FILED
1 MAR 06 2013
SUSAN M SPRAUL, CLERK
2 U.S. BKCY. APP. PANEL
OF THE NINTH CIRCUIT
3 UNITED STATES BANKRUPTCY APPELLATE PANEL
4 OF THE NINTH CIRCUIT
5 In re: ) BAP No. CC-12-1118-PaMkBe
)
6 KEVIN WASKO and CASSONDRA DEHAY, ) Bankr. No. 07-10845-MT
)
7 Debtors. ) Adv. Proc. 07-01136-MT
___________________________________)
8 )
STUART H. KAPLAN, M.D.; )
9 MOONDANCE, LLC, )
)
10 Appellants, )
)
11 v. ) M E M O R A N D U M1
)
12 KEVIN WASKO; CASSONDRA DEHAY, )
)
13 Appellees. )
___________________________________)
14
Argued and Submitted on November 15, 2012,
15 at Pasadena, California
16 Filed - March 6, 2013
17 Appeal from the United States Bankruptcy Court
for the Central District of California
18
Honorable Maureen Tighe, Bankruptcy Judge, Presiding
19
20 Appearances: Alan Wayne Forsley of Fredman Knupfer Lieberman LLP
argued for appellants Stuart H. Kaplan, M.D. and
21 Moondance, LLC; Jerome Bennett Friedman of Friedman
Law Group, P.C. argued for appellees Kevin Wasko
22 and Cassondra Dehay.
23
Before: PAPPAS, MARKELL and BEESLEY,2 Bankruptcy Judges.
24
25
1
26 This disposition is not appropriate for publication.
Although it may be cited for whatever persuasive value it may have
27 (see Fed. R. App. P. 32.1), it has no precedential value. See 9th
Cir. BAP Rule 8013-1.
28 2
The Honorable Bruce T. Beesley, United States Bankruptcy
Judge for the District of Nevada, sitting by designation.
-1-
1 The bankruptcy court granted the motion for summary judgment
2 of appellants Stuart H. Kaplan, M.D. (“Kaplan”) and Moondance
3 LLC,3 and determined that their claim under a state court judgment
4 against chapter 74 debtors Kevin Wasko and Cassondra Dehay
5 (collectively “Debtors”) for $1,493,569.06 was excepted from
6 discharge under §§ 523(a)(2), (a)(4) and (a)(6). The bankruptcy
7 court declined, however, to grant Kaplan’s motion to amend the
8 summary judgment to include an exception to discharge for the
9 state court’s later award against Debtors of $495,642.97 in
10 attorney’s fees. Kaplan appeals the denial of that motion. On
11 this record, we VACATE the bankruptcy court’s order and REMAND
12 this matter for further proceedings.
13 FACTS
14 The State Court Action
15 Kaplan is a dermatologist. Debtors jointly operated
16 nightclubs both before and after their marriage in 2000. Sometime
17 in 1997 or 1998, Debtors became Kaplan’s patients. Their
18 professional relationships developed into personal friendships.
19 In 2001, Debtors approached Kaplan with a proposal that he
20 invest in a nightclub they intended to open and and operate in
21 Marbella, Spain, called Luna Azul (the “Property”) through a new
22 company known as Spanish Investments Network (“SIN”). Debtors
23
24
3
Moondance LLC is a company controlled by Kaplan. For
25 convenience, we refer to both appellants as Kaplan.
26 4
Unless otherwise indicated, all chapter, section and rule
references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532, and
27 to the Federal Rules of Bankruptcy Procedure, Rules 1001-9037.
The Federal Rules of Civil Procedure are referred to as Civil
28 Rules.
-2-
1 offered Kaplan a 50 percent ownership interest in SIN if he would
2 give them $500,000. Kaplan agreed, and on March 6, 2002, wire
3 transferred the $500,000 to the SIN bank account. In early April,
4 2002, Kaplan transferred an additional $250,000 to SIN. As the
5 state court judge would later find, a few months after the funds
6 were transferred, Debtors “ceased all communication with [Kaplan]
7 and disappeared, without report on the status of the venture or
8 any explanation.” Statement of Decision, Kaplan v. Wasko, Case
9 No. SC082177 (Los Angeles Superior Court, November 22, 2010)
10 (hereafter “SOD”).
11 On June 24, 2004, Kaplan filed suit against Debtors in Los
12 Angeles Superior Court (the “State Court Action”). Kaplan’s
13 complaint, amended twice, alleged eleven causes of action against
14 Debtors, including fraud and breach of fiduciary duty. Kaplan
15 sought to recover the $750,000 investment, plus interest, punitive
16 damages, attorney’s fees and costs.
17 On March 19, 2007, Debtors filed a bankruptcy petition.5
18 Their schedule E listed a contingent, unliquidated, disputed debt
19 to Kaplan for $750,000.
20 Shortly thereafter, on March 26, 2007, Debtors caused the
21 State Court Action to be removed to the bankruptcy court. Despite
22 Debtors’ objection, the bankruptcy court remanded the State Court
23 Action to the state court on June 7, 2007.
24 Few details concerning the subsequent proceedings in the
25 State Court Action were included in the appellate record.
26
27 5
While Debtors originally sought relief under chapter 11,
the bankruptcy court granted Debtors’ motion to convert the case
28 to chapter 7 on October 24, 2011.
