Court Opinion

ID: 818100
Source: CourtListenerOpinion
Date Created: 2013-02-01 22:56:25.059041+00
Date Added: 2024-06-11T08:04:21.678410
License: Public Domain

FILED
                                                            NOV 01 2012
 1                                                      SUSAN M SPRAUL, CLERK
                                                          U.S. BKCY. APP. PANEL
 2                                                        OF THE NINTH CIRCUIT

 3                   UNITED STATES BANKRUPTCY APPELLATE PANEL
 4                             OF THE NINTH CIRCUIT
 5   In re:                        )         BAP No.   12-1269-JuKiD
                                   )
 6   JAMES LARRY SACCHERI and      )         Bk. No.   09-17721
     JUDITH ANNE SACCHERI,         )
 7                                 )         Adv. No. 09-1273
                    Debtors.       )
 8   ______________________________)
     JAMES LARRY SACCHERI,         )
 9                                 )
                    Appellant,     )
10                                 )
     v.                            )         M E M O R A N D U M*
11                                 )
     ST. LAWRENCE VALLEY DAIRY;    )
12   JUDITH ANNE SACCHERI,         )
                                   )
13                  Appellees.     )
     ______________________________)
14
                     Argued and Submitted on October 19, 2012
15                           at Sacramento, California
16                           Filed - November 1, 2012
17                Appeal from the United States Bankruptcy Court
                      for the Eastern District of California
18
              Honorable Richard T. Ford, Bankruptcy Judge, Presiding
19                      _____________________________________
20   Appearances:      Appellant James Larry Saccheri argued pro se;
                       Jeff Reich, Esq. argued for appellee St. Lawrence
21                     Valley Dairy.
                       ____________________________________
22
23   Before:     JURY, KIRSCHER, and DUNN 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-
 1            Chapter 71 debtor, James Larry Saccheri (“Saccheri” or
 2   “Debtor”), appeals from the bankruptcy court’s judgment in favor
 3   of appellee, St. Lawrence Valley Dairy, Inc. (the “Dairy”),
 4   finding that his debt in the amount of $492,006.67 plus
 5   attorneys’ fees of $59,382.50 and costs of $2,737.50 was
 6   nondischargeable under § 523(a)(2)(A) and (4).
 7            We AFFIRM the bankruptcy court’s decision finding that the
 8   debt was nondischargeable under § 523(a)(2)(A) and
 9   (a)(4)(embezzlement), except for the award of attorneys’ fees
10   which we REVERSE.      We remand this proceeding to the bankruptcy
11   court for entry of judgment consistent with this disposition.
12                                   I. FACTS
13   A.       Prepetition Events
14            Saccheri, an attorney,2 approached his friends and clients
15   to invest in a dairy farm located in Chateaugay, New York.        One
16   of the investors, Michael J. Montgomery (“Montgomery”), was a
17   distant family member of Saccheri and Saccheri’s client for
18   almost twenty years.3     The other investors, James and Joan
19   Kozera, had known Saccheri since grade school and were also
20
21
          1
22          Unless otherwise indicated, all chapter and section
     references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532, and
23   “Rule” references are to the Federal Rules of Bankruptcy
     Procedure.
24
          2
            Saccheri resigned from the California State Bar in April
25   2001 with charges pending.
26        3
            Montgomery was also a farmer and real estate investor. He
27   testified that he owned approximately 135 income properties
     consisting of single family residences, commercial buildings and
28   apartment buildings. Montgomery invested $480,000 in the Dairy.

                                       -2-
 1   former clients.4     Montgomery and the Kozeras did not want to
 2   invest in the Dairy if loans were involved.
 3            From September 4, 2003 until November 24, 2003, Saccheri
 4   was the sole officer and director of the Dairy.     On November 24,
 5   2003, Montgomery became the secretary/treasurer.     On April 12,
 6   2004, at the Dairy’s first annual meeting of shareholders and
 7   directors, Montgomery, James Kozera, Joan Kozera and Saccheri
 8   were elected to the board of directors.     Saccheri was elected
 9   president, Montgomery was elected secretary/treasurer,
10   Mr. Kozera was elected vice-president and Mrs. Kozera was a
11   director.     The officers and directors remained the same until
12   December 27, 2007.
13            At all times, Saccheri had control of the Dairy’s bank
14   accounts and he alone kept the company’s books and prepared the
15   financial statements.     Over time, Saccheri began taking
16   substantial sums of money from the Dairy in the form of “loans”
17   without board approval and which far exceeded his annual
18   compensation of $30,000.5     These “loans” were capitalized as
19   “other assets” on the Dairy’s balance sheet with a line item
20   entitled “North Country Trust” or “NC Trust”.
21            In 2007, Montgomery became aware that he had signed papers
22   for an unauthorized secured loan arranged by Saccheri in the
23
24        4
            There were other investors as well. Saccheri testified
     that his sister, Janice, and her husband invested $20,000. The
25
     record also shows that Dr. Lee invested in the Dairy. Dr. Lee’s
26   shares were bought back for $50,000 (500 shares at $100 a share).
          5
27          Saccheri disputes the bankruptcy court’s factual finding
     that his salary was $30,000. As noted below, we do not find any
28   of the court’s factual findings clearly erroneous.

                                       -3-
 1   amount of $350,000 from Yankee Farm Credit to the Dairy.
 2   Montgomery received a letter from the bank stating that the
 3   property taxes were not being paid on the property in New York,
 4   which was a requirement of the loan.
 5        Also in 2007, Montgomery further learned about Saccheri’s
 6   self-dealings and concealment of the financial condition of the
 7   Dairy through his trust attorney, Paul Franco, who had reviewed
 8   the Dairy’s records.   Saccheri’s self-dealings included, among
 9   other things, obtaining the unauthorized secured loan from
10   Yankee Farm Credit and his use of the Dairy’s money to pay
11   personal expenses, including payments on his house and for
12   health insurance.   Montgomery also learned from his trust
13   attorney that he had personally guaranteed the $350,000 Yankee
14   Farm Credit loan by signing a document without reading it.
15        Montgomery called a meeting at Mr. Franco’s office.     The
16   Kozeras, Montgomery, Saccheri and others attended.   After they
17   left the meeting, the board members realized that Saccheri alone
18   was preparing the financial statements and doing the bookkeeping
19   for the Dairy.   They agreed that a CPA should be hired.   At a
20   subsequent meeting, after Saccheri failed to bring in an
21   accountant, Saccheri resigned.
22        Subsequently, Mrs. Kozera and Mr. Ezell, the CPA, discussed
23   money going in and out of the Dairy’s bank account to other bank
24   accounts the board members knew nothing about.   They discovered
25   that Saccheri had written checks from the Dairy to pay back
26   funds to the Palmira Marando Trust, which was maintained for
27   Montgomery’s grandmother.   Saccheri had taken funds from the
28

