In re: Robert Edward Zuckerman

FILED
APR 10 2020
SUSAN M. SPRAUL, CLERK
U.S. BKCY. APP. PANEL
ORDERED PUBLISHED OF THE NINTH CIRCUIT
UNITED STATES BANKRUPTCY APPELLATE PANEL
OF THE NINTH CIRCUIT
In re: BAP No. CC-19-1200-TaFS
ROBERT EDWARD ZUCKERMAN, Bk. No. 1:18-bk-11150-VK
Debtor. Adv. No. 1:18-ap-01081-VK
ROBERT EDWARD ZUCKERMAN,
Appellant,
v. OPINION
HENRY CRIGLER; EDWARD P. ALBINI; CHRIS
BOWERMAN; HENRY P. CRIGLER; K.
OWYOUNG CRIGLER; GARY DEZORZI;
ERHARD YORK, TRUSTEE; GRAHAM
GETTEMY; VERN FUNG; EDWARD KEANE;
KATHERINE MANN; FREDERICK MANN; JIM
NORD, MEIN TRUST; GARY RICIOLI; MARY
LOU SCHMIDT; CHARLES SEBRANEK; LINDAY
SINCLAIR; GREGG VERNON;
MATTHEW ZDANEK; PATRICIA BARNES;
KEN BOWERMAN; DALE DAVIS; JACINDA
DUVAL; LOUISE ESCHER YORK; ROBERT P.
GILMAN; BILL HING; GARY HOLBROOK;
LILLIAN LAPHAM; VITO LOVERO; JIM NORD,
PATRICK FAMILY TRUST; EVELINA DALE
PERITORE; JUSTIN POENG; LEON SANDERS;
MARK SCHULTE; RICHARD SEVERSEN;
WALTER SPIRIDONOFF; CARMEN VIOLIN;
NANSI WEIL,
Appellees.
Argued and Submitted on February 27, 2020
at Pasadena, California
Filed – April 10, 2020
Appeal from the United States Bankruptcy Court
for the Central District of California
Honorable Victoria S. Kaufman, Bankruptcy Judge, Presiding
Appearances: Kathryn M. Davis argued for appellant; Edward
McCutchan, Jr. of Sunderland McCutchan, LLP on brief
for appellees Edward P. Albini, Henry Crigler, Chris
Bowerman, Henry P. Crigler, K. Owyoung Crigler, Gary
DeZorzi, Erhard York, Trustee, Graham Gettemy, Vern
Fung, Edward Keane, Katherine Mann, Frederick Mann,
Jim Nord, Mein Trust, Gary Ricioli, Mary Lou Schmidt,
Charles Sebranek, Linday Sinclair, Gregg Vernon,
Matthew Zdanek, Patricia Barnes, Ken Bowerman, Dale
2
Davis, Jacinda Duval, Louise Escher York, Robert P.
Gilman, Bill Hing, Gary Holbrook, Lillian Lapham, Vito
Lovero, Jim Nord, Patrick Family Trust, Evelina Dale
Peritore, Justin Poeng, Leon Sanders, Mark Schulte,
Richard Seversen, Walter Spiridonoff, Carmen Violin, and
Nansi Weil.
Before: TAYLOR, FARIS, and SPRAKER, Bankruptcy Judges.
TAYLOR, Bankruptcy Judge:
INTRODUCTION
Debtor Robert E. Zuckerman appeals from the bankruptcy court’s
summary judgment order (“Order”) excepting from discharge under
§ 523(a)(2)(A)1 a debt for fraud and elder abuse reduced to judgment in
state court. We agree with the bankruptcy court’s determination that
Appellees were entitled to summary judgment based on the preclusive
effect of the state court’s judgment. Therefore, we AFFIRM.
1
Unless specified otherwise, “chapter “and “section” references are to the
Bankruptcy Code, 11 U.S.C. §§ 101–1532, “Rule” references are to the Federal Rules of
Bankruptcy Procedure, “Civil Rule” references are to the Federal Rules of Civil
Procedure, and “CCP” references are to the California Code of Civil Procedure.
