FILED JUL 26 2024 NOT FOR PUBLICATION SUSAN M. SPRAUL, CLERK U.S. BKCY. APP. PANEL OF THE NINTH CIRCUIT UNITED STATES BANKRUPTCY APPELLATE PANEL OF THE NINTH CIRCUIT

In re: BAP Nos. HI-23-1009-SGB MARYLIN FELIPE CSIGI, HI-23-1114-SGB Debtor. Bk. No. 21-00222 MARYLIN FELIPE CSIGI, Appellant, Adv. No. 21-90012 v. VILLIA PONCE, Trustee of the Filomena MEMORANDUM* D. Felipe Trust, Dated January 25, 2014, Appellee.

Appeal from the United States Bankruptcy Court for the District of Hawaii Robert J. Faris, Chief Bankruptcy Judge, Presiding

Before: SPRAKER, GAN, and BRAND, Bankruptcy Judges.

INTRODUCTION

Chapter 131 debtor Marylin Felipe Csigi appeals from a judgment

after trial in favor of Villia Ponce, as the successor trustee of the Filomena

D. Felipe Trust, dated January 25, 2014 (“Trust”). The bankruptcy court

* This disposition is not appropriate for publication. Although it may be cited for whatever persuasive value it may have, see Fed. R. App. P. 32.1, it has no precedential value, see 9th Cir. BAP Rule 8024-1. Unless specified otherwise, all chapter and section references are to the 1

Bankruptcy Code, 11 U.S.C. §§ 101–1532. held that Marylin2 committed defalcation while acting as the former trustee

of the Trust. The court further determined that Marylin “consciously

disregarded or was willfully blind to her obligations [as trustee of the trust]

and engaged in conduct that was certain to violate those obligations.” The

court concluded that Marylin misappropriated $858,639 from the trust,

which should be excepted from her discharge under § 523(a)(4).

Marylin also appeals from an order granting Villia a fee award of

$160,838.50 under Haw. Rev. St. (“HRS”) § 554D-1004.

None of Marylin’s arguments adequately support reversal of the

judgment or the fee award. Accordingly, we AFFIRM.

FACTS 3

A. Marylin, her mother, and her siblings.

This appeal focuses on Marylin’s conduct as trustee of the Trust

before her mother, Filomena D. Felipe, passed away in June 2018. Marylin

is one of eleven children Filomena had with her husband, who predeceased

her. Villia is one of Marylin’s ten siblings.

Filomena suffered a stroke in 2005, which left her disabled and in

need of assistance with activities of daily living. For a number of years

2 For ease of reference, we refer to Marylin and her family members by their first names. No disrespect is intended. 3 We exercise our discretion, when appropriate, to take judicial notice of

documents electronically filed in the underlying bankruptcy case and adversary proceeding. See Atwood v. Chase Manhattan Mortg. Co. (In re Atwood),

, 233 n.9 (9th Cir. BAP 2003). 2 following her stroke, Filomena continued to live with her son Remigio

Felipe in the home she owned on Kihapai street in Kailua, Hawaii

(“Kihapai House”). Remigio provided her with some of the assistance she

needed. By March 2013, however, some of Remigio’s siblings, including

Marylin, decided that Remigio was not adequately caring for Filomena.

Consequently, Marylin and her cousin’s wife moved Filomena out of the

Kihapai House. Through the end of 2013, Filomena alternated living in the

homes of Marylin and her sister Melita Domingo. However, in or around

January 2014, Filomena permanently moved into Marylin’s house and

continued to live there for the rest of her life.

B. Filomena’s Trust.

Also in January 2014, Filomena had her attorney prepare a set of

estate planning documents, including the Trust and a deed conveying the

Kihapai House to the Trust. Her only other significant asset was a bank

account with a balance of roughly $400, which also was transferred into the

Trust. Filomena designated herself as “primary trustee.” She designated

Marylin and her eldest daughter Corazon Andres as “co-successor

trustees.”

Filomena was the Trust’s “primary beneficiary.” The Trust provided,

“[a]s long as I [Filomena] shall live, I will have the exclusive right to the use

and benefit of the income and the assets of this [T]rust. Upon my death, my

successor trustee(s) shall take charge of the assets then remaining in this

[T]rust and distribute them” according to the Trust’s distribution plan.

3 The distribution plan referenced Marylin’s agreement to take care of

Filomena and set aside for Marylin 20% of the Trust’s net proceeds. The

remaining 80% was to be split evenly among Filomena’s ten other children.

As for management of the Trust’s assets, the Trust provided that upon

replacement of Filomena as trustee, the successor trustees were required to

use the trust estate for Filomena’s benefit for the rest of her life. The Trust

further specified that the successor trustees “shall be fully authorized to

make gifts from this trust to third parties or to the successor trustee(s) as

individual(s) as determined in the sole discretion of the successor

trustee(s).”

Also of note, in a paragraph entitled “Accounting Waived,” the Trust

gave the successor trustee(s) discretion to decide whether and to what

extent they should prepare and deliver an accounting to the remainder

beneficiaries. The Trust additionally stated: “successor trustee(s) shall not

be required to make any current reports or accountings to any court nor to

any beneficiaries.”

Several months later, in May 2014, Filomena amended her estate plan

in two respects. First, she resigned as trustee of the Trust. And second, she

designated Marylin as her sole successor trustee, with Corazon named as

alternate successor trustee, should Marylin decline to serve. The Trust

otherwise did not change.

4 C. Filomena’s mental condition and Marylin’s knowledge of it.

The parties submitted considerable evidence at trial as to Filomena’s

mental capacity between 2014 and her death in 2018. At the time she

moved in with Marylin in January 2014, Filomena was 90 years old.

Though she had survived the 2005 stroke, there is no dispute that the

stroke had left her physically disabled. It is unclear to what extent, if any,

the stroke mentally affected Filomena. Marylin testified that she spent

virtually every day with Filomena between 2014 and her death in 2018. She

insisted that she enjoyed her mother’s company, they participated in the

same activities, and she did not notice any significant mental deficit

affecting her mother.

On the other hand, while they saw Filomena much less frequently,

some of Marylin’s sisters testified that Filomena during this time frame

seemed forgetful and confused. They also stated that sometimes she would

talk to herself as if she were talking to family members who were not

actually present.

