Including information about his associates
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[stamp] “FILED APR 26 1999”
Willis A. Carto and Elisabeth Carto
Related Bankruptcy Court Case No. 98-08050-H7
Legion For The Survival Of Freedom, a Texas Corporation,
Willis A. Carto and Elisabeth Carto,
Adv. Case No. 98-90374-H7
The Legion for the Survival of Freedom, Inc. ("LSF") filed an adversary complaint against Willis A. Carto and Elisabeth Carto ("Debtors") alleging claims for relief for embezzlement and larceny under Section 523(a)(4) and seeking to except from discharge a state court judgment in the amount of $6,430,000. LSF moved for summary judgment on the ground that the doctrine of collateral estoppel applies to the state court judgment.
Debtors moved for summary judgment claiming that all the elements of collateral estoppel have not been met and that the applicable statute of limitations has run on the claims asserted.
This Court has jurisdiction to determine this matter pursuant to 28 U.S.C. Sections 1334 and 157(b)(1) and General Order No. 312-D of the United States District Court for the Southern District of California. This is a core proceeding pursuant to 28 U.S.C. Section 157(b)(2)(I).
This dispute involves assets gifted to LSF by Jean Farrel ("Farrel"). After Farrel’s death, several disputes arose between the personal representative of Farrel’s estate, Joan Althaus, who was also a beneficiary, and LSF. The disputes were resolved in July 17, 1990, at which time certain assets were turned over to a Swiss public notary, Mr. Roland Rochat ("Rochat"). Rochat held assets for LSF in trust worth $7,585,189.60.
Debtors served as members of LSF’s board of directors prior to 1984. In September 1985, Willis Carto was appointed by LSF as its limited agent, for the purpose of representing its interests regarding the gifts of Farrel and her estate, and the later prosecution of the litigation between Joan Althaus and LSF. Debtors continued to be associated with LSF through September of 1993, by their occupying the same suite of offices as LSF, working as volunteers on the business of LSF, and advising officers and employees of LSF concerning the business transactions of LSF.
In June 1993, LSF began to suspect Debtors were acting to benefit themselves rather than LSF. Willis Carto allegedly informed an LSF employee that the Farrel assets were being transferred “to good causes.” On September 24, 1993, LSF’s board of directors terminated Willis Carto’s limited agency.
LSF brought suit in the San Diego Superior Court, North County Judicial District, against Carto and others (collectively “Defendants").1 The suit alleged, inter alia, causes of action for civil conspiracy to defraud and conversion. The complaint alleged Defendants converted the Farrel assets for their own benefit. The complaint further alleged LSF had never authorized any distribution of the Farrel assets to the Defendants or anyone else, and never authorized Defendants to dispose of the assets or remove them from their custody with Rochat. The complaint alleged the acts of Defendants were fraudulent, willful, wanton, malicious, oppressive and were undertaken with the intent to defraud LSF.
A bench trial was held before the Honorable Runston Maino. After hearing the evidence, the court awarded judgment in favor of LSF and against the Defendants, jointly and severally, for $6,430,000. The following is contain in the count’s statement of decision ("Statement of Decision") dated November 14, 1996:
First Cause of Action, Civil Conspiracy to Defraud
Judgment for the defendant as there does not appear to be a cause of action for a civil conspiracy to defraud.
Second Cause of Action. Conversion
Judgment for the plaintiff as against all defendants. The Court finds that 45% of the Farrel Estate, $7,500,000, belonged to the plaintiff. No defendant was entitled to use, possess, or withhold any portion of this $7,500,000. All defendants have substantially interfered with the plaintiff’s property rights as to this $7,500,000. As to all defendants this interference was intentional and without any justification.
Reasonable, necessary and provable costs of $1,070,000 in order to secure the $7,500,000 for the Legion will be allowed.
The Court finds Liberty Lobby has converted $2,650,000 of the plaintiff’s property. Interest at 10% on this sum will start on January 1, 1993.
