Case: 11-1379 Document: 21 Filed: 02/17/2012
FILED
Page: 1 of 21
FEB 17 2012
1 SUSAN M SPRAUL, CLERK
U.S. BKCY. APP. PANEL
2 OF THE NINTH CIRCUIT
3 UNITED STATES BANKRUPTCY APPELLATE PANEL
4 OF THE NINTH CIRCUIT
5 In re: ) BAP No. CC-11-1379-LaPaMk
)
6 HAVY NGUYEN, ) Bk. No. 10-25953-SC
)
7 Debtor. ) Adv. No. 10-1533-SC
______________________________)
8 )
GENESIS V J, INC., )
9 )
Appellant, )
10 )
v. ) MEMORANDUM*
11 )
HAVY NGUYEN, )
12 )
Appellee. )
13 ______________________________)
14 Argued and Submitted on January 20, 2012,
at Pasadena, California
15
Filed - February 17, 2011
16
Appeal from the United States Bankruptcy Court
17 for the Central District of California
18 Honorable Scott Clarkson, Bankruptcy Judge, Presiding
19
Appearances: Edward Hays of Marshack Hays LLP argued on behalf
20 of Appellant Genesis V J, Inc.; Allan Dean Epstein
argued on behalf of Appellee Havy Nguyen.
21
22 Before: LAFFERTY**, PAPPAS and MARKELL, Bankruptcy Judges.
23
24
25 *
This disposition is not appropriate for publication.
Although it may be cited for whatever persuasive value it may
26 have (see Fed. R. App. P. 32.1), it has no precedential value.
See 9th Cir. BAP Rule 8013-1.
27
**
Hon. William J. Lafferty III, Bankruptcy Judge for the
28 Northern District of California, sitting by designation.
Case: 11-1379 Document: 21 Filed: 02/17/2012 Page: 2 of 21
1 Appellant Genesis V J, Inc. (“Genesis”), having obtained a
2 judgment by default against the appellee Havy Nguyen (the
3 “Debtor”) for breach of contract, and against the Debtor’s
4 spouse, Bill Ha (“Mr. Ha”), for fraud in the inducement, filed an
5 adversary proceeding seeking to deny the Debtor’s discharge under
6 sections 727(a)(2)1 and 727(a)(4) and to declare the state court
7 judgment nondischargeable under sections 523(a)(2), 523(a)(4),
8 and 523(a)(6). Following a trial, the bankruptcy court found
9 against Genesis and determined that the claim based on the state
10 court judgment was dischargeable as to the Debtor.2 Genesis
11 thereafter filed a timely appeal. We affirm.
12 I. FACTS
13 Genesis V J, Inc. purchased a furniture store known as Home
14 Design Furniture Gallery (“Home Design”)3 from the Debtor. The
15 Debtor’s spouse, Mr. Ha, operated and controlled Home Design, and
16 negotiated the sale in all respects on behalf of the Debtor.
17 Until 2006, the Debtor and Mr. Ha jointly owned Home Design
18 through a corporation, VYNA, Inc. In 2006, the corporation was
19 dissolved and all of its assets were transferred to the Debtor as
20
21
1
Unless specified otherwise, all chapter and section
22 references are to the Bankruptcy Code,
11 U.S.C. §§ 101-1532, and
all "Rule" references are to the Federal Rules of Bankruptcy
23 Procedure, Rules 1001-9037. All "Civil Rule" references are to
the Federal Rules of Civil Procedure.
24
2
The section 727 claims were dismissed upon oral motion of
25 Genesis prior to the conclusion of trial.
26 3
Prior to the sale, Home Design was operated under the name
Showcase Furniture Gallery (“Showcase”). The record is unclear
27 as to when the name was changed from Showcase to Home Design.
For ease of reference, we will refer to the furniture store as
28 Home Design, irrespective of its name at the relevant time.
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1 sole proprietor. Despite this change in ownership, Mr. Ha
2 continued to operate and maintain complete control over Home
3 Design. Other than being the legal owner, the Debtor had at all
4 times no meaningful involvement in the operation of Home Design.
5 In early 2007, Mr. Ha decided to list Home Design for sale
6 with a business broker. The advertisement indicated that the
7 business earned annual net profits of $630,000. In response to
8 the ad, Manorama Gupta (“Ms. Gupta”), Genesis’ president,
9 contacted Mr. Ha to inquire about purchasing Home Design. During
10 the course of negotiations, Mr. Ha represented himself as a co-
11 owner (even though Home Design was solely in the Debtor’s name)
12 and made various representations regarding Home Design, including
13 representations as to its profitability and its assets.