At trial, the principal evidence of Filomena’s mental condition came

from her primary care physician, Dr. Marina Badua. Though Dr. Badua did

not testify at trial, the parties presented letters and notes she had written

between 2013 and 2018. The parties also presented to the bankruptcy court

a handful of hospital medical records from Filomena’s hospital admissions

in 2017 and 2018. Some of Dr. Badua’s notes mention dementia; others do

not.

5 In 2014, Dr. Badua wrote three letters commenting on Filomena’s

mental capacity. The letters were admitted into evidence but are not part of

the record on appeal. Regardless, the bankruptcy court discussed these

three letters in its post-trial findings. As the court noted, Dr. Badua first

wrote on January 21, 2014, that Filomena “now is 90 years old and

becoming forgetful, confused, and disoriented at this time and I feel that

she is no longer mentally competent to manage her personal and financial

affairs.” But two days later Dr. Badua wrote in her second letter that

Filomena “is oriented to time, place and person.” Then, on May 8, 2014, six

days before Filomena amended her estate plan to place Marylin in charge

of the Trust, Dr. Badua wrote in her third letter that Filomena was

“oriented to time, place and person and found to be mentally competent to

make decisions on her own.”

In January 2015, Dr. Badua wrote in her notes to Filomena’s medical

file that “S = gets confused at night,” “talking to herself,” and “gen alert.”

In April 2015, Dr. Badua wrote: “S = she has been confused[,] disoriented,

getting restless, talking to herself—with visual and auditory

hallucinations.” For her diagnosis that day Dr. Badua wrote, “Senile

Dementia w/ Psychosis.”

In April 2017, Dr. Badua wrote “CC: Disorientation, Memory loss.”

One of her seven diagnoses that day included “Senile Dementia.” In May

2017, Filomena had a six-day hospital stay. At the conclusion of her stay

Dr. Badua wrote, “alert, oriented x” but also listed “Senile Dementia” again

6 among her diagnoses. 4 In April 2018, as part of an annual health

assessment, Dr. Badua wrote “S = sometimes she gets confused[,] talking to

herself[,] confused and disoriented.”5

D. Use of Trust funds before sale of Kihapai House.

As of the Trust’s creation, the Kihapai House was the principal Trust

asset. Filomena also received monthly social security payments, which

ranged between $720 and $734.6 The bank statements admitted into

evidence at trial reflect receipt of these social security payments. The bank

statements also show occasional deposits in irregular amounts from some

other unidentified source, which totaled roughly $11,500. But there is no

corroborating evidence documenting the source of these deposits.

Marylin generally testified that she and her husband personally paid

4 Filomena’s discharge summary notes at the conclusion of the six-day hospital stay in May 2017 refer to both “Medical delirium, in the setting of dementia” and “Dementia” as two of her eight discharge diagnoses. 5 Filomena was hospitalized again in February 2018. The notes for that hospital

stay state: “Per daughter at bedside, patient has intermittent episodes during which she would hallucinate a person and converse with them. During these episodes, patient would refuse to speak to family and refuse oral intake. Daughter states that patient was normal earlier yesterday but began refusing oral intake yesterday afternoon . . . . History is limited secondary to patient’s baseline dementia.” Marylin admitted that she brought her mother to the hospital and the vast majority of the time was the only family member present during her mother’s hospital stays. But she denied that she ever commented to any doctor or hospital staff regarding her mother’s mental condition. Nor did she recall ever hearing any medical professional refer to the term “dementia.” Unlike Dr. Badua’s notes, none of the hospital notes in the record refer to “senile dementia.” 6 The record includes general references to rent from the Kihapai House, but it is

unclear whether the Trust received any rents after Filomena moved in with Marylin. 7 for expenses incurred in maintaining the Kihapai House, including utilities,

but she did not include any detail in her testimony. Moreover, no

documentation was submitted into evidence to corroborate the alleged

personal payments for the Kihapai House, or to fix the amount of personal

funds they expended. Rather, the banking records submitted by the parties

show that the Kihapai House utility bills largely were funded from

Filomena’s social security payments.

The bank statements ranging from February 2014 through April 2016

also included copies of checks that appear to pay not only utilities but also

various medical, legal, and laboratory test expenses. The bank statements

and checks in the record from May 2016 and after tell a different story, as

described below.

E. Sale of Kihapai House and use of the sale proceeds.

Marylin and most of her siblings eventually agreed that the Kihapai

House should be sold. In April 2016, acting as trustee of the Trust, Marylin

signed the sale closing documents and received $873,739.00 in net sale

proceeds, which she deposited into a trust account that she opened

specifically for that purpose.

Marylin contends that she reimbursed herself from Filomena’s bank

account for groceries, healthcare, and supplies for Filomena. Prior to the

sale of the house her stated reimbursements usually ranged from roughly

$200 to $1,300. After receiving the sale proceeds, however, the

reimbursements became more frequent and included much larger

8 payments to Marylin and members of her immediate and extended family.

She variously described payments to other family members either as gifts

or as compensation for services rendered either for Filomena’s benefit or to

maintain the Kihapai House before it was sold.

Marylin admitted that her financial record keeping was poor. She

further acknowledged that she frequently failed to maintain legible

contemporaneous records, like receipts, that would show how she spent

the net sale proceeds.

As of June 21, 2018, several days before Filomena passed away, the

balance from the sale proceeds in the trust account had been reduced to

$42,102.69. Marylin testified that she withdrew this remaining balance from

the Trust account and deposited it into a joint account she shared with her

husband. According to Marylin, her own health was very poor at the time,

she considered her own life at risk, and she wanted to make sure her

husband had access to the remaining Trust funds in case he needed them

for funeral or other expenses associated with her or Filomena’s passing.

On June 30, 2018, Filomena passed away.

Subsequently, Marylin was unable to fully explain what happened to

the funds she transferred to the joint account with her husband. She

represented that a portion of them were used to satisfy Filomena’s final

expenses and to defray costs incurred for her funeral and multiple family

gatherings following Filomena’s passing. Additional sums evidently were

paid to purchase “offerings” left at the cemetery when Marylin visited

9 Filomena’s gravesite.

F. The probate court proceedings.

Within a few months of Filomena’s passing, Villia asked Marylin for

a copy of Filomena’s estate plan. In November 2018, Villia sent Marylin a

letter, return receipt requested, reiterating this request. Marylin testified

that she ignored the letter, claiming that she thought it was a joke.

