Cody Farms, Inc. et al v. Deerman et al

UNITED STATES BANKRUPTCY COURT
DISTRICT OF NEW MEXICO
In re: 	WILLARD L. DEERMAN and 	No. 11-09-15348 J
CHARLOTTE DEERMAN,
Debtors.
CODY FARMS, INC., individually and
Derivatively as a member of and on behalf
of FALCON FARMS, L.L.C.; ROBERT
L. FLETCHER and MARY K. FLETCHER,
husband and wife,
Plaintiffs,
v. 	Adversary No. 10-1019 J
WILLARD L. DEERMAN and
CHARLOTTE S. DEERMAN,
Defendants.
MEMORANDUM OPINION
THIS MATTER is before the Court on the Motion for Partial Summary Judgment
(sometimes called the “Motion”) and supporting memorandum filed by Plaintiffs, Cody Farms,
Inc. (“Cody Farms”), individually and derivatively as a member of and on behalf of Falcon
Farms, L.L.C. (“Falcon Farms”), Robert L. Fletcher, and Mary K. Fletcher, husband and wife
(the Fletchers), by and through their attorneys of record, Jennings, Strouss, & Salmon, P.L.C.
(Brian Imbornoni). See Docket Nos. 28 and 29. Defendants Willard L. Deerman and Charlotte
S. Deerman (together, the Deermans), by and through their attorneys of record, Law Office of
George “Dave” Giddens, P.C. (Dean Cross), filed a response in opposition to the Motion and
Plaintiffs filed a reply. See Docket Nos. 32 and 33. 	Plaintiffs and Defendants previously
entered into a Stipulated Order to Stay Adversary Proceeding and to Compel Arbitration
pursuant to which the parties proceeded with an arbitration case captioned Cody Farms, Inc., et
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al. v. Willard L. Deerman, et ux., American Arbitration Association No. 76 180 & 00397 08 (the
“Arbitration Case”). 	See Docket No. 25. The arbitrator in the Arbitration Case (the
“Arbitrator”) has since entered his Findings of Fact, Conclusions of Law and Interim Award and
has entered a Final Arbitration Award (“Arbitration Award”) in the Arbitration Case.
Plaintiffs assert that the Court should apply collateral estoppel to the findings made by
the Arbitrator and determine that a portion of the award issued by the Arbitrator constitutes a
non-dischargeable debt as to the Deermans under 11 U.S.C. §§ 523(a)(2)(A), 523(a)(4) and
523(a)(6). The Deermans raise essentially two issues in opposition to the Motion: 1) by filing
and prosecuting the Motion, the Plaintiffs have violated both the automatic stay and a stay order
entered in this adversary proceeding; and 2) because the Deermans still have the right to contest
the arbitration award, the award has no preclusive effect and the Motion is pre-mature. For the
reasons set forth below, the Court concludes that the filing and prosecution of the Motion
violates neither the automatic stay nor the stay order entered in this adversary proceeding, that
the Deermans are barred from contesting the Arbitration Award, and that the Arbitrator’s
findings have collateral estoppel effect. The Court will grant Plaintiff’s Motion, provided that
the Arbitrator’s findings of fact establish all elements necessary to a finding of non-
dischargeability of the debt at issue in this adversary proceeding.
BACKGROUND AND PROCEDURAL HISTORY
The Deermans filed a voluntary petition under Chapter 11 of the Bankruptcy Code on
November 20, 2009 as Case No. 11-09-15348 JA. Pre-petition, Cody Farms filed its arbitration
claim against the Deermans. 	The Deermans filed a response to the arbitration claims on January
12, 2009, including a counterclaim against Cody Farms and a third-party claim against Robert L.
Fletcher. 	Plaintiffs initiated this adversary proceeding by filing a Complaint to Determine Non-
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Dischargeability of Debt (“Complaint”) on February 16, 2010. The Complaint includes
individual claims and derivative claims asserted by Cody Farms as a member of Falcon Farms.
Plaintiffs did not, however, pursue any derivative claims as part of the Arbitration Case. See
Memorandum in Support of Motion for Partial Summary Judgment (“Plaintiffs’ Supporting
Memorandum”), p. 11, n.2 – Docket No. 29, even though the caption in the Arbitration Case
reflects Cody Farms both individually and derivatively as a member of and on behalf of Falcon
Farms.
Cody Farms and the Fletchers filed a motion for relief from stay in the Deermans’
bankruptcy case requesting relief from the automatic stay to allow the movants and the
Deermans to proceed with the Arbitration Case. On October 4, 2010, a Stipulated Order to Stay
Adversary Proceeding and to Compel Arbitration (“Stipulated Order”) was entered in this
adversary proceeding. See Docket No. 25. The Stipulated Order recited that its purpose is to
stay the adversary proceeding to permit the parties to liquidate their claims against each other in
the Arbitration Case, and that the Plaintiffs had filed a motion for relief from stay in the
Deermans’ bankruptcy case to permit the Arbitration Case to proceed. Id. The Stipulated Order
included the following provisions: 1) this adversary proceeding is stayed pending further order
of this Court; 2) the Deermans agree to proceed with arbitration, provided they are given a
reasonable opportunity to cure any previous failure to respond to discovery or to otherwise
participate in the Arbitration Case; 3) the factual determinations of liability and the amount of
debt, if any, owed by either party to the other will be determined in the Arbitration Case; 4) this
Court retains exclusive jurisdiction to determine whether any award in the Arbitration Case is
non-dischargeable; and 5) either party may request the Court to vacate the Stipulated Order so
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that the parties may resume proceedings in this adversary case in the event that the motion for
relief from stay in the Deerman’s bankruptcy case is denied. See Docket No. 25.
On October 26, 2010, the Court entered an Order Granting Motion for Relief from Stay
(“Stay Relief Order”) in the Deermans’ bankruptcy case. See Case No. 09-15348 – Docket No.
132. The Stay Relief Order modified the automatic stay provisions of 11 U.S.C. § 362 so that
the Plaintiffs and the Deermans could proceed with the Arbitration Case, provided that the
Plaintiffs would not attempt to enforce any award entered in the Arbitration Case against the
Deermans without further leave of this Court, and provided further that this Court retains
exclusive jurisdiction over the dischargeability of any award. Id.
The Arbitration Case was conducted in Arizona. The Arbitrator entered Findings of Fact
and Conclusions of Law and an Interim Award in the Arbitration Case on February 2, 2012. On
March 19, 2012, the Arbitrator entered a Final Arbitration Award (defined above as the
“Arbitration Award”) in the Arbitration Case. The Arbitration Award has not been confirmed.
In their bankruptcy case, the Deermans filed Debtors’ Motion to Extend Time to File
Amended Plan and Disclosure Statement (“Motion to Extend”). See Bankruptcy Case No. 11-
09-15348 J – Docket No. 237. 	The Motion to Extend includes arguments that echo the
Deermans’ arguments in opposition to the pending Motion filed in this adversary proceeding:
namely, that the Plaintiffs cannot obtain a non-dischargeable judgment without first confirming
the Arbitration Award and that the Deermans can challenge the Arbitration Award as part of a
proceeding to confirm the Arbitration Award. See Motion to Extend - ¶¶ 4, 5,6 - Case No. 11-
09-15348 JA – Docket No. 237. 	At a preliminary hearing on the Motion to Extend, the parties
agreed that the Deermans will have thirty days following the Court’s ruling on the instant Motion
within which to file an amended plan and disclosure statement.
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SUMMARY JUDGMENT STANDARDS
Summary Judgment, governed by Rule 56, Fed.R.Civ.P., made applicable to adversary
proceedings by Rule 7056, Fed.R.Bankr.P. , will be granted when the movant demonstrates that
there is no genuine dispute as to any material fact and that the movant is entitled to judgment as a
matter of law. Rule 56(a), Fed.R.Civ.P. 	In order to defeat a motion for summary judgment,
the opposing party must “go beyond the pleadings and by [his] own affidavits, or by the
depositions, answers to interrogatories, and admissions on file, designate specific facts showing
that there is a genuine issue for trial.” Celotex Corp. v. Catrett, 477 U.S. 317, 324, 106 S.Ct.
2548, 91 L.Ed.2d 265 (1986)(internal citations omitted). When evaluating a motion for
summary judgment, the Court must view the facts in the light most favorable to the party
opposing summary judgment. Harris v. Beneficial Oklahoma, Inc., (In re Harris), 209 B.R. 990,
995 (10 th Cir. BAP 1997)(“When applying this standard, we are instructed to ‘examine the
factual record and reasonable inferences therefrom in the light most favorable to the party
opposing summary judgment.’”)(quoting Wolf v. Prudential Ins. Co. of America, 50 F.3d 793,
796 (10 th Cir. 1995)(quoting Applied Genetics Int’l, Inc. v. First Affiliated Sec., Inc., 912 F.2d
1238, 1241 (10th Cir. 1990)(additional internal quotation marks omitted)).
Plaintiffs’ statement of facts not in genuine dispute is based on the Findings of Fact and
Conclusions of Law, the Interim Award, and the Arbitration Award entered in the Arbitration
Case. 	The Deermans do not dispute that the Arbitrator made such findings and conclusions as
part of the Arbitration Case,1 but nevertheless take issue with several of the Plaintiffs’
1See Response to Motion for Summary Judgment, Memorandum in Support of Response to Motion for Summary
Judgment, and Alternatively Motion to Stay Briefing on Motion for Summary Judgment (“Defendants’ Response”),
p. 3, n. 1 (“Respondents to do not dispute that the Arbitrator made the Findings . . . cited in Petitioners[’] Statement
of Undisputed Fact.”).
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undisputed facts.2 As determined below, the Deermans are precluded from contesting the
Arbitrator’s factual findings made in the Arbitration Case. Consequently, in reviewing
Plaintiffs’ request for partial summary judgment, the Court will treat the Arbitrator’s findings of
fact as not subject to genuine dispute and will consider whether those facts entitle Plaintiffs to
judgment as a matter of law.
DISCUSSION
A. Whether the Motion violates the automatic stay or the Stipulated Order entered in this
adversary proceeding.
The Deermans assert that the Motion violates the automatic stay imposed by 11 U.S.C. §
362. 	This Court disagrees. 	The automatic stay imposed by 11 U.S.C. § 362 operates to stay the
continuation of an action or proceeding against the debtor “to collect, assess, or recover a claim
against the debtor that arose before the commencement” of the debtor’s bankruptcy case. 11
U.S.C. §362(a)(6). 	Its scope is extremely broad. In re Sullivan, 357 B.R. 847, 853
(Bankr.D.Colo. 2006)(citing In re Gagliardi, 290 B.R. 808, 814 (Bankr.D.Colo. 2003)).
However, an action to contest dischargeability of a debt under section 523 of the Bankruptcy
Code brought by a creditor against a debtor cannot violate the automatic stay because the
automatic stay does not apply to acts taken in a debtor’s bankruptcy case brought before the
2For example, Plaintiffs’ Statement of Undisputed Fact No. 24 states that “Beginning in early 2007, Mr. Deerman
repeatedly represented to Mr. Fletcher that Falcon’s 2006 carryover hay inventory had been sold. Mr. Fletcher
believed Mr. Deerman’s statement that Falcon’s 2006 carryover hay was sold.” See Plaintiffs’ Supporting
Memorandum, p. 5, ¶ 24 – Docket No. 29. In response, the Deermans state, in part, that
Falcon’s inventory records reflect that Falcon sold approximately 78.2% of its 2006 horse quality hay
inventory from January 2007 through May 2007. Falcon’s hay sales for the first five months of 2007 were
from Falcon’s 2006 inventory because the hay from 2007 crop year had not come in. Respondent
Deerman told Petitioner Fletcher that the remaining 2006 hay inventory was sold to dairies if Petitioner
Robert Fletcher would agree to reduce the price of the damaged 2006 inventory to as low as $100 per ton.
Respondent Fletcher repeatedly refused to reduce the 2006 hay inventory prices because the bank would
call the note and Falcon would be out of business.