The Court finds the other defendants converted $6,430,000 of the plaintiff’s funds. Liability is joint end several. Interest will run from January 1, 1991.
Since a thief and a receiver cannot be the same person the P.C. 4961 has not and cannot be proven as against Mr. & Mrs. Carto, Mr. & Mrs. Furr, Mr. Fischer or Vibet. As to Liberty Lobby, I am not convinced they knew that someone had stolen the $2,650,000 which they obtained. Therefore the plaintiff is not entitled to triple damages and attorney fees per P.C. 4961.2
Rule 56(c) of the Federal Rule Civil Procedure ("FRCP") made applicable to adversary proceedings by Fed. R. Bankr. P. 7056, provides that summary judgment:
[S]hall be rendered forthwith if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.
Collateral estoppel applies in bankruptcy proceedings. Grogan v. Garner, 498 U.S. 279, 284 (1991); In re Graham, 973 F. 2d 1089, 1097 (3rd Cir. 1992). “In determining the collateral estoppel effect of a state court judgment, federal courts must as a matter of full faith and credit apply that state’s law of collateral estoppel.” In re Bugna, 33 F. 3rd 1054 (9th Cir 1994).
The party seeking to assert collateral estoppel has the burden of proving all the requisites for its application. To sustain this burden, a party must introduce a record sufficient to reveal the controlling acts and pinpoint the exact issues litigated in the prior action. Any reasonable doubt as to what was decided by a prior judgment should be resolved against using it as an estoppel.
In re Berr, 172 B.R. 299, 306 (9th Cir. BAP 1994) (citations omitted).
This Court can give the state court judgment no greater reclusive effect than it carries under California law. Under California law, collateral estoppel requires that: (1) the issue sought to be precluded is identical to the issue in a former proceeding; (2) the issue was actually litigated in the former proceeding; (3) the issue was decided in the former proceeding; (4) the judgment in the former proceeding is a final judgment on the merits; and (5) the party against whom preclusion is sought must be the same party as in the former proceeding. In re Molina, 228 B.R. 248, 250 (9th Cir. BAP 1998); In re Kelly, 182 B.R. 255, 258 (9th Cir. BAP 1995), aff'd, 100 F. 3d 110 (9th Cir. 1996). There is no dispute the fourth and fifth prong of the above referenced test have been satisfied in this case.
To apply collateral estoppel, the issues addressed in the first proceeding must be identical to those in this proceeding. Collateral estoppel will apply in a second proceeding that involves separate claims if the claims involve the same issue and the subject matter of the suits may be different as long as the requirements for collateral estoppel are met. U.S. v. Shanbaum, 10 F. 3d 305, 311 (5th Cir. 1994).
Embezzlement in the context of nondischargeability requires three elements: (1) property rightfully in the possession of a nonowner; (2) nonowner’s appropriation of the property to a use other than that to which it was entrusted; and (3) circumstances indicating fraud. In re Littleton, 942 F. 2d 551, 555 (9th Cir. 1991); see also In re Wada, 210 B.R. 572, 576 (9th Cir. BAP 1997) (Embezzlement is the “fraudulent appropriation of property by a person to whom such property has been entrusted or into whose hands it has lawfully come"). Embezzlement differs from larceny for nondischargeability purposes only in that original taking was lawful. In re Dempster, 182 B.R. 790, 802 (Bankr. N. D. Ill. 1995).
LSF contends that collateral estoppel should apply to the state court judgment regarding the first two elements of embezzlement and larceny, but concedes there is an issue regarding the Debtors' fraudulent intent. [LSF reply 2:23-28]. The Court finds that collateral estoppel should apply to the first element of larceny. In the Statement of Decision Judge Maino declined to award treble damages and attorney fees pursuant to P. C. 496.1 because he found Debtors to be thieves. Such a finding indicates Debtors original taking of LSF’s property was unlawful. The Court also finds that collateral estoppel applies to the second element of the above referenced test because the state court findings make clear that Debtors appropriated LSF’s property to a use other than for which it was entrusted.
