In re: Mehran Shahverdi

FILED JUN 07 2013 1 SUSAN M SPRAUL, CLERK U.S. BKCY. APP. PANEL 2 OF THE NINTH CIRCUIT UNITED STATES BANKRUPTCY APPELLATE PANEL 3 OF THE NINTH CIRCUIT 4 5 In re: ) BAP No. CC-12-1287-MkTaPa ) 6 MEHRAN SHAHVERDI, ) Bk. No. 08-20205-MT ) 7 Debtor. ) Adv. No. 09-0119-MT ______________________________ ) 8 ) MEHRAN SHAHVERDI, ) 9 ) Appellant, ) 10 ) v. ) MEMORANDUM* 11 ) WILLIAM HABLINSKI ARCHITECTURE,) 12 a California Partnership, ) ) 13 Appellee. ) _______________________________) 14 Argued and Submitted on May 16, 2013 15 at Pasadena, California 16 Filed – June 7, 2013 17 Appeal from the United States Bankruptcy Court for the Central District of California 18 Honorable Maureen Tighe, Bankruptcy Judge, Presiding 19 20 Appearances: Barry R. Wegman of the Law Offices of David A. Tilem argued for Appellant Mehran Shahverdi; John 21 D. Faucher of Faucher & Associates argued for Appellee William Hablinski Architecture, a 22 California partnership. 23 Before: MARKELL, TAYLOR, and PAPPAS, Bankruptcy Judges. 24 25 26 * This disposition is not appropriate for publication. 27 Although it may be cited for whatever persuasive value it may have (see Fed. R. App. P. 32.1), it has no precedential value. 28 See 9th Cir. BAP Rule 8013-1.

1 INTRODUCTION1 2 This case involves an individual Chapter 13 debtor and his 3 former employer. The bankruptcy court rendered summary judgment 4 in favor of the debtor’s former employer under Sections 5 523(a)(2)(A) and 523(a)(4) on the basis of the issue preclusive 6 effect of an arbitral award. We vacate the bankruptcy court’s 7 judgment and remand. 8 STATEMENT OF FACTS 9 A. The Pre-bankruptcy Proceedings 10 1. Debtor’s Employment at William Hablinski Architecture (“WHA”). 11 12 Mehran Shahverdi, the debtor/Appellant (“Debtor”) came to 13 the United States from Iran on a student visa in 1984. As early 14 as 1988, Debtor had done architectural design work for Daniel 15 Elihu. The Elihu family owned a construction company, Amir 16 Construction. Debtor testified2 that he had never worked for 17 Amir Construction, even though he included the company on his 18 resume. 19 In 1997, Debtor received his Bachelor of Architecture from 20 the University of Southern California, and became an American 21 citizen. 22 1 23 Unless specified otherwise, all chapter and section references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532, and 24 all Rule references are to the Federal Rules of Bankruptcy Procedure, Rules 1001-9037. All Civil Rule references are to the 25 Federal Rules of Civil Procedure and are abbreviated as “FRCP”. 26 2 All references to any party’s testimony are drawn from the 27 arbitration: William Hablinski Architecture v. Shahverdi, Case No.: 03-4412-RWT (Sept. 7, 2010) [hereinafter “Arbitration 28 Award”].

1 Appellee WHA is an architecture firm that designs and 2 supervises the construction of high-end custom homes. In 3 approximately May 2000, WHA hired the Debtor as a “Job Captain.” 4 Debtor’s job involved production and low level management 5 activities. When WHA hired Debtor, the firm required him to sign 6 the firm’s Employee Handbook. The Employee Handbook contained 7 articles that addressed the following: (1) conflicts of interest, 8 secondary employment,3 and confidentiality. Under WHA’s Employee 9 Handbook’s provisions, personal use of the office computers was 10 expressly prohibited. 11 The Job Captain position required that Debtor work under a 12 Project Manager’s supervision while assisting in the production 13 of construction drawings, coordinating with consultants, and 14 developing the project’s ultimate details. In order to 15 facilitate this process, WHA employs a computer system that 16 allows its employees to develop a full set of documents for use 17 by all parties to a project, including consultants. Thus, 18 employees such as Debtor would use the computer system to 19 generate and then transmit parts of designs and drawings to 20 various consultants. In order to send work documents to third 21 parties, a Job Captain needed a supervisor’s prior authorization. 22 23 3 24 Richard Manion (“Manion”), a partner at WHA, testified that under Article 31, an employee could not work on non-firm projects 25 in the office or use office resources. While there was no policy prohibiting moonlighting, any secondary employment could not be 26 detrimental to an employee’s performance or conflict with any 27 other company policy. To the extent that an employee engaged in secondary work, the employee was prohibited from doing it at the 28 Hablinski office.

1 WHA gave Debtor access to the firm’s project design 2 software, AutoCADD, and WHA’s servers. Because Debtor had access 3 to WHA’s servers, Debtor also had access to WHA’s company files, 4 including its computer design library files (“Design Library”). 5 The Design Library provided its users with a resource that: 6 (1) could help identify for clients a variety of certain design 7 styles and characteristics, (2) had books on a variety of styles 8 of architecture, and (3) contained AutoCADD proprietary files, 9 drawings, hard copy drawings, and designs from WHA’s previous 10 projects. WHA considers the Design Library to be an internal 11 document that is not available to anyone outside the firm. 12 Indeed, William Hablinski testified that the Design Library was a 13 trade secret because its contents were not known to competitors, 14 and would be of economic value to WHA’s competitors were they 15 known. 16 Among other projects,4 Debtor was assigned to the Unity 17 Family Trust project for the Sands family. The client was fairly 18 demanding, required a lot of attention, and was responsible for 19 making changes requiring the Unity Family Trust project to grow 20 from what was a 14,000 square foot house to the 20,000 square 21 foot house it came to be. Under WHA’s project identification 22 system, WHA denominated the Unity Family Trust project as project 23 number 9930. This meant that it was the 30th project of the year 24 1999. 25 4 Debtor testified that in addition to the Unity Family trust 26 Project he worked on the 77 Beverly Park project, “Lot 58 Beverly 27 Park project, the Sycamore project, 0031 Cabana, a copy of the Westbury House, [and] two projects in San Marino along with other 28 smaller projects.” Arbitration Award (Sept. 7, 2010) at 25.

