FILED
JAN 12 2012
1 SUSAN M SPRAUL, CLERK
U.S. BKCY. APP. PANEL
OF THE NINTH CIRCUIT
2
3 UNITED STATES BANKRUPTCY APPELLATE PANEL
4 OF THE NINTH CIRCUIT
5 In re: ) BAP No. CC-11-1065-HPaMk
)
6 MANMOHAN SINGH BIRING, ) Bk. No. 07-21006
)
7 Debtor. ) Adv. No. 08-01172
______________________________)
8 )
MANMOHAN SINGH BIRING, )
9 )
Appellant, )
10 )
v. ) M E M O R A N D U M1
11 )
YOGESH DHAWAN, )
12 )
Appellee. )
13 ______________________________)
14
Argued and Submitted on November 16, 2011,
15 at Pasadena, California
16 Filed - January 12, 2012
17 Appeal from the United States Bankruptcy Court
for the Central District of California
18
Honorable Peter H. Carroll, Bankruptcy Judge, Presiding
19
20 Appearances: Gregory M. Salvato, Esq. of Salvato Law Offices
argued for the Appellant. Bren Conner, Esq. of
21 Conner & Associates argued for the Appellee.
22
23 Before: HOLLOWELL, PAPPAS and MARKELL, Bankruptcy Judges.
24
25
26 1
This disposition is not appropriate for publication.
27 Although it may be cited for whatever persuasive value it may
have (see Fed. R. App. P. 32.1), it has no precedential value.
28 See 9th Cir. BAP Rule 8013-1.
1 Creditor Yogesh Dhawan (Dhawan) obtained a default judgment
2 in California state court and subsequently sued the debtor to
3 determine the nondischargeability of the debt pursuant to
4 § 523(a).2 The bankruptcy court granted Dhawan’s motion for
5 summary judgment, determining that there was no genuine issue of
6 material fact because of the preclusive effect of the state court
7 judgment. We AFFIRM.
8 I. FACTS
9 The Debtor is a pulmonary and critical care physician,
10 licensed to practice medicine in California. He has expertise in
11 skin care and other cosmetic treatments. In 2002, the Debtor
12 created Healthwest, Inc. (Healthwest) to offer and sell licenses
13 for “med spa” clinics (Clinics) that provided laser hair removal,
14 Botox, light treatment and microdermabrasion. The Debtor,
15 through Healthwest, sold the licenses with options to operate the
16 Clinics in certain exclusive territories. As part of the
17 purchase, the Debtor would provide necessary support services for
18 the operation of the Clinics.
19 On August 13, 2003, Healthwest filed an application with the
20 California Department of Corporations (CDOC) to register its sale
21 of licenses and options as franchises. In October or November
22 2003, the Debtor provided Dhawan with its franchise offering.
23 Based on the information and representations provided by the
24 Debtor in connection with the Clinic opportunity, Dhawan
25
26 2
Unless otherwise specified, all chapter and section
27 references are to the Bankruptcy Code,
11 U.S.C. §§ 101-1532, and
all “Rule” references are to the Federal Rules of Bankruptcy
28 Procedure, Rules 1001-9037.
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1 purchased a license to operate a Clinic and entered into a
2 Licensing Servicing Agreement, a Management Support Services
3 Agreement, and an Asset Purchase Agreement with the Debtor and
4 Healthwest.
5 On July 7, 2004, the CDOC finalized its review of Healthwest
6 and denied its franchise registration application, finding that
7 Healthwest had advertised and sold the Clinics by means of
8 fraudulent misrepresentation. It found that “the offer or sale
9 of [the] franchises in California would constitute
10 misrepresentation, deceit and fraud on the purchasers,” for
11 reasons including that the Debtor and Healthwest sold multiple
12 licenses for the same territories.
13 On September 24, 2004, Dhawan filed a complaint against the
14 Debtor and Healthwest in California state court alleging thirteen
15 causes of action including fraud, fraudulent inducement to
16 contract, negligent misrepresentation, breach of contract, unfair
17 competition and unfair business practices in connection with his
18 purchase of the Clinic (the State Court Complaint). Dhawan
19 alleged that the Debtor, individually and as the sole shareholder
20 and officer of Healthwest, fraudulently induced him to invest in
21 the Clinic and enter into the associated agreements, and then
22 systematically breached those agreements by not delivering what
23 was promised. The State Court Complaint incorporated the
24 findings of the CDOC. Dhawan sought general, special, and
25 punitive damages in an unspecified amount.