14 In May 2007, in reliance on Mr. Ha’s representations,
15 Genesis agreed to purchase all of Home Design’s assets, including
16 the showroom lease, all of the inventory, business goodwill,
17 relationships with wholesalers, fixtures, and two trucks. Mr. Ha
18 and Genesis prepared an Asset Purchase Agreement (the “Purchase
19 Agreement”), which provided for payment by Genesis of $500,000 —
20 $350,000 up front (split into a $10,000 initial deposit and a
21 $340,000 cashier’s check upon closing) and an additional
22 $150,0000 over twenty-four months — in exchange for the assets of
23 Home Design.
24 Because the Debtor was the legal owner of Home Design, the
25 Purchase Agreement required the Debtor’s signature. On or about
26 May 21, 2007, Ms. Gupta and Mr. Ha met with the Debtor at her
27 place of employment, and presented her with the Purchase
28 Agreement. Prior to this meeting, the Debtor had never met or
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1 spoken to Ms. Gupta and had never seen or reviewed the Purchase
2 Agreement. Nonetheless, the Debtor, at Mr. Ha’s request,
3 executed the Purchase Agreement without reviewing its terms. In
4 return, Ms. Gupta provided Mr. Ha with a check, payable to the
5 Debtor, for $10,000 (the initial deposit). Genesis later paid
6 the remaining $340,000 via cashiers check, and executed a
7 promissory note in favor of the Debtor in the amount of $150,000.
8 Shortly after the sale was closed, Genesis discovered that
9 Mr. Ha’s representations regarding the profitability of Home
10 Design and its assets were fraudulent. Genesis discovered that
11 Mr. Ha had falsified tax returns to inflate the profitability of
12 the business and also learned that Home Design did not own much
13 of the inventory that the Purchase Agreement purported to
14 transfer. Moreover, Mr. Ha never delivered the building lease or
15 the two trucks, as required by the Purchase Agreement. Genesis
16 eventually was forced to dispose of the assets it did receive for
17 a near total loss.
18 On December 14, 2007, Genesis filed a lawsuit against the
19 Debtor and Mr. Ha in the Superior Court of California, County of
20 Orange, alleging breach of contract, fraud, negligent
21 misrepresentation, unfair business practices, intentional
22 interference with prospective economic relations, negligent
23 interference with prospective economic relations, and fraud in
24 the inducement. On June 15, 2009, the state court conducted a
25 trial at which neither defendant appeared. In light of the non-
26 appearance, the trial took the form of a default prove-up
27 hearing.
28 After hearing testimony and admitting documentary evidence,
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1 the state court entered judgment against the Debtor for breach of
2 contract, but stated that there was insufficient evidence to find
3 the Debtor liable for fraud.4 In addition, the state court found
4 Mr. Ha liable for fraud in the inducement based on the theory
5 that he acted as an “agent” of the Debtor in negotiating the sale
6 of Home Design. The Court ultimately awarded damages in the
7 amount of $423,067.60, for which the Defendants are jointly and
8 severally liable. The Court also awarded punitive damages in the
9 amount of $150,000 against Mr. Ha. In light of the foregoing
10 disposition, and with acquiescence of Genesis’ counsel, the state
11 court declared the remaining causes of action moot. On July 6,
12 2009, the state court entered a judgment in the amount of
13 $573,067.60 against both Defendants.5
14 On May 25, 2010, the Debtor filed a voluntary petition under
15 chapter 7 of the Bankruptcy Code. On September 7, 2010,
16 Plaintiff filed a timely complaint seeking to deny the Debtor’s
17 discharge under sections 727(a)(2) and 727(a)(4) and to declare
18 the state court judgment nondischargeable under sections
19
20 4
Despite this statement, the record, when considered as a
whole, is ambiguous as to whether the state court judge intended
21 to make a final determination on the issue of the Debtor’s fraud.
Indeed, the bankruptcy court determined that the state court had
22 not made such a determination.
23 5
Although the transcript of the judge’s remarks at trial
indicates that the state court did not intend to impose punitive
24 damages against the Debtor, the form of judgment entered by the
state court makes the Debtor jointly liable for the punitive
25 damages. Given the fact that the state court did not find the
Debtor liable on a tort for which punitive damages could be
26 awarded, the Court assumes this was an oversight in the entry of
the judgment. See Walker v. Signal Cos., Inc.,
149 Cal. Rptr.
27 119, 126 (Cal. Ct. App. 1978)(“Punitive damages are not
recoverable in an action for breach of contract no matter how
28 willful, malicious, or fraudulent the breach”).