1 2. Marilyn Drive House. 2 One month after WHA hired Debtor in May 2000, Debtor 3 contacted the Elihus seeking a profit sharing arrangement on any 4 design projects the Elihus might send him. On January 1, 2001, 5 one of the Elihus asked Debtor to submit a proposal to build the 6 Marilyn Drive house. On March 1, 2001, Debtor submitted a 7 proposal and was selected to do the design. In a letter to the 8 Elihus, Debtor wrote, “I see this project as a 12,500 square foot 9 high-end Tuscany Villa in Beverly Hills.” Arbitration Award 10 (Sept. 7, 2010) at 38. Over seven to eight months, Debtor spent 11 approximately 850 hours on the Marilyn Drive house. Debtor 12 testified that without access to the WHA library, he would have 13 spent an additional 50 to 100 hours. 14 In April 2003, WHA became aware that Debtor was involved in 15 another project. Apparently, Debtor’s immediate supervisor, 16 David Michael Hogan, along with another WHA employee, discovered 17 the “Marilyn Way house” when they were on their way to showrooms 18 in nearby Hollywood. Mr. Hogan testified that the Marilyn Way 19 house was strikingly similar to that of the Unity Family Trust 20 project. After subsequently obtaining a permitted set of 21 drawings from the city of Beverly Hills, Mr. Hogan noted a number 22 of similarities. Among them were: (1) the copyright statement 23 which was identical to the WHA copyright statement; (2) the 24 project used the same title sheet WHA uses; (3) the Unity Family 25 Trust label which is unique to the Unity Family Trust; and (4) a 26 reference to another WHA project that WHA included on the Sands 27 project designs so builders could see the qualifications detail 28 that WHA required. The Marilyn Way house featured a number of

1 design elements that were essentially the same as used on the 2 Sands project, in addition to design elements taken from other 3 WHA projects. The Marilyn Way house drawings indicated that 4 Debtor authored the project. 5 Following WHA’s discovery of the Marilyn Way house, and the 6 similarities it shared with the Unity Family Trust Project, WHA 7 asked all of the employees to bring their personal laptop 8 computers into work. WHA told its employees that they wanted to 9 update their employees’ computers. Debtor complied, and it was 10 then that WHA searched his hard drive to find, among other 11 things, the following items: (1) the same directory structure 12 that the WHA firm used to organize its library, (2) job numbers 13 that matched the WHA job numbers, (3) twenty to thirty projects 14 that WHA had completed years earlier, and (4) certain design 15 features of the Sands project. WHA also discovered time sheets 16 on Debtor’s hard drive indicating that Debtor was spending 17 significant amounts of time on the Marilyn Way house along with 18 other non-WHA projects. Indeed one of WHA’s partners concluded 19 that the “time sheets reflected that [Debtor was either] not 20 sleeping or was superhuman.” 21 Debtor admitted that he downloaded certain software and 22 files to facilitate his working on WHA projects from his home. 23 Apparently, WHA did allow its employees to do work at home with 24 permission, but that would not justify the scope of projects 25 Debtor had on his hard drive – Debtor had no prior association 26 with most of them. Further, employees were not permitted to keep 27 designs on their computers. 28

1 3. WHA’s Termination of Debtor. 2 After concluding that Debtor had violated several of WHA’s 3 Employee Handbook policies, including those dealing with 4 conflicts of interest, secondary employment, and confidentiality, 5 WHA terminated him. William Hablinski testified that regardless 6 of the fact that the Employee Handbook allowed an employee to opt 7 for arbitration over litigation, Mr. Hablinski wanted to file a 8 lawsuit against Debtor. Mr. Hablinski further testified that he 9 wanted to go public with his claims against Debtor. Apparently, 10 when Debtor’s supervisors at WHA terminated him, one of WHA’s 11 partners reassured him that WHA was “going to keep it private and 12 won’t tell anyone if you want to look for a job.” Arbitration 13 Award (Sept. 7, 2010) at 28:15-16. 14 Following Debtor’s termination, the police contacted him, 15 though ultimately no criminal complaint was filed; WHA, however, 16 filed a complaint with the California State Architectural Board; 17 and the facts surrounding Debtor’s termination were featured in 18 the press. 19 4. The State Court Proceedings. 20 On June 18, 2003, WHA filed a lawsuit against Debtor for 21 tortious interference with contract, trespass to chattels, 22 conversion, misappropriation of trade secrets, and negligent 23 misrepresentation, among other claims, in the Los Angeles 24 Superior Court (the “State Court Proceeding”). All of the 25 participating parties were represented by counsel. On August 20, 26 2003, Debtor filed a motion to compel arbitration. On 27 September 20, 2003, the State Court granted the motion, 28 dismissing the State Court Proceeding with prejudice. On appeal,

1 the California Court of Appeals ruled that notwithstanding the 2 dismissal with prejudice, the State Court could later confirm any 3 arbitration award issued from the private contractual 4 arbitration. 5 a. The Arbitration. 6 The arbitration hearing commenced on December 16, 2008 7 (stayed later that same day due to Debtor’s filing of bankruptcy) 8 and continued for several sessions until final submission in late 9 July 30, 2010.5 The case was heard as a binding arbitration by 10 the Hon. Robert W. Thomas, retired Judge of the Los Angeles 11 Superior Court (the “Arbitrator”). WHA sought relief for 12 thirteen causes of action which included: conversion, trespass to 13 chattels, unjust enrichment, promissory estoppel, 14 misappropriation of trade secrets, unfair competition, common law 15 unfair competition, breach of confidential relationship, false 16 promise (fraud), and negligent misrepresentation. On August 23, 17 2010, the Arbitrator issued his fifty-five-page Arbitration Award 18 in favor of the Appellees. In doing so, the Arbitrator made 19 extensive factual findings and conclusions of law, including the 20 following: 21 ...[Debtor] took computer drawings from the Unity Family Trust (Sands) plans and used them 22 on the Elihu Marilyn Drive house. The nature, amount and legal importance of what was copied 23 and used was disputed. It is found that the Unity Trust files were copied onto [Debtor’s] 24 personal files. 25 5 On April 16, 2009, Appellants filed an adversary complaint 26 against Debtor seeking a judgment of nondischargeability under 27 Sections 523(a)(2) and (a)(4). On May 4, 2009, the bankruptcy court granted WHA’s motion for relief from the automatic stay to 28 continue the Arbitration.

1 Arbitration Award(Sept. 7, 2010) at 47:14-17. 2 * * * * * 3 [Debtor] took documents from more than just the Sands project. ...[Debtor] also took 4 aspects of WHA computer files for a number of other residential projects as well as portions 5 of the computer detail library. [Debtor] even had plans on his computer for projects that he 6 did not ever work on...[totaling] over thirty WHA projects on [Debtor’s] personal computer. 7 8 Id. at 47:19-25. 9 * * * * * 10 [Debtor’s] actions constituted a taking of WHA property and converting it to his own use. 11 This property consisted of AutoCadd files, drawings, design library elements, hard copy 12 drawings and designs.... this conduct was a Breach of Fiduciary Duty [Debtor] owed to his 13 employer FHA. ...[Debtor’s] actions were also a Breach of Employment Contract between the 14 parties. 15 Id. at 47:27-32. 16 * * * * * 17 ...[Debtor’s] actions constitute an improper download of WHA trade secrets, copyright and 18 other material that clearly belonged to WHA. This material was used for [Debtor’s] 19 financial benefit. This material was intended to be used on WHA projects, not the Marilyn 20 Drive house. This was in conflict with [Debtor’s] obligations to WHA. 21 22 Id. at 47:34-38. 23 * * * * * 24 ...[Debtor’s] actions constituted fraud. He broke his Employee Handbook promise to WHA not 25 to unlawfully take and use trade Secret and/or Design Library material for his personal use 26 and benefit. ...[Debtor] engaged in his own business activities in conflict with his 27 obligations to WHA. 28 Id. at 47-48.

