In Re: Christopher A. Eberts

Filing 31

MINUTES (IN CHAMBERS): ORDER AFFIRMING BANKRUPTCY COURT ORDERS AND JUDGMENTS by Judge Michael W. Fitzgerald (see attached Minute order for further details). For the reasons stated, the Bankruptcy Court's Orders and Judgments are AFFIRMED. (Made JS-6. Case Terminated.) (jp)

UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF CALIFORNIA

JS-6

CIVIL MINUTES -- GENERAL
Case No. CV 11-08827-MWF
Title:

Date: March 27, 2013

In re: Christopher A. Eberts

PRESENT: HONORABLE MICHAEL W. FITZGERALD, U.S. DISTRICT
JUDGE
Rita Sanchez
Courtroom Deputy

None Present
Court Reporter

ATTORNEYS PRESENT FOR APPELLANTS:

ATTORNEYS PRESENT FOR APPELLEE:

None Present

None Present

PROCEEDINGS (IN CHAMBERS): ORDER AFFIRMING BANKRUPTCY
COURT ORDERS AND JUDGMENTS
Plaintiffs-Appellants Palm Finance Corporation (“Palm”), Night Train
Films, LLC (“NTF LLC”) and A-Mark Entertainment, LLC (“AME”) have filed
this bankruptcy appeal from the following: (1) Amended Judgment filed and
entered September 26, 2011; (2) Order Granting in Part and Denying in Part
Plaintiff’s Motion to Alter [and] Amend the Judgment and to Amend or Make
Additional Findings of Fact filed and entered on September 26, 2011; and, (3)
Memorandum of Decision [Re:] Plaintiff’s Motion to Alter and Amend the
Judgment and to Amend or Make Additional Findings of Fact filed and entered on
September 26, 2011, pursuant to which the Bankruptcy Court amended the
Judgment After Trial filed and entered on June 9, 2011 (collectively, the “Orders
and Judgments”). (See Notice of Appeal at 1-2 & Exs. A-C (Docket No. 2)).
The Court has reviewed the papers filed on this appeal and held a hearing on
March 4, 2013.
Procedural Background
On November 3 and 4, 2010, and February 8, 2011, the Bankruptcy Court
for the Central District of California (the Honorable Ernest M. Robles) conducted a
trial in this adversary proceeding. (Excerpts of Record (“ER”) 279 (Docket Nos.
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UNITED STATES DISTRICT COURT
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In re: Christopher A. Eberts

17-1 to -12)). Plaintiffs-Appellants sought to exempt from discharge certain
claims against Debtor-Defendant-Appellee Christopher A. Eberts. (ER 280-81).
On June 7, 2011, the Bankruptcy Court issued its Memorandum of Decision.
(ER 279). And, on June 9, 2011, the Bankruptcy Court issued the corresponding
Judgment After Trial. (ER 308).
In the Judgment After Trial, the Bankruptcy Court awarded judgment in
favor of Palm in the amount of $190,000, finding that this claim (partially) was
nondischargeable pursuant to 11 U.S.C. § 523(a)(2)(A). (ER 308-09). The
Bankruptcy Court ruled that the remainder of Palm’s claim would be subject to any
discharge received by Eberts in his Chapter 7 bankruptcy case. (ER 309).
Furthermore, the Bankruptcy Court awarded judgment in favor of Eberts
with respect to NTF LLC’s and AME’s claims and ruled that their respective
claims would be subject to any discharge received by Eberts in his Chapter 7
bankruptcy case. (ER 309).
On June 23, 2011, Palm and NTF LLC filed a Motion to Alter and Amend
the Judgment and to Amend or Make Additional Findings [of] Fact (the “Motion”).
(See Notice of Appeal Ex. C at 1-2). On September 26, 2011, the Bankruptcy
Court issued its Memorandum of Decision on the Motion, as well as an Order
Granting in Part and Denying in Part the Motion and an Amended Judgment.
(Notice of Appeal Exs. A-C).
In ruling on the Motion, the Bankruptcy Court amended that portion of the
Judgment entered on June 9, 2011, in favor of Palm in the nondischargeable
amount of $190,000 to include prejudgment interest pursuant to 28 U.S.C. § 1961
in the total amount of $2,033.40. (Notice of Appeal Ex. A at 2). The other
provisions of the Judgment entered on June 9, 2011, remained unchanged. (Notice
of Appeal Ex. A at 2).
Plaintiffs-Appellants filed a timely notice of appeal on October 7, 2011.
(Docket No. 2). This appeal raises five questions for review. The first three
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UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF CALIFORNIA