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1 523(a)(2), 523(a)(4), and 523(a)(6).
2 Prior to trial in the bankruptcy court, the Debtor filed a
3 motion to preclude litigation of Genesis’ section 523(a)(2),
4 (a)(4), and (a)(6) claims based on the Debtor’s assertions
5 regarding the collateral estoppel effect of the state court
6 judgment. The bankruptcy court treated the Debtor’s motion as a
7 motion in limine and heard oral argument prior to trial. The
8 Debtor argued that the state court found her liable for breach of
9 contract, and only breach of contract, and found that there was
10 insufficient evidence to impose liability on the fraud cause of
11 action. As a result, the Debtor asserted that Genesis should be
12 precluded from relitigating the issue of the Debtor’s alleged
13 fraud or other willful and malicious acts in the bankruptcy
14 court.
15 Genesis opposed the motion in limine and, far from
16 contending as it has on this appeal that collateral estoppel
17 applied to the agency issue, asserted that the state court did
18 not make any findings regarding fraud or agency and that the
19 bankruptcy court needed to make a determination as to those
20 issues.
21 After considering the argument of the parties, both written
22 and oral, and reviewing the state court trial record, the
23 bankruptcy court determined that Genesis was not precluded from
24 litigating the issue of fraud because it was not “actually
25 litigated” as to the Debtor in the state court action. The
26 bankruptcy court found that, even though Genesis put on some
27 evidence regarding the Debtor’s alleged fraud, the state court
28 stopped short of making a final determination as to that issue.
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1 Furthermore, based on Genesis’ assertion that the bankruptcy
2 court was required to determine the agency issue, the bankruptcy
3 court did not even consider applying collateral estoppel to the
4 state court’s “finding” that there was an agency relationship
5 between the Debtor and Mr. Ha but, instead, took evidence on the
6 matter.
7 Immediately after ruling on the motion, the bankruptcy court
8 conducted a trial on the action. Prior to the conclusion of
9 trial, but after presenting evidence with respect to the
10 section 727 claims for relief, Genesis moved to dismiss its
11 section 727 claims for relief. The trial continued on the
12 section 523 claims for relief and, at the trial’s conclusion, the
13 bankruptcy court ruled in favor of the Debtor on the remaining
14 claims for relief.
15 Pertinent to this appeal, the bankruptcy court determined
16 that the Debtor was not liable for any direct fraud with respect
17 to the subject transaction and that there was insufficient
18 evidence to impute any fraud to the Debtor based on an agency
19 relationship. More specifically, the bankruptcy court found that
20 the evidence simply did not show that the Debtor had anything to
21 do with the business other than being the nominal owner and
22 signing the Purchase Agreement at Mr. Ha’s direction.
23 The bankruptcy court entered judgment on June 30, 2011,
24 declaring that the state court judgment was dischargeable as to
25 the Debtor. Genesis filed a timely notice of appeal on July 14,
26 2011.
27 ///
28 ///
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1 II. ISSUES
2 1. Did the bankruptcy court err in not applying issue
3 preclusion to the state court’s “finding” that Mr. Ha was the
4 agent of the Debtor?
5 2. Did the bankruptcy court err in finding that Mr. Ha’s
6 fraud should not be imputed to the Debtor based on an agency
7 relationship and that the debt is therefore dischargeable?
8 III. JURISDICTION
9 The bankruptcy court had jurisdiction under 28 U.S.C.
10 § 157(b)(2)(I) and § 1334. We have jurisdiction under 28 U.S.C.
11 § 158.
12 IV. STANDARDS OF REVIEW
13 We review the bankruptcy court’s determination regarding the
14 availability of issue preclusion de novo as a mixed question of
15 law and fact. Cogliano v. Anderson (In re Cogliano),
355 B.R.
16 792, 800 (9th Cir. BAP 2006). Once we determine that issue
17 preclusion is available, the bankruptcy court’s decision
18 regarding whether or not to apply the doctrine is reviewed for
19 abuse of discretion. See Robi v. Five Platters, Inc.,
838 F.2d
20 318, 321 (9th Cir. 1988)(“As to issue preclusion, once we
21 determine that [it] is available, the actual decision to apply it
22 is left to the district court’s discretion”); Lopez v. Emergency
23 Serv. Restoration, Inc. (In re Lopez),
367 B.R. 99, 103 (9th Cir.
24 BAP 2006); George v. City of Morro Bay (In re George),
318 B.R.
25 729, 733 (9th Cir. BAP 2004).