                                      -4-
 1   trust in his role as trustee.6     They also discovered that
 2   Saccheri had written unauthorized checks totaling $152,400.44
 3   from the Dairy to the Trenhaile Estate.     At an April 1, 2008,
 4   shareholder meeting, when Saccheri was asked why he took the
 5   money from the Dairy, Saccheri replied that he was in debt from
 6   his declining law practice 1995 to 2000.     Then from 2000 to 2004
 7   he stated that he accumulated even more personal consumer debt.
 8            On June 25, 2008, the parties entered into a settlement and
 9   release agreement (“Settlement Agreement”) whereby they settled
10   the claims for $375,000.     In connection with the Settlement
11   Agreement, Saccheri signed an unsecured promissory note for
12   $299,000 and a second note for $76,000 which was secured by a
13   deed of trust on Saccheri’s family home.     Under the terms of the
14   settlement, if Saccheri was not in default, the Dairy agreed not
15   to pursue any action at law or equity against him.     The
16   Settlement Agreement contained an attorneys’ fees clause which
17   stated that the losing party shall pay the prevailing party a
18   reasonable sum for attorneys’ fees incurred in bringing an
19   action for the purpose of enforcing this Settlement Agreement or
20   pursuing a breach thereof.
21            Saccheri made only a few payments on the notes before
22   defaulting.
23   B.       Bankruptcy Events
24            On August 12, 2009, Saccheri and his wife Judith filed a
25   joint chapter 7 petition.     In Schedule D, debtors listed the
26
27
          6
            Saccheri admitted that he wrote twenty-eight checks to the
28   Palmira Marando Trust totaling $81,525.

                                       -5-
 1   Dairy as having a secured debt in the amount of $75,597 against
 2   their residence.   In Schedule F, debtors listed the Dairy as
 3   having an unsecured debt in the amount of $297,416.
 4                         The Adversary Proceeding
 5        On November 9, 2009, the Dairy filed a nondischargeability
 6   complaint against Debtor for an unliquidated amount.   On
 7   June 25, 2010, the Dairy filed a third amended complaint
 8   (“TAC”).   The TAC alleged four claims for relief, with the first
 9   three claims asserted against Debtor and the fourth claim
10   asserted against Judith.    The first and second claims for relief
11   were based on § 523(a)(4) and alleged that Debtor had committed
12   fraud or defalcation while acting in a fiduciary capacity and
13   embezzlement.   The third claim for relief, based on
14   § 523(a)(2)(A), alleged that Debtor had obtained money and goods
15   by false pretenses, false representation and actual fraud.   The
16   facts underlying each of the claims for relief were essentially
17   the same and related to the numerous unauthorized “loans” Debtor
18   had taken from the Dairy and his concealment of those “loans”
19   from the other board members.
20        The fourth claim for relief, asserted against Judith only,
21   was based on § 523(a)(6).   The bankruptcy court dismissed the
22   claim against Judith on summary judgment.
23        On April 6, 2011, the bankruptcy court held a final pre-
24   trial hearing and bifurcated the trial into liability and damage
25   phases.    The court set a trial for the liability phase on May 9
26   and 10, 2011.   At the conclusion of the trial the matter was
27   submitted to allow for further findings and briefs.
28        On June 29, 2011, the bankruptcy court issued its findings

                                     -6-
 1   of fact and conclusions of law.   The bankruptcy court found that
 2   the Dairy had proven all the elements for embezzlement under
 3   § 523(a)(4), for defalcation while acting as fiduciary under
 4   § 523(a)(4) and for fraud under § 523(a)(2)(A).   Based on these
 5   conclusions, the court found that the debt in an unspecified
 6   amount was nondischargeable.
 7        On July 18, 2011, the Dairy filed a fourth amended
 8   complaint which restated its TAC and added a fifth claim for
 9   relief requesting a declaration that Judith’s community property
10   interest was liable for the nondischargeable debt attributed to
11   her spouse.
12        The damage phase proceeded to trial on November 29 and 30,
13   and December 1, 2011.   On April 6, 2012, the bankruptcy court
14   issued additional findings of fact and conclusions of law.    In a
15   forty-four line item chart which listed various checks and
16   transactions, certain amounts were charged against Saccheri,
17   credited or disallowed.   The court addressed each of the items,
18   ultimately finding the total nondischargeable amount was
19   $399,131.35.   The court also found that the Dairy, as the
20   prevailing party, was entitled to its attorneys’ fees and costs
21   under the terms of the Settlement Agreement.   In its conclusions
22   of law, the bankruptcy court found that Judith’s community
23   assets were liable for the damages.   Also, due to Debtor’s
24   fraudulent conduct, the bankruptcy court applied the doctrine of
25   unclean hands and found Debtor was not entitled to the benefit
26   of doubt on the issues of damages.    The bankruptcy court noted
27   that Debtor had deceived people who had trusted him over a
28   substantial period of time.

                                    -7-
 1        The Dairy then submitted its application for attorneys’
 2   fees and costs seeking $59,382.50 in fees and $2,737.50 in costs
 3   for a total of $62,120.   The Dairy attached detailed time
 4   records to the application.
 5        On May 2, 2012, Debtor filed an opposition to the fee
 6   application.   Relying on Itule v. Metlease, Inc. (In re Itule),
 7   114 B.R. 206, 213 (9th Cir. BAP 1990); Grove v. Fulwiler
 8   (In re Fulwiler), 624 F.2d 908, 910 (9th Cir. 1980); and
 9   AT&T Universal Card Servs. v. Bonnifield (In re Bonnifield),
10   154 B.R. 743, 745 (Bankr. N.D. Cal. 1993), Debtor argued that
11   the attorneys’ fees and costs should not be awarded because the
12   attorneys’ fees provision in the Settlement Agreement was
13   conditioned on an action that was brought for the purpose of
14   enforcing the agreement or pursuing a breach thereof.    Debtor
15   asserted that the Dairy was not seeking to enforce the
16   Settlement Agreement or the notes in the adversary, instead
17   choosing to litigate issues related to fraud, not contract.
18   Debtor also objected to the amount of fees requested because
19   they were unreasonable.
20        In reply, the Dairy argued that the adversary was “simply
21   the enforcement of the subject Settlement Agreement.    In such
22   matters, attorney[s]’ fees are permissible.”   The Dairy, citing
23   Transought v. Johnson, 931 F.2d 1505 (11th Cir. 1991), asserted
24   the general rule that attorneys’ fees are properly awarded to a
25   creditor prevailing on a bankruptcy claim if there exists a
26   statute or valid contract authorizing the fees.
27        On May 7, 2012, the bankruptcy court issued further
28   findings of fact and conclusions of law.   The court found that

