In re: Paul Y. Johnson and Celeste C. Johnson

FILED
APR 16 2018
1 NOT FOR PUBLICATION
SUSAN M. SPRAUL, CLERK
U.S. BKCY. APP. PANEL
2 OF THE NINTH CIRCUIT
3 UNITED STATES BANKRUPTCY APPELLATE PANEL
OF THE NINTH CIRCUIT
4
5 In re: ) BAP No. SC-17-1194-LBF
)
6 PAUL Y. JOHNSON and ) Bk. No. 3:16-bk-05753-LT
CELESTE C. JOHNSON, )
7 ) Adv. No. 3:16-ap-90186-LT
Debtors. )
8 ______________________________)
)
9 PAUL Y. JOHNSON; )
CELESTE C. JOHNSON, )
10 )
Appellants, )
11 )
v. ) M E M O R A N D U M*
12 )
W3 INVESTMENT PARTNERS, LP, )
13 )
Appellee. )
14 ______________________________)
15 Submitted Without Argument on March 22, 2018
at Pasadena, California
16
Filed - April 16, 2018
17
Appeal from the United States Bankruptcy Court
18 for the Southern District of California
19 Honorable Laura S. Taylor, Chief Bankruptcy Judge, Presiding
_________________________
20
Appearances: Kennan E. Kaeder on brief for Appellants; Paul J.
21 Delmore and Daniel W. Towson of Simpson Delmore
Greene LLP on brief for Appellee.
22 _________________________
23 Before: LAFFERTY, BRAND, and FARIS, Bankruptcy Judges.
24
25
26 *
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 8024-1.
1 The bankruptcy court granted summary judgment to Appellee on
2 its nondischargeability claim under § 523(a)(2)(A).1 In so
3 doing, the court gave issue preclusive effect to a prepetition
4 stipulated judgment entered in state court as part of a
5 litigation settlement. That judgment deemed admitted the facts
6 alleged in the state court complaint, which included allegations
7 supporting a finding of fraud.
8 Appellants’ primary argument is that the bankruptcy court
9 erred in applying issue preclusion to the stipulated judgment
10 because it amounted to an unenforceable prepetition waiver of the
11 discharge. We disagree, and for the reasons set forth below, we
12 AFFIRM.
13 FACTS
14 A. The State Court Litigation
15 Appellants Paul and Celeste Johnson were the principals of
16 Cel J, Inc. Cel J was the general partner of Sushi on the Rock
17 Carlsbad, L.P., which operated a restaurant in Carlsbad,
18 California. Appellee W3 Investment Partners, LP, was a limited
19 partner in Sushi on the Rock, having provided a capital
20 contribution of $575,000. Paragraph VI of the Agreement of
21 Limited Partnership executed by the partners in September 2004
22 provided that Cel J would be paid a management fee of $7,000 per
23 month and that, once the partnership’s operating reserves reached
24 $100,000, the limited partners would receive any excess as
25
1
26 Unless specified otherwise, all chapter and section
references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532, all
27 “Rule” references are to the Federal Rules of Bankruptcy
Procedure, and all “Civil Rule” references are to the Federal
28 Rules of Civil Procedure.
-2-
1 capital reimbursement and cash distributions in proportion to
2 their investments in the partnership.
3 In 2006, W3 sued Cel J and the Johnsons (collectively,
4 “Defendants”) in San Diego County Superior Court, pleading
5 thirteen causes of action including breach of contract, breach of
6 fiduciary duty, conversion, and three fraud causes of action:
7 intentional misrepresentation, concealment, and false promise.
8 In its first amended state court complaint (“FAC”), W3 alleged
9 that from 2004 to 2006 Defendants (i) intentionally diverted
10 Sushi on the Rock’s revenues and spent the partnership funds for
11 their personal benefit; (ii) intentionally produced inaccurate
12 and misleading financial statements; and (iii) purposefully
13 failed to make required distributions to the limited partners.
14 With respect to the Eighth Cause of Action for Fraud -
15 Intentional Misrepresentation, W3 alleged:
16 74. Pursuant to the Agreement between W3 and
CEL J, CEL J represented to W3 that CEL J is required
17 to make certain deposits to the Operating Reserve
Account and cause distributions to be made to W3, as
18 described in paragraphs 15(a) - (d). It was further
represented to W3 that CEL J would have responsibility
19 for the safekeeping and use of all Sushi on the Rock
assets and funds and that it would not use these assets
20 and funds in any manner except for the exclusive
benefit of the Sushi on the Rock.
