9th Circuit Opinion

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Office of the Circuit Executive

U.S. Court of Appeals for the Ninth Circuit


Case Name: GERGELY V LEE-BENNER

Case Number:	Date Filed:
95-56511	04/09/97

FOR PUBLICATION

UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT

In re: ROBERT Z. GERGELY, Debtor. No. 95-56511 JORDAN ALEXANDER LEE-BENNER, a minor, by and through his BAP No. Guardian ad Litem, KAREN MILLS, CC-94-01111-VjO Plaintiff-Appellant, OPINION v.

ROBERT Z. GERGELY, Defendant-Appellee.

In re: ROBERT Z. GERGELY, Debtor.

JORDAN ALEXANDER LEE-BENNER, a No. 96-55364 minor, by and through his BAP No. Guardian ad Litem, KAREN MILLS, CC-94-02459-MoH Plaintiff-Appellant,

v.

ROBERT Z. GERGELY, Defendant-Appellee.

Appeal from the Ninth Circuit Bankruptcy Appellate Panel Meyers, Ollason, and Hagan, Judges, Presiding and Volinn, Jones, and Ollason, Judges, Presiding

Argued and Submitted March 3, 1997--Pasadena, California

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Filed April 9, 1997

Before: Jerome Farris, Alex Kozinski, and Thomas G. Nelson, Circuit Judges

Opinion by Judge Farris

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SUMMARY The summary, which does not constitute a part of the opinion of the court, is copyrighted C 1994 by Barclays Law Publishers. _________________________________________________________________

Bankruptcy/Dischargeability of Debts

The court of appeals affirmed a judgment of the bankruptcy appellate panel (BAP) in part and reversed in part. The court held that in bankruptcy, a doctor is not entitled to discharge of a debt based on malpractice in performing an obstetric pro- cedure undergone by the creditor's mother because of the debtor's misrepresentation.

While appellant Jordan Lee-Benner was an unborn child, appellee Dr. Robert Gergely performed an obstetric procedure on Lee-Benner's mother that resulted in permanent injury to Lee-Benner. Lee-Benner sued Gergely for medical malprac- tice, alleging that the doctor had misrepresented the need for the procedure and performed it negligently. Lee-Benner obtained a state-court malpractice judgment against Gergely for $780,282.

Three years later, Gergely filed a Chapter 7 bankruptcy petition. Lee-Benner brought an adversary action to have the judgment debt, which had grown to nearly $1 million includ- ing interest, declared nondischargeable. Lee-Benner advanced three theories: (1) the debt resulted from a false representa- tion; (2) Gergely had committed fraud while acting in a fidu- ciary capacity; and (3) Gergely had inflicted willful and malicious injury. Lee-Benner also objected to discharge of Gergely's debts on the ground that he had made misrepresen- tations in his petition.

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The bankruptcy court issued a pretrial order requiring the parties to present all testimony through declarations of the witnesses, except for rebuttal testimony at trial. The order also required attachment to the declarations of any exhibits relat- ing to them. If a witness's declaration were unavailable, the proponent's counsel was to provide a declaration summariz- ing the testimony and stating why the witness was unavail- able.

Lee-Benner submitted a declaration prepared by an accoun- tant who had reviewed Gergely's records, but no exhibits. His trial brief alluded to evidence outside his declaration.

The bankruptcy court would not allow Lee-Benner to examine Gergely as part of his case-in-chief and excluded documentary evidence Lee-Benner offered, ruling that such evidence would have violated the pretrial order.

Gergely pointed out that Lee-Benner had not submitted exhibits or other evidence in support of his allegations. He also bifurcated his opening declaration, styling the second half "Opposition to Insinuations in Trial Brief. " Gergely stated that he did not mean to waive objections to the "insinuations" for Lee-Benner's failure to submit evidence. At the end of Lee-Benner's case-in-chief, the bankruptcy court allowed Gergely to withdraw the second half. The court would not allow Lee-Benner to rebut the remaining portion of Gergely's declaration with testimony and declarations, ruling that it should have been submitted as prescribed in the pretrial order.

