of prejudice
to the defendants; (4) the public policy favoring disposition of cases on their merits; and
(5) the availability of less drastic sanctions.” 833 F.2d at 130.
                                             24
a bankruptcy court’s evidentiary decision absent a showing of prejudice.

See In re Mbunda, 484 B.R. at 351.

      NextGear has not made a credible showing of prejudice. It included

Debtor on its pretrial witness list and Debtor was present at trial and

available to testify. Yet, after the court denied its request to read the

deposition transcript, NextGear chose not to call Debtor as a witness. See

Brazos River Authority v. GE Ionics, Inc., 469 F.3d 416, 434 (5th Cir. 2006)

(“[D]istrict courts are reluctant to allow the reading into evidence of [a]

deposition if the witness is available to testify at trial, and such exclusion is

usually deemed harmless error.” (cleaned up)); Dhyne v. Meiners Thriftway,

Inc., 184 F.3d 983, 990 (8th Cir. 1999) (“[T]hough arguably inconsistent with

the language of [Civil] Rule 32(a)(2), precluding a party from reading the

deposition testimony of an available adverse party is at worst harmless

error.”).

      NextGear argues that it was deprived of a full and fair opportunity to

establish Debtor’s fraudulent conduct, but we see no reason why the

testimony it adduced at Debtor’s deposition could not be adduced at trial

through live testimony. The bankruptcy court did not abuse its discretion

by excluding Debtor’s deposition testimony and NextGear has not shown

any prejudice by the exclusion.

C.    NextGear’s Other Arguments

      NextGear argues that if Debtor’s brother Marouf Kazaz was the party

who engaged in the alleged fraudulent conduct, Debtor should be liable for

                                       25
the debt under principles of estoppel and ratification. Essentially, it claims

that Debtor should be estopped from denying his brother’s alleged fraud

because he did nothing to prevent the theft, did not assist NextGear in

recovering the collateral, and allegedly destroyed Kar Max’s business

records. Alternatively, NextGear argues that Debtor ratified the actions of

his brother because Debtor had control of Kar Max’s bank account yet

remained silent about any unauthorized use of the account.

      These arguments are meritless. NextGear made no allegation of

estoppel or ratification in its complaint and presented no evidence at trial

to support such liability. Moreover, estoppel is akin to implied waiver and

can be employed only for defensive purposes. See Peasley v. Verizon Wireless

(VAW) LLC, 364 F.Supp.2d 1198, 1200-01 (S.D. Cal. 2005) (citing Matsuo

Yoshida v. Liberty Mut. Ins. Co., 240 F.2d 824, 829-30 (9th Cir. 1957)).

Estoppel and waiver can preclude the assertion of legal rights but cannot

be used to impose legal duties. Id. at 1201 (quoting Groves v. Prickett, 420

F.2d 1119, 1125-26 (9th Cir. 1970).

      If Debtor’s brother made payments or sold vehicles on behalf of Kar

Max, ratification would merely make Kar Max liable for the actions of its

unauthorized agent. See Rakestraw v. Rodrigues, 8 Cal. 3d 67, 72-74 (1973)

(discussing the effect of ratification under California law). NextGear does

not articulate a legal basis for a nondischargeable judgment against Debtor

based on these theories.

                                       26
                            CONCLUSION

     Based on the foregoing, we AFFIRM the bankruptcy court’s order

denying NextGear’s claims for nondischargeability.

                                   27