Deermans’ Response, p. 6-7, ¶ 5.
Based on these additional facts, the Deermans assert that there is a genuine issue of material fact as to
whether the 2006 hay inventory had been sold and whether Mr. Fletcher had a legitimate belief that the
inventory had been sold or had not been sold. Id.
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Bankruptcy Court seeking relief under the Bankruptcy Code. See Sears, Roebuck & Co. v.
Hodges (In re Hodges), 83 B.R. 25, 26 (Bankr.N.D.Cal. 1988)(observing that “an action taken in
the bankruptcy court can only be found to be a violation of the automatic stay when there is no
basis under the Code for the action[,]” and concluding that, “[a]s a matter of law . . . a
nondischargeability action can never violate the automatic stay.”); Lawson v. Nationsbank
Mortg. Corp. (In re Lawson), 2000 WL 33943198, *6 (Bankr.S.D.Ga. Sept. 22, 2000)(“the
automatic stay does not apply to actions or claims brought before the bankruptcy court with
jurisdiction over the debtor’s bankruptcy case.”)(citation omitted). See also, United States v.
Inslaw, Inc., 932 F.2d 1467, 1474 (D.C. Cir. 1991)(“For obvious reasons, however, courts have
recognized that § 362(a) cannot stay actions specifically authorized elsewhere in the bankruptcy
code, such as motions to convert reorganizations to liquidation proceedings”).
The Deermans also assert that the Stipulated Order entered in this adversary proceeding
precluded the Plaintiffs from filing or prosecuting their Motion. The Stipulated Order provides
that this “adversary proceeding is stayed pending further order of this Court.” See Stipulated
Order, p. 2, ¶ 1 – Docket No. 25. But even the Stipulated Order provides that either party may
request the Court to vacate the Stipulated Order so the parties may resume proceeding in this
adversary proceeding if the Stay Relief Order in the Deermans’ bankruptcy case is denied; that
any award entered in the Arbitration Case in favor of the Plaintiffs and against the Deermans
“shall not be enforceable without further order of this Court[;]” and that this Court retains
“exclusive jurisdiction to determine whether any such award is nondischargeable under §523 of
the Bankruptcy Code.” Id. at ¶ 2.
Having proceeded with the Arbitration Case and obtained an arbitration award as
contemplated by the Stipulated Order and Stay Relief Order, Plaintiffs have returned to the this
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Court as contemplated by the Stipulated Order to request a determination that the debt at issue is
non-dischargeable. The stay imposed by the Stipulated Order was intended to stay this adversary
proceeding until the Arbitrator concluded the Arbitration Case. That has occurred. The Motion
has been fully briefed. It does not make sense to require the movants to refile a motion for
partial summary judgment and supporting papers and the Defendant to refile their response.
Under the circumstances, the Court will vacate the stay imposed by the Stipulated Order nunc
pro tunc as of the date of the filing of the Motion. The filing and prosecution of the Motion,
therefore, does not violate the stay imposed by the Stipulated Order.
B. 	Whether the Deermans can contest the arbitration award
Section 9 of the Federal Arbitration Act, 9 U.S.C. §§ 1 – 16 (“FAA”), governs the
procedure for confirming an arbitration award. 	That section provides, in relevant part:
If the parties in their agreement have agreed that a judgment of the court shall be entered
upon the award made pursuant to the arbitration, and shall specify the court, then at any
time within one year after the award is made any party to the arbitration may apply to the
court so specified for an order confirming the award, and thereupon the court must grant
such an order unless the award is vacated, modified, or corrected as prescribed in sections
10 and 11 of this title. If no court is specified in the agreement of the parties, then such
application may be made to the United States court in and for the district in within which
such award was made.
9 U.S.C. § 9.
Sections 10 and 11 of the FAA specify which court may issue an order vacating, modifying or
correcting an arbitration award and set forth the grounds for issuance of such an order.3 Section
3 Those sections provide:
(a) In any of the following cases the United States court in and for the district wherein the award was made
may make an order vacating the award upon the application of any party to the arbitration--
(1) where the award was procured by corruption, fraud, or undue means;
(2) where there was evident partiality or corruption in the arbitrators, or either of them;
(3) where the arbitrators were guilty of misconduct in refusing to postpone the hearing, upon
sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy; or of any
other misbehavior by which the rights of any party have been prejudiced; or
(4) where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual,
final, and definite award upon the subject matter submitted was not made.
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12 of the FAA describes how a motion is to be made for an order vacating, modifying or
correcting an arbitration award, and imposes a three-month time limit for serving such a motion.
4 Here, Plaintiffs have not sought to confirm the Arbitration Award pursuant to Section 9 the
FAA; nor have the Deermans sought to vacate, modify or correct the Arbitration Award within
the three-month period specified in Section 12 of the FAA.
The Deermans cite cases from other jurisdictions which hold that a party can challenge an
arbitration award in defense to an action to confirm an arbitration award. See, e.g., Chauffeurs,
Teamsters, Warehousemen and Helpers Local Union No. 364 v. Ruan Transport Corp., 473
F.Supp. 298, 303 (N.D.Ind. 1979)(holding that Section 12 of the FAA “only limits the time
(b) If an award is vacated and the time within which the agreement required the award to be made has not
expired, the court may, in its discretion, direct a rehearing by the arbitrators.
(c) The United States district court for the district wherein an award was made that was issued pursuant to
section 580 of title 5 may make an order vacating the award upon the application of a person, other than a party to
the arbitration, who is adversely affected or aggrieved by the award, if the use of arbitration or the award is clearly
inconsistent with the factors set forth in section 752 of title 5.
9 U.S.C. §10.
In either of the following cases the United States court in and for the district wherein the award was made may make
an order modifying or correcting the award upon the application of any party to the arbitration--
(a) Where there was an evident material miscalculation of figures or an evident material mistake in the
description of any person, thing, or property referred to in the award.
(b) Where the arbitrators have awarded upon a matter not submitted to them, unless it is a matter not
affecting the merits of the decision upon the matter submitted.
(c) Where the award is imperfect in matter of form not affecting the merits of the controversy.
The order may modify and correct the award, so as to effect the intent thereof and promote justice between the
parties.
9 U.S.C. § 11.
4 Section 12 of the FAA provides:
Notice of a motion to vacate, modify, or correct an award must be served upon the adverse party or his
attorney within three months after the award is filed or delivered. If the adverse party is a resident of the
district within which the award was made, such service shall be made upon the adverse party or his attorney
as prescribed by law for service of notice of motion in an action in the same court. If the adverse party shall
be a nonresident then the notice of the application shall be served by the marshal of any district within
which the adverse party may be found in like manner as other process of the court. For the purposes of the
motion any judge who might make an order to stay the proceedings in an action brought in the same court
may make an order, to be served with the notice of motion, staying the proceedings of the adverse party to
enforce the award.
9 U.S.C. § 12.
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during which the party against whom an arbitrator rules can initiate court action; section 12 does
not limit the time during which the defenses enumerated in sections 10 and 11 are available.”);
Paul Allison, Inc. v. Minikin Storage of Omaha, Inc., 452 F.Supp. 573, 575 (D. Neb.
1978)(holding “that the time stricture within § 12 is inapplicable when the party who prevails at
arbitration moves to confirm the award and the defendant desires to raise objections in response
to that motion.”). Those courts reason, in part, that because the language in Section 9 references
Sections 10 and 11 of the FAA, but not Section 12 which imposes the three-month limit for
seeking to vacate, modify or correct an arbitration award, the time limit in Section 12 does not
limit a party’s ability to contest the arbitration award in defense of an action to confirm the
award. See Ruan Transport, 473 F.Supp. at 302 (pointing out that the reference in Section 9 to
“‘the next two sections’ indicates that the time limitation of section 12, the third following
section, was not intended to apply to the defense of a motion to confirm.”). 	This Court
disagrees.
In discerning a statute’s meaning, the starting place is the plain meaning of the language
itself. See United States v. Ron Pair Enters., Inc., 489 U.S. 235, 241, 109 S.Ct. 1026, 103
L.Ed.2d 290 (1989)(resolving a dispute over the meaning of a statute “begins . . . with the
language of the statute itself.”)(citation omitted); In re Wilbur, 344 B.R. 650, 653 (Bankr.D.Utah
2006)(“Statutory construction begins with the language of the statute itself and an analysis of
whether the language is plain.”)(citation omitted). When the meaning of the language is plain,
the Court’s analysis ends. Ron Pair, 489 U.S. at 241(when the plain meaning of the language is
clear, the court’s inquiry ends, and “‘the sole function of the courts is to enforce it according to
its terms.’”)(quoting Caminetti v. United States, 242 U.S. 470, 485, 37 S.Ct. 192, 194, 61 L.Ed.
442 (1917)).
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A plain reading of the language in Sections 9 through 12 of the FAA supports the
conclusion that a party’s failure to act within the three-month limitation period is fatal to such
party’s ability to vacate, modify, or correct the award under the FAA. There is no need for
Section 9 of the FAA to reference Section 12 in order for the time limitation contained in Section
12 to apply to a defense to an application to confirm an award on grounds specified in Sections
10 and 11. Under Section 9, on a timely application the court “must” confirm the award “unless
the award is vacated, modified, or corrected as prescribed in sections 10 and 11 of this title.” 9
U.S.C. § 9 (emphasis added). An arbitration award cannot be vacated, modified, or corrected as
prescribed in sections 10 and 11 unless a motion is made within the three-month period specified
in Section 12. As pointed out by the Seventh Circuit in Chauffeurs, Teamsters, Warehousemen
and Helpers, Local Union 135 v. Jefferson Trucking Co., Inc., 628 F.2d 1023, 1026 (7th Cir.
1980), Section 9 of the FAA:
instructs that a court ‘must grant’ an application for confirmation unless the award is
challenged within a three month period following its issuance. . . . . Accordingly, the
plain meaning of Section 9 of the statute would seem to bar the defendant from raising a
delinquent motion to vacate the award. 5
Many courts likewise hold that the failure to timely seek to vacate, modify or correct an
arbitration award within the time limits contained in Section 12 of the FAA precludes such party
from contesting the award. See, e.g., In re Robinson, 326 F.3d 767, 771 (6th Cir. 2003)(stating
that “arbitration awards under the FAA are binding unless a motion to vacate or modify has been
filed in accordance with the terms of that Act” and finding that because the complainant did not
avail himself of the review provisions under the FAA and did not make a timely request to
5As noted by the District Court in Tokura Construction Co., Ltd. v. Corporacion Raymond, S.A., 533 F.Supp. 1274,
1278 (S.D.Tex. 1982), the fact that Jefferson Trucking was decided under the Labor Relations Act of 1947, 29
U.S.C. § 185(e), “does not detract from the persuasiveness” on the issue of whether the failure to timely seek to
vacate or modify an arbitration award under Section 12 of the FAA precludes a defendant from prosecuting
objections to an award even in defense to a motion to confirm the award.
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vacate or modify the arbitration award, he was barred from collaterally attacking the award in his
bankruptcy proceeding). See also, Int’l Bhd. of Elec. Workers, Local Union 969 v. Babcock &
Wilcox, 826 F.2d 962, 966 (10 th Cir. 1987)(applying Colorado law and recognizing that “courts
have uniformly held that a defendant’s failure to move to vacate the arbitration award within the
prescribed time period precludes it from seeking affirmative relieve in a subsequent action to
enforce the award.”)(citing Taylor v. Nelson, 788 F.2d 220, 225 (4th Cir. 1986); Florasynth , Inc.
v. Pickholz, 750 F.2d 171, 175 (2nd Cir. 1984)(holding that the defendant’s failure to seek to
vacate an arbitration award within the three month time limit under the FAA precluded the
defendant from later seeking to vacate the award in defense of a motion to confirm the award);
Brotherhood of Teamsters and Auto Truck Drivers Local No. 70 of Alameda County v. Celotex
Corp., 708 F.2d 488, 490 (9th Cir. 1983)(“a party’s failure to petition to vacate an unfavorable
award within the applicable statutory period bars the party from asserting affirmative defenses in
a subsequent proceeding to confirm the award.”)(citing Sheet Metal Workers Int’l Ass’n, Local
252 v. Standard Sheet Metal, Inc., 699 F.2d 481, 483 (9th Cir. 1983)).