-3-
1 However, it appears that the state court bifurcated the issues for
2 trial. The first phase of the bench trial occurred from
3 February 23 to April 28, 2010, and addressed the liability and
4 compensatory damage issues. The state court issued a tentative
5 decision finding in favor of Kaplan and against Debtors on the
6 liability issues, and determining that Kaplan was entitled to an
7 award of compensatory damages. While the state court expected to
8 begin the second phase of the trial concerning Kaplan’s claim for
9 punitive damages on October 27, 2010, the parties stipulated to an
10 award of $100,000 in exemplary damages, which the state court
11 could incorporate in its judgment.
12 The state court then issued a detailed statement of decision,
13 explaining, in part, that:
14 The evidence at trial of defendants' misconduct, fraud and
breaches of fiduciary duties established that the conduct of
15 both defendants was willful, and that each of them acted
fraudulently and with malice.
16
17 SOD at 39. The state court entered a judgment (“Judgment”) for
18 Kaplan and against Debtors on November 22, 2010. It granted
19 relief to Kaplan based upon Debtors’ negligent misrepresentation;
20 deceit and fraud in the inducement; breach of fiduciary duty;
21 money had and received; breach of oral contract; conspiracy; and
22 embezzlement. The Judgment awarded Kaplan $750,000 in
23 compensatory damages from Debtors plus interest. Per the parties’
24 stipulation, the court also awarded Kaplan $100,000, plus
25 interest, in exemplary damages for fraud, breach of fiduciary
26 duty, conspiracy and embezzlement. Debtors did not appeal the
27 Judgment.
28 At some later date not clear in the record, Kaplan filed a
-4-
1 motion under Cal. Code Civ. Proc. § 2033.4206 requesting cost-of-
2 proof sanctions against Debtors for failing to admit certain
3 Requests for Admissions (the “RFA Motion”). The state court held
4 a hearing on the RFA Motion on February 9, 2011. A hearing
5 transcript is not included in our record.
6 After the hearing and supplemental briefing by the parties,
7 on June 29, 2011, the state court entered an order granting
8 Kaplan’s motion and imposing sanctions against Debtors under the
9 California statute (the “RFA Sanctions Order”). In the order, the
10 court found that Debtors had each failed to admit to the Requests
11 for Admission, and that:
12 these requests sought admission of matters within the
knowledge of [Debtors], and plaintiffs ultimately proved
13 the subject matter of the requests true at trial.
[Their] failure to admit these requests was in bad faith
14 and part of a scheme that defendants employed to
wrongfully take and convert plaintiffs’ investment.
15
RFA Sanctions Order at 2-3 ¶¶ 1-2. The state court awarded Kaplan
16
“$495,642.97, jointly and severally against [Debtors], pursuant to
17
Code of Civil Procedure section 2033.420 for [his] costs in
18
proving the subject matter of the requests for admission addressed
19
by the motion[.]” RFA Sanctions Order at 7 ¶ 24. The state court
20
21 6
Expenses incurred in proving matters which
party to whom request was directed failed to
22 admit; When court to require payment
23 (a) If a party fails to admit the genuineness of any
document or the truth of any matter when requested to do
24 so under this chapter, and if the party requesting that
admission thereafter proves the genuineness of that
25 document or the truth of that matter, the party
requesting the admission may move the court for an order
26 requiring the party to whom the request was directed to
pay the reasonable expenses incurred in making that
27 proof, including reasonable attorney's fees.
28 CAL. CODE CIV. PROC. § 2033.420.
-5-
1 based the amount of the award on the report submitted by Kaplan’s
2 attorney containing “a detailed accounting of the number of hours
3 spent in proving the matters required to [be] proved solely due to
4 Defendants’ unreasonable — and dishonest — failure to admit these
5 matters.” RFA Sanctions Order at 7 ¶ 21.
6 The Adversary Proceeding
7 In June 2007, shortly after the bankruptcy court remanded the
8 State Court Action, Kaplan had commenced an adversary proceeding
9 against Debtors seeking an exception to discharge for his claims
10 against Debtors under § 523(a)(2)(A), (a)(4) and (a)(6). The
11 bankruptcy court held this adversary proceeding in abeyance while
12 the State Court Action proceeded to a conclusion.
13 After the state court’s entry of the Judgment and RFA
14 Sanctions Order, on July 21, 2011, Kaplan filed a motion for
15 summary judgment in the adversary proceeding. Specifically,
16 Kaplan argued that there were no genuine issues of fact, and that
17 both the state court Judgment and RFA Sanctions Order were
18 preclusive and controlled the disposition of his discharge
19 exception claims in the adversary proceeding.
20 Debtors filed a limited opposition to the summary judgment
21 motion on August 19, 2011. Although they did not contest Kaplan’s
22 request for an exception to discharge for the Judgment, they
23 argued that the RFA Sanctions Order was not yet a final judgment
24 and that they intended to appeal that order in the state court
25 system.7
26 The bankruptcy court conducted a hearing on the Kaplan
27
28 7
The RFA Sanctions Order was never appealed.