3
FACTS2
A. The State Court Action and Judgment
In 2009, Appellees and others (collectively, “Plaintiffs”) sued
Mr. Zuckerman (“State Court Action”), beginning a seven-year slog to hold
him accountable for intentional misrepresentation, concealment (fraud),
promises without intent to perform, conspiracy to defraud, and elder
abuse. He and his counsel, Raul Garcia, were strategically absent
throughout the state court litigation, failing to comply with a staggering
number of discovery requests and sanctions orders3—possibly to duck
liability, but ultimately with serious consequences. One such order
(“Admissions Order”) deemed the following admitted by Mr. Zuckerman
for his failure to respond to requests for admissions:
1. . . . Zuckerman engaged in fraud [–] intentional
misrepresentation as alleged in the second amended
2
Mr. Zuckerman omitted from his excerpts of the record the bankruptcy court’s
prior ruling (“Ruling”) that included its reasoning for entering the Order on appeal and
key evidentiary rulings. As the omitted Ruling is a necessary portion of the record, we
are entitled to presume that its contents are harmful to his position and to affirm or
dismiss his appeal summarily. See Rule 8018(b)(1); Cmty. Commerce Bank v. O'Brien (In re
O'Brien), 312 F.3d 1135, 1137 (9th Cir. 2002); Gionis v. Wayne (In re Gionis), 170 B.R. 675,
680–81 (9th Cir. BAP 1994). Nonetheless, we obtained a copy of the Ruling and will take
judicial notice of it and other documents filed in the bankruptcy court’s dockets, as
appropriate. See Atwood v. Chase Manhattan Mortg. Co. (In re Atwood), 293 B.R. 227, 233
n.9 (9th Cir. BAP 2003).
3
Appellees and a third-party to this appeal, Richard Abel, detailed the
unanswered discovery and sanctions orders in filings in Adv. Proc. Nos.
1:18-ap-01081-VK and 1:18-ap-01086-VK.
4
complaint[]. . . .
2. . . . Zuckerman engaged in fraud – concealment as alleged in
the second amended complaint[] . . . .
3. . . . Zuckerman engaged in fraud – promise without intent to
perform as alleged in the second amended complaint[] . . . .
4. . . . Zuckerman engaged in elder abuse as alleged in the
second amended complaint[] . . . .
5. . . . Zuckerman engaged in a conspiracy to defraud as alleged
in the second amended complaint[] . . . .
In early 2015, Appellees tried their case against Mr. Zuckerman.
Neither he nor Mr. Garcia showed up for trial, and the state court entered
judgment against him. The court later vacated the judgment per
Mr. Garcia’s CCP § 473 request for relief therefrom.
In late 2016, the court again held trial. Mr. Zuckerman did not
appear, despite notices to appear in lieu of subpoena. While Mr. Garcia
appeared, he did so solely to stop trial through various motions.
First, he moved to dismiss the case because Appellees did not bring it
to trial within the five-year period prescribed by CCP § 583.310. The state
court denied the motion because Mr. Zuckerman had previously agreed
that CCP § 583.310 would not apply. Next, he requested a stay while he
sought a writ of prohibition restraining the court from trying the case. The
court denied the request. Finally, he moved to withdraw as
5
Mr. Zuckerman’s counsel, stating that he was not ready to proceed with
trial. The court denied the motion and directed the parties to proceed with
the trial.
The court asked where Mr. Zuckerman was. Mr. Garcia responded
that “strategically our plan was not to proceed with the trial,” and
“tactically, we were going to ask for a stay.” (Emphasis added.) He also
indicated that he believed Mr. Zuckerman “just came out of surgery on
Friday.” Then, after confirming that he would not be arrested for leaving,
he left the courtroom.
In Mr. Zuckerman’s absence, the court held an uncontested trial
under CCP § 594, which included witness testimony and documentary
evidence.
The court entered judgment against Mr. Zuckerman the next day. It
later amended the judgment (“Judgment”) to increase the total award to
$15,135,096 to account for attorney’s fees and costs. The Judgment notes
Mr. Zuckerman’s deemed admissions and provides that, after the evidence
at trial, the court renders judgment against Mr. Zuckerman, “who engaged
in a joint venture to intentionally, purposefully and maliciously defraud
each of the plaintiffs in this matter finding damages under the plaintiffs’
third amended complaint’s causes of action for intentional
misrepresentation, concealment, promise without intent to perform and
elder abuse[.]” The Judgment included findings related to the fraud.
