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In re Evans

filed: December 2, 1993.


Appeal from the United States Bankruptcy Court for the Central District of California. Honorable Kathleen T. Lax, Bankruptcy Judge, Presiding. BK. No. LA91-76189-KL. Adv. No. AD91-06310-KL

Before: Perris, Volinn, and Jones, Bankruptcy Judges.

Author: Perris

PERRIS, Bankruptcy Judge:

The appellees filed an adversary proceeding seeking a determination that a state court judgment debt owed them by the debtor was nondischargeable under 11 U.S.C. § 523(a)(4). The bankruptcy court granted the appellees' motion for summary judgment, determining that the state court decision established all necessary elements under section 523(a)(4). We REVERSE the bankruptcy court's decision and REMAND for further proceedings.


Raymond H. Pollard ("Pollard") and John L. Langford ("Langford") owned 27 acres of real property in Santa Barbara, California. In October of 1982, the property was in the process of being subdivided into approximately 70 duplex lots. Pollard and Langford employed the debtor, a licensed real estate broker, to market and sell the real property and agreed to pay the debtor a $100,000 commission if she obtained purchasers for the real property on acceptable terms.

In May of 1983, Pollard and Langford agreed to sell the property to Primavera Joint Venture, a joint venture consisting of the debtor and four other individuals. The debtor acted as the real estate broker in the sale. Los Robles Corporation, a corporation formed by the debtor assumed the debtor's interest in the joint venture and became the managing general partner of the joint venture.

As part of the sale transaction, Pollard and Langford were to obtain options to purchase up to 10 subdivision lots at development cost. The options were to be for the benefit of Pollard's and Langford's children, the appellees Michael Pollard, Steven Pollard and Pamela Langford Rogers (collectively "the appellees"). Although the original draft of the sale contract included provisions for the options, Pollard and Langford had the option provision removed for tax reasons and the parties agreed to handle the option agreement outside of escrow by a separate written agreement.

Between June of 1983 and the close of escrow on the sale in January of 1984, the parties unsuccessfully attempted to put together a written option agreement. The appellees submitted written option agreements to the debtor in June of 1983 for Primavera's approval. Other than questioning the selection of one or more of the lots specified in the option agreement, the debtor did not communicate to Pollard, Langford or the appellees that Primavera's position was at odds with the written option agreements submitted by the appellees. When Pollard become concerned that Primavera had not delivered signed option agreements, the debtor executed a document, in June of 1984, pledging her $100,000 commission as security for the delivery of the option agreements.

When escrow on the transaction closed in January of 1984, the parties had not executed written option agreements as had been contemplated. Pollard, nevertheless released the debtor's $100,000 commission to her. Following close of escrow, the parties made further unsuccessful efforts to wrap up the option issue. The parties disputed the proper consideration to be paid under the options, whether the options would expire prior to the completion of off-site improvements and whether Pollard and Langford should defer payment of interest installments due on the purchase price as a condition of any options.

When the parties' efforts at resolving the option issue failed, the appellees filed a state court action against the debtor and others, alleging, inter alia, breach of fiduciary duty and negligence. Following a bench trial in November of 1990, the state court issued a tentative decision and a statement of decision, both of which determined that the debtor's fiduciary duty as a real estate broker included a duty to act in the best interest of her clients by seeking to obtain the option agreements. The court further determined that the debtor breached the fiduciary duty that she owed to the appellees as the intended beneficiaries of the option agreements, causing damage to the appellees in the amount of $171,763.04. The court entered a judgment for the appellees and against the debtor in that amount, plus interest and costs.*fn2

The debtor filed a Chapter 7 petition in May of 1991. Subsequently, the appellees filed an adversary proceeding alleging that the state court judgment debt was nondischargeable under 11 U.S.C. § 523(a)(4). The appellees moved for summary judgment, relying upon the state court decisions and the doctrine of collateral estoppel. After a hearing, the bankruptcy court ruled that the factual issues determined in the state court action established the elements under section 523(a)(4). The debtor filed this timely appeal from the bankruptcy court's judgment determining the debt to be nondischargeable.


The ultimate issue in this appeal is whether the state court's decision established that the debtor committed a defalcation while acting as a fiduciary under the standards of section 523(a)(4). As the appeal arises from a ruling on a summary judgment motion, we review the bankruptcy court's decision de novo. E.g. In re Baird, 114 Bankr. 198, 201 (9th Cir. BAP 1990). The sub-issues in this appeal concern the bankruptcy court's application of ...

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