Opinion
No. 7-03-14833 ML, Adversary No. 03-1291 M.
August 12, 2005
FINDINGS OF FACT AND CONCLUSIONS OF LAW
The Court held a trial on the merits of this adversary proceeding in Las Cruces on May 19, 2005. Plaintiffs were represented by Ismael Camacho. Defendants Roger Villegas and CV Consultants Associates (CV Consultants) were represented by R. Trey Arvizu III. Roger Villegas, a/k/a Cornelio R. Villegas did not appear at trial. Prior to the filing of the Defendants' bankruptcy proceeding, Plaintiffs obtained a judgment in the Third Judicial District Court, Cause No. CV 20021-218 against Roger Villegas and CV Consultants in the total amount of $59,830.06, including punitive damages in the amount of $25,000.00. Plaintiffs seek to have this judgment declared non-dischargeable as a debt for money obtained by false pretenses, a false representation or actual fraud in accordance with 11 U.S.C. § 523(a)(2)(A). Based on the evidence and testimony presented at trial, the Court finds that Plaintiffs have not met their burden of proving that Roger Villegas intended to defraud them at the time they entered into the contract that forms the basis of Plaintiffs' claim. Consequently, the debt does not meet the requirements for non-dischargeability under 11 U.S.C. § 523(a)(2)(A). In reaching this determination, the Court enters the following findings of fact and conclusions of law:
Cecilia Villegas was also named as a Defendant in this Adversary Proceeding, but was dismissed by the Order Granting In Part and Denying In Part Motion for Summary Judgment. (Docket # 21).
1. In June of 2001, Plaintiffs purchased a parcel of vacant land from CV Consultants for $20,000.00. ( See Defendants' Exhibit A).
2. Roger Villegas negotiated the sale.
3. During the negotiations, Roger Villegas promised Plaintiffs that all infrastructure necessary to place a mobile home on the property would be completed. This work included installing water and sewer lines, paving roads, and installing electric and gas connections.
4. In reliance on Roger Villegas' representations, Plaintiffs borrowed money to purchase a mobile home to be placed on the property.
5. In July of 2001, Roger Villegas installed cement runners on the property so that the mobile home could be transferred onto the property.
6. The mobile home was placed on the property, but Plaintiffs were not allowed to stay in their home because the mobile home company from which Plaintiffs purchased their mobile home had not obtained a permit for moving the mobile home onto the property and because the infrastructure required by the Dona Ana County Subdivision Act had not been installed.
7. Sometime thereafter Roger Villegas began work on installing a water line. However, he never completed the installation of the water line, nor did he complete any of the other infrastructure he promised to install.
8. Plaintiffs filed a complaint in the Third Judicial District Court, County of Dona Ana, State of New Mexico as Cause No. CV-2002-1218 ("State Court Action") against Roger Villegas and CV Consultants for breach of contract and fraud.
9. Judgment by default was entered in the State Court Action against Roger Villegas and CV Consultants on March 12, 2003. The Judgment and Order entered in the State Court Action included findings that the Defendants breached their contract with Plaintiffs and intended by their actions to take unfair advantage of Plaintiffs.
10. Cecilia Villegas and Cornelio R. Villegas filed their voluntary Chapter 7 petition for bankruptcy on June 16, 2003.
11. Exceptions to discharge are to be construed narrowly against the creditor, and liberally in favor of the debtor. See Bellco First Fed. Credit Union v. Kaspar (In re Kaspar), 125 F.3d 1358, 1361 (10th Cir. 1997) ("exceptions to discharge are to be narrowly construed, and because of the fresh start objectives of bankruptcy, doubt is to be resolved in the debtor's favor.") (citing In re Hunter, 780 F.2d 1577, 1579 (11th Cir. 1986)).
12. Debts for money obtained by false pretenses, a false representation or actual fraud are not dischargeable. 11 U.S.C. § 523(a)(2)(A).
13. To prevail on a cause of action to except a debt from discharge under 11 U.S.C. § 523(a)(2)(A), the following elements must be established: 1) that the debtor made a false representation to the creditor; 2) that the false representation was made with the intent to deceive the creditor; 3) that the creditor justifiably relied on the representation; and 4) that as a result the creditor suffered a loss. See Young v. Fowler Bros. (In re Young), 91 F.3d 1367, 1373 (10th Cir. 1996). See also, Field v. Mans, 516 U.S. 59, 74-75, 116 S.Ct. 437, 133 L.Ed.2d 351 (1995) (establishing standard of "justifiable" rather than "reasonable" reliance).
14. Plaintiffs bear the burden of proving each element of a cause of action under 11 U.S.C. § 523(a)(2)(A) by a preponderance of evidence. Grogan v. Garner, 498 U.S. 279, 286-91, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991) (holding that preponderance of evidence standard applies to all exceptions to discharge).
15. Intent to deceive, though critical to the determination of non-dischargeability under 11 U.S.C. § 523(a)(2)(A), can be proven by circumstantial evidence in light of the totality of circumstances, since rarely will a debtor readily admit his or her intent to deceive. See In re Hoyt, 277 B.R. 121, 133 (Bankr.N.D.Okla. 2002) (noting that "the Tenth Circuit has adopted the `totality of the circumstances' approach" to determine whether a representation was made with the requisite intent to deceive) (citing Young, 91 F.3d at 1375); In re Abraham, 247 B.R. 479, 483 (Bankr.D.Kan. 2000) ("Since a promisor does not usually admit fraudulent intent, the plaintiff must prove circumstances substantial enough to support an inference that there was an intent to defraud.").