21
75. The representations made to W3 that the
22 required deposits would be made to the Operating
Reserve Account, distributions would be made to W3 and
23 that Sushi on the Rock assets and funds would be used
exclusively for the benefit of the partnership were all
24 entirely false. Instead, Sushi on the Rock assets and
funds were and are being fraudulently used by CEL J,
25 CELESE and P. JOHNSON for their own personal benefit
and enjoyment, as evidenced by the fraudulent
26 withdrawals, expenses and transfers described above in
paragraphs 16 through 29.
27
76. At the time that the representations were
28 made, CEL J, C. JOHNSON and P. JOHNSON knew they were
-3-
1 false and/or made the representations recklessly and
without regard for their truth.
2
77. CEL J, C. JOHNSON and P. JOHNSON intended
3 that W3 rely on these representations in making their
Capital Contribution to Sushi on the Rock and intended
4 that W3 rely on these representations after Sushi on
the Rock was operational.
5
78. W3 did, in fact, reasonably rely on the above
6 representations in that it would not have executed the
Agreement if it had known that deposits would not be
7 made into the Operating Reserve Account, distributions
would not be made to W3 and that Sushi on the Rock
8 assets and funds would not be used exclusively for the
benefit of the Sushi on the Rock, but rather for the
9 personal benefit of CEL J, C. JOHNSON and P. JOHNSON.
10 79. As a direct and proximate result of the
aforementioned acts of CEL J, C. JOHNSON and P.
11 JOHNSON, it is herein alleged that W3 has been damaged
in an amount to be proven at trial and has incurred and
12 continues to incur costs and expenses including, but
not limited to, consequential damages, litigation costs
13 and reasonable attorneys’ fees as provided under the
Agreement.
14
15 Similar allegations supported the Ninth Cause of Action for
16 Fraud - Concealment:
17 82. CEL J, C. JOHNSON and P. JOHNSON
intentionally failed to disclose to W3 that they would
18 not make the required deposits into the Operating
Reserve Account, would not cause required distributions
19 to be made to W3, as described in paragraphs 15(a) -
(d) and that they intended to use Sushi on the Rock
20 assets and funds for their own personal benefit and not
for the exclusive benefit of Sushi on the Rock, as
21 described above in paragraphs 16 through 29.
22 83. W3 was unaware of the fact that CEL J, C.
JOHNSON and P. JOHNSON intended not make [sic] the
23 required deposits into the Operating Reserve Account,
would not cause required distributions to be made to
24 W3, as described in paragraphs 15(a) - (d) and that
they intended to use Sushi on the Rock assets and funds
25 for their own personal benefit and not for the
exclusive benefit of Sushi on the Rock, as described
26 above in paragraphs 16 through 29. This deception was
reasonably relied on by W3.
27
84. CEL J, C. JOHNSON and P. JOHNSON intended to
28 deceive W3 by concealing the above facts in order to
-4-
1 cause W3 to make a Capital Contribution to Sushi on the
Rock and to continue its participation in Sushi on the
2 Rock after it became profitable.
3 W3 also alleged a Tenth Cause of Action for Fraud - False
4 Promise, relying on allegations almost identical to those
5 supporting the Ninth Cause of Action for Fraud - Concealment.
6 After litigating the matter for nearly two and a half years,
7 the parties, represented by counsel, reached a settlement whereby
8 Defendants agreed to pay W3 $625,000. The settlement agreement
9 (“Settlement Agreement”) required Defendants to pay at least
10 $2,000 per month for five years; the remaining amount was to be
11 paid in eighteen equal monthly installments of approximately
12 $28,000 each. In Paragraph I.B. of the Settlement Agreement, the
13 Johnsons denied any liability to W3. At the same time,
14 Paragraph III.2., which required the Johnsons to each personally
15 guarantee the obligations of Defendants under the agreement,
16 provided that the Johnsons “have further expressly agreed to and
17 understand that all such obligations under the Agreement and the
18 Stipulated Judgment shall be fully and entirely nondischargeable
19 and shall survive any liquidation proceeding, receivership
20 proceeding, conservatorship proceeding, bankruptcy proceeding
21 and/or any other similar proceeding.”
22 Defendants (and their counsel) also executed a stipulated
23 judgment (“Stipulated Judgment”) that was to be entered if they
24 breached the Settlement Agreement, and the Johnsons each executed
25 personal guarantees of the amounts due under the settlement. The
26 Stipulated Judgment provided, in relevant part:
27 3. Cel J. Inc., Celeste Johnson and Paul Johnson
expressly agree, acknowledge and stipulate that the
28 filing and/or entry of this stipulated judgment deems
-5-
1 all allegations, statements and facts contained in the
first-amended complaint to be true and accurate.
