FILED
2/24/2014
SUSAN M. SPRAUL, CLERK
1 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-12-1621-KiTaKu
6 )
TONY L. PHAN and JENNY NGUYEN,) Bk. No. 8:12-16820-MW
7 )
Debtors. ) Adv. No. 8:12-1334-MW
8 )
)
9 TONY L. PHAN; JENNY NGUYEN, )
)
10 Appellants, )
)
11 v. ) M E M O R A N D U M1
)
12 THU NGUYEN; TRUC PHAN, )
)
13 Appellees. )
______________________________)
14
Argued and Submitted on September 19, 2013,
15 at Pasadena, California
16 Filed - February 24, 2014
17 Appeal from the United States Bankruptcy Court
for the Central District of California
18
Honorable Mark S. Wallace, Bankruptcy Judge, Presiding
19
20 Appearances: David Y. Tang argued for appellants Tony L. Phan
and Jenny Nguyen; Justin Sterling of Do Phu & Anh
21 Tuan, APLC, argued for appellees Thu Nguyen and
Truc Phan.
22
23
Before: KIRSCHER, TAYLOR and KURTZ, 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. See 9th
28 Cir. BAP Rule 8013-1.
1 Appellants, chapter 7 debtors Tony L. Phan and Jenny Nguyen
2 ("Debtors"), appeal an order from the bankruptcy court granting
3 appellees' motion for summary judgment determining that their debt
4 was excepted from discharge under 11 U.S.C. § 523(a)(2)(A)2 based
5 on issue preclusion. We VACATE and REMAND.
6 I. FACTUAL BACKGROUND AND PROCEDURAL HISTORY
7 A. Prepetition events
8 Appellees, Thu Nguyen and Truc Phan ("Plaintiffs"),3 are
9 related to Debtors. As alleged by Plaintiffs, in or about July
10 2000, the parties agreed to purchase together a residence located
11 in Garden Grove, California ("Residence"). Each couple was to
12 contribute 50% of the down payment and 50% of the costs associated
13 with the purchase. Each couple was to have a 50% ownership
14 interest in the Residence and share equally the benefits and
15 obligations of ownership, including paying 50% of the mortgage
16 payments, utilities, homeowner association fees and property
17 taxes. Title to the Residence was taken in Debtors' names only.
18 Despite Plaintiffs' repeated requests over the years, their names
19 were never put on the title. Defendants assured Plaintiffs that
20 they still held a 50% ownership interest.
21 In July 2007, Plaintiffs sued Debtors in state court over the
22 ownership interest in the Residence ("First Case"). A Lis Pendens
23
24
2
Unless specified otherwise, all chapter and section
25 references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532, all
“Rule” references are to the Federal Rules of Bankruptcy
26 Procedure, Rules 1001-9037, and all “Civil Rule” references are to
the Federal Rules of Civil Procedure.
27
3
Because the adverse parties have the same surnames, for
28 clarity we refer to them as "Debtors" and "Plaintiffs."
-2-
1 was recorded on August 3, 2007, in connection with the lawsuit.
2 On January 28, 2009, the allegations in the First Case were
3 settled in open court ("Settlement Agreement"). The reporter's
4 partial transcript indicates that Debtors agreed Plaintiffs had a
5 50% interest in the Residence and agreed to pay Plaintiffs 50% of
6 the Residence's net worth (appraised net worth less selling costs
7 plus mortgage and prorated property taxes). The payment to
8 Plaintiffs was to be accomplished by either refinancing the
9 Residence or Debtors buying out Plaintiffs' 50% share of the
10 equity in it. At that time, Plaintiffs believed their share of
11 the proceeds to be $76,500.4
12 On May 14, 2010, Plaintiffs filed a First Amended Complaint
13 ("Second Case") in state court, alleging that Debtors had
14 intentionally concealed from them that Debtors had secretly
15 secured a $150,000 line of credit ("HELOC") on the Residence in
16 December 2007 and, during the settlement negotiations that led to
17 the January 28, 2009 Settlement Agreement, had intentionally
18 failed to disclose this second lien. Plaintiffs discovered the
19 existence of the HELOC on or about April 20, 2009.5 According to
20
4
21 This figure is based on the following:
22 Residence fair market value: $ 270,000
Balance of first mortgage: - $ 90,000
23 Broker and other fees (10%): - $ 27,000
Total equity: $ 153,000 ÷ 2 = $76,500
24
5
Plaintiffs also sued Wells Fargo Bank for giving Debtors
25 the HELOC while the Lis Pendens was in existence against the
Residence. Plaintiffs and Wells Fargo ultimately settled.