This application of the plain meaning of the FAA is consistent with the strong federal
policy favoring resolution of disputes through arbitration.6 In furtherance of this policy,
[o]nce an arbitration award is entered, the finality that courts should afford the arbitration
process weighs heavily in favor of the award, and courts must exercise great caution
when asked to set aside an award. Because a primary purpose behind arbitration
agreements is to avoid the expense and delay of court proceedings, it is well settled that
judicial review of an arbitration award is very narrowly limited.
Foster v. Turley, 808 F.2d 38, 42 (10th Cir. 1986)(internal citations omitted).
6See Metz v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 39 F.3d 1482, 1488-89 (10 th Cir. 1994)(stating that
“[t]here is a strong federal policy encouraging the expeditious and inexpensive resolution of disputes through
arbitration.”)(citation omitted); ARW Exploration Corp. v. Aguirre, 45 F.3d 1455, 1462 (10 th Cir. 1995)(stating that
“[t]he Federal Arbitration Act, § 9 U.S.C. §§ 1 – 16, evinces a strong federal policy in favor of arbitration.”)(citing
Shearson/American Express, Inc. v. McMahon, 482 U.S. 220, 226, 107 S.Ct. 2332, 2337, 96 L.Ed.2d 185 (1987)).
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The Deermans assert that because the parties’ agreement requires application of New
Mexico law, the Court must apply the Arbitration Act as adopted in New Mexico, not the FAA.
See Response , p. 16, ¶ 12 – Docket No. 32. But the result is the same whether the Court applies
the FAA or applicable New Mexico law. New Mexico has adopted the Uniform Arbitration Act.
See N.M.S.A. 1978 §44-7A-1(a) (Repl. Pamp. 2007)(“The provisions of this act may be cited as
the ‘Uniform Arbitration Act.’”). Similar to the FAA, the New Mexico Uniform Arbitration Act
contains a restriction on the time period within which a party may seek to vacate, modify, or
correct an arbitration award. See N.M.S.A. 1978 § 47-7A-24(a)(Repl. Pamp. 2007)(providing
that a motion to vacate an arbitration award “must be filed within ninety days after the movant
receives notice of the award . . . ”) and N.M.S.A. 1978 §44-7A-25 (Repl. Pamp. 2007)(providing
a ninety-day period within which a party can seek to modify or correct an arbitration award).
Under N.M.S.A. 1978 § 44-7A-29 (Repl. Pamp. 2007), a party may contest the following
decisions through an appeal:
(1) An order denying a motion to compel arbitration;
(2) An order granting a motion to stay arbitration;
(3) An order confirming or denying confirmation of an award;
(4) An order modifying or correcting an award;
(5) An order vacating an award without directing a rehearing; or
(6) A final judgment entered pursuant to the Uniform Arbitration Act.
N.M.S.A. 1978 § 44-7A-29(a) (Repl. Pamp. 2007).
The Deermans point out that this section contemplates a right to appeal an order confirming an
arbitration award and contend that, until Plaintiffs seek to confirm the arbitration award, the
Deermans have not been allowed to fully realize their appeal rights. However, under New
Mexico law, a party who fails to timely file an action seeking to vacate, modify, or correct an
arbitration award cannot later contest the award. See United Technology and Resources, Inc. v.
Dar Al Islam, 115 N.M. 1, 5, 846 P.2d 307, 311 (1993)(“By failing to file a motion to modify or
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correct within ninety days after delivery of the arbitrator’s award, [Appellant] waived its right to
present its substantive defenses to confirmation of the award.”). Thus, where a party fails to
make a timely request to vacate, modify, or correct an arbitration award, a court is required to
confirm the award. Id. Because the Deermans did not seek to modify or vacate the arbitration
award within the ninety-day period provided under the New Mexico Uniform Arbitration Act,
they have forfeited their right to do so even if the New Mexico Uniform Arbitration Act applies.
C. Confirmation of the Arbitration Award
The Deermans also argue that Plaintiffs must first confirm the Arbitration Award before
they can enforce it, and that by seeking to obtain a non-dischargeable judgment based on the
collateral estoppel effect of the Arbitration Award Plaintiffs are making an end run around the
confirmation requirement. 	Though Plaintiffs assert that confirmation is permissive, not
mandatory, they alternatively request this Court to confirm the Arbitration Award. 	The
Deermans agree that this Court has the authority to confirm the Arbitration Award, but assert that
they must be allowed to present evidence exposing the flaws in the Arbitration Award. See Case
No. 11-09-15348 – Docket No. 237, ¶¶ 7 and 14. This Court agrees that confirmation is not the
only method of enforcing an arbitration award.7 But because entry of a non-dischargeable
monetary judgment based on the Arbitration Award would have the same practical effect as
7See Photopaint Technologies, LLC v. Smartlens Corp., 335 F.3d 152, 159 (2 nd Cir. 2003)(acknowledging that “an
action at law offers and alternative remedy to enforce an arbitral award . . .”); Sverdrup Corp. v. WHC Constructors,
Inc., 989 F.2d 148, 154 (4th Cir. 1993)(stating that “[t]he FAA supplemented rather than extinguished any
previously existing remedies[ ]” and finding, therefore, that “an action at law remains a viable alternative to
confirmation proceedings under § 9 [of the FAA]” as a means to enforce a final arbitration award)(citations
omitted); Kentucky River Mills v. Jackson, 206 F.2d 111, 120 (6 th Cir. 1953)(explaining that “[a] party may . . .
apply to the court for an order confirming the award, but is not limited to such remedy. Prior to the enactment of the
United States Arbitration Act, an action at law on the award was the proper method of enforcing it.”)(citing Red
Cross Line v. Atlantic Fruit Co., 264 U.S. 109, 44 S.Ct. 274, 68 L.Ed. 582)(1924)); Insurdata Mktg. Services, LLC
v. Healthplan Services, Inc., 352 F.Supp.2d 1252, 1254-55 (M.D.Fla. 2005)(holding that a party could seek
enforcement of arbitration award through common law contract action rather than seeking confirmation of the award
under the FAA).
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confirmation, and Plaintiffs have requested this Court to confirm the Arbitration Award, the
Court will consider whether to confirm the Arbitration Award.
Section 9 of the FAA imposes a one-year statute of limitations period for motions to
confirm an arbitration award. Photopaint Technologies, LLC v. Smartlens Corp., 335 F.3d 152,
158-160 (2nd Cir. 2003).8 The New Mexico Uniform Arbitration Act does not contain a
limitations period to confirm an arbitration award. See N.M.S.A. 1978 § 44-7A-22 (“After a
party to an arbitration proceeding receives notice of an award, the party may make a motion to
the court for an order confirming the award, at which time the court shall issue a confirming
order . . . ”). Here, the Arbitration Award was entered on March 9, 2012, less than one year ago.
Therefore, the motion to confirm the Arbitration Award is not time barred whether confirmation
is sought under the FAA or the New Mexico Uniform Arbitration Act. 	The Operating
Agreement of Falcon Farms, L.L.C., pursuant to which the parties arbitrated their dispute,
provides that “judgment on such [arbitration] decision may be entered in any court of competent
jurisdiction.” See Operating Agreement, ¶ 10.14. This language, combined with the parties’
agreement and consent to this Court’s authority to confirm the Arbitration Award, is sufficient to
allow this Court to confirm the Arbitration Award.9
The Deermans assert that this Court should not confirm the Arbitration Award for two
reasons: 	first, the Deermans take issue with several of the Plaintiffs’ undisputed facts set forth
in the Motion, although they agree that the Arbitrator made those findings (see Response, p.3
n.1); and second, the Deermans assert that the Arbitrator made errors of law. This Court has
8But see Sverdrup, 989 F.2d at 151-156 (refusing to read Section 9 of the FAA as a strict statute of limitations,
reasoning that the language in Section 9 of the FAA is permissive, and holding that the FAA did not bar an action to
confirm an arbitration award more than one year after the award).
9Cf. Robinson, 326 F.3d at 771 (reasoning that because bankruptcy courts are “‘courts of the United States’ for
purposes of Section 3 of the FAA, it would seem to follow that they are ‘United States Court[s]’ for purposes of
Section 10 of the FAA as well.”)(citation omitted).
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concluded that the Deermans may not, as a defense to confirmation of the Arbitration Award,
assert that the award should be vacated, modified or corrected. The Deermans have forfeited any
right to contest the Arbitration Award as a defense to confirming it on the grounds to the award
should be vacated, modified or corrected.
In addition, even if the Deermans had not forfeited their right to contest the Arbitration
Award, their two defenses to confirmation of the Arbitration Award fail as a matter of law.
Judicial review of an arbitration award is extremely limited. Dominion Video Satellite, Inc. v.
Echostar Satellite, L.L.C., 430 F.3d 1269, 1275 (10 th Cir. 2005)(citation omitted). Erroneous
findings of fact made by an arbitrator in issuing an arbitration award are insufficient grounds to
vacate or modify the award. See United Paperworkers Int’l Union, AFL-CIO v. Misco, Inc., 484
U.S. 29, 38, 108 S.Ct. 364, 371, 98 L.Ed.2d 286 (1987)(stating that “[c]ourts thus do not sit to
hear claims of factual or legal error by an arbitrator as an appellate court does in reviewing
decisions of lower courts.”); In re WorldCom, Inc., 340 B.R. 719, 726 (Bankr.S.D.N.Y.
2006)(“Mere ‘errors of law and fact are not grounds for vacating an arbitral award . . .
’”)(quoting Sanders v. Gardner, 7 F.Supp.2d 151, 163 (E.D.N.Y. 1998)(citing Edward M. Siegel
v. Titan Indus. Corp., 779 F.2d. 891, 892-93 (2d Cir. 1985)).
Other than the statutory bases for contesting confirmation of an arbitration award
authorized under the FAA and the New Mexico Uniform Arbitration Act, there may exist a
judicially-created basis for vacating an award where an arbitrator acts “in ‘manifest disregard’ of
the law.” Dominion Video, 430 F.3d at 1275. Under the “manifest disregard” standard, the
moving party must demonstrate from the record of the arbitration proceeding that the arbitrator
“‘knew the law and explicitly disregarded it.’” Id. (quoting Bowen v. Amoco Pipeline Co., 254
F.3d 925, 932 (10th Cir. 2001)(internal citation omitted)). Even when an arbitrator makes a
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mistake in the application of the law, the arbitrator’s findings will not be set aside. Dominion
Video, 430 F.3d at 1275 (stating that “[m]erely ‘erroneous interpretations or applications of the
law are not reversible.’”)(quoting ARW Exploration Corp. v. Aguirre, 45 F.3d 1455, 1463 (10 th
Cir. 1995)). 	In contesting the Motion, the Deermans have not asserted that the Arbitrator’s
decision exhibited a “‘willful inattentiveness to the governing law.’” Dominion Video, 430 F.3d
at 1275 (quoting ARW Exploration, 45 F.3d at 1463). 	Nor, for that matter, have the Deermans
asserted that there was any other type of misconduct on the part of the Arbitrator, such as fraud
or corruption. 	Consequently, the Court concludes that the Arbitration Award should be
confirmed.
D. Whether to give preclusive effect to the Arbitration Award
Having determined that the Deermans cannot contest the Arbitration Award and that the
Arbitration Award should be confirmed, the Court must now determine whether to give collateral
estoppel effect to the Arbitration Award for purposes of determining the non-dischargeability of
the debt at issue in this adversary proceeding. It is well-settled that collateral estoppel can be
applied in bankruptcy to determine dischargeability claims. See Grogan v. Garner, 498 U.S.