The bankruptcy court dismissed Lee-Benner's adversary action and denied his objection to discharge. The BAP affirmed.

On appeal, Gergely contended that his debt was not for money obtained by fraud, but for damages resulting collater- ally from an alleged fraud. Alternatively, he asserted that any

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misrepresentation was made to and relied on by Lee-Benner's mother, who was not the creditor. Gergely also took the posi- tion that Lee-Benner's fraud claim was time-barred because he did not bring it within the period of the California statute of limitations.

[1] Debts for fraud or defalcation while acting in a fidu- ciary capacity are excepted from discharge. No facts estab- lishing a fiduciary capacity were alleged in Lee-Benner's complaint. A fiduciary relationship is one involving confi- dence, trust, and good faith, and applies only if an express trust preexisted the debt. No such express trust arises out of the doctor-patient relationship.

[2] Debts for willful and malicious injury by the debtor to another entity are excepted from discharge. This applies to wrongful acts done intentionally, which necessarily produce harm. [3] Lee-Benner did not allege that Gergely acted mali- ciously. Although malice can be proved without showing an intent to injure, without such an intent it was necessary to show that Gergely committed a wrongful act that necessarily produced harm. This required that the act was certain or almost certain to cause the harm. [4] Malpractice was not cer- tain or almost certain to occur. Lee-Benner therefore failed to allege that Gergely acted maliciously. Dismissal of the claim was not error.

[5] The pretrial order required written declarations in lieu of direct oral evidence. It was a valid order. Lee-Benner did not follow that procedure. The bankruptcy court did not abuse its discretion in adhering to the requirements of its pretrial order.

[6] The pretrial order established a procedure for introduc- ing documentary evidence. Lee-Benner's failure to follow that procedure was fatal to his introduction of documentary evi- dence.

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[7] Gergely's withdrawal of the portion of his declaration captioned "Opposition to Insinuations in Trial Brief" effec- tively limited the scope of cross-examination. [8] Although Gergely did not specifically reserve the right to withdraw the second portion of his declaration, a reservation was implicit in his statement that he did not mean to waive objections. There was no abuse of discretion in allowing Gergely to with- draw the second part of the declaration.

[9] The Rules of Evidence allow a trial court to exercise reasonable control over the mode and order of interrogating witnesses and presenting evidence. Requiring evidence to be presented by declaration is an accepted technique for shorten- ing bench trials. Requiring evidence responding to an oppos- ing witness's declaration to be submitted prior to trial is also consistent with the need to ascertain the truth. [10] The pre- trial order permitted cross-examination and therefore pre- served an opportunity for the judge to evaluate the declarant's demeanor and credibility. The requirement that the basis for cross-examination be submitted before trial promoted effi- cient and accurate factfinding. Lee-Benner did not comply. The court did not abuse its discretion.

[11] The Bankruptcy Code excepts from discharge any debt for money to the extent obtained by false pretenses, a false representation, or actual fraud. [12] An action for nondischar- geability requires only: (1) a representation; (2) falsity; (3) scienter; (4) reliance; and (5) that the creditor sustained the loss and damage as the proximate result of the representation. Malpractice is a foreseeable result of any medical procedure. The fifth element can be proved if the debtor fraudulently induced the creditor to undergo a procedure that was negli- gently performed. Lee-Benner alleged damage from negligent performance of a procedure undergone because of intentional misrepresentation. His claim should not have been dismissed.

[13] Under state law, Lee-Benner could have stated a fraud claim. California courts allow recovery for negligence occur-

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ring before a plaintiff's birth when damage to the unborn child was foreseeable. If Lee-Benner had standing to bring an otherwise traditional fraud claim under California law, that claim would be for fraud under the Bankruptcy Code.