26 According to the parties' stipulated judgment, on April 27, 2009,
about one week after Plaintiffs discovered the second lien, the
27 state court granted Plaintiffs' ex-parte application to enforce
the Settlement Agreement and ordered that the Residence be sold
28 (continued...)
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1 Plaintiffs, shortly after entering the Settlement Agreement,
2 Debtors stopped making any further mortgage payments, took the
3 remaining proceeds from the HELOC, abandoned the Residence, and
4 made their whereabouts unknown. As a result, the Settlement
5 Agreement could not be effectuated. Plaintiffs claimed to have
6 made all further mortgage and HOA payments since that time. By
7 August 2009, the first lien was in default and foreclosure
8 proceedings were initiated. Plaintiffs eventually cured the
9 arrearages and saved the Residence from foreclosure. The Second
10 Case asserted claims for intentional misrepresentation, negligent
11 misrepresentation, conversion, declaratory judgment, equitable
12 lien, constructive trust and quiet title.
13 Debtors failed to file an answer in the Second Case, and
14 their default was taken. On June 14, 2011, Plaintiffs submitted a
15 request for default judgment seeking $171,812.52 in damages for
16 Debtors' alleged fraud. The breakdown of Plaintiffs' claimed
17 damages was as follows:
18 Plaintiffs' share of proceeds had Residence been sold as
ordered: $ 76,500.00
19 Interest @ 8% on proceeds: $ 6,120.00
Mortgage payments made since January 2009: $ 40,389.72
20 HOA fees paid since October 2009: $ 5,347.80
Costs: $ 455.00
21 Attorney's fees: $ 43,000.00
Total Damages: $ 171,812.526
22
23
5
24 (...continued)
and that Plaintiffs receive 50% of the net proceeds, exclusive of
25 the $150,000 second lien.
26 6
The attachment to Plaintiffs’ Request for Court Judgment
filed with the state court on June 19, 2011, states damages in the
27 amount of $171,357.52, but the correct arithmetic number is
$171,812.52, which is closer to the $171,813 figure Plaintiffs
28 state on the cover sheet for their request.
-4-
1 In support of their default judgment request, Plaintiffs offered
2 their declarations, their attorney's declaration, and cancelled
3 checks evidencing all payments made.
4 On July 6, 2011, the state court entered a default judgment
5 against Debtors in the Second Case ("Default Judgment"). Although
6 it did not make any specific factual findings regarding Debtors'
7 fraud, the state court awarded Plaintiffs reduced damages in the
8 amount of $132,584.90: $122,237.52 in general damages ($76,500 +
9 $40,389.72 + $5,347.80); $6,120.00 in interest; $3,772.38 in
10 attorney's fees (as opposed to the $43,000 requested); and $455.00
11 for costs, based on Plaintiffs’ testimony and other evidence.
12 Plaintiffs executed on the Default Judgment by garnishing
13 Debtors' wages. Debtors filed a chapter 7 bankruptcy case on
14 May 31, 2012.
15 B. The nondischargeability proceeding
16 On June 21, 2012, Plaintiffs timely filed an adversary
17 complaint seeking to except their debt from discharge under
18 § 523(a)(2)(A), (a)(4) and (a)(6). In support, Plaintiffs
19 submitted copies of the First Amended Complaint in the Second
20 Case, the stipulated judgment with Wells Fargo and the Default
21 Judgment.
22 Like the Second Case, the nondischargeability complaint
23 alleged fraud and conversion and further noted that Plaintiffs
24 obtained a judgment against Debtors for intentional
25 misrepresentations, negligent misrepresentation, conversion,
26 declaratory judgment, equitable lien and constructive trust.
