Fresno Lawyer – Randolf Krbechek

Several categories of debt are excluded from relief under the Bankruptcy Code, meaning that a debtor cannot obtain a discharge for these debts.

In Bos v. Board of Trustees, ___ F.3d ___ (9th Cir. 2015), the Ninth Circuit considered whether an employer’s contractual requirement to contribute to an employee benefits fund made the employer a fiduciary of unpaid contributions.  The court held that there was no such relationship for purposes of bankruptcy law.

The case involved claims by the Carpenters’ Union against Gregory Bos and his corporation.  Mr. Bos agreed that his corporation would be bound by the Carpenters’ Master Agreement.  The employer was required to make monthly payments to the union’s trust fund based on hours of work.

The essential facts were undisputed.  Mr. Bos had full control over the finances of his corporation.  Mr. Bos had the authority to determine whether payments were made to the union or to other creditors.  Even more, Mr. Bos signed a promissory note for the amount owed to the union.

Section 523(a)(4) of the Bankruptcy Code provides a debtor may not discharge debts due to “fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny.”  Held the Ninth Circuit, “we have consistently held unpaid contributions by employers to employee benefit funds are not plan assets.”

Continuing with its “limited approach … in recognizing fiduciary status,” the Ninth Circuit held that unpaid contributions owed to the union were contractual obligations, not obligations arising from a fiduciary relationship involving control over property belonging to a third person.

The obligation to make payments “is in fact more appropriately classified as a contractual right to bring a claim against the employer for delinquent payments… Even if the language in the trust agreements in the promissory note sufficed to turn unpaid contributions into some form of plan assets, neither [the the corporation] nor [the individual debtor] had control over such asset prior to nonpayment.”

Therefore, the court held that the debtor did not act as a fiduciary under 11 U.S.C. section 523(a)(4).

Bos v. Board of Trustees, ___ F.3d ___ (9th Cir. 2015)

Sir Edward Coke was born in 1552.  He was regarded as a great lawyer.  He was twice married, his domestic life being full of quarrels.  Coke was one of the most truculent of English lawyers, and an arch-rival of Francis Bacon.  “He was a potent element in Francis Bacon’s ruin,” says Dean Church.

On the study of law, Coke said the following, true now for many centuries:

“Our student shall observe, that the knowledge of the law is like a deepe well, out of which each man draweth according to the strength of his understanding.  He that reacheth deepest, he seeth the amiable and admirable secrets of the law, wherein I assure you the sages of the law in former times (whereof sir William Herle was a principal one) have had the deepest reach.

“And as the bucket in the depth is easily drawn to the uppermost part of the water, (for nullum elementum in suo propio loco est grave) but take it from the water, it cannot be drawne up but with great difficultie; so albeit beginnings of this study seem difficult, yet when the professor of the law can dive into the depth, it is delightfull easie and without any heavy burthen so long as he keepe himselfe in his own proper element.”

It seems that we’re not afraid to be packin’ down on the ranch.

Here’s a thorny problem.  The trial court found that the seller of a house lied to the buyer.  The buyer sought the remedy of rescission.  The trial court denied relief, in part because of events that occurred with the passage of time.

The court of appeal disagreed in Wong v. Stoler (June 23, 2015) __ Cal.App.4th ___, saying that equity favored the buyers.  The case will embolden aggressive plaintiffs’ attorneys.  Read on.

Let’s start with the facts.  The buyers purchased a 4,400 square foot house in May 2008 for $2.35 million.  The house was located at 2 Sudan Lane, San Carlos.  The sellers misrepresented the sewer hookup, and did not disclose that it was not a city connection.  The buyers first learned of the private sewer system in November 2008.

Here’s an important fact.  “By this time, much of the home was down to the studs as a result of the demolition work.”  By the time of trial, “the court reasoned that the [sellers] had purchased a new home over four years ago and had spent $100,000 in improving it, and the [buyers] had spent $300,000 improving the property and had removed a significant amount of the original landscaping.”