26 In evaluating whether the bankruptcy court abused its
27 discretion, we must first determine de novo whether the
28 bankruptcy court identified the correct legal standard. See
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1 People’s Capital & Leasing Corp. v. Big3D, Inc. (In re Big3D,
2 Inc.),
438 B.R. 214, 219-220 (9th Cir. BAP 2010)(en banc)(citing
3 United States v. Hinkson,
585 F.3d 1247, 1262 (9th Cir. 2009)).
4 If the bankruptcy court identified the correct legal
rule, this court then determines whether its application
5 of the correct legal standard to the facts was
(1) illogical, (2)implausible, or (3) without support in
6 inferences that may be drawn from the facts in the
record. Only if the bankruptcy court did not identify
7 the correct legal rule, or if its application of the
correct legal standard to the facts was illogical,
8 implausible, or without support in inferences that may be
drawn from facts in the record, is it appropriate to
9 conclude that the bankruptcy court abused its discretion.
10
Id. (citation omitted)(internal quotations marks omitted).
11 With respect to the bankruptcy court’s determination
12 regarding the agency issue, we review the bankruptcy court’s
13 findings of fact for clear error. Beaupied v. Chang (In re
14 Chang),
163 F.3d 1138, 1140 (9th Cir. 1998).
15 V. DISCUSSION
16 A. Genesis Waived Its Issue Preclusion Argument Regarding Agency
17 Genesis argues that the bankruptcy court erred by not
18 applying issue preclusion6 to the state court’s determination
19 that Mr. Ha acted as the Debtor’s agent in connection with the
20 sale of Home Design. However, Genesis waived this argument by
21 not presenting it to the bankruptcy court.
22 Generally, appellate courts do not consider arguments “that
23
6
24 Although the parties refer to the collateral estoppel
effect of the state court’s rulings, the Supreme Court now
25 generally uses the term “issue preclusion” instead of “collateral
estoppel.” Taylor v. Sturgell,
553 U.S. 880, 892 n.5 (2008)
26 (“issue preclusion encompasses the doctrines once known as
‘collateral estoppel’ and ‘direct estoppel’”), citing Migra v.
27 Warren City School Dist. Bd. of Educ.,
465 U.S. 75, 77 n.1
(1984); see also Paine v. Griffin (In re Paine),
283 B.R. 33, 38
28 (9th Cir. BAP 2002).
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1 are not ‘properly raise[d]’ in the trial courts.” O’Rourke v.
2 Seaboard Sur. Co. (In re Fegert, Inc.),
887 F.2d 955, 957 (9th
3 Cir. 1989); see also In re Cybernetic Serv., Inc.,
252 F.3d 1039,
4 1045 n.3 (9th Cir. 2001)(stating that appellate court will not
5 explore ramifications of argument because it was not raised in
6 the bankruptcy court and, accordingly, was waived); Scovis v.
7 Henrichsen (In re Scovis),
249 F.3d 975, 984 (9th Cir.
8 2001)(stating that court will not consider issue raised for first
9 time on appeal absent exceptional circumstances); Concrete Equip.
10 Co., Inc. v. Fox (In re Vigil Bros. Constr., Inc.),
193 B.R. 513,
11 520 (9th Cir. BAP 1996). An argument is “properly raised” if it
12 was raised sufficiently for the trial court to make a ruling.
13 In re Fegert, Inc.,
887 F.2d at 957. Despite the general rule,
14 “[a] reviewing court may consider an issue raised for the first
15 time on appeal if (1) there are exceptional circumstances why the
16 issue was not raised in the trial court, (2) the new issue arises
17 while the appeal is pending because of a change in the law, or
18 (3) the issue presented is purely one of law and the opposing
19 party will suffer no prejudice as a result of the failure to
20 raise the issue in the trial court.” Franchise Tax Bd. v.
21 Roberts (In re Roberts),
175 B.R. 339, 345 (9th Cir. BAP
22 1994)(internal quotations omitted)(citing United States v.
23 Carlson,
900 F.2d 1346, 1349 (9th Cir. 1990)).
24 There is nothing in the record showing that Genesis made the
25 argument that the bankruptcy court was precluded from making a
26 determination regarding the existence of an agency relationship
27 ///
28 ///
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1 between the Debtor and Mr. Ha.7 In its closing at trial, Genesis
2 did argue that the state court found Mr. Ha liable for fraud in
3 the inducement based on the theory that he acted as an agent for
4 the Debtor. However, Genesis never argued to the bankruptcy
5 court that the state court’s use of agency principles to impose
6 liability on Mr. Ha precluded the bankruptcy court from
7 determining the issue of whether an agency relationship existed.