2
4. Cel J., Inc, Celeste Johnson and Paul Johnson
3 expressly agree, acknowledge and stipulate that this
stipulated judgment is directly related to and arises
4 solely out of their fraudulent conduct, including their
breaches of fiduciary duty, as specifically alleged in
5 the first-amended complaint.
6 At a hearing before the settlement judge on April 23, 2008,
7 the settlement terms were put on the record. Those terms
8 included that the amounts due under the personal guarantees would
9 not be dischargeable in bankruptcy and that in the event of a
10 default a stipulated judgment could be entered. Debtors
11 indicated at that hearing that they understood the terms of the
12 settlement and were willing to be bound by its terms.
13 Defendants made payments under the Settlement Agreement for
14 five years but thereafter defaulted. As a result, W3 sought
15 entry of the Stipulated Judgment in state court. For reasons
16 that were never fully explained, the state court did not enter
17 the Stipulated Judgment but rather a form judgment in the
18 principal amount of $516,000 (the “Form Judgment”). The Form
19 Judgment included the following language: “Defendants have
20 stipulated/ agreed that his [sic] judgment: (i) deems the first-
21 amended complaint true and accurate; and (ii) it arises solely
22 out of their fraudulent conduct, including breaches of fiduciary
23 duties.”
24 B. The Nondischargeability Proceeding
25 The Johnsons filed a chapter 7 petition on September 20,
26 2016, listing the judgment in favor of W3 on Schedule F in the
27 amount of $558,147. W3 filed a timely adversary proceeding
28 seeking to except its claim from discharge under §§ 523(a)(2)(a),
-6-
1 (a)(4), and (a)(6). In May 2017, W3 filed a motion seeking
2 summary judgment on its claims under §§ 523(a)(2)(A) and (a)(4)
3 only, based on the issue preclusive effect of the state court
4 judgment.
5 Debtors opposed the motion. They pointed out that the state
6 court entered the Form Judgment, not the Stipulated Judgment.
7 They also argued that the stipulation of nondischargeability of
8 the amounts due under the settlement was void as against public
9 policy and that the fraud issues were not actually litigated,
10 pointing out that the Settlement Agreement itself contained
11 neither any admission of liability nor any facts supporting a
12 fraud finding. In support of their opposition, Debtors submitted
13 declarations from Mr. and Ms. Johnson. Ms. Johnson testified
14 that neither she nor her husband had done anything alleged in the
15 complaint. She stated that W3 misunderstood that the Johnsons
16 had taken the $7,000 monthly management fee from the partnership
17 in increments as it was able to pay and that she had a ledger of
18 what had been taken for that fee. She further stated that “[t]he
19 idea that myself or Paul entered into the limited partnership
20 with an intent to defraud [W3] is simply absurd. Shawn Nevitt of
21 W3 was a customer in our La Jolla location. He heard about the
22 project and asked Paul if he could invest.” Ms. Johnson also
23 pointed out that a receiver appointed during the state court
24 litigation had monitored the partnership and, after three months,
25 had found nothing wrong. She further stated that she felt
26 bullied by the settlement judge into settling the lawsuit because
27 he told her she had no chance of winning, and the Johnsons had no
28 money to keep litigating. Mr. Johnson’s declaration essentially
-7-
1 agreed with everything stated by Ms. Johnson.
2 At the hearing on summary judgment, W3’s counsel stated that
3 he did not know why the state court judge had entered the Form
4 Judgment rather than the Stipulated Judgment because the
5 associate who had handled the matter was no longer with his firm.
6 The bankruptcy court asked W3's counsel to look into the matter
7 and submit a declaration explaining what was submitted to the
8 state court in support of the request to enter the Stipulated
9 Judgment: “whatever documents were put before Judge Prager that
10 formed the basis for his determination that – and I’m using his
11 words – that the judgment arises solely out of their, plural,
12 fraudulent conduct.” Thereafter, W3’s counsel, Paul Delmore,
13 filed a declaration2 stating in relevant part:
14 [O]n October 18, 2013, we provided Judge Prager with
the fully executed Confidential Settlement Agreement,
15 which included as exhibits the First Amended Complaint,
the Stipulated Judgment executed by Defendants, and the
16 Guaranty of Obligations and Payments signed by
Defendants.
