Opinion
NOT FOR PUBLICATION
ORDER ON TRUSTEE'S MOTION FOR PARTIAL SUMMARY JUDGMENT
PETER W. BOWIE, Judge United States Bankruptcy Court
This case has followed a tortuous path to the present juncture. The underpinnings began when Ana Castillo's step-father filed his own chapter 7 bankruptcy. In that case his chapter 7 trustee, Gregory Akers (Trustee), obtained a fraudulent transfer judgment against Ana. That judgment was not appealed and is final.
Ana and her husband, Adolfo Castillo, filed their own bankruptcy. Mr. Akers has filed a complaint objecting to discharge under 11 U.S.C. § 727, as well as objecting to the dischargeability of the particular debt owed to the Juarez estate because of the fraudulent transfer judgment. The Trustee asserted that the debt was excepted from discharge under §§ 523 (a) (2), (a) (4) & (a) (6).
During pretrial proceedings before another judge of this Court, the Court issued a Notice of Intended Trial Procedure. In it, the Court reviewed the status of the case and stated that the evidentiary excerpts provided by the Trustee on the § 727 issues were sufficient to establish a prima facie case, shifting the burden of going forward to Ms. Castillo. Because no evidentiary objections had been timely filed by Ms. Castillo, the Court observed those items would be admitted at trial. The Court set out a brief roadmap of the issues to be tried on the § 727 allegations.
The Court then wrote:
The final claim is to except the judgment in favor of the Plaintiff from discharge under § 523(a) (4). After presiding at the [fraudulent conveyance] trial, this Court is familiar with the underlying facts and the resulting judgment. The funds Ana Castillo moved from the joint account with William Juarez to her individual account was money held in trust for William Juarez. The issues remaining for trial on that claim will focus on whether there was a defalcation by Ana Castillo in her role as the trustee of that trust.
Doc. 60, p.2. It appears from the foregoing that the Trustee's claims of nondischargeability under 11 U.S.C. § 523 (a) (2) and (a)(6) were disposed of during pretrial proceedings, leaving the § 727 and § 523 (a) (4) claims for resolution by trial.
The case did go forward for trial, and after post-trial proceedings the Court entered an amended judgment on April 18, 2012. The Court ruled that the trustee's objections to discharge under § 727 were denied. However, the Court found the fraudulent conveyance judgment nondischargeable under 11 U.S.C. § 523(a) (4). (Doc. 108). Ms. Castillo timely appealed that judgment to the Ninth Circuit Bankruptcy Appellate Panel (BAP). The Trustee filed a cross-appeal on the judgment in Ms. Castillo's favor on the § 727 claims.
On appeal, the BAP affirmed the trial court's denial of the § 727 allegations by the Trustee, but vacated and remanded the judgment in the Trustee's favor on the § 523(a)(4) count. At the center of the BAP's ruling on the § 523 (a)(4) claim was the unsettled record in the trial court focusing on that claim. The BAP noted: "the court expressed a willingness to consider additional legal argument on the § 523(a) (4) claim because the relevant legal issues had not been adequately addressed in either the Fraudulent Transfer Action or in the Discharge Action, and because the Castillos did not have legal representation." (BAP Memorandum, Doc. 111 p.7).
The BAP noted the trial court's statement at the time it ruled on the § 727 claims that it felt the debtors should consult counsel on the § 523(a) {4) claim. The BAP stated: While the bankruptcy court was focused on additional legal argument, it also left open the possibility that it might hold a further evidentiary hearing: .... " "The court later reiterated that it ultimately might decide to hold another evidentiary hearing in a scheduling order entered on May 2, 2011. In that order the court further indicated that all § 523 (a) (4) issues, including the fiduciary capacity and defalcation issues, were still open issues: .... " (Doc. 111 p.8).
Ms. Castillo filed a supplemental brief in which she argued that any disbursements she made were "with the express consent" of her mother, her step-father, or both. In support, she proffered written declarations and deposition excerpts of the parents, to which the Trustee objected. One of those objections was that the proffered testimony was contradicted by earlier testimony of the parents and inconsistent with it.
At a subsequent hearing, the trial court "stated that it would not benefit from hearing the additional evidence Ms. Castillo proposed to offer." (Doc. 111, p.10). The BAP framed its view of the trial court's ruling and stated: "In the process, the court excluded the additional evidence Ms. Castillo had sought to offer and disregarded her claim that her disbursement of the proceeds had been authorized by the Juarezes." (Doc. 111, p. 11) .