26 Although the Debtor and Healthwest were properly served with
27 the State Court Complaint, neither answered. Default judgments
28 were entered against the Debtor and Healthwest on February 8,
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1 2005. Dhawan submitted evidence and testimony concerning the
2 claims made in the State Court Complaint to support the amount of
3 his resulting damages at a “prove up” hearing held on
4 September 12, 2005. Although the Debtor admits he received both
5 the State Court Complaint and the statement of damages, he did
6 not appear at the prove up hearing.
7 On September 12, 2005, the state court entered a
8 $1,924,008.64 judgment jointly and severally against the Debtor
9 and Healthwest (the Judgment). The state court awarded damages
10 based on the “oral testimony and other evidence presented by
11 [Dhawan], including [his] written declaration, and supporting
12 exhibits.” It found that “consistent with this action and the
13 evidence presented,” Dhawan “sustained damages as alleged in the
14 complaint.” The Judgment specified the damages:
15 1) $85,000 for Mr. Dhawan’s initial payment for the
[Clinic] and options pursuant to the License Agreement,
16 which has been rendered useless by the Defendants’
17 misrepresentations and breaches of contract to aid in
the operation of the [Clinic];
18
2) $225,000 for the lost value of the options on the
19 . . . territories . . . pursuant to both the parties’
20 Option Agreement and Asset Purchase Agreement for which
Mr. Dhawan was denied his opportunity to exercise the
21 options due to the breaches and fraudulent conduct as
evidenced and identified by the Department of
22 Corporations;
23
3) $129,000 in the amount that Mr. Dhawan became
24 obligated, and now remains obligated on the promissory
note executed in connection with the Asset Purchase
25 Agreement, but which Defendants breached by failing to
26 provide the assets promised;
27 4) $198,990 to purchase the equipment and other assets
28
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1 that should have been provided by Defendants . . .
pursuant to the Asset Purchase Agreement;
2
3 5) $245,343.64 in losses and additional expenditures
. . . due to Defendants’ failure to provide the
4 support, training and marketing efforts that had been
promised in both the Licensing Agreement and Marketing
5 Agreement;
6
6) $510,000 in lost profits . . . ;
7
7) $510,000 which represents the net income for [the
8 Clinics] that had been optioned as was set forth in the
9 profit and loss statements which were used by the
Defendants to induce Mr. Dhawan’s reliance;
10
8) costs in the amount of $675; and,
11
12 9) $20,000 in relocation and related expenses for
Plaintiff’s family.
13
14 On November 28, 2007, the Debtor filed a voluntary petition
15 under chapter 7. Dhawan filed an adversary proceeding on
16 February 26, 2008, to have the Judgment declared nondischargeable
17 under § 523(a)(2), (a)(4) and (a)(6) (the Nondischargeability
18 Complaint). Like the State Court Complaint, the
19 Nondischargeability Complaint alleged that the Debtor
20 fraudulently induced him to invest in the Clinic. Dhawan
21 contended that the Debtor knew that the information in the
22 franchise offering was false and never intended to perform on the
23 agreements in connection with the Clinic as promised. He
24 asserted that the offering and sale of the Clinic was part of a
25 scheme to defraud him.
26 Dhawan filed a motion for summary judgment on the basis that
27 the Judgment had preclusive effect on the issue of whether the
28 Debtor committed fraud under § 523(a)(2)(A). The Debtor filed an
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1 opposition. After a hearing on December 21, 2010, the bankruptcy
2 court issued a memorandum decision determining that the Debtor
3 had a full and fair opportunity to litigate the State Court
4 Complaint and that because the issue of his fraudulent conduct
5 was necessarily decided in the state court, he was precluded from
6 relitigating Dhawan’s fraud claim in bankruptcy. The bankruptcy
7 court entered a judgment on January 19, 2011, declaring the
8 Judgment nondischargeable pursuant to § 523(a)(2). The Debtor
9 timely appealed.
10 II. JURISDICTION
11 The bankruptcy court had jurisdiction under 28 U.S.C.
12 § 157(b)(2)(A), (I), (O) and § 1334. We have jurisdiction under
13
28 U.S.C. § 158.
14 III. ISSUE
15 Did the bankruptcy court err in granting summary judgment
16 excepting from discharge the $1,924,008 in damages awarded by the
17 state court?
18 IV. STANDARDS OF REVIEW
19 We review de novo the bankruptcy court’s grant of summary
20 judgment. Ghomeshi v. Sabban (In re Sabban),
600 F.3d 1219,
21 1221-22 (9th Cir. 2010); Cutter v. Seror (In re Cutter),
398 B.R.
22 6, 16 (9th Cir. BAP 2008).