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In re: Christopher A. Eberts

questions relate to NTF LLC’s claim against Eberts, which the Bankruptcy Court
concluded would be subject to discharge. The fourth relates to that part of Palm’s
claim against Eberts which the Bankruptcy Court likewise concluded would be
subject to discharge. And the fifth relates to the calculation of prejudgment
interest on the $190,000 amount of Palm’s (partial) claim, which the Bankruptcy
Court concluded was excepted from discharge. Specifically,
1. Plaintiffs-Appellants contend that NTF LLC’s claim should be
excepted from discharge pursuant to 11 U.S.C. § 523(a)(4) based
on Eberts’s alleged fraud or defalcation while acting in a fiduciary
capacity. Did the Bankruptcy Court err by concluding that NTF
LLC’s claim was not excepted from discharge on this basis?
2. Alternatively, Plaintiffs-Appellants contend that NTF LLC’s claim
should be excepted from discharge pursuant to 11 U.S.C. §
523(a)(4) based on Eberts’s alleged embezzlement. Did the
Bankruptcy Court err by concluding that NTF LLC’s claim was
not excepted from discharge on this basis?
3. Alternatively, Plaintiffs-Appellants contend that NTF LLC’s claim
should be excepted from discharge pursuant to 11 U.S.C. §
523(a)(6) based on conversion. Did the Bankruptcy Court err by
concluding that NTF LLC’s claim was not excepted from
discharge on this basis?
4. Plaintiffs-Appellants contend that Palm’s claim should be excepted
from discharge pursuant to 11 U.S.C. § 523(a)(2)(B) based on a
materially false writing. Did the Bankruptcy Court err by
concluding that Palm’s claim was not excepted from discharge on
this basis?
5. Plaintiffs-Appellants contend that Palm should have been awarded
prejudgment interest on the Judgment amount of $190,000
pursuant to California Civil Code Sections 3287 and 3289. Did the
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UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF CALIFORNIA

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Case No. CV 11-08827-MWF
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Date: March 27, 2013

In re: Christopher A. Eberts
Bankruptcy Court err in awarding prejudgment interest pursuant to
28 U.S.C. § 1961 rather than California law?

(Appellants’ Opening Br. at 2 (Docket No. 17)).
Factual Background
By now, the facts are well known to the parties and the Bankruptcy Court.
Here, the Court only briefly summarizes the facts relevant to this appeal, relying on
the Bankruptcy Court’s post-trial Memorandum of Decision and the parties’ own
briefing on this appeal.
Eberts
Eberts is a movie producer. (Appellee’s Br. at 1 (Docket No. 20)). Eberts
was the co-member and co-manager of a small production company, Rifkin/Eberts,
LLC (“RE LLC”). (Appellee’s Br. at 1-2). Eberts filed his bankruptcy petition in
February 2009. (Appellants’ Reply Br. at 17 (Docket No. 25)).
NTF LLC’s Claim Against Eberts
NTF LLC was a limited liability company set up to finance the film “Night
Train,” and its original members were AME and R/E LLC. (ER 286). R/E LLC
dissolved in early 2008. (ER 286). NTF’s sole current member is AME. (ER
287).
In July 2007, Palm loaned NTF LLC $2,539,541.25. The loan proceeds
were deposited into a City National Bank (“CNB”) account. (ER 287). R/E was
responsible for the production of Night Train, and Eberts handled this CNB
account. (ER 287). The CNB account was a special purpose vehicle dedicated to
cover the costs of producing Night Train and for no other purpose. (ER 287).
NTF argues that Eberts effected several money transfers from out of this
CNB account that were prohibited because the transfers were not related to the
production of Night Train. (See, e.g., ER 287-89).
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UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF CALIFORNIA

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Case No. CV 11-08827-MWF
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Date: March 27, 2013

