Garcia v. Fawzy (In re Garcia), BAP No. CC-19-1214-SGF

In re: LISA M. GARCIA, Debtor.

LISA M. GARCIA, Appellant/Cross-Appellee, v. SAMEH FAWZY, Appellee/Cross-Appellant.

BAP No. CC-19-1214-SGF

BAP No. CC-19-1232-SGF (Cross-Appeals)

Adv. No. 6:18-ap-01065-SC

UNITED STATES BANKRUPTCY APPELLATE PANEL OF THE NINTH CIRCUIT

September 1, 2020

NOT FOR PUBLICATION

Bk. No. 6:18-bk-10058-SC

MEMORANDUM^*

Appeal from the United States Bankruptcy Court for the Central District of California

Scott C. Clarkson, Bankruptcy Judge, Presiding

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

INTRODUCTION

The bankruptcy court entered judgment excepting from discharge an Arizona state court judgment that creditor Sameh Fawzy obtained againstChapter 7¹ debtor Lisa Garcia. The state court judgment was based on conversion and constructive fraud. The bankruptcy court granted Fawzy relief under § 523(a)(6) but denied him relief under § 523(a)(2)(A). Garcia appeals from the § 523(a)(6) ruling. Fawzy cross-appeals from the § 523(a)(2)(A) ruling.

Both rulings hinged on whether Garcia's state of mind, as found by the Arizona jury, was the same as that required for nondischargeability under either § 523(a)(6) or § 523(a)(2)(A). The bankruptcy court answered this question in the affirmative for § 523(a)(6) but in the negative for § 523(a)(2)(A). With respect to § 523(a)(6), nothing in the state court record demonstrates that the jury actually found, or needed to find, that Garcia harbored an intent to injure Fawzy or subjectively believed that injury was substantially certain to occur as a result of her conduct.

As for § 523(a)(2)(A), the bankruptcy court correctly declined to apply issue preclusion to satisfy the fraud element of intent to deceive. The record from the state court trial did not establish that the jury actually and necessarily decided that Garcia intended to deceive Fawzy.

The record arguably suggests that the bankruptcy court may have intended to alternately grant judgment on the § 523(a)(6) claim based onthe parties' stipulated facts and other evidence presented at the bankruptcy court trial. But the bankruptcy court did not render a specific finding of fact on the willfulness element. On this record, we only can speculate as to what the bankruptcy court intended with respect to the evidence it admitted at trial and what it believed this evidence established. Therefore, we will remand the § 523(a)(6) claim for the bankruptcy court to clarify whether, in the absence of issue preclusion, the admissible evidence presented at the bankruptcy court trial, including specific parts of the state court trial transcript, established that Garcia acted willfully and maliciously within the meaning of § 523(a)(6).

Consequently, we AFFIRM the bankruptcy court's § 523(a)(2)(A) ruling, but we VACATE its § 523(a)(6) ruling and REMAND for further proceedings.

FACTS

Fawzy and Garcia met in 2000 and were engaged in 2003. At the time of their engagement, the couple lived in Tennessee, where Fawzy had purchased and operated a grocery store. Garcia loaned Fawzy $48,878.23 to help fund the grocery store purchase. In 2004, however, Garcia moved to New York to attend a two-year physician's assistants program. Around this same time, Fawzy enlisted in the United States Army. Before deploying to Iraq, Fawzy executed a general power of attorney which enabled Garcia to manage his financial affairs. He also leased the grocery store to a thirdparty for a one-year term. At the end of the lease term, the third party purchased the grocery store from Fawzy. During Garcia's time in Tennessee and New York, Fawzy financially supported her.

Fawzy returned from his Iraq deployment in late 2005 or early 2006, with several injuries requiring treatment. During the first half of 2006, while Fawzy still was convalescing, Garcia withdrew a total of $76,134.10 from the couple's joint bank accounts, without Fawzy's knowledge or approval. Of this amount, Garcia originally transferred $10,900.00 from Fawzy's separate business bank account to one of the couple's joint accounts, from which she later withdrew it.

Additionally, Fawzy owned a Toyota 4Runner that Garcia had been using for years. When Fawzy moved to Tennessee to open his grocery store, he left the 4Runner with Garcia so she could use it. But he remained the owner of record. When Garcia moved to Tennessee, she drove the vehicle there from California, where she formerly lived. She next took the 4Runner with her to New York. In April 2006, she changed title to the vehicle into her own name, without telling Fawzy. She signed Fawzy's name on the documentation transferring title, instead of signing her own name and using her power of attorney. In September 2006, after taking Fawzy to the Walter Reed Medical Hospital for further treatment, she drove the vehicle to California, where she again relocated.

