Rutanen v. Baylis ( 2000 )

United States Court of Appeals
For the First Circuit
No. 99-2352
IN RE: CARL E. BAYLIS,
Debtor,
CONSTANCE B. RUTANEN; ELLA QUEVILLON, BY AND FOR THE ESTATE OF ROBERT
S. QUEVILLON; THERESA J. ALEXANDER,
Plaintiffs, Appellees,
v.
CARL E. BAYLIS, INDIVIDUALLY AND IN HIS CAPACITY AS CO-TRUSTEE OF THE
ANTONIA QUEVILLON TRUST,
Defendant, Appellant.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Nathaniel M. Gorton, U.S. District Judge]
Before
Torruella, Chief Judge,
Stahl and Lipez, Circuit Judges.
David M. Nickless, with whom Nickless & Phillips was on brief for
appellant.
Christopher S. Wheeler, with whom Robert A. Gelinas and Bulkley,
Richardson & Gelinas, LLP, were on brief for appellees.
July 6, 2000
STAHL, Circuit Judge. Defendant-appellant Carl Baylis
appeals the district court's decision that a seven-year-old state
probate court finding should be given preclusive effect in the
subsequent adversarial bankruptcy court proceeding. We vacate and
remand.
I.
In October 1969, Baylis, an attorney specializing in taxation
and estate planning, created a trust (the “Trust”) for Antonia
Quevillon. Baylis included in the agreement an exculpatory clause
which provided that the Trustees would be “liable only for [their] own
willful conduct or omissions in bad faith.” The res of the Trust
consisted of two apartment buildings in Worcester, Massachusetts, and
six in Southbridge, Massachusetts. The Trust provided that Quevillon
would serve as trustee and that upon her death, Estelle Ballard and
Baylis would serve as co-trustees. Ballard was one of Quevillon's
daughters and was, along with her siblings--plaintiffs-appellees
Constance Rutanen, Robert Quevillon,1 and Theresa Alexander (the
“plaintiffs”)--an income beneficiary of the Trust. Ballard had agreed
1
The estate of Robert Quevillon is represented in this action by
Ella Quevillon.
-2-
with her mother to be paid fifty dollars per week for the management of
the properties. Baylis was paid only for specific work he performed
for the Trust.
During the life of the Trust, net income was to be
distributed equally among the beneficiaries. Twenty years after
Antonia Quevillon's death, the Trust was to terminate, and the Trust
property was to be divided equally among the children of her son
Marcel. The Trust terminated on May 20, 1991, and the Trust property
was distributed to Marcel Quevillon's children.
Upon Antonia Quevillon's death in 1971, Ballard and Baylis
sold one of the properties to pay estate taxes. Over the next fifteen
years, the Trust paid the beneficiaries modest amounts. In 1985, the
plaintiffs, concerned because of the minute amounts they were receiving
from the Trust, met with Ballard and Baylis to discuss its operation.
By then, both Worcester buildings had been sold, but the Trust still
held the six Southbridge buildings. At this meeting, it was agreed,
with no objection from Ballard, that the co-trustees would sell the
remaining properties and invest the proceeds in treasury notes.
By January 1986, Ballard and Baylis had received offers for
the properties. A Mr. and Mrs. John Young made an offer for two of the
properties, and Ramshorn Realty Trust (“Ramshorn”) offered to buy the
other four. The total price offered for the six buildings totaled
$1,640,000, which was $300,000 greater than the properties' appraised
-3-
values. Ballard then decided not to sell any of the properties,
claiming that she wanted to keep them for herself. Because Baylis
believed that the real estate market had peaked, he urged the sale of
the properties, but Ballard remained steadfast in her refusal to sell.