In re: Christopher A. Eberts
Palm’s Claim Against Eberts

Palm’s claim against Eberts is based on two loan transactions that Eberts
personally guaranteed. (ER 281). Specifically, on October 11, 2006, Palm loaned
$1 million to Who’s Your Caddy, LLC (“WYC LLC”), and on September 26,
2007, Palm loaned $350,000 to Stag Night Films, LLC (“Stag Night LLC”). (ER
281).
Palm asserts that it relied on a written financial statement regarding Eberts’s
assets and liabilities (the “Financial Statement”) in making both loans. (ER 281).
The Financial Statement showed that Eberts had a net worth in the amount of
$12,577,060.00, as of August 31, 2006. (ER 281). The Financial Statement was
an attachment to the Guarantor’s Verification of Accuracy of Financial Statement
(“Verification”), which provided that the Financial Statement was complete and
accurate as of August 31, 2006, and as of October 11, 2006 (i.e., the effective date
of the Verification). (ER 281). Eberts prepared the Financial Statement by
himself, and Palm reviewed and materially relied on it in making the two loans.
(ER 281).
Palm contends that Eberts’s Financial Statement was false because it
overstated the value of certain assets and failed to include certain liabilities. (See,
e.g., ER 282-85). Palm argues that Eberts was most likely insolvent at the time of
these loans, and that he had a reckless disregard for the truth of his financial
circumstances as reflected in the Financial Statement. (ER 285). Palm also
contends that Eberts submitted the Financial Statement with the intent to deceive
Palm as evidenced by the totality of the circumstances, and that Palm reasonably
relied on the Financial Statement in making these loans. (ER 285).
Standards of Review
The parties agree on the following standards of review:
“Findings of fact, whether based on oral or documentary evidence, shall not
be set aside unless clearly erroneous, and due regard shall be given to the
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UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF CALIFORNIA

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In re: Christopher A. Eberts

opportunity of the bankruptcy court to judge the credibility of the witnesses.” Fed.
R. Bankr. P. 8013.
Conclusions of law are reviewed de novo. In re Littleton, 942 F.2d 551, 553
(9th Cir. 1991).
“When a mixed question of law and fact is presented, the standard of review
turns on whether factual matters or legal matters predominate.” United States v.
Marbella, 73 F.3d 1508, 1515 (9th Cir. 1996) (citation omitted). “If an ‘essentially
factual’ inquiry is present, or if the exercise of the district court’s discretion is
determinative, then we give deference to the decision of the [court]; otherwise, we
conduct a de novo review.” Id. (citation omitted).
Discussion
1. NTF LLC’s Section 523(a)(4) claim (fraud or defalcation while acting
in fiduciary capacity): The Bankruptcy Court properly concluded that
Eberts was not a fiduciary for purposes of Section 523(a)(4)
Under 11 U.S.C. § 523(a)(4), “debts that arise from ‘fraud or defalcation
while [the debtor was] acting in a fiduciary capacity . . .’ are nondischargeable.”
Ragsdale v. Haller, 780 F.2d 794, 795 (9th Cir. 1986) (citation omitted).
NTF LLC argues that Eberts was a fiduciary of NTF LLC based on the fact
that R/E LLC was a manager of NTF LLC. (ER 289). Stated differently, as a
manager of NTF LLC, R/E LLC was a “trustee” over the assets of NTF LLC and
owed NTF LLC the “duty of acting in the highest good faith.” (ER 289).
According to NTF LLC, Eberts owed these same duties to NTF LLC because he
was a manager of R/E LLC. (ER 289).
Practically speaking, NTF LLC contends (1) that R/E LLC was a manager of
NTF LLC and therefore owed a fiduciary duty to NTF LLC, and (2) that Eberts
was a manager of R/E LLC and therefore owed a fiduciary duty to R/E LLC – and,
therefore, to NTF LLC.
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UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF CALIFORNIA

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In re: Christopher A. Eberts