Sometime in 2006, the couple ended their relationship. Afterwards,Fawzy unsuccessfully attempted to recover from Garcia his 4Runner and his cash. Then, in 2007, Garcia again relocated - this time to Arizona. In late 2007, Fawzy filed a complaint in Arizona state court against Garcia seeking to recover the vehicle and the cash.

Garcia filed an answer and counterclaim. According to Garcia, when Fawzy bought the grocery store, she became his partner by funding roughly half of its purchase price. She also claimed that she worked full time at the grocery store in 2003 and 2004, but she never received any compensation for doing so. In contrast, she asserted that Fawzy paid himself at least $4,000 per month over the same time period. She also claims he withdrew thousands of dollars from their joint bank accounts for his individual purposes and benefit. In October 2008, while the state court lawsuit was pending, Garcia transferred back to Fawzy title to and possession of the 4Runner.

The state court held a jury trial in 2009. The jury found that Garcia converted the 4Runner and the $10,900.00 she transferred from Fawzy's business bank account. The jury awarded Fawzy $7,400.00 for conversion of the 4Runner but awarded no damages for conversion of the $10,900.00.²The jury next found that Garcia was liable for $76,134.10 plus interest for constructive fraud, arising from her withdrawals from the couple's joint checking accounts in 2006. The jury also awarded Fawzy punitive damages of $40,000.00, plus attorney's fees. In addition to the jury verdicts granting Fawzy relief, the jury denied Garcia relief on her breach of contract, partnership, and conversion counterclaims.

The punitive damages award against Garcia was based on the jury's finding that Garcia "acted with an evil mind and committed fraud against Mr. Fawzy." The state court instructed the jury in detail regarding what constitutes an evil mind under Arizona law. It instructed the jury that any of the following could support an evil mind finding: "1, intent to cause injury; Or 2, wrongful conduct motivated by spite or ill will; Or 3, Ms. Garcia acted to serve her own interests having reason to know and consciously disregarding a substantial risk that [her] conduct may significantly injure the rights of others."

In contrast, the jury was not given a jury instruction regarding what it generally means to "commit fraud." The only fraud-related claim on which the court instructed the jury was constructive fraud. The constructive fraud jury instruction made it clear that intent to deceive wasnot required in order to establish liability for constructive fraud. Indeed, the constructive fraud jury instruction advised the jury that "intent of the party charged" was irrelevant to the constructive fraud cause of action.³

After the jury rendered its verdict in favor of Fawzy, the court awarded $25,000.00 for attorney's fees, prejudgment interest of $15,456.27, and court costs and jury fees of $10,331.61. It then entered final judgment in June 2009 in the aggregate amount of $174,321.98.

Subsequently, Garcia commenced her bankruptcy case by filing a voluntary chapter 7 petition. Fawzy timely filed a complaint seeking to except the judgment debt from discharge under §§ 523(a)(2)(A) and (a)(6). He then filed a motion for summary judgment based on the § 523(a)(6) claim and the asserted issue preclusive effect of the state court judgment. The bankruptcy court denied the summary judgment motion. According to the court, the jury's findings did not establish the requisite state of mind for nondischargeability under § 523(a)(6).

Prior to trial, the parties stipulated to numerous admitted facts, including many of the facts set forth above. The court approved the parties' amended joint pretrial stipulation and set the matter for trial, with all direct testimony to be submitted by declaration. At the pretrial conference, the parties discussed the admission and use of the state court trial transcript as an exhibit. The court indicated that the state court transcript would be admitted but that any party seeking to use it to prove the truth of the matter testified to would need to make the witness who previously testified available at the bankruptcy court trial for potential additional cross-examination.

Fawzy presented a half-page declaration at the bankruptcy court trial and relied on the admitted facts from the pretrial stipulation. He also argued that the state court judgment, jury verdict, and state court trial transcript demonstrated his entitlement to issue preclusion on all elements necessary for relief under both §§ 523(a)(2)(A) and (a)(6). At the conclusion of trial, the court rendered oral findings of fact and conclusions of law. The court concluded that issue preclusion applied to establish all of the elements for nondischargeability under § 523(a)(6) but not under § 523(a)(2)(A).

The bankruptcy court supplemented its oral findings of fact and conclusions of law with a memorandum decision after trial. With respect to § 523(a)(2)(A), the bankruptcy court stated that nothing in the state courtjury instructions or jury verdict established that the jury...