17
6. We also included a Judicial Counsel [sic]
18 Judgment form JUD-100 together with a copy of the
Stipulated Judgment that Defendants executed as part of
19 the settlement. . . . [T]he Judicial Counsel [sic]
Judgment form mistakenly did not reference or
20 incorporate the Stipulated Judgment signed by
Defendants. Hence, when the Superior Court Clerk filed
21 the Judgment form signed by Judge Prager on October 29,
2013, the Clerk did not include the Stipulated Judgment
22 signed by Defendants as part of the entered judgment.
23 The bankruptcy court denied the motion as to the § 523(a)(4)
24 claim but granted it as to the § 523(a)(2)(A) claim, finding that
25 issue preclusion applied to the facts stipulated to by the
26
27
2
Debtors erroneously stated in their opening brief that W3
28 did not provide the requested declaration.
-8-
1 Johnsons, and those facts supported a finding of
2 nondischargeability under § 523(a)(2)(A).3
3 The Johnsons timely appealed.
4 JURISDICTION
5 The bankruptcy court had jurisdiction pursuant to 28 U.S.C.
6 §§ 1334 and 157(b)(2)(I). We have jurisdiction under 28 U.S.C.
7 § 158.
8 ISSUE
9 Whether the bankruptcy court erred in granting summary
10 judgment to W3 by giving issue preclusive effect to the state
11 court judgment as to the § 523(a)(2)(A) nondischargeability
12 claim.
13 STANDARDS OF REVIEW
14 We review de novo the bankruptcy court’s decision to grant
15 summary judgment. Plyam v. Precision Dev., LLC (In re Plyam),
16 530 B.R. 456, 461 (9th Cir. BAP 2015). We also review de novo
17 the bankruptcy court’s determination that issue preclusion was
18 available. Id. If issue preclusion was available, we review the
19 bankruptcy court’s application of issue preclusion for an abuse
20 of discretion. Id. A bankruptcy court abuses its discretion if
21 it applies the wrong legal standard, misapplies the correct legal
22 standard, or if its factual findings are illogical, implausible,
23 or without support in inferences that may be drawn from the facts
24 in the record. TrafficSchool.com, Inc. v. Edriver Inc., 653 F.3d
25
26 3
On June 28, 2017, W3 filed a first amended complaint to
27 eliminate the § 523(a)(4) and (a)(6) claims; accordingly, the
bankruptcy court’s order granting summary judgment on the
28 § 523(a)(2)(A) claim is final.
-9-
1 820, 832 (9th Cir. 2011) (citing United States v. Hinkson,
2 585 F.3d 1247, 1262 (9th Cir. 2009) (en banc)).
3 DISCUSSION
4 A. Summary Judgment Standard
5 Summary judgment may be granted “if the movant shows that
6 there is no genuine issue as to any material fact and the movant
7 is entitled to judgment as a matter of law.” Civil Rule 56(a),
8 incorporated via Rule 7056; Barboza v. New Form, Inc. (In re
9 Barboza), 545 F.3d 702, 707 (9th Cir. 2008). The trial court may
10 not weigh evidence in resolving such motions, but rather
11 determines only whether a material factual dispute remains for
12 trial. Covey v. Hollydale Mobilehome Estates, 116 F.3d 830, 834
13 (9th Cir. 1997), opinion amended on denial of rehr’g, 125 F.3d
14 1281 (Mem.). A dispute is genuine if there is sufficient
15 evidence for a reasonable fact finder to hold in favor of the
16 non-moving party, and a fact is “material” if it might affect the
17 outcome of the case. Far Out Prods., Inc. v. Oskar, 247 F.3d
18 986, 992 (9th Cir. 2001) (citing Anderson v. Liberty Lobby, Inc.,
19 477 U.S. 242, 248–49 (1986)). The initial burden of showing
20 there is no genuine issue of material fact rests on the moving
21 party. Margolis v. Ryan, 140 F.3d 850, 852 (9th Cir. 1998).