The Bankruptcy Court rejected this argument, concluding as follows: NTF
LLC “provides no authority that [R/E LLC]’s fiduciary status extends to its
individual managers/members. Consequently, [NTF LLC] has failed to prove that
[Eberts] is a fiduciary and its § 523(a)(4) claim based on fraud or defalcation while
acting in a fiduciary capacity fails.” (ER 304).
The facts relevant to this issue are not in dispute. Instead, the determinative
legal question on this appeal is whether Eberts was a fiduciary of NTF LLC for
purposes of Section 523(a)(4). “Because the issue of whether a relationship is
‘fiduciary’ within the meaning of 11 U.S.C. § 523(a)(4) is a question of federal
law, it is reviewed de novo.” Ragsdale, 780 F.2d at 795 (citation omitted).
“The meaning of ‘fiduciary’ in § 523(a)(4) is an issue of federal law.” Id. at
796 (citation omitted). However, the “broad, general definition of fiduciary – a
relationship involving confidence, trust and good faith – is inapplicable in the
dischargeability context.” Id. (citation omitted).
Importantly, “[t]he fiduciary relationship must be one arising from an
express or technical trust that was imposed before and without reference to the
wrongdoing that caused the debt.” In re Cantrell, 329 F.3d 1119, 1125 (9th Cir.
2003) (citation and internal quotation marks omitted). Under Section 523(a)(4),
the “trust giving rise to the fiduciary relationship must be imposed prior to any
wrongdoing; [and] the debtor must have been a ‘trustee’ before the wrong and
without reference to it. These requirements eliminate constructive, resulting or
implied trusts.” Ragsdale, 780 F.2d at 796 (citations omitted).
“Although the concept of fiduciary is to be narrowly defined as a matter of
federal law, state law is to be consulted to determine when a trust in this strict
sense exists.” Id. (citation omitted). “If state law creates an express or technical
trust relationship between the debtor and another party and imposes trustee status
upon the debtor, the debtor will be a fiduciary under section 523(a)(4).” In re
Baird, 114 B.R. 198, 202 (B.A.P. 9th Cir. 1990) (citation omitted) (“The debt
alleged to be non-dischargeable must arise from a breach of trust obligations
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imposed by law, separate and distinct from any breach of contract.” (citation
omitted)).
“The statute must define the trust res, spell out the trustee’s fiduciary duties
and impose a trust prior to and without reference to the wrong which created the
debt.” Id. (citations omitted) (discussing Arizona statute which “provides that
certain moneys paid to a contractor shall be deemed to be held in trust for the
benefit of persons furnishing labor and materials”). Additionally, in the Ninth
Circuit, the “‘express or technical trust’ required for section 523(a)(4) liability can
arise from a state’s common law.” In re Abrams, 229 B.R. 784, 790 n.6 (B.A.P.
9th Cir. 1999) (citations omitted).
“The elements of a valid trust under California law include a competent
trustor, an intention on the part of the trustor to create a trust, a trustee, an estate
conveyed to the trustee, an acceptance of the trust by the trustee, a beneficiary, a
legal purpose, and a legal term.” In re Teichman, 774 F.2d 1395, 1399 (9th Cir.
1985) (discussing requirements of fiduciary duty under Section 523(a)(4)).
According to NTF LLC, Eberts “acted in a fiduciary capacity based on the
obligations in the NTF LLC Operating Agreement, his exclusive control over the
CNB account, and the relationship between Eberts, R/E LLC and NTF LLC.
(Appellants’ Reply Br. at 3).
Essentially, NTF LLC argues that under the totality of the circumstances
Eberts was a fiduciary of NTF LLC. While this may be true in a general – or even
some legal – sense, this Court agrees with the Bankruptcy Court that NTF LLC has
identified no authority for the proposition that Eberts was a fiduciary for purposes
of Section 523(a)(4).
NTF LLC argues that it has identified a trust obligation imposed by
California law. See In re Baird, 114 B.R. at 202. In In re Abrams, the Bankruptcy
Appellate Panel (“BAP”) imposed a so-called “second-tier” fiduciary duty in the
partnership context. See 229 B.R. at 790. The BAP found “ample support for the
proposition that ABWA, as general partner of Sea Palms, owed a fiduciary duty to
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Sea Palms . . . . [and that the debtor], as general partner of ABWA, owed a
fiduciary duty to ABWA.” Id. at 790. As the BAP stated, “What is less clear is
whether Abrams [i.e., the debtor] directly owed Sea Palms a fiduciary duty simply
by virtue of the duties which flowed from Abrams to ABWA and from ABWA to
Sea Palms.” Id. Ultimately, the BAP concluded on the facts of the case that the
debtor, “as the general partner of the general partner of the limited partnership, is a
‘fiduciary’ for section 523(a)(4) purposes.” Id. at 792.
Here, NTF LLC analogizes itself to Sea Palms, R/E LLC to ABWA, and
Eberts to the debtor in In re Abrams. In this respect, NTF LLC’s argument
proceeds in two steps: First, under California Corporations Code § 17153, the
“fiduciary duties a manager owes to the limited liability company and to its
members are those of a partner to a partnership and to the partners of the
partnership.” Second, In re Abrams held that a so-called “second-tier” partner is a
fiduciary under Section 523(a)(4). Therefore, NTF LLC argues that, under
California law, a “second-tier” manager/member of a limited liability company
likewise is a fiduciary under Section 523(a)(4).
This argument fails. As a preliminary matter, In re Abrams is not binding on
this Court. “BAP decisions cannot bind the district courts themselves. As article
III courts, the district courts must always be free to decline to follow BAP
decisions and to formulate their own rules within their jurisdiction.” Bank of Maui
v. Estate Analysis, Inc., 904 F.2d 470, 472 (9th Cir. 1990).
Regardless, and as discussed above, Section 523(a)(4) requires an express or
technical trust imposed, in this case, by California statutory or common law. NTF
LLC has identified no such authority. Indeed, as the BAP stated in In re Abrams,
“[t]here is no California case directly on point addressing the ‘second-tier’ issue.”
229 B.R. at 791 (emphasis added) (noting the “importance of control in
establishing fiduciary duties under California law”).
Instead, In re Abrams relied on the Fifth Circuit’s interpretation of Texas
partnership law. Id. (discussing LSP Inv. P’ship v. Bennett, 989 F.2d 779 (5th Cir.
1993)). The BAP noted that the Fifth Circuit “believed” that the Court of Civil
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In re: Christopher A. Eberts