27 Debtors filed their answer on July 26, 2012.
28 On September 25, 2012, Plaintiffs moved for summary judgment
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1 on the § 523 claims, contending that their debt was excepted from
2 discharge based on issue preclusion ("MSJ"). Although Plaintiffs
3 acknowledged that the complaint in the Second Case asserted claims
4 other than fraud, they argued that the basis of the complaint was
5 for Debtors' fraudulent conduct in inducing them to enter into the
6 Settlement Agreement in the First Case and that the Default
7 Judgment was granted on the basis of Debtors' intentional
8 misrepresentation. In support of the MSJ, Plaintiffs submitted
9 copies of the Third Amended Complaint filed in the First Case, the
10 First Amended Complaint filed in the Second Case, the transcript
11 from the settlement hearing in the First Case, the prove-up
12 documents Plaintiffs submitted with their default judgment
13 request, and the Default Judgment.
14 Debtors opposed the MSJ. They argued that Plaintiffs' Second
15 Case, which resulted in the Default Judgment, failed to provide
16 any facts showing that Debtors had committed actual fraud or made
17 a false representation leading the parties to reach the Settlement
18 Agreement. Debtors further argued that the Second Case failed to
19 include any factual basis showing that Debtors were acting in a
20 fiduciary capacity while the alleged fraud or defalcation was
21 perpetrated or showing that Debtors had caused a willful and
22 malicious injury to Plaintiffs by applying for the HELOC when that
23 loan was applied for long before the settlement was even
24 discussed. More importantly, Debtors argued that the Default
25 Judgment did not make any findings of wrongdoing amounting to
26 fraud, false pretense, or conversion. Debtors argued that the
27 state court could have granted damages solely based on Plaintiffs'
28 other causes of actions, which may not be exceptions to discharge
-6-
1 under § 523(a). Debtors argued that Plaintiffs were not entitled
2 to summary judgment as they had failed to establish that no
3 material facts were in dispute.
4 On October 30, 2012, Debtors filed an objection to certain
5 evidence submitted by Plaintiffs in support of the MSJ,
6 particularly the Default Judgment and the documents Plaintiffs had
7 submitted in state court to prove up their default judgment
8 request.
9 The bankruptcy court held a hearing on the MSJ on November 7,
10 2012. We do not have a copy of the transcript in the record. The
11 court apparently took the matter under advisement after the
12 hearing.
13 On November 16, 2012, the bankruptcy court entered a
14 memorandum decision and order granting Plaintiffs' MSJ and
15 determining that the Default Judgment was excepted from discharge
16 under § 523(a)(2)(A) based on issue preclusion. Debtors'
17 objection to certain evidence was denied for being untimely.
18 Debtors filed a premature notice of appeal on November 30,
19 2012, which was deemed timely once the bankruptcy court entered a
20 judgment in favor of Plaintiffs later that same day.
21 Rule 8002(a). The judgment awarded Plaintiffs $132,584.90, the
22 full amount of the Default Judgment, plus statutory interest.
23 II. JURISDICTION
24 The bankruptcy court had jurisdiction pursuant to 28 U.S.C.
25 §§ 1334 and 157(b)(2)(I). We have jurisdiction under 28 U.S.C.
26 § 158.
27 III. ISSUES
28 1. In granting summary judgment, did the bankruptcy court err in
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1 determining that issue preclusion was available, or abuse its
2 discretion in applying issue preclusion to the Default Judgment?
3 2. Did the bankruptcy court err in determining that the debts
4 incurred by Debtors' non-payment of the mortgages and HOA fees
5 were also excepted from discharge?
6 IV. STANDARDS OF REVIEW
7 We review de novo the bankruptcy court's grant of summary
8 judgment. Ghomeshi v. Sabban (In re Sabban), 600 F.3d 1219,
9 1221-22 (9th Cir. 2010); Cutter v. Seror (In re Cutter),
398 B.R.
10 6, 16 (9th Cir. BAP 2008).
11 We review de novo a bankruptcy court's determination that
12 issue preclusion is available. Lopez v. Emerg. Serv. Restoration,
13 Inc. (In re Lopez),
367 B.R. 99, 103 (9th Cir. BAP 2007); Khaligh
14 v. Hadaegh (In re Khaligh),
338 B.R. 817, 823 (9th Cir. BAP 2006).
15 Once we determine that issue preclusion is available, we review
16 whether applying it was an abuse of discretion.
Id. A bankruptcy
17 court abuses its discretion if it applied the wrong legal standard
18 or its findings were illogical, implausible or without support in
19 the record. TrafficSchool.com, Inc. v. Edriver Inc.,
653 F.3d
20 820, 832 (9th Cir. 2011).