-6-
1 summary judgment motion on September 1, 2011. Without opposition,
2 the court granted Kaplan an exception to discharge under
3 § 523(a)(2)(A), (a)(4) and (a)(6) for $1,493,569.06, the damages
4 awarded to him in the Judgment. Agreeing with Debtors, the
5 bankruptcy court denied the motion as to the RFA Sanctions Order
6 because it was not yet a final order of the state court (the
7 “Summary Judgment Order”). The Summary Judgment Order granted
8 leave to Kaplan to amend their summary judgment motion when the
9 RFA Sanctions Order became a final order.
10 On November 15, 2011, Kaplan filed a motion to amend the
11 Summary Judgment Order8 to add the award made in the RFA Sanctions
12 Order, which was now final. To support this motion, Kaplan relied
13 upon this Panel’s decisions in Florida v. Ticor Title Ins. Co.
14 (In re Florida), 164 B.R. 636 (9th Cir. BAP 1994) and Roussos v.
15 Michaelides (In re Roussos), 251 B.R. 86 (9th Cir. BAP 2000) which
16 he contended had held that a debt for a creditor’s attorney’s fees
17 and costs awarded under state law should be excepted from
18 discharge if that obligation arose from the same conduct that gave
19 rise to the underlying indebtedness. Kaplan argued that the RFA
20 Sanctions Order arose from the same conduct by Debtors as that
21 giving rise to the other damages awarded in the nondischargeable
22 Judgment, and therefore, that the attorney’s fees award should
23 also be excepted from discharge.
24
25 8
Although the bankruptcy court granted Kaplan leave to
amend the summary judgment motion, Kaplan moved to amend the
26 Summary Judgment Order. The bankruptcy court did not find this
procedure objectionable, nor do we. In effect, by this motion,
27 Kaplan renewed his request for entry of a summary judgment
determining that the award to Kaplan in the RFA Sanctions Motion
28 was excepted from discharge.
-7-
1 Debtors responded to Kaplan’s motion to amend the Summary
2 Judgment Order on November 28, 2011. Debtors argued that, unless
3 there is an underlying statutory or contractual basis for awarding
4 attorney’s fees, then any award, even when ancillary to the
5 nondischargeable claim, is subject to discharge.
6 The bankruptcy court conducted a hearing on Kaplan’s motion
7 to amend on December 7, 2011. After considering the parties’
8 arguments, the court continued the hearing so that it could review
9 the case law.
10 At the continued hearing on February 15, 2012, the bankruptcy
11 court announced its decision on the record. It denied Kaplan’s
12 motion to amend the summary judgment to include an exception to
13 discharge for the attorneys fees awarded in the RFA Sanctions
14 Order because, in the words of the bankruptcy court, those fees
15 “as they’ve been awarded below, are not directly consequential
16 from the nondischargeability issue.” Hr’g Tr. 1:22-23,
17 February 15, 2012.
18 The bankruptcy court’s order denying Kaplan’s motion was
19 entered on February 21, 2012 (the “Second Summary Judgment
20 Order”). Kaplan filed a timely appeal on March 6, 2012.
21 JURISDICTION
22 The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334
23 and 157(b)(2)(I). We have jurisdiction under 28 U.S.C. § 158.
24 ISSUES
25 Whether the bankruptcy court erred when it denied Kaplan’s
26 motion for to amend the summary judgment and determined that the
27 award of attorneys fees by the state court in the RFA Sanctions
28 Order was not excepted from discharge.
-8-
1 Whether the bankruptcy court erred in determining that issue
2 preclusion was not available or applicable to the RFA Sanctions
3 Order.
4 STANDARDS OF REVIEW
5 We review de novo the bankruptcy court’s decisions concerning
6 summary judgment. SNTL Corp. v. Ctr. Ins. Co. (In re SNTL Corp.),
7 571 F.3d 826, 834 (9th Cir. 2009). Where no factual dispute
8 exists on an appeal regarding exception to discharge, the review
9 is de novo. Waag v. Permann (In re Waag), 418 B.R. 373, 376 (9th
10 Cir. BAP 2009).
11 The availability of issue preclusion is reviewed de novo.
12 George v. City of Morro Bay (In re George), 318 B.R. 729, 732-33
13 (9th Cir. BAP 2004), aff'd, 144 F.App'x. 636 (9th Cir. 2005).
14 Once it is determined that issue preclusion may be applied, the
15 trial court's decision to do so is reviewed for abuse of
16 discretion. Id. at 733. In determining whether to apply issue
17 preclusion, the court is to be given broad discretion in light of
18 the advantages of avoiding burdensome litigation and promoting
19 judicial economy. Parklane Hosiery Co. v. Shore, 439 U.S. 322,
20 321 (1979). Reasonable doubts about what was decided in a prior
21 judgment are resolved against applying issue preclusion. Lopez v.
22 Emergency Serv. Restoration, Inc. (In re Lopez), 367 B.R. 99,
23 107-08 (9th Cir. BAP 2007).
24 DISCUSSION
25 Summary judgment should be granted only "if the pleadings,
26 the discovery and disclosure materials on file, and any affidavits
27 show that there is no genuine issue as to any material fact and
28 that the movant is entitled to judgment as a matter of law."
-9-
1 Civil Rule 56(c)(2), incorporated by Rule 7056; Barboza v. New
2 Form, Inc. (In re Barboza), 545 F.3d 702, 707 (9th Cir. 2008).
3 Exceptions to discharge must be strictly construed. Snoke v. Riso
4 (In re Riso), 978 F.2d 1151, 1154 (9th Cir. 1992) (“[G]iven the
5 strong fresh start policy in the Code, exceptions to discharge are
6 strictly construed against an objecting creditor and in favor of
7 the debtor.); Ghomeshi v. Sabban (In re Sabban), 384 B.R. 1, 5
8 (9th Cir. BAP 2008), aff'd, 600 F.3d 1219, 1222 (9th Cir. 2010).