In February 1986, in an attempt to complete the transactions before an
increase in the federal capital gains tax became effective, Baylis
first offered Ballard a chance to buy all the property, which she was
unable to do because she lacked financing, and then offered her an
additional management fee of either $75,000 or $133,667 if she would
assent to the sale. She refused. Nevertheless, despite her refusal,
Baylis presented unsigned purchase and sale agreements to the Youngs in
May 1986 and to Ramshorn in June 1986. Both parties executed and
returned the agreements to Baylis.
After he received the signed purchase and sale agreements,
Baylis attempted to garner Ballard's signature on them. She refused,
prompting Baylis to propose to her that the Trust would sell the two
properties earmarked for the Youngs to her instead. In return, she was
to assent to the sale of the other four properties to Ramshorn, resign
as co-trustee, and agree to a trustee fee for Baylis. Ballard agreed.
In December 1986, when the Youngs became aware of this
arrangement, they sued Baylis for fraud and Ballard and Baylis, in
their capacities as co-trustees, for specific performance. Ballard
-4-
then withdrew her agreement with Baylis and refused to sell the four
properties to Ramshorn. The properties, therefore, remained unsold.
Ballard and Baylis used Trust funds to finance their defense of the
Young litigation. Jointly, they spent approximately $12,000 in
defending themselves as co-trustees, with Baylis spending approximately
$7000 to defend himself against the fraud claim. Finally, to settle
its litigation the Trust paid $15,000 to the Youngs in connection with
their fraud claim against Baylis.
That same December, Baylis filed with the probate court a
petition for a license to sell the properties on behalf of the Trust.
The probate court decided to defer acting on the petition until Ballard
gave her consent to sell. She never did. Baylis thereafter failed to
pursue the petition even though he believed that Ballard's reason for
refusing to sell was baseless and that her refusal constituted a breach
of fiduciary duty. Consequently, the property was not sold. Within a
short time, property values in the area fell, and the value of the
Trust was diminished.
In May 1988, the plaintiffs sued Ballard and Baylis in
Massachusetts Probate Court. The plaintiffs sought an accounting and
alleged breach of fiduciary duty, conversion, fraud, and negligent
misrepresentation. After a bench trial, the court found that Baylis
had acted negligently in failing to prevent Ballard from fulfilling her
fiduciary duties. In addition, it found that the exculpatory clause in
-5-
the Trust Agreement was unenforceable and that, in failing to sell the
properties, Ballard and Baylis had acted in bad faith. The trial court
entered judgment for $330,079.95 against Ballard and Baylis.
The Massachusetts Appeals Court affirmed the judgment of the
probate court with respect to both its negligence and bad faith
determinations. The Supreme Judicial Court of Massachusetts (“SJC”)
granted Ballard and Baylis's application for further appellate review
and affirmed. In so doing, however, the court expressly refused to
reach the issue of bad faith, stating that a finding of negligent
breach of fiduciary duty would suffice to affirm the judgment. Baylis
subsequently filed a petition for rehearing in which he requested,
inter alia, that the SJC reverse the trial court's finding of bad
faith. The SJC denied the petition.
Following the SJC's affirmance, Baylis filed for bankruptcy.
The plaintiffs opposed the discharge of his judgment debt to them and
brought an adversary action pursuant to 11 U.S.C. § 523(a). This
section of the Bankruptcy Code prohibits the discharge of any debt
arising from “defalcation while acting in a fiduciary capacity,” id.
§ 523(a)(4), or from “willful and malicious injury,” id. § 523(a)(6).
The parties filed cross-motions for summary judgment,2 agreeing to be
bound by the probate court's factual findings, except for the finding
2Although they styled their motions as ones for “summary
judgment,” it is evident that they expected the bankruptcy court simply
to resolve the case on a stipulated record.
-6-
that Baylis acted in bad faith. The plaintiffs argued that the
bankruptcy court should accord this finding preclusive effect, but the
court disagreed. The court went on to find neither willful and
malicious injury nor defalcation. Therefore, the court held that
Baylis's debt to the plaintiffs was dischargeable and entered judgment
to Baylis in the adversary action.