                                    -8-
 1   the amount of damages listed as $399,131.35 was incorrect.        The
 2   bankruptcy court noted that the correct amount of damages was
 3   $492,006.57.    Citing Fleishmann Distilling Corp. v. Maier
 4   Brewing Co., 386 U.S. 714, 717 (1967), the bankruptcy court
 5   noted that attorneys’ fees are not ordinarily recoverable in the
 6   absence of a statute or enforceable contract providing for such
 7   fees.    The court concluded that the Settlement Agreement clearly
 8   provided for allowance of attorneys’ fees.       The court also
 9   observed that Cal. Code Civ. P. § 1021 provided for attorneys’
10   fees by agreement, express or implied.        In the end, the
11   bankruptcy court decided that the requested fees were reasonable
12   and awarded them in full.
13           On May 7, 2012, the bankruptcy court filed the judgment
14   finding $492,006.57 plus attorneys’ fees of $59,382.50 and costs
15   of $2,737.50 nondischargeable under § 523(a)(2)(A) and (4).        On
16   May 8, 2012, the bankruptcy court entered the judgment.         Debtor
17   timely filed a notice of appeal.
18                             II.   JURISDICTION
19           The bankruptcy court had jurisdiction over this proceeding
20   under 28 U.S.C. §§ 1334 and 157(b)(2)(I).       We have jurisdiction
21   under 28 U.S.C. § 158.
22                                III.    ISSUES
23           A.   Whether the bankruptcy court erred in concluding that
24   the Dairy proved the elements for nondischargeability under
25   § 523(a)(2)(A);
26           B.   Whether the bankruptcy court erred in concluding that
27   the Dairy proved the elements for embezzlement under
28   § 523(a)(4);

                                         -9-
 1            C.   Whether the bankruptcy court erred in finding that
 2   Debtor was a fiduciary within the meaning of § 523(a)(4);
 3            D.   Whether the bankruptcy court erred in its calculation
 4   of damages; and
 5            E.   Whether the bankruptcy court erred in awarding the
 6   Dairy its attorneys’ fees.7
 7                           IV.   STANDARDS OF REVIEW
 8            In the context of an appeal from a nondischargeability
 9   judgment, we review the bankruptcy court’s findings of fact
10   under the clearly erroneous standard and its conclusions of law
11   de novo.      Honkanen v. Hopper (In re Honkanen), 446 B.R. 373, 382
12   (9th Cir. BAP 2011).     However, the ultimate question of whether
13   a particular debt is dischargeable is a mixed question of fact
14   and law that we review de novo.      Id.; see also Searles v. Riley
15   (In re Searles), 317 B.R. 368, 373 (9th Cir. BAP 2004) (stating
16   that mixed questions are reviewed de novo when they require the
17   court “to consider legal concepts and exercise judgment about
18   values animating legal principles.”).
19            “The determination of justifiable reliance [under
20   § 523(a)(2)(A)] is a question of fact subject to the clearly
21   erroneous standard of review.”      Eugene Parks Law Corp. Defined
22   Benefit Pension Plan v. Kirsh (In re Kirsh), 973 F.2d 1454, 1456
23   (9th Cir. 1992) (per curiam).
24            The bankruptcy court’s factual findings regarding the
25
          7
26          Debtor lists twenty-one issues for purposes of this
     appeal. The majority of the issues pertain to the bankruptcy
27   court’s factual findings, most of which relate to the court’s
     calculation of damages. We address Debtor’s factual errors
28   arguments below.

                                        -10-
 1   amount of damages are also reviewed under a clearly erroneous
 2   standard.   Lundell v. Ulrich (In re Ulrich), 236 B.R. 720, 723
 3   (9th Cir. BAP 1999).
 4        A bankruptcy court’s factual findings are clearly erroneous
 5   if they are illogical, implausible, or without support from
 6   inferences that may be drawn from the record.   United States v.
 7   Hinkson, 585 F.3d 1247, 1259–61 (9th Cir. 2009) (en banc).    It
 8   is well settled that “review under the ‘clearly erroneous
 9   standard’ is significantly deferential, requiring a ‘definite
10   and firm conviction that a mistake has been committed.’”
11   Concrete Pipe & Prods. of Cal., Inc. v. Constr. Laborers Pension
12   Trust for So. Cal., 508 U.S. 602, 622 (1993).    We are required
13   to uphold any determination of the bankruptcy court that falls
14   within a broad range of permissible conclusions.   Cooter & Gell
15   v. Hartmarx Corp., 496 U.S. 384, 400 (1990).
16        The issue of whether a relationship is “fiduciary” within
17   the meaning of § 532(a)(4) is a question of law, Runnion v.
18   Pedrazzini (In re Pedrazzini), 644 F.2d 756, 758 (9th Cir.
19   1981), which we review de novo.   Ragsdale v. Haller, 780 F.2d
20   794 (9th Cir. 1986).
21        We review the bankruptcy court’s evidentiary rulings for
22   abuse of discretion.   See Johnson v. Neilson (In re Slatkin),
23   525 F.3d 805, 811 (9th Cir. 2008).    We also “review for abuse of
24   discretion the bankruptcy court’s award of prejudgment interest,
25   but review de novo whether an award of prejudgment interest is
26   authorized under state or federal law.”   Id. at 820.
27        Under the abuse of discretion standard of review, we first
28   “determine de novo whether the [bankruptcy] court identified the