Appeals of Texas in Crenshaw v. Swenson, 611 S.W. 2d 886 (Tex. Civ. App.
1980), “placed particular importance on the nature of the business relationship as a
whole and the control which the ‘second-tier’ general partner imposed upon the
entire enterprise.” Id. Specifically, according to the Fifth Circuit, and as quoted
by the BAP in In re Abrams,
In reviewing the line of cases that gave rise to the rule in Texas
that the managing partner of a partnership owes to his copartners the
highest fiduciary obligations known at law, it is clear that the issue of
control has always been the critical fact looked to by the courts in
imposing this high level of responsibility.
Bennett, 989 F.2d at 789; see also In re Abrams, 229 B.R. at 791. Therefore, while
the BAP in In re Abrams recited the appropriate standard, the analysis focused on
the business relationship among the various partnerships – and, in particular, the
question of control – more than on the creation of any express or technical trust.
While this analysis may speak to the question who may qualify as a
fiduciary under California law in a general sense, it does not necessarily speak to
the question whether there is any express or technical trust under California law –
and therefore a fiduciary duty under Section 523(a)(4). It is this latter question that
is determinative on this appeal. See In re Niles, 106 F.3d 1456, 1463 (9th Cir.
1997) (“[A] debtor is only a ‘fiduciary’ for purposes of § 523(a)(4), where state
law imposes an express or statutory trust on the funds at issue.”).
At the hearing, counsel for NTF LLC relied primarily on In re Kalinowski,
482 B.R. 334 (B.A.P. 10th Cir. 2012). But this case is unavailing for the same
reason. In In re Kalinowski, the question was whether a technical trust had been
created under a New Mexico statute: “No express trust was alleged, so the
plaintiff’s claim that [the debtor] was acting as a fiduciary depends upon the
existence of a ‘technical trust.’ Technical trusts are typically created by statute
and, in this case, [the creditor] relied upon § 60-13-23(F) of [New Mexico’s]
Contractors Act for the existence of a trust.” Id. at 338 (citation omitted). Again,
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this decision does not speak to the question whether an express or technical trust
was created under California law.
Finally, as a matter of fact, it is clear – and implied from the Bankruptcy’s
Court’s conclusion – that neither the NTF LLC Operating Agreement nor any other
agreement created an express trust with respect to the funds in the CNB account.
Accordingly, the Bankruptcy Court’s Orders and Judgments are AFFIRMED
on this issue.
2. NTF LLC’s Section 523(a)(4) claim (embezzlement): The Bankruptcy
Court properly concluded that the circumstances of Eberts’s money
transfers from the CNB account did not indicate fraud for purposes of
Section 523(a)(4)
Alternatively, NTF LLC argues that its claim is nondischargeable because
the prohibited transfers from the CNB account constituted embezzlement for
purposes of Section 523(a)(4). See 11 U.S.C. § 523(a)(4) (debts that arise from
“embezzlement” are nondischargeable).
“Federal law and not state law controls the definition of embezzlement for
purposes of section 523(a)(4).” In re Wada, 210 B.R. 572, 576 (B.A.P. 9th Cir.
1997).
Under Section 523(a)(4), the “elements of a claim based on embezzlement
are” as follows: “property owned by another is rightfully in the possession of a
bankruptcy debtor”; “the bankruptcy debtor appropriates such property to a use
other than the use for which the property was entrusted to the bankruptcy debtor”;
and, “circumstances indicating fraud.” In re Mickens, 312 B.R. 666, 680 (Bankr.
N.D. Cal. 2004) (citations omitted).
Here, the Bankruptcy Court concluded that the “first two elements for
embezzlement are satisfied.” (ER 305). The Bankruptcy Court found that Eberts
had authority to transfer monies from the CNB account, and that Eberts made
transfers for purposes other than the production of Night Train. (ER 305).
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The Bankruptcy Court also found that Eberts made the transfers at issue
because R/E LLC was making several movies simultaneously, and that at times it
became necessary to juggle funds among accounts designated for different movies.
(ER 305). According to the Bankruptcy Court, these circumstances may indicate
“sloppy business practices,” but “they do not indicate fraud.” (ER 305).
Again, NTF LLC does not quibble with the Bankruptcy Court’s factual
findings but instead argues, as a matter of law, that the circumstances surrounding
these money transfers indicate fraud.
However, this Court agrees with the conclusion of the Bankruptcy Court.
Embezzlement for purposes of Section 523(a)(4) requires a “specific intent to
defraud.” In re Wilson, 114 B.R. 249, 252 (Bankr. E.D. Cal. 1990). Specifically, a
plaintiff must prove “fraud in fact involving moral turpitude or intentional wrong
rather than implied or constructive fraud.” Id. at 252 n.10 (citations omitted).
The undisputed facts demonstrate neither. At most, Eberts was juggling
money among accounts designated for different movies. He neither intended to
defraud NTF LLC nor intended any wrong.
Accordingly, the Bankruptcy Court’s Orders and Judgments are AFFIRMED
on this issue.
3. NTF LLC’s Section 523(a)(6) claim (conversion): The Bankruptcy
Court properly concluded that Eberts lacked intent to injure for
purposes of Section 523(a)(6)
Alternatively, NTF LLC argues that its claim is nondischargeable because
the prohibited transfers from the CNB account constituted conversion for purposes
of Section 523(a)(6).
“Section 523(a)(6) prevents discharge ‘for willful and malicious injury by
the debtor to another entity or to the property of another entity.’” In re Ormsby,
591 F.3d 1199, 1206 (9th Cir. 2010) (citing 11 U.S.C. § 523(a)(6)). The United
States Supreme Court has “made clear that for section 523(a)(6) to apply, the actor
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must intend the consequences of the act, not simply the act itself.” Id. (citation
omitted). Specifically, “[b]oth willfulness and maliciousness must be proven to
block discharge under section 523(a)(6).” Id.
In the Ninth Circuit, Section 523(a)(6)’s “willful injury requirement is met
only when the debtor has a subjective motive to inflict injury or when the debtor
believes that injury is substantially certain to result from his own conduct.” Id.
(citation omitted). Furthermore, a debtor “is charged with the knowledge of the
natural consequences of his actions.” Id. (citation omitted).
In this case, the Bankruptcy Court found that Eberts “made the transfers
because he needed the money for other movies, not to cause harm to [NTF LLC].”
(ER 306). Consequently, the Bankruptcy Court concluded that NTF LLC had
failed to prove the intent necessary for willful injury and did not reach the
malicious injury issue. (ER 305-06).
For the reasons stated above, the Court again agrees. The fact that Eberts
may have juggled money among accounts designated for different movies does not
indicate that Eberts intended to harm NTF LLC.
Nor does NTF LLC’s reliance on the alternative, “substantial certainty”
standard change this result. It is implied, if not clear, from the Bankruptcy Court’s
conclusion that, on the undisputed facts, Eberts intended to replace any money
improperly removed from the CNB account with money from an account
designated for a different movie. Therefore, NTF LLC failed to prove that injury
was “substantially certain” to result from Eberts’s conduct or that Eberts knew the
“natural consequences of his actions” would have been harmful to NTF LLC.
Accordingly, the Bankruptcy Court’s Orders and Judgments are AFFIRMED
on this issue.