[14] The expiration of a state statute of limitations on fraud actions does not affect an action for nondischargeability if there is a valid judgment. The creditor is not seeking a new money judgment based on fraud, he is litigating the issue of dischargeability and the timeliness of the petition is governed by bankruptcy rules. [15] Lee-Benner's debt was established. The state limitations period for fraud actions was irrelevant.

_________________________________________________________________

COUNSEL

Bridget Baynes, Law Offices of Bridget Baynes, Santa Ana Heights, California; Richard D. Brady, Law Office of Richard D. Brady, Costa Mesa, California, for the plaintiff-appellant.

Gary A. Starre, Starre & Cohn, Los Angeles, California, for the defendant-appellee.

_________________________________________________________________

OPINION

FARRIS, Circuit Judge:

Jordan Alexander Lee-Benner appeals the bankruptcy court's dismissal of his adversary action seeking a declaration that debtor Robert Gergely's debt to him is nondischargeable. He also appeals the denial of his objection to discharge of Gerge- ly's debts, asserting error in certain evidentiary rulings. The Bankruptcy Appellate Panel affirmed both decisions. We have jurisdiction under 28 USC S 158(d). We affirm in part, reverse in part, and remand for further proceedings.

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I.

Gergely, an obstetrician, performed an amniocentesis on Lee-Benner's mother during her pregnancy with Lee-Benner. As a result of difficulties with the amniocentesis, Lee-Benner was blinded in one eye.

After his birth, Lee-Benner brought suit against Gergely in state court. Lee-Benner claimed that Gergely misrepresented the need for the amniocentesis and that he performed the pro- cedure negligently. The court entered judgment for Lee- Benner, awarding $780,282 in damages, but did not specify on which legal theory the judgment was rendered.

Three years later, Gergely filed a Chapter 7 bankruptcy petition. Lee-Benner moved to have the amount due him, now nearly $1 million including post-judgment interest, declared nondischargeable under 11 USC S 523. He asserted three the- ories of nondischargeability: (1) that the debt resulted from a false representation; (2) that Gergely had committed fraud while acting in a fiduciary capacity; and (3) that Gergely had inflicted willful and malicious injury. The bankruptcy court dismissed Lee-Benner's action.

Lee-Benner also objected to discharge of Gergely's debts under 11 USC S 727, alleging that Gergely had made misrep- resentations in his bankruptcy petition. The bankruptcy court conducted a hearing in which all direct evidence was offered in writing before the hearing. Instead of offering evidence, Lee-Benner sought to make his case primarily in rebuttal, but was thwarted by several evidentiary rulings. The bankruptcy court denied the objection to discharge.

The Bankruptcy Appellate Panel affirmed both the dis- missal and the denial of the objection to discharge. The two appeals from the Bankruptcy Appellate Panel were consoli- dated for argument before us.

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II.

We review decisions of the Bankruptcy Appellate Panel de novo, In re Alsberg, 68 F.3d 312, 314, cert. denied, 116 S.Ct. 1568 (1996), conducting an independent review of the bank- ruptcy court's decisions. In re Roosevelt, 87 F.3d 311, 314 (9th Cir. 1996). We accept as true the allegations of the com- plaint for nondischargeability. See Brown v. Felsen, 442 U.S. 127 (1979).

[1] Section S 523(a)(4) excepts from discharge debts "for fraud or defalcation while acting in a fiduciary capacity." No facts establishing a fiduciary capacity were alleged in Lee- Benner's complaint. "The meaning of `fiduciary' in S 523(a)(4) is an issue of federal law." Ragsdale v. Haller, 780 F.2d 794, 796 (9th Cir. 1986). "The broad, general defini- tion of fiduciary -- a relationship involving confidence, trust, and good faith -- is inapplicable." Id. The section applies only if an express trust pre-existed the debt. In re Niles, No. 95-55968, slip op. at 1366 (9th Cir. Feb. 12, 1997). No such express trust arises out of the doctor-patient relationship. See In re Karlin, 112 B.R. 319, 322 (9th Cir. BAP 1990), aff'd 940 F.2d 1534 (9th Cir. 1991); In re Pouliot, 196 B.R. 641, 650-51 (Bankr. S.D. Fl. 1996). The dismissal of Lee-Benner's claim under S 523(a)(4) was not error.