9 A trial court may grant summary judgment on the basis of issue
10 preclusion. Granite Rock Co. v. Int'l Bhd. of Teamsters, Local
11 287, 649 F.3d 1067, 1070 (9th Cir. 2011).
12 In this appeal, the bankruptcy court effectively granted
13 summary judgment twice. First, without opposition from Debtors,
14 it determined in the Summary Judgment Order that, based on issue
15 preclusion, the damages awarded by the state court to Kaplan in
16 the Judgment were excepted from discharge under §§ 523(a)(2),
17 (a)(4) and (a)(6). However, in the Summary Judgment Order, the
18 bankruptcy court declined to allow an exception to discharge of
19 the attorney’s fees awarded to Kaplan in the RFA Sanctions Order
20 because, it decided, there was an “issue of contention” as to
21 whether the RFA Sanctions Order should be “given the same
22 preclusive effect as that given the Judgment.” Tentative Ruling
23 (adopted in the Summary Judgment Order) at 2, September 1, 2011.
24 Then, after the RFA Sanctions Order became final, at the
25 hearing on February 15, 2012, the bankruptcy court not only denied
26 Kaplan’s motion to amend the Summary Judgment Order to include an
27 exception to discharge for the RFA Sanctions Order, but the court
28 effectively held that the attorney’s fees awarded by the state
-10-
1 court were indeed discharged. According to the bankruptcy court:
2 [T]he Florida case is actually not controlling here
because the attorney fees, as they’ve been awarded
3 below, are not directly consequential from the
nondischargeability issue. . . . And the
4 dischargeability status depends on the primary debt
that’s nondischargeable. . . . [T]his is on [] giving
5 preclusive effect to an earlier judgment, and the Court
needs to evaluate all the factors on whether it’s a fair
6 and good policy to give preclusive effect. It doesn’t —
it’s not supported.
7
8 Hr’g Tr. 1:21–2:11, February 15, 2012.
9 As near as we can discern, the bankruptcy court apparently
10 decided that issue preclusion should not be applied to the state
11 court’s findings in the RFA Sanctions Order in deciding whether
12 the attorney’s fees it awarded could be discharged. In its oral
13 ruling, the bankruptcy court did not clearly articulate why it
14 declined to apply issue preclusion, nor did it identify “all the
15 factors” it considered in reaching its conclusion. As explained
16 below, these omissions are problematic.
17 Availability of Issue Preclusion
18 Simply stated, issue preclusion "bars ‘successive litigation
19 of an issue of fact or law that was actually litigated and
20 resolved in a valid court determination essential to that prior
21 judgment,' even if the issue recurs in the context of a different
22 claim." Taylor v. Sturgell, 553 U.S. 880, 892 (2008) (quoting New
23 Hampshire v. Maine, 532 U.S. 742, 748-49 (2001)). The purpose of
24 issue preclusion is to conserve judicial resources and foster
25 confidence in the outcome of adjudications by providing finality
26 and avoiding inconsistent rulings. See Taylor, 553 U.S. at 892.
27 It is settled that issue preclusion may be applied in exception to
28 discharge proceedings. Grogan v. Garner, 498 U.S. 279, 284-85
-11-
1 (1991).
2 The RFA Sanction Order was entered by a California state
3 court. To determine the preclusive effect of a California state
4 court's findings in a judgment or order, the bankruptcy court must
5 first determine if issue preclusion is available under California
6 preclusion law. 28 U.S.C. § 1738 (the Full Faith and Credit
7 Statute); Marrese v. Am. Acad. of Orthopaedic Surgeons, 470 U.S.
8 373, 380 (1985). When state preclusion law controls, the
9 discretion to apply the doctrine is exercised in accordance with
10 state and federal law. Khaligh v. Hadegh (In re Khaligh),
11 338 B.R. 817, 823 (9th Cir. BAP 2006), aff'd, 506 F.3d 956
12 (9th Cir. 2007).
13 Under California law, the party asserting issue preclusion
14 has the burden of establishing the following "threshold"
15 requirements for its availability:
16 First, the issue sought to be precluded from
relitigation must be identical to that decided in a
17 former proceeding. Second, this issue must have been
actually litigated in the former proceeding. Third, it
18 must have been necessarily decided in the former
proceeding. Fourth, the decision in the former
19 proceeding must be final and on the merits. Finally,
the party against whom preclusion is sought must be the
20 same as, or in privity with, the party to the former
proceeding.
21
22 Harmon v. Kobrin (In re Harmon), 250 F.3d 1240, 1245 (9th Cir.
23 2001) (the “Harmon” requirements).
24 Here, there does not appear to be any dispute that some of
25 the Harmon criteria are satisfied by the RFA Sanctions Order. It
26 was a final order, and the parties and their adversarial positions
27 in state court were the same as in this litigation. What is
28 disputed in this appeal, however, is whether the issue decided in
-12-
1 state court, i.e., Debtors’ liability for attorneys’ fees to
2 Kaplan under Cal. Code Civ. Proc. § 2033.420, was identical,
3 actually litigated, and necessarily decided in relation to the
4 issues before the bankruptcy court, i.e., whether that “debt”
5 arose from conduct of the type giving rise to an exception to
6 discharge under § 523(a)(2), (a)(4) and/or (a)(6).