1 * * * * * 2 ...WHA employees were not to use the [Design Library] for their own purposes. ...The Design 3 Library itself can qualify as a trade secret. This [Design Library] was found to have been 4 misappropriated by [Debtor]. 5 Id. at 49:17-20. 6 * * * * * 7 ...[Debtor] violated the Confidentiality policy in the Employee Handbook by using Unity 8 Family Trust material on the Elihu project. The Sands project was a confidential WHA 9 project. 10 Id. at 50:12-14. 11 * * * * * 12 ...[WHA’s] belief that [Debtor] was in a conspiracy with the Elihu group as his 13 partners was unsubstantiated. The evidence of a joint venture was insufficient. There was 14 no direct evidence presented at the Arbitration to support this theory. 15 16 Id. at 50:17-20. 17 * * * * * 18 [WHA directed] that a Superior Court Complaint be filed, [and that the State Court Case] 19 received publicity. [Doing so] was improper and a violation of [WHA’s] own rules.... 20 21 Id. at 53:9-12. 22 Within the Arbitrator’s discussion of damages, he pointed to 23 several possible bases for WHA’s damages. Those included the 24 following: 25 While the Arbitrator has found that [Debtor] is liable for damages to WHA for his actions, 26 placing a value on them is difficult. There is no precise measurement available. 27 28 Id. at 50:23-25.

1 * * * * * 2 [While] Mr. Hablinski testified that [Debtor] caused him to spend “enormous” amounts of 3 money on legal fees [valued in the range of $1.6 - $3 million]...[and Debtor’s actions] 4 caused WHA reputation damage[,] [t]here is no estimation of value put on that statement. 5 The Arbitrator believes that the situation did cause reputation damage to WHA. 6 7 Id. at 50:28-32. 8 * * * * * 9 WHA states that for Conversion, the measure of recovery is the value of the converted 10 property plus a “fair compensation for time and money properly expended in pursuit of the 11 property.” [WHA said] the value of the converted property was in excess of $600,000. 12 13 Id. at 51. 14 * * * * * 15 WHA [claims that it] has incurred costs and expenses in recovering its stolen property in 16 the amount of $410,000 [including $30,000 in forensic expert fees and $380,000 in legal 17 fees]. 18 Id. at 51:25-28. 19 * * * * * 20 [WHA seeks] between $800,000 and $1.2 million for loss of contracts [because as a result of 21 Debtor’s actions, the Sands stopped referring clients].6 22 23 Id. at 51:30-32. 24 Finally, the Arbitrator awarded damages as follows: 25 6 The Arbitrator found that “losing referrals from Fred Sands 26 has value. It is impossible to state just how much...What is 27 known is that Mr. Sands would not refer anyone to WHA after the Elihu Marilyn Drive house was discovered.” Arbitration Award 28 (Sept. 7, 2010) at 63:36-40.

1 [T]he full value of the Claimant WHA [sic] claims against [Debtor are] $950,000 which 2 includes the $50,000 unjust enrichment amount. A total punitive damage award of 3 $100,000 will also be awarded on Fraud and Conversion Causes of Action.7 4 5 Id. at 52:24-25. 6 The recovery to be awarded Claimant WHA under all remaining Causes of Action are subsumed 7 in a single legal theory which encompasses Fraud. The same give rise to the finding in 8 favor of [WHA] and against [Debtor] on all theories. 9 10 Id. at 52:27-29. 11 * * * * * 12 [$100,000 to Debtor for his] Emotional Distress Claim]. 13 14 Id. at 54:6-7. 15 The Arbitrator then netted the offsetting awards, granting WHA 16 a total award of $950,000. Finally, the Arbitrator added that he 17 did “not intend to entertain any request for additional attorney’s 18 fees from either side...the Arbitrator requires submission of 19 authority for the award of any additional fees.” Id. at 55:4-7. 20 b. Confirming The Arbitration Award. 21 On November 18, 2010, the California Superior Court granted 22 WHA’s petition to confirm the arbitration award against Debtor, and 23 a Judgment issued in conformity with the arbitration award as 24 follows: 25 26 7 The Arbitrator earlier explained that the punitive damages 27 award was measured by “$50,000 for the Fraud Cause of Action and $50,000 for the Conversion Cause of Action.” Arbitration Award 28 (Sept. 7, 2010) at 63:22-23.

1 JUDGMENT BE ENTERED IN FAVOR OF PETITIONER, William Hablinski Architecture, and against 2 respondent, Mehren Shahverdi, in the amount of Nine Hundred and Fifty Thousand Dollars 3 ($950,000.00), plus 4 (a) Pre-judgment interest in the amount of $14,314.85, calculated at a rate 5 of 10% per annum (260.27 per day) from August 23, 2010 to October 18, 6 2010; 7 (b) Post-judgment interest at a legal rate of 10% per annum from the date 8 the judgment is entered until the judgment is paid in full; and 9 (c) Costs of suit. 10 11 California Superior Court Confirmation of Arbitration Award 12 (Nov. 18, 2010) at 1-2. 13 No appeal was taken, and the time to appeal the state court 14 Judgment against Debtor has passed. 15 5. Debtor’s Bankruptcy Case. 16 On December 16, 2008, Debtor filed a Chapter 13 bankruptcy 17 petition. On April 16, 2009, WHA filed an adversary complaint 18 against Debtor seeking a judgment of nondischargeability under 19 Sections 523(a)(2) and (a)(4). On May 4, 2009, the bankruptcy 20 court granted WHA’s motion for relief from the automatic stay to 21 continue the Arbitration. Following the conclusion of the 22 Arbitration proceedings, on March 19, 2011, WHA filed its Motion 23 for Summary Judgment against Debtor based on WHA’s 24 Sections 523(a)(2) and (a)(4) claims. 25 On July 6, 2011, the bankruptcy court held a hearing on 26 Appellant’s Motion for Summary Judgment. During that hearing the 27 bankruptcy court indicated that it was prepared to find that the 28 Arbitration Award was issue preclusive as to Appellee’s

1 Section 523(a)(4) embezzlement claim. However, the bankruptcy 2 court also had reservations about finding that the Arbitration 3 Award was issue preclusive as to both the Appellee’s 4 Section 523(a)(2) fraud claim and the Arbitral Award of Damages. 5 The Section 523(a)(2) claim troubled the bankruptcy court 6 because, as a matter of California law, fraud is a broad concept, 7 whereas under Section 523(a)(2) fraud “is a very narrow, very 8 clearly defined cause of action.” Tr. of Oral Arg. (Nov. 18, 9 2010) at 8:19-22. The bankruptcy court emphasized that while 10 fraud under Section 523(a)(2) requires a misrepresentation and 11 then a reliance on that misrepresentation, the Arbitrator’s 12 findings did not appear to anywhere identify that Debtor actually 13 represented to WHA that by signing the Employment Agreement, “I’m 14 not going to take these secret designs but I’m really planning on 15 doing it....” Id. at 16:12-17. 16 In response, Debtor’s counsel sought to distinguish the 17 facts the Arbitrator found with respect to the elements of 18 embezzlement under Section 523(a)(4) from those of fraud under 19 Section 523(a)(2). He did this on the basis of the Arbitrator’s 20 lack of a finding that Debtor knowingly misrepresented his 21 intentions respecting use of the Design Library when Debtor 22 signed the Employment Agreement. The problem with the “ongoing 23 misrepresentation” theory, he argued, was that such a theory 24 failed to distinguish between Debtor’s broken promise and 25 Debtor’s false promise: 26 “because any time anybody has made a promise, if every time they show up, it’s a restating 27 of that promise and they later develop the intent to do what they shouldn’t be doing, its 28 going to be fraud, and there’s...no such thing