279, 284-85 n.11, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991)(clarifying that “collateral estoppel
principles do indeed apply in discharge exception proceedings pursuant to § 523(a).”). Further,
courts, including bankruptcy courts, have given arbitration awards preclusive effect in
subsequent litigation, even in the absence of confirmation of the award.10 Whether it is
10See, e.g., In re Rosendahl, 307 B.R. 199, 209 (Bankr.D.Or. 2004)(stating that “an unconfirmed arbitration award
can be regarded as a final determination for issue preclusion purposes on subject matters of fact and law in
appropriate circumstances” and applying collateral estoppel to a non-dischargeability claim under § 523(a)(6) based
on an unconfirmed arbitration award); Wilbert Life Ins. Co. v. Beckemeyer (In re Beckemeyer), 222 B.R. 318, 321
(Bankr.W.D.Tenn. 1998)(finding that confirmation of an arbitration is not required in order to give preclusive effect,
provided the award is final under applicable law); Val-U Const. Co. of South Dakota v. Rosebud Sioux Tribe, 146
F.3d 573, 581 (8 th Cir. 1998)(“‘[t]he fact that the award in the present case was not confirmed in a court . . . does not
vitiate the finality of the award.’”)(quoting Wellons, Inc. v. T.E. Ibberson Co., 869 F.2d 1166, 1169 (8 th Cir. 1989));
Jacobson v. Fireman’s Fund Ins. Co., 111 F.3d 261, 267-68 (2nd Cir. 1997)(holding that “res judicata and collateral
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appropriate to give collateral estoppel effect in a particular instance depends on applicable state
law. Rosendahl, 307 B.R. at 208 (stating that “the preclusion effects of decisions of state
tribunals in bankruptcy court are determined by the preclusion law of the concerned state” and
applying California law to determine whether the arbitration award resulting from arbitration
conducted in California was entitled to preclusive effect).
Here, the arbitration was conducted in Arizona, and the Arbitrator’s factual findings that
Plaintiffs assert have collateral estoppel effect were issued in the Arizona Arbitration Case.
Accordingly, the Court will look to the collateral estoppel law of Arizona. Under Arizona law,
collateral estoppel will preclude a party from contesting an issue litigated in a prior proceeding if
the following requirements are met:
1) the issue was actually litigated in the prior proceeding;
2) the parties had a full and fair opportunity and motive to litigate the issue;
3) the prior decision was a valid and final decision on the merits;
4) resolution of the issue was essential to the prior decision; and
5) the parties to the prior action are the same (or in privity with a party to the prior
action).11
Campbell v. SZL Properties, Ltd., 204 Ariz. 221, 223, 62 P.3d 966, 968 (Ct.App.
2003)(citing Garcia v. Gen Motors Corp., 195 Ariz. 510, 514, 990 P.2d 1069, 1073 (Ct.
App. 1999)); See also, In re Guccione, 268 B.R. 10, 14-15 (Bankr.E.D.N.Y.
2001)(same)(citing Collins v. Miller & Miller, Ltd., 189 Ariz. 387, 397, 943 P.2d 774,
757 (1996)).
The Court has not found a case interpreting Arizona law that gave collateral estoppel effect to an
arbitration award, nor has either party directed the Court to a case on that point. 	However, in
estoppel apply to issues resolved by arbitration where there has been a final decision on the merits, notwithstanding
a lack of confirmation of the award.”)(citation and internal quotation marks omitted).
11Scottsdale Mem’l Health Sys., Inc. v. Clark, 157 Ariz. 461, 466, 759 P.2d 607, 612 (1988)(collateral estoppel only
applies to parties and persons in privity with parties).
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Lansford v. Harris, 174 Ariz. 413, 850 P.2d 126 (Ct.App. 1992), the Arizona Court of Appeals
considered whether an issue had already been litigated as part of a fee arbitration, ultimately
determining that collateral estoppel did not bar subsequent litigation because the issue had not
actually been litigated as part of the arbitration. 	The collateral estoppel elements under New
Mexico law are substantially similar to the requirements under Arizona law.12 Under New
Mexico law, arbitration awards may be given collateral estoppel effect provided that the
“‘arbitration affords opportunity for presentation of evidence and argument substantially similar
in form and scope to judicial proceedings[ ]’” and provided that all elements of collateral
estoppel are also satisfied. Rex v. Manufactured Housing, 119 N.M. at 505, 892 P.2d at 952
(quoting Restatement (Second) of Judgments § 84 cmt. c (1980)). 	The Court will give
preclusive effect to the Arbitration Award provided that all the collateral estoppel elements are
satisfied.
12See Rex, Inc. v. Manufactured Housing Committee, 119 N.M. 500, 504, 892 P.2d 947, 951 (the required collateral
estoppel elements are “‘(1) the party to be estopped was a party [or privy] to the prior proceeding, (2) the cause of
action in the case presently before the court is different from the cause of action in the prior adjudication, (3) the
issue was actually litigated in the prior adjudication, and (4) the issue was necessarily determined in the prior
litigation.’”)(quoting Shovelin v. Central New Mexico Electric Cooperative, Inc., 115 N.M. 293, 297, 850 P.2d 996,
1000 (1993)). 	Matched up side by side, the collateral estoppel elements under New Mexico and Arizona law are:
Arizona 	New Mexico
The issue was actually litigated 	The issue was actually litigated
the parties had a full and fair
opportunity and motive to litigate the
issue;
Once the other three elements are
demonstrated, the court determines “whether
the non-moving party ‘had a full and fair
opportunity to litigate the issue in the prior
litigation.’” Rex, 119 N.M. at 504, 892 P.2d
at 951 (quoting Shovelin, 115 N.M. at 297).
The resolution of the issue was
essential to the decision in the prior
action
The issue was necessarily determined in the
prior litigation
The parties in the prior action are the
same
the party to be estopped was a party to the
prior proceeding
The prior decision was a valid and
final decision on the merits
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As analyzed above, the Arbitration Award is a valid and final decision on the merits.
Further, the issues the Arbitrator decided were actually litigated, and the issues were essential to
the issuance of the Arbitration Award. The parties to the Arbitration Award are the same, or in
privity, with the parties to this adversary proceeding.13 Cody Farms, Robert Fletcher, and the
Deermans were all parties to the Arbitration Case and are also parties in this adversary
proceeding. 	And while Mrs. Fletcher was not a named party in the Arbitration Case and Cody
Farms did not pursue its derivative claims as part of the Arbitration Case,14 Arizona recognizes
the use of non-mutual offensive collateral estoppel by a party who was not a party to the prior
litigation against a party who was a party to the prior proceedings. See In re Ward, 21 F.3d
1119, *3 n. 8 (9th Cir. 1994)(Table)(stating that “Arizona courts have recently accepted the use
of nonmutual offensive collateral estoppel as long as the party against whom preclusion is sought
had a ‘full and fair opportunity to litigate the issue in the prior proceedings.’”)(emphasis in
original)(quoting Wetzel v. Arizona State Real Estate Dep’t, 727 P.2d 825, 828-29 (Ariz.Ct.App.
1986), cert. denied, 492 U.S. 914 (1987)(remaining citation omitted)).15
The Deermans had a full and fair opportunity to litigate the issues raised in the
arbitration, and, in fact did actively participate in the arbitration proceeding. See Stipulated
Order, ¶¶ 3 and 4 (providing that the Deerman’s agreement to proceed with arbitration “is
13 Under Arizona law, “privity between a party and a non-party requires both a substantial identity of interests and a
working or functional relationship . . . in which the interests of the non-party are presented and protected by the
party in the litigation.” Hall v. Lalli, 194 Ariz. 54, 57, 977 P.2d 776, 779 (Ariz. 1999)(internal quotation marks and
citations omitted). Mr. Fletcher owns Cody Farms and is one of the two managers of Falcon Farms. Mr. Fletcher is
in privity with Cody Farms in its derivative capacity inasmuch as Mr. Fletcher’s interests as manager of Falcon
Farms and owner of Cody Farms are substantially identical to the derivative interests of Cody Farms in this
adversary proceeding. Similarly, Falcon Farms is in privity with Cody Farms, which owns 50% Falcon Farms, and
with Mr. Fletcher, one of Falcon Farms’ two managers.
14 See Plaintiffs’ Memorandum in Support of Motion for Partial Summary Judgment, p. 11, n 2.
15Cf. Resolution Trust Corp. v. Keating, 186 F.3d 1110, 1114 (9 th Cir. 1999)(the elements for non-mutual collateral
estoppel in a federal court are: 1) a full and fair opportunity to litigate the issue in the prior action; 2) the issues to
be precluded were actually litigated and necessary to support the judgment in the prior action; 3) the judgment was a
final judgment; and 4) the party against whom collateral estoppel is asserted was a party or in privity with a party in
the prior action)(citing Pena v. Gardner, 976 F.2d 469, 472 (9 th Cir. 1992)).
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conditioned upon the Arbitrator’s agreement to provide Debtors with a reasonable opportunity to
cure any previous failure to respond to discovery or to otherwise participate in the Arbitration
Case” and that the parties would “reasonably cooperate to obtain a new mutually acceptable
schedule with the Arbitrator for the amendment of pleadings, the disclosure of expert witnesses
and opinions, the completion of discovery and the completion of the arbitration hearing
consistent with the applicable rules of arbitration.”).
The Court will, therefore, give collateral estoppel effect to the factual findings of the
Arbitrator. 	The only remaining issue is whether the Arbitrator’s factual findings establish all
elements necessary to a determination of non-dischargeability under 11 U.S.C. §§ 523(a)(2)(A),
(a)(4) and/or (a)(6).
E. 	The Facts Not Subject to Genuine Dispute
The following facts, which include many of the factual findings made by the Arbitrator in
connection with the Arbitration Case are not subject to genuine dispute:
1. 	Falcon Farms is a New Mexico limited liability company, formed in 2005.
2. 	The members of Falcon Farms are Cody Farms, which holds a 50% interest,
and the Deermans, who, together, hold a 50% interest.
3. 	Cody Farms is a Texas corporation owned by Robert Fletcher.
4. 	Robert Fletcher and Willard Deerman are the managers of Falcon Farms.
5. 	The business purpose of Falcon Farms was to buy premium quality alfalfa hay
cut in the field by the growers, and to bale the hay in three-tie bales to sell to
horse owners and race tracks.
6. 	Because Mr. Fletcher had no experience in the hay business, it was agreed that
Mr. Deerman would be responsible for running the business, including buying
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and selling the hay, and that Mr. Fletcher would handle the finances and
accounting.
7. 	Falcon Farms entered into a verbal agreement with James Rascoe to purchase
his entire 2006 production of alfalfa hay from approximately 800 acres in the
Dell City, Texas area at $125.00 per ton in the windrow.
8. 	Falcon Farms also purchased hay from Bud Deerman Farms and from other
growers in the La Mesa, New Mexico area.
9. 	On December 14, 2006, Fletcher Farms, Inc. (“Fletcher Farms”), a Texas
corporation, bought 320 acres of farmland in the Dell City area, and on
February 28, 2007, Fletcher Farms bought another 320 acres.
10. Fletcher Farms added improvements to the properties with the construction of
four hay barns, an office and a commercial scale.
11. Beginning in early 2007, Mr. Deerman repeatedly represented to Mr. Fletcher
that Falcon Farms’ 2006 carryover hay inventory had been sold.
12. Mr. Fletcher believed Mr. Deerman’s statement that Falcon Farms’ 2006
carryover hay inventory was sold.
13. It would not be unusual for Falcon Farms to be storing hay that had been sold
to customers. It is very common in the horse industry for alfalfa growers to
store hay for customers for later delivery. See Plaintiffs’ Supporting
Memorandum, ¶ 25; Defendants’ Response, p. 2, ¶ D.
14. Mr. Deerman’s representations that the 2006 hay had been sold were false.
Falcon Farms continued to carry large quantities of 2006 hay inventory
through 2007 and 2008.