7 In reaching its decision, there is no indication in the
8 record before us that the bankruptcy court conducted a review of
9 the RFA Sanctions Order to address the three questionable Harmon
10 factors. Instead, the bankruptcy court appears to have ruled that
11 issue preclusion would not be applied for reasons of public
12 policy: “[T]his is on [] giving preclusive effect to an earlier
13 judgment, and the Court needs to evaluate all the factors on
14 whether it's a fair and good policy to give preclusive effect [to
15 the RFA Sanctions Order.] It doesn't — it's not supported.” Hr’g
16 Tr. 27-11, February 15, 2012.
17 In short, the bankruptcy court acknowledges that it was
18 conducting an issue preclusion analysis of the RFA Sanctions
19 Order. However, the court did not explain what factors it was
20 evaluating or why it was not “fair and good policy to give
21 preclusive effect” to the RFA Sanctions Order. Further, it would
22 appear that the court conflated whether issue preclusion was in
23 fact available with the second part of the analysis, whether it
24 should be applied.
25 Application of Issue Preclusion in Exceptions to Discharge
26 Bankruptcy courts “have exclusive jurisdiction to determine
27 dischargeability of debts under §§ 523(a)(2) (fraud and
28 deception); (a)(4) (fiduciary fraud, embezzlement, or larceny);
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1 and (a)(6) (willful and malicious injury to person or property).”
2 Ackerman v. Eber (In re Eber), 687 F.3d 1123, 1128 (9th Cir.
3 2012); see § 523(c)(1). The effect of this rule is that “the
4 bankruptcy court is not confined to a review of the judgment and
5 record in the prior state-court proceedings when considering the
6 dischargeability of [a creditor’s] debt.” Brown v. Felsen,
7 442 U.S. 127, 129-30 (1979). In other words, “final judgments in
8 state courts are not necessarily preclusive in United States
9 bankruptcy courts." Sasson v. Sokoloff (In re Sasson), 424 F.3d
10 864, 872 (9th Cir. 2005).
11 Therefore, although all federal courts have “broad
12 discretion” in a decision to apply issue preclusion based on a
13 state court judgment, Parklane Hosiery Co., 439 U.S. at 331, that
14 discretion is particularly expansive in exceptions to discharge
15 under § 523(a)(2), (a)(4) and (a)(6). Comer v. Comer
16 (In re Comer), 723 F.2d 737, 740 (9th Cir. 1984) (holding that a
17 bankruptcy judge should not “rely solely on state court judgments
18 when determining the nature of a debt for purposes of
19 dischargeability, if doing so would prohibit the bankruptcy court
20 from exercising its exclusive jurisdiction to determine
21 dischargeability.”)
22 The Panel has previously provided guidelines for bankruptcy
23 courts on how to satisfy their independent responsibility to
24 determine if the findings of a state court judgment should be
25 applied to justify an exception to discharge based on issue
26 preclusion. In re Lopez, 367 B.R. at 99. Observing that, “at its
27 heart, the decision to apply issue preclusion entails a measure of
28 discretion and flexibility,” id. at 107, the Panel noted that
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1 bankruptcy courts are guided by the concepts incorporated in the
2 Restatement (Second) of Judgments:
3 “the need for flexibility in the operative principles,
and this recognition has served as the basis for the
4 exceptions to the rule of issue preclusion set forth in
§ 28." RESTATEMENT (SECOND) OF JUDGMENTS, Title E,
5 Introductory Note (1980). The exceptions to the general
rule of issue preclusion that are set out in Restatement
6 (Second) § 28 include such flexible concepts as: change
in applicable legal context; avoiding inequitable
7 administration of laws; differences in quality or
extensiveness of procedures; and lack of adequate
8 opportunity or incentive to obtain a full and fair
adjudication in the initial action. Id. §§ 28(2), (3) &
9 (5).
10 Id.; see also Parklane Hosiery Co., 439 U.S. at 327 n.6, 330 n.13,
11 331 n.14, 333 n.21, 353, 354 n.22 (where the Supreme Court cites
12 the Restatement and Restatement (Second) of Judgments repeatedly
13 as authoritative on questions of issue preclusion).
14 Although the Lopez panel recognized that application of issue
15 preclusion in exception to discharge cases is principally a
16 question of federal law, it understood that, where a state law
17 judgment is available for issue preclusion, state (California) law
18 still must be taken into consideration. Fortunately,
19 California law is consistent with federal law on the
question of discretionary application of issue
20 preclusion. In California, issue preclusion is not
applied automatically or rigidly, and courts are
21 permitted to decline to give issue preclusive effect to
prior judgments in deference of countervailing
22 considerations of fairness. The court balances "the
need to limit litigation against the right of a fair
23 adversary proceeding in which a party may fully present
the facts." Thus, policy considerations may limit use of
24 issue preclusion in any particular instance.
25 In re Lopez, 367 B.R. at 108 (citations omitted); see also,
26 Khaligh v. Hadaegh (In re Khaligh), 338 B.R. 817, 828 (9th Cir.
27 BAP 2006), aff’d 506 F.3d 956 (9th Cir. 2007) (noting that the
28 California courts “take into account the considerations
-15-
1 articulated in Restatement (Second) of Judgments.”).