6
Mr. Garcia filed an appeal, which was dismissed for failure to file
required documents.
B. The Nondischargeability Action and Summary Judgment
Mr. Zuckerman filed for bankruptcy about a year later. Appellees
filed an adversary complaint to except from his discharge the debt owed to
them under the Judgment, pursuant to § 523(a)(2)(A).
They later moved for summary judgment, arguing that the Judgment,
together with the doctrine of issue preclusion, entitled them to judgment as
a matter of law. Mr. Zuckerman opposed.
Following argument at two hearings, the bankruptcy court relied on
issue preclusion and entered its Order granting Appellees summary
judgment. Mr. Zuckerman appealed.
JURISDICTION
The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334 and
157(b)(1) and (b)(2)(I). We have jurisdiction under 28 U.S.C. § 158,
notwithstanding that the bankruptcy court did not memorialize its
judgment in a separate document as required by Civil Rule 58(a), made
applicable by Rule 7058. The parties waived the separate-document
requirement, and 150 days have elapsed since the bankruptcy court entered
its Order. See Fed. R. Bankr. P. 8002(a)(5)(A)(ii); Bankers Tr. Co. v. Mallis, 435
U.S. 381, 387-88 (1978). And “[t]he court’s failure to comply with the
separate-document requirement of Rule 58(a). . . does not affect the validity
of an appeal.” Fed. R. Bankr. P. 8002 advisory committee’s note to 2018
amendment.
7
ISSUE
Did the bankruptcy court err in granting summary judgment under
§ 523(a)(2)(A) based on issue preclusion?
STANDARDS OF REVIEW
We review de novo a bankruptcy court’s decision to grant summary
judgment and except a debt from discharge under § 523. Black v. Bonnie
Springs Family Ltd. P’Ship (In re Black), 487 B.R. 202, 210 (9th Cir. BAP 2013).
We also review de novo a bankruptcy court’s determination that issue
preclusion was available. Id. If issue preclusion is available, we then review
the application for an abuse of discretion. Id. Under that standard, we
reverse where the bankruptcy court applied the wrong legal standard, it
misapplied the correct legal standard, or its factual findings are illogical,
implausible, or without support in inferences that may be drawn from the
facts in the record. See TrafficSchool.com, Inc. v. Edriver Inc., 653 F.3d 820, 832
(9th Cir. 2011).
We may affirm on any ground supported by the record. In re Black,
487 B.R. at 211.
DISCUSSION
Summary judgment is appropriate when the pleadings and
supplemental materials show that there is no genuine issue as to any
material fact and the moving party is entitled to judgment as a matter of
law. Roussos v. Michaelides (In re Roussos), 251 B.R. 86, 91 (9th Cir. BAP
8
2000). A properly-supported summary judgment motion cannot be
defeated by the mere existence of some alleged factual dispute. Id. The
requirement is that there be no genuine issue of material fact. Anderson v.
Liberty Lobby, Inc., 477 U.S. 242, 247-48 (1986). Only disputes over facts that
might affect the outcome of the lawsuit may defeat a summary judgment
motion. Id. at 248. That is, if the evidence is such that a reasonable jury
could return a verdict for the nonmoving party, then the dispute over a
material fact is genuine. Id.The issue preclusive effect of a state court judgment may be the basis
for granting summary judgment in a dischargeability proceeding. See
Grogan v. Garner, 498 U.S. 279, 284-85 & n.11 (1991). Federal courts “must
give to a state-court judgment the same preclusive effect as would be given
that judgment under the law of the State in which the judgment was
rendered.” Migra v. Warren City Sch. Dist. Bd. of Educ., 465 U.S. 75, 81 (1984).
Thus, we apply California law.