1 as just a straight broken promise. It’s always going to be fraud, and we don’t have 2 that under the law....” 3 (Id. at 18-19). 4 The bankruptcy court determined that Debtor had knowingly 5 engaged in deceptive conduct at the time he signed his employment 6 agreement based on two facts: (1) at the time he signed his 7 employment agreement, he had already been in contact with the 8 Elihus with the hope of getting a contract to build a “high-end 9 Tuscany villa,”8 and (2) it could easily be inferred that the 10 arbitrator found that Debtor engaged in deceptive conduct when he 11 violated his employment agreement by copying WHA’s files into his 12 personal computer and used them for his benefit. Ultimately, the 13 bankruptcy court found that the Arbitration Award was issue 14 preclusive as to WHA’s Section 523(a)(2) fraud claim. 15 During the July 6, 2012, hearing on WHA’s Motion for Summary 16 Judgment, the bankruptcy court also indicated that it was having 17 8 Of course this does not align with either the testimony or 18 the findings in the Arbitration Award. For example, Debtor 19 testified that while he was hired in May 2000, he contacted the Elihus in June 2000, seeking a profit sharing arrangement on any 20 design projects they might send him. Debtor further testified that it was not until March 1, 2001, that Debtor submitted a 21 proposal on the Marilyn Drive house and that he stated that he saw the project as a “high-end Tuscany villa.” Moreover, the 22 Arbitrator specifically found that: 23 [WHA’s] belief that [Debtor] was in a 24 conspiracy with the Elihu group as his partners was unsubstantiated. The evidence of 25 a joint venture was insufficient. There was 26 no direct evidence presented at the Arbitration to support this theory. 27 Arbitration Award (Sept. 07, 2010) at 62:17-20 (emphasis 28 added).

1 significant trouble finding that the Arbitration Award had issue 2 preclusive effect as to damages. The bankruptcy court stated 3 that “whatever the arbitrator found were the damages, that’s it. 4 He doesn’t have to explain how he broke it down.” Tr. of Oral 5 Arg. (Nov. 18, 2010) at 10:18-20. Further, the bankruptcy court 6 emphasized that: 7 I don’t know if it’s clear or not for issue preclusion in that what is this $950,000. We 8 know that $50,000 of it is unjust enrichment. Is the rest the fees he didn’t collect from 9 Sands or the value of the trade secrets or legal fees and expert fees Hablinski spent 10 chasing him down? Where does it come from? 11 Id. at 10:4-9. Finally, the bankruptcy court added that “what 12 was that amount based on? How does he get to that number?” Id. 13 at 6:23-24. 14 In response, WHA stated: “Well, obviously, the...arbitrator 15 wasn’t clear enough.” Id. at 10:10-11. However, later in its 16 Supplemental Brief on Damages, WHA argued that the entire damages 17 amount constituted actual damages due to embezzlement based on 18 the fact that: 19 [T]he arbitrator found that the full value of the [WHA] claims against [Debtor] to be 20 $950,000 which includes the $50,000 unjust enrichment amount.... The recovery awarded 21 [WHA] under all remaining Causes of Action are subsumed in a single legal theory which 22 encompasses Fraud. The same facts giving rise to the finding in favor of [WHA] and against 23 [Debtor] on all theories. 24 Plaintiff’s Supplemental Brief on Damages (Aug. 17, 2011) at 25 2:9-14 (quotations and citations omitted). WHA essentially 26 reasoned that the “single theory” was embezzlement which 27 “subsumed” fraud. 28

1 In contrast, Debtor argued that one of the problems with the 2 causes of action before the Arbitrator was that one of those 3 causes was for negligent misrepresentation which could also be 4 construed as fraud. Later in his Supplemental Brief on Damages, 5 Debtor emphasized that the Arbitrator failed to specify his 6 measure of damages allocation based on each of WHA’s causes of 7 action. On this basis, Debtor argued that it was therefore 8 impossible to determine that amount of damages which would fall 9 within the realm of nondischargeability. 10 Ultimately, the bankruptcy court granted summary judgment in 11 favor of WHA on the basis of the Arbitration Award’s finding of 12 damages. After briefly reviewing the California Uniform Trade 13 Secrets Act’s damages provisions as a basis for awarding summary 14 judgment in favor of WHA the bankruptcy court stated: 15 While the basis for the arbitration award was detailed, the damages awarded for each cause 16 of action were combined into one award on all causes of action. The arbitrator found “the 17 full value of the Claimant WHA claims...to be $950,000 which includes the $50,000 unjust 18 enrichment amount.” As the amount for unjust enrichment is dischargeable, that amount will 19 be deducted from the total award on the dischargeability action, reducing WHA’s award 20 to $900,000. The arbitration award also stated, “A total punitive damage award of 21 $100,000 will also be awarded on the Fraud and Conversion Causes of Action.” 22 ...The $950,000 award already included WHA’s 23 attorney’s fees, so nothing further will be awarded for fees. 24 Memorandum of Decision (Apr. 24, 2012) at 12-13. Thus, the 25 bankruptcy court found that $900,000 was nondischargeable. 26 Debtor timely filed his appeal. 27 28

1 JURISDICTION 2 The bankruptcy court had jurisdiction pursuant to 28 U.S.C. 3 §§ 1334 and 157(b)(2)(I). We have jurisdiction under 28 U.S.C. 4 § 158(a)(1). 5 ISSUES 6 1. Did the bankruptcy court commit reversible error when it 7 found that the $900,000 of the Arbitration Award’s lump sum 8 damages against Debtor was issue preclusive as to 9 nondischargeability? 10 2. Did the bankruptcy court commit reversible error when it 11 found the measure of damages for the misappropriation of a 12 trade secret includes the value of the property 13 misappropriated, where the Plaintiff was never deprived of 14 the use or title of the property?9 15 STANDARDS OF REVIEW 16 We review de novo the bankruptcy court’s decision to grant 17 summary judgment. Boyajian v. New Falls Corp. (In re Boyajian), 18 564 F.3d 1088, 1090 (9th Cir. 2009); Lopez v. Emergency Serv. 19 Restoration, Inc. (In re Lopez), 367 B.R. 99, 103 (9th Cir. BAP 20 2007). Viewing the evidence in the light most favorable to the 21 non-moving party (i.e., Debtor), we determine whether the 22 bankruptcy court correctly found that there are no genuine issues 23 of material fact and that the moving party (i.e., WHA) is 24 entitled to judgment as a matter of law. Jesinger v. Nev. Fed. 25 Credit Union, 24 F.3d 1127, 1130 (9th Cir. 1994); Gertsch v. 26 27 9 Because we resolve this appeal entirely under the first 28 issue, we decline to reach this second issue on appeal.

