Opinion
Case No. 03-14006-SSM, Adversary Proceeding No. 04-1005
March 26, 2004
MEMORANDUM OPINION AND ORDER
This matter is before the court on the plaintiff's motion for summary judgment, seeking to have its claim in the amount of $769,125.55, evidenced by an arbitration award, deemed nondischargeable under §§ 523(a)(2)(A), (B), and (a)(6), Bankruptcy Code. A hearing was held in open court on March 23, 2004, at the conclusion of which the court ruled from the bench that the motion would be denied. The purpose of this memorandum opinion and order is to explain in more detail the reasons for the court's ruling.
Background
The plaintiff, Grayson, Kubli Hoffman, P.C. ("Grayson"), is a law firm. In December 2001, the defendant, Amanda Alexx Giovanni ("Ms. Giovanni"), hired Grayson to defend her in litigation in the Circuit Court for the City of Alexandria brought by her former employer, Andrulis Corp. Ms. Giovanni paid a $10,000 retainer to Grayson but, according to Grayson, made no further payments during the course of the representation. On June 11, 2001, Grayson moved to withdraw from representing her. The Alexandria Circuit Court denied Grayson's motion, and Grayson continued to represent Ms. Giovanni through the trial. The Alexandria Circuit Court found Ms. Giovanni liable for fraud, breach of fiduciary duty, and conversion, and awarded Andrulis compensatory damages in the amount of $27,675 and punitive damages in the amount of $10,000.
In July 2002, Grayson filed suit against Ms. Giovanni in Fairfax County Circuit Court alleging breach of the representation contract and fraud based upon Ms. Giovanni's failure to pay any additional fees besides the retainer. Ms. Giovanni then moved to compel arbitration, and on December 20, 2002, the Fairfax Circuit Court entered an order compelling arbitration. On August 18, 2003, the American Arbitration Association issued an award, holding that
Grayson has proven each contract based claim (Counts I-III) by a preponderance of the evidence and each fraud claim (Counts IV and V) by clear and convincing evidence. A compensatory Award is hereby entered, in favor of Grayson and against Giovanni, in the principal sum of $417,049.70 under each such claim (and in the aggregate);
Pursuant to Virginia law, because Grayson has proven each fraud-based claim (Counts IV and V) by clear and convincing evidence, an Award of punitive damages is hereby entered, in favor of Grayson and against Giovanni, in the amount of . . . $100,000 under each such claim (and in the aggregate).
In addition, the Arbitrator awarded Grayson $175,000 for legal fees incurred in the collection process, $77,075.85 for pre-judgment interest, and interest at the rate of 1.5% per month from August 1, 2003, until the award is paid in full.
On August 21, 2003, Grayson filed a motion in the Fairfax Circuit Court to confirm the arbitration award and for entry of judgment. The motion was placed on the August 29, 2003, motions docket. However, on August 27, 2003, two days prior to the scheduled hearing, Ms. Giovanni filed for relief under chapter 13 of the Bankruptcy Code in this court, thereby staying the Fairfax Circuit Court proceeding under § 362(a), Bankruptcy Code. Neither an order confirming the award nor a money judgment has been entered in the Fairfax Circuit Court. Grayson seeks summary judgment arguing that the arbitration award should be given collateral estoppel effect making its claim nondischargeable under §§ 523(a)(2)(A), (B), and (a)(6).
The debtor voluntarily converted her case to chapter 7 on November 12, 2003. She has not yet received a discharge.
Discussion
To evaluate the preclusive effect of a state court judgment, a federal court must apply the preclusion law of the state which rendered the judgment. See 28 U.S.C. § 1738; Marrese v. Am. Academy of Orthopaedic Surgeons, 470 U.S. 373, 381, 105 S.Ct. 1327, 1332, 84 L.Ed.2d 274 (1985); (Pahlavi v. Ansari In re Ansari), 113 F.3d 17, 19 (4th Cir. 1997), cert. denied, 118 S.Ct. 298, 139 L.Ed.2d 230 (1997); Hagan v. McNallen (In re McNallen), 62 F.3d 619, 624 (4th Cir. 1995); Schriver v. Valley Stream Fin. Corp., 218 B.R. 797, 801 (E.D. Va. 1998); Hildebr and v. Kugler (In re Kugler), 170 B.R. 291 (Bankr. E.D. Va. 1994). It has been held that the Full Faith and Credit statute "obliges federal courts to give the same preclusive effect to . . . state-court judgment[s] as would the courts of the State rendering the judgment[s]." McDonald v. City of W. Branch, 466 U.S. 284, 287-288, 104 S.Ct. 1799, 1801-1802, 80 L.Ed.2d 302 (1984). Although Congress could presumably have broadened the reach of § 1738 to extend to arbitration awards as well, it has not done so. McDonald, 466 U.S. at 288, 104 S.Ct. at 1802 ("Arbitration is not a `judicial proceeding' and, therefore, § 1738 does not apply to arbitration awards."); Barrentine v. Arkansas-Best Freight Sys., Inc., 450 U.S. 728, 742-45, 101 S.Ct. 1437, 1445-47, 67 L.Ed.2d 641 (1981); Alexander v. Gardner-Denver Co., 415 U.S. 36, 56-60, 94 S.Ct. 1011, 1023-25, 39 L.Ed.2d 147 (1974).