In California, issue preclusion prevents parties from re-litigating an
issue if: (1) the issue is identical to that decided in a former proceeding;
(2) the issue was actually litigated in the former proceeding; (3) the issue
was necessarily decided in the former proceeding; (4) the decision in the
former proceeding is final and on the merits; and (5) the party against
whom preclusion is sought is the same as, or in privity with, the party to
the former proceeding. Lucido v. Super. Ct., 51 Cal. 3d 335, 341-43 (1990).
9
Even if all five requirements are satisfied, however, its application must be
consistent with the public policies of “preservation of the integrity of the
judicial system, promotion of judicial economy, and protection of litigants
from harassment by vexatious litigation[.]” Id. at 343.
The party asserting issue preclusion bears the burden of proving all
the requisites for its application. Kelly v. Okoye (In re Kelly), 182 B.R. 255, 258
(9th Cir. BAP 1995). To sustain this burden, the party must introduce a
record sufficient to reveal the controlling facts and the exact issues litigated
in the prior action. Id. Any reasonable doubt as to what was decided in the
prior action will weigh against applying issue preclusion. Id.We need not, and do not, address the bankruptcy court’s
unchallenged determination that the fourth (decision is final) and fifth
(same parties) issue preclusion criteria are met. And we conclude that
Appellees produced evidence showing that there is no genuine issue as to
any material fact that the other criteria are met; namely, that judgment was
entered in their favor against Mr. Zuckerman on actual fraud claims after
trial. Mr. Zuckerman did not dispute the validity of their evidence. Nor did
he produce affirmative evidence that would demonstrate that a genuine
issue of material fact exists regarding the entry of judgment for actual fraud
after trial or that application of issue preclusion would contravene public
policy. Thus, the bankruptcy court properly granted summary judgment
based on issue preclusion.
10
A. There is an “identity of issues.”
Taking the disputed issue preclusion criteria in turn, the first
(identical issue) is met. Section 523(a)(2)(A) provides that a debt may be
excepted from discharge to the extent it was obtained by “false pretenses, a
false representation, or actual fraud, other than a statement respecting the
debtor’s or an insider’s financial condition[.]” Section 523(a)(2)(A) requires
proof by a preponderance of the evidence that: (1) the debtor made the
representations; (2) at the time the debtor knew they were false; (3) the
debtor made them with the intention and purpose of deceiving the
creditor; (4) the creditor relied on such representations; and (5) the creditor
sustained the alleged loss and damage as the proximate result of the
representations having been made. Lee v. Tcast Commc’ns, Inc. (In re Jung
Sup Lee), 335 B.R. 130, 136 (9th Cir. BAP 2005).
Actual fraud under California law mirrors these elements, as follows:
(1) a misrepresentation (false representation, concealment, or
nondisclosure); (2) knowledge of falsity; (3) intent to defraud (i.e., to induce
reliance); (4) justifiable reliance; and (5) resulting damage. Engalla v.
Permanente Med. Grp., Inc., 15 Cal. 4th 951, 974 (1997). Mirroring one
another, an actual fraud finding satisfies the “identical issue” criteria for
issue preclusion in a § 523(a)(2)(A) action. 4 In re Jung Sup Lee, 335 B.R. at
136. In this case, there is an “identity of the issues” because the Judgment
4
As explained infra, Mr. Zuckerman filed an unsolicited supplemental brief that
we decline to consider. The brief contends, inter alia, that actual fraud under California
law does not mirror actual fraud under § 523(a)(2)(A). His contention runs contrary to
established precedent and is rejected.
11
explicitly provides that Mr. Zuckerman is liable for fraud.
Nevertheless, Mr. Zuckerman argues on appeal that in finding issue
preclusion applies, the bankruptcy court impermissibly relied on a general
finding of fraud that was imputed to him solely on a conspiracy theory
basis in the absence of a specific finding of a misrepresentation by him. We
believe he is essentially arguing that the elements of actual fraud are not
the same as those under § 523(a)(2)(A) in this case. It is not evident from
the excerpts of record that he adequately raised this argument to the
bankruptcy court. We therefore need not consider it. Stewart v. U.S.
Bancorp, 297 F.3d 953, 956 n.1 (9th Cir. 2002).