23 We review de novo a bankruptcy court’s determination that
24 issue preclusion is available. Lopez v. Emerg. Serv.
25 Restoration, Inc. (In re Lopez),
367 B.R. 99, 103 (9th Cir. BAP
26 2007); Khaligh v. Hadaegh (In re Khaligh),
338 B.R. 817, 823
27 (9th Cir. BAP 2006). Once we determine that issue preclusion is
28 available, we review whether applying it was an abuse of
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1 discretion. In re Lopez,
367 B.R. at 103; In re Khaligh,
2
338 B.R. at 823; Miller v. County of Santa Cruz,
39 F.3d 1030,
3 1032 (9th Cir. 1994). A bankruptcy court abuses its discretion
4 when it applies the incorrect legal rule or its application of
5 the correct legal rule is “(1) illogical, (2) implausible, or
6 (3) without support in inferences that may be drawn from the
7 facts in the record.” United States v. Loew,
593 F.3d 1136, 1139
8 (9th Cir. 2010) (quoting United States v. Hinkson,
585 F.3d 1247,
9 1261-62 (9th Cir. 2009)(en banc))(internal quotation marks
10 omitted).
11 V. DISCUSSION
12 A. Summary Judgment
13 In reviewing the bankruptcy court’s decision on a motion for
14 summary judgment, we apply the same standards as the bankruptcy
15 court. Summary judgment may be granted “if the pleadings, the
16 discovery and disclosure materials on file, and any affidavits
17 show that there is no genuine issue as to any material fact and
18 that the movant is entitled to judgment as a matter of law.”
19 Fed. R. Civ. P. 56(a) (incorporated by Rule 7056); Barboza v. New
20 Form, Inc. (In re Barboza),
545 F.3d 702, 707 (9th Cir. 2008).
21 The party seeking summary judgment bears the initial burden
22 of establishing the absence of a genuine issue of material fact.
23 Celotex Corp. v. Catrett,
477 U.S. 317, 322-23 (1986). A dispute
24 is genuine if there is sufficient evidence for a reasonable fact-
25 finder to hold in favor of the non-moving party, and a fact is
26 “material” if it might affect the outcome of the case. Far Out
27 Prods., Inc. v. Oskar,
247 F.3d 986, 992 (9th Cir. 2001) (citing
28 Anderson v. Liberty Lobby, Inc.,
477 U.S. 242, 248-49 (1986)).
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1 Once the moving party has met its initial burden, the non-moving
2 party must show specific facts establishing the existence of
3 genuine issues of fact for trial.
Id., at 256.
4 B. Issue Preclusion
5 Issue preclusion applies in nondischargeability proceedings
6 to bar the relitigation of factual issues that were determined in
7 a prior state court action. Grogan v. Garner,
498 U.S. 279, 284-
8 85 n.11 (1991). To determine the issue-preclusive effect of a
9 California state court’s judgment, we apply California preclusion
10 law.
28 U.S.C. § 1738; Marrese v. Am. Acad. of Orthopaedic
11 Surgeons,
470 U.S. 373, 380 (1985); Gayden v. Nourbakhsh (In re
12 Nourbakhsh),
67 F.3d 798, 800 (9th Cir. 1995). Under California
13 law, the party asserting issue preclusion has the burden of
14 establishing the following “threshold” requirements:
15 (1) the issue sought to be precluded must be identical to
that decided in a former proceeding;
16
17 (2) the issue must have been actually litigated in the
former proceeding;
18
(3) it must have been necessarily decided in the former
19 proceeding;
20
(4) the decision in the former proceeding must be final and
21 on the merits; and,
22 (5) the party against whom preclusion is sought must be the
23 same as, or in privity with, the party to the former proceeding.
24 Harmon v. Kobrin (In re Harmon),
250 F.3d 1240, 1245 (9th Cir.
25 2001); In re Lopez,
367 B.R. at 104.
26 Additionally, the application of issue preclusion requires a
27 “mandatory ‘additional’ inquiry into whether imposition of issue
28 preclusion would be fair and consistent with sound public
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1 policy.” In re Khaligh,
338 B.R. at 824-25. As stated by the
2 California Supreme Court:
3 We have repeatedly looked to the public policies
underlying the doctrine before concluding that
4 collateral estoppel should be applied in a particular
setting. . . . Accordingly, the public policies
5 underlying collateral estoppel - preservation of the
integrity of the judicial system, promotion of judicial
6 economy, and protection of litigants from harassment by
vexatious litigation - strongly influence whether its
7 application in a particular circumstance would be fair
to the parties and constitutes sound judicial policy.