                                    -11-
 1   correct legal rule to apply to the relief requested.”     Hinkson,
 2   585 F.3d at 1262.   And if the bankruptcy court identified the
 3   correct legal rule, we then determine under the clearly
 4   erroneous standard whether its factual findings and its
 5   application of the facts to the relevant law were illogical,
 6   implausible, or without support in inferences that may be drawn
 7   from the facts in the record.    Id.
 8        “Awards of attorney[s’] fees are generally reviewed for an
 9   abuse of discretion.   However, we only arrive at discretionary
10   review if we are satisfied that the correct legal standard was
11   applied and that none of the [bankruptcy court’s] findings of
12   fact were clearly erroneous.    We review questions of law de
13   novo.”   Rickley v. Cnty. of L.A., 654 F.3d 950, 953 (9th Cir.
14   2011).   To the extent the issue is whether California law allows
15   the award of attorneys’ fees, our review is de novo.     Fry v.
16   Dinan (In re Dinan), 448 B.R. 775, 783 (9th Cir. BAP 2011).
17                             V.    DISCUSSION
18        On appeal, Debtor argues that the bankruptcy court erred in
19   concluding that the debt owed to the Dairy was nondischargeable
20   under § 523(a)(2)(A) and (4) due to mistakes of fact and law.
21   Debtor alleges numerous factual errors, contending that the
22   bankruptcy court improperly found the element of justifiable
23   reliance was met under § 523(a)(2)(A) and charged or failed to
24   give him credit for certain amounts when it calculated the
25   damage award.   Debtor also asserts that he was not a fiduciary
26   within the meaning of § 523(a)(4).      Finally, Debtor contends
27   that the bankruptcy court erred in awarding attorneys’ fees to
28   the Dairy because the issues litigated in the adversary

                                      -12-
 1   proceeding fell outside the scope of the attorneys’ fee clause
 2   in the Settlement Agreement.
 3            Before addressing Debtor’s contentions of law, we address
 4   his asserted factual errors which are listed under his issues on
 5   appeal.     As appellant, Debtor had the “responsibility to file an
 6   adequate record, and the burden of showing that the bankruptcy
 7   court’s findings of fact are clearly erroneous.     [Debtor] should
 8   know that an attempt to reverse the trial court’s findings of
 9   fact will require the entire record relied upon by the trial
10   court be supplied for review.”     Kritt v. Kritt (In re Kritt),
11   190 B.R. 382, 387 (9th Cir. BAP 1995) (citing Burkhart v. FDIC
12   (In re Burkhart), 84 B.R. 658, 660-61 (9th Cir. BAP 1988)).
13            Debtor has provided us with only select portions of the
14   relevant transcripts.     Moreover, Debtor refers to trial exhibits
15   which are ostensibly included under Tab Y; however, the
16   documents under Tab Y do not have exhibit numbers on them,
17   making it nearly impossible for us to match the exhibits with
18   testimony.     To compound the problem, it does not appear that
19   Debtor included all the exhibits from trial in the record.        Due
20   to the incomplete record, effective appellate review of factual
21   errors under the clearly erroneous standard will be difficult if
22   not impossible.8
23            “The settled rule on transcripts in particular is that
24
25        8
            BAP Rule 8006-1 provides: “The excerpts of the record
26   shall include the transcripts necessary for adequate review in
     light of the standard of review to be applied to the issues
27   before the Panel. The Panel is required to consider only those
     portions of the transcript included in the excerpts of the record
28   . . . .”

                                       -13-
 1   failure to provide a sufficient transcript may, but need not,
 2   result in dismissal or summary affirmance and that the appellate
 3   court has discretion to disregard the defect and decide the
 4   appeal on the merits.”    Kyle v. Dye (In re Kyle), 317 B.R. 390,
 5   393-94 (9th Cir. BAP 2004), aff’d, 170 Fed.Appx. 457 (9th Cir.
 6   2006).    Having obtained the partial transcripts and some
 7   exhibits, although unnumbered, we exercise our discretion to
 8   review Debtor’s alleged factual errors on the merits.
 9           We first observe that Debtor failed to match the majority
10   of the asserted factual errors with any of the elements under
11   § 523(a)(2)(A) or (a)(4).    Indeed, the only element Debtor
12   discusses in his brief pertaining to § 523(a)(2)(A) is
13   justifiable reliance, which we address below.     From what we can
14   tell, some of the factual errors alleged relate to the nature
15   and extent of Debtor’s fraudulent conduct.
16           Specifically, Debtor contends that the bankruptcy court
17   erroneously found his compensation was $30,000 per year9 when he
18   testified that his compensation package was later modified with
19   board approval to include management fees, health insurance, and
20   other expenses.    Hr’g Tr. at 315-17, 5/10/11.   However, the
21   bankruptcy court did not believe Debtor’s testimony regarding
22   his modified compensation package and there was no written
23   evidence to support his testimony.
24           Debtor also takes issue with the bankruptcy court’s factual
25
         9
26          James Kozera testified that the directors allowed this
     salary although it was never discussed. Kozera also testified
27   that this salary had not changed. Hr’g Tr. at 152, 162-63,
     5/9/11. Montgomery testified that he remembered Debtor’s annual
28   compensation as $32,000. Hr’g Tr. at 91, 5/9/11.

                                      -14-
 1   finding that Montgomery and the other directors were not aware
 2   of the $350,000 loan between the Dairy and Yankee Farm Credit
 3   until 2007.   The record shows there were numerous documents
 4   pertaining to the loan, including a guarantee by Montgomery,
 5   that Montgomery signed.   Montgomery testified that he did not
 6   read or understand the documentation that he signed authorizing
 7   the $350,000 loan and did not learn about it until he received
 8   the letter from Yankee Farm Credit that the taxes were not being
 9   paid on the property.   Debtor contends that Montgomery’s
10   testimony should not have been believed because Montgomery was
11   an educated man and experienced buyer of real estate.   Debtor
12   maintains that Montgomery’s testimony is “beyond the realm of
13   possibility.”
14        The record shows that the bankruptcy court found otherwise
15   based on the relationship between Debtor and Montgomery.
16   Montgomery testified that he trusted Debtor and that he did not
17   read legal papers, instead referring them to Debtor, his
18   attorney for twenty years.   The court found Montgomery’s
19   testimony believable.   The bankruptcy court also believed the
20   testimony of the Kozeras that they did not know about the loan
21   and would never have authorized it.
22        On this record we cannot say that the court’s factual
23   findings in connection with the board’s discovery of the Yankee
24   Farm Credit loan are illogical, implausible, or without support
25   from inferences drawn from the record.   Hinkson, 585 F.3d at
26   1259-61.   In addition, findings based on determinations
27   regarding the credibility of witnesses “demand[] even greater
28   deference to the trial court’s findings; for only the trial