In May 2019, Villia filed a probate court petition to compel

production of a copy of the Trust and for an accounting. The court granted

that petition by order entered August 26, 2019. Marylin produced a copy of

the Trust and after several months an accounting. Nonetheless, the probate

court entered an order on January 22, 2020, indicating that the initial

accounting was insufficient. Accordingly, the probate court ordered

Marylin to file an “updated, full and complete trust accounting,” together

with “detailed back-up records for the trust accounting” by February 20,

2020.

In February and March 2020, Marylin belatedly produced bank

statements and 488 pages of her credit card records. The court issued a new

order in May 2020 indicating that Marylin still had not fully complied with

the prior orders directing her to fully account for the Trust’s assets. Then,

Villia filed a petition for declaratory relief, and to surcharge and remove

Marylin as trustee. Villia asserted that Marylin had failed to account for the

Trust’s assets, had engaged in obvious self-dealing, and had thereby

breached her fiduciary duties as trustee of the Trust.

10 The probate court agreed with Villia and entered an order in March

2021 granting the petition for declaratory relief, and to surcharge and

remove Marylin as trustee (“Probate Order”). The probate court found that

Marylin had: (1) failed to submit a complete trust accounting or to provide

back-up records sufficient to support her accounting; (2) violated her

fiduciary duties; and (3) “misappropriated and misused trust funds while

serving as Trustee of the Trust, and a surcharge is necessary.” The probate

court assigned the matter to the court’s civil trials calendar for a

determination of the amount Marylin should be surcharged. The probate

court also directed entry of final judgment in furtherance of its Probate

Order in accordance with Hawaii Probate Rule 34(a) and Hawaii Rule of

Civil Procedure 54(b).

G. Marylin’s bankruptcy and Villia’s nondischargeability action.

Within a week of entry of the Probate Order, Marylin filed her

chapter 13 bankruptcy petition. Villia responded by filing a complaint

seeking a money judgment determining the amount Marylin should be

surcharged as former trustee of the Trust and excepting that amount from

discharge under § 523(a)(4). The complaint relied heavily on the probate

court proceedings and the Probate Order. Villia alleged that Marylin never

complied with the probate court’s multiple orders to provide a complete

accounting and never provided meaningful backup documentation in

support of the accounting.

In the complaint, Villia claimed that Marylin should be held liable for

11 “at least $766,047.91,” which the complaint broke down into the following

amounts:

AMOUNT DESCRIPTION

$ 18,500.00 Loaned to Roberto Lamug

$ 5,000.00 Loaned to Edgar Felipe

$ 42,102.69 Final withdrawal of Trust funds to close Trust account

$221,619.00 Unsubstantiated reimbursements Marylin made directly and indirectly to herself $275,000.00 A “gift” Marylin made to herself and used to settle litigation against her immediate family and their meat distribution business, Tasty Meats $187,500.00 Excessive and improper use of Trust funds to remodel Marylin’s house $ 16,326.22 Excessive and improper use of Trust funds to purchase an automobile

Villia also sought to hold Marylin liable for attorney’s fees.

In August 2022, Villia moved for summary judgment. She contended

that based on the issue preclusive effect of the Probate Order, she was

entitled as a matter of law to a nondischargeability judgment against

Marylin. Villia sought damages totaling “at least $873,739.” She calculated

the damages based on the same “[i]mproper transactions of note”

constituting “misused or misappropriated trust funds,” listed in the

complaint, except that the motion increased the improper home

remodeling expenses from $187,500 to $227,500 and the improper

automobile purchase expenses from $16,326.22 to $24,362.22. The summary

12 judgment motion ultimately asserted that the entire amount of net

proceeds from the sale of the Kihapai House—“at least $873,739”—should

be excepted from discharge as “misappropriated and inadequately

accounted for.”

The bankruptcy court granted in part Villia’s summary judgment

motion. It held that the Probate Order had issue preclusive effect that the

Trust was valid, Marylin was trustee of the Trust, and “Marylin violated

her fiduciary duties and misappropriated and misused trust funds while

serving as Trustee of the Trust.” According to the bankruptcy court, the

only issues remaining for trial were the amount of Marylin’s liability and

whether she acted with the requisite state of mind for nondischargeability

under § 523(a)(4). 7

H. The nondischargeability trial and the bankruptcy court’s findings.

The bankruptcy court held a four-day trial that took place in

November 2022. In December 2022, the court issued its findings of fact and

conclusions of law holding Marylin liable for all but $15,100 of the $873,739

in net proceeds Marylin received from the sale of the Kihapai House.

According to the court, though Marylin claimed that hundreds of

thousands of dollars were given out by the Trust as gifts to herself and to

third parties, only $15,100 qualified as both corroborated and bona fide

gifts. The court further held that Marylin’s defalcation of the Kihapai

7 Marylin has not challenged on appeal the bankruptcy court’s order granting partial summary judgment. 13 House proceeds was accompanied by the requisite state of mind to render

her liability for $858,639 ($873,739 less $15,100 in “verified gifts”)

nondischargeable under § 523(a)(4).

In the process of finding Marylin liable for the nondischargeable

debt, the court made a number of observations. It acknowledged that

Marylin must have used some the Kihapai House proceeds to reimburse

herself for expenses she paid out of pocket for Filomena’s care and

subsistence. But, as the court explained, it was impossible to fix the amount

of those expenses because Marylin “made no effort” to separate Filomena’s

living expenses from those of Marylin and her immediate family, which

she also reimbursed from the Kihapai House proceeds. The court did not

identify the aggregate amount of proceeds Marylin claimed to have spent

on reimbursements, but at the conclusion of trial Villia variously calculated

this amount as ranging roughly between $350,0000 and $400,000.

The court further found that Marylin improperly used the following

additional amounts: (a) $275,000 to settle the business-related lawsuit

against Marylin, her husband, and two of their children; (b) $225,000 to

remodel the family’s house; (c) $24,362.22 to purchase an automobile; and

(d) an unspecified “substantial amount” for Las Vegas trips and other

family outings and gatherings.

I. The judgment, the fee award, and the appeals therefrom.

On December 29, 2022, the bankruptcy court entered a judgment

liquidating the Trust’s claim at $858,639 and excepting it from Marylin’s

14 discharge. Marylin timely appealed the nondischargeability judgment.