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15. In reliance upon Mr. Deerman’s representations that the 2006 carryover hay
had been sold, Mr. Fletcher incurred additional debt to purchase hay grown
during the 2007 season. 	Mr. Fletcher would not have agreed to borrow
additional money to purchase 2007 hay and would not have agreed to supply
additional hay to Falcon Farms if he had known that the 2006 carryover hay
had not been sold.
16. Through the summer of 2007, Mr. Deerman continued to represent to Mr.
Fletcher that Falcon Farms’ hay had been sold, including the 2007 hay that
was being purchased, and that Falcon Farms needed to buy more hay.
17. With a large volume of 2006 hay still on hand and with new purchases
underway, Falcon Farms was soon experiencing cash flow problems. 	To
address these problems, Falcon Farms applied to Capital Farm Credit for an
increase in its revolving line of credit.
18. On June 20, 2007, Falcon Farms, Cody Farms, the Fletchers, and the
Deermans signed a new Promissory Note increasing Falcon Farms’ revolving
credit to $2.5 million. The additional $901,000 in borrowing was fully
disbursed to Falcon Farms by July 25, 2007.
19. By the end of 2007 and the beginning of 2008, Falcon Farms owed Fletcher
Farms $186,776.20 for a portion of Fletcher Farms’ 2007 hay cuttings.
Falcon Farms also owed Cody Farms $43,297.20 for money advanced to pay
James Rascoe for his fourth 2007 hay cutting.
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20. In late 2007 and early 2008, as Falcon Farms’ financial condition continued to
deteriorate, Mr. Deerman began systematically diverting Falcon Farms’ cash
and hay proceeds to his own benefit.
21. On November 1, 2007, Mr. Deerman withdrew $5,000 from Falcon Farms’
bank account by writing a countercheck to himself.
22. On November 30, 2007, Mr. Deerman wrote a check for $15,000 to Bud
Deerman Farms from Falcon Farms’ bank account.
23. When Mr. Fletcher discovered these payments of $5,000 and $15,000, he
confronted Mr. Deerman about the payments and Mr. Deerman said he
withdrew the funds because he needed some money.
24. In January and March of 2008, Mr. Deerman wrote checks to Bud Deerman
Farms from Falcon Farms’ bank account even though Falcon Farms had
stopped buying hay months earlier when it ran out of money. 	The first check
was written to Bud Deerman Farms on January 10, 2008 in the amount of
$12,558.80. The second check was written to Bud Deerman Farms on
January 31, 2008 in the amount of $31,200.00, and the third was written to
Bud Deerman Farms on March 19, 2008 in the amount of $27,382.60. These
three checks were not written for any legitimate business purpose and
constituted an improper conversion of money by Mr. Deerman.
25. On March 18, 2008, the Deermans opened a bank account in the name of
Falcon Farms at Bank of the Rio Grande in Las Cruces, New Mexico, with
themselves as the sole signatories. 	The account was opened without the
knowledge or consent of Cody Farms or the Fletchers.
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26. The Deermans transferred funds from a Falcon Farms account to the account
at Bank of the Rio Grande.
27. On September 11, 2008, the Deermans opened a bank account in the name of
Falcon Farms at Bank of America with themselves as sole signatories. The
account was opened without the knowledge or consent of Cody Farms or the
Fletchers.
28. The Deermans transferred funds from Falcon Farms’ bank account at Bank of
the Rio Grande to Falcon Farms’ bank account at Bank of America.
29. On September 28, 2008, the Deermans wrote a check from Falcon Farms’
bank account to their personal accountants in the amount of $803.04.
30. On September 22, 2008, the Deermans wrote two checks from Falcon Farms’
bank account to the firm of James & Haugland, P.C. in the amount of
$5,000.000 and $299.00. 	On February 16, 2009, the Deermans wrote another
check to James & Haugland, P.C. in the amount of $45,000.00. 	Wiley
James, with the firm of James & Haugland, P.C. represented the Deermans
personally, represented the Deermans in their Chapter 11 bankruptcy case, and
currently represents Deerman Farms, Inc. in its Chapter 12 bankruptcy case.
31. On January 5, 2009, the Deermans wrote a check from Falcon Farms’ bank
account to Hubert & Hernandez, P.A. in the amount of $25,000.00, and on
January 4, 2009, the Deermans wrote another check from Falcon Farms’ bank
account to Hubert & Hernandez, P.A. in the amount of $23,000.
32. Dean B. Cross, Esq., one of the attorneys who represented the Deermans in
the Arbitration Case, was previously associated with Hubert & Hernandez,
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P.A. 	The Arbitration Case was filed just before the two checks were written
to Hubert & Hernandez, P.A.
33. On April 20, 2009, the Deermans wrote a check from Falcon Farms’ bank
account to James & Haugland, P.C. in the amount of $5,000.00 representing
the Deermans’ half of the retainer for attorney Steve James who was retained
to serve as independent counsel for Falcon Farms in the action filed by Capital
Farm Credit. 	The Deermans agreed to split the cost of the retainer with
Cody Farms and the Fletchers, who paid the other half of the retainer.
34. On April 20, 2009, the Deermans wrote a check from Falcon Farms’ bank
account in the amount of $14,475.00 to the American Arbitration Association
in connection with the Arbitration Case. 	The Deermans admit that this was a
personal expense paid by them with Falcon Farms’ funds.
35. In March of 2006, the Deermans paid $25,000.00 from Falcon Farms’ bank
account to the Deerman’s late son, Wade Deerman, to purchase a used mobile
home. Mr. Fletcher never agreed to purchase the mobile home from Wade
Deerman, and the mobile home was never used in Falcon Farms’ business.
36. The mobile home was eventually sold to Mr. Deerman for $6,000, when
Falcon Farms’ equipment was liquidated.
37. In 2007, Mr. Deerman received distributions from Falcon Farms’ petty cash in
the amount of $16,000.00 but provided receipts supporting only the sum of
$1029.17, leaving a balance owed by Mr. Deerman to Falcon Farms in the
amount of $14,970.00.
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38. In 2008, Mr. Deerman received distributions from Falcon Farms’ petty cash in
the amount of $10,600.00 but provided no receipts justifying these
distributions.
F. 	Whether Partial Summary Judgment Should Be Granted
i) 	11 U.S.C. § 523(a)(2)(A) – non-dischargeability based on fraud
Debts for money obtained by false pretenses, a false representation, or actual fraud are
non-dischargeable under 11 U.S.C. § 523(a)(2)(A). There are five required elements under this
subsection to establish the non-dischargeability of a debt obtained by false representation: 1) the
debtor made a false representation to the creditor; 2) the debtor made the false representation
with the intent to deceive the creditor; 3) the creditor relied on the false representation; 4) the
creditor’s reliance was justifiable16 ; and 5) the false representation caused the creditor to sustain
a loss. 	See Fowler Bros. v. Young (In re Young), 91 F.3d 1367, 1373 (10 th Cir. 1996). “False
representations are ‘representations knowingly and fraudulently made that give rise to the debt.’”
Adams Cnty. Dept. of Soc. Services v. Sutherland-Minor (In re Sutherland-Minor), 345 B.R. 348,
354 (Bankr.D.Colo. 2006)(quoting Cobb v. Lewis (In re Lewis), 271 B.R. 877, 885 (10 th Cir.
BAP 2002)). False pretenses, as distinguished from false representations, “involve[ ] an implied
misrepresentation that is meant to create and foster a false impression.” Gordon v. Bruce (In re
Bruce), 262 B.R. 632, 636 (Bankr.W.D.Pa. 2001)(citing In re Scarlata, 127 B.R. 1004, 1009
(N.D.Ill. 1991)). In other words, “a ‘false pretense’ is an ‘implied misrepresentation or conduct
which creates and fosters a false impression, as distinguished from a ‘false representation’ which
is an express misrepresentation.” Stevens v. Antonious (In re Antonious), 358 B.R. 172, 182
(Bankr.E.D.Pa. 2006)(quoting In re Haining, 119 B.R. 460, 463-64 (Bankr.D.Del.
16See Field v. Mans, 516 U.S. 59, 116 S.Ct. 437, 133 L.Ed.2d 351 (1995)(establishing justifiable reliance standard
under § 523(a)(2)(A)).
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1990)(remaining citations omitted).17 “False pretenses have “also been defined as any series of
events, when considered collectively, that create a contrived and misleading understanding of a
transaction, in which a creditor is wrongfully induced to extend money or property to the
debtor.” Id. at 182 (citing In re Barr, 194 B.R. 1009, 1019 (Bankr.N.D.Ill. 1996)).
The Arbitrator’s factual findings issued as part of the Findings of Fact and Conclusions of
Law entered in the Arbitration Case include the following:
While acting as a managing member of Falcon [Farms], Mr. Deerman represented to the
Fletchers and others that the millions of dollars’ worth of hay Falcon [Farms] had in
inventory in the fall of 2006 and throughout 2007, including the large amount of hay
stacked out of doors, was sold. These representations were false. In fact, the hay had not
been sold and no contracts for sale of the hay had been made. Mr. Deerman knew that
his representations were false at the time they were made, and he made them with the
intent and purpose of deceiving Claimants [Cody Farms and the Fletchers].
The evidence reflects that Mr. Deerman concealed his failure or inability to sell the
thousands of tons of hay purchased by Falcon [Farms] to induce Claimants to continue
their financial support of Falcon [Farms]’s operations.
In reliance upon Mr. Deerman’s representations that Falcon [Farms]’ hay was sold,
Claimants advanced additional money and incurred additional liability for Falcon
[Farms]’ borrowing. In June of 2007, Claimants agreed to sign as co-borrowers on
$901,000.00 in increased borrowing from Capital Farm Credit.
Claimants also agreed to provide the production from their own hay farms, for which
they are owed $186,776.20, and to advance $43,297.20 to Falcon [Farms] to fund
additional hay purchases from James Rascoe. Claimants would not have agreed to
advance additional funds or to incur additional debt if the true status of Falcon [Farms]’
hay inventories had been known to them.
Claimants sustained damages in the amount of $1,030.073.40 as the direct and proximate
result of their reasonable reliance on Mr. Deerman’s materially false representations.
Findings of Fact and Conclusions of Law, pp 14- 15, ¶¶ 4 – 8.
17See also, The William W. Barney, M.D. P.C. Retirement Fund v. Perkins (In re Perkins), 298 B.R. 778, 788
(Bankr.D.Utah 2003)(stating that “[a] false pretense as used in § 523(a)(2)(A) includes material omissions, and
means ‘implied misrepresentations or conduct intended to create and foster a false impression.’”)(quoting Peterson
v. Bozzano (In re Bozzano), 173 B.R. 990, 993 (Bankr.M.D.N.C. 1994)(remaining citation omitted)).
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Though set forth as part of the Arbitrator’s legal conclusions, the above statements contain
factual findings that are supported by the Arbitrator’s findings of fact. These facts establish all
elements necessary to a determination of non-dischargeability under 11 U.S.C. § 523(a)(2)(A).
Mr. Deerman made false representations to the Cody Farms and the Fletchers that the 2006 hay
inventory had been sold, when, in fact, it had not. Mr. Deerman knew that his representations
were false at the time he made them, and he made them with the intent to deceive Cody Farms
and the Fletchers. In reliance on Mr. Deerman’s representations, Cody Farms and the Fletchers
agreed to co-sign a promissory note to Capital Farm Credit that increased Falcon Farms’
borrowing by $901, 000, provided additional production from their own hay farms for which
they are owed $186,776.20, and advanced $43,297.20 to fund additional hay purchases from
James Rascoe.
The Arbitrator also found that the Fletchers’ reliance on Mr. Deerman’s
misrepresentations was reasonable. 	It was not unusual for hay that had been sold to be stored,
which supports an inference that the Fletchers had no reason to suspect that Mr. Deerman’s
representation that the 2006 hay had been sold was false. 	Non-dischargeability under 11 U.S.C.