22 B. Issue Preclusion
23 In applying issue preclusion to a state court judgment, the
24 bankruptcy court must apply the forum state’s law of issue
25 preclusion. Harmon v. Kobrin (In re Harmon), 250 F.3d 1240, 1245
26 (9th Cir. 2001); In re Plyam, 530 B.R at 462. In California,
27 application of issue preclusion requires that: (1) the issue
28 sought to be precluded from relitigation is identical to that
-10-
1 decided in a former proceeding; (2) the issue was actually
2 litigated in the former proceeding; (3) the issue was necessarily
3 decided in the former proceeding; (4) the decision in the former
4 proceeding is final and on the merits; and (5) the party against
5 whom preclusion is sought was the same as, or in privity with,
6 the party to the former proceeding. In re Plyam, 530 B.R. at 462
7 (citing Lucido v. Super. Ct., 51 Cal. 3d 335, 341 (1990)). In
8 addition, California courts apply issue preclusion only if
9 application of the doctrine furthers the public policies
10 underlying the doctrine. In re Harmon, 250 F.3d at 1245. Those
11 policies include “preservation of the integrity of the judicial
12 system, promotion of judicial economy, and protection of
13 litigants from harassment by vexatious litigation . . . .”
14 Lucido, 51 Cal. 3d at 770-71.
15 It is undisputed that the issues deemed decided in the state
16 court litigation were identical to those presented in the
17 nondischargeability proceeding, that the parties were identical,
18 and that the state court judgment was final and on the merits.
19 Additionally, the bankruptcy court concluded that Debtors’
20 coercion argument did not raise a public policy challenge to
21 issue preclusion. Debtors do not challenge this conclusion on
22 appeal, except to the extent they argue that the settlement
23 documents constituted an unenforceable waiver of the discharge.
24 Thus, the only element in dispute in this appeal is the
25 “actually litigated” requirement (and, by implication, the
26
27
28
-11-
1 “necessarily decided” requirement).4 Ordinarily, stipulated
2 judgments are not given preclusive effect because the issues were
3 not actually litigated and thus this element could not be
4 satisfied. Berr v. FDIC (In re Berr), 172 B.R. 299, 306 (9th
5 Cir. BAP 1994). Where the record or judgment evidences an intent
6 by the parties for a stipulated judgment to be preclusive,
7 however, a court may give effect to that judgment. Id.; see
8 Hayhoe v. Cole (In re Cole), 226 B.R. 647, 655 (9th Cir. BAP
9 1998) (“[I]f the parties stipulated to the underlying facts that
10 support a finding of nondischargeability, the Stipulated Judgment
11 would then be entitled to collateral estoppel application.”).
12 Where a party admits liability in a stipulated judgment, that
13 party may be precluded from relitigating that liability. Cal.
14 State Auto. Ass’n Inter-Ins. Bureau v. Superior Ct., 50 Cal. 3d
15 658, 664-65 (1990).5
16 Here, Debtors contend that the bankruptcy court should not
17 have given issue preclusive effect to the Form Judgment because
18 it and the other settlement documents constituted an
19 unenforceable prepetition waiver of the discharge. While Debtors
20 are correct that the settlement documents contain language that
21
22 4
If an issue was necessarily decided in a prior proceeding,
23 it was actually litigated, but an issue may be actually litigated
without being necessarily decided. In re Harmon, 250 F.3d at
24 1248 & n.9.
25 5
Similarly, under California law, courts may apply issue
26 preclusion to a default judgment so long as the defendant was
personally served or had actual knowledge of the litigation, the
27 issue was properly raised and submitted to the court, and the
court actually determined the issue. In re Harmon, 250 F.3d at
28 1246-47.
-12-
1 could be so construed (Paragraph III.2. of the Settlement
2 Agreement), they also contain language deeming admitted the fraud
3 allegations contained in the FAC (e.g., the Stipulated Judgment
4 and the Form Judgment entered by the state court). The
5 bankruptcy court correctly disregarded the general
6 nondischargeability language but found that the Debtors’ deemed
7 admission of the facts establishing fraud liability was entitled
8 to preclusive effect.
9 1. The settlement documents deemed admitted the facts
supporting a finding of nondischargeability and thus
10 did not constitute an unenforceable prepetition waiver
of discharge.
11
12 A prepetition waiver of discharge is unenforceable as
13 against public policy. Bank of China v. Huang (In re Huang),
14 275 F.3d 1173, 1177 (9th Cir. 2002); In re Cole, 226 B.R. at 654.
15 But a party may stipulate to facts that the bankruptcy court can
16 apply in a nondischargeability action. In re Cole, 226 B.R. at
17 655 (citing Klingman v. Levinson, 831 F.2d 1292, 1296 n.3 (7th
18 Cir. 1987)). In certain narrow circumstances, however, the
19 bankruptcy court should not give preclusive effect to stipulated
20 facts. See Wank v. Gordon (In re Wank), 505 B.R. 878 (9th Cir.