On January 12, 2023, Villia moved to recover attorney’s fees and costs

of $160,838.50 under HRS § 554D-1004 (“Fee Motion”). After briefing and a

hearing, the bankruptcy court entered an order granting Villia’s Fee

Motion in full (“Fee Award”). The court then amended its

nondischargeability judgment to add the Fee Award to the amount

excepted from discharge, bringing the total amended nondischargeability

judgment to $1,019,477.50. Marylin again timely appealed.

JURISDICTION

The bankruptcy court had jurisdiction under

. We

have jurisdiction under

.

ISSUES

1. Whether the bankruptcy court erred when it entered judgment

against Marylin on Villia’s § 523(a)(4) claim.

2. Whether the bankruptcy court abused its discretion when in entered

the Fee Award.

STANDARDS OF REVIEW

When we hear an appeal from a nondischargeability judgment

entered after trial, we review the bankruptcy court’s factual findings under

the clearly erroneous standard and its conclusions of law de novo. See

Candland v. Ins. Co. of N. Am. (In re Candland),

(9th Cir.

1996). Factual findings are clearly erroneous if they are illogical,

implausible, or without support in the record. Retz v. Samson (In re Retz),

15

(9th Cir. 2010). “Where there are two permissible views

of the evidence, the factfinder’s choice between them cannot be clearly

erroneous.” Anderson v. City of Bessemer City,

(1985). In

contrast, when we consider a matter de novo, we give no deference to the

bankruptcy court’s ruling. See Francis v. Wallace (In re Francis),

(9th Cir. BAP 2014).

Generally, we review the bankruptcy court’s Fee Award based on

state law for an abuse of discretion. See Kona Enters., Inc. v. Est. of Bishop,

, 883 (9th Cir. 2000). However, its interpretation of the relevant

state fees statute is reviewed de novo. See id. The bankruptcy court abused

its discretion if it applied an incorrect legal rule or its factual findings were

illogical, implausible, or without support in the record. TrafficSchool.com v.

Edriver Inc.,

(9th Cir. 2011).

DISCUSSION

I. APPEAL FROM NONDISCHARGEABILITY JUDGMENT.

A. Nondischargeability under § 523(a)(4).

Section 523(a)(4) excepts from discharge debts “for fraud or

defalcation while acting in a fiduciary capacity, embezzlement, or larceny.”

Only fiduciary defalcation is at issue in this appeal. To prove that a debt

arises from a nondischargeable fiduciary defalcation, a plaintiff creditor

generally must establish: “1) an express trust existed, 2) the debt was

caused by fraud or defalcation, and 3) the debtor acted as a fiduciary to the

creditor at the time the debt was created.” Otto v. Niles (In re Niles),

(9th Cir. 1997) (citation omitted), partially abrogated on other

grounds by Bullock v. BankChampaign, N.A.,

(2013).

The Supreme Court in Bullock clarified that fiduciary defalcation only

is nondischargeable under § 523(a)(4) if the fiduciary acts with a

sufficiently culpable state of mind. Bullock explained that the fiduciary

must act in “bad faith” or with “moral turpitude.” Bullock,

-

74. In the alternative, Bullock elaborated, the fiduciary’s conduct is

sufficiently culpable if she knows her conduct is wrongful, or she acts in

conscious disregard of (or with willful blindness to) “a substantial and

unjustifiable risk that [her] conduct will turn out to violate a fiduciary

duty.”

B. Marylin’s arguments on appeal.

1. Reasonableness of expenses—generally.

Many of Marylin’s arguments hinge on her claim that she reasonably

used the Trust funds for Filomena’s benefit. As Marylin points out, the

bankruptcy court acknowledged that some amount of expense for

Filomena’s care and subsistence would have been a reasonable charge

against the Trust estate. The court additionally remarked that acquiring a

car suitable for Filomena to ride in also could have been a reasonable trust

expense. Similarly, the court recognized that some expense for home

improvements to make Filomena’s living conditions more comfortable also

could have constituted a reasonable trust expense. Marylin argues that the

court erred because the reasonableness of some amount of expense

17 prevented her from forming the culpable state of mind required for a

nondischargeable fiduciary defalcation per Bullock—at least as to those

amounts reasonably expended.

Marylin insists that the court was required to assess the

reasonableness of each individual expenditure from the Kihapai House

proceeds. Furthermore, she contends that the court should have denied

Villia’s nondischargeability claim to the extent it found each individual

expense reasonable. Finally, Marylin argues that it “shocks the conscience”

and constitutes reversible error that the bankruptcy court did not credit

Marylin for a single expense arising from her care for Filomena between

2014 and 2018.

a. Failure to keep records.

Marylin’s arguments belie a fundamental misunderstanding of the

bankruptcy court’s decision. Though the court recognized the likelihood

that Marylin spent some amount for the benefit of Filomena and the Trust,

it specifically found that she failed to present any credible evidence that

would have allowed the bankruptcy court to fix any specific amount as

being spent for Filomena’s or the Trust’s benefit—reasonable or otherwise.

As the court stated:

It is impossible to determine how much of the [Trust’s] money Marylin used for [Filomena’s] living expenses, as opposed to the living expenses of Marylin and her husband and children, because Marylin never kept any record of the purposes for which she spent the money, and she made no effort to separate

18 [Filomena’s] expenses from her own expenses.

Mem. Dec. (Dec. 9, 2022) at 10.

Similarly, the court found: “because Marylin failed to keep any

records of her use of the trust funds, it is impossible to determine how

much of these expenses are appropriate.” Id. at 15-16. It also remarked:

“Marylin’s conduct [in failing to keep records of her expenditures] makes it

impossible to verify the accuracy of the Final Account or to confirm that the

expenditures listed in the account were proper uses of the trust’s funds.”

Id. at 21.

The bankruptcy court further found that Marylin intentionally failed

to keep sufficient records as part of her knowingly wrongful attempt to use

all the Kihapai House proceeds for her own benefit. Id. at 19-20. The

bankruptcy court based this finding on the totality of Marylin’s conduct,

behavior, and knowledge in dealing with the Kihapai House proceeds

between April 2016, when the Kihapai House was sold, and June 2018,

when Filomena passed away. Id. at 18-20. For example, the court

additionally found that many of the transactions using the Kihapai House

proceeds—particularly those involving the litigation settlement, the home

remodel, and the car purchase—were structured in a manner most

beneficial to Marylin and her immediate family and simultaneously most

detrimental to the Trust’s interests. The putative gift of Trust funds to settle

the lawsuit against Marylin and her immediate family could have been

structured as a loan. Likewise, the expenditure of Trust funds for the home 19 remodel could have been structured to give the Trust an interest in

Marylin’s house commensurate with the amount of Trust funds invested.