§ 523(a)(2)(A) requires only justifiable, not reasonable, reliance. Field v. Mans, 516 U.S. 59,
116 S.Ct. 437, 133 L.Ed.2d 351 (1995)(establishing justifiable reliance standard under 11
U.S.C. § 523(a)(2)(A)). Reasonable reliance is a higher standard than justifiable reliance. See
Columbia State Bank, N.A. v. Daviscourt (In re Daviscourt), 353 B.R. 674, 684 n. 23 (10 th Cir.
BAP 2006)(stating that “‘[r]easonable’ reliance requires a higher standard of care by the relying
party than does ‘justifiable’ reliance.”)(citations omitted). 	Consequently, the Arbitrator’s
finding that the Fletchers’ reliance was reasonable is more than sufficient to satisfy the reliance
requirement under 11 U.S.C. § 523(a)(2)(A).
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ii) 	11 U.S.C. § 523(a)(6) – willful and malicious injury
Debts resulting from “willful and malicious injury by the debtor to another entity or to
the property of another entity” are non-dischargeable. 11 U.S.C. § 523(a)(6). 	Non-
dischargeability under this subsection requires that the debtor’s actions be both willful and
malicious. Panalis v. Moore (In re Moore), 357 F.3d 1125, 1129 (10 th Cir. 2004)(“Without
proof of both [willful and malicious elements under 523(a)(6)], an objection to discharge under
that section must fail.”)(emphasis in original); Mitsubishi Motors Credit of America, Inc. v.
Longley (In re Longley), 235 B.R. 651, 655 (10th Cir. BAP 1999)(stating that “[i]n the Tenth
Circuit, the phrase ‘willful and malicious injury’ has been interpreted as requiring proof of two
distinct elements – that the injury was both ‘willful’ and ‘malicious.’”).18
Plaintiffs assert that Cody Farms and the Fletchers were willfully and maliciously injured
by the Deermans’ purposeful and deliberate diversion of cash and hay proceeds from Falcon
Farms’ bank accounts. 	The Arbitrator’s Findings of Fact and Conclusions of law include
findings that the Deermans wrote checks from Falcon Farms’ bank accounts to pay Deermans’
18 The “willful” element requires both an intentional act and an intended harm; an intentional act that leads to harm is
not sufficient. See Kawaauhau v. Geiger, 523 U.S. 57, 61, 118 S.Ct. 974, 977, 140 L.Ed.2d 90 (1998)(holding that
“[t]he word ‘willful’ in (a)(6) modifies the word ‘injury,’ indicating that nondischargeability takes a deliberate or
intentional injury, not merely a deliberate or intentional act that leads to injury.”)(emphasis in original). “[D]ebts
arising from recklessly or negligently inflicted injuries do not fall within the compass of § 523(a)(6).” Id. at 64. In
The Tenth Circuit has articulated the “willful” component as requiring proof that the debtor “must ‘desire . . . [to
cause] the consequences of his act . . . or believe [that] the consequences are substantially certain to result from it.’”
Moore, 357 F.3d at 1129 (quoting Longley, 255 B.R. at 657 (quoting Restatement (Second) of Torts § 8A (1965)).
The “malicious” element requires an intentional, wrongful act, done without justification or excuse. See, e.g.,
Bombardier Capital, Inc. v. Tinkler (In re Tinkler), 311 B.R. 869, 880 (Bankr.D.Colo. 2004)(finding that “the
malice prong of 11 U.S.C. § 523(a)(6) is satisfied upon a showing [that] the injury was inflicted without just cause
or excuse.”)(citations omitted)(emphasis in original)); America First Credit Union v. Gagle (In re Gagle), 230 B.R.
174, 181 (Bankr.D.Utah 1999)(finding that “[i]n order for an act to be willful and malicious it must be a deliberate
or intentional injury (willful) that is performed without justification or excuse (malicious).”); Saturn Systems, Inc. v.
Militare (In re Militare), 2011 WL 4625024, *3 (Bankr.D.Colo. 2011)(“a malicious act under § 523(a)(6) is a
‘wrongful act, done intentionally, without just cause or excuse.’”)(quoting Tinkler, 311 B.R. at 880 (quoting Tinker
v. Colwell, 193 U.S. 473, 486, 24 S.Ct. 505 (1904)); Tso v. Nevarez (In re Nevarez), 415 B.R. 540, 544
(Bankr.D.N.M. 2009)(“‘Malicious’ requires that an intentional act be ‘performed without justification or
excuse.’”)(quoting Gagle, 230 B.R. at 181)). But cf. McCain Foods USA, Inc. v. Shore (In re Shore), 317 B.R. 536,
543 (10 th Cir. BAP 2004)(pointing out that “neither Geiger nor the Tenth Circuit have explicitly addressed whether a
plaintiff must demonstrate that an injury occurred without just cause or excuse in a § 523(a)(6) proceeding or even
what circumstances might establish such an element[.]”).
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personal expenses, the expenses of a separate Deerman entity, or for the benefit of members of
the Deermans’ family, that had no legitimate business purpose for Falcon Farms, and that the
Deermans diverted hay proceeds from Falcon Farms for their own benefit. Conversion can
support a finding on non-dischargeability under 11 U.S.C. § 523(a)(6).19 However, a threshold
requirement to a determination of non-dischargeability under 11 U.S.C. § 523(a)(6) premised on
conversion is whether the plaintiff had a property interest in the converted property. See May v.
Cagan (In re Cagan), 2010 WL 3853316, *4 (Bankr.D.N.M. 2010)(stating that whether the
plaintiff had a property interest in the funds at issue is a prerequisite to establishing a
nondischargeable claim under 11 U.S.C. § 523(a)(6) and is also required to establish the tort of
conversion under state law); Shah, 96 B.R. at 293(“The threshold issue for Plaintiff is whether it
had any personal property over which Defendants asserted wrongful dominion.”). Neither Cody
Farms nor the Fletchers had a security interest in the funds that the Deermans diverted from
Falcon Farms’ bank accounts; nor did the funds in Falcon Farms’ bank accounts constitute
property of the Fletchers or property of Cody Farms. 20 Cody Farms’ and the Fletchers’ only
interest in the diverted funds is an indirect one arising from Cody Farms’ membership interest in
Falcon Farms. 	Consequently, Cody Farms and the Fletchers are not entitled to summary
judgment on their direct claim for non-dischargeability under 11 U.S.C. § 523(a)(6). Cody
Farms may, however, be entitled to assert a derivative claim on behalf of the limited liability
company. As discussed below, the Court concludes that Cody Farms has derivative standing to
assert claims under 11 U.S.C. § 523(a)(4) and 11 U.S.C. § 523(a)(6) on behalf of Falcon Farms.
19See Longley, 235 B.R. at 657 (acknowledging that “conversion can, under certain circumstances, give rise to a
non-dischargeable debt pursuant to § 523(a)(6).”); Bank of Utah v. Auto Outlet, Inc. (In re Auto Outlet, Inc.), 71
B.R. 674, 676 (Bankr.D.Utah 1987)(“Although this section does not specifically mention conversion, ‘willful and
malicious injury’ was intended to include ‘willful and malicious conversion.’”)(citing 124 Cong.Rec.H.11096 (daily
ed. Sept. 28, 1978); S. 17412 (daily ed. Oct. 6, 1978)(statement of Rep. Edwards and Sen. DeConcini)); Borg-
Wagner Acceptance Corp. v. Shah (In re Shah), 96 B.R. 290, 293 (Bankr.C.D.Cal. 1989)(“The tort of conversion is
one type of wrongful behavior that may be nondischargeable under Section 523(a)(6).”)(citations omitted).
20 Falcon Farms is also a plaintiff in this adversary proceeding through Cody Farms’ derivative claims.
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The Arbitrator’s factual findings sufficiently establish that the Deermans acted both willfully and
maliciously in converting Falcon Farms’ cash and hay proceeds to their own use. 	The
Deermans’ actions were deliberate, necessarily caused Falcon Farms an intentional financial
harm, and were undertaken without just cause or excuse. Therefore, all elements necessary to
sustain a claim for non-dischargeability of debt under 11 U.S.C. § 523(a)(6) have been satisfied.
iii) 	11 U.S.C. § 523(a)(4) - 	fraud or defalcation while acting in a fiduciary capacity,
larceny or embezzlement.
Plaintiffs assert that the Arbitration Award in the amount of $254,289.67 “for the
misappropriation and diversion of the assets and funds of Falcon Farms” constitutes a non-
dischargeable debt under 11 U.S.C. § 523(a)(4). See Arbitrator’s Findings of Fact and
Conclusions of Law, p. 16, ¶ 16. Debts for “fraud or defalcation while acting in a fiduciary
capacity, embezzlement, or larceny” are non-dischargeable pursuant to 11 U.S.C. § 523(a)(4).
Fiduciary Capacity under 11 U.S.C. § 523(a)(4)
Fiduciary capacity within the meaning of 11 U.S.C. § 523(a)(4) is extremely narrow; it
only arises when there is an express or technical trust, and must exist prior to and not as a result
of the wrongdoing. See Duncan v. Neal (In re Neal), 324 B.R. 365, 370 (Bankr.W.D.Okla.
2005), aff’d, 342 B.R. 384 (10 th Cir. BAP 2006)(“The Tenth Circuit has taken a very narrow
view of the concept of fiduciary duty under this section.”); Allen v. Romero, 535 F.2d 618, 621
(10 th Cir. 1976)(stating that “[t]he exemption under §17(a)(4) [the predecessor under the former
Bankruptcy Act to §523(a)(4)] applies only to technical trusts and not to those which the law
implies from contract.”)(citation omitted). See also, Davis v. Aetna Acceptance Co., 293 U.S.
328, 333, 55 S.Ct. 151, 154, 79 L.Ed.3d 393 (1934)(noting that the debtor “must have been a
trustee before the wrong and without reference thereto.”). 	“Neither a general fiduciary duty of
confidence, trust, loyalty, and good faith, nor an inequality between the parties’ knowledge or
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bargaining power is sufficient to establish a fiduciary relationship for purposes of
dischargeability.” Young, 91 F.3d at 1372 (internal citations omitted).
Plaintiffs assert that the Deermans owed them a fiduciary duty within the meaning of 11
U.S.C. § 523(a)(4) based on their status as members of a limited liability company. In support of
their argument, Plaintiffs direct the Court to the language in the New Mexico statutes governing
limited liability companies providing that members of limited liability companies owe a
fiduciary duty to other members. See N.M.S.A. 1978 § 55-19-16(D). A statute can impose
fiduciary duties sufficient to establish a technical trust for purposes of 11 U.S.C. § 523(a)(4).21
However, even when a state statute imposes fiduciary duties upon members of a limited
liability company, courts often conclude that such duties are insufficient to establish a trust
within the meaning of 11 U.S.C. § 523(a)(4). See, e.g., Abraham, Bar-Am and Nourit, LLC v.
Grosman (In re Grosman), 2007 WL 1526701, *16 (Bankr.M.D.Fla. May 22, 2007)(finding that
“[a]lthough Florida Statute Section 608.4225 does supply certain fiduciary duties, for example,
holding limited liability company property as trustee and refraining from intentional misconduct,
the statute does not establish any type of express or technical trust as required by Section
523(a)(4).”); Moses v. Duncan (In re Duncan), 2011 WL 6749054, * (Bankr.N.D.Okla. Dec. 22,
2011)(concluding that the “trust” provision of the Oklahoma limited liability statute created a
“‘trust ex maleficio (i.e., a trust arising from malfeasance)” which falls outside the scope of §
523(a)(4)). Cf. Holaday v. Seay (In re Seay), 215 B.R. 780, 787 (10th Cir. BAP 1997)(“Even
though the Oklahoma state courts may approve of a general policy that creates a fiduciary duty
21See, e.g., Allen v. Romero, 535 F.2d at 621 (finding that the New Mexico statute governing licensed contractors
“clearly imposes a fiduciary duty upon contractors who have been advanced money pursuant to construction
contracts.”). See also, Neal, 324 B.R. at 370 (a technical trust is a trust “imposed by state statutes . . . which may
lead to the existence of a fiduciary relationship.”); Cundy v. Woods (In re Woods), 284 B.R. 282, 288 (D. Colo.