The plaintiffs appealed to the district court, arguing that
the bankruptcy court had erred in its determination that issue
preclusion did not apply to the probate court's determination of bad
faith. In a Memorandum and Order dated October 29, 1999, the district
court reversed the holding of the bankruptcy court, holding that issue
preclusion did apply. It further held that the finding of bad faith
under Massachusetts law required concomitant findings of defalcation
and willful and malicious injury under the Bankruptcy Code.
Consequently, it reversed and ordered that judgment be entered in favor
of the plaintiffs. This appeal followed.
II.
The sole issue before us is whether the district court was
correct in ruling that the bankruptcy court should have given
preclusive effect to the probate court's finding that Baylis had acted
in bad faith. We review this ruling de novo. See IRS v. Cousins (In
re Cousins), 209 F.3d 38, 40 (1st Cir. 2000); Prebor v. Collins (In re
I Don't Trust), 143 F.3d 1, 3 (1st Cir. 1998).
-7-
The plaintiffs argue that the issue of bad faith was fully
and fairly litigated in the state probate court and, as such, should
have preclusive effect in the bankruptcy proceeding. In doing so, they
point out that the probate court found Baylis to have acted in bad
faith and that the appeals court affirmed this finding. Further, they
argue that this finding of bad faith suffices to prove that Baylis
committed defalcation and inflicted willful and malicious injuries on
the plaintiffs. Baylis responds that because the probate court
alternatively found that Baylis was negligent and had acted in bad
faith and because the SJC affirmed only on the negligence ground, there
was no preclusive final judgment on the issue of bad faith. Thus, we
must decide whether issue preclusion applies when a trial court's
judgment, which rests on alternative grounds, is affirmed by the
intermediate appeals court on both grounds, but by the court of last
resort on only one ground.
It is well-settled that a previously litigated issue between
two parties should not be relitigated. See Montana v. United States,
440 U.S. 147, 153 (1979); Miles v. Aetna Cas. & Sur. Co., 589 N.E.2d
314, 316-17 (Mass. 1992). The principles of issue preclusion apply to
nondischargeability proceedings in bankruptcy. See Grogan v. Garner,
498 U.S. 279, 285 n.11 (1991). By federal statute, judicial
proceedings in state court “shall have the same full faith and credit
in every court within the United States . . . as they have by law or
-8-
usage in the courts of such State.” 28 U.S.C. § 1738. Therefore, in
a case such as this, we employ Massachusetts issue preclusion law. See
Kyricopoulos v. Town of Orleans, 967 F.2d 14, 16 (1st Cir. 1992) (per
curiam). And, as we previously have noted, Massachusetts courts follow
the traditional rules for the doctrine of issue preclusion. See
Willhauck v. Halpin, 953 F.2d 689, 705 (1st Cir. 1991) (citing Martin
v. Ring, 514 N.E.2d 663, 664 (Mass. 1987)).
For an issue to receive preclusive effect in a later
proceeding under Massachusetts law, the following four elements must be
present: (1) the issue sought to be precluded must be identical to that
in the prior litigation; (2) the parties actually must have litigated
the issue; (3) the judgment regarding the issue must have been binding
and valid; and (4) the issue's determination must have been essential
to the judgment. See Martin, 514 N.E.2d at 664; see also Keystone
Shipping Co. v. New England Power Co., 109 F.3d 46, 51 (1st Cir. 1997)
(noting that these four elements are required both by Massachusetts
courts and by the First Circuit).