And the car could have been titled in the name of the Trust rather than in

the name of Marilyn’s husband. But in each instance, the Trust received

nothing in exchange for the funds expended. Marylin’s appeal did not

challenge the court’s findings regarding the structure of these transactions,

which evidenced her conscious disregard of her fiduciary duties and her

deliberate decision to engage in conduct that was certain to violate those

duties. See id. at 20, 29.

Marylin has done nothing on appeal to challenge the court’s scienter

findings, other than to assert the reasonableness of some of her

expenditures. The record supports each of the bankruptcy court’s findings,

which were sufficient to tie Marylin’s conduct to the requisite culpable

state of mind.

b. The parties’ respective burdens.

Marylin argues that it was incumbent on Villia as plaintiff to

demonstrate that each expenditure was not reasonably and appropriately

made for Filomena’s or the Trust’s benefit. Marylin contends that Villia

bore the burden of proof as to each expenditure because: (1) the Trust

waived her obligation to account for the Trust’s assets or to keep records to

support any such accounting; and (2) Villia as the plaintiff in the

nondischargeability action bore the burden to prove Marylin’s liability.

Though the Trust had language purporting to excuse Marylin from

20 providing an accounting, trust law limits the effect of such provisions. As

explained in the commentary accompanying the Restatement (Third) of

Trusts § 83 (2007), a trust may purport to “dispense with or limit the

normal requirements for submission of reports or accountings under this

Section or as imposed by statute.” But this does not excuse trustees from

the essential duty “to maintain records in some reasonable form.”

Restatement (Third) of Trs. § 83, cmt. d. Thus, “[a] trustee who fails to keep

proper records is liable for any loss or expense resulting from that failure.”

Id. at cmt. a(1).8 Moreover, “[a] trustee's failure to maintain necessary books

and records may also cause a court in reviewing a judicial accounting to

resolve doubts against the trustee.” Id.; see also Maue v. Maue (In re Maue),

, 387 (Bankr. W.D. Wash. 2019) (stating that “where a trustee

has failed to keep accurate and timely records . . . , all presumptions must

be taken against the trustee in determining damages.”). As similarly stated

in Wood v. Honeyman,

(Or. 1946), trustees are “bound to

keep clear and accurate accounts.” And when they fail to do so “the

presumptions are all against [them], obscurities and doubts being resolved

adversely to [them].”

(quoting BOGERT ON TRS. AND TRUSTEES § 962).9

8 Hawaii courts typically consider persuasive the Restatement (Third) of Trusts. See In re Mitsuo Yoneji Revocable Tr. Dated Nov. 27, 1985 (“Mitsuo”),

, 903 n.11 (Haw. Ct. App. 2020) (listing cases). Though none of the cases cited in Mitsuo specifically relied on comments a or d of the Restatement (Third) of Trusts § 83, we have no reason to doubt that Hawaii courts would find these comments persuasive. 9 The reporter’s notes accompanying comments a(1) and d to Restatement (Third)

of Trusts § 83 quote extensively from Wood. One of the most apt passages from Wood 21 As for the respective evidentiary burdens of the parties, most courts

following the Restatement have held that once the plaintiff has presented

sufficient evidence of a breach of duty and a related loss to the trust, the

burden shifts to the defendant—the trustee—to establish that her breach

did not actually cause any loss. See Restatement (Third) of Trs. § 100 cmt. f,

accompanying Reporter’s Notes, and cited cases; see also In re Niles,

(applying California law in the context of a § 523(a)(4) action

and holding that the burden shifts to the fiduciary to adequately account

for trust funds, “once the principal has shown that funds have been

entrusted to the fiduciary and not paid over or otherwise accounted for”).

Villia established that the Trust received $873,739.00 in net proceeds

from the sale of the Kihapai House, that Marylin failed to adequately

account for the exhaustion of those funds, and that the dissipation of the

Trust’s funds without adequate explanation constituted a breach of

observes:

If a fiduciary can be rendered free from the duty of informing the beneficiary concerning matters of which he is entitled to know, and if he can also be made immune from liability resulting from his breach of the trust, equity has been rendered impotent. The present instance would be a humiliating example of the helplessness into which courts could be cast if a provision, placed in a trust instrument through a settlor’s mistaken confidence in a trustee, could relieve the latter of a duty to account. Such a provision would be virtually a license to the trustee to convert the fund to his own use and thereby terminate the trust.

Id. at 164. 22 Marylin’s fiduciary duties. At that point, it was incumbent on Marylin as

the former trustee to present some credible evidence as to what happened

to the sale proceeds and the reasonableness of her expenditures.

The court found not credible Marylin’s testimony on the use of the

sale proceeds. It further found her accounting unreliable. Indeed, Marylin

repeatedly conceded that she did not know and could not verify or identify

the purpose of specific payments listed in her Final Account. Multiple

times during trial, Marylin commented that the Final Account was

prepared at the time of the probate court litigation by her then attorney and

by another professional in the attorney’s office. She further testified that

her involvement in its preparation was very limited. She also repeatedly

rationalized her inability to verify certain amounts in the Final Account or

to explain how they were derived. This testimony led the bankruptcy court

to ultimately find: “Marylin’s conduct makes it impossible to verify the

accuracy of the Final Account or to confirm that the expenditures listed in

the account were proper uses of the trust’s funds.” Mem. Dec. (Dec. 9, 2022)

at 21. That finding was not clearly erroneous. 10

10 Marylin cites several cases that she argues suggest that each transaction must be looked at individually in the process of determining nondischargeability. See Heptacore, Inc. v. Luster (In re Luster),

(7th Cir. Nov. 1, 2002); Maciolek v. Firer (In re Firer),

(Bankr. D. Conn. 2004); Urological Grp., Ltd. v. Petersen (In re Petersen),

(Bankr. C.D. Ill. 2003). None of these cases help Marylin. None of them involved the circumstances presented here, where the plaintiff established that the entirety of the Trust’s funds were dissipated without the trustee adequately explaining how the funds were used or the reasonableness of the alleged use. As indicated above, Marylin’s argument ignores the fact that the burden 23 2. Reasonableness of expenses—specific amounts paid.

a. Payments for utilities and for healthcare and legal services.