Debtors do not dispute these elements have been met, but contend they are entitled to summary judgment on the issue of the Debtors' fraudulent intent.3 Specifically, Debtors contend Judge Maino found Mr. Carto was mistaken about his role with the LSF and his powers, he did not find that Mr. Carto’s beliefs were not his true beliefs or that he did not really believe that he had the powers and rights he exercised. According to Debtors, Judge Maino found Mr. Carto was simply mistaken in his belief. Debtors rely on a letter dated November 13, 1996, written by Judge Maino. The relevant portions are as follows:
The purpose of this letter is to inform you as to how I saw the evidence. It is not a Statement of Decision.
Mr. Carto is not without sympathy. If he had not purchased the debts of the Legion many years ago it probably would have expired. He has devoted many years of his life toward the Legion, perhaps without pay. He took it upon himself to pursue the Farrel estate at considerable cost to his time and to some of his personal money.
However, I did not find him to be a witness who can be relied upon. His demeanor when he testified was evasive and argumentative. He could not follow the instructions of the court or his counsel when they asked him not to volunteer information. His demeanor on the stand made the job of his very able counsel much more difficult. I found that much of his testimony made no sense, much of his testimony in court was different from his previous testimony, much of his testimony was contradicted by other witnesses or by documents. By the end of the trial I was of the opinion that Mr. Carto lacked candor, lacked memory, and lacked the ability to be forthright about what he did honestly remember.
One of Mr. Carto’s fundamental misconceptions is his relationship to the Legion. Just because he purchased the debts of the Legion and devoted time and money toward its goals does not allow him to use the Legion as if he owned it. The Legion is a public non-profit institution which has a life separate from Mr. Carto’s life.
Mr. Carto believes that his status as a “substitute incorporator” or “member” of the Legion gives him the power and right to control the Legion. This is not the law. There is no statute or decision which gives “incorporators” or “substitute incorporators” authority over the Board of Directors or the authority to elect, appoint, or remove a member of the Board of Directors. In addition, the Legion had no “member” who could elect, appoint, or remove a member of the Board of Directors.
Because Mr. Carto thinks he is the Legion and he owns and controls it, he acted in a certain way toward it. He told people they were appointed or elected to the Board of Directors when they were not so appointed or elected. Mr. Carto did not keep the Directors fully informed about Legion business. He wrote Board minutes and ordered them backdated. Mr. Carto tried to direct the educational direction of the Legion by issuing orders to the staff and by threatening to fire them. Mr. Carto had no legal right to do any of these things.
Mr. Carto took advantage of the Board of Directors by failing to inform them of the corporate opportunity in the Farrel estate. For the Legion to know whether or not there is a corporate opportunity and whether or not they want to and can take advantage of it is a decision to be made by the Board of Directors. This is not a decision for Mr. Carto.
Mr. Carto had a legal obligation to fully disclose to the Board of Directors the potential size of the Farrel estate, how much it might cost to recover it, the size of the legacy once recovered, the nature and location of the assets, and when, and to whom and why assets from the estate had been disbursed. Mr. Carto failed to discharge any of these legal obligations.
Another of Mr. Carto’s misconceptions is that he and not the Legion is entitled to the proceeds from the Farrel estate. This makes no sense. I have already discussed some reasons for this opinion. In addition, the evidence is that when Mr. Carto went into court in this country he brought suit on behalf of the Legion and not on behalf of himself. He had agency status from the Legion to recover funds and he got the Legion to give up the Farrel money. There was no reason to do any of these things if Mr. Carto really believed the Farrel money was his.
Another misconception by Mr. Carto is that he had the right to take the Farrel money and give it to other good causes instead of the Legion. Mr. Carto cannot do this. Mr. Carto was an agent for the Legion. His obligation was to collect Farrel money for the Legion and to account for it. He was not an agent for Ms. Farrel or her estate.