The court found that the sellers acted with reckless disregard in negligently misrepresenting the material facts about the true nature of the sewer system. “The court further found that the misrepresentations affected the property’s value and that the [buyers] would not have bought the property if they had known about the private sewer system.”

Nonetheless, the trial court determined that, given the “burden that rescission would place on the [sellers],” rescission was neither a fair nor appropriate remedy.

The court of appeal saw no reason not to handle the sellers with rough hands.  Explained the court,”Under California law, negligent misrepresentation is a species of actual fraud and a form of deceit … Thus, a single misstatement as to a material fact, knowingly made with intent to induce another into entering the contract, will, if believed and relied on by that other, afford a complete ground for rescission.”

Now comes the hammer. “Where defendant has been guilty of fraudulent acts or conduct which have induced the agreement between him and the plaintiff, courts of equity are not so much concerned with decreeing that defendant receive back [ ] identical property [ ] as they are in declaring that his nefarious practices shall result in no damage to the plaintiff.”

“Persons who attempt to secure profits by deceitful means may not confidently expect to receive special consideration from courts of equity … If his fraudulent acts have resulted in disastrous financial consequences to himself, it is no one’s fault but his own, and he must sustain the necessary inconveniences thereby entailed.”

Ouch.  “We recognize that changes have been made to the property and years have transpired.  But the changes in the property were commenced before the [buyers] learned of the [sellers’] misrepresentations, and much of the time that has elapsed has been due to the [sellers] contesting the rescission … While untangling the deal may not be easy, we are unaware of any insurmountable obstacles.”

“Thus, we remand the case to the trial court to effectuate the Wongs’ rescission … The trial court’s goal [ ] in fashioning this remedy must be, to the extent possible, to restore the Wongs to their status quo ante.”

Is this practical?  The transaction occurred in May 2008.  The trial court judgment was entered in early 2013, and the decision of the court of appeal was entered in June 2015.  How is the trial court going to be able to unwind seven years?  How are the parties going to unwind seven years?  Should we simply refer to the property as “Bleak House”?

When you read the cases, it’s hard not to reach the conclusion that the courts view a liability release agreement with distrust. A new high water mark in this analysis was reached in the recent decision in Etelvina Jimenez v. 24 Hour Fitness USA, Inc. (June 9, 2015) __ Cal.App.4th ___. In Jimenez, the court relied on a manager’s non-verbal gestures to defeat a release from liability.

Etelvina Jimenez joined a 24 Hour Fitness health club in Sacramento in 2009. In 2011, she suffered severe head injuries when she fell backwards off a moving treadmill and hit her head on a nearby exercise machine.

When plaintiff joined the gym, she was required to sign a membership agreement. However, Ms. Jimenez could not read or speak English. The manager “pointed to his computer screen to a figure, $24.99, indicating the membership fee, and made pumping motions with his arms like he was exercising.”

According to the court, plaintiff understood the “physical gestures to mean that if she paid that amount, she could use the facility.” Added the court, the manager “did not point out the release to Etelvina or make any other indications about the scope of the agreement aside from his gestures mimicking exercise and the fee.”

Etelvina believed she signed an agreement only to pay the monthly fee of $24.99.

The court held that the act of pointing at the computer screen and making a pumping motion could constitute a nonverbal gesture giving rise to a claim for affirmative misrepresentation.

Let’s say that one more time: the contract was written in English. It contained a release from liability clause. Plaintiff did not speak or read English. Nobody compelled plaintiff to sign up at 24 Hour Fitness – she could have chosen other gyms. The manager pointed at the dollar figure on his screen and “made pumping motions with his arms.” Based on this non-verbal communication, the court held that a reasonable jury could infer a misrepresentation by the manager, thereby negating the release agreement.

Explained the court, “under the circumstances, already ripe for misrepresentation overreaching, [the manager’s] gestures and pointing may well have misrepresented the nature of the document [plaintiff] signed. This is an inherently factual question for a jury to decide.”