21 The question of whether a claim for relief is dischargeable
22 presents mixed issues of law and fact, which we also review
23 de novo. Peklar v. Ikerd (In re Peklar),
260 F.3d 1035, 1037 (9th
24 Cir. 2001). The Ninth Circuit has held that the bankruptcy
25 court's findings made in the context of the dischargeability
26 analysis, including the court's findings made as part of the
27 dischargeability ruling, are factual findings reviewed under the
28 clearly erroneous standard. Candland v. Ins. Co. of N. Am.
-8-
1 (In re Candland),
90 F.3d 1466, 1469 (9th Cir. 1996). “Thus,
2 whether a creditor has proven an essential element of a claim
3 under § 523 is a factual determination reviewed for clear error.”
4 Kaur v. Kaur (In re Kaur),
2011 WL 4502981, at *2 (9th Cir. BAP
5 June 29, 2011) (citing In re Candland,
90 F.3d at 1469); Cossu v.
6 Jefferson Pilot Sec. Corp. (In re Cossu),
410 F.3d 591, 595-96
7 (9th Cir. 2005); Am. Express Travel Related Servs. Co. v. Vee
8 Vinhnee (In re Vee Vinhnee),
336 B.R. 437, 443 (9th Cir. BAP
9 2005)).
10 A finding is clearly erroneous if it is "illogical,
11 implausible or without support in the record." Retz v. Samson
12 (In re Retz),
606 F.3d 1189, 1196 (9th Cir. 2010)(citing United
13 States v. Hinkson,
585 F.3d 1247, 1261-62 & n.21 (9th Cir. 2009)
14 (en banc)).
15 V. DISCUSSION
16 A. Governing law
17 1. Summary judgment standards
18 Under Civil Rule 56(a), applicable here under Rule 7056,
19 summary judgment is appropriate when "the movant shows that there
20 is no genuine dispute as to any material fact and the movant is
21 entitled to judgment as a matter of law." Summary judgment should
22 not be entered when there are disputes over facts that may affect
23 the outcome of the suit under the governing law. Anderson v.
24 Liberty Lobby, Inc.,
477 U.S. 242, 249 (1986). The moving party
25 bears the initial burden of showing that no material factual
26 dispute exists. Celotex Corp. v. Catrett,
477 U.S. 317, 322-23
27 (1986); Soremekun v. Thrifty Payless, Inc.,
509 F.3d 978, 984 (9th
28 Cir. 2007). When ruling on a motion for summary judgment, a court
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1 must view all the evidence in the light most favorable to the
2 nonmoving party. Cnty of Tuolumne v. Sonora Cmty. Hosp.,
236 F.3d
3 1148, 1154 (9th Cir. 2001).
4 2. Issue preclusion standards
5 Preclusion principles apply in discharge exception
6 proceedings under § 523(a) to preclude relitigation of state court
7 findings relevant to the dischargeability determination. Grogan
8 v. Garner,
498 U.S. 279, 284 n.11 (1991). Further, 28 U.S.C.
9 § 1738 requires the Panel, as a matter of full faith and credit,
10 to apply the relevant state's preclusion principles. Gayden v.
11 Nourbakhsh (In re Nourbakhsh),
67 F.3d 798, 800 (9th Cir. 1995).
12 Here, we apply the issue preclusion principles of California, the
13 state from which the Default Judgment originated. Cal-Micro, Inc.
14 v. Cantrell (In re Cantrell),
329 F.3d 1119, 1123 (9th Cir. 2003).
15 Under California law, issue preclusion bars relitigation of
16 an issue if: (1) the issue sought to be precluded is identical to
17 that decided in the prior proceeding; (2) the issue was actually
18 litigated in the prior proceeding; (3) the issue was necessarily
19 decided in the prior proceeding; (4) the judgment in the prior
20 proceeding is final and on the merits; and (5) the party against
21 whom preclusion is sought is the same, or in privity with, the
22 party to the prior proceeding. Harmon v. Kobrin, (In re Harmon),
23
250 F.3d 1240, 1245 (9th Cir. 2001)(citing Lucido v. Sup. Ct.,
24
51 Cal.3d 335, 341 (1990)).
25 The party seeking to assert issue preclusion has the burden
26 of proving all the requisites for its application. Kelly v. Okoye
27 (In re Kelly),
182 B.R. 255, 258 (9th Cir. BAP 1995). "To sustain
28 this burden, the party must introduce a record sufficient to
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1 reveal the controlling facts and pinpoint the exact issues
2 litigated in the prior action."