2 In this appeal, our ability to review the bankruptcy court’s
3 decision is hampered by the brevity of its analysis in its oral
4 ruling. The court did not engage in an analysis concerning
5 whether the RFA Sanctions Order satisfied the five Harmon factors.
6 If the bankruptcy court ruled that issue preclusion was not
7 available under state law, it was unnecessary to reach the
8 discretionary question of its application in this case. As noted
9 above, the court seemingly declined to apply issue preclusion for
10 policy reasons, but did not explain what factors or considerations
11 it relied upon for its decision.
12 Given this record, we must remand this matter to the
13 bankruptcy court with instructions that it conduct an adequate
14 issue preclusion analysis concerning the state court’s RFA
15 Sanctions Order. To do so, it should first examine the five
16 Harmon factors paying particular attention to the three factors in
17 dispute — whether the issues decided by the state court in the RFA
18 Sanctions Order were identical, actually litigated, and
19 necessarily decided in relation to the exception to discharge
20 issues before the bankruptcy court.9 Then, if the bankruptcy
21
9
22 To determine if an issue is identical to the issue before
the court deciding preclusion and whether it has been actually
23 litigated, we are required to examine the record in the prior
court’s case. United States v. Hernandez, 572 F.2d 218, 222 (9th
24 Cir. 1978). Based on what has been submitted to us, it may be
that the bankruptcy court had an inadequate record to make that
25 determination. In essence, the bankruptcy court was given only
the RFA Sanctions Order, which imposed attorney's fees on Debtors
26 because of their failure to admit as fact matters specified in the
RFAs that Kaplan was later required to prove at trial. The RFA
27 Sanctions Order lists 27 RFAs that Wasko failed to answer, and 30
RFAs that Dehay failed to answer. However, the RFA Sanctions
28 (continued...)
-16-
1 court determines that issue preclusion is available, it should
2 exercise its independent duty to determine if issue preclusion
3 should apply in this case, guided by the federal and California
4 guidelines discussed above.
5 In light of the facts of this case and the case law, an issue
preclusion analysis of the RFA Sanctions Order was required.
6
7 The RFA Sanctions Order and the Summary Judgment Order were
8 separate orders. In the Summary Judgment Order, based upon
9 Debtors’ prebankruptcy conduct in their dealings with Kaplan, the
10 bankruptcy court found that the state court had made the necessary
11 findings of fact to support an exception to discharge in Kaplan’s
12 favor under §§ 523(a)(2)(A), (a)(4) and (a)(6). Debtors have not
13 challenged the bankruptcy court’s decision.
14 On remand, the bankruptcy court must also determine whether
15 the RFA Sanctions Order preclusively establishes an exception to
16 discharge. As Debtors note, in contrast to the Summary Judgment
17 Order, the RFA Sanctions Order resulted solely from their post-
18 bankruptcy failure to comply with discovery rules in the state
19 court litigation. In other words, the attorneys fee award in the
20 RFA Sanctions Order did not directly result from the same conduct
21
22
9
(...continued)
23 Order did not explain what facts those RFAs specifically
addressed. We have examined the docket and it does not appear
24 that the bankruptcy court was ever given copies of the RFAs.
Additionally, counsel for Debtors offered to provide the
25 bankruptcy court with a transcript of the hearing where the state
court explained its reasons for granting the attorney's fee award
26 in the RFA Sanctions Order, but there is no indication that the
transcript was ever provided, nor does it appear in the court's
27 docket. Hr'g Tr. 6:16-20, Dec. 7, 2011. On remand, to perform a
proper issue preclusion analysis, the bankruptcy court may wish to
28 obtain copies of the RFAs and the state court hearing transcript.
-17-
1 giving rise to the Judgment. Because the two state court orders
2 were based ostensibly on conduct occurring at different times in
3 relation to Debtors’ bankruptcy filing, a determination that the
4 Judgment is excepted from discharge would not necessarily require
5 that the amounts awarded to Kaplan under the state court’s second,
6 independent order, were also nondischargeable.
7 As noted above, there is a strong bankruptcy policy that
8 exceptions to discharge are to be strictly construed so as to
9 effectuate the Congressional policy of permitting debtors a
10 financial fresh start and against the creditor. In re Riso,
11 978 F.2d at 1154; In re Rahm, 641 F.2d 755, 756-57 (9th Cir.
12 1981); In re Sabban, 384 B.R. at 5. Despite this, Kaplan argues,
13 case law supports his position that “once it is established that
14 “specific money or property has been obtained by fraud . . . any
15 debt arising therefrom is excepted from discharge.” Kaplan’s Op.
16 Br. at 7 (quoting Cohen v. De la Cruz, 523 U.S. 213, 218 (1998)).
17 Kaplan’s argument implies that, once a bankruptcy court decides to
18 except a debt from discharge based on issue preclusion, any
19 attorney’s fees associated with that debt are also excepted from
20 discharge, without the need for a separate issue preclusion
21 inquiry. We disagree with Kaplan’s reading of Cohen that no
22 separate issue preclusion inquiry is necessary.