[2] Section 523(a)(6) excepts from discharge debts "for willful and malicious injury by the debtor to another entity." This section applies to "wrongful act[s] done intentionally, which necessarily produce[ ] harm." In re Cecchini, 780 F.2d 1440, 1443 (9th Cir. 1986).

[3] Lee-Benner did not allege that Gergely acted mali- ciously. We recognize that malice can be proved without showing an intent to injure. In re Littleton, 942 F.2d 551, 554 (9th Cir. 1991) (per curiam). However, without such an intent it is "necessary to show that [Gergely] committed a wrongful act which necessarily produced harm." Id. This standard

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requires that the act be "certain or almost certain to cause" the harm. Id. at 555 (quoting In re Littleton, 106 B.R. 632, 637 (9th Cir. BAP 1989)). We have upheld a finding that debtors' acts would not necessarily have produced harm, and con- cluded that "[c]onsequently, the debtors' conduct was not malicious, as that term is used in S 523(a)(6)." Id.

Nothing in In re Britton, 950 F.2d 602 (9th Cir. 1991), changed this standard. In Britton we observed that "it was foreseeable that injury would result" because"[m]alpractice can be seen as a foreseeable consequence of any medical procedure." Id. 605 (misrepresentation by debtor; malpractice by third party). However, we quoted the "necessarily causes harm" language of Littleton, and noted that Cecchini is our "leading case on this issue." Id. Our conclusion in Britton that the debtor acted maliciously was derived from the particular facts of that case, including that the debtor had intentionally misrepresented himself to be a doctor. See id. at 603 (reciting facts); see also id. at 605 (regarding S 523(a)(2)(A) claim: "on these facts, there appears to be no policy argument for limit- ing the extent of . . . liability"). To read the case otherwise would be to change the law, which a lone panel has no author- ity to do. Cf. In re Walker, 48 F.3d 1161, 1164 & n.3 (11th Cir. 1995) (noting that if Britton changed the law it created a
split with six other circuits) (citing cases and adopting major- ity rule).

[4] Malpractice was not certain or almost certain to occur. Lee-Benner therefore failed to allege that Gergely acted mali- ciously. Dismissal of the claim under S 523(a)(6) was not error.

III.

Lee-Benner appeals several evidentiary rulings of the bank- ruptcy court. Each ruling arose out of the bankruptcy court's pretrial order:

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1. (a) Except as herein provided, each party shall present the testimony of all its witnesses through declarations of said witnesses . . . .

(b) The only oral testimony which may be offered at trial by a party through its witnesses will be strictly limited to rebuttal testimony.

(c) If a portion of a witness' declaration concerns an exhibit to be admitted into evidence at trial, the exhibit must be attached to the declaration.

(d) If a party is unable to obtain a declaration of a witness, counsel for that party shall file a declaration stating the name of the witness and a detailed sum- mary of the expected testimony and why counsel was unable to obtain the witness' declaration.

(emphasis in original). The order also contained a schedule for submitting declarations and exhibits.

Lee-Benner submitted no exhibits, but only a three-page declaration, prepared by an accountant who had reviewed Gergely's records. Lee-Benner's trial brief alluded to evi- dence other than that contained in the declaration but his sole submission under the pretrial order was the three-page decla- ration.

Gergely (1) pointed out that Lee-Benner had not submitted exhibits or other evidence to support many of his allegations; and (2) bifurcated his opposing declaration, captioning the second half "Opposition to Insinuations in Trial Brief."

Lee-Benner did nothing to cure the deficiency. At trial the bankruptcy court made several evidentiary rulings based on the record.

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We review the bankruptcy court's evidentiary rulings for abuse of discretion. In re Sternberg, 85 F.3d 1400, 1408 (9th Cir. 1996).