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4. Palm’s Section 523(a)(2)(B) claim (use of a materially false statement
in writing): The Bankruptcy Court’s findings of fact were not clearly
erroneous

As discussed above, Palm’s claim is based on two loan transactions that
Eberts personally guaranteed. However, Palm has not appealed the Bankruptcy
Court’s decision with respect to the second loan (i.e., that made to Stag Night
LLC). (See Appellants’ Opening Br. at 2 n.1). Instead, Palm argues only that it
relied on Eberts’s Financial Statement in making the loan to WYC LLC, and that
the Financial Statement was materially false.
To succeed on a Section 523(a)(2)(B) claim, a plaintiff must prove the
following, by a preponderance of evidence:
(1) a [written] representation of fact by the debtor,
(2) that was material,
(3) that the debtor knew at the time to be false,
(4) that the debtor made with the intention of deceiving the creditor,
(5) upon which the creditor relied,
(6) that the creditor's reliance was reasonable, [and]
(7) that damage proximately resulted from the representation.
In re McGee, 359 B.R. 764, 772 (B.A.P. 9th Cir. 2006) (citations omitted); see also
11 U.S.C. § 523(a)(2)(B).
According to the Bankruptcy Court, the written representations at issue are
the line items on Eberts’s Financial Statement. (See ER 282-85, 291). The
materiality of these statements (the second element listed above) is not in dispute.
(ER 291). However, the Bankruptcy Court found, as a matter of fact, that “Palm
has only proven that one of the items at issue is false by a preponderance of the
evidence” (i.e., the line item related to the so-called “Orum Property”). (See ER
292-96).