21 BAP 2014).
22 In Wank, the parties settled prepetition state court
23 litigation and stipulated that if the agreed-upon sum was not
24 paid timely, a $1.1 million judgment would be entered against the
25 defendant. Id. at 881-82. The judgment provided that the
26 obligations arising from the settlement agreement would be
27 nondischargeable in bankruptcy. Id. at 882. The defendant
28 executed a declaration which stated that its purpose was to
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1 provide a factual basis to further the intent of the parties to
2 ensure that he could not discharge the debt in bankruptcy. Id.
3 Defendant testified in the declaration that (i) he had made false
4 representations to the creditors to induce them to place funds in
5 his trust account and to permit defendant to act as their primary
6 investor; (ii) he told creditors the investment would be safe and
7 that he was an attorney with expertise in such matters; and
8 (iii) he knew at the time he executed the contracts and accepted
9 the funds that there was a possibility funds could be lost but
10 did not inform creditors. Id. The settlement agreement provided
11 that the declaration would be kept in a sealed envelope by an
12 escrow agent, to be unsealed and submitted to the bankruptcy
13 court in the event defendant defaulted on the settlement and
14 filed bankruptcy. Id. at 882-83.
15 After the defendant defaulted on the settlement agreement
16 and creditors caused the stipulated judgment to be entered in
17 state court, defendant filed a chapter 7 petition. Id. at 883.
18 Creditors filed an adversary proceeding seeking to except from
19 discharge the amount due under the stipulated judgment. In that
20 proceeding, the defendant filed a second declaration in which he
21 contended that he had signed the first declaration under duress
22 and while he was under the influence of anxiety medication and
23 that he had objected to the statements but had signed the first
24 declaration because the settlement represented a substantial
25 discount from the damages alleged in the lawsuit and permitted
26 him to pay over time. He also stated that he believed his
27 statements could not be enforced against him. Id. at 884.
28 The bankruptcy court granted creditors’ motion for summary
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1 judgment on the § 523(a)(2)(A) claim, stating that although it
2 had disregarded the general nondischargeability language in the
3 settlement agreement and first declaration, debtor’s factual
4 admissions in his first declaration sufficiently supported the
5 § 523(a)(2)(A) claim to warrant summary judgment. Id. at 885-86.
6 On appeal, the Panel held that, under the unique
7 circumstances of that case, the bankruptcy court erred in giving
8 defendant’s statements preclusive effect. This was because the
9 “singular goal” of the first declaration, as set forth in the
10 document itself, was to provide a factual basis to further the
11 intention of the parties to ensure that defendant could not
12 discharge the stipulated judgment in bankruptcy. Id. at 889-90.
13 The Panel thus concluded that:
14 the reliability of the factual statements [in the first
declaration] are potentially tainted by the
15 [creditors’] motives. The document was solely intended
to ensure that Wank could not obtain effective relief
16 in bankruptcy. While, perhaps, some of Wank’s factual
statements could be trusted, to do so would require the
17 bankruptcy court to weigh the credibility of those
statements against the circumstances under which the
18 First Declaration was executed.
19 Id. at 890.
20 The Panel also noted that the first declaration was not part
21 of the stipulated judgment, but rather was “a standalone document
22 that was . . . only to be used in the event of a bankruptcy
23 filing to provide grounds for an exception to discharge.” Id. at
24 891.6 The Panel vacated the judgment and remanded.
25
6
26 The Panel also found that the bankruptcy court had
impermissibly weighed evidence and made credibility
27 determinations in the summary judgment context and noted that no
evidence in the record supported the justifiable reliance element
28 (continued...)
-15-
1 Debtors contend that this case is analogous to Wank and that
2 their factual admissions were akin to an unenforceable
3 prepetition waiver of bankruptcy protections. The bankruptcy
4 court rejected this contention, finding that Wank was
5 distinguishable. Specifically, the court found that Debtors’
6 stipulation to the facts in the state court complaint was made at
7 the time of settlement and was relied upon by the state court
8 when it entered the judgment, while the declaration in Wank was
9 only to be unsealed and presented if the debtor filed for
10 bankruptcy.
11 The bankruptcy court found that this case was more akin to
12 Son v. Park, No. C 10-00085 MHP, 2010 WL 4807089 (N.D. Cal.
13 Nov. 19, 2010). In Son, the debtor defaulted on a prepetition
14 litigation settlement and filed a bankruptcy petition. The
15 bankruptcy court lifted the stay to permit the creditor to seek
16 entry of a stipulated judgment per the terms of the settlement.