1 Johnson & Johnson (In re Gertsch), 237 B.R. 160, 165 (9th Cir. 2 BAP 1999). We review the bankruptcy court's legal conclusions 3 de novo and its factual findings for clear error. Wolfe v. 4 Jacobson (In re Jacobson), 676 F.3d 1193, 1198 (9th Cir. 2012). 5 The availability of issue preclusion is a question of law 6 the BAP reviews de novo. In re Jacobson, 676 F.3d at 1198(citing 7 Dias v. Elique, 436 F.3d 1125, 1128 (9th Cir. 2006)). If issue 8 preclusion is available, the decision to apply it is reviewed for 9 abuse of discretion. Dias v. Elique, 436 F.3d 1125, 1128 (9th 10 Cir. 2006). 11 When state preclusion law controls, such discretion is 12 exercised in accordance with applicable state law. Gayden v. 13 Nourbakhsh (In re Nourbakhsh), 67 F.3d 798, 800-01 (9th Cir. 14 1995). A bankruptcy court abuses its discretion when it applies 15 the incorrect legal rule or its application of the correct legal 16 rule is “(1) illogical, (2) implausible, or (3) without support 17 in inferences that may be drawn from the facts in the record.” 18 United States v. Loew, 593 F.3d 1136, 1139 (9th Cir. 2010) 19 (quoting United States v. Hinkson, 585 F.3d 1247, 1261–62 (9th 20 Cir. 2009)(en banc)) (internal quotation marks omitted). 21 To the extent that questions of fact cannot be separated 22 from questions of law, we review these questions as mixed 23 questions of law and fact, applying a de novo standard. Ratanasen 24 v. Cal. Dep't of Health Servs., 11 F.3d 1467, 1469 (9th Cir. 25 1993). A mixed question of law and fact occurs when the 26 historical facts are established, the rule of law is undisputed, 27 and the issue is whether the facts satisfy the legal rule. 28 Pullman–Standard v. Swint, 456 U.S. 273, 289 n.19 (1982).

1 DISCUSSION 2 For the reasons set forth below, we reverse the bankruptcy 3 court’s entry of summary judgment in favor of the WHA, and remand 4 with instructions. 5 A. The Record. 6 Our efforts to substantively review this case are hampered 7 by the failure of both parties to fully comply with the Federal 8 Rules of Appellate Procedure and the Bankruptcy Appellate Panel 9 Rules. Fed. R. App. P. 10(b)(2) provides that, 10 [i]f the appellant intends to urge on appeal that a finding or conclusion is unsupported 11 by the evidence or is contrary to the evidence, the appellant shall include in the 12 record a transcript of all evidence relevant to such finding or conclusion. 13 14 (Emphasis added). 15 Stated simply, an appellant has the burden of ensuring the 16 record provided to the Panel is adequate to support the Panel’s 17 consideration and determination of the issues presented by the 18 appeal.10 Burkhart v. Fed. Deposit Ins. Corp. (In re Burkhart), 19 84 B.R. 658, 660 (9th Cir. BAP 1988) (responsibility to file an 20 adequate record rests with an appellant); Torez v. Torez 21 (In re Torrez), 63 B.R. 751, 753 (9th Cir. BAP 1986), aff'd 22 827 F.2d 1299 (9th Cir. 1987). 23 As a preliminary matter, it is difficult to determine from 24 the record precisely the number of causes of action that WHA 25 brought before the Arbitrator. In its Memorandum of Decision on 26 10 27 Appellees likewise must ensure that the evidentiary materials essential to supporting the bankruptcy court’s findings 28 upon which they rely are in the record.

1 Summary Judgment, the bankruptcy court indicated that “WHA 2 pursued thirteen causes of action in the arbitration proceedings: 3 conversion, trespass to chattels, unjust enrichment, promissory 4 estoppel, misappropriation of trade secrets, unfair competition 5 under Business and Professions Code § 17200, common law unfair 6 competition, breach of confidential relationship, false promise 7 (fraud), and negligent misrepresentation.” Memorandum of 8 Decision (Apr, 24, 2012) at 2:13-16 (emphasis added). But this 9 enumeration features only ten of the apparent thirteen causes of 10 action. 11 Debtor’s Opening Brief on appeal is similarly lacking in 12 that while it asserts that “WHA arbitrated claims under 13 13 different causes of action...”, Appellant’s Opening Brief 14 (Aug. 14, 2012) at 4, it cites only to the bankruptcy court’s 15 Memorandum of Decision, which in turn does not cite to the 16 Arbitration Award or any other document in the record. Moreover, 17 a look further back in the record reveals that in Debtor’s 18 Opposition to Motion for Summary Judgment, Debtor asserted that 19 “...all 17 of the claims for relief were considered during a 20 lengthy arbitration.” Opposition (June 8, 2011) at 4:20-22 21 (referencing WHA’s Complaint for Determination of 22 Nondischargeability)(emphasis added). 23 On mere cursory inspection of WHA’s Complaint for 24 Determination of Nondischargeability, we note that it lists 25 seventeen causes of action. However, the last three causes of 26 action are as follows: (15) Exception to Discharge-Fraud 27 [11 U.S.C. Section 523(a)(2)]; (16) Exception to 28 Discharge–Embezzlement [Cal. Penal Code § 508; 11 U.S.C.

1 Section 523(a)(4)]; and (17) Petition to Compel the Continuation 2 of the Arbitration. It is difficult to imagine that an 3 arbitrator would “consider” these causes of action, given the 4 bankruptcy court’s exclusive jurisdiction to determine 5 nondischargeability, and the mootness of the cause of action 6 seeking to compel the very arbitration the Arbitrator was 7 considering. 8 WHA sheds very little additional light in that its Reply to 9 Defendant’s Opposition to Motion for Summary Judgment states 10 that: 11 Once the [Bankruptcy] Court granted [WHA] relief from the automatic stay to pursue 12 arbitration...all [WHA] needed to litigate in the adversary proceeding was the question of 13 how bankruptcy law would apply to the issues WHA expected to resolve in the arbitration. 14 And so WHA agreed to dismiss counts 1 through 14, and count 17, in the adversary proceeding 15 - precisely because they would be litigated in the arbitration, not in the Bankruptcy court. 16 17 Opposition (June 8, 2011) at 3-4. Counts one through fourteen in 18 WHA’s Adversary Complaint track precisely those in WHA’s State 19 Court Proceeding Complaint. 20 Finally, the Arbitration Award does not expressly identify 21 all of the causes of action WHA brought before the Arbitrator. 22 Instead, it lists only ten causes of action – the very same ten 23 causes of action the bankruptcy court enumerated in its 24 Memorandum of Decision. Moreover, the tenth cause of action the 25 Arbitration Award enumerated was the thirteenth cause, Negligent 26 Misrepresentation, in what one may only assume was included in 27 the original complaint before the Arbitrator. 28

