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In re Tomkow

United States Bankruptcy Appellate Panel of the Ninth Circuit

January 5, 2017

KENNETH BARTON, Appellee. Bk. No. 2:13-bk-19712-WB, 2:13-bk-19713-WB Adv. No. 2:13-ap-01751-WB, 2:13-ap-01752-WB

          Argued and Submitted on October 21, 2016 at Pasadena, California

         Appeal from the United States Bankruptcy Court for the Central District of California Honorable Julia Wagner Brand, Bankruptcy Judge, Presiding

          Lewis R. Landau on behalf of appellants Terrance Alexander Tomkow and Zafar David Khan;

          Patrick C. McGarrigle of McFarrigle, Kenney & Zampiello, APD on behalf of appellee Kenneth Barton.

          Before: TAYLOR, FARIS, and MCKITTRICK, [*] Bankruptcy Judges.


          TAYLOR, Bankruptcy Judge


         Appellants[1] Terrance Tomkow and Zafar Khan appeal from two orders: (1) an order granting summary judgment in favor of Kenneth Barton determining that a California state court judgment against them was nondischargeable under § 523(a)(2)(A)[2]and (a)(6); and (2) an order denying their subsequent motion for direct appeal certification to the Ninth Circuit.

         Binding Ninth Circuit authority controls our decision here; we AFFIRM the bankruptcy court's orders.


         During the late 1990s, Appellants and Barton co-founded start-up companies including RIL, which owned or controlled various patents relating to authentication and verification of emails and electronic payments. Barton later suffered a stroke and was sidelined from active involvement in the businesses. Afterward, his relationship with Appellants deteriorated to the point that he commenced state court litigation seeking unpaid compensation and reimbursement of expenses.

         During that litigation, Barton discovered that Appellants had taken control of his 6, 016, 500 common stock shares in RIL and returned them to the company treasury, thereby divesting him of an equity interest in the company. In response, he commenced a second action against Appellants and RIL, among others, in California state court alleging causes of action including conversion and fraud.

         The state court ruled in Barton's favor on both the conversion and fraud causes of action and against Appellants and RIL. It determined that Appellants had acted with malice, oppression, and fraud and, thus, that Barton was entitled to punitive damages. The state court then conducted a second phase of trial to quantify punitive damages.

         Following the parties' submission of the punitive damages issue to the state court, Appellants each filed a chapter 13 petition.

         In a revised statement of decision and ruling on punitive damages, the state court awarded Barton the value of his converted stock in RIL.[3] It ultimately entered an amended judgment awarding Barton compensatory damages in the amount of $2, 840, 060, damages for emotional distress, and $880, 021.91 in prejudgment interest. For punitive damages, the state court awarded $250, 000 against Khan and $150, 000 against Tomkow. In so doing, it found that Khan and Tomkow acted with malice, oppression, and fraud. Appellants appealed from the state court judgment to the California Court of Appeal.

         In the meantime, Barton filed an adversary complaint against Appellants in the bankruptcy court, seeking a nondischargeability determination under § 523(a)(2)(A), (a)(4), and (a)(6) based on the state court judgment.

         The California Court of Appeal subsequently affirmed the state court's determination of Appellants' liability based on conversion. But, because the determination of conversion was supported by substantial evidence, it did "not consider whether [Appellants] were additionally liable under theories of fraud, breach of fiduciary duty and unfair competition." It affirmed the punitive damages award based on a finding of malice and deceit. The California Supreme Court denied Appellants' petition for review of the appellate court's decision. Thus, that decision is now final. In response, Barton moved for summary judgment on his nondischargeability complaint in the bankruptcy court.