23 In Cohen, the Supreme Court held that, for purposes of
24 § 523(a)(2), “any debt” arising from a judicial determination of
25 fraud is likewise excepted from discharge, and in that case, “any
26 debt” included the “treble damages, attorney’s fees and other
27 relief” awarded to the creditor under state law. Id. at 223. In
28 that case the court agreed with the bankruptcy court that, because
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1 the creditor’s nondischargeable claim against the debtor arose
2 under New Jersey’s rent control statute, an award to the creditor
3 under a related statute providing for recovery of attorney’s fees
4 in actions for violations of the statutory rent controls was also
5 excepted from discharge.10 Cohen, 523 U.S. at 218. Strictly
6 speaking, then, the rule announced in Cohen dealt only with
7 exceptions to discharge for attorney’s fees where there was a
8 connection between a statute authorizing the fee award, and the
9
10 10
The two statutes cited in the Cohen decision were:
11 N.J. Stat. § 56:8-2. Fraud, etc., in connection with sale or
advertisement of merchandise or real estate as unlawful practice
12
The act, use or employment by any person of any
13 unconscionable commercial practice, deception, fraud,
false pretense, false promise, misrepresentation, or the
14 knowing concealment, suppression, or omission of any
material fact with intent that others rely upon such
15 concealment, suppression or omission, in connection with
the sale or advertisement of any merchandise or real
16 estate, or with the subsequent performance of such
person as aforesaid, whether or not any person has in
17 fact been misled, deceived or damaged thereby, is
declared to be an unlawful practice[.]
18
N.J. Stat. § 56:8-19. Action, counterclaim by injured person;
19 recovery of damages, costs
20 Any person who suffers any ascertainable loss of moneys
or property, real or personal, as a result of the use or
21 employment by another person of any method, act, or
practice declared unlawful under this act or the act
22 hereby amended and supplemented may bring an action or
assert a counterclaim therefor in any court of competent
23 jurisdiction. In any action under this section the court
shall, in addition to any other appropriate legal or
24 equitable relief, award threefold the damages sustained
by any person in interest. In all actions under this
25 section, including those brought by the Attorney
General, the court shall also award reasonable
26 attorneys' fees, filing fees and reasonable costs of
suit.
27
These are the texts of the statutes in effect in 1998 when
28 the Supreme Court issued its decision in Cohen.
-19-
1 statutes establishing the debtor’s liability for the creditor’s
2 claim.
3 Applying Cohen, four courts of appeals have adopted what the
4 parties in this appeal describe as a "statutory/contractual basis"
5 analysis in this context. Under this approach to construing
6 § 523(a), attorney fee awards are excepted from discharge only
7 when based on a statute or contract11 related to the creditor’s
8 underlying claim. Transouth Fin. Corp of Fla. v. Johnson,
9 931 F.2d 1505, 1509 (11th Cir. 1991); United Merchants and
10 Manufacturers Inc. v. Equitable Life Assurance Society of the
11 United States (In re United Merchants and Manufacturers), 674 F.2d
12 134 (2nd Cir. 1982); Fry v. Dinan (In re Dinan), 448 B.R. 775, 778
13 (9th Cir. BAP 2011); Florida v. Ticor Title Ins. Co.
14 (In re Florida), 164 B.R. 636, 639 (9th Cir. BAP 1994).12
15
11
16 As the case law demonstrates, where there is a contractual
basis for the award of attorney’s fees awarded in a
17 nondischargeable judgment, such fees may also be excepted from
discharge. Jordan v. Se. Nat'l Bank (In re Jordan), 927 F.2d 221,
18 226-28 (5th Cir. 1991) (finding that a debt excepted from
discharge "includes state-approved contractually required
19 attorney's fees")(quoting Martin v. Bank of Germantown (In re
Martin), 761 F.2d 1163, 1168 (6th Cir. 1985)). Because there was
20 no written contract between the parties in this case providing for
an award of attorney fees to the prevailing party, we need not
21 consider that case law here.
12
22 There was also some discussion in the bankruptcy court of
a less numerous, minority line of decisions espousing a so-called
23 "status-dependent" approach to determine whether attorney's fees
awards are subject to discharge in this context. As explained in
24 these decisions, whether there is a contractual or statutory basis
for the award of attorney's fees is not determinative. Instead,
25 "the dischargeability of ancillary obligations such as attorney's
fees turn[s] on the dischargeability of the underlying debt. . ."
26 DuPhily v. DuPhily, 52 B.R. 971, 978 (D. Del. 1985) (citing
In re Chambers, 36 B.R. 42 (Bankr. D. Wis. 1984); In re Sposa,
27 31 B.R. 307 (Bankr. E.D. Va. 1983)). As discussed below, the
Panel has adopted the statutory/contractual position in our
28 (continued...)
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1 Both Kaplan and Debtors in this appeal cite to the Panel’s
2 opinion in In re Florida to support their positions. As the
3 bankruptcy court correctly determined, but for possibly different
4 reasons than our own, In re Florida is not controlling on the
5 availability of issue preclusion in this case. However, since
6 In re Florida was a published opinion, and we are bound by its
7 holdings, we will examine it in detail.
8 In In re Florida, before bankruptcy, Ticor sued Alvin Florida
9 in U.S. district court. After a bench trial, the district court
10 found that Florida, in attempting to sell certain property, had
11 forged a release of an I.R.S. lien. Because Ticor had insured
12 title to the property free of the I.R.S. lien, it was forced to
13 pay its insured when the release was discovered and then revoked
14 by the I.R.S. The district court found Ticor's actual loss was
15 $153,922, trebled these damages pursuant to the RICO statute,
16 18 U.S.C § 1961 et seq., and awarded attorney’s fees of $124,950
17 to Ticor pursuant to the remedies provision of RICO, 18 U.S.C.