Marylin also directs us to multiple checks paid from the Trust

account in 2014 and 2015—before the Kihapai House was sold and Marylin

received the net sale proceeds. She contends these checks are concrete and

detailed documentary evidence of payments made for Filomena’s benefit.

Marylin argues the bankruptcy court erred by not crediting against the

Kihapai House proceeds the aggregate amount of these and similar checks

paid to utilities, healthcare providers, and legal service providers.

The record demonstrates two problems with Marylin’s argument.

First, there is no evidence that Marylin paid the checks to utilities,

healthcare providers, and legal service providers using her personal funds.

To the contrary, the bank records presented into evidence show that these

payments were made from the Trust’s bank account. There is no

documentary evidence in the record demonstrating that any of the money

in the Trust’s bank account consisted of personal funds from Marylin or

her husband. Filomena’s social security proceeds were the principal source

of funds in the Trust account before the sale of the Kihapai House.

Admittedly, during this period there were deposits of roughly $11,500 in

non-social security funds. Once again, there is no documentary evidence as

shifted to her to reasonably explain how her use of the Trust funds benefitted Filomena or the Trust estate, which the bankruptcy court found she failed to do. 24 to the source of these deposits into the Trust account. Marylin did testify

that she and her husband sometimes deposited personal funds into the

Trust account. But she never provided any details or identified any specific

deposits or payments. Thus, Marylin has not shown that the bankruptcy

court erred by denying her credits for payments for utilities, healthcare,

and legal services made from the Trust bank account.

Second, there is no documentary evidence tying the bills paid to the

Kihapai House or to Filomena’s healthcare and legal needs. The utility

payments might have satisfied bills for the Kihapai House’s utility services.

If so, such payments would have benefitted the Trust by maintaining the

house before its sale. But with respect to the utility payments, the record

does not demonstrate that these payments were made on bills for the

Kihapai House. The record does not include any utility bills identifying the

Kihapai House as the service address for any identified payment. Similarly,

the record generally indicates that the designated healthcare service

provider payee—Dr. Badua—provided medical care for Filomena. But

there is no documentary evidence directly tying the checks paid to Dr.

Badua to bills for Filomena’s medical care. Certainly, such payments might

have been for Filomena’s medical care, but it also is possible that such

payments were for family members other than Filomena. There is simply

no documentary evidence to prove that the identified payments were for

Filomena’s care or benefit. Rather, Marylin only presented the checks

themselves. The only documentary evidence admitted at trial tying the

25 specific payments to Filomena was the post hoc Final Account, which the

court found unreliable. The record amply supports the court’s finding that

the Final Account was not reliable. At bottom, the bankruptcy court did not

clearly err when it found that there was insufficient evidence to prove that

Marylin made any specific payments for the Trust’s benefit from her

personal funds.

b. Payments for settlement of litigation, the home remodel, and the car.

It is undisputed that Marylin spent $275,000 of the Kihapai House

proceeds to settle a lawsuit against herself and her immediate family. She

also used $225,000 from the house proceeds to remodel her family’s house

to add four additional bedrooms and three additional bathrooms. And she

spent $24,362.22 of the Trust’s funds to purchase a car registered in her

husband’s name. The bankruptcy court ultimately held that none of these

amounts could be credited as valid and reasonable Trust expenses incurred

for the benefit of Filomena or the Trust estate. Marylin raises two partially

overlapping arguments as to why the bankruptcy court should have

credited her the amounts spent on these three transactions against any

nondischargeable liability.

i. Mental capacity and authorization of payments.

Marylin testified and argued at trial that Filomena authorized or

directed the payments for the settlement and the remodel as gifts to

Marylin. She alternately contends that Filomena agreed to pay for the

26 settlement in recognition of Marylin’s promise to care for Filomena in her

home for the rest of Filomena’s life. Marylin argues that her testimony

proved that Filomena authorized these large expenditures, and there was

no conflicting evidence. But the bankruptcy court specifically found that

her trial testimony on this point was not credible. See Mem. Dec. (Dec. 9,

2022) at 13.

The court further found either that Filomena did not actually consent

to these payments or that her consent was vitiated by Filomena’s lack of

mental capacity at the time consent purportedly was given. Marylin insists

that the bankruptcy court erred because it stated that she had exercised

undue influence over her mother. Marylin contends that this violated her

due process rights because Villia had not specifically argued undue

influence. Alternatively, she argues that the evidence presented at trial was

insufficient to demonstrate the elements for undue influence.

Marylin claims she was not reasonably notified before trial that

undue influence was at issue and did not have a reasonable opportunity to

address that issue at trial. This argument misses the point. The parties

presented at trial substantial evidence of Filomena’s competency and

mental capacity, including her medical records and doctor’s notes. Thus,

the issue of Filomena’s mental status was squarely raised and litigated.

True, the bankruptcy court referenced undue influence when discussing

Filomena’s ability to knowingly and voluntarily authorize Marylin’s use of

Trust assets for her own benefit while she served as trustee. But the court

27 made these references within the larger context of considering the merits of

Marylin’s common law defenses to her patent self-dealing: whether

Filomena had consented to, ratified, or otherwise released Marylin from

liability for her conduct as trustee. See Restatement (Third) Trs. § 97 and

accompanying case citations (discussing defenses of consent, ratification,

and release).

As part of these defenses, the defendant-trustee bears the burden of

proving that the consent, ratification, or release was freely given by a

competent beneficiary—and not induced by the improper conduct of the

trustee. This is “because of the strict fiduciary relationship between trustee

and beneficiary.” Id. at cmt. e. Accordingly, “a trustee who would rely on a

beneficiary’s consent, ratification, or release normally has the burden of

showing that the beneficiary . . . was sufficiently informed to understand

the character of the act or omission and was in a position to reach an

informed opinion on the advisability of consenting, ratifying, or granting a

release.” Id. Equally important, a beneficiary’s consent to or ratification of a

breach of trust will not free the trustee from liability when the beneficiary

was induced to act by fraud, duress, undue influence, or by other abuse of

the fiduciary relationship—including procurement of the “beneficiary’s

approval of a transaction in which the trustee’s personal interest is adverse

to that of the beneficiary, and the release or transaction involves a bargain

that is not substantively fair and reasonable.” Id. at cmt. f; see also BOGERT’S

THE LAW OF TRUSTS AND TRUSTEES § 941(“all direct dealings between trustee

28 and beneficiary are regarded with suspicion by the court, [so] the trustee

must bear the burden of proving that such dealings were conducted by him

with the utmost fairness, and that full disclosure and independent advice

are considered as important lights on the honesty of the transaction”).

