Opinion
NOT FOR PUBLICATION
Argued and Submitted at Eugene, Oregon. May 20, 2005
Appeal from the United States Bankruptcy Court for the District of Oregon. Bk. No. 01-64498, Adv. No. 01-06302. Honorable Albert E. Radcliffe, Chief Bankruptcy Judge, Presiding.
SYLLABUS
Pre petition Debtor-husband was appointed as his brother's conservator. Husband was then removed, and sued in state court by his successor. The successor also sued Debtor-wife. The successor obtained a judgment against both Debtors. The judgment against the wife was based on a theory of fraudulent conveyance.
Husband and wife then filed Chapter 7. The then acting conservator filed a Section 523 action against both debtors. At trial, another successor conservator relied on the state court judgment's preclusive effect to make out his § 523 (a) (6) claim. The bankruptcy court held against him, and declared the judgment dischargeable as to the wife.
On appeal, the Bankruptcy Appellate Panel (BAP) affirmed. The court reiterated that the issue preclusion law of the forum state controls. In the case at bar, the state court judgment merely recited that judgment against the wife was for " fraudulent conveyance." No other evidence was adduced to show that the state court and jury considered whether the wife had acted with intent to injure, as required by § 523(a) (6). Under Oregon law, intentional injury may be irrelevant to fraudulent conveyance liability, as same may be premised on constructive fraud which requires no intentional injury. Thus, under Oregon law, two of the [five] elements of issue preclusion had not been shown, those being that the issue [intentional injury] in the two proceedings was identical and that the issue was actually litigated and was essential to a final decision on the merits of the prior proceeding. The state court judgment was therefore not entitled to preclusive effect.
Allan Lee Bennett, Debtor, Pro se, Woodburn, OR.
Wanda May Bennett, Debtor, Pro se, Woodburn, OR.
For Mark Hoyt, Conservator for Ronny Lynn Bennett, C. Frederick Burt, Conservator for Ronny Lynn Bennett, Plaintiffs: KEVIN T LAFKY, SALEM, OR.
Allan Lee Bennett, Defendant, Pro se, Woodburn, OR.
Wanda May Bennett, Defendant, Pro se, Woodburn, OR.
Wanda M. Bennett, Trustee, Wanda Bennett Trust, Pro se.
Before: MONTALI, RIEGLE [ and KLEIN, Bankruptcy Judges.
Hon. Linda B. Riegle, Bankruptcy Judge for the District of Nevada, sitting by designation.
This disposition is not appropriate for publication and may not be cited except when relevant under the doctrines of law of the case, res judicata, or collateral estoppel. See 9th Cir. BAP Rule 8013-1.
Appellant's predecessor obtained a judgment in state court against debtors and subsequently filed a nondischargeability action against debtors. Applying the principles of issue preclusion, the bankruptcy court found that the judgment against the debtor husband was nondischargeable but that the judgment against the debtor wife was dischargeable. Appellant appealed that portion of the judgment declaring the debtor wife's debt to be dischargeable. We AFFIRM.
I.
FACTS
Beginning in 1992, debtor Allan Lee Bennett (" Allan") served as conservator for the estate of his brother, Ronny Bennett (" Ronny"). After Allan was removed as conservator, at least three successor conservators were appointed (including the current successor conservator, appellant C. Frederick Burt (" Burt")).
One of the successor trustees, Gregory C. Hansen (" Hansen"), sued Allan in Oregon state court for conversion, breach of fiduciary duty, and fraudulent conveyance. He also sued debtor Wanda Bennett (" Wanda"), individually and in her capacity as trustee of the Wanda Bennett Living Trust (" Trust"), for fraudulent conveyance. After a jury trial, the state court entered a judgment (the " Judgment") in January 1997 against Allan for conversion, breach of fiduciary duty and fraudulent conveyance and against Wanda and the Trust for fraudulent conveyance. In addition, punitive damages were awarded against the Trust and against Wanda in her capacity as trustee of the Trust.