A final misconception of Mr. Carto’s is that the Board of Directors gave up the assets of the Farrel estate on March 5, 1991, and allowed Mr. Foetisch to disburse it to suitable independent organizations. This is not so. The Legion never gave such permission on March 5, 1991, or on any other date. And even if they had done so, such an act was contrary to the law.
Debtors also point out that LSF requested punitive damages which Judge Maino declined to award. California Civil Code Section 3294 authorizes punitive damages to be awarded “in an action for the breach of an obligation not arising from contract, where it is proven by clear and convincing evidence that the defendant has been guilty of oppression, fraud, or malice….” Thus, Debtors argue the findings support, by negative implication, the Debtors did not have the fraudulent intent necessary for a finding of embezzlement or larceny under Section 523(a)(4).
Debtors correctly point out that a claim for relief for embezzlement under Section 523(a)(4) requires a finding of the debtor’s fraudulent intent. Collateral estoppel would apply to LSF’s judgment for conversion, but only if all the elements for embezzlement or larceny under federal bankruptcy law are met. The Court notes that LSF alleges in numerous places throughout its complaint that the Defendants “obtained the property through fraud and deceit.” [LSF complaint 8:13/23; 10:6; 11:11-13]. However, whether the superior court focused on Debtors' fraudulent intent is ambiguous at best and not mentioned in the Statement of Decision. Any reasonable doubt as to what was decided by a prior judgment should be resolved against using it as an estoppel. Berr, 172 B.R. at 306.
The Court questions whether Judge Maino’s letter can even be used for collateral estoppel purposes. It is unclear whether Judge Maino’s letter is part of the record below. Nonetheless, it is clear that Judge Maino did not intend that his views set forth in the letter were to constitute a Statement of Decision. Thus, it appears that the letter was merely advisory and not a final decision for purposes of collateral estoppel. Interestingly, the letter was not referenced or otherwise incorporated into the subsequently written Statement of Decision. In any event, the letter is subject to different interpretations and is insufficient to show Debtors lacked the requisite fraudulent intent necessary to prove a case for embezzlement or larceny.
It is also unclear what burden of proof the superior court applied through the case. “Issues are not identical if the second action involves application of a different legal standard, even though the factual setting of both suits be the same.” Peterson v. Clark Leasing Corp., 451 F. 2d 1291, 1292 (9th Cir. 1971).
Finally, the failure of Judge Maino to award punitive damages does not by negative implication equate to a finding that Debtors did not commit fraud. Although an award of punitive damages requires clear and convincing evidence (a higher burden of proof than that required for nondischargeability), the award is also discretionary. See BAJI 14.71 This Court cannot guess why Judge Maino chose not to award punitive damages in this case.
In sum, the Court finds there are material issues of fact regarding Debtors' fraudulent intent. Therefore, the Court denies Debtors' motion for summary judgment on this issue.
Debtors also argue that the claims for relief for larceny and embezzlement are barred by the applicable statute of limitations. Under California Code of Civil Procedure Section 338, the statute of limitations is three years. However, the time period may be tolled if the person is out of state. California Code of Civil Procedure Section 351 provides:
If, when the cause of action accrues against a person, he is out of the state, the action may be commenced within the term herein limited, after his return to the state, and if, after the cause of action accrues, he departs from the state, the time of his absence is not part of the time limitation for the commencement of the action.
Presumably the three year statute of limitations would have run in this case by at least July 22, 1997, because the complaint was filed on July 22, 1994. Mr. Carto declares that during the period of July 22, 1994 through July 22, 1997, he was only absent from the State of California for approximately 200 days. From the period of July 22, 1997 (the latest possible expiration day for the relevant statute of limitations), he was only out of the state approximately 300 days. Thus, the July 22, 1997, statute of limitations bar date could only have been extended by approximately ten months until no later than May 22, 1998.