1 Because the bankruptcy court appears to have found that the 2 arbitrator considered only thirteen causes of action, and because 3 the bankruptcy court enumerated only ten of them, we cannot 4 adequately determine the precise nature of the causes of action 5 the Arbitrator considered when he determined that “all remaining 6 Causes of Action are subsumed in a single legal theory which 7 encompasses Fraud.” Arbitration Award (Sept. 7, 2010) at 8 52:27-28. 9 B. Bankruptcy Court’s Use of Issue Preclusion. 10 Appellant argues the bankruptcy court improperly applied 11 issue preclusion concepts below when it gave deference to the 12 Arbitration Award findings related to the damage calculation. 13 For reasons discussed below, we hold that issue preclusion 14 applies as to the finding of non-dischargeability under 15 Sections 523(a)(2) and (a)(4). We determine, however, that issue 16 preclusion cannot be used to establish the damages allocable to 17 these non-dischargeable claims. 18 The doctrine of issue preclusion applies to dischargeability 19 proceedings under Section 523(a). Grogan v. Garner, 498 U.S. 20 279, 284-85 (1991). Issue preclusion, or collateral estoppel, 21 bars a party from relitigating any issue necessarily included in 22 a prior, final judgment. Malkoskie v. Option One Mortg. Corp., 23 188 Cal.App.4th 968, 115 Cal.Rptr.3d 821, 825 n.4 (Cal.App. Dist. 24 2010) (citing Rice v. Crow, 81 Cal.App.4th 725, 97 Cal.Rptr.2d 25 110, 116–17 (Cal.App. 2000)). The burden of establishing the 26 doctrine rests on the party asserting it. Ferraro v. 27 Camarlinghi, 161 Cal.App.4th 509, 529, 75 Cal.Rptr.3d 19, 36 28 (Cal.App. 2008)(citing Vella v. Hudgins, 20 Cal.3d 251, 257,

1 142 Cal.Rptr. 414, 572 P.2d 28 (1977)). Accord, Lopez v. 2 Emergency Service Restoration (In re Lopez), 367 B.R. 99, 108 3 (9th Cir. BAP 2007). 4 “To meet this burden, the moving party must have pinpointed 5 the exact issues litigated in the prior action and introduced a 6 record revealing the controlling facts. Reasonable doubts about 7 what was decided in the prior action should be resolved against 8 the party seeking to assert preclusion.“ Honkanen v. Hopper 9 (In re Honkanen), 446 B.R. 373, 382 (9th Cir. BAP 2011) (internal 10 citations omitted). 11 When determining the preclusive effect of a state court 12 judgment, we must apply, as a matter of full faith and credit,11 13 that state's issue preclusion principles. In re Nourbakhsh, 14 67 F.3d at 800. 15 Under California law, issue preclusion applies only if all 16 of the following elements have been satisfied: 17 (1) The issue sought to be precluded must be identical to that decided in 18 the former proceeding; 19 (2) The issue must have been actually litigated in the former 20 proceeding; 21 22 11 Pursuant to 28 U.S.C. § 1738, “[f]ederal courts must give 23 the same preclusive effect to state court judgments that those judgments would be given in that state's own courts.” Duarte v. 24 Bardales, 526 F.3d 563, 577 n.4 (9th Cir.), reh’g denied, 530 F.3d 1151 (2008) (quoting Clements v. Airport Auth. of Washoe 25 Cnty., 69 F.3d 321, 326 (9th Cir. 1995)); see also Grogan v. Garner, 498 U.S. 279, 284 (1991)(“[A] bankruptcy court could 26 properly give collateral estoppel effect to those elements of the 27 claim that are identical to the elements required for discharge and which were actually litigated and determined in the prior 28 action.”).

1 (3) The issue must have been necessarily decided in the former 2 proceeding; 3 (4) The decision in the former proceeding must be final and on the 4 merits; 5 (5) The party against whom issue preclusion is sought must be the 6 same as, or in privity with, the party to the former proceeding. 7 (6) Whether imposition of issue 8 preclusion in the particular setting would be fair and consistent with 9 sound public policy. 10 Khaligh v. Hadaegh (In re Khaligh), 338 B.R. 817, 824-25 (9th 11 Cir. BAP 2006), aff’d, 506 F.3d 956 (9th Cir. 2007) (citing 12 Lucido v. Super. Ct., 51 Cal.3d 335, 341-43, 272 Cal.Rptr. 767, 13 795 P.2d 1223, 1225-27 (1990)). 14 Here, four of the elements of issue preclusion are 15 undisputably satisfied: (1) the issues of fraud and embezzlement 16 were actually litigated in the Arbitration, (2) the issues of 17 fraud and embezzlement were necessarily decided in the 18 Arbitration, (3) the parties in the Arbitration and in the 19 nondischargeability action are the same, and (4) the bankruptcy 20 court gave adequate consideration in its finding that the 21 Arbitration met the adjudicatory standards required in order to 22 be fair and consistent with sound public policy. 23 Debtor contends that the damages finding was not on the 24 merits. However, this argument is incorrect. The Ninth Circuit 25 has expressly provided that “[a] final judgment is an order by 26 the court and is classically a decision made on the merits of the 27 case.” Self v. Gen. Motors Corp., 588 F.2d 655, 660 (9th Cir. 28

1 1978)(emphasis added). Under California’s statutes, when a 2 California state court confirms an arbitral award, the judgment 3 becomes final. Cal. Civ. Proc. Code § 1287.4; see also Khaligh, 4 338 B.R. at 824. 5 In this case, Debtor compelled arbitration in the first 6 instance, and neither party disputes that the Arbitrator 7 considered all of the available evidence, the parties’ arguments, 8 and the law applicable to the parties’ respective claims. The 9 Arbitration Award is a fifty-five page decision, conducted in an 10 inherently adjudicatory fashion, and, as discussed above, was 11 confirmed in the California Superior Court. Therefore, the 12 decision is final and on the merits. 13 The remaining element in dispute is whether the issue sought 14 to be precluded from litigation in the adversarial proceeding is 15 identical to that decided in the Arbitration Award. 16 1. Identity of issues under Section 523(a)(2)(A) 17 Section 523(a)(2)(A) provides that a discharge does not 18 include any debt for money, property, or services "to the extent 19 obtained by false pretenses, a false representation, or actual 20 fraud...." 11 U.S.C. § 523(a)(2)(A). In order to establish that 21 the debt had been obtained through fraud and is nondischargeable 22 under Section 523(a)(2)(A), the plaintiff must demonstrate that: 23 (1) The debtor made false representations; 24 (2) The debtor knew the representations were false when he made them; 25 (3) The debtor made the representations with 26 the intent and purpose of deceiving the creditor; 27 (4) The creditor relied on such 28 representations; and