8 Because Genesis never raised the argument, the bankruptcy court
9 conducted a trial in which it was required to determine whether
10 an agency relationship existed between the Debtor and Mr. Ha.
11 Only after receiving an adverse ruling from the bankruptcy court
12 does Genesis now seek to apply preclusion principles to the
13 determination of the agency issue.
14 Furthermore, it does not appear that any of the exceptions
15 to the general rule apply. The first two exceptions are
16 unquestionably not met: there are no exceptional circumstances
17 and the issue did not arise from a change in the law while the
18 appeal was pending. The third exception (i.e., the issue
19 involves a pure legal question and the opposing party will not be
20
21 7
In fact, during the hearing before the bankruptcy court,
Genesis argued that the state court had made no determination
22 with respect to fraud by the Debtor, including whether fraud
should be imputed to her via Mr. Ha's alleged agency, and that
23 the issue therefore needed to be tried in the adversary
proceeding. See Transcript of Bankruptcy Court Trial, pg. 16,
24 lns. 20-25 (stating “[a]gency was not litigated in state court”).
To the extent such an assertion might also support a finding that
25 Genesis should be judicially estopped from asserting that the
bankruptcy court erred by not applying issue preclusion with
26 respect to this issue, the panel notes that the Debtor has not
raised that argument on appeal, and that in light of the clear
27 waiver of the preclusion argument in the bankruptcy court, it is,
in any event, unnecessary for the panel to resolve here an issue
28 concerning judicial estoppel.
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1 prejudiced) is likewise inapplicable. First, the availability of
2 issue preclusion involves mixed questions of law and fact. See
3 In re Cogliano, 355 B.R. at 800. Indeed, in this case, factual
4 questions predominate with respect to the issue of Ha’s agency
5 due to the murkiness of the state court trial transcript. As
6 discussed later, it is difficult to determine exactly which
7 issues of fact the state court decided and which issues it
8 declined to decide. Ultimately, the record is ambiguous at best
9 as to whether the state court made a finding regarding the agency
10 issue.
11 The panel also concludes that the Debtor is prejudiced by
12 Genesis’ failure to raise issue preclusion in the bankruptcy
13 court in the first instance. By failing to raise the issue
14 before the bankruptcy court, Genesis deprived the Debtor of the
15 opportunity to develop a record and to make legal as well as
16 factual arguments against the application of issue preclusion.8
17 “[I]f [the debtor] might have tried [her] case differently either
18 by developing new facts in response to or advancing distinct
19 legal arguments against the issue, it should not be permitted to
20 be raised for the first time on appeal.” United States v.
21 Patrin,
575 F.2d 708, 712 (9th Cir. 1978). Genesis has waived
22 its argument that the bankruptcy court was precluded from making
23 a determination regarding whether an agency relationship existed
24 between the Debtor and Mr. Ha.
25 ///
26
8
27 Additionally, without a record, we are left to guess at
what the bankruptcy would have decided had it been presented with
28 the issue.
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1 B. The Bankruptcy Court Would Not Have Abused Its Discretion in
2 Declining to Apply Issue Preclusion
3 Even if Genesis did not waive its issue preclusion argument,
4 the bankruptcy court would not have abused its discretion by
5 declining to apply issue preclusion.
6 Issue preclusion applies in nondischargeability proceedings.
7 Grogan v. Garner,
498 U.S. 279, 284-85 (1991). Issue preclusion
8 “bars ‘successive litigation of an issue of fact or law that was
9 actually litigated and resolved in a valid court determination
10 essential to that prior judgment,’ even if the issue recurs in
11 the context of a different claim.” Taylor,
553 U.S. at 892
12 (quoting New Hampshire v. Maine,
532 U.S. 742, 748-49 (2001)).
13 The purpose of issue preclusion is to conserve judicial resources
14 and foster confidence in the outcome of adjudications by
15 providing finality and avoiding inconsistent rulings. See
id.
16 To determine the preclusive effect of a California state
17 court’s finding, the panel applies California preclusion law.
18
28 U.S.C. § 1738 (the Full Faith and Credit Statute); Marrese v.
19 Am. Acad. of Orthopaedic Surgeons,
470 U.S. 373, 380 (1985).
20 When state preclusion law controls, the discretion to apply the
21 doctrine is exercised in accordance with state law. Khaligh v.