LSF presented several documents in opposition. In a declaration in the Liberty Lobby, Inc., and Willis A. Carto, v. Mark Weber, Case No. 98-CV00236 (HHK), pending in the United States District Court for the District of Columbia, Mr. Carto declared that he was a resident of the District of Columbia and not the State of California. At the February 27, 1998, judgment debtor examination, Carto testifies that he did not have a residence in California, but only an office in Escondido. Although he does admit that the office was in a house. [Transcript 9: 8-25]. In addition, in his March 30, 1998, opposition to Mark Weber’s motion to change venue, Mr. Carto alleges that he is a resident of the District of Columbia.
This evidence is enough to raise a material issue of fact regarding Mr. Carto’s whereabouts during the time period in question. Therefore, the Court denies Debtors' summary judgment on the issue of the statute of limitations.
The embezzlement and larceny prongs of Section 523(a)(4) closely mirror a Section 523(a)(6) claim where there has been a conversion of funds. Both analyses focus on the intent of the debtor.
The Court notes that LSF’s dischargeability complaint contained two claims for relief: one for larceny and the other for embezzlement. LSF did not specifically seek relief under Section 523(a)(6), nor does it seek summary judgment in its favor under that section.
At the hearing on this matter, the Court questioned whether Section 523(a)(6) applied to the facts at hand. The Court notes that LSF could amend their complaint with leave of this Court to include a Section 523(a)(6) claim for relief at this time. See In re Tester, 56 B.R. 208 (W. D. Virginia 1985). The substance of the amendment arises out of the identical factual allegations and is allowable in light of the liberality of allowance of amendment to pleadings expressed in Federal Rule Bankruptcy Procedure ("FRBP") 7015 and FRCP 15(a). Such an amendment, alleging no additional factual averments should be permissible even if made after the general period for filing objections to discharge under FRBP 4007(c). In re Blewett, 14 B.R. 840, 842 (9th Cir. BAP 1981). Therefore, this Court would allow LSF to amend its complaint to add a Section 523 (a)(6) claim for relief. In the interest of judicial economy, the Court will not require LSF to do so.
Moreover, the Court can sua sponte grant summary judgment. A court may grant summary judgment without notice if the losing party has had a “full and fair opportunity to ventilate the issues involved in the motion.” See In re Harris Pine Mills, 44 F. 3d 1431, 1439 (9th Cir. 1995); Waterbury v. T. G. & Y. Stores Company, 820 F. 2d 1479, 1480 (9th Cir. 1987); Cool Fuel, 685 F. 2d at 311; Fuller v. City of Oakland, 47 F. 3d 1522, 1533 (9th Cir. 1995) (sua sponte summary judgment is proper only when there are no issues of material fact and the losing party has been given an adequate opportunity to develop its case in opposition to summary judgment). The Court finds that Debtors had notice and the opportunity to rebut the application of collateral estoppel under Section 523(a)(6). Therefore, the Court analyzes the application of collateral estoppel under Section 523(a)(6) in this case.
Section 523(a)(6) excepts from the individual debtor’s discharge “any debt … for willful and malicious injury by the debtor to another entity or to the property of another entity.” 11 U.S.C. Section 523(a)(6). The elements of nondischargeability under Section 523(a)(6) are: (1) a wrongful act, (2) done intentionally, (3) which necessarily causes injury, and (4) is done without just cause or excuse. In re Cechini, 780 F. 2d 1440, 1443 (9th Cir. 1986). One court noted:
This four-part definition does not require a showing of biblical malice, i.e., personal hatred, spite, or ill-will. Nor does it require a showing of an intent to injure, but rather it requires only an intentional act which causes injury. Moreover, we held in In re Britton, 950 F. 2d 602, 606 (9th Cir. 1991) that a court applying this test must take into consideration a policy that favors the victims of fraud over perpetrators.
In re Molina, 228 B.R. 248, 251 (9th Cir. BAP 1998) citing In re Bammer, 131 F. 2d 788, 791 (9th Cir. 1997) (citations omitted); see also Printy v. Dean Witter Reynolds, Inc., 110 F. 3d 853, 860 (1st Cir 1997) (finding that conversion “translates easily into an intent to willfully and maliciously cause harm").