1 (5) The creditor sustained the alleged loss 2 and damage as a proximate result of these representations. 3 Ghomeshi v. Sabban (In re Sabban), 600 F.3d 1219, 1222 (9th Cir. 4 2010). 5 The elements of fraud under Section 523(a)(2)(A) “‘mirror 6 the elements of common law fraud’ and match those for actual 7 fraud under California law, which requires that the plaintiff 8 show: (1) misrepresentation; (2) knowledge of the falsity of the 9 representation; (3) intent to induce reliance; (4) justifiable 10 reliance; and (5) damages.” Tobin v. Sans Souci Ltd. P'ship 11 (In re Tobin), 258 B.R. 199, 203 (9th Cir. BAP 2001)(quoting 12 Younie v. Gonya (In re Younie), 211 B.R. 367, 373–74 (9th Cir. 13 BAP 1997), aff'd, 163 F.3d 609 (9th Cir. 1998)(table decision)). 14 “The ‘identical issue’ requirement addresses whether 15 ‘identical factual allegations’ are at stake in the two 16 proceedings, not whether the ultimate issues or dispositions are 17 the same.” Lucido, 51 Cal.3d at 342, 795 P.2d at 1225 (citing 18 People v. Sims, 32 Cal.3d 468, 485, 186 Cal.Rptr. 77, 651 P.2d 19 321 (1982)). To determine whether issues in prior and subsequent 20 proceedings are identical, for purposes of applying issue 21 preclusion, a court examines whether the requirements of proving 22 the issue at stake in the subsequent proceeding “closely mirror” 23 requirements of proving issues presented in the prior action. 24 In re Nourbakhsh, 162 B.R. at 844; Stevens v. Briles 25 (In re Briles), 228 B.R. 462, 466 (Bankr. S.D. Cal. 1998), aff’d, 26 16 Fed.Appx. 698 (9th Cir. 2001)(unpublished). 27 28

1 Here, the bankruptcy court found that WHA sustained damage 2 resulting from its reliance that Debtor would follow the 3 provisions in the Employee Handbook. However, the amount of 4 damages the bankruptcy court found was limited only to the 5 Arbitration Award of “punitive damages for fraud because [the 6 Arbitrator] found that [Debtor’s] actions damaged [WHA’s] 7 reputation.” Memorandum of Decision (Apr. 24, 2012) at 7:20-21. 8 The bankruptcy court did not make any additional findings of fact 9 suggesting the amount of damages, if any, the Arbitration Award 10 allocated to fraud. 11 As discussed above, the Arbitration Award of punitive 12 damages for fraud was limited to $50,000. This suggests that the 13 remaining $850,000 in damages would have to flow from 14 nondischargeability under Subsection 523(a)(4) for embezzlement. 15 2. Identity of Issues under 523(a)(4) 16 As the bankruptcy court noted, federal law and not state law 17 controls the definition of embezzlement for purposes of 18 Section 523(a)(4). In re Wada, 210 B.R. 572, 576 (9th Cir. BAP 19 1997); see also Fraternal Order of Eagles, Aerie 1490 v. Mercer 20 (In re Mercer), 169 B.R. 694, 697 (Bankr. W.D. Wash. 1994); 21 In re Schultz, 46 B.R. 880, 890 (Bankr. D.Nev. 1985). Thus, 22 under Section 523(a)(4), embezzlement requires three elements: 23 “(1) property rightfully in the possession of a nonowner; (2) a 24 nonowner's appropriation of the property to a use other than 25 which [it] was entrusted; and (3) circumstances indicating 26 fraud.” In re Littleton, 942 F.2d 551, 555 (9th Cir. 1991). 27 The bankruptcy court found that the Arbitration Award met 28 all of the facts establishing the elements of embezzlement under

1 Section 523(a)(4). Specifically, the bankruptcy court found that 2 “[t]he facts establishing elements of conversion and embezzlement 3 were raised as the second and seventeenth causes of action in the 4 adversary complaint.” Memorandum of Decision (Apr. 24, 2012) at 5 11:20-21. As discussed above, the seventeenth cause of action in 6 the Adversary Complaint was a “Petition To Compel The 7 Continuation Of The Arbitration” (“Seventeenth Cause of Action”). 8 Adversary Complaint (Apr. 16, 2009) at 38. Contrary to the 9 bankruptcy court’s finding, we can find no facts in the 10 Seventeenth Cause of Action establishing any of the elements of 11 embezzlement. 12 The second cause of action was for “Conversion.” Id. at 22. 13 However, “conversion” does not by itself require any particular 14 mens rea, rather it is merely a wrongful taking.12 While in the 15 instant case, the taking was a breach of the duty that Debtor 16 owed to his employer, conversion by itself does not provide an 17 adequate basis for finding the mens rea necessary to support 18 embezzlement under Section 523(a)(4). Upon a careful review of 19 the Arbitration Award, we cannot locate the Arbitrator’s use of 20 the term embezzlement. While the Arbitration Award’s findings of 21 22 12 See Oakdale Vill. Grp. v. Fong, 43 Cal. App. 4th 539, 23 543-44, 50 Cal. Rptr. 2d 810, 812 (1996)(stating “Conversion is the wrongful exercise of dominion over the property of another. 24 The elements of a conversion are the plaintiff's ownership or right to possession of the property at the time of the 25 conversion; the defendant's conversion by a wrongful act or disposition of property rights; and damages. It is not necessary 26 that there be a manual taking of the property; it is only 27 necessary to show an assumption of control or ownership over the property, or that the alleged converter has applied the property 28 to his own use.”).

1 punitive damages and fraud might be sufficient to support a 2 finding of embezzlement under Section 523(a)(4), the bankruptcy 3 court’s basis for finding embezzlement requires further findings 4 tying the necessary mens rea to the elements of conversion. 5 Moreover, as a measure of the damages of the property Debtor 6 embezzled, the bankruptcy court found only that the 7 “...arbitrator awarded punitive damages based on these causes of 8 actions.” Memorandum of Decision (Apr. 24, 2012) at 11:27-28 9 (emphasis added).13 Thus, the only specific finding the 10 bankruptcy court made with respect to damages under 11 Section 523(a)(4) flowed from the punitive damages award. As 12 discussed previously, the punitive damages award featured $50,000 13 for fraud and $50,000 for conversion. 14 Thus, the bankruptcy court specifically allocated $100,000 15 in punitive damages as between its finding of non- 16 dischargeability under Sections 523(a)(2) and (a)(4). However, 17 $800,000 of the damages the bankruptcy court found 18 nondischargeable still remains without any identifiable 19 20 13 21 Determining what “these causes of actions” were is difficult, if not impossible. This is because earlier in the 22 same paragraph the bankruptcy court states that: “The facts establishing elements of conversion and embezzlement were raised 23 as the second and seventeenth causes of action in the adversary 24 proceeding complaint.” Id. at 11:20-22. However, reference back to the Adversary Complaint shows that while the second cause of 25 action was for conversion, the seventeenth cause of action was a “Petition to Compel the Continuation of the Arbitration.” Id. at 26 38. Thus, the bankruptcy court’s reference to “these causes of action” refers to at least one cause of action having nothing to 27 do with embezzlement. 28