17 That judgment included fraud findings based on facts admitted by
18 the debtor at the settlement hearing and pursuant to the parties’
19 agreement that the judgment would include a fraud finding. Id.
20 at *2. In the creditor’s subsequent nondischargeability action,
21 the bankruptcy court gave issue preclusive effect to the
22 stipulated judgment, finding that it established four of the five
23 elements of a § 523(a)(2)(A) claim. The court held a trial on
24 the fifth element and entered judgment finding the debt
25 nondischargeable. Id. at *3. On appeal, the District Court held
26
27
6
(...continued)
28 of the § 523(a)(2)(A) claim. Id. at 891-95.
-16-
1 that the bankruptcy court had not erred in applying issue
2 preclusion to the stipulated judgment, nor was the judgment an
3 impermissible prepetition waiver of the discharge, because the
4 debtor had agreed at the settlement hearing that the admission of
5 fraud and findings of fact supporting fraud would be included in
6 the stipulated judgment. Id. at *7.
7 Debtors argue that, unlike the debtor in Son, they did not
8 stipulate to any liability or facts supporting fraud at the time
9 of settlement. They contend that the bankruptcy court erred when
10 it stated that Debtors’ stipulation to the facts in the state
11 court complaint were made at the time of the settlement because
12 they did not admit liability at that time. In fact, Debtors
13 explicitly denied liability in the settlement agreement. Debtors
14 also point out that no facts were stipulated to at the settlement
15 conference and that the operative settlement documents (the
16 Settlement Agreement, Stipulated Judgment, and Guarantees) “came
17 later.”
18 The facts of this case do not precisely mirror those
19 presented in Son (or in Wank), but the salient question is
20 whether the circumstances surrounding the settlement or the
21 judgment itself evidence the parties’ intent for the Stipulated
22 Judgment to have preclusive effect. In re Berr, 172 B.R. at 306.
23 Those circumstances include stipulating to facts that support a
24 finding of nondischargeability. In re Cole, 226 B.R. at 655.
25 In paragraph 9 of his declaration in support of W3's motion
26 for summary judgment, W3's counsel testified that the parties
27 intended that the settlement would be nondischargeable in
28 bankruptcy and that W3 had
-17-
1 specifically negotiated this language with Defendants
with the intent that if Defendants breached the
2 Settlement Agreement, the Stipulated Judgment entered
against them would clearly set forth a finding of fraud
3 and breach of fiduciary duty. We specifically required
these admissions from Defendants so that in the event
4 they proceeded to bankruptcy, the admission of
fraudulent conduct would prove to render the judgment
5 non-dischargeable.
6 Debtors provided no evidence to refute this testimony. Although
7 they testified in their declarations that they felt pressured to
8 settle, they did not testify that they did not understand the
9 terms of the Settlement Agreement or the Stipulated Judgment,
10 which they and their attorney signed as part of the settlement.
11 Those documents evidence their intent for the state court
12 judgment to have preclusive effect.
13 For these reasons, the bankruptcy court did not err in
14 concluding that the Stipulated Judgment was not an unenforceable
15 prepetition waiver of the discharge but was instead evidence that
16 the Debtors intended the findings incorporated into that judgment
17 to have preclusive effect in any future bankruptcy case.
18 Accordingly, the actually litigated requirement was met.
19 Although the bankruptcy court did not explicitly address the
20 “necessarily decided” requirement, the record reflects that this
21 element was also met. The Form Judgment explicitly states that
22 the judgment arose solely from Debtors’ fraudulent conduct as
23 described in the FAC. Accordingly, the bankruptcy court did not
24 err in applying issue preclusion to the state court judgment.
25 2. Debtors have not presented any other meritorious
argument supporting the conclusion that the bankruptcy
26 court erred in applying issue preclusion to the state
court judgment.
27
28 Debtors also argue that the Stipulated Judgment should not
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1 have been given preclusive effect because that judgment was never
2 entered. Instead, the state court entered the Form Judgment.
3 The Form Judgment, however, contained essentially equivalent
4 language deeming the FAC true and accurate and indicating that
5 the judgment arose solely from Debtors’ fraudulent conduct.
6 Moreover, as the bankruptcy court found, and as evidenced by
7 Mr. Delmore’s declaration testimony, Debtors’ stipulation to the
8 allegations in the FAC was before the state court when it entered
9 the Form Judgment.