"The Supreme Court recently held that the word 'willful' in (a)(6) modified the word 'injury,' indicating that nondischargeability takes a 'deliberate or intentional injury not merely a deliberate or intentional act that leads to injury.'” In re Gieger, 523 U.S. 57 (1998). This definition represents a very narrow reading of willful requiring a deliberate injury akin to that needed to establish an intentional tort. Id. Although Gieger defined willful, it did not define malicious. “Whether the fourth element of the Ninth Circuit test (done without just cause or excuse) retains viability has not yet been addressed.” Molina, 228B.R. at 251. Nonetheless, if the fourth element remains a separate element in the Ninth Circuit, the Court finds that all elements can be directly satisfied by the findings of the superior court.
Under Section 523(a)(6), the plaintiff must establish that the wrongful act, such as conversion, was done intentionally, that it necessarily produces harm, and is without just cause or excuse. Unlike Section 523(a)(4), there is no requirement that the plaintiff demonstrate fraudulent intent. Under California law, conversion is an intentional tort.
In the Statement of Decision, the superior court found that Debtors interfered with LSF’s property rights. The court further found that as to all Defendants, including Debtors, the interference was intentional and without any justification. The court found that the Defendants, including Debtors, converted $6,430,000 of LSF’s funds. Implicit in these findings is the fact that Debtors' acts necessarily caused harm to LSF. The Court finds that collateral estoppel applies, and that all the elements under Section 523(a)(6) have been met in this case.4
This Memorandum Decision constitutes findings of fact and conclusions of law pursuant to Federal Rule of Bankruptcy Procedure 7052. LSF is directed to file with this Court an order in conformance with this Memorandum Decision within ten (10) days from the date of entry hereof.
Dated: April 26, 1999
John J. Hargrove
United States Bankruptcy Judge
1. The other defendants included Henry Fischer aka Henri Fischer; Liberty Lobby, Inc., a corporation; Vibet, Inc., a corporation, and Mr. and Mrs. Furr.
2. Penal Code Section 496 entitled “Receiving stolen property; punishment; swap meet vendors and others dealing in or collection merchandise or personal property; damages and costs; attempt offenses; penalties” provides in relevant part:
(a) Every person who buys or receives any property that has been stolen or that has been obtained in any manner constituting theft or extortion, knowing the property to be so stolen or obtained, or who conceals, sells, withholds, or aids in concealing, selling, or withholding any property form the owner, knowing the property to be so stolen or obtained, shall be punished by imprisonment in a state prison …
(c) any person who has been injured by a violation of subdivision (a) or (b) may bring an action for three times the amount of actual damages, if any, sustain by the plaintiff, costs of suit, and reasonable attorney fees.
3. Debtors did not file a separate motion for summary judgment, but gave notice of their request in their opposition. If there are not factual issues and the non-moving party is entitled to judgment as a matter of law, and if the moving party has had notice and an opportunity to address the issues, summary judgment may be entered for the non-moving party. Cool Fuel, Inc. v. Connett, 685 F. 2d 309, 311 (9th Cir. 1982).
4. At the hearing on this matter, Debtors argued that the superior court’s failure to award punitive damages shows that Debtors did not have the requisite intent for conversion. However, the superior court’s failure to award punitive damages in irrelevant. Under California law, “malice” requires proof by clear and convincing evidence of conduct which was intended to cause injury o the plaintiff, or despicable conduct which was carried on with a willful and conscious disregard of the rights or safety of others. Cal. Civ. Code Section 3294(c)(1). Not only is the burden of proof different from that under the nondischargeability statute, but the definition of malice is different as well. “'Malice' under federal law for purposes of Section 523(a)(6) requires proof by a preponderance of the evidence of an act done with the actual intent to cause injury.” In re Branam, 226 B.R. 45, 52 (9th Cir. BAP 1998) (citation omitted). In addition, the award of punitive damages is discretionary. Therefore, the failure of Judge Maino to aware punitive damages does not preclude this Court from finding that the doctrine of collateral estoppel applies.