22 Hadegh (In re Khaligh),
338 B.R. 817, 823 (9th Cir. BAP 2006),
23 aff’d,
506 F.3d 956 (9th Cir. 2007).
24 Under California law, the party asserting issue preclusion
25 has the burden of establishing the following “threshold”
26 requirements:
27 First, the issue sought to be precluded from relitigation
must be identical to that decided in a former proceeding.
28 Second, this issue must have been actually litigated in
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1 the former proceeding. Third, it must have been
necessarily decided in the former proceeding. Fourth,
2 the decision in the former proceeding must be final and
on the merits. Finally, the party against whom
3 preclusion is sought must be the same as, or in privity
with, the party to the former proceeding.
4
5 Harmon v. Kobrin (In re Harmon),
250 F.3d 1240, 1245 (9th Cir.
6 2001).9
7 1. Satisfaction of the Five Threshold Elements
8 Here, three of the five threshold requirements are
9 undisputably satisfied: (1) the parties in the state court and in
10 the nondischargeability action are the same, (2) the state court
11 judgment is final and on the merits, and (3) the issue sought to
12 be precluded from re-litigation is identical to that purportedly
13 decided in the former proceeding (i.e., whether Mr. Ha acted as
14 the agent of the Debtor in negotiating the sale of the business).
15 The more difficult questions are whether the issue of Mr. Ha’s
16 status as the Debtor’s agent was “actually litigated” and
17 “necessarily decided” by the state court.
18 a. Was Agency “Actually Litigated”?
19 Under California law, “an issue was actually litigated if it
20 was properly raised, submitted for determination, and determined
21 in that proceeding.” Hernandez v. City of Pomona,
94 Cal. Rptr.
22 3d 1, 10 (Cal. Ct. App. 2009) (citing People v. Sims,
186 Cal.
23
9
Even if these five threshold requirements are met,
24 application of issue preclusion requires a “mandatory
‘additional’ inquiry into whether imposition of issue preclusion
25 would be fair and consistent with sound public policy.” Khaligh,
338 B.R. at 824-25. California courts “have recognized that
26 certain circumstances exist that so undermine the confidence in
the validity of the prior proceeding that the application of
27 collateral estoppel would be ‘unfair’ to the defendant as a
matter of law.” Roos v. Red,
30 Cal. Rptr. 3d 446, 453 (Cal. Ct.
28 App. 2005).
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Case: 11-1379 Document: 21 Filed: 02/17/2012 Page: 15 of 21
1 Rptr. 77 (Cal. Ct. App. 1982)). In determining whether an issue
2 was actually litigated, a court should look beyond the bare
3 findings and must scrutinize the pleadings and evidence presented
4 to determine what was actually determined in the prior
5 proceeding. Schaefer/Karpf Prods. V. CNA Ins. Cos., 76 Cal Rptr.
6 2d 42, 45-46 (Cal. Ct. App. 1998).
7 In this case, Genesis argues that it properly raised, and
8 submitted for determination, the agency issue by alleging in the
9 state court complaint that Mr. Ha acted as the Debtor’s agent
10 with respect to the sale of Home Design and by presenting
11 evidence at the prove-up hearing from which the state court could
12 make a determination regarding whether Mr. Ha acted as the
13 Debtor’s agent. Further, the state court made a determination on
14 this issue when it found Mr. Ha liable for fraud in the
15 inducement based on the theory that he acted as the Debtor’s
16 “agent” in negotiating the sale of Home Design.
17 However, when one looks at the state court record in its
18 entirety, there is little support for a finding that the state
19 court intended to make a legal determination on the issue. One
20 of the hallmarks of an agency relationship is a principal’s
21 control over its agent’s actions within the scope of the agency.
22 See Tsurukawa v. Nikon Precision, Inc. (In re Tsurukawa),
23
287 B.R. 515, 521 (9th Cir. BAP 2002)(citing Alvarez v. Felker
24 Mfg. Co.,
230 Cal. App. 2d 987, 999,
41 Cal. Rptr. 514, 521
25 (1964)). In this case, the state court was not provided with any
26 pertinent evidence regarding Debtor’s ability to control Mr. Ha’s
27 actions in relation to Home Design. Based on the evidence
28 presented to the state court, the Debtor was the owner of Home
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1 Design in name only and had nothing to do with the business.
2 Moreover, the state court did not describe any factual or legal
3 basis for its “finding” of an agency relationship, or present any
4 sort of reasoned opinion on the issue. The state court merely
5 used the term to describe a basis for finding liability as to Mr.