The record in this appeal is deficient. The state court complaint is not a part of the record; neither is the complaint initiating the underlying adversary proceeding.
In 2001, Wanda and Allan filed a joint bankruptcy petition. Mark Hoyt (" Hoyt"), another successor conservator, filed the underlying adversary proceeding to have the Judgment declared nondischargeable under 11 U.S.C. § 523(a). Thereafter, Burt was appointed as successor conservator but did not substitute himself as plaintiff in the nondischargeability proceeding.
Unless otherwise indicated, all section and rule references are to the Bankruptcy Code, 11 U.S.C. § § 101-1330 and the Federal Rules of Bankruptcy Procedure, Rules 1001-9036.
Trial commenced in the nondischargeability proceeding on June 4, 2003. On June 11, 2004, the bankruptcy court entered a judgment in favor of Allan and Wanda, because the real party in interest (Burt) was not acting as plaintiff. We reversed and remanded, holding that the bankruptcy court erred in not giving Burt a reasonable opportunity to substitute himself as plaintiff. See Memorandum issued by BAP on December 15, 2003, in BAP No. 0R-03-1383-BKMu.
Following the remand, Burt was substituted as plaintiff and the bankruptcy court resumed the trial that originally commenced in 2003. The bankruptcy court noted that the claims against the Trust and against Wanda as trustee of the Trust had been dismissed from the nondischargeability proceeding. Applying the doctrine of collateral estoppel (now commonly called issue preclusion), the bankruptcy court held that the portion of the Judgment against Allan for breach of fiduciary duty was nondischargeable. In contrast, the court found that the portion of the Judgment against Wanda and Allan for fraudulent conveyance was dischargeable, because liability for fraudulent conveyance in Oregon does not require a showing of intent while section 523(a)(6) does.
In addressing the preclusive effect of the Judgment, the bankruptcy court repeatedly referred to issue preclusion or collateral estoppel. Both this panel and the Oregon Supreme Court now refer to collateral estoppel as " issue preclusion." See Paine v. Griffin (In re Paine), 283 B.R. 33, 38 (9th Cir. BAP 2002) (noting that " issue preclusion" includes the doctrines of direct estoppel and collateral estoppel while " claim preclusion" has " often been called 'res judicata' in a non-generic sense"), citing Migra v. Warren City School Dist. Bd. of Educ., 465 U.S. 75, 77 n.1, 79 L.Ed.2d 56, 104 S.Ct. 892 (1984); Drews v. EBI Cos., 310 Ore. 134, 795 P.2d 531, 535 (Ore. 1990).
The Judgment against Allan totalled $ 32, 504.92 in principal and $ 612.50 in costs. Allan was found liable in the amount of $ 32, 504.92 on the conversion count, in the same amount for the breach of fiduciary duty count, and in the same amount for the fraudulent conveyance count. Wanda was found individually liable for the same amount on the fraudulent conveyance count. The punitive damages were not assessed against Allan or Wanda individually.
At oral argument before this panel, counsel for Burt conceded that liability for fraudulent conveyance in Oregon does not require a finding of intent to defraud; a finding of constructive fraud is sufficient.
On August 26, 2004, the bankruptcy court entered its judgment declaring the Judgment against Allan to be nondischargeable and against Wanda to be dischargeable. Burt filed a timely notice of appeal. Neither Allan nor Wanda filed a cross-appeal, but they did file (on January 12, 2005) a motion for sanctions against Burt's counsel or for dismissal of the appeal (" Motion for Sanctions"). We entered an order taking the Motion for Sanctions under advisement pending resolution of the appeal on the merits. For the reasons set forth in a separate order, we are denying the Motion for Sanctions.
II.
ISSUE
Did the bankruptcy court err in refusing to grant preclusive effect to that portion of the Judgment holding Wanda liable for fraudulent conveyance?
III.