10 Debtors contend that this case is similar to Cole, in which
11 the BAP held that a stipulated judgment was not entitled to
12 preclusive effect because it was based on the occurrence of
13 future events. 226 B.R. at 655. But Cole is factually
14 distinguishable: there, the underlying state court complaint did
15 not allege fraud in connection with the promissory note giving
16 rise to the debt at issue. The stipulated judgment in that case
17 provided that (i) defendant would not list the debt in any
18 bankruptcy petition or request that the debt be discharged,
19 (ii) defendant had the funds to pay the debt and plaintiff relied
20 on that representation in releasing its writ of attachment,
21 (iii) the debt was nondischargeable under § 523(a)(2)(B),
22 (iv) plaintiff would not have released the writ of attachment but
23 for the defendant’s representations of nondischargeability; and
24 (v) any attempt by defendant to discharge the debt would be an
25 admission that he obtained the release of the writ of attachment
26 under false pretenses and thus the debt would be nondischargeable
27 under § 523(a)(2)(A). Id. The Panel held that the bankruptcy
28 court did not err in declining to give issue preclusive effect to
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1 the stipulated judgment because the stipulated facts had nothing
2 to do with the merits of the state court lawsuit and would have
3 had no evidentiary effect in a § 523(a)(2) action. Id. at 656.
4 Here, in contrast, the factual admissions incorporated into
5 the state court judgment directly relate to the merits of the
6 fraud claim. Accordingly, Debtors’ reliance on Cole is
7 misplaced.
8 C. The bankruptcy court did not err in concluding that the
deemed admissions supported a finding of nondischargeability
9 under § 523(a)(2)(A).
10 Under § 523(a)(2)(A), a debt for money obtained by the
11 debtor under “false pretenses, a false representation, or actual
12 fraud” may be excepted from discharge. Summary judgment is
13 proper in considering an exception to discharge under
14 § 523(a)(2)(A) if the movant is able to show that there is no
15 genuine issue of material fact as to each of the five elements of
16 exception to discharge under that provision:
17 (1) misrepresentation, fraudulent omission or deceptive conduct
18 by the debtor; (2) knowledge of the falsity or deceptiveness of
19 his statement or conduct; (3) an intent to deceive;
20 (4) justifiable reliance by the creditor on the debtor’s
21 statement or conduct; and (5) damage to the creditor proximately
22 caused by its reliance on the debtor’s statement or conduct.
23 Turtle Rock Homeowners Ass'n v. Slyman (In re Slyman), 234 F.3d
24 1081, 1085 (9th Cir. 2000).
25 Debtors’ admissions establish all of the elements of a
26 § 523(a)(2)(A) claim. Those admissions are: (1) Cel J and the
27 Johnsons made representations to W3 that they would make the
28 required deposits into the operating reserve account and that
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1 funds would be used for the exclusive benefit of the partnership,
2 and failed to disclose that the Johnsons intended to use Sushi on
3 the Rock assets and funds for their own personal benefit (false
4 representation); (2) at the time the representations were made,
5 defendants knew they were false and/or made the representations
6 recklessly and without regard for their truth (knowledge of
7 falsity); (3) Defendants intended to deceive W3 by concealing
8 their intent to not make the required deposits and distributions
9 and intended that W3 rely on their representations in making
10 their capital contribution to Sushi on the Rock (intent to
11 deceive); (4) W3 reasonably relied on the above representations
12 in that it would not have executed the partnership agreement if
13 it had known that the deposits and distributions would not be
14 made and that assets and funds would be used for the personal
15 benefit of Defendants (justifiable reliance);7 and (5) as a
16 direct and proximate result of the aforementioned acts, W3 has
17 been damaged in an amount to be proven at trial (damage
18 proximately caused by debtor’s statement or conduct).
19 Debtors do not dispute that, once the bankruptcy court
20 concluded that it was appropriate to give preclusive effect to
21 the state court judgment, the relevant allegations of the FAC –
22 which were deemed admitted – established all the elements of a
23 § 523(a)(2)(A) claim. And we find no error in the bankruptcy
24 court’s application of the law to the facts.
25
7
26 Reasonable reliance is a more exacting standard than
justifiable reliance; accordingly, a finding of reasonable
27 reliance meets the lower standard of justifiable reliance.
Tallant v. Kaufman (In re Tallant), 218 B.R. 58, 69 n.15 (9th
28 Cir. BAP 1998).
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1 CONCLUSION
2 For the reasons explained above, we AFFIRM the bankruptcy
3 court’s grant of W3's motion for summary judgment on its
4 § 523(a)(2)(A) claim.
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