18 § 1964(c).13 Finding that the forgery was "malicious, fraudulent
19 and oppressive," the district court awarded a coextensive judgment
20 to Ticor against Florida consisting of $153,922 in compensatory
21
22
12
(...continued)
23 published decision In re Florida and thus we do not consider this
alternative view.
24
13
18 U.S.C. § 1964(c) provides that:
25
Any person injured in his business or property by reason
26 of a violation of section 1962 of [the RICO statute] may
sue therefor in any appropriate United States district
27 court and shall recover threefold the damages he
sustains and the cost of the suit, including a
28 reasonable attorney's fee[.]
-21-
1 damages and $307,844 in punitive damages, and a small discovery
2 sanction.14 The judgment was affirmed on appeal.
3 After Florida filed for bankruptcy, Ticor sought an exception
4 to discharge of its debt under § 523(a)(2) and (6). Acting on the
5 creditor’s motion for summary judgment, the bankruptcy court
6 determined the debts to be excepted from discharge in total under
7 § 523(a)(6), including the amounts representing Ticor's litigation
8 expenses in the state court suit and the discovery sanction.
9 On appeal to the BAP, Florida challenged the bankruptcy
10 court’s determination that the discovery sanction and attorney’s
11 fees were excepted from discharge. The Panel ruled,
12 Florida contends that all damages awarded under the RICO
claim, including the discovery sanction and attorney's
13 fees, are punitive. Florida's description of these
elements as punitive damages somewhat mischaracterizes
14 them. The bankruptcy court found that those portions of
the claim based on attorney's fees and costs and the
15 discovery sanction were debts which were ancillary to
the underlying debt and partook of its character.
16
17 Id. at 639.
18 In this case, the parties have differing views about how the
19 attorney’s fees awarded in Florida “partook of the character” of
20 the nondischargeable debt, and whether that participation
21 justified exception to discharge for the attorney’s fee award.
22 However, the full context of the Panel’s decision reveals that the
23 attorney’s fees were awarded for violation of the RICO statute,
24 which proscribed conduct that the Bankruptcy Code would consider
25
26 14
Other than noting that the discovery sanction was for
$15,000, little information about it is provided in the Florida
27 decision. It was, however, “awarded under the RICO claim,”
In re Florida, 164 B.R. at 639, and thus was awarded, like the
28 attorney’s fees, on the basis of a statute.
-22-
1 grounds for an exception to discharge. Therefore, like Cohen,
2 In re Florida stands for the proposition that violation of a
3 statute that provides for an award of attorney’s fees for conduct
4 which the Bankruptcy Code considers grounds for exception to
5 discharge may result in denial of discharge for those attorney’s
6 fees.
7 In this appeal, the statute on which the RFA Sanctions Order
8 was based, Cal. Code Civ. Proc. § 2033.420, sanctions the failure
9 to respond to requests for admission of facts that then requires a
10 party to prove them. In other words, under the statute, an award
11 of attorney’s fees may be made for conduct that a bankruptcy court
12 may find does not support an exception to discharge.
13 On remand to the bankruptcy court, Kaplan is free to argue
14 that, like the state court apparently found, Debtors’ failure to
15 respond to the RFAs was part of Debtors’ scheme to defraud him.
16 In that respect, Kaplan may contend that there is an identity of
17 issues between the FRA Sanctions Order and the bankruptcy court’s
18 determination that the Judgment debt is excepted from discharge
19 under § 523(a)(2), (a)(4) or (a)(6). However, in light of the
20 strong policy considerations in bankruptcy law that exceptions to
21 discharge are narrowly construed, and the issue preclusion case
22 law discussed above, attorney’s fees awarded under a statute will
23 be excepted from discharge only if that statute proscribes conduct
24 that violates one of the provisions of § 523(a).15 Because an
25
15
26 Indeed, In re Florida cautions against recognizing a
remote connection between conduct that results in an exception to
27 discharge judgment and the conduct resulting in the award of
attorney’s fees: “It may be that the relationship of ancillary to
28 (continued...)
-23-
1 award of attorney’s fees under Cal. Code Civ. Proc. § 2033.420
2 does not necessarily result from conduct proscribed in the
3 Bankruptcy Code, an award of attorneys fees under that statute is
4 not automatically excepted from discharge.
5 CONCLUSION
6 The bankruptcy court must conduct an analysis of the
7 availability and applicability of issue preclusion to the RFA
8 Sanctions Order. Even if the bankruptcy court determines that
9 issue preclusion is available, it must then, as a matter of
10 discretion, decide whether the doctrine should or should not be
11 applied. Assuming issue preclusion is both available and
12 applicable, the bankruptcy court must then independently decide
13 whether the conduct giving rise to the award of attorney’s fees to
14 Kaplan in this case is sufficient to support an exception to
15 discharge under § § 523(a)(2), (4), or (6).
16 We VACATE the bankruptcy court's order denying Kaplan's
17 motion to amend the summary judgment order to add an exception to
18 discharge for the attorneys fees awarded in the RFA Sanctions
19 Order. We REMAND this matter to the bankruptcy court for further
20 proceedings consistent with this memorandum.
21
22
23
24
25
26
15
(...continued)
27 primary obligations can become so attenuated that it would be
unreasonable to characterize them as integral to the original
28 willful and malicious injury.” 164 B.R. at 639.
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