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CIVIL MINUTES—GENERAL
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UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF CALIFORNIA

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CIVIL MINUTES -- GENERAL
Case No. CV 11-08827-MWF
Title:

Date: March 27, 2013

In re: Christopher A. Eberts

Furthermore, the Bankruptcy Court found, “[b]ased on the evidence
submitted at trial,” that “only two of the alleged omitted liabilities should have
been included on the Financial Statement” (i.e., those related to the Eleven Eleven
Films and “The Deal” guaranties). (See ER 296-98). With respect to every other
line item, the Bankruptcy Court concluded that Palm had failed to prove falsity by
a preponderance of the evidence. (ER 298). And with respect to those items as to
which Palm had shown falsity, the Bankruptcy Court concluded, again as a matter
of fact: “even if [Eberts] had knowledge of the falsities on the Financial
Statement,” he had no “intent to deceive Palm.” (ER 298-300). Again, Palm had
failed to prove intent by a preponderance of the evidence. The Bankruptcy Court
did not reach the reliance issue. (ER 300).
On this appeal, Palm argues that the Bankruptcy Court’s findings were
clearly erroneous. (See, e.g., Appellants’ Opening Br. at 26). The Court disagrees.
“[R]eview under the ‘clearly erroneous’ standard is significantly deferential,
requiring a ‘definite and firm conviction that a mistake has been committed.’”
Concrete Pipe & Prods. of Cal., Inc. v. Constr. Laborers Pension Trust for S. Cal.,
508 U.S. 602, 623, 113 S. Ct. 2264, 124 L. Ed. 2d 539 (1993). “This standard
plainly does not entitle a reviewing court to reverse the finding of the trier of fact
simply because it is convinced that it would have decided the case differently.”
Anderson v. City of Bessemer City, 470 U.S. 564, 573, 105 S. Ct. 1504, 84 L. Ed.
2d 518 (1985). Thus, “[w]here there are two permissible views of the evidence,
the factfinder’s choice between them cannot be clearly erroneous.” Id. at 574
(citations omitted).
The Court has reviewed the Bankruptcy Court’s post-trial Memorandum of
Decision, the contentions of the parties on this appeal, and – where necessary – the
record itself. It is evident that the Bankruptcy Court carefully parsed the
conflicting testimony as to each line item on Eberts’s Financial Statement, and that
each finding is amply supported by the record. Quite simply, the Court cannot say
that any of the Bankruptcy Court’s findings of fact were clearly erroneous under
the standards discussed above.
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UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF CALIFORNIA

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CIVIL MINUTES -- GENERAL
Case No. CV 11-08827-MWF
Title:

Date: March 27, 2013

In re: Christopher A. Eberts

Moreover, Palm’s reliance on the so-called “adverse inference” rule is of no
moment here. First, the Bankruptcy Court already considered and rejected this
argument. (See, e.g., Notice of Appeal Ex. C at 12-14). Second, this Court too has
considered Palm’s argument and concludes that the Bankruptcy Court’s findings
were not clearly erroneous in this respect.
Accordingly, the Bankruptcy Court’s Orders and Judgments are AFFIRMED
on this issue.
5. Palm’s Section 523(a)(2)(A) claim (nondischargeable in the amount of
$190,000): The Bankruptcy Court properly awarded prejudgment
interest according to federal law
As noted above, the Bankruptcy Court concluded that Eberts’s debt to Palm
was nondischargeable in the amount of $190,000, pursuant to Section
523(a)(2)(A). That decision is not part of this appeal.
The Bankruptcy Court also awarded Palm prejudgment interest at the federal
T-Bill rate of 0.51% to run from May 4, 2009, to June 9, 2011, in the total amount
of $2,033.40. (See Notice of Appeal Ex. B at 2).
On this appeal, Palm instead seeks prejudgment interest in the amount of
$147,820.12, pursuant to California Civil Code §§ 3287 and 3289(a). According
to Palm, the award of prejudgment interest is governed by state law because the
$190,000 debt arose under state law. (Appellants’ Opening Br. at 35).
As the Ninth Circuit has stated, the “federal prejudgment interest rate applies
to actions brought under federal statute, such as bankruptcy proceedings, unless the
equities of the case require a different rate.” Banks v. Gill Distrib. Ctrs., Inc., 263
F.3d 862, 871 (9th Cir. 2001) (citations omitted) (“reasoned justification” may
require different rate).
Palm has not articulated any reasoned justification or equitable rationale for
why anything other than the federal rate should apply to its prejudgment interest
award. Instead, Palm argues that it brought this action pursuant to California law
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UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF CALIFORNIA

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CIVIL MINUTES -- GENERAL
Case No. CV 11-08827-MWF
Title:

Date: March 27, 2013

In re: Christopher A. Eberts

rather than any federal statute. Palm relies on In re Niles, 106 F.3d 1456, for the
proposition that prejudgment interest on nondischargeable debts which “arose
under state law” are “also governed by state law.” Id. at 1463.
In the Banks litigation, the bankruptcy court awarded prejudgment interest
according to state law because the “removed [adversary proceeding] case . . . is
equivalent to a diversity action, as it is not brought under any aspect of federal law
and is in this court only due to its relationship to the Banks’ bankruptcy. In
diversity cases, state law governs the award of pre-judgment interest.” In re
Banks, 225 B.R. 738, 750 (Bankr. C.D. Cal. 1998) (citation omitted) (“Interest on a
federal judgment is determined by 28 U.S.C. § 1961 . . . .”).
Here, Palm’s claim is not equivalent to a diversity action. Illustratively,
Palm argues that in February 2009 it won a judgment – for breach of contract – in
the amount of $1,163,580.24 against WYC LLC and Eberts, as guarantor, in
California state court. (Appellants’ Reply Br. at 16-17). While that state court
judgment included interest in the amount of $164,793.79, the judgment was null
and void as against Eberts because it was entered a few days after he filed his
bankruptcy petition. The judgment therefore violated the automatic stay.
(Appellants’ Reply Br. at 16-17).
Palm has not sought to collect this state court judgment in the adversary
proceeding in this case. Indeed, Palm did not seek recovery for breach of contract
but instead for certain improper transfers. This debt was based on federal law (i.e.,
Section 523), not on state law. See ER 8 (Compl. ¶ 46) (“The monies diverted by
Eberts were obtained by false pretenses, false representations and/or actual fraud as
contemplated by [Section 523(a)(2)(A)] and are, therefore, nondischargeable.”).
For the same reason, In re Niles is distinguishable. In that case, the claimant
had won a state court judgment before the debtor filed for bankruptcy. 106 F.3d at
1458. In the adversary proceeding, the claimant then sought to collect this
judgment as nondischargeable debt pursuant to Section 523(a)(4). Id.

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UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF CALIFORNIA

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CIVIL MINUTES -- GENERAL
Case No. CV 11-08827-MWF
Title:

Date: March 27, 2013

In re: Christopher A. Eberts

Palm’s claim that its debt is nondischargeable pursuant to Section
523(a)(2)(A) is different from its breach of contract lawsuit and judgment in
superior court. Rather, the $190,000 judgment in this case is a product of federal
law and does not arise from the putative $1,163,580.24 amount awarded for breach
of contract in the state court action.
As the bankruptcy court stated in In re Rosen, “when liability arises under
the United States Bankruptcy Code, it is federal law that governs the interest rate.
The determination of the dischargeability of a debt under § 523(a) is purely a
matter of a federal law. The interest rate in this proceeding clearly should be
governed by federal law.” 232 B.R. 284, 298 (Bankr. E.D.N.Y. 1999) (citations
omitted).
At the hearing, counsel for Palm argued that the debt arose from the
underlying loan, and that the loan agreement arose from state law. The Court is
not persuaded. First, under this suggested rule, every debt would “arise under
state law” and prejudgment interest always would be awarded according to state
law.
Second, and as the Bankruptcy Court stated in this case, Palm “does not
identify with any specificity the state law pursuant to which its nondischargeable
debt arose. . . . Palm appears to imply that its claim arose under some sort of state
law contract theory.” (Notice of Appeal Ex. C at 6). “However, in rendering the
Judgment, the [Bankruptcy] Court did not examine whether [Eberts] breached any
agreement. Rather, the [decision] rested on [Eberts]’s knowledge of the falsity of
certain representations, his intent to deceive Palm, and Palm’s justifiable reliance
on those representations.” (Id.)
Stated simply, the Court agrees with the Bankruptcy Court that Palm’s
nondischargeable debt arose under federal law (i.e., Section 523(a)(2)(A)) rather
than any state law, whether contractual or otherwise. (See Notice of Appeal Ex. C
at 6 (“Palm has not established that its underlying debt arose under state law;
therefore, state law does not govern the prejudgment interest issue.”)).
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CIVIL MINUTES—GENERAL
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UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF CALIFORNIA

JS-6

CIVIL MINUTES -- GENERAL
Case No. CV 11-08827-MWF
Title:

Date: March 27, 2013

In re: Christopher A. Eberts

Accordingly, the Bankruptcy Court’s Orders and Judgments are AFFIRMED
on this issue.
Conclusion
For the reasons stated above, the Bankruptcy Court’s Orders and Judgments
are AFFIRMED.
IT IS SO ORDERED.

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