STANDARD OF REVIEW
We review de novo the preclusive effect of a judgment; the issue presents a mixed question of law and fact in which the legal questions predominate. The Alary Corp. v. Sims (In re Associated Vintage Group, Inc.), 283 B.R. 549, 554 (9th Cir. BAP 2002).
IV.
DISCUSSION
Issue preclusion applies in nondischargeability proceedings. Grogan v. Garner, 498 U.S. 279, 284-85, 112 L.Ed.2d 755, 111 S.Ct. 654 (1991). Because Burt is arguing that the Judgment against Wanda is preclusive in the underlying nondischargeability action, he " must introduce a record sufficient to reveal the controlling facts and pinpoint the exact issues litigated [in the state court action]." Kelly v. Okoye (In re Kelly), 182 B.R. 255, 258 (9th Cir. BAP 1995), aff'd, 100 F.3d 110 (9th Cir. 1996).
The preclusive effect of a state court judgment is determined by the law of the state in which the judgment was entered. Gayden v. Nourbakhsh (In re Nourbakhsh), 67 F.3d 798, 800 (9th Cir. 1995). In Oregon, " if one tribunal has decided an issue, the decision on that issue may preclude relitigation of the issue in another proceeding if five requirements are met:
1. The issue in the two proceedings is identical.
2. The issue was actually litigated and was essential to a final decision on the merits in the prior proceeding.
3. The party sought to be precluded has had a full and fair opportunity to be heard on that issue.
4. The party sought to be precluded was a party or was in privity with a party to the prior proceeding.
5. The prior proceeding was the type of proceeding to which this court will give preclusive effect."
Nelson v. Emerald People's Util. Dist., 318 Ore. 99, 862 P.2d 1293, 1296-97 (Ore. 1993) (internal citations omitted).
Here, the bankruptcy court determined that the first two elements were not present with respect to Burt's nondischargeability claims against Wanda. The state court judgment imposed liability on Wanda individually only on the claim for fraudulent conveyance. Burt contends that the judgment is preclusive with respect to his nondischargeability claim against Wanda for " willful and malicious injury" under section 523(a)(6). We disagree. Because section 523(a)(6) requires a showing of intent and Oregon fraudulent conveyance law does not, the issues in the two proceedings were not identical; moreover, no evidence has been presented that the issue of Wanda's intent was actually litigated.
Under Oregon law, a fraudulent conveyance can be actionable if a debtor did not receive a reasonably equivalent value for a transfer and (1) was engaged in a transaction for which its remaining assets were unreasonably small or (2) reasonably should have believed that it would incur debts beyond its ability to pay. Ore. Rev. St. § 95.230(1). In other words, a conveyance may be fraudulent even without actual intent to hinder, delay or defraud a creditor. In contrast, section 523(a)(6) requires a showing that a debtor intended to cause an injury, not just that he intended to perform the act itself. Kawaauhau v. Geiger, 523 U.S. 57, 61-62, 140 L.Ed.2d 90, 118 S.Ct. 974 (1998) (" The word 'willful' in (a)(6) modifies the word 'injury, ' indicating that nondischargeability takes a deliberate or intentional injury, not merely a deliberate or intentional act that leads to injury."); see also Carrillo v. Su (In re Su), 290 F.3d 1140, 1143 (9th Cir. 2002) (noting that Geiger establishes that section 523(a)(6) does not apply to those debts arising from unintentionally inflicted injuries). Therefore, because intent to injure can be irrelevant in a fraudulent conveyance action in Oregon, and because Burt has introduced no evidence to show that the state court and jury considered whether Wanda acted with intent to injure, the issues decided by the state court judgment with respect to the fraudulent conveyance claim were different than those presented by a section 523(a)(6) claim. Moreover, no evidence has been presented that the intent issue was actually litigated.
