Opinion
NOT FOR PUBLICATION
MEMORANDUM DECISION RE MOTION FOR SUMMARY JUDGMENT FILED BY THOMAS FERNANDEZ AND GLORIA G. FERNANDEZ
MARGARET M. MANN, Bankruptcy Judge.
On April 13, 2011, the Superior Court of California entered a default judgment in the amount of $393,029 ("Judgment") in favor of Thomas F. Fernandez and Gloria G. Fernandez ("Plaintiffs") against Akiba T. Miniefee ("Debtor") and several other defendants jointly and severally. The Judgment was based upon Plaintiffs' business dealings with Tricomm Worldwide, LLC ("Tricomm"), of which Debtor was an employee. After Debtor filed Chapter 7 bankruptcy several months later, Plaintiffs filed suit against Debtor to determine the nondischargeability of the Judgment, alleging claims for "actual fraud" and "fraud or defalcation while acting in a fiduciary capacity" under 11 U.S.C. §§ 523(a)(2)(A) and 523(a)(4).
The other defendants were James L. Hutchinson, Jr., Antipaz Cabotaje, Jr., Olivia Cabotaje and Tricomm.
All statutory references for the remainder of this document will be to Title 11, United States Code, unless otherwise indicated.
Plaintiffs now seek summary judgment, contending that Debtor is precluded from re-litigating the issues inherent in the Judgment. Because the Judgment includes no findings of fact, and therefore no specific rulings on the issues of fraud or defalcation, and because the wide range of theories alleged in the Complaint do not establish fraud or defalcation by necessity, Plaintiffs have not carried their burden of demonstrating the absence of triable issues of fact for the Judgment to be excepted from discharge at this stage of the case. Summary Judgment is thus denied.
I. Factual Background
Plaintiffs sued Debtor, Tricomm, and the other defendants in state court on seven theories: breach of contract, fraud, conversion, unjust enrichment, breach of the covenant of good faith and fair dealing, intentional infliction of emotional distress, and civil conspiracy. Plaintiffs alleged in each cause of action that they hired the defendants to consult on the acquisition of ownership interests in real estate investment properties, paid $60,000 for these services, but received no consulting services nor any ownership interests in real estate.
After Debtor initially failed to respond to the state court complaint, a default was entered and then set aside. Debtor then failed to respond to discovery or to appear at a settlement conference, causing the state court to strike Debtor's answer. The Judgment of $393,029, of which $300,000 was awarded as punitive damages, was then entered after a further evidentiary hearing. No findings of fact were made in the Judgment to identify the theories on which the damage award was based.
In response to the nondischargeability complaint in this Court, Debtor confirms the business relationship Tricomm had with Plaintiffs, but denies either fraud or defalcation. Debtor claims that she abandoned her valid defenses to Plaintiffs' claims in state court because she could no longer afford an attorney. The Court notes Debtor is also unrepresented in this case.
II. Jurisdiction
Under 28 U.S.C. § 157(b)(1), this Court has authority to enter final judgment and findings of fact and conclusions of law in this nondischargeability proceeding, which is "core" to the Bankruptcy Code. 28 U.S.C. § 157(b)(2)(L) (2012) (discharge issues are statutorily core); Grogan v. Garner, 498 U.S. 279, 284 (1991) (bankruptcy courts have exclusive jurisdiction over discharge matters); Sasson v. Sokoloff (In re Sasson), 424 F.3d 864, 867-68 (9th Cir. 2005); see also Cowen v. Kennedy (In re Kennedy), 108 F.3d 1015, 1018 (9th Cir. 1997) (affirming bankruptcy court's entry of a monetary judgment on a state-law fraud claim). Additionally, this order denying summary judgment is not a final order under Bankruptcy Rule 7054, but an interlocutory one, since further proceedings will be had before this case is resolved. See O'Toole v. McTaggart (In re Trinsum Group, Inc.), 467 B.R. 734, 741 (Bankr. S.D.N.Y. 2012) (summary judgment decisions that do not resolve the entire case are interlocutory). The Court has jurisdiction on these bases.