1 allocation to specific factual issues giving rise to nondischargeability. 2 3. The bankruptcy court committed reversible error when it found that the $900,000 of the Arbitration Award’s lump 3 sum damages against Debtor was issue preclusive as to nondischargeability. 4 5 The sufficiency of a court’s factual findings are assessed 6 under Rule 52(a). Icicle Seafoods, Inc. v. Worthington, 475 U.S. 7 709, 713 (1986). The ultimate test of the adequacy of a trial 8 judge’s findings of fact under FRCP 52(a) is whether they are 9 explicit enough to give the appellate court a clear understanding 10 of the basis of the trial court's decision, and to enable it to 11 determine the ground on which the trial court reached its 12 decision. Alpha Distrib. Co. of Cal., Inc. v. Jack Daniel 13 Distillery, 454 F.2d 442, 453 (9th Cir. 1972). Even when a 14 bankruptcy court does not make formal findings, however, the BAP 15 may conduct appellate review “if a complete understanding of the 16 issues may be obtained from the record as a whole or if there can 17 be no genuine dispute about omitted findings.” Veal v. Am. Home 18 Mortg. Serv., Inc. (In re Veal), 450 B.R. 897, 919-20 (9th Cir. 19 BAP 2011) (quoting Gardenhire v. Internal Revenue Serv. 20 (In re Gardenhire), 220 B.R. 376, 380 (9th Cir. BAP 1998), rev'd 21 on other grounds, 209 F.3d 1145 (9th Cir.2000)). However, if 22 after such a review the record lacks a clear basis for the 23 court’s ruling, we must vacate the court’s order and remand for 24 further proceedings. Veal, 450 B.R. at 920 (citing Alpha 25 Distributing, 454 F.2d at 452-53). 26 In Alpha Distributing, the plaintiff alleged that the 27 defendants engaged in efforts to hamper a competitor distributor. 28 Id. at 452-53. However, the district court’s findings of fact

1 focused almost entirely on the plaintiff’s breach of contract 2 claim to the virtual exclusion of all but the most peripheral 3 references to the factual issues presented on the antitrust 4 claims. Id. at 453. The district court’s conclusion of law on 5 the antitrust claims found only that the defendants were entitled 6 to judgment on those claims. Id. In reversing the district 7 court, the Court of Appeals reasoned that on the basis of the 8 lack of findings on the antitrust claims, there was “no way of 9 knowing whether the district court’s decision in favor of 10 defendants on those claims was based on resolution of the 11 determinative facts in their favor.” Id. 12 We have reviewed the record and nothing there establishes 13 that the bankruptcy court’s finding that $900,000 in damages 14 necessarily flows from factual issues giving rise to 15 nondischargeability. Like the court in Alpha Distributing, the 16 bankruptcy court’s findings focused almost entirely on the fraud 17 and conversion causes of action determined in the Arbitration 18 Award. However, as presented, there were at least two causes of 19 action the Arbitrator identified that are dischargeable: trespass 20 to chattels, and negligent misrepresentation. 21 Illustrative of the bankruptcy court’s error is its 22 dismissal of Jamgotchian v. Slender, 170 Cal. App. 4th 1384, 1400 23 (2009), a case Debtor relied on to distinguish trespass to 24 chattels from conversion. The bankruptcy court chided Debtor for 25 his reliance on the case because it discussed trespass to 26 chattels. Indeed, the bankruptcy court stated that “[a]lthough 27 the case distinguishes trespass to chattels with conversion, a 28 piece of chattel property is not the same as the intellectual

1 property (trade secrets) in this case.” Memorandum of Decision 2 (Apr. 24, 2012) at 10:19-23. 3 Thus, the bankruptcy court in its own terms identified a 4 cause of action at issue in the Arbitration, while failing to 5 recognize its significance in identifying the amount of damages 6 allocable to dischargeable debt. The record is consistent with 7 the bankruptcy court’s holding that the Arbitrator combined the 8 trespass to chattel cause with the other causes of action at 9 issue, including fraud and conversion, and then awarded lump sum 10 “damages [] for each cause of action....” Id. at 12:26-27. 11 However, this holding is not adequate to support the entire 12 $900,000 as nondischargeable damages because it fails to 13 disaggregate and distinguish the factual findings which lead to 14 nondischargeable debt from those Arbitrator’s factual findings 15 which lead to dischargeable debt. 16 C. The Bankruptcy Court Abused its Discretion When It Found Nondischargeability Under the California Uniform Trade 17 Secrets Act. 18 For reasons that are not entirely clear, the bankruptcy 19 court’s damages discussion begins with a reference to the 20 California Uniform Trade Secrets Act (“CUTSA”) Cal. Civ. Code 21 § 3426.3 (West) as an apparently independent cause of action 22 giving rise to nondischargeability. Memorandum of Decision 23 (Apr. 24, 2012) at 12:16-17. This is the first time the CUTSA 24 was mentioned by the bankruptcy court. After giving a brief 25 recitation of the elements of CUTSA, the bankruptcy court 26 concluded the following: 27 While the basis for the arbitration award was detailed, the damages awarded for each 28 cause of action were combined into one award

1 on all causes of action. The arbitrator found “the full value of the Claimant WHA 2 claims...to be $950,000 which includes the $50,000 unjust enrichment amount.” As the 3 amount for unjust enrichment is dischargeable, that amount will be deducted 4 from the total award on the dischargeability action, reducing WHA’s award to $900,000. 5 The arbitration award also stated, “A total punitive damage award of $100,000 will also 6 be awarded on the Fraud and Conversion Causes of Action.” 7 ...The $950,000 award already included WHA’s 8 attorney’s fees, so nothing further will be awarded for fees. 9 10 Id. at 12-13. Thus, it appears that the bankruptcy court found 11 that $900,000 was nondischargeable, although there was no effort 12 made to connect this amount with the nondischargeable claims for 13 relief. In addition, notably absent from this discussion is any 14 reference of CUTSA, the apparent starting point of the damages 15 discussion. 16 Even if the CUTSA references are ignored, however, the 17 bankruptcy court’s analysis provided no connection between its 18 summary judgment analysis and its conclusions of 19 nondischargeability under Sections 523(a)(2) and (a)(4). 20 Moreover, this analysis provide no guidance as to whether the 21 inclusion of attorney’s fees in the damages award flowed only 22 from the arbitrator’s factual findings giving rise to 23 nondischargeable debt. In short, as a reviewing court, we cannot 24 connect the many types of damages discussed (unjust enrichment, 25 conversion, attorney’s fees and the like) to the nondischargeable 26 claims for relief alleged. This requires reversal. 27 28

1 CONCLUSION 2 The bankruptcy court’S findings did not adequately support 3 its decision to allocate the damages awarded to WHA to the debts 4 excepted from discharge. We therefore must VACATE the bankruptcy 5 court’s judgment and REMAND this matter with instructions that 6 the bankruptcy court determine the proper allocation of the 7 Arbitrator’s damage award between dischargeable and 8 nondischargeable claims. 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28