Bankruptcy No. 08-28138-C-7
ORDER AFFIRMING DECISION OF BANKRUPTCY COURT
Robert Charles Destfino ("Mr. Destfino") and Ila Jane Destfino ("Mrs. Destfino"), collectively ("Appellants"), appeal the Bankruptcy Court's October 2, 2009 ruling and February 12, 2010 amended judgment. Appellants contest the Court's finding that they are liable as fiduciaries under 11 U.S.C. § 523(a)(4) and that they are liable for all funds disbursed. Appellants also appeal the Court's decision to allow Gerald Bockting ("Appellee") to pursue this action despite being a party to an illegal transaction; its decision to grant Appellee's counter-motion to amend; and its reliance on Appellee's supplemental brief. Appellee opposes the appeal. For the reasons stated below,*fn1 the decision of the Bankruptcy Court is AFFIRMED.
I. FACTUAL AND PROCEDURAL BACKGROUND
In 2004 Appellants and Appellee invested in a company called "Corporate Sole."*fn2 According to Appellants, Corporate Sole was a scam business whose front man, William Kennedy, promised investors that if they bought luxury cars and houses under certain conditions, he could "legally eliminate his customers' mortgage and auto loan debts, and avoid tax consequences." Brief for Appellants at 3 [hereinafter Appellants' Br.].
On September 14, 2004, Mrs. Destfino, the niece of Appellee's deceased wife, and Appellee entered into a "Business Limited Agreement". Pursuant to this Agreement, Mrs. Destfino and Appellee invested Appellee's life savings by buying luxury cars and refinancing his two properties pursuant to the methods outlined in the Corporate Sole business plan. Id. at 6. After signing the agreement, Appellee and Mrs. Destfino opened two joint checking and savings accounts. Brief for Appellee at 7 [hereinafter Appellee's Br.]. Also on September 14, 2004, Appellee signed a document giving Mrs. Destfino a general power of attorney. Id. On September 23, 2004, Appellee executed a "Letter of Resignation as Settlor-Trustee" naming Mrs. Destfino as the trustee under his will. Id. at 8-9. After these transactions, Mrs. Destfino paid the down payment on several luxury vehicles. Id.
On October 20, 2004, Appellee refinanced one house, the "Converse Court House," and deposited $228,000 into one of the joint accounts. Id. at 9. On that same day, Appellants transferred $128,000 into their personal bank account. Id. On November 8, 2004, Appellee refinanced a second house, the "East Brook House," and Appellants transferred $140,000 of that money into their personal bank account. Id. at 10. On November 29, 2005, Mr. Destfino obtained a $337,500 loan from New Century Mortgage through a secured deed of trust on the East Brook House. Id. at 12.
The Bankruptcy Court found that from 2004-2006, Appellants placed Appellee's money in their personal and business bank accounts and used the money for purposes not authorized by Appellee. Excerpts of Record at 22 [hereinafter E.R.]. Throughout the trial, Appellants produced multiple and incomplete accounting statements; as of this appeal, there remains unaccounted funds. E.R. at 26.
Appellants filed a Chapter 7 Bankruptcy on June 18, 2008. On June 27, 2008, Appellee filed an adversary proceeding against Appellants asserting numerous claims including fraud, defalcation while acting in a fiduciary capacity, embezzlement or larceny, and willful and malicious injury. On October 2, 2009, at the conclusion of the trial, the Bankruptcy Court made findings, supported by evidence, and stated them on the record. The Bankruptcy Court held that a fiduciary relationship existed between Appellants and Appellee. The judge held Appellants liable for defalcation under 11 U.S.C. § 523(a)(4), but not liable for fraud or embezzlement. E.R. at 67-69. The Court also assessed total damages at $388,000 which is the total amount of money received by the Appellants minus the money Appellee acknowledged receiving. E.R. at 69.
On December 12, 2009, Appellants filed a motion to amend the judgment requesting that their liability be amended to zero. E.R. at 90.
On February 18, 2010, the Bankruptcy Court amended the judgment to hold that Appellants were liable for embezzlement under 11 U.S.C. § 523(a) (4) and it declined to eliminate the judgment. E.R. at 21-22.
A district court has jurisdiction to hear appeals from a bankruptcy court pursuant to 28 U.S.C. 158(a). The bankruptcy court's interpretations of the Bankruptcy Code and conclusions of law are reviewed de novo by the district court. Blausey v. United States Trustee, 552 F.3d 1124, 1132 (9th Cir. 2009) (citations omitted). The Bankruptcy Court's factual findings are reviewed for clear error. Id. Factual review under this standard requires deference to the Bankruptcy Court. McClure v. Thompson, 323 F.3d 1233, 1240 (9th Cir. 2003). Clear error is not demonstrated by pointing to conflicting evidences in the record. National Wildlife Federation v. National Martine Fisheries Service, 422 F.3d 782, 795 (9th Cir. 2005). Instead, if the trial court's account of the evidence is plausible in light of the record viewed in its entirety, the reviewing court may not reverse it even though convinced that, had it been sitting as the trier of fact, it would have weighed the evidence differently. Id.
Appellants raise the following issues on appeal:
1. Whether the bankruptcy court erred in holding that Robert and Ila Destfino were fiduciaries in the context of 11 U.S.C. Section 523(a)(4)?
2. Whether the bankruptcy court erred in holding the Destfinos liable for all funds disbursed?
3. Whether the bankruptcy court erred as a matter of law, in allowing a party to an illegal ...