III. Summary Judgment Standards
On a motion for summary judgment, the moving party bears the burden of demonstrating that "there is no genuine dispute as to any material fact" and that it "is entitled to judgment as a matter of law." FED. R. Crv. P. 56(a); FED. R. BANKR. P. 7056. To prevail, the moving party must establish that each essential element of its claim is undisputed. See Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). The Court is "required to view all facts and draw all reasonable inferences in favor of the nonmoving party" when reviewing the Motion. Brosseau v. Haugen, 543 U.S. 194, 195 n.2 (2004). Because the underlying purpose of the Bankruptcy Code is to grant the debtor a "fresh start, " courts construe exceptions to discharge narrowly. Retz v. Samson (In re Retz), 606 F.3d 1189, 1197 (9th Cir. 2010) (quoting Bernard v. Sheaffer (In re Bernard), 96 F.3d 1279, 1281 (9th Cir. 1996)). The moving party also bears the burden of proof on all elements of issue preclusion. Khaligh v. Hadaegh (In re Khaligh), 338 B.R. 817, 825 (B.A.P. 9th Cir. 2006). Regardless, if the necessary elements are met, this Court must give preclusive effect to the nondischargeability issues decided in state court as a matter of full faith and credit. Bugna v. McArthur (In re Bugna), 33 F.3d 1054, 1057 (9th Cir. 1994).
Here, Plaintiffs have not met their burden because the Judgment does not make express or implied findings of the elements of fraud or defalcation as required by §§ 523(a)(2)(A) and 523(a)(4). In the absence of these findings, the Judgment does not preclude the issue of dischargeability. Material issues of fact remain, and summary judgment cannot be granted.
IV. Application of Collateral Estoppel to State Court Judgments
Pursuant to 28 U.S.C. § 1738, federal courts apply the issue preclusion principles from the state in which the judgment was entered. Grogan, 498 U.S. at 284; Honkanen v. Hopper ( In re Honkanen ), 446 B.R. 373, 382 (B.A.P. 9th Cir. 2011). In California, the state in which the Judgment was entered, collateral estoppel applies if five threshold elements are met: (1) identical issue; (2) actually litigated in the former proceeding; (3) necessarily decided in the former proceeding; (4) former decision final and on the merits; and (5) party against whom preclusion sought either the same, or in privity with, party in former proceeding. Khaligh, 338 B.R. at 824. Even if all five requirements are met, the Court must also ensure that the application of collateral estoppel is fair and consistent with sound public policy. Alonso v. Summerville (In re Summerville), 361 B.R. 133, 143 (B.A.P. 9th Cir. 2007); Lucido v. Superior Court, 51 Cal.3d 335, 343 (Cal. 1990).
As to elements two, four and five, the analysis is the same for both of Plaintiffs' §§ 523(a)(2)(A) and 523(a)(4) claims. Element two, the "actually litigated" requirement ensures that parties in the former proceeding had "notice of the hearing as well as the opportunity and incentive to present [their] case." Lucido, 51 Cal.3d at 354. In California, a default judgment is conclusive to the issues tendered by the complaint as if it had been rendered after answer filed and trial had on all allegations denied by the answer. Newsome v. Moore (In re Moore), 186 B.R. 962, 971 (Bankr. N.D. Cal. 1995) (citing Fitzgerald v. Herzer, 177 P.2d 364, 366 (Cal.Ct.App. 1947)).
The state court case was actually litigated to a greater degree than would result from a mere failure to respond to a complaint. After Plaintiffs filed their complaint in the state court action, Debtor filed an answer on May 21, 2010, and also provided written responses to plaintiffs' discovery requests on July 15, 2010. Debtor then abandoned her defense by declining to appear for both her original and rescheduled depositions and the mandatory settlement conference. After the missed settlement conference, the judge struck her answer for failure to appear to the settlement Conference and entered a default. Debtor had the opportunity and incentive to present her case, Lucido, 51 Cal.3d at 354, and the "actually litigated" requirement is satisfied.
Element four, that the decision in the former proceeding must be final and on the merits, is also present for all of Plaintiffs' claims. Khaligh, 338 B.R. at 824. The default judgment was not appealed, and it is therefore final on its merits.
Element five, that the party against whom preclusion sought must be either the same, or in privity with, the party in the former proceeding, is met as well. Khaligh, 338 B.R. at 824. While Plaintiffs Judgment is against Debtor and James L. Hutchinson, Jr., jointly and severally, the "same parties" requirement is met when a party asserts claim preclusion against a single defendant from a joint and several judgment. In Baldwin, the Ninth Circuit Bankruptcy Appellate Panel rejected the argument that the plaintiff had to show which portion of the judgment was attributable to the conduct of the defendant because the default judgment imposed joint and several liability on each defendant. See Baldwin v. Kilpatrick ( In re Baldwin ), 245 B.R. 131, 137 (B.A.P. 9th Cir. 2000) (citing Coca-Cola Bottling Co. v. Lucky Stores, Inc., 11 Cal.App.4th 1372, 1376 (1992)). This is consistent with the definition of joint and several liability, which permits apportionment of liability either among multiple parties or to only one of the group, at the adversary's discretion. BLACK'S LAW DICTIONARY 997 (9th ed. 2009).