In his opening brief, Burt cites Impulsora Del Territorio Sur, S.A. v. Cecchini (In re Cecchini), 780 F.2d 1440, 1443 (9th Cir. 1986) for the proposition that when a wrongful act is " done intentionally, necessarily produces harm and is without just cause or excuse, it is 'willful and malicious' even absent proof of specific intent to injure." Id. at 1443. Burt, however, overlooks that Cecchini's standard for determining willful and malicious injury under section 523(a)(6) was overruled by the Supreme Court in Geiger. See Baldwin v. Kilpatrick (In re Baldwin), 245 B.R. 131, 135 (9th Cir. BAP 2000), aff'd, 249 F.3d 912 (9th Cir. 2001) (noting that Geiger overrules Cecchini ). Consequently, Burt's sole argument on appeal -- that issue preclusion applies because the state court judgment satisfies Cecchini's standard for " malicious and willful injury" -- is not well-taken.
The Ninth Circuit's decision in Harmon v. Kobrin (In re Harmon), 250 F.3d 1240 (9th Cir. 2001) is instructive in the current appeal. In Harmon, a creditor sued a debtor in state court on many grounds, alleging facts which would have satisfied the elements of a section 523(a)(2) claim. Id. at 1246. The creditor obtained a default judgment against the debtor and then requested the bankruptcy court to grant preclusive effect to the state court judgment in a subsequent nondischargeability proceeding. The Ninth Circuit held that issue preclusion was inapplicable because the state court had not necessarily decided the fraud and intent to defraud issue in entering its judgment; the state court could have entered the judgment without finding that the debtor had committed actual fraud (or acted with intent to defraud). Id. at 1248-49 n.10. In the present case, the Oregon state court could have imposed liability on Wanda for fraudulent conveyance without considering or deciding whether she acted with intent to injure or defraud. Thus, one of the elements of section 523(a)(6) (intent to injure) was not addressed or resolved by the state court. The Judgment against Wanda does not preclude litigation on the section 523(a)(6) issue in bankruptcy court.
The Ninth Circuit noted in Harmon that the state court could have granted the plaintiff relief under the California Corporations Code section entitling partners to rescind partnership agreements for fraud or misrepresentation because the state court had found that the debtor had engaged in constructive fraud. " But such a finding [of constructive fraud on the part of the debtor] would be insufficient to establish fraud under § 523(a)(2)(A), because under § 523(a)(2)(A), the debtor must have intended to deceive the creditor, but in the case of 'constructive fraud . . . it is not necessary to prove deliberate or intentional fraud.'" Id. at 1248 n. 10 (internal citation omitted).
Because the state court litigation and the nondischargeability proceeding did not require similar showings of intent to harm, the issues presented in each were not identical. In addition, the element of intent was not necessarily decided in order for the state court to enter its judgment against Wanda. Accordingly, under Oregon law, the Judgment against Wanda is not entitled to preclusive effect in the underlying section 523(a)(6) action against Wanda. The bankruptcy court did not err and we affirm.
V.
CONCLUSION
For the foregoing reasons, we AFFIRM.
At one point in its oral decision, the bankruptcy court stated that " claim preclusion" would apply. As noted above, claim preclusion is the more modern nomenclature for " res judicata." The Supreme Court has explained the distinctions between claim and issue preclusion:
We use the term " claim preclusion" to refer to " res judicata" in a narrow sense, i.e., the preclusive effect of a judgment in foreclosing litigation of matters that should have been raised in an earlier suit. In contrast, we use the term " issue preclusion" to refer to the effect of a judgment in foreclosing relitigation of a matter that has been litigated and decided.
Marrese v. American Academy of Orthopaedic Surgeons, 470 U.S. 373, 376 n.1, 84 L.Ed.2d 274, 105 S.Ct. 1327 (1985). We believe that the bankruptcy court intended to state " issue preclusion" instead of " claim preclusion, " inasmuch as its analysis shows that the relevant issue (breach of fiduciary duty by Allan) had been litigated and decided by the state court.