Marylin squarely put at issue Filomena’s mental capacity when she

argued that her mother had authorized the improvements to Marylin’s

house and the settlement of her immediate family’s business litigation.

Inherently, trustees may not make substantial payments to themselves for

their own benefit without valid authorization. The testimony related to

Filomena’s mental capacity and her medical records were admitted into

evidence to establish Filomena’s ability, or inability, to validly consent to

Marylin’s use of the Trust proceeds for her personal benefit. Based on the

evidence presented, the bankruptcy court found that Filomena’s

deteriorating mental capacity between 2014 and 2018 vitiated any consent

Filomena purportedly gave in 2016.

Marylin places an inappropriate emphasis on the court’s use of the

phrase “undue influence.” The court used this term generically to refer to

Filomena’s deteriorating mental condition and found that by the time of

the self-dealing transactions in the second half of 2016, she lacked sufficient

capacity for Marylin to rely on any such authorization to use the Trust

assets for her personal benefit while serving as trustee. The court’s ultimate

reference to undue influence did not deprive Marylin of notice or the

opportunity to be heard on the controlling question of Filomena’s

29 authorization of Marylin’s expenditures and the validity of any such

authorization.

Marylin also challenges the sufficiency of the evidence supporting

the court’s finding that Marylin knew or had reason to know that any

authorization her mother gave was of doubtful validity. As the bankruptcy

court explained:

Marylin attempts to justify many of her expenditures by claiming that Mother authorized them. But the trustee should not follow the direction of a settlor-beneficiary if there was reason to doubt the validity of the instruction or authorization. Cloud v. U.S. [Nat’l] Bank of [Or.], [

(Or. 1977)]. Marylin knew that Mother’s mental state had declined and that Mother’s total dependence on Marylin gave Marylin undue influence over Mother. Even if Mother authorized some or all of the expenditures, Marylin was not entitled to rely on those instructions.

Mem. Dec. (Dec. 9, 2022) at 29 (footnote omitted).

Cloud is apposite. It stands for the proposition that a trustee cannot

legally rely on the settlor’s facially-valid authorization of a transaction

involving trust assets when she has reason to know that the settlor’s

authorization might be invalid. Cloud relied on Restatement (Second) of

Trusts § 226A (“§ 226A”).

. As the Cloud court explained,

§ 226A dealt with the analogous problem of a trustee who makes a

payment from trust funds or conveys trust property based on the trust’s

terms, but the trust turns out to be invalid. Id. According to both Cloud and

§ 226A, the trustee is liable for damages arising from the payment or

30 conveyance, “if, but only if, when he made such payment or conveyance he

knew that the trust was invalid or had or should have had reasonable

doubt as to its validity.” Id. (quoting § 226A).11 Marylin has not challenged

the court’s application of Cloud.

There is ample evidence in the record to support the bankruptcy

court’s determination that Marylin should have known better than to rely

on any authorization purportedly given by Filomena for the use of Trust

funds to pay for the $275,000 settlement or the $225,000 home remodel.

Relying principally on the notes of Filomena’s primary care physician Dr.

Badua, the bankruptcy court found that Filomena’s mental condition began

to deteriorate no later than 2014 and was significantly impaired by no later

than 2016, at the time Marylin claimed Filomena allegedly authorized the

payments for the settlement and the home remodel. Mem. Dec. (December

9, 2022) at 5-7, 11, 16. Dr. Badua’s notes between 2014 and 2016 sometimes

refer to Filomena’s senile dementia and also occasionally refer to her

confusion, disorientation, or hallucinations.

Marylin contends that the bankruptcy court’s findings were clearly

erroneous. She points out that Dr. Badua only referred to dementia in some

of her doctor’s notes from this time period. Marylin further observes that

11 Section 226A is consistent with the version of the Uniform Trust Code as adopted and enacted in Hawaii. See HRS § 554D-1006 (“A trustee who acts in reasonable reliance on the terms of the trust as expressed in the trust instrument shall not be liable to a beneficiary for a breach of trust to the extent the breach resulted from the reliance.” (emphasis added)). 31 there is nothing in Dr. Badua’s notes prescribing any medication or

referring Filomena to any specialists on account of her alleged diminished

mental capacity. At bottom, Marylin interprets Dr. Badua’s notes

differently than the bankruptcy court. She claims that the notes when read

carefully are more consistent with a finding that Filomena’s mental

condition did not significantly change between 2014 and 2016.

We simply are not persuaded by this argument. Marylin maintains

that Filomena authorized the use of $500,000 in Trust funds—well over half

of the net Kihapai House proceeds—to pay for Marylin’s litigation

settlement and the remodeling of her home. After considering the totality

of the evidence, the bankruptcy court found that Filomena’s authorizations

were lacking and that Marylin knew or should have known that her

mother did not have the mental capacity to make a valid authorization by

the middle of 2016, when Marylin started spending the proceeds from the

sale of the house. The court’s findings were neither illogical, implausible,

nor without support in the record. As of the date of the challenged

disbursements, Dr. Badua’s notes—especially when combined with

Filomena’s hospitalization records and the testimony of Marylin’s

siblings—were sufficient to support the bankruptcy court’s mental capacity

findings. Marylin simply disagrees with the inferences the court drew from

the evidence and its ultimate finding. But, “[w]here there are two

permissible views of the evidence, the factfinder’s choice between them

cannot be clearly erroneous.” Anderson,

.

32 ii. Benefit argument and its evolution.

In the adversary proceeding, Marylin maintained that the remodel

was undertaken, and the car was purchased for Filomena’s benefit. On

appeal, Marylin has somewhat modified her contentions regarding benefit

and reasonableness. In the bankruptcy court she contended that the

entirety of the remodel and the entirety of the car purchase were

reasonable expenses of the Trust. On appeal, she more modestly argues

that the bankruptcy court acknowledged that at least some portion of the

remodel and some portion of the auto purchase benefitted Filomena and

hence the court should have credited her for at least that portion of the

payments as reasonable Trust expenses.