                                    -15-
 1   judge can be aware of the variations in demeanor and tone of
 2   voice that bear so heavily on the listener’s understanding of
 3   and belief in what is said.”   Anderson v. City of Bessemer City,
 4   N.C., 470 U.S. 564, 575 (1985).
 5         We also point out that the outcome of this appeal does not
 6   stand or fall on these alleged factual errors regarding Debtor’s
 7   fraud.    The record shows Debtor committed multiple frauds by
 8   writing unauthorized checks on the Dairy’s bank account for his
 9   personal use none of which were evidenced by independent
10   director approval, board authorization, or any directors’
11   meeting minutes.   Debtor admitted his liability on many of these
12   unauthorized transactions:   he admitted to borrowing $81,525
13   from the Dairy to repay monies that he had taken from the
14   Palmira Marando Trust,10 to taking unauthorized ATM charges of
15   $61,444.63 (with an offset of $1,531.48), to making payments on
16   his home totaling $34,418.52, and he did not dispute charges
17   against him for the 2004 checks totaling $60,530.78, the 2005
18   checks totaling $72,300, the 2006 checks totaling $42,850, and
19   the 2007 checks totaling $44,625.      Thus, there is ample evidence
20   to show Debtor engaged in fraud and a continuing course of
21   deceptive conduct.
22         Debtor asserts numerous factual errors with respect to the
23   bankruptcy court’s calculation of damages.     Again, the record
24
          10
            In addition, the record shows that Debtor was not
25   authorized to borrow $152,504.44 from the Dairy to repay monies
26   he had taken from the Trenhaile Estate. Although Debtor
     testified that he was authorized to borrow the money for the
27   repayment to the Trenhaile Estate, the bankruptcy court did not
     find his testimony believable nor was there any documentation to
28   support his contentions.

                                     -16-
 1   reveals that Debtor submitted no corporate minutes or other
 2   writings conclusively establishing that he had obtained
 3   authorization from any director or the board for the
 4   transactions involved in this appeal.11   The lack of
 5   documentation made it difficult for the bankruptcy court to
 6   evaluate the numerous alleged charges and credits and calculate
 7   the damages with any type of precision.
 8         Where a ‘defendant by his own wrong has prevented a
           more precise computation . . . [the factfinder] may
 9         make a just and reasonable estimate of the damage
           based on relevant data, and render its verdict
10         accordingly. Any other rule would enable the
           wrongdoer to profit by his wrongdoing at the expense
11         of his victim. It would be an inducement to make
           wrongdoing so effective and complete in every case as
12         to preclude any recovery, by rendering the measure of
           damages uncertain.’
13
14   In re Ulrich, 236 B.R. at 723.    In the end, Debtor’s financial
15   machinations coupled with the lack of documentation were a major
16   problem for him, especially in light of the fact that he was an
17   attorney who had practiced law for decades.   The bankruptcy
18   court found “[b]y education and by professional experience as an
19
20
          11
            The bankruptcy court found there was no “clear evidence”
21   to support Debtor’s contention that he should receive $10,000
     credit for the purchase of the Dairy’s stock. The bankruptcy
22
     court also requested documentation showing that Debtor was
23   entitled to a credit of the dividends that he received on stock
     that he never validly purchased. The record shows that Debtor
24   never pointed to any documentation regarding this credit. With
     respect to the charges for Dr. Lee, the record shows that Debtor
25   never explained why Dr. Lee would “loan” money to the Dairy nor
26   did he provide any documentation to support such a loan.
     Likewise, with Debtor’s remaining challenges to the bankruptcy
27   court’s factual findings on damages, Debtor points to no
     documents in the record that would support his testimony or
28   asserted errors on appeal.

                                      -17-
 1   attorney, Defendant was well aware that he should document
 2   everything, especially when involved in self-dealing efforts, he
 3   did not.”
 4         Without conclusive documentation, the bankruptcy court was
 5   not compelled to believe Debtor’s self-serving testimony, which
 6   in most instances, the court did not find credible.    We do not
 7   disturb the “quintessentially factual determination” of
 8   credibility “in the absence of clear error.”    United States v.
 9   Lummi Indian Tribe, 841 F.2d 317, 319 (9th Cir. 1988).     Debtor
10   has pointed to no evidence in the record that suggests the
11   bankruptcy court’s assessments of witness credibility were so
12   blatantly wrong as to require reversal.
13         Moreover, under the doctrine of unclean hands, Debtor must
14   come into court with clean hands or he will be denied relief,
15   regardless of the merits of his claim.     Precision Instrument
16   Mfg. Co. v. Auto. Maint. Mach. Co., 324 U.S. 806, 814–15 (1945);
17   Republic Molding Corp. v. B.W. Photo Utils., 319 F.2d 347, 350
18   (9th Cir. 1963) (plaintiff’s unclean hands weigh in the
19   equitable balance that underlies the design of a remedy).    Here,
20   the bankruptcy court applied the doctrine of unclean hands
21   finding that Debtor was not entitled to the benefit of doubt
22   regarding the charges or credits with respect to the calculation
23   of the damages because he had deceived people who had trusted
24   him over a substantial period of time.12
25
          12
26          Generally, the application of the equitable doctrine of
     unclean hands is within the discretion of the trial court and is
27   reviewed for abuse of that discretion. See TransWorld Airlines,
     Inc. v. Am. Coupon Exch., Inc., 913 F.2d 676, 694 (9th Cir.
28                                                      (continued...)

                                    -18-
 1        On this record, we conclude that the bankruptcy court’s
 2   factual findings Debtor challenges on appeal fell within the
 3   broad range of permissible conclusions.   Cooter & Gell, 496 U.S.
 4   at 400.   Therefore, the bankruptcy court’s factual findings were
 5   not clearly erroneous.
 6   A.   Debtor’s Liability Under § 523(a)(2)(A)
 7        To establish that a debt is nondischargeable under
 8   § 523(a)(2)(A), a creditor must establish five elements:
 9   (1) misrepresentation, fraudulent omission or deceptive conduct
10   by the debtor; (2) knowledge of the falsity or deceptiveness of
11   the statement or conduct; (3) an intent to deceive;
12   (4) justifiable reliance by the creditor on the debtor’s
13   statement or conduct; and (5) damage to the creditor proximately
14   caused by its reliance on the debtor’s statement or conduct.
15   Turtle Rock Meadows Homeowners Ass’n v. Slyman (In re Slyman),
16   234 F.3d 1081, 1085 (9th Cir. 2000).   The Dairy had the burden
17   of proving the various elements by a preponderance of the
18   evidence.   Id.   “The burden of showing something by a
19   ‘preponderance of the evidence,’ . . . ‘simply requires the
20   trier of fact to believe that the existence of a fact is more
21   probable than its nonexistence before [he] may find in favor of
22   the party who has the burden to persuade the [judge] of the
23
          12
24          (...continued)
     1990). Debtor does not raise any issue with respect to the
25   court’s application of the doctrine on appeal. Nonetheless, we
26   mention the court’s application of the doctrine because it
     clearly relates to the court’s credibility assessment of Debtor’s
27   testimony on damages. Findings based on determinations regarding
     the credibility of witnesses “demand[] even greater deference to
28   the trial court’s findings . . . .” Anderson, 470 U.S. at 575.