The focus of the BAP on review was on the denial of the opportunity to Ms. Castillo to present the supplemental evidence from her parents. The BAP characterized her argument as claiming "that the bankruptcy court erred when it declined to consider her additional evidence." (Doc. 111, p. 14). The BAP then presumed that the court had declined to hear the evidence because it thought it irrelevant. Having set up its strawman argument, it proceeded to explain why the proffered evidence was relevant. The BAP concluded:
[W]e hold that the bankruptcy court erred as a matter of law when it declined to consider whether Ms. Castillo was authorized to use the Proceeds in the ways that she did. As a result, the court also erred when it excluded Ms. Castillo's additional evidence on relevancy grounds.
(Doc. 111, pp. 17-18).
Following remand, the case was reassigned to this judge, and a status conference was set. At that conference, the Court set a deadline for Ms. Castillo to file an amended witness list, and for the Trustee to file any objections. Ms. Castillo complied, naming her mother and her stepfather. The Trustee filed multiple objections, including that her parents should have been included on the original witness list and were not newly discovered or not reasonablely discoverable earlier. The Trustee also reargued his assertions to the BAP that the more recently proffered testimony of the parents was inconsistent with earlier statements and testimony they had given.
The BAP discussed the Trustee's objections at some length, and rejected them on multiple grounds. Doc. 111, p. 9, 14. At footnote 16 the BAP wrote:
Akers strenuously and at length has asserted that the Juarezes' later statements regarding the use of the Proceeds were inconsistent with their earlier testimony, going so far as to characterize the later statements as fraud on the court. However, notwithstanding Mr. Akers' presentation, it is still conceivable that the Juarezes might have been able to reconcile or at least explain the differences in their various statements if they had been given the opportunity to testify at a further evidentiary hearing. The bankruptcy court as trier of fact needed to find whether the Juarezes' various statements regarding the Proceeds were credible. In other words, the issue of the Juarezes' veracity went to the weight and credibility that should have been given to their declarations and not to their admissibility.
Doc. 111, p. 20, fn. 16.
At a subsequent status conference, the Court required Ms. Castillo to provide the current address and phone number for her parents so their depositions could be arranged. Obtaining the participation of the Juarezes in depositions was protracted by medical issues, a motion to compel, and a protective order. Ultimately, they were obtained. Thereafter, the Trustee filed a motion for summary judgment, arguing, in part, that Ms. Castillo should not be permitted to claim the existence of a genuine issue of material fact from the allegedly inconsistent statements of the Juarezes.
Neither party to the summary judgment motion had raised, much less addressed the Supreme Court's decision in Bullock v. BankChampaicrn, N.A., __ U.S. __, 133 S.Ct. 1754, decided May 13, 2013, and directly addressing the elements of 11 U.S.C. § 523 (a) (4). So the Court invited supplemental briefing, which was provided. Following argument, the matter was taken under submission.
The short answer to the Trustee's motion was provided by the BAP in footnote 16. There are issues of fact on which this Court must take testimony from the Juarezes. In his motion, the Trustee seeks to preclude the Court from doing so on the theory that Ms. Castillo cannot raise a genuine issue of material fact by inconsistent statements. Whatever else may be said about that argument in this context, the BAP has already rejected that' argument and ruled that any inconsistencies go to "weight and credibility", not to admissibility. The Court has to decide those issues after hearing the testimony, rather than resolving them by the Trustee's efforts to impeach the Juarezes by use of paper declarations and no live testimony.
For the foregoing reasons, the Trustee's motion for summary judgment is denied without prejudice. This adversary proceeding will be set for status conference on April 21, 2014 at 10:00 a.m., Department 4, Room 328, 325 West F Street, for the purpose of setting the date and time for concluding the trial on the Trustee's claim under 11 U.S.C. § 523(a) (4), on the issues of whether the Proceeds were held in trust following the transfer to Ms. Castillo's account; whether those facts were sufficient to make her a fiduciary as to those funds within the meaning of § 523(a) (4); and, if so, whether she committed any defalcation within the meaning of § 523(a) (4) as explained by the Supreme Court in Bullock.
IT IS SO ORDERED.