6 Ha for fraud in the inducement. Stated differently, even though
7 the state court referred to Mr. Ha as an “agent” of the Debtor,
8 it does not appear that the state court made a legal
9 determination that the Debtor was the principal and Mr. Ha was
10 the agent.
11 It is well established that the application of issue
12 preclusion under California law involves a measure of discretion.
13 “[I]ssue preclusion is not applied automatically or rigidly, and
14 courts are permitted to decline to give issue preclusive effect
15 to prior judgments in deference of countervailing considerations
16 of fairness.” In re Lopez, 367 B.R. at 108 (citing Lucido v.
17 Super. Ct.,
272 Cal. Rptr. 3d 767, 795 (Cal. 1990)). Given the
18 ambiguity of the record and the lack of specific findings of fact
19 by the state court that would support a determination that an
20 agency relationship existed, it is far from clear that the
21 bankruptcy court would have abused its discretion in declining to
22 apply issue preclusion to the agency issue. As a matter of
23 fairness, when faced with serious questions about the scope of a
24 ruling, the bankruptcy court should err on the side of caution
25 and avoid applying issue preclusion when a state court’s exact
26 determination is ambiguous. In this case, the state court’s
27 determination was simply not sufficiently firm to be given
28 preclusive effect. The bankruptcy court did not abuse its
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1 discretion in making its own determination regarding the agency
2 issue.
3 b. Agency Was Not “Necessarily Decided”
4 Under California law, an issue has been “necessarily
5 decided” if it is not “entirely unnecessary” to the judgment in
6 the initial proceedings. Zevnik v. Superior Court,
70 Cal. Rptr.
7 3d 817, 821 (Cal. Ct. App. 2008)(citing Lucido,
272 Cal. Rptr. 3d
8 at 769).
9 Genesis argues that the state court based its ruling that
10 Mr. Ha could be held liable for fraud on the fact that he was
11 acting as the Debtor’s agent. In finding Mr. Ha liable for
12 fraud, the state court stated as follows:
13 So what I have just convinced myself is that the fraud in
the inducement does not have to be by the contracting
14 party. A third party, a broker, a salesperson, some body
else could induce somebody to enter into a contract by
15 fraud. That agent would then be liable.
16 Since Ha is the agent in this case who made the
fraudulent inducement, he would be responsible for fraud
17 in the inducement.
18 Transcript of State Court Trial, pg. 25, lns. 17-25. Thus,
19 Genesis argues that the state court record supports its assertion
20 that the issue of agency was “necessarily decided.”
21 In reviewing the state court judge’s musings on the issues
22 of fraud and agency, it appears that the court made this finding
23 primarily because it was the most obvious vehicle by which
24 liability could be imposed upon Mr. Ha for fraud in the
25 inducement. However, it does not follow that this question was
26 “necessarily decided,” because the court might have premised a
27 finding of fraud in the inducement directly against Mr. Ha based,
28 for example, upon his false statements of co-ownership of the
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Case: 11-1379 Document: 21 Filed: 02/17/2012 Page: 18 of 21
1 business. In this context, it seems that the state court’s
2 finding of agency was simply the most convenient, but hardly the
3 exclusive, way of getting to the result that the state court was
4 convinced was correct, i.e., that Mr. Ha had committed fraud.
5 Ultimately, a finding of agency was unnecessary to the state
6 court’s determination, because the state court could have imposed
7 liability for fraud in the inducement on Mr. Ha without ever
8 addressing the issue of agency. Cf. In re Harmon,
250 F.3d at
9 1248-49 (stating that, because the state court could have entered
10 a default judgment against the defendant without finding that he
11 had committed fraud, the issue was not necessarily decided in the
12 prior proceeding).10
13 Last, as previously discussed, the state court record is
14 ambiguous regarding whether the state court decided the agency
15 issue. Given the fact that it is unclear what the state court
16 intended to decide, we cannot say that the bankruptcy court would
17 have abused its discretion in declining to apply issue preclusion
18 to the agency issue.
19 ///
20 ///
21 ///
22
23
10
In the alternative, even if the state court did make a
24 determination that Mr. Ha was the Debtor’s agent, the state court
also made a determination that he acted outside the scope of his
25 agency. See Transcript of State Court Trial, pg. 25, lns. 2-3
(stating “lying would be outside the scope of his employment”).
26 Thus, even if the agency issue was necessarily decided, to be
doctrinally consistent, the bankruptcy court would have also been
27 precluded from imputing Mr. Ha’s fraud to the Debtor, because the
state court also found that Mr. Ha’s actions were outside the
28 scope of the agency.