                                     -19-
 1   fact’s existence.’”   Concrete Pipe & Prods. of Cal., Inc.,
 2   508 U.S. at 622.
 3        Debtor’s Fraud
 4        As described above, Debtor’s deceptive conduct amounted to
 5   multiple frauds, some of which he admitted.
 6        Knowledge and Intent to Deceive
 7        Debtor does not identify errors of fact or law with any
 8   degree of specificity regarding the elements of knowledge and
 9   intent to deceive.    Rather, Debtor makes a blanket statement
10   that the bankruptcy court’s conclusion that Debtor was liable
11   under § 523(a)(2)(A) was erroneous.    To the extent Debtor’s
12   assignment of error is directed at the knowledge and intent to
13   deceive elements, we reject it.
14        Debtor’s knowledge and intent to deceive may be inferred by
15   circumstantial evidence and from Debtor’s conduct.   Edelson v.
16   Comm’r, 829 F.2d 828, 832 (9th Cir. 1987) (“A court may infer
17   fraudulent intent from various kinds of circumstantial
18   evidence.”); Donaldson v. Hayes (In re Ortenzo Hayes), 315 B.R.
19   579, 587 (Bankr. C.D. Cal. 2004) (“Knowledge may be proven by
20   circumstantial evidence and inferred from the debtor’s course of
21   conduct.”).
22        Here, the bankruptcy court found numerous transactions by
23   the Debtor with the Dairy were unauthorized by the board.     The
24   court further found that during Debtor’s tenure as president, he
25   prepared all of the financial books and records of the Dairy,
26   had control of the checkbooks, and concealed the unauthorized
27   “loans” under the NC Trust.   In addition, the bankruptcy court
28   observed that Debtor had been an attorney for over twenty years,

                                     -20-
 1   and as an experienced attorney, he would have known the
 2   importance of documenting financial arrangements with others.
 3   Yet, Debtor did not document any of the loans he allegedly
 4   received from plaintiff.
 5        These factual findings are not independent of each other
 6   but show a continuing pattern of wrongful conduct.   Therefore,
 7   the bankruptcy court could reasonably infer that Debtor had
 8   knowledge of his deceptive conduct and the intent to deceive.
 9        The Directors’ Justifiable Reliance
10        Debtor argues that the bankruptcy court erred in finding
11   that the Kozeras and Montgomery justifiably relied on Debtor’s
12   misrepresentations and/or deceptive conduct.   The bankruptcy
13   court found that the directors had no reason not to believe
14   Debtor.   The court properly considered that Debtor had been both
15   the Kozeras’ and Montgomery’s attorney for years and their
16   trusted friend.   See In re Kirsch, 973 F.2d at 1458 (“In
17   considering whether reliance is justifiable, the court must take
18   into account ‘the knowledge and relationship of the parties.’”).
19   In addition, the bankruptcy court found that the financial
20   documents “all looked good” as they were made to conceal the
21   money that Debtor had been taking through the line item on the
22   balance sheet showing his alleged “loans” as “other assets”
23   under what he called North Country Trust or NC Trust.   The
24   NC Trust supposedly held money that the Dairy had not expended,
25   but it actually reflected the money Debtor had taken from the
26   Dairy in unauthorized “loans.”
27        Debtor contends the bankruptcy court erred in finding that
28   the Dairy justifiably relied on his misrepresentations because

                                      -21-
 1   the statute of limitations on the Dairy’s fraud claims had
 2   expired by June 30, 2007.13    Debtor argues that by June 30, 2004,
 3   when Montgomery had finished signing all the loan documents, the
 4   Dairy knew or should have known or should have discovered the
 5   facts on which the Dairy bases it claims for relief.
 6           We are not persuaded by Debtor’s statute of limitations
 7   defense.    First, the only place we see the statute of
 8   limitations mentioned is in Debtor’s answer to the TAC.      It does
 9   not appear from the record that Debtor argued the issue at trial
10   in the bankruptcy court.    See Barnes v. Belice (In re Belice),
11   461 B.R. 564, 569 n.4 (9th Cir. BAP 2011) (holding that
12   arguments not raised in the bankruptcy court can be deemed
13   waived for appeal purposes).
14           Second, under California law, the Dairy’s cause of action
15   for fraud did not “accrue[ ] until the discovery . . . of the
16   facts constituting the fraud or mistake.”    Cal. Code Civ. P.
17   § 338(d).    As noted above, the bankruptcy court believed
18   Montgomery that he did not learn of the Debtor’s fraud until
19   2007 when he received the letter from Yankee Farm Credit stating
20   that the property taxes were not being paid on the property in
21   New York.
22           Third, Debtor limits the “discovery” of his fraud as
23   relating only to the unauthorized $350,000 Yankee Farm Credit
24   loan.     However, Debtor obtained numerous other unauthorized
25   “loans” from the Dairy which the record shows were discovered by
26
          13
27          Since the gravamen of the Dairy’s complaint is based on
     fraud, California’s three year statute of limitation under Cal.
28   Code Civ. P. § 338 would apply.

                                      -22-
 1   the Kozeras and Montgomery only after the CPA they hired
 2   examined the Dairy’s books and records.
 3        For these reasons, we conclude that the bankruptcy court’s
 4   finding on the justifiable reliance element was not clearly
 5   erroneous.
 6        Damages
 7        As noted, the record supports the bankruptcy court’s
 8   factual findings regarding an award of damages.   We discuss the
 9   bankruptcy court’s award of prejudgment interest and attorneys’
10   fees in further detail below.
11        In sum, on the record provided, we discern no error with
12   the bankruptcy court’s conclusion that the Dairy had proved all
13   the elements for § 523(a)(2)(A) by a preponderance of the
14   evidence.
15   B.   Debtor’s Liability Under Section 523(a)(4)
16        Section 523(a)(4) prohibits the discharge of debts “for
17   fraud or defalcation while acting in a fiduciary capacity,
18   embezzlement, or larceny.”
19        The elements for embezzlement are (1) property rightfully
20   in the possession of a nonowner; (2) nonowner’s appropriation of
21   the property to a use other than that for which it was
22   entrusted; and (3) circumstances indicating fraud.    Transamerica
23   Commercial Fin. Corp. v. Littleton (In re Littleton), 942 F.2d
24   551, 555 (9th Cir. 1991).    Again, Debtor does not address errors
25   of fact or law specifically related to these elements in his
26   briefs.
27        The bankruptcy court found that the Dairy’s money was
28   rightfully in the possession of Debtor, but then he