Where Plaintiffs' request for summary judgment fails is regarding elements one and three, which the Court applies below to each of the §§ 523(a)(2)(A) and 523(a)(4) claims separately. Since these technical elements are not satisfied, the Court need not address the public policy implications of applying issue preclusion to a state court judgment. See Khaligh, 338 B.R. at 824 (analysis of public policy is obviated where other elements of issue preclusion are not met).
A. Identical Issue and Necessarily Litigated Elements Applied to Fraud Claim
The "identical issue" requirement addresses whether "identical factual allegations" are at stake in the two proceedings. Lucido, 51 Cal.3d at 342. The § 523(a)(2)(A) elements" mirror the elements of common law fraud" in California. Younie v. Gonya ( In re Younie ), 211 B.R. 367, 373 (B.A.P. 9th Cir. 1997) (citing In re Hashemi, 104 F.3d 1122, 1125 (9th Cir. 1997), as amended, cert, denied, 117 S.Ct. 1824 (1997)). Identical factual elements are at stake in the Judgment and in Plaintiffs' claim under § 523(a)(2)(A); as such, element one is satisfied as to the fraud claim.
The third element, that the issues have been necessarily litigated, is the one lacking for the fraud claim and bars the application of issue preclusion. A prior decision can be given preclusive effect in later proceedings "where the record shows an express finding upon the allegation" for which preclusion is sought. Cal-Micro, Inc. v. Cantrell ( In re Cantrell ), 329 F.3d 1119, 1124 (9th Cir. 2003) (quoting Estate of Williams, 223 P.2d 248, 254 (Cal. 1950)). The state court failed to make specific findings on the five statutory elements of fraud: "(1) misrepresentation, fraudulent omission or deceptive conduct by the debtor; (2) knowledge of the falsity or deceptiveness of his statement or conduct; (3) an intent to deceive; (4) justifiable reliance by the creditor on the debtor's statement or conduct; and (5) damage to the creditor proximately caused by its reliance on the debtor's statement or conduct." Harmon v. Kobrin (In re Harmon), 250 F.3d 1240, 1246 (9th Cir. 2001). Younie, 211 B.R. at 374. But no findings were made here of any kind.
Alternatively, "the express finding requirement can be waived if the court in the prior proceeding necessarily decided the issue." In re Harmon, 250 F.3d at 1246; see also Chew v. Gates, 27 F.3d 1432, 1438 (9th Cir. 1994) (general verdict will support estoppel only if issue as to which estoppel is sought must necessarily have been determined in a prior proceeding). In these circumstances, an express finding is not required because "if an issue was necessarily decided in a prior proceeding, it was actually litigated." Id. Though Plaintiffs properly alleged fraud in their state court complaint, the Court cannot determine if fraud was actually the basis for the Judgment because allegations other than fraud were also alleged in the state court complaint and could have been the basis for the Judgment.
Each of the elements of the fraud claim under California law were alleged in the state court complaint: (1) at the time Debtor promised to provide the consulting and investing services to Plaintiffs, Debtor had no intention of doing so and did not have the expertise claimed; (2) Debtor's representations regarding real estate and investment expertise were made with the intent to induce Plaintiffs to enter the agreement and pay the consulting fees to Debtor; (3) Plaintiffs could not have discovered with reasonable diligence Debtor's lack of expertise or intention not to perform and acted in reliance on Debtor's false promises in entering the agreement; (4) Plaintiffs would not have entered the agreement had they known the true intentions of Debtor; and (5) Debtor failed to perform and as a proximate result, Plaintiffs suffered the loss of their $60,000. Plaintiffs also sought damages exemplary and punitive damages under California Civil Code § 3294(a).