2001)(noting that “[a] technical trust may arise as a result of defined obligations imposed upon the debtor by state or
federal statute.”)(citing Allen v. Romero, 535 F.2d at 622).
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between joint venturers, this policy is not sufficient to fulfill the Tenth Circuit’s requirements of
a common law trust for purposes of § 523(a)(4).”).22
The relevant New Mexico statute governing limited liability companies provides, in part:
every member who is vested with particular management responsibilities by the
articles of organization or an operating agreement and every manager shall
account to the limited liability company and hold as trustee for it any profit or
benefit he derives from:
(1) any transaction connected with the conduct or winding up of the limited
liability company; or
(2) any use by such member or manager of the company’s property, including
confidential or proprietary information of the limited liability company or
other matters entrusted to him as a result of his status as a member or manager
unless:
(a) the material facts of the relationship of the interested manager or member
to the contract, transaction or use were disclosed or known to all of the
other managers or members who, in good faith, authorized or approved the
contract, transaction or use by: 1) the affirmative vote of a majority of all
of the disinterested managers; or 2) the affirmative vote of all of the
disinterested members, even though all of the disinterested managers were
less than a majority of all of the managers or even though all of the
disinterested members did not have a majority share of the voting power
of all of the members; or
(b) the contract, transaction or use was fair to the limited liability company
when it was authorized or approved.
N.M.S.A. 1978 § 55-19-16(D). 23
This statutory language uses trust-type language requiring every member to “hold as
trustee” any profit or benefit derived from any transaction or use of the limited liability
company’s property. Plaintiffs argue that because the statute uses trust-type language and
22But see, e.g., Andrews v. Wells (In re Wells), 368 B.R. 506, 512 (Bankr.M.D.La. 2006)(finding that the Louisiana
limited liability company statute imposed a fiduciary duty on a debtor-member of a limited liability company
sufficient to establish fiduciary capacity under 11 U.S.C. § 523(a)(4), provided that the debtor actually takes part in
managing the entity.); Lewis v. Spivey (In re Spivey), 440 B.R. 539, 545 (Bankr.W.D.Ark. 2010)(finding that “a
managing member of a limited liability company may also have a fiduciary relationship with the limited liability
company” and noting that Arkansas has recognized “that a corporate officer is charged with a fiduciary duty to the
corporation . . . sufficient for a § 523(a)(4) cause of action.”)(citing Bell v. Collins (In re Collins), 137 B.R. 754, 756
(Bankr.E.D.Ark. 1992)). Cf. The Credit Experts, LLC v. Santos (In re Santos), 2012 WL 2564366, *5
(Bankr.E.D.Va. July 2, 2012)(noting that courts “have held that partners have fiduciary duties to each other, for
purposes of § 523(a)(4).”)(citing FNFS, Ltd.,v. Harwood (In re Harwood), 637 F.3d 615 (5 th Cir. 2011) and
Ragsdale v. Haller, 780 F.2d 794 (9th Cir. 1986)).
23 Because subsection (a) refers to transactions described in subsection (1), subsections (a) and (b) apply not only to
subsection (2) but also to subsection (1).
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defines the trust res as “any profit or benefit” derived from the use of the limited liability
company’s property, the statute imposes a technical trust within the meaning of 11 U.S.C. §
523(a)(4). This Court disagrees.
Although the statute uses trust-type language, it contemplates a trust that would arise as a
result of a member’s failure to account. 	That type of trust is a trust that arises as a result of a
member’s wrongdoing and cannot support a finding of fiduciary capacity for purposes of 11
U.S.C. § 523(a)(4). The substance of the New Mexico statute is similar to the Oklahoma statute
at issue in Duncan, 2011 WL 6749054 which the bankruptcy court concluded did not meet the
non-dischargeability requirements for a technical trust. That statute provided in relevant part that
every manager must account to the limited liability company and hold as trustee for it any
profit or benefit derived by the manager without the informed consent of the members
from any transaction connected with the conduct or winding up of the limited liability
company or from any personal use by the manger of its property.
18 O.S. 2001, § 2016(5).
The Duncan court reasoned that the statutory language “without the consent” renders the so-
called trust a trust ex maleficio which falls outside the scope of 11 U.S.C. § 523(a)(4). Duncan
2011 WL 6749054 at *18 (relying on case law from the Tenth Circuit Bankruptcy Appellate
Panel interpreting similar language in the Uniform Partnership Act). Sections 55-19-16(D)(2)(a)
and (b) similarly contemplate consent or approval from the disinterested member or managers,
such that action taken without consent or approval is what gives rise to the trust relationship.
The Court concludes that the statute creates a trust that arises from a member’s malfeasance
which cannot support a non-dischargeability claim under 11 U.S.C. § 523(a)(4). 	Thus,
Plaintiff’s claims premised on a breach of fiduciary duty while acting in a fiduciary capacity fail
as a matter of law.
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Embezzlement and Larceny Under 11 U.S.C. § 523(a)(4)
Embezzlement and larceny are separate grounds under 11 U.S.C. § 523(a)(4) for which
no fiduciary capacity is required. See In re Lynch, 315 B.R. 173, 175 (Bankr.D.Colo. 2004)(“A
claim for nondischargeability under Section 523(a)(4) may rest on proof of larceny or
embezzlement, without proof of a fiduciary relationship.”)(citing In re Wallace, 840 F.2d 762,
765 (10 th Cir. 1988)).24 Embezzlement, for purposes of non-dischargeability under 11 U.S.C. §
523(a)(4), is defined as “‘the fraudulent appropriation of property by a person to whom such
property has been entrusted or into whose hands it has lawfully come.’” Wallace, 840 F.2d at
765 (citation to quoted case omitted).25 “‘Larceny is defined as the ‘fraudulent and wrongful
taking and carrying away of property of another with intent to convert it to the taker’s use and
with intent to permanently deprive the owner of such property.’” Dorado, 400 B.R. at 309
(quoting In re Tilley, 286 B.R. 782, 789 (Bankr.D.Colo. 2002)(additional internal quotation
marks and citations omitted)). Larceny differs from embezzlement in that larceny “‘requires that
the funds originally come into the Debtor’s hands unlawfully,’” whereas with embezzlement, the
debtor initially acquires the property lawfully. Id. (quoting Tinkler, 311 B.R. at 876 (quoting
Webber v. Giarratano (In re Giarratano), 299 B.R. 328, 338 (Bankr.D.Del. 2003)). Both
larceny and embezzlement require that the debtor act with fraudulent intent.26
24 See also, Hernandez v. Dorado (In re Dorado), 400 B.R. 304, 309 (Bankr.D.N.M. 2008)(acknowledging that
debts may be excepted from discharge when the debts result from a debtor’s embezzlement or larceny even in the
absence of a fiduciary relationship).
25See also Hill v. Putvin (In re Putvin), 332 B.R. 619, 627 (10 th Cir. BAP 2005)(“Under 523(a)(4) embezzlement
will have occurred when there is a ‘fraudulent appropriation of property by a person to whom such property has
been entrusted, or into whose hands it has lawfully come, and it requires fraud in fact, involving moral turpitude, or
intentional wrong, rather than implied or constructive fraud.’”)(additional internal quotation marks and citations
omitted)); Marks v. Hentges (In re Hentges), 373 B.R. 709, 723 (Bankr.N.D.Okla. 2007)(“embezzlement requires
proof of a defalcation or misappropriation of property by one to whom it is entrusted, plus proof of fraudulent
intent.”).
26See Tinkler, 311 B.R. at 876 (“‘Larceny is proven for § 523(a)(4) purposes if the debtor has wrongfully and with
fraudulent intent taken property from its owner.’”)(quoting Kaye v. Rose (In re Rose), 934 F.2d 901, 902 (7 th Cir.
1991)); Tilley, 286 B.R. at 789 (among the required elements for embezzlement is fraudulent intent); Sullivan v.
Clayton (In re Clayton), 198 B.R. 878, 885 (Bankr.E.D.Pa. 1996)(“Essential to both larceny and embezzlement is
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The Arbitrator’s findings of fact are sufficient to support a claim for embezzlement. To
demonstrate that the debtor fraudulently appropriated property for purposes of establishing
embezzlement under 11 U.S.C. § 523(a)(4), the plaintiff must show that the debtor appropriated
the property for a use other than that for which it was entrusted or that the debtor was not
lawfully entitled to use the funds for the purposes for which they were in fact used, and the
circumstances indicate fraud.27 The Arbitrator’s findings of fact establish that Mr. Deerman
diverted cash from Falcon Farms to his own benefit, that certain checks he wrote were not
written for any legitimate business purpose, and that such actions constituted an improper
conversion of money by Mr. Deerman. These facts establish that Mr. Deerman used property of
Falcon Farms for a purpose other than that for which the funds were entrusted to him. 	Mr.
Deerman wrote checks from Falcon Farms’ bank account to pay for his own personal expenses,
including legal fees, accountant’s fees, and the Deermans’ share of the arbitration costs. He also
used Falcon Farms’ funds to pay Bud Deerman Farms even though Falcon Farms had stopped
buying hay months earlier when it ran out of money. Mr. Deerman used petty cash without
supporting the disbursement with proper receipts. Finally, Mr. Deerman used Falcon Farms’
funds to purchase his son’s mobile home. The Award determined that the Deermans are liable to
Plaintiffs “for the sum of $254,289.67 for the misappropriation and diversion of assets and funds
of Falcon Farms.” 	See Final Arbitration Award, ¶ 1(b). The Arbitration Award together with
the Findings and Conclusions are sufficient for the Court to infer that the Deermans acted with
the element of fraudulent intent.”)(citing In re Graham, 194 B.R. 369, 374 (Bankr.E.D.Pa. 1996) and In re Spector,
133 B.R. 733, 741 (Bankr.E.D.Pa. 1991)).
27 See, e.g., In re Bucci, 493 F.3d 635, 644 (6 th Cir. 2007)(“‘A creditor proves embezzlement by showing that he
entrusted his property to the debtor, the debtor appropriated the property for a use other than that for which it was
entrusted, and the circumstances indicate fraud.’”)(quoting Brady v. McAllister (In re Brady), 101 F.3d 1165, 1173
(6 th Cir. 1996)); Belfry v. Cardozo (In re Belfry), 862 F.2d 661, 662 (8 th Cir. 1988)(“A plaintiff must establish that
the debtor was not lawfully entitled to use the funds for the purposes for which they were in fact used.”)(citation
omitted); Kruse v. Murray (In re Murray), 408 B.R. 268, 275 (Bankr.D.Mo. 2009)(to establish a claim for
embezzlement, the plaintiff must demonstrate that “the debtor was not lawfully entitled to use the funds for the
purpose for which they were in fact used.”)(citation omitted).
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the requisite fraudulent intent to establish a claim for embezzlement within the meaning of 11
U.S.C. § 523(a)(4).
However, Plaintiffs claim based on embezzlement cannot be asserted directly against the
Deermans since the funds that the Deermans misappropriated belonged to Falcon Farms; the
embezzlement claim is a derivative claim. See Spivey), 440 B.R. at 545 (finding that a claim for
defalcation by debtor of limited liability company’s property belonged to the limited liability
company since the duty and the debt was owed to the company; consequently, the member’s
interest in the claim was derivative); White v. Whittle (In re Whittle), 449 B.R. 427, 430
(Bankr.M.D.Fla. 2011)(finding that plaintiffs could not assert a direct claim for embezzlement
against a member of limited liability company because any damage would be inflicted on the
limited liability company, not the plaintiffs individually). See also Wallner v. Liebl (In re Liebl),
434 B.R. 529, 541 (Bankr.N.D.Ill. 2010)(concluding that plaintiff could not recover individually
on a claim based on the debtor’s embezzlement of funds from limited liability company because
plaintiff could not demonstrate that the misappropriated property belonged to him personally).