8
9 Lucido v. Super. Ct.,
51 Cal.3d 335, 342-43 (1990)(internal
10 citations omitted); see also In re Lopez,
367 B.R. at 108.
11 To meet its burden, the moving party must have pinpointed
12 the exact issues litigated in the prior action and introduced a
13 record revealing the controlling facts. Kelly v. Okoye (In re
14 Kelly),
182 B.R. 255, 258 (9th Cir. BAP 1995), aff’d,
100 F.3d
15 110 (9th Cir. 1996). Reasonable doubts about what was decided in
16 the prior action are resolved against the party seeking
17 preclusion.
Id.
18 C. Section 523(a)(2)(A)
19 The Bankruptcy Code excepts from discharge any debt for
20 money, property, services, or credit obtained by false pretenses,
21 a false representation, or actual fraud. 11 U.S.C.
22 § 523(a)(2)(A). To prevail on a claim under § 523(a)(2)(A), a
23 creditor must demonstrate five elements: (1) misrepresentation,
24 fraudulent omission or deceptive conduct by the debtor;
25 (2) knowledge of the falsity or deceptiveness of the debtor’s
26 statement or conduct; (3) an intent to deceive; (4) justifiable
27 reliance by the creditor on the debtor’s statement or conduct;
28 and (5) damage to the creditor proximately caused by its reliance
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1 on the debtor’s statement or conduct. Candland v. Ins. Co. of N.
2 Am. (In re Candland), 90 F.3d at 1466, 1469 (9th Cir. 1996);
3 Turtle Rock Meadows Homeowners Ass’n v. Slyman (In re Slyman),
4
234 F.3d 1081, 1085 (9th Cir. 2000). The elements of
5 § 523(a)(2)(A) mirror common law fraud. Field v. Mans,
516 U.S.
6 59, 61 (1995). The creditor bears the burden of proving each
7 element of § 523(a)(2)(A) by a preponderance of the evidence.
8 Grogan v. Garner,
498 U.S. at 287.
9 D. Application of Issue Preclusion
10 The Debtor argues that issue preclusion should not apply in
11 this case because the issue of fraud, including the element of
12 intent to deceive, was not actually litigated or necessarily
13 decided in the state court since it was the result of a default.
14 However, while in the minority, California law accords
15 preclusive effect to default judgments, “at least where the
16 judgment contains an express finding on the allegations.”
17 Gottlieb v. Kest,
141 Cal.App.4th 110, 149 (Cal. Ct. App. 2006);
18 Green v. Kennedy (In re Green),
198 B.R. 564, 566 (9th Cir. BAP
19 1996). The rationale behind finding that default judgments can
20 be preclusive is that defendants who are served with a summons
21 and complaint but fail to respond are presumed to admit all the
22 facts pled in the complaint. In re Harmon,
250 F.3d at 1247.
23 Therefore, a default judgment:
24 conclusively establishes, between the parties so far as
subsequent proceedings on a different cause of action
25 are concerned, the truth of all material allegations
26 contained in the complaint in the first action, and
every fact necessary to uphold the default judgment
27 . . . .
28
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1 Gottlieb v. Kest, 141 Cal.App.4th at 149 (internal citations
2 omitted).
3 For a default judgment to be “actually litigated,” the
4 material factual issues must have been both raised in the
5 pleadings and necessary to uphold the default judgment. Id.
6 Therefore, the record in the prior proceeding must show an
7 express finding upon the allegation for which preclusion is
8 sought. However, “the express finding requirement can be waived
9 if the court in the prior proceeding necessarily decided the
10 issue.” Cantrell v. Cal-Micro, Inc. (In re Cantrell),
329 F.3d
11 1119, 1124 (9th Cir. 2003). “In such circumstances, an express
12 finding is not required because if an issue was necessarily
13 decided in a prior proceeding, it was actually litigated.”
Id.
14 (internal citations omitted).
15 There is no dispute here that the Debtor received notice of
16 the State Court Complaint, as well as the default judgment and
17 Dhawan’s filed statement of damages and notice of the “prove up”
18 hearing. Nevertheless, the Debtor asserts that the issue of
19 fraud was not actually litigated because the Judgment did not
20 contain express findings of fraud. He contends that the issue of
21 fraud was not necessarily decided because the damages that were
22 awarded could have been based on Dhawan’s claims for negligent
23 misrepresentation or breach of contract rather than fraud.