"The records and judicial proceedings of any court of any . . . State, Territory or Possession . . . shall be proved or admitted in other courts within the United States and its Territories and Possessions by the attestation of the clerk and seal of the court annexed, if a seal exists, together with a certificate of a judge of the court that the said attestation is in proper form. Such . . . judicial proceedings . . ., so authenticated, shall have the same full faith and credit in every court within the United States and its Territories and Possession as they have by law or usage in the courts of such State, Territory or Possession from which they are taken." (emphasis added).
In the absence of a state court "judgment," there appears to be no basis upon which the court could find that collateral estoppel would apply. The court has nevertheless considered whether, under Virginia law, an unreviewed arbitration award would be entitled to collateral estoppel effect. In Virginia, "collateral estoppel precludes further litigation of an issue in a subsequent proceeding when that issue was actually litigated and its resolution was essential to a valid, final and personal judgment rendered in a prior proceeding." Kugler, 170 B.R. at 297; see also Horton v. Morrison, 248 Va. 304, 448 S.E.2d 629 (1994). The Supreme Court of Virginia has explained that the application of collateral estoppel requires the following elements to be shown:
[1.] the parties to the two proceedings, or their privies, must be the same;
[2.] the factual issue sought to be litigated actually must have been litigated in the prior action and must have been essential to the prior judgment; and
[3.] and the prior action must have resulted in a valid, final judgment against the party sought to be precluded in the present action.
[4.] Additionally, collateral estoppel in Virginia requires mutuality, that is, a party is generally prevented from invoking the preclusive force of a judgment unless that party would have been bound had the prior litigation of the issue reached the opposite result.
TransDulles Ctr., Inc. v. Sharma, 252 Va. 20, 22-23, 472 S.E.2d 274, 275 (1996) (emphasis added); see also In re Prof'l Coatings (N.A.), Inc., 210 B.R. 66, 79-88 (Bankr. E.D. Va. 1997) (St. John, J.) (providing extensive analysis of the requirements for collateral estoppel under Virginia law).
Under section 8.01-581.012 of the Code of Virginia,"[u]pon granting an order confirming, modifying or correcting an [arbitration] award, a judgment or decree shall be entered in conformity therewith and be docketed and enforced as any other judgment or decree." See also Moore Bros. Constr. Co. v. Brown Root, Inc., 962 F. Supp. 838, 842 (E.D. Va. 1997) ("In Virginia, by statute and under the common law, arbitration awards, which have been confirmed by the court are given collateral estoppel effect.") (emphasis added); accord Jalil v. Avdel Corp., 873 F.2d 701, 704 (3rd Cir. 1989), cert. denied, 493 U.S. 1023, 110 S.Ct. 725, 107 L.Ed.2d 745 (1990); Caldeira v. County of Kauai, 866 F.2d 1175, 1178 (9th Cir. 1989), cert. denied, 493 U.S. 817, 110 S.Ct. 69, 107 L.Ed.2d 36 (1989); Molina v. Gutierrez (In re Molina), 228 B.R. 248, 250 (B.A.P. 9th 1998). Although the statute and case law do not in so many words state that unconfirmed arbitration awards are not to be given collateral estoppel effect, the import of the cited authorities is that Virginia law requires an arbitration award to be confirmed and judgment entered before collateral estoppel can be applied.
Since the only evidentiary underpinning for the summary judgment motion is the findings made by the arbitrator summary judgment is not appropriate. It is, accordingly,
ORDERED:
1. The motion for summary judgment is denied.
2. The clerk shall mail a copy of this order, or send electronic notice of its entry, to the parties listed below.