The bankruptcy court specifically found that Marylin failed to

present any evidence that would enable the court to fix a specific amount

paid for the remodel or for the car as reasonable Trust expenses. As set

forth above, Marylin needed to prove which of her expenditures

constituted reasonable expenses for the benefit of Filomena or the Trust.

The record supports the bankruptcy court’s finding that Marylin failed to

meet this burden. Thus, we perceive no reversible error in the bankruptcy

court’s determination that Marylin was not entitled to any credit for any

part of the $225,000 spent on the remodel or any part of the $24,362.22

spent on the car.

3. Marylin’s other arguments.

There are two other arguments we need to address, albeit briefly.

33 First, according to Marylin, the bankruptcy court committed reversible

error by awarding damages after trial in excess of the amount alleged in

Villia’s complaint. But Marylin cites no authority to support the novel

proposition that damages after trial cannot exceed specific amounts alleged

in the plaintiff’s complaint. Nor are we aware of any such authority. To the

contrary, federal decisions generally do not limit a plaintiff’s recovery after

trial to the specific amounts alleged in the complaint. See Rutter Grp. Prac.

Guide, Fed. Civ. Proc. Before Trial ¶¶ 8:715-8:718 (Calif. and 9th Cir. ed.

April, 2024) (listing cases).

Finally, Marylin maintains that the court’s findings regarding

“verified gifts” were clearly erroneous. The bankruptcy court found that

$15,100 in Trust expenditures were sufficiently corroborated to be bona

fide gifts. The court treated these expenditures as “verified gifts” and

credited them against the Kihapai House proceeds. According to Marylin,

because the court found $15,100 in verified gifts, the bankruptcy court was

obliged to similarly treat other expenditures that Marylin also alleged were

gifts. She claims that the court did not identify which specific $15,100 in

expenditures qualified as bona fide gifts, nor is it possible on the record

presented to discern any meaningful distinction between and among all of

the expenditures Marylin alleged were gifts.

Marylin’s gift argument perplexes us. It is fundamentally inconsistent

with the scheme of shifting burdens we discussed earlier in this decision.

Regardless of how the bankruptcy court found that $15,100 in trust

34 expenditures were “verified gifts,” the record supports the bankruptcy

court’s finding that the remainder of Marylin’s alleged gift conveyances

were insufficiently documented.

II. APPEAL FROM FEE AWARD.

A bankruptcy court may award nondischargeable attorney’s fees

against a debtor in a nondischargeability action when an award of such

fees is authorized under applicable non-bankruptcy law and when the

awarded fees flowed from the debtor’s nondischargeable conduct. See

Kadjevich v. Kadjevich (In re Kadjevich),

(9th Cir. 2000)

(“Because the nondischargeable fraud debt was the source of the award of

attorney fees, the award likewise was nondischargeable even if it resulted

from the debtor’s good-faith attempt to litigate the issue of

dischargeability.” (citing Cohen v. de la Cruz,

(1998)); see

also Ghomeshi v. Sabban (In re Sabban),

(9th Cir. 2010)

(attorney’s fees must flow from nondischargeable conduct). Here, the fees

the bankruptcy court awarded flowed directly from Marylin’s knowingly

wrongful breach of her fiduciary duties to the trust. Marylin does not argue

otherwise.

After prevailing at trial, Villia moved to recover her attorney’s fees

and costs incurred in both the nondischargeability action and in the main

bankruptcy case. Villia sought to recover fees and costs totaling

$160,838.50. To support her Fee Motion, Villia primarily relied on HRS

§ 554D-1004(a), which states:

35 In a judicial proceeding involving the administration, interpretation, or validity of a trust, the court may award reasonable attorney’s fees, costs, and expenses to any party to the trust who has acted in the best interest of the trust as a whole, to be paid by another party or from the trust that is the subject of the controversy.

But Villia also relied on Hawaii’s common law of trusts. Citing In re Estate

of Dwight,

(Haw. 1984), Villia asserted that she was

entitled to recover all fees and costs she incurred as a result of Marylin’s

breach of her fiduciary duties.

In granting the Fee Motion in full, the bankruptcy court referenced

both the common law and HRS § 554D-1004(a).

On appeal from the Fee Award, Marylin contends that the

bankruptcy court’s interpretation of HRS § 554D-1004(a) is overbroad.

According to Marylin, the nondischargeability action and her underlying

bankruptcy case were “post-probate collection matter[s]” that did not

involve “administration, interpretation, or validity of a trust” as specified

in HRS § 554D-1004(a). Therefore, she concludes that the fees Villia

incurred in the nondischargeability action and in her bankruptcy case are

not recoverable under HRS § 554D-1004(a).

Marylin’s argument completely ignores the common law right to

recover fees based on the trustee’s breach of her fiduciary duties, which

broadly aims “to make the trust and its beneficiaries whole”

notwithstanding the trustee’s breach of trust. Restatement (Third) of Trs.

36 § 100, cmts. a, b(2). To accomplish this “make whole” goal, trust law

affords courts with the discretion to award fees and costs in appropriate

cases. See id. at cmt. b(2), and accompanying Reporter’s Note (listing cases);

see also Mitsuo,

& n.9 (relying in part on cmt. b(2) to the

Restatement (Third) of Trusts § 100 and holding that a beneficiary can be

surcharged for the litigation expenses incurred by the trust as a result of

the beneficiary’s breach of trust).

Furthermore, we agree with the bankruptcy court that HRS § 554D-

1004(a) cannot reasonably be construed to limit or narrow the plaintiff’s

common law right to recover fees incurred as a result of the defendant's

breach of her fiduciary duties. See HRS § 554D-106 (indicating that

Hawaii’s version of the Uniform Trust Code does not supplant or

supersede the common law of trusts except when the Uniform Trust Code

specifically so provides); see also Editor’s Notes accompanying Unif. Tr.

Code (2000) § 106 (“The Code is supplemented by the common law of

trusts, including principles of equity.”).

In short, Marylin’s Fee Award appeal lacks merit. She has failed to

present any cogent basis to reverse the Fee Award.

CONCLUSION

For the reasons set forth above, we AFFIRM both the bankruptcy

court’s nondischargeability judgment and its Fee Award.

37