Derivative Standing
Plaintiffs did not pursue derivative claims as part of the Arbitration Case28 but have filed
this adversary proceeding both individually and on behalf of Falcon Farms. 	As a member of
Falcon Farms, Cody Farms can sue derivatively on behalf of the limited liability company. The
New Mexico Limited Liability Company Act provides, in relevant part:
a suit on behalf of the limited liability company may be brought in the name of the
limited liability company by: (A) any member of the limited liability company who is
authorized to sue by the affirmative vote of members having a majority of the voting
power of all members whose interests are not adverse to the interests of the limited
liability company, whether or not the articles of organization or an operating agreement
vests management of the limited liability company in one or more managers.
28See Plaintiffs’ Memorandum in Support of Motion for Partial Summary Judgment, p. 11 n. 2.
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See N.M.S.A. 1978 § 53-19-58 (emphasis added).
The members of Falcon Farms are Cody Farms and the Deermans. Because the
Deermans’ interest is adverse to the interest of Falcon Farms, and the Deermans and Cody Farms
are the only members of Falcon Farms, Cody Farms was not required under N.M.S.A. 1978 §
53-19-58 to obtain a vote before initiating a derivative suit on behalf of Falcon Farms. 	See In re
D’Anello, 477 B.R. 13, 23 (Bankr.D.Mass. 2012)(reasoning that when 1) other members did not
raise the lack of a vote authorizing a derivative suit as grounds for dismissal; 2) the derivative
claims were brought against members whose claims were adverse to the limited liability
company, and 3) the only member eligible to vote to authorize the suit was the member who
sought to file the suit, filing the complaint impliedly constituted the necessary vote to authorize a
derivative suit)(quoting Billings v. GTFM, LLC, 449 Mass. 281, 289 n. 18, 867 N.E.2d 714
(Mass. 2007)).29
Because this adversary proceeding was brought both derivatively and individually, the
Court finds that Cody Farms is entitled to partial summary judgment on its derivative claim for
embezzlement against the Deermans brought on behalf of Falcon Farms based on the arbitrator’s
findings of fact. Cf. Liebl), 434 B.R. at 537 (sustaining non-dischargeability claim for
embezzlement brought derivatively on behalf of a limited liability company, inferring that the
debtor acted with fraudulent intent by appropriating funds from the limited liability company for
his own personal use and benefit).
29 Plaintiffs cite Bevan v. Davita, Inc., 2011 WL 4343223 (D.N.M.)(Arbitration Award) which interpreted N.M.S.A.
1978 § 53-19-58 to bar a manager from bringing a derivative claim against the other manager in a two-manager
limited liability company because the manager who sought to file suit did not have the majority vote authorizing the
action, as the reason Plaintiffs declined to pursue a derivative claim in the Arbitration Case. That decision of an
arbitrator is not binding on this Court. Section 53-19-18 does not serve as a bar to a derivative action where, as here,
Cody Farms holds all of the voting power of all members where the interests are not adverse to the interests of
Falcon Farms. Moreover, similar to D’Anello, the Deermans have not raised a lack of standing on the part of Cody
Farms to assert a derivative claim as grounds for dismissal; consequently, they have waived it.
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iv) 	Damages – the amount of the non-dischargeable debt
The Arbitration Award awarded the sum of $254,289.67 based on “the misappropriation
and diversion of the assets and funds of Falcon Farms.” See Arbitration Award, p. 2, ¶ 1(b). As
analyzed above, these misappropriated funds are non-dischargeable under 11 U.S.C. § 523(a)(4)
and 11 U.S.C. § 523(a)(6) as a derivative claim brought by Cody Farms on behalf of Falcon
Farms. The Arbitration Award includes pre-judgment interest in the amount of $135,419.94
based on the award for the Deermans’ misappropriation and diversion of Falcon Farms’s assets.
See Arbitration Award, p.2, ¶ 1(b). 	This pre-judgment interest amount is entitled to collateral
estoppel effect and constitutes part of the non-dischargeable judgment. Cf. In re Roussos, 251
B.R. 86, 94 (9th Cir. BAP 2000), aff’d, 33 Fed.Appx. 365 (9th Cir. 2002)(acknowledging that
collateral estoppel can be applied to a state court’s award of punitive damages and included as
part of a non-dischargeable debt, and observing further that “a nondischargeable ‘debt’ may
include prejudgment interest, attorneys’ fees and costs, and punitive damages, not all of which
are actual out-of –pocket losses to the creditor due to fraud, but all of which arise from the
debtor’s liability for the fraudulent conduct.”); The Aetna Casualty and Surety Co. v. Markarian
(In re Markarian), 228 B.R. 34, 45 (1st Cir. BAP 1998)(concluding, based on Cohen v. De La
Cruz, 523 U.S. 213, 118 S.Ct. 1212, 1215, 140 L.Ed.2d 341 (1998) that the entire amount of
damages awarded by the district court, including the pre- and post-judgment interest was
excepted from discharge).
Plaintiffs also request the Court to determine that $1,130,073.40 is non-dischargeable
under 11 U.S.C. § 523(a)(2)(A) as a debt procured by fraud. The Arbitration Award provides:
Claimants sustained damages in the amount of $1,130,073.40 as the direct and proximate
result of their reasonable reliance on Mr. Deerman’s materially false representations.
This amount includes $901,000.00 in increased liability to Capital Farm Credit as co-
borrowers on Falcon’s revolving line of credit, $186,776.20 for the value of additional
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hay provided to Falcon and $43,297.20 in additional advances to fund hay purchases
from James Rascoe.
See Findings of Fact and Conclusions of Law, p. 15, ¶ 8.
However, the Arbitrator’s findings of fact establish that $186,776.20 of the $1,130,073.40 in
damages is attributable to additional hay provided to Falcon Farms by Fletcher Farms, not by the
Fletchers individually and not by Cody Farms. See Findings of Fact and Conclusions of Law, p.
7, ¶ 30 (stating that “[t]he La Mesa office [of Falcon Farms] only paid Fletcher Farms for its first
and second cuttings and a small portion of its third cutting in 2007, leaving a balance due of
$186,776.20 for Fletcher Farm’s [sic.] third and fourth cuttings.”). Fletcher Farms is not a party
to this adversary proceeding. Thus, $186,776.20 cannot be included in the total amount of the
non-dischargeable judgment in favor of the Plaintiffs. 	The Arbitrator’s factual findings also
establish that Cody Farms paid the $43,297.20 to James Rascoe. Id. (“Falcon also failed to pay
James Rascoe $43,297.20 for his fourth cutting. Cody Farms paid this invoice as an additional
advance to Falcon.”). Cody Farms is owned by Mr. Fletcher, and is a party to this adversary
proceeding, both individually, and derivatively on behalf of Falcon Farms. As analyzed above,
Plaintiffs’ fraud claims against the Deermans are direct claims. 	Cody Farms, is, therefore,
entitled to a non-dischargeable judgment under 11 U.S.C. § 523(a)(2)(A) in the amount of
$43,297.20.
With respect to the remaining $901,000.00 component of the $1,130,073.40 award
attributable to the Deermans’ misrepresentations, Cody Farms and the Fletchers each co-signed
the promissory note that increased Falcon Farms’ liability to Capital Farm Credit by
$901,000.00. However, it is not entirely clear from the Arbitrator’s factual findings what portion
of this debt Plaintiffs paid to Capital Farm Credit. The Arbitrator’s factual findings establish that
Capital Farm Credit filed a complaint against Falcon Farms, Cody Farms, the Fletchers and the
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Deermans, and that Capital Farm Credit agreed to settle its claims against Cody Farms and the
Fletchers for the total sum of $1,500,000.00 pursuant to a Compromise and Settlement
Agreement. See Findings of Fact and Conclusions of Law, pp. 11, ¶ 46. 	Certain proceeds held
in trust by the Deermans’ attorneys in the amount of $160,039.91 were used to pay a portion of
the settlement amount. Id. 	The remaining balance in the amount of $1,339,960.0030 due under
the terms of the Compromise and Settlement Agreement was paid from the sale of certain real
property owned by Fletcher Farms. Id., ¶ 47. 	The Arbitrator awarded $669,980.04, one-half of
the amount paid to Capital Farm Credit from the sale of Fletcher Farms’s property, as a
contribution claim. See Arbitration Award, p.3, ¶ 1(c). The Arbitration Award provides that any
amounts recovered under the contribution award shall be credited against the $1,130,073.40. 	Id.
It is not possible for the Court to determine from the Arbitration Award what portion of
the $901,000.00 is non-dischargeable. 	While the Arbitrator’s factual findings reflect that
Capital Farm Credit filed a proof of claim in the Deermans’ bankruptcy case in the amount of
$1,828.427.8731 , the factual findings do not set forth the components of Capital Farm Credit’s
claim. 	Further, the Arbitrator made no findings regarding what portion of the $1,500,000 the
Fletchers paid to Capital Farm Credit was or should have been applied to the $901,000. It is
possible that Capital Farm Credit discounted the $901,000 as part of the settlement. 	Thus, the
Court cannot ascertain from the Arbitrator’s factual findings what portion of the $1,500,000.00
settlement amount is attributable to the $901,000 that the Plaintiffs paid. 	Further evidence is
required to establish the amount of the non-dischargeable debt attributable to the $901,000.00 in
30 The Findings of Fact reflect that the remaining balance is $1,339, 960.00; however, $1,500,000.00 less the
$160,039.91 applied from the proceeds in the Deermans’ attorneys’ trust account leaves an actual balance of
$1,339,960.09. This discrepancy is immaterial and hardly worth noting.
31The Arbitrator’s Findings of Fact and Conclusions of law include a finding that Capital Farm Credit filed a proof
of claim in the Deermans’ bankruptcy case in the amount of $1,828,427.87, of which all but $1,000.00 is unsecured,
and that the Deermans have filed an objection to the claim, asserting that in the event Capital Farm Credit holds a
valid claim, it should be reduced by the $1,500,000.00 to be paid under the compromise and settlement agreement.
See Findings of Fact and Conclusions of Law, p. 12, ¶ 46.
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increased liability caused by the Deermans’ fraudulent misrepresentations, including the impact,
if any, of the contribution claim awarded in paragraph (c) of the Arbitration Award.
CONCLUSION
For the foregoing reasons, the Court concludes that Plaintiffs are entitled to partial
summary judgment on their non-dischargeability claims under 11 U.S.C. § 523(a)(2)(A), 11
U.S.C. § 523(a)(4), and 11 U.S.C. § 523(a)(6) based on the preclusive effect of the Arbitration
Award. 	Cody Farms is entitled to a non-dischargeable judgment in the amount of $389,709.61,
including pre-judgment interest in the amount of $135,419.94, as a derivative claim on behalf of
Falcon Farms based on its claims under 11 U.S.C. § 523(a)(4) and 11 U.S.C. § 523(a)(6) arising
from the Deermans’ misappropriation and diversion of the assets and funds of Falcon Farms.
Cody Farms is also entitled to a non-dischargeable judgment in the amount of $43,297.20 based
on its fraud claim under 11 U.S.C. § 523(a)(2)(A).
The Fletchers are entitled to a determination of liability on their claim for fraud under 11
U.S.C. § 523(a)(2)(A). 	However, further evidence is needed with respect to the damages
amount attributable to the Fletchers’ fraud claim. The Court will enter a separate judgment
consistent with this Memorandum Opinion.
________________________________________
ROBERT H. JACOBVITZ
United States Bankruptcy Judge
Date entered on docket: October 24, 2012
COPY TO:
Christopher M Gatton 	Brian Imbornoni
Denise J. Trujillo 	Jennings, Strouss & Salmon, P.L.C.
Law Office of George Dave Giddens, PC 	Attorney for Plaintiffs
Attorneys for Defendants 	201 E. Washington, Street, Suite 1100
10400 Academy Rd., #350 	Phoenix, AZ 	85004-2385
Albuquerque, NM 87111
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