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Case: 11-1379 Document: 21 Filed: 02/17/2012 Page: 19 of 21
1 C. The Bankruptcy Court Did Not Err in Finding That Fraud Should
2 Not Be Imputed to the Debtor Based on Agency Principles
3 In order to establish that a debt is nondischargeable under
4 section 523(a)(2)(A), a creditor must establish five elements by
5 a preponderance of the evidence:
6 (1) misrepresentation, fraudulent omission or deceptive
conduct by the debtor; (2) knowledge of the falsity or
7 deceptiveness of his statement or conduct; (3) an intent
to deceive; (4) justifiable reliance by the creditor on
8 the debtor’s statement or conduct; and (5) damage to the
creditor proximately caused by its reliance on the
9 debtor’s statement or conduct.
10 Turtle Rock Meadows Homeowners Ass’n v. Slyman (In re Slyman),
11
234 F.3d 1081, 1085 (9th Cir. 2000); Ghomeshi v. Sabban (In re
12 Sabban),
384 B.R. 1, 5 (9th Cir. BAP 2008).
13 Genesis argues that the Debtor is liable for the fraud
14 because Mr. Ha was acting as the Debtor’s agent when he committed
15 fraud against Genesis, and fraud committed by an agent acting on
16 behalf of a principal is imputed to the principal. In other
17 words, Genesis argues that it does not have to prove that the
18 Debtor committed any direct fraud, it need only show that Mr. Ha
19 committed fraud while acting as agent for the Debtor.11
20 1. Mr. Ha Was Not the Debtor’s Agent
21 As noted previously, “[a] primary characteristic of an
22 agency relationship is the principal’s right to control the
23 agent’s conduct regarding matters entrusted to it.” In re
24 Tsurukawa,
287 B.R. at 521 (citing Alvarez v. Felker Mfg. Co.,
25
26 11
Genesis has not appealed the bankruptcy court’s finding
concerning the absence of direct fraud by the Debtor. Thus, the
27 only issue before the panel is whether the bankruptcy court
should have imputed Mr. Ha’s fraud to the Debtor based on agency
28 principles.
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Case: 11-1379 Document: 21 Filed: 02/17/2012 Page: 20 of 21
1
41 Cal. Rptr. 514, 521 (Cal. Ct. App. 1964)). Genesis argues
2 that, even if the Debtor did not practice any control over the
3 business or Mr. Ha, she had the ability to control Mr. Ha by
4 virtue of being the owner of the business. Genesis argues that
5 the panel has previously recognized that “[o]wnership status is,
6 by definition, a position of control.” See Tsurukawa,
287 B.R. at
7 522. Thus, by virtue of her position, the Debtor was in a
8 position to control Mr. Ha, and therefore an agency relationship
9 existed.
10 Notwithstanding the foregoing, the facts of this case are
11 distinguishable from the facts in Tsurukawa, and compel a
12 different result.
13 As an initial matter, “ownership” cannot by itself create an
14 agency relationship; there must be something more than bare legal
15 title to assets. In Tsurukawa, we cited with approval the
16 bankruptcy court’s analysis that “it is not appropriate to find
17 an agency relationship in every instance in which a spouse takes
18 bare legal title to business property held for the benefit of the
19 couple . . . .”
Id. (quoting Bankruptcy Court’s Memorandum of
20 Decision (Jan. 14, 2002) at 5-6 (footnote omitted)). Courts
21 should be careful when assessing whether a true agency
22 relationship exists between married couples.
Id. at 522-523.
23 The facts in Tsurukawa are distinguishable from the facts in this
24 case because the spouse in Tsurukawa played a substantial role in
25 helping her husband carry out his fraudulent intent. In this
26 case, unlike Tsurukawa, the Debtor had no involvement in the
27 business, other than holding bare legal title to assets, and had
28 no involvement in the sale of business, other than signing the
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Case: 11-1379 Document: 21 Filed: 02/17/2012 Page: 21 of 21
1 Purchase Agreement. Moreover, there are no facts that suggest
2 the Debtor’s status as owner (or her actions with respect to the
3 sale of Home Design) enabled Mr. Ha to commit fraud. Indeed, the
4 evidence indicated that the Debtor had no control over Mr. Ha
5 with respect to Home Design.
6 We cannot find any error in the bankruptcy court’s
7 determination that no agency relationship existed between the
8 Debtor and Mr. Ha.
9 VI. CONCLUSION
10 For the foregoing reasons, we affirm the bankruptcy court’s
11 determination that the debt owed by the Debtor to Genesis is
12 dischargeable in bankruptcy.
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