“If a judgment of a court of first instance is based on
determinations of two issues, either of which standing independently
would be sufficient to support the result, the judgment is not
conclusive with respect to either issue standing alone,” and neither
receives preclusive effect. 1 Restatement (Second) of Judgments § 27
cmt. i [hereinafter Restatement]; see also York Ford, Inc. v. Building
-9-
Inspector & Zoning Adm'r, 647 N.E.2d 85, 87-88 (Mass. App. Ct. 1995)
(adopting the rule of comment i to section 27). If, however, “the
appellate court” affirms both grounds of the holding, each ground
receives preclusive effect. 1 Restatement § 27 cmt. o; see also York
Ford, Inc., 647 N.E.2d at 88 n.7 (adopting the rule of comment o to
section 27). On the other hand, if “the appellate court” affirms on
one ground and passes on the other, “the judgment is conclusive [only]
as to the first determination.” 1 Restatement § 27 cmt. o.
In this case, each determination of the court of first
instance was affirmed by the appeals court, but the SJC affirmed one
determination and explicitly passed on the other. This result appears
to generate a novel complication, but because of the role the SJC plays
when reviewing cases in this posture, the general tenets of comment o
apply. Strictly speaking, when the SJC reviews cases that originate in
probate court, its concern is not with the decision of the
Massachusetts Appeals Court; rather, the SJC reviews the disposition of
the probate court as if the appeal came directly to it. See, e.g., In
re Adoption of Hugo, 700 N.E.2d 516, 520-21 (Mass. 1998) (noting that
the SJC reviews the findings of the probate court for clear errors of
law), cert. denied, 526 U.S. 1034 (1999); White v. White, 76 N.E.2d 15,
16-17 (Mass. 1947) (“All questions of law, fact and discretion are open
for our decision, and we can find facts contrary to the [probate]
judge's findings if convinced that he is plainly wrong.”). In this
-10-
sense, when the SJC hears a case that originated in the probate court,
its ruling supercedes that of the Massachusetts Appeals Court for the
purposes of issue preclusion and assumes the role of “the appellate
court” to which comment o refers.3 The SJC's determination that the bad
faith finding was unnecessary to decide the case thus vitiates any
argument that the finding should receive preclusive effect.
The SJC's skeptical view of the evidence of bad faith, which
it found to be “questionable,” Rutanen v. Ballard, 678 N.E.2d 133, 140
(Mass. 1997), adds additional support to our conclusion. Alternative
holdings from a court of first instance receive no preclusive effect
until affirmed by the appellate court in part because the court of
first instance may not have considered each determination “as carefully
or rigorously” as it would have if each had been essential to the
result. 1 Restatement § 27 cmt. i. Once the losing party has obtained
an appellate decision on the issue, however, “the balance weighs in
favor of preclusion” because the appellate court has reviewed and
upheld the determinations of the court of first instance. 1 id.
3Moreover, an opinion of the Massachusetts Appeals Court is not a
“decision” binding on the parties until its rescript issues to the
lower court. See Commonwealth v. Aboulaz, 688 N.E.2d 1374, 1377 (Mass.
App. Ct.), review denied, 692 N.E.2d 963 (Mass. 1998). But in this
case, the rescript of the appeals court never issued to the probate
court because “[i]f an application of further appellate review is
granted the rescript of the Appeals Court shall not issue to the lower
court.” Mass. R. App. P. 23. Because the appeals court's opinion
never became a binding decision, the SJC is the relevant appellate
court for issue preclusion purposes.
-11-
cmt. o. In other words, the alternative determination cannot have
preclusive effect until the appellate court analyzes it and decides
that the court of first instance correctly resolved it. Here, the
relevant appellate court not only failed to endorse the correctness of
the finding, but it explicitly questioned it.4 Under these
circumstances, issue preclusion should not apply.
III.
For the foregoing reasons, the decision of the district court
is vacated, and the case is remanded for further action consistent with
this opinion. No costs.
4
Furthermore, comments i and o to section 27 are not meant as
exceptions to the general rule of issue preclusion stated in that
section. Instead, they elucidate one of the basic elements of that
rule, that the determination must have been “essential to the
judgment.” In this case, however, the SJC explicitly said that the
finding of Baylis's bad faith was not essential to the judgment. The
failure to meet that element means that the finding is not entitled to
preclusive effect.
-12-