Id. Any reasonable doubt as to
3 what was decided by a prior judgment should be resolved against
4 allowing the issue preclusive effect.
Id.
5 3. Exceptions to discharge under § 523
6 Plaintiffs’ complaint contains allegations for establishing
7 nondischargeable debts under §§ 523(a)(2)(A), 532(a)(4) and
8 523(a)(6). The bankruptcy court focuses on § 523(a)(2)(A) in its
9 memorandum of decision and order and specifically reaches no
10 decision on whether any debt is excepted from discharge under
11 §§ 523(a)(4) and 523(a)(6). The bankruptcy court concludes that
12 the Second Case limited “its scope of factual allegations to those
13 of intentional fraud, deceit and concealment.” Memo. Dec.
14 (Nov. 16, 2012) Docket No. 22, p. 3. Later in its memorandum
15 decision, the court concludes:
16 The set of operative facts in both the state court
complaint and the adversary complaint allege fraud – and
17 only fraud. Plaintiffs do not plead mistake, simple
breach of contract or even negligence. The state court
18 complaint alleges other causes of action including
conversion, equitable lien, constructive trust, unjust
19 enrichment, and quiet title, but all of these causes of
action stem from [Debtors’] fraud. If Plaintiffs had
20 alleged both fraud and breach of contract, the legal
analysis perhaps would be different. But as Plaintiffs
21 argued their case, their only avenue to a remedy was
through a finding of fraud. Therefore, fraud was the
22 only issue before the Superior Court, and this Court has
specifically found as a fact that the Superior Court
23 determined that line item damages of $76,500.00 should
be awarded in respect of such fraud.
24
25 Memo. Dec. (Nov. 16, 2012) Docket No. 22, p. 5. Although
26 conversion is alleged in the Second Case and in the adversary
27 complaint, no findings address whether conversion may have been
28 the basis for any judgment, based on Debtors’ wrongful exercise
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1 and control of the net equity in the amount of $76,500 to which
2 Plaintiffs were entitled under the Settlement Agreement.
3 At the time Plaintiffs submitted their documents to prove-up
4 their state court Request for Court Judgment, their declaration
5 asserted claims for intentional and negligent misrepresentations,
6 conversion and quiet title. Plaintiffs requested the same amount
7 of damages for intentional and negligent misrepresentations and
8 conversion. Plaintiffs’ attorney attached a statement to
9 Plaintiffs’ Request for Court Judgment that identified fraud
10 damages in the amount of $76,500; no mention is made regarding
11 damages for conversion. The state court judge made no specific
12 findings as to whether the recalculated damages were based on
13 fraud or conversion.
14 To prevail on a claim under § 523(a)(2)(A), a creditor must
15 demonstrate five elements: (1) misrepresentation, fraudulent
16 omission or deceptive conduct by the debtor; (2) knowledge of the
17 falsity or deceptiveness of the debtor's statement or conduct;
18 (3) an intent to deceive; (4) justifiable reliance by the creditor
19 on the debtor's statement or conduct; and (5) damage to the
20 creditor proximately caused by its reliance on the debtor's
21 statement or conduct. Turtle Rock Meadows Homeowners Ass'n v.
22 Slyman (In re Slyman),
234 F.3d 1081, 1085 (9th Cir. 2000). The
23 elements of fraud under California law and the elements of fraud
24 under § 523(a)(2)(A) are identical. Younie v. Gonya
25 (In re Younie),
211 B.R. 367, 373-74 (9th Cir. BAP 1997).
26 Under California law, conversion is “the wrongful exercise of
27 dominion over the personal property of another.” Peklar v. Ikerd
28 (In re Peklar),
260 F.3d 1240, 1037 (9th Cir. 2001) (citing
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1 Taylor v. Forte Hotels Int'l,
235 Cal.App.3d 1119, 1124 (1991)).
2 In re Peklar,
260 F.3d at 1037, further instructs: “‘The act must
3 be knowingly or intentionally done, but a wrongful intent is not
4 necessary.’ Taylor, 235 Cal.App.3d at 1124) (citing Poggi v.