For the life of me, I cannot understand how pointing at a dollar figure on a computer screen and pumping one’s arms could be construed as misrepresenting the terms of a contract that plaintiff was unable to read. Perhaps the legislature should revisit this issue. Perhaps gym membership contracts, like auto sale contracts, should have mandatory Spanish versions for Spanish-speaking customers.

But that’s a question for the legislature, not for the courts. Here, we have a court making a policy decision because it simply did not want to enforce the release clause.

The law is filled with rules.  Rules give guidance to judges.

Sometimes the legal result does not square with the facts.  In Estate of Britel (2015) 236 Cal.App.4th 127, “the court admitted into evidence a DNA test showing a 99.9996 percent probability that the decedent (Amine Britel) was A.S.’s (the child’s) father.”  Yet the court held that the child was not entitled receive any property under the law of intestate succession.  How did this happen?

When a person dies without a will, the judge will look to the law of intestate succession to determine who will receive the decedent’s property.  Explained the court of appeal, “Intestate succession is governed entirely by statute.  The heirs of a person are those whom the law appoints to succeed at the decedent’s death.”

“As relevant here, if there is no surviving spouse or domestic partner of an intestate decedent, the intestate estate passes to the decedent’s ‘issue’ … For the purpose of determining intestate succession, the relationship of parent and child exists between a person and the person’s natural parents, regardless of the marital status of the natural parents.”

Sounds promising for the child.  But here is where the argument ran ashore.  The mother, Jackie Stennett, “contends biological parents are, by definition, natural parents within the meaning of [Probate Code] section 6450.  Not so.”

Instead, when child born out of wedlock wants to show he is the natural child of a man who died without leaving a will, the statute requires “clear and convincing evidence that the father has openly held out the child as his own.”  A paternity test administered after death is not sufficient by itself.

Explained the court, “We conclude [the statute] requires an affirmative representation of paternity that is unconcealed and made in open view.  But although the representation must be a public one, in the sense of being made in open view, the statute does not require an announcement to the world, an official action, or an affectionate fatherly intent.  Each case depends upon its own circumstances.”

The court held that Jackie Stennett [the mother] failed to prove “that Amine openly held out A.S. as his own child.”  Hence, the legal result, which does not square with the facts.

Roscoe Pound, Dean of Harvard Law from 1916 to 1936, was a prolific writer in 1920s and 1930s regarding jurisprudence.  Here is Dean Pound’s description – both succinct and accurate – regarding the path of the law.

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“The historical school thought of each in terms of the growth of an organism, in terms of a development by the force of something working from within, wholly apart from human activity.  Blackstone’s analogy of an English castle made into a modern house, of something made over by men for their needs, by constant adaptations of and addings to the old materials, is quite as well taken.

“Indeed we might well compare these systems of law to one of the old churches in Rome.  Perhaps the Servian wall is in its foundations and an old pre-Christian basilica was the first edifice.  It was made over into a church in the fourth century.

“Perhaps in the ninth century a new church was built on the foundations and with part of the walls.

“It was rebuilt in the twelfth century and many stones and ornaments and some of the old mosaics and paintings were incorporated.

“It was restored frequently in later centuries and overhauled thoroughly in an eighteenth-century restoration in the baroque style of the time.

“The nineteenth century has added new chapels and monuments and has sought sometimes to bring to light some fragments of antiquity.

“How much of what men use today is the Servian wall or the Roman basilica, or the church in which the fifth-century council sat, or the church of the twelfth century or even the church of the Renaissance?  Such a picture is much nearer the truth than the picture of organic evolution and continuous identity with which the historical school made us familiar.”

Roscoe Pound, Interpretations of Legal History (Macmillan Company 1923)

The federal bankruptcy courts publish detailed statistics on bankruptcy filings.  California has four federal judicial districts, with Fresno located in the Eastern District.

The 2011-2014 bankruptcy filings for the Eastern District of California show a substantial decline, as shown in this table:

What does this mean for the future?  Hard to tell, as the Central Valley remains in the grip of a years-long drought.  Agricultural revenues will remain depressed, which will not help the local economy.