A

Lee-Benner had hoped to examine Gergely as part of his (Lee-Benner's) case in chief. The court held that Lee-Benner should have submitted a declaration from Gergely under part 1(a) of the pretrial order, or a 1(d) declaration from counsel explaining why a 1(a) declaration could not be obtained.

[5] The pretrial order required written declarations in lieu of direct oral evidence. It was a valid order. In re Adair, 965 F.2d 777, 779 (9th Cir. 1992). Lee-Benner did not follow that procedure. The bankruptcy court did not abuse its discretion in adhering to the requirements of its pretrial order.

Lee-Benner also sought to introduce documentary evidence as a foundation for the testimony of his expert as part of his case in chief. The court ruled that this would violate the requirement that exhibits be attached to the appropriate decla- ration.

[6] Lee-Benner argues that the evidence should have been admitted because it was listed on the parties' joint pretrial exhibit list. The exhibit list is irrelevant. The pretrial order established a procedure for introducing documentary evi- dence. Lee-Benner's failure to follow that procedure was fatal to his introduction of evidence.

B

[7] At the close of Lee-Benner's case in chief, the court permitted Gergely to withdraw the portion of his declaration captioned "Opposition to Insinuations in Trial Brief." That withdrawal effectively limited the scope of cross- examination.

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[8] Although Gergely did not specifically reserve the right to withdraw the second portion of his declaration, such a res- ervation was implicit in Gergely's statement that he did "not mean to waive his objections that the insinuations should be totally disregarded for Plaintiff's failure to submit evidence." Gergely explained that he did not know how best to respond to Lee-Benner's failure to present an affirmative case. Lee- Benner should have cured his failure to comply with the pre- trial order when that failure was brought to his attention. We find no abuse of discretion in allowing Gergely to withdraw the declaration.

Lee-Benner attempted to rebut the remaining portion of Gergely's declaration with oral testimony of witnesses and with documentary evidence. The court did not admit the evi- dence, explaining that it should have been submitted as reply declarations and attached exhibits.

[9] The Rules of Evidence allow a trial court to:

exercise reasonable control over the mode and order of interrogating witnesses and presenting evidence so as to (1) make the interrogation and presentation effective for the ascertainment of the truth, [and] (2) avoid needless consumption of time.

FRE 611(a). Requiring evidence to be presented by declara- tion is "an accepted and encouraged technique for shortening bench trials" that is consistent with Rule 611(a)(2). Adair, 965 F.2d at 779 (quoting Phonetele, Inc. v. American Telephone & Telegraph Co., 889 F.2d 224, 232 (9th Cir. 1989)). And requiring evidence responding to an opposing witness's decla- ration to be submitted prior to trial is also consistent with the need to ascertain the truth. The opposing witness can still be cross-examined regarding the contradictory evidence, and the court can assess his demeanor during that cross-examination. If the testimony is false, that falsity will be revealed by the reply evidence and related cross-examination.

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[10] The pretrial order permitted oral cross-examination. It therefore "preserve[d] an opportunity for the judge to evaluate the declarant's demeanor and credibility." Id. The require- ment that the evidentiary basis for that cross-examination be submitted before trial merely promoted efficient and accurate factfinding. Lee-Benner did not comply with that require- ment. The court did not abuse its discretion.

IV.

[11] The bankruptcy code excepts from discharge "any debt . . . for money . . . to the extent obtained by . . . false pre- tenses, a false representation, or actual fraud. " 11 USC S 523(a)(2)(A). Lee-Benner alleged in his claim for nondis- chargeability that Gergely intentionally misrepresented the need for an amniocentesis.

Gergely argues that Lee-Benner's theory of fraud is incon- sistent with S 523(a)(2)(A). He contends that the debt is not for money obtained by fraud, but for damages resulting collat- erally from an alleged fraud. Since the statute covers money "obtained by" fraud, Gergely argues that it does not apply to the facts alleged.