5 Scott,
167 Cal. 372, 375 (1914). Under California law, ‘a
6 conversion is not per se always a willful and malicious injury to
7 the property of another.’ Larsen v. Beekmann,
276 Cal.App.2d 185,
8 189, [(1969)].” “Under California preclusion law, collateral
9 estoppel effect is given to a judgment that ‘actually and
10 necessarily’ decides the issue in question. People v. Howie,
11
41 Cal.App.4th 729, 736 (1995). A judgment for conversion under
12 California substantive law decides only that the defendant has
13 engaged in the ‘wrongful exercise of dominion’ over the personal
14 property of the plaintiff. It does not necessarily decide that
15 the defendant has caused ‘willful and malicious injury’ within the
16 meaning of § 523(a)(6). A judgment for conversion under
17 California law therefore does not, without more, establish that a
18 debt arising out of that judgment is non-dischargeable under
19 § 523(a)(6).” In re Peklar,
260 F.3d at 1039. Likewise, the
20 establishment of conversion is not dependent on proving fraudulent
21 intent. In California, conversion committed with fraudulent
22 intent constitutes embezzlement. In re Basinger,
45 Cal.3d 1348,
23 1363 (1988) (citing People v, Kronemyer,
189 Cal.App.3d 314, 361
24 (1987)). A judgment of conversion does not necessarily decide
25 that the defendant has caused conversion with fraudulent intent or
26 embezzlement.
27
28
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1 B. The bankruptcy court did abuse its discretion in applying
issue preclusion to the Default Judgment.
2
3 California law accords preclusive effect to default
4 judgments, "at least where the judgment contains an express
5 finding on the allegations." Gottlieb,
141 Cal.App.4th 110, 149
6 (2006); Green v. Kennedy (In re Green),
198 B.R. 564, 566 (9th
7 Cir. BAP 1996). The rationale behind finding that default
8 judgments can be preclusive is that defendants who are served with
9 a summons and complaint but fail to respond are presumed to admit
10 all the facts pled in the complaint. In re Harmon,
250 F.3d at
11 1247. Therefore, a default judgment:
12 conclusively establishes, between the parties so far as
subsequent proceedings on a different cause of action are
13 concerned, the truth of all material allegations
contained in the complaint in the first action, and every
14 fact necessary to uphold the default judgment[.]
15 Gottlieb, 141 Cal.App.4th at 149 (internal citations omitted).
16 At the outset, we observe that the fourth and fifth criterion
17 for application of issue preclusion are satisfied. The Default
18 Judgment is final and was on the merits, and the parties in each
19 action are the same. Debtor does not challenge the bankruptcy
20 court's findings with respect to these requirements on appeal.
21 Accordingly, we review only the first three.
22 We conclude, as did the bankruptcy court, that the first
23 criterion for application of issue preclusion is satisfied. "The
24 'identical issue' requirement addresses whether 'identical factual
25 allegations' are at stake in the two proceedings, not whether the
26 ultimate issues or dispositions are the same." Lucido,
51 Cal.3d
27 at 342. Here, the issues at stake in the state court proceeding
28 and in the adversary proceeding were the same: whether Debtors'
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1 conduct constituted fraud or conversion and damaged Plaintiffs.
2 The First Amended Complaint in the Second Case does not plead
3 mistake, simple breach of contract or even negligence, but it does
4 plead fraud and conversion. Debtors do not appear to challenge
5 the bankruptcy court's finding that this first criterion involving
6 “identical factual allegations” is satisfied. Their argument
7 focuses more on whether the issue of fraud was actually litigated
8 and necessarily decided in the prior proceeding.
9 For a default judgment to be "actually litigated," the
10 material factual issues must have been both raised in the
11 pleadings and necessary to uphold the default judgment. Gottlieb,
12 141 Cal.App.4th at 149. Therefore, the record in the prior
13 proceeding must show an express finding upon the allegation for
14 which preclusion is sought. However, "the express finding
15 requirement can be waived if the court in the prior proceeding
16 necessarily decided the issue." In re Cantrell,
329 F.3d at 1124.
17 "In such circumstances, an express finding is not required because
18 if an issue was necessarily decided in a prior proceeding, it was
19 actually litigated."