Case law reflects a tension in the interpretation of fiduciary duties. One camp favors a “I know it when I see it” approach, while the more rigorous jurists seek to discern the basis for imposition of such liability.

This tension is on full display in the recent en banc decision in U.S. v. Milovanovic, ___ F.3d ___ (9th Cir. April 24 2012). The majority decision found liability under the Mail Fraud Statute, 18 U.S.C. § 1341, based on the holding in Skilling v. U.S., 130 S. Ct. 2896 (2010).

Explained the Ninth Circuit, “A close examination of the Supreme Court’s opinion in Skilling reveals that embedded in the Court’s holding – ‘that § 1346 criminalizes only the bribe-and-kickback core of the pre-McNally case law’ – is the implication that a breach of a fiduciary duty is an element of honest services fraud.”

The Ninth Circuit then reached for soft law, holding that “a fiduciary duty for the purposes of the Mail Fraud Statute is not limited to a formal ‘fiduciary’ relationship well-known in the law, but also extends to a trusting relationship in which one party acts for the benefit of another and induces the trusting party to relax the care and vigilance which it would ordinarily exercise.”

Truly, that’s about as soft and broad a definition of a fiduciary relationship as is possible.  Continued the court, “Because allegations in the indictment, which we must take as true for the purposes of this appeal, assert that the State, through outsourcing the work to private contractors, reposed a special trust in Lamb and Milovanovic to ensure the integrity of the testing of CDL applicants, and thus relied on the provision of their honest services in administering the tests and certifying the results, we hold that a jury could find that Milovanovic’s and Lamb’s conduct falls within the ambit of §§ 1341 and 1346.”

Remember, this is the same Ninth Circuit that held that, when a raisin grower is required to turn over a portion of his crop to an agency of the federal government, there is no “taking without just compensation” for Constitutional purposes.  Horne v. U.S. Dept. of Agriculture, ___ F.3d ___ (9th Cir. July 25, 2011). The Horne opinion is certainly a low point in the scholarly tenure of Judge Michael Hawkins.

Back to U.S. v. Milovanovic. The concurring opinion by Judge Richard Clifton drives home the casual nature of the majority’s analysis. Judge Clifton begins by “repeat[ing] an observation made nearly 50 years ago:

“‘Fiduciary’ is a vague term, and it has been pressed into service for a number of ends.  My view is that the term `fiduciary’ is so vague that plaintiffs have been able to claim that fiduciary obligations have been breached when in fact the particular defendant was not a fiduciary stricto sensu but simply had withheld property from the plaintiff in an unconscionable manner.”

Judge Clifton continues.  “’Fiduciary’ has not gotten any clearer in the half-century since then, and our decision here does not help.  We accede to the agreement of the parties that the Supreme Court defined a breach of fiduciary duty as an essential element required for honest services mail fraud.  But we conclude that ‘fiduciary’ here does not mean a ‘formal, or classic, fiduciary duty.’  Rather, we hold that a fiduciary duty as an element of mail fraud ‘is not limited to a formal fiduciary relationship well-known in the law.’”

Here’s where Judge Clifton shines. “But we should not muddy the meaning of ‘fiduciary’ any further by employing it here to mean something other than ‘fiduciary.’  By doing so we further devalue the term and invite that much more confusion as to what the word means in other situations.”

“In some contexts, after all, the term ‘fiduciary’ is intended to mean ‘fiduciary,’ not our variation on that concept.  We should instead simply define the essential element for honest services mail fraud as the trusting relationship described in the majority opinion and leave the word ‘fiduciary’ out of it.”

The concurrence has the better of the argument. A published opinion that establishes a soft, murky definition for the essential term “fiduciary” does no benefit to the development of the law.

U.S. v. Milovanovic, ___ F.3d ___ (9th Cir. April 24 2012).

In early English society, rent was paid by way of labor or other services.  Only gradually did rent became an item paid in money.  Consider this analysis by Oxford Prof. A. W. B. Simpson.