                                     -23-
 1   “appropriated it to his own use by spending it or paying his
 2   bills and obligations which was not known or authorized by the
 3   Plaintiffs . . . and it was done with a fraudulent intent.”     The
 4   record amply supports the bankruptcy court’s findings of fact
 5   and conclusions of law regarding the elements for embezzlement.
 6   Therefore, we do not disturb the court’s decision on appeal.
 7        To prevail on a claim arising from “fraud or defalcation
 8   while acting in a fiduciary capacity”, the creditor must prove
 9   not only the debtor’s fraud or defalcation, but also that the
10   debtor was acting in a fiduciary capacity when the debtor
11   committed the fraud or defalcation.   Citing the Fifth Circuit
12   case of Moreno v. Ashworth (In re Moreno), 892 F.2d 417 (5th
13   Cir. 1990), the bankruptcy court found Debtor was acting as a
14   fiduciary because he was the president of a private corporation
15   entrusted with funds for a particular purpose.   On appeal,
16   Debtor maintains that he was not a fiduciary for purposes of
17   § 523(a)(4) citing Cal-Micro, Inc. v. Cantrell (In re Cantrell),
18   329 F.3d 1119, 1125-1128 (9th Cir. 2003).   We agree that the
19   holding in Cantrell applies to these facts.
20        In Cantrell, the Ninth Circuit reiterated that the term
21   “fiduciary” is construed narrowly for purposes of § 523(a)(4).
22   Id. at 1125.   Under this narrow construction, the fiduciary
23   relationship must arise from an express or technical trust.     Id.
24   (“‘The broad, general definition of fiduciary—a relationship
25   involving confidence, trust and good faith—is inapplicable in
26   the dischargeability context.”) (citing Ragsdale v. Haller
27   (In re Haller), 780 F.2d 794, 796 (9th Cir. 1986)).
28        Bankruptcy courts look to state law to determine whether an

                                    -24-
 1   express trust relationship exists.      In re Cantrell, 329 F.3d at
 2   1125.    Under California corporations law, corporate officers and
 3   directors are not fiduciaries within the meaning of § 523(a)(4).
 4   Id. at 1127.    The Cantrell court explained, “although officers
 5   and directors [under California law] are imbued with the
 6   fiduciary duties of an agent and certain duties of a trustee,
 7   they are not trustees with respect to corporate assets.”     Id. at
 8   1126 (emphasis added).    Cantrell relied on Bainbridge v. Stoner,
 9   106 P.2d 423 (Cal. 1940), which explicitly held that the
10   relationship in California between a director on the one hand
11   and the corporation and its shareholders on the other hand,
12   strictly speaking, was one of agency and not trust.
13   In re Cantrell, 329 F.3d at 1126 (citing Bainbridge, 106 P.2d at
14   426).
15           The Dairy recognizes that California law draws a
16   distinction between the fiduciary duties of corporate officers
17   and directors who are viewed as agents and the fiduciary duties
18   of a trustee.    Nonetheless, the Dairy argues that Debtor was a
19   trustee because he was entrusted with the bank accounts of the
20   Dairy and had virtually “unlimited sway over them.”     We are not
21   persuaded.    In the Fifth Circuit case of In re Moreno, the
22   debtor, an officer, did not dispute that he was a fiduciary
23   under Texas law which is inapposite to California law.
24   In re Moreno, 892 F.2d at 421.     Moreover, although Debtor was in
25   a relationship with the board members that involved confidence,
26   trust and good faith, this general definition of fiduciary is
27   inapplicable in the dischargeability context.     Accordingly, we
28   conclude that the bankruptcy court erred in finding that Debtor

                                      -25-
 1   was a fiduciary within the meaning of § 523(a)(4).
 2         However, because the court’s embezzlement finding was
 3   correct, the bankruptcy court’s conclusion that the damages were
 4   nondischargeable under § 523(a)(4) will not be disturbed on
 5   appeal.
 6   C.    Other Damages
 7         Prejudgment Interest
 8         Debtor asserts that the bankruptcy court erred in charging
 9   him for interest in the amount of $47,464.22 on the promissory
10   notes on two grounds:   first, Debtor maintains that there was no
11   testimony to support how the Dairy calculated the interest on
12   the notes and second, Debtor argues that the notes form a part
13   of the Settlement Agreement and release and the Dairy did not
14   state a claim for breach of the Settlement Agreement in the
15   adversary proceeding, instead pursuing claims based on fraud.
16         In its findings, the bankruptcy court noted that it was
17   reluctant to award the interest claims as set forth in the
18   Settlement Agreement and two promissory notes but that there was
19   no other way to compensate the Dairy for its loss of property
20   and money except by allowing interest.   The court further found
21   that since no other interest calculations were offered by either
22   party, it “seems reasonable to allow the interest that the
23   parties agreed upon in the [notes].”14
24         The award of prejudgment interest in nondischargeability
25
26        14
            Although Debtor contends that there was no testimony to
27   support how the Dairy calculated the interest on the notes, this
     argument cannot form a basis for reversal on appeal when we do
28   not have the complete transcripts in the record.

                                    -26-
 1   proceedings is authorized under Cohen v. de la Cruz, 523 U.S.
 2   213, 223 (1998), where the United States Supreme Court concluded
 3   that the text of § 523(a)(2)(A) “encompasses any liability
 4   arising from money, property, etc., that is fraudulently
 5   obtained, including treble damages, attorney’s fees and other
 6   relief that may exceed the value obtained by the debtor.”
 7        In awarding prejudgment interest, the bankruptcy court did
 8   not specifically state what law it was applying when it awarded
 9   the prejudgment interest.   Under federal law, courts may allow
10   prejudgment interest even though a governing statute is silent
11   regarding such interest.    Frank Music Corp. v.
12   Metro–Goldwyn–Mayer, Inc., 886 F.2d 1545, 1550 (9th Cir. 1989),
13   cert. denied, 494 U.S. 1017 (1990).    “[T]he award of prejudgment
14   interest in a case under federal law is a matter left to the
15   sound discretion of the trial court.   Awards of prejudgment
16   interest are governed by considerations of fairness and are
17   awarded when it is necessary to make the wronged party whole.”
18   Acequia Inc. v. Clinton (In re Acequia, Inc.), 34 F.3d 800 (9th
19   Cir. 1994) (determining that an award of prejudgment interest in
20   a § 548(a) case is left to the sound discretion of the trial
21   court and is awarded when necessary to make the wronged party
22   whole).
23        Where a debt that is found to be nondischargeable arose
24   under state law, “the award of prejudgment interest on that debt
25   is also governed by state law.”   Otto v. Niles (In re Niles),
26   106 F.3d 1456, 1463 (9th Cir. 1997).   Under California law, the
27   court may award prejudgment interest in actions other than
28   contract in its discretion.   Cal. Civ. Code § 3288 (“In an