Id. (internal citations omitted).
20 Debtors assert that the issue of fraud was not actually
21 litigated, because the Default Judgment did not contain express
22 findings of fraud or any specific ruling on the issue of fraud.
23 They also contend that the issue of fraud was not necessarily
24 decided, because the damages that were awarded could have been
25 based on Plaintiffs' claims for other causes including conversion.
26 We agree.
27 Here, the First Amended Complaint and the nondischargeability
28 complaint alleged fraud and conversion. As Debtors assert, the
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1 First Amended Complaint alleged claims that were non-fraud
2 related. Although the bankruptcy court concluded that Plaintiffs'
3 factual allegations supporting their claims for negligent
4 misrepresentation, declaratory judgment, equitable lien,
5 constructive trust and quiet title were entirely supported by
6 factual allegations that Debtors intentionally and knowingly
7 deceived Plaintiffs, the court did not similarly conclude that the
8 factual allegations also established conversion.
9 On this record, we are unwilling to conclude that Debtors'
10 fraud underlies all of the state court claims. The Second Case
11 allegations and the Plaintiffs’ declaration specifically include
12 allegations concerning ‘wrongful exercise of dominion’ of the net
13 proceeds to be distributed to them upon the sale of the property
14 in the same amount as alleged for Debtors’ fraud. The Default
15 Judgment did not expressly identify that each component of the
16 $132,584.90 award was based on the fraudulent conduct of Debtors.
17 We are unable to conclude from this record that the state court
18 expressly found that fraud was the cause of Plaintiffs’ damages
19 when Plaintiffs alleged fraud and conversion in the same amount.
20 As no express finding exists determining whether fraud or
21 conversion caused Plaintiffs’ damages, we are hard-pressed to
22 conclude that the express finding requirement has been waived and
23 that the state court necessarily decided only fraud when two
24 plausible causes exist for the recovery of damages – one possibly
25 nondischargeable and the other dischargeable. Because the facts
26 may support fraud and conversion as alleged in the Second Case and
27 may have been the basis for the Default Judgment, the issue of
28 fraud was not "actually litigated" and therefore, was not
-16-
1 necessarily decided. See In re Cantrell,
329 F.3d at 1124.
2 Reasonable doubt exists as to which cause of action was the basis
3 for the judgment. As such, the second and third criterion for
4 application of issue preclusion are not satisfied.
5 On this record, the bankruptcy court erred in concluding that
6 the issue of whether Debtors committed fraud within the meaning of
7 § 523(a)(2)(A) was precluded by the Default Judgment and could not
8 be relitigated in the bankruptcy court. Accordingly, the
9 bankruptcy court abused its discretion in applying issue
10 preclusion in this case.7
11 VI. CONCLUSION
12 Because the bankruptcy court abused its discretion in
13 applying issue preclusion to the Default Judgment, and because
14 Plaintiffs did not satisfy their burden of demonstrating that no
15 genuine issues of material fact existed as to the elements of
16 fraud, the bankruptcy court erred in granting Plaintiffs summary
17 judgment on their § 523(a)(2)(A) claim for relief. Therefore, we
18 VACATE the Summary Judgement and REMAND for further proceedings
19 consistent with this decision.
20
21
7
If all of the threshold requirements for issue preclusion
22 are met, the bankruptcy court then must decide whether application
of issue preclusion would "further the policy interests underlying
23 the doctrine." In re Harmon,
250 F.3d at 1249, n.11 (citing
Lucido,
51 Cal.3d at 342-43). The California Supreme Court has
24 identified three such policy interests: "'preservation of the
integrity of the judicial system, promotion of judicial economy,
25 and protection of litigants from harassment by vexatious
litigation.'" Baldwin v. Kilpatrick (In re Baldwin),
249 F.3d
26 912, 919-20 (9th Cir. 2001)(quoting Lucido,
51 Cal.3d at 343).
The bankruptcy court did not analyze this issue, and Debtors
27 do not raise this on appeal. As such, we do not consider it.
Smith v. Marsh,
194 F.3d 1045, 1052 (9th Cir. 1999)(issues not
28 raised in appellant's opening brief are deemed waived).
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