“At the time of the Conquest [in 1066] large parts of the country were not cultivated, and those that were, were not farmed by individual farmers acting independently of each other, each relying on his own resources, but by a communal system of agriculture which depended for its success upon the co-operation of all the members of a small village community, formed an economic unit which was largely self-supporting.”

“The lands occupied by such a community would be partly cultivated and partly waste land … In this arable land the inhabitants of the manor had individual holdings, often consisting of scattered strips, each unfenced from those of his neighbor. The great open fields which were the result of this practice were cultivated and cropped uniformly in accordance with local custom.”

Comment – Note how joint tenancies, which carry with them the joint right of possession of property, fit neatly into this ancient system.

“Feudalism [ ] imposed upon each lord the duty to administer justice to his tenants, and to hold a court in which they might litigate … The Royal justices, when, in Glanvil’s time [he died 1190] were working out the embryonic land law, took a momentous decision. They decided that the Royal courts would concern themselves only with persons who held their lands by free tenure.”

“If we are to understand who these unfree tenants were, and what were the marks of their curious status, we must look at the history of that manorial system of economy which prevailed over a large part of England in the Middle Ages, and which, in some isolated instances, has lasted even up to the present day.”

“Before 1066 a high proportion of these communities had fallen under the domination of powerful individuals, but the precise relationship between such lords and the inhabitants of the manors varied enormously … A large proportion of the humbler cultivators were men who were personally free, but who were bound by custom [ ] to perform services of an agricultural nature or supply produce to the lord.”

“The agricultural services would usually take the form of a duty to cultivate the lands which the lord farmed as his own – the demesne lands, as they came to be called … After the Conquest the personal status of many of these landholders tended to be depressed, and many of those whose ancestors in Anglo-Saxon times had been free men came to be reduced to some form of personal subjection to their lord.”

“Such men, the villeins of medieval law, came to occupy a curious position in consequence of the way in which the early lawyers worked out the legal implications of their status.  Broadly speaking they became only relatively unfree.”

“In most manors there was to be found a class of tenants who were undoubtedly free men. Some such men might hold their lands by services obviously appropriate to free men alone – by knight service for example.”

“In many cases, however, they might be bound to perform services which did not differ noticeably from those owed by villeins … In the end this forced the courts to alter their attitude to such tenants, but this was not to happen until the very end of the fifteenth century.”

“Though there would be oppressive lords, and villeins whose complaints have not come down to us, yet in general the services due from a villein tenant were as rigidly
fixed and probably as generally observed as those due from free tenants.  They were defined by local custom, which was thought to be binding on lord and tenant alike.”

“In practice the villein tenant was frequently as well off as the tenant who held by free tenure.  His services were fixed and recorded, and so were the various incidents of his tenure … In the course of the fourteenth century the practice of commuting rents and services in kind for money payments became widespread, and the process continued in the fifteenth and sixteenth centuries.  Various factors have been selected by historians as being the causes of this phenomenon.”

“In some manors commutation was probably introduced because it led to more efficient estate management …The Black Death destroyed a large proportion of the villein tenants of manors, and the ensuing competition for labour amongst manorial lords brought into being a class of labourers prepared to hire out their services to the highest bidder they could find.”

“By the middle of the fifteenth century the mass of villein tenants no longer laboured for their lords, but paid him a fixed rent for their holdings in lieu of personal service … The commutation of services naturally enhanced the social status of tenants in villeinage, and, at the same time as it becomes common, we find the name villein tenure giving way to the more modern name of copyhold tenure … The court roll itself became a sort of register of titles to copyhold land, for since all transactions were recorded upon the roll, it provided conclusive evidence of a copyholder’s rights.”

“Throughout the course of the Middle Ages the number of villeins declined, and the class became extinct by the beginning of the seventeenth century: the law tended to encourage liberty, and there were many ways in which a villein could become free …The last reported case is Pigg v. Caley (1618). The disappearance of villein status is still rather a mystery; there were still a considerable number in Elizabeth’s reign.  The status of villeinage was never formally abolished.”

A. W. B. Simpson, An Introduction to the History of the Land Law (Oxford University Press 1961), pages 146-151.