16. Claims of non-dischargeability premised upon a failure to fulfill a promise to complete something in the future require a showing that the promisor never intended to fulfill the promise at the time the promise was made. As stated by the bankruptcy court for the District of Kansas,
If a plaintiff charges that a promise or statement concerning a future event was fraudulent, the plaintiff must show more than merely nonperformance of the promise. The plaintiff must prove the promisor intended to deceive at the time he or she made the promise.
Abraham, 247 B.R. at 483 (citing Davsko v. Golden Harvest Products, Inc., 965 F.Supp. 1467, 1476 (D.Kan. 1997)).
17. Plaintiffs have not shown by sufficient circumstantial evidence that Defendant never intended to fulfill his promise at the time the promises were made to complete the infrastructure necessary for the mobile home.
18. The default judgment entered in the State Court Action does not have preclusive effect as to Plaintiffs' claim under 11 U.S.C. § 523(a)(2)(A). Bankruptcy courts differ as to whether courts should look to federal law or state law principles of collateral estoppel when considering whether a state court judgment should be given preclusive effect in a bankruptcy proceeding to determine dischargeability. See In re Wald, 208 B.R. 516 (Bankr.N.D.Ala. 1997) (discussing both approaches, and electing to follow the majority in applying federal principles of collateral estoppel); In re Itzler, 247 B.R. 546 (Bankr.S.D.Fla. 2000) (noting that the Eleventh Circuit has expressly held that state law collateral estoppel principles must be applied if the judgment was rendered in state court).
19. Whether proceeding under federal law, or New Mexico law, whether an issue was actually litigated is central to the concept of collateral estoppel. Wald, 208 B.R. at 520 ("[T]he General Federal Rule . . . requires that the issues sought to be precluded must have been actually litigated in the prior proceeding before collateral estoppel is applied.") (emphasis in original); Romero v. State, 97 N.M. 569, 572, 642 P.2d 172, 175 (1982) ("The doctrine of collateral estoppel applies to relitigation of identical issues or facts which were actually and necessarily decided in a prior suit between the same parties or their privies.") (citation omitted).
20. "[C]ollateral estoppel has application in dischargeability litigation, but only when issues identical to dischargeability issues have been actually adjudicated on proper proof submitted in an adversarial context, as opposed to adjudication by default." Wald, 208 B.R. at 560. See also, Grogan v. Garner, 498 U.S. 279, 284-85 n. 11, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991) (collateral estoppel applies to dischargeability actions).
21. "In New Mexico, we recognize that default judgments do not have collateral estoppel effect in future litigation, although they may have res judicata effect." Blea v. Sandoval, 107 N.M. 554, 558, 761 P.2d 432, 436 (Ct.App. 1988).
In In Wald, the bankruptcy court discusses Brown v. Felsen, 442 U.S. 127, 99 S.Ct. 2205, 60 L.Ed.2d 767 (1979) for the principle that res judicata does not apply to dischargeability proceedings. 208 B.R. at 520-524. See also, In re Tsamasfyros, 940 F.2d 605, 606 (10th Cir. 1991) (also discussing the holding in Brown v. Felson that while res judicata does not preclude the bankruptcy court from subsequently determining dischargeability, collateral estoppel principles may).
22. Here, although the state court held a hearing on damages, the issues of fraud were not actually litigated. Nor does the language contained in the default judgment indicate that all elements required for non-dischargeability under 11 U.S.C. § 523(a)(2)(A) have been met. The judgment states that the defendants have disregarded the state court lawsuit (i.e. they have defaulted), breached their contract with plaintiffs, and "have intended by their actions to take unfair advantage of plaintiffs and others." This conclusion does not show that Defendants acted with the requisite intent to defraud at the time the initial promises were made as required under 11 U.S.C. § 523(a)(2)(A). More importantly, the state court conclusions were entered by default, absent any actual litigation.
23. A more difficult question is whether, by implication, the fact that the state court awarded punitive damages sustains a finding that the actions taken by Defendant were necessarily sufficiently egregious as to satisfy the required elements for a non-dischargeability action under 11 U.S.C. § 523(a)(2)(A). However, because the language in the default judgment is insufficient to show that all elements required for non-dischargeability under 11 U.S.C. § 523(a)(2)(A) were met, the Court cannot conclude that the judgment, including the punitive damages award has preclusive effect.
In their Complaint, Plaintiffs cite Cohen v. de la Cruz, 523 U.S. 213, 118 S.Ct. 1212, 140 L.Ed.2d 341 (1998) for the proposition that the punitive damages portion of the state court judgment is non-dischargeable. Cohen v. de la Cruz determined that when damages are awarded based on actual fraud, both the actual and the punitive damages portions of the award are considered non-dischargeable, since both the actual and the punitive damages arose from the debtor's actual fraud. Id. Here, because the default judgment entered in state court is insufficient to determine liability within the non-dischargeability context, Cohen v. de la Cruz has no application.
Based on the foregoing, the Court concludes that Plaintiffs have failed to meet their burden of showing that the debt represented by the state court judgment was obtained by false pretense, a false representation or actual fraud within the meaning of 11 U.S.C. § 523(a)(2)(A). Consequently the debt is dischargeable. These findings of fact and conclusions of law are entered in accordance with Rule 7052, Fed.R.Bankr.P. An appropriate judgment will be entered.