         Appellants opposed the motion. They asserted primarily that pursuant to Zevnik v. Superior Court, 159 Cal.App.4th 76 (2008), where a trial court decided a case based on alternate grounds and the court of appeal affirmed on only one of those grounds, issue preclusion was available only on the ground affirmed by the appellate court. Appellants pointed out that the California Court of Appeal had affirmed the state court judgment only on Barton's conversion claim under California law; thus, they argued, the state court judgment was not entitled to issue preclusion based on the state court's ruling of fraud or breach of fiduciary duty in relation to the § 523(a)(2)(A) or (a)(4) claims. At best, Appellants contended, the state court judgment for conversion potentially supported a claim under § 523(a)(6). But, even then, they asserted, Barton barely addressed the conversion claim in his motion for summary judgment. And, they noted, conversion under California law did not establish a § 523(a)(6) claim conclusively. Appellants also argued that the punitive damages award on the conversion claim, to the extent affirmed on appeal, fell short of establishing a § 523(a)(6) claim. Finally, Tomkow argued that Barton neglected to address the fact that, with respect to the punitive damages award, there was a difference in liability between Khan and Tomkow; namely, the amount of damages assessed against Appellants reflected a difference in the level of culpability.

         In response, Barton argued that binding Ninth Circuit precedent - DiRuzza v. County of Tehama, 323 F.3d 1147 (9th Cir. 2003) - established that the California Court of Appeal's affirmance of any ground contained in the state court judgment implicitly ratified all of the trial court's reasoning in the judgment.

         At the hearing, the bankruptcy court determined that the state court judgment was entitled to issue preclusive effect for the § 523(a)(2)(A) and (a)(6) claims and, thus, granted summary judgment in Barton's favor on them. It, however, denied the motion as to the § 523(a)(4) claim. In response, Appellants' counsel orally requested direct appeal certification to the Ninth Circuit. The bankruptcy court agreed that additional briefing and a hearing on Appellants' request were warranted.

         The bankruptcy court then entered judgments determining that, with the exception of the damages award for emotional distress, the state court judgment was excepted from Appellants' discharges under § 523(a)(2)(A) and (a)(6). Appellants timely appealed.

         Appellants made good on their request and filed a motion for direct appeal certification. They stated that the bankruptcy court "understandably rejected application of the Zevnik rule based on a Ninth Circuit decision [DiRuzza] predating Zevnik and that applied the 1865 California Supreme Court's Skidmore case." As a result of DiRuzza, they urged the bankruptcy court to certify the appeal directly to the Ninth Circuit under 28 U.S.C. § 158(d)(2)(A); they opined that the Ninth Circuit could and would then certify the question to the California Supreme Court.

         Barton opposed the motion, and the bankruptcy court agreed with him. It concluded at a subsequent hearing that Appellants had not satisfied 28 U.S.C. § 152(d)'s requirements for direct appeal certification. It believed that the law in the Ninth Circuit was clear and that there was no dispute requiring resolution among the California courts. The bankruptcy court noted that the Ninth Circuit had considered and rejected the Zevnik analysis in DiRuzza and that the California Supreme Court also had, but declined, the opportunity to revisit the issue.

         The bankruptcy court subsequently entered an order denying Appellants' motion. Appellants amended their notice of appeal to include this order.


         The bankruptcy court had jurisdiction pursuant to 28 U.S.C. §§ 1334 and 157(b)(2)(I). We have jurisdiction under 28 U.S.C. § 158.


         1. Whether the bankruptcy court erred in granting summary judgment in Barton's favor on his § 523(a)(2)(A) claim based on the issue preclusive effect of the fraud claim in the state court judgment, given that the California Court of Appeal affirmed that judgment on another ground.

         2. Whether the bankruptcy court erred in granting summary judgment in Barton's favor on his § 523(a)(6) claim based on the issue preclusive effect of the state court judgment.

         3. Whether the bankruptcy court erred in denying Appellants' motion for direct appeal certification to the Ninth Circuit.


         We review de novo the bankruptcy court's decisions to grant summary judgment and to except a debt from discharge under § 523(a). See Ghomeshi v. Sabban (In re Sabban), 600 F.3d 1219, 1221-22 (9th Cir. 2010); Oney v. Weinberg (In re Weinberg), 410 B.R. 19, 28 (9th Cir. BAP 2009); see also Carrillo v. Su (In re Su), 290 F.3d 1140, 1142 (9th ...

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