[12] Gergely's literal reading of S 523(a)(2)(A) is inconsis- tent with our case law. See In re Levy, 951 F.2d 196, 198 (9th Cir. 1991) (section 523(a)(2)(A) "limits nondischargeability to the amount of benefit to the debtor or loss to the creditor the act of fraud itself created"). An action for nondischargea- bility under S 523(a)(2)(A) requires only: (1) a representation; (2) falsity; (3) scienter; (4) reliance; and "(5) that the creditor sustained the alleged loss and damage as the proximate result of the representations having been made." In re Britton, 950 F.2d at 604. Malpractice is a foreseeable result of any medical procedure, id. at 604-05, and the fifth element can be proved if the debtor fraudulently induced the creditor to undergo a procedure that was then negligently performed. Id. at 605 (holding bankruptcy court's finding of proximate causation

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not to be clearly erroneous). Lee-Benner alleged damage from negligent performance of a procedure undergone because of intentional misrepresentation. That was sufficient. His claim should not have been dismissed.

Gergely's alternative argument that any alleged misrepre- sentation was made only to, and relied on only by, Lee- Benner's mother is advanced because Lee-Benner, not his mother, is the creditor contesting dischargeability. We under- stand but reject the argument.

We have stated that S 523(a)(2)(A) requires misrepresenta- tions made "with the intention and purpose of deceiving the creditor," on which "the creditor relied." Id. at 604 (emphasis added). However, we have never considered whether for bankruptcy purposes an unborn child can claim fraud for rep- resentations made to his mother that damage him.

[13] We are satisfied that under state law Lee-Benner could have stated such a fraud claim. California courts allow recov- ery for negligence occurring before a plaintiff's birth where damage to the unborn child was foreseeable. See, e.g., Turpin v. Sortini, 31 Cal.3d 220, 230 (1982) ("wrongful life"). The California Supreme Court has also stated in dictum that:

[I]t appears anomalous to deny recovery simply because it was not possible for the "child-to-be " to make a choice. In the preconception or fetal stage, as in childhood, it is parents who nearly always make medical choices to protect their children's interests.

Id. at 234 n.9. This reasoning applies at least as well to fraud as to negligence. Gergely has cited no contrary authority. If Lee-Benner has standing to bring an otherwise-traditional fraud claim under California law, then that claim would be for fraud within S 523(a)(2)(A).

[14] Gergely next argues that Lee-Benner did not bring a fraud action before the applicable California limitations

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period expired. However, the expiration of a state statute of limitations on fraud actions does not affect an action for non- dischargeability if there is a valid judgment. In construing dis- chargeability under S 17 of the former Bankruptcy Act, we rejected the argument that Gergely now presents:"[The credi- tor] is not seeking a new money judgment based on fraud; he is litigating the issue of dischargeability . . . , and the timeli- ness of the petition is governed by the Bankruptcy rules." Matter of Gross, 654 F.2d 602, 604 (9th Cir. 1981). We fol- lowed Gross in In re Daley, a case decided under S 523. 776 F.2d 834, 837-38 (9th Cir. 1985). More recently, the Tenth Circuit reached the same conclusion:

[T]he question of the dischargeability of the debt under the Bankruptcy Code is a distinct issue gov- erned solely by the limitations periods established by bankruptcy law. In this case, the debt has already been established, so the state statute of limitations is immaterial.

In re McKendry, 40 F.3d 331, 337 (10th Cir. 1994).

[15] The law has not changed since Gross and McKendry. Lee-Benner's debt is established. The state limitations period for fraud actions is irrelevant to the dischargeability of an established debt.

We therefore reverse the dismissal of Lee-Benner's claim for nondischargeability under S 523(a)(2)(A), and remand so that Lee-Benner may attempt to show that Gergely's debt to him arose from fraud. We affirm the dismissal of Lee- Benner's other nondischargeability claims, and the denial of objection to discharge.

AFFIRMED IN PART, REVERSED IN PART, AND REMANDED.

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