24 The Debtor relies on In re Harmon to support his position.
25
250 F.3d 1240. In that case, the plaintiff sued the debtor for
26 conversion, contract violations and damages for restitution and
27 dissolution of partnership in connection with a failed joint
28 venture in an Ostrich ranch. After the state court judgment
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1 became final, the plaintiff sought to have it declared
2 nondischargeable under § 523(a)(2)(A). The Ninth Circuit held
3 that the state court did not provide express findings of fraud
4 (or anything else) in the judgment and because fraud could not be
5 interpreted from the basis of the complaint, the issue of fraud
6 had not been actually litigated.
7 Here, however, the State Court Complaint, like the
8 Nondischargeability Complaint, alleged fraud in connection with
9 the offer and sale of the Clinics. While the Debtor asserts that
10 the State Court Complaint alleged many causes of action that were
11 non-fraud related, the causes of action were, in fact, all
12 related to the Debtor’s alleged fraud in the offer and sale of
13 the Clinic franchises. The State Court Complaint alleged facts
14 supporting Dhawan’s claims that the Debtor falsely represented to
15 Dhawan the profits available from the Clinic, the exclusiveness
16 of operations, and the support available from the Debtor. Dhawan
17 alleged that the Debtor fraudulently induced him to enter the
18 Licensing Servicing Agreement and the Asset Purchase Agreement.
19 He alleged that he relied on the Debtor’s misrepresentations in
20 purchasing the Clinic and entering into the agreements as part of
21 the transaction. Finally, Dhawan alleged that the Debtor
22 breached those agreements by intentionally failing to perform as
23 promised.
24 In entering the Judgment, the state court expressly found
25 that Dhawan presented evidence consistent with the allegations in
26 the State Court Complaint and awarded Dhawan the damages
27 sustained as a result. Additionally, the Judgment referenced the
28 CDOC findings that the Debtor had engaged in fraudulent conduct
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1 with respect to the offer and sale of the Clinics and in selling
2 exclusive operating territories under its agreements.
3 Thus, the Debtor’s fraud underlies all of the state court
4 claims. Simply because the Judgment did not expressly identify
5 that each component of the $1,924,008 award was based on the
6 fraudulent conduct of the Debtor, it does not mean that there was
7 a “reasonable doubt as to what was decided.” See In re Kelly,
8
182 B.R. at 258. The Judgment cannot be sustained, as the Debtor
9 argues, on solely the non-fraud breach of contract claims because
10 the agreements themselves were found to be the result of the
11 Debtor’s fraudulent conduct.3
12 Because the factual issues supporting fraud were raised in
13 the State Court Complaint and necessary to the Judgment, the
14 State Court Complaint was “actually litigated” and necessarily
15 decided. Id.; see Younie v. Gonya (In re Younie),
211 B.R. 367,
16 374-75 (9th Cir. BAP 1997). There is no question that the
17 parties to the bankruptcy action are the same as those that
18 participated in the state court. The State Court Complaint and
19 the Nondischargeability Complaint alleged the same set of facts
20 and circumstances, and the Judgment was a final decision on the
21 merits. Thus, the threshold requirements for the application of
22 issue preclusion are satisfied. The bankruptcy court did not err
23
3
24 The bankruptcy court relied on the state court’s oral
ruling that Dhawan was entitled to an award of punitive damages,
25 although punitive damages were ultimately not reduced to
judgment, as a basis for determining that the issue of fraud was
26
necessarily decided. In this case, regardless of the punitive
27 damage award, the evidence in the record is sufficient to
demonstrate that the issue of fraud was necessary to uphold the
28 Judgment.
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1 in concluding that the issue of whether the Debtor committed
2 fraud within the meaning of § 523(a)(2)(A) was precluded by the
3 Judgment and could not be relitigated in the bankruptcy court.
4 We perceive no abuse of discretion in the bankruptcy court’s
5 decision to apply issue preclusion in this case.
6 Because of the preclusive effect of the Judgment, Dhawan
7 satisfied his burden of demonstrating that there were no genuine
8 issues of material fact as to the elements of fraud. As a
9 result, the bankruptcy court did not err in granting Dhawan
10 summary judgment on his Nondischargeability Complaint.
11 VI. CONCLUSION
12 The bankruptcy court did not err in giving preclusive effect
13 to the Judgment. For that reason, we AFFIRM the bankruptcy
14 court’s grant of summary judgment to Dhawan.
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