B. Collateral Estoppel Application to the § 523(a)(4) Claim
Plaintiffs' second cause of action under § 523(a)(4) requires proof that Debtor was (1) acting in a fiduciary capacity and (2) in that capacity, committed fraud or defalcation. Teichman v. Teichman (In re Teichman), 774 F.2d 1395, 1398 (9th Cir. 1985). Because exceptions to discharge in bankruptcy are construed narrowly to fulfill the Bankruptcy Code's ambition to give the debtor a "fresh start", a fiduciary relationship is narrowly defined for the purposes of § 523(a)(4). Id. Outside of a bankruptcy context, a fiduciary relationship can be any one that involves confidence, trust, and good faith, but this broader definition is inapplicable here. Ragsdale v. Haller, 780 F.2d 794, 796 (9th Cir. 1986). In the § 523(a)(4) context, "fiduciary capacity" only includes express or technical trust relationships; implied or constructive trusts do not create a fiduciary relationship. Lovell v. Stanifer ( In re Stanifer ), 236 B.R. 709, 714 (B.A.P. 9th Cir. 1999). The general characteristics of an express trust are: (1) sufficient words to create a trust; (2) a definite subject; and (3) a certain and ascertained object or res. Schlect v. Thornton ( In re Thornton ), 544 F.2d 1005, 1007 (9th Cir. 1976); In re Stanifer, 236 B.R. at 714; Reagh v. Kelley, 10 Cal.App.3d 1082, 1089 (1970). Another requirement under § 523(a)(4), is that the fiduciary relationship must have existed before the alleged incident of fraud or defalcation. Woodworking Enterprises, Inc. v. Baird (In re Baird), 114 B.R. 198, 202 (B.A.P. 9th Cir. 1990). In short, for a debt to be excepted from discharge, it "is not enough that, by the very act of wrongdoing out of which the contested debt arose, the bankrupt has become chargeable as a trustee ex maleficio." Davis v. Aetna Acceptance Co., 293 U.S. 328, 333 (1934); Honkanen, 446 B.R. at 378-79. The state and bankruptcy issues are thus not identical for issue preclusion purposes, and element one is lacking.
Element three, that the claim have been necessarily decided in state court, also cannot be found for Plaintiffs' defalcation claim. The Judgment on which Plaintiffs rely contains no findings of fact. Application of issue preclusion as to the fiduciary duty claim faces the additional obstacle that no fiduciary relationship was even alleged in state court in any of the seven causes of action in the state court complaint. The complaint does allege that Debtor is an owner and shareholder of Tricomm, though these allegations are vigorously denied by Debtor. If those allegations are true, that would likely make her a fiduciary of Tricomm, but that is distinct from any alleged fiduciary relationship between Debtor and Plaintiffs, which would have to meet the higher standard in bankruptcy of a fiduciary relationship for the debt to be nondischargeable. See Lewis v. Scott ( In re Lewis ), 97 F.3d 1182 (9th Cir. 1996). Summary judgment on this claim must also be denied for failure of elements one and three of the issue preclusion test.
C. Effect of Punitive Damage Assessment in State Court Judgment
Plaintiffs argue that the assessment of punitive damages in the amount of $300,000 by the state court judgment implies a finding of fraud. Under California law, exemplary and punitive damages may be granted in an action for the breach of a non-contractual obligation where it is proven by clear and convincing evidence that the defendant is guilty of oppression, fraud, or malice. Cal. Civ. Code § 3294(a). The terms are statutorily defined, and a judge may award exemplary and punitive damages for any one or a combination thereof. Oppression is defined as "despicable conduct that subjects a person to cruel and unjust hardship in conscious disregard of that person's rights, " id., and oppression does not constitute fraud or willfulness. See Brandstetter v. Derebery (In re Derebery), 324 B.R. 349, 356 (Bankr. C.D. Cal. 2005) (finding that punitive damages do not indicate willfulness); Urological Group Ltd v. Peterson (In re Petersen), 296 B.R. 766, 788 (Bankr. C.D. Ill. 2003) (denying punitive damages on fraud claim because no intentional and outrageous conduct and thus dischargeable).
The state court judgment breaks down the total award of $393,029 into five categories: $60,000 for damages, $30,000 for prejudgment interest, $2,500 for attorney's fees, $529 for costs, and $300,000 for punitive damages. While it is plausible that the punitive damage amount was assessed due to a finding of fraud by the state court, this is not the only possibility. If Debtor's conduct was due to oppression or despicable conduct, the award of punitive damages would still be dischargeable, and an award of punitive damages under California law does not preclude the issue of nondischargeability for this reason. See Petersen, 296 B.R. at 788.
V. Conclusion
The Judgment does not make findings that necessarily determine the issue of fraud or breach of fiduciary duty. Nor can the Court find that these findings are implicit because other claims that are dischargeable were before the state court to decide. Because all five threshold elements of application of issue preclusion are not met, the Judgment is not entitled to preclusive effect. Material disagreements of fact remain, and the Motion for Summary Judgment must be denied. Plaintiffs still have the opportunity to prove their fraud claims at trial, but the issue is not precluded from being tried in this Court