                                     -27-
 1   action for the breach of an obligation not arising from
 2   contract, and in every case of oppression, fraud, or malice,
 3   interest may be given, in the discretion of the jury.”).15
 4         Here, the parties entered into a Settlement Agreement on
 5   June 25, 2008, agreeing that the Diary’s claim against Debtor
 6   was $375,000.    Since that time —— and actually well before — the
 7   Debtor has had possession and use of the Dairy’s money.   Thus,
 8   the underlying purpose justifying an award of prejudgment
 9   interest is present —— compensation to the Dairy for its loss of
10   the use of its money that Debtor “loaned” himself without
11   authorization.   Additionally, because the parties did not offer
12   any other interest calculations, the bankruptcy court found it
13   “reasonable” to use the interest rate agreed to by the parties
14   in the promissory notes.   See Blau v. Lehman, 368 U.S. 403, 414
15   (1962) (“[I]nterest is not recovered according to a rigid theory
16   of compensation for money withheld, but is given in response to
17   considerations of fairness”).   Without contrary evidence, the
18   bankruptcy court properly exercised its discretion by selecting
19
          15
20          California law also provides that prejudgment interest is
     a matter of right where there is a vested right to recover
21   “damages certain as of a particular day.” Cal. Civil Code
     § 3287(a). “[T]he certainty requirement of [Civil Code] section
22
     3287, subdivision (a) has been reduced to two tests: (1) whether
23   the debtor knows the amount owed or (2) whether the debtor would
     be able to compute the damages.” Fireman’s Fund Ins. Co. v.
24   Allstate Ins. Co., 234 Cal.App.3d 1154, 1173 (Cal. Ct. App.
     1991). It is equally possible that the bankruptcy court was
25   awarding prejudgment interest as a matter of right rather than by
26   exercising its discretion. After all, the parties had liquidated
     the amount of damages owed in the Settlement Agreement. The fact
27   that the amount may have later increased due to charges, credits
     or disallowances did not make the amount of the damages less
28   certain.

                                     -28-
 1   the rate of interest set forth in the promissory notes.16
 2   Accordingly, we conclude that the bankruptcy court did not abuse
 3   its discretion in awarding the Dairy prejudgment interest.
 4           Attorneys’ Fees and Costs
 5           Debtor contends that the bankruptcy court erred in awarding
 6   the Dairy attorneys’ fees in this proceeding because the issues
 7   litigated were based on fraud and nondischargeability and thus
 8   not within the scope of the attorneys’ fee provision in the
 9   Settlement Agreement.    We agree.
10           Attorneys’ fees may be awarded and declared
11   nondischargeable in an action to determine dischargeability of
12   debt.     Cohen, 523 U.S. at 223.    However, before attorneys’ fees
13   are awarded, two requirements must be met:      (1) an underlying
14   contract or nonbankruptcy law must provide a right to recover
15   attorneys’ fees, and (2) the issues litigated in the
16   dischargeability action must fall within the scope of the
17   contractual or statutory attorneys’ fees provision.      See
18   In re Dinan, 448 B.R. at 785 (9th Cir. BAP 2011) (“under Cohen,
19   the determinative question for awarding attorneys’ fees is
20   whether the creditor would be able to recover the fee outside of
21   bankruptcy under state or federal law”).
22           The Dairy contends that the award of attorneys’ fees was
23   appropriate and cites the Eleventh Circuit case Transouth,
24   931 F.2d 1505, which, in turn, cited Fleishmann Distilling
25   Corp., 386 U.S. at 717, in support of its position.      These cases
26
27
          16
            If the trial court had selected the California Judgment
28   rate of interest of 10%, the award would have been much higher.

                                         -29-
 1   simply stand for the proposition that attorneys’ fees are
 2   properly awarded to a creditor prevailing on a bankruptcy claim
 3   if there exists a statute or valid contract that authorizes the
 4   fees.    However, these cases do not address the remaining
 5   question for the award of attorneys’ fees in nondischargeability
 6   actions:    whether the issues litigated in the dischargeability
 7   action fall within the scope of the contractual or statutory
 8   attorneys’ fees provision.
 9           In the bankruptcy court, the Dairy asserted that the
10   “present issue before the court is simply the enforcement of the
11   subject Settlement Agreement.    In such matters, attorney’s fees
12   are permissible.”    The Dairy distinguished the cases of
13   In re Fulwiler, 624 F.2d 908, and In re Bonnifield, 154 B.R.
14   743, contending that in those cases “dischargeability was at
15   issue” and not the enforcement of a Settlement Agreement.
16   Exactly.    The Dairy’s claims in the nondischargeability
17   proceeding were not brought to enforce the terms of the
18   agreement or to pursue a breach.    The Dairy did not plead that
19   Debtor was liable under the Settlement Agreement nor did it
20   litigate that Debtor had breached the agreement.    Rather, the
21   action pursued the remedy of nondischargeability based on the
22   tort claims of fraud, breach of fiduciary duty and embezzlement
23   for purposes of § 523(a)(2)(A) and (a)(4).    Moreover, the
24   attorneys’ fees clause was in an agreement that was not even in
25   existence at the time the acts which led to nondischargeability
26   occurred.    The adversary proceeding concerned those acts, not
27   the Settlement Agreement.    Therefore, the attorneys’ fee clause
28   in the agreement was inapplicable to the claims litigated.

                                      -30-
 1   Accordingly, we conclude that the bankruptcy court erred in
 2   awarding the attorneys’ fees.
 3                           VI.     CONCLUSION
 4        For the reasons stated, we AFFIRM the bankruptcy court’s
 5   decision finding that the debt was nondischargeable under
 6   § 523(a)(2) and (a)(4)(embezzlement), except for the award of
 7   attorneys’ fees which we REVERSE.      We remand this proceeding to
 8   the bankruptcy court to enter a judgment consistent with this
 9   disposition.
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28

                                     -31-