But even if he had raised it in the bankruptcy court, his argument
fails; the Judgment is against him alone, makes clear that he was the sole
defendant at the time of trial, and finds that he was “the central figure in
charge” of the fraudulent scheme. Moreover, and contrary to
Mr. Zuckerman’s urging, the Judgment does include findings relating to
his fraudulent misrepresentations to Plaintiffs. For example, the state court
explicitly found that he fraudulently obtained $6,435,000 in loans from
Plaintiffs with no intent to use the money in a development project or to
repay their loans and, in fact, no part of the loans were ever used in any
manner for the project. And the state court explicitly found that he
overvalued the security for the loans through his misrepresentations and
concealment of their true worth.
12
Mr. Zuckerman further complains that Appellees failed to allege and
argue that the specific issues to be preclusively determined by the
bankruptcy court were identical to those decided in the State Court Action.
We disagree; Appellees argued in their summary judgment motion that the
§ 523(a)(2)(A) elements were “established by the four corners” of the
Judgment, which they had incorporated by reference in their complaint.
B. The issues were “actually litigated.”
As for the “actually litigated” requirement, Mr. Zuckerman argues
that the Judgment is fundamentally a default judgment because (1) his
liability was allegedly largely based on defaulted admissions that included
conclusions of law; and (2) he was allegedly abandoned by his counsel at
the time of trial.5 And he contends that as a default judgment, it has no
preclusive effect because the state court did not make express findings
upon fraud allegations. We disagree.
1. The state court held an uncontested trial.
This is not a default scenario; while Mr. Zuckerman and his counsel
chose not to attend trial, Mr. Zuckerman had answered the operative
5
While unclear in his opening brief, Mr. Zuckerman seems to suggest in his reply
brief that the alleged abandonment is relevant to both the “actually litigated” and
public policy criteria. We only address it in the public policy portion of this
memorandum because, as discussed infra, the state court was obliged to treat the trial as
nothing less than an actual trial in light of Mr. Zuckerman’s participation in the
proceedings, including answering the operative complaint and appearing through
counsel at the outset of trial. And to the extent that he submits the state court treated it
as anything less, his window to challenge the Judgment on that basis closed prepetition.
There having been an actual trial on Appellees’ fraud claims, the issues were “actually
litigated” notwithstanding any alleged abandonment.
13
complaint, participated in the litigation before trial, and received actual
notice of trial and a subpoena for his attendance at trial. See Jorge v. Mannie
(In re Mannie), 258 B.R. 440, 445 n.3 (Bankr. N.D. Cal. 2001) (“A judgment
after trial is not a default judgment simply because the defendant fails to
appear at trial.”).
Appellees exercised their only remedy for Mr. Zuckerman’s
absence–they moved the state court to proceed with the trial in absentia
under CCP § 594 and introduced their evidence to sustain their causes of
action. See Wilson v. Goldman, 274 Cal. App. 2d 573, 576 (1969) (“Where the
defendant who has answered fails to appear for trial the plaintiff’s sole
remedy is to move the court to proceed with the trial and introduce
whatever testimony there may be to sustain the plaintiff’s cause of action.”
(citation and internal quotation marks omitted)). Sections 585 and 594 of
the Code of Civil Procedure do not authorize the entry of default in the
event a defendant does not appear at the time an action is called for
hearing where an answer is on file. Id. Thus, the uncontested trial held by
the state court was only uncontested in the sense that Mr. Zuckerman was
not present to participate. See id. at 577 n.1. His answer was on file and was
effective, and Appellees were required to prove all the essential
controverted allegations of their complaint. Id.Because it would have been improper for the state court to strike
Mr. Zuckerman’s answer and enter default, Appellees’ fraud claims were
14
necessarily “actually litigated” under CCP § 594 and must have been
resolved in their favor by the Judgment. See Thomas v. Housing Auth. of the
Cty. of L.A., No. CV 04-6970MMMRCX, 2005 WL 6136432, at *11 (C.D. Cal.
June 3, 2005); accord Garner v. Lehrer (In re Garner), 56 F.3d 677, 680 (5th Cir.
1995) (holding, with respect to a Texas judgment entered after a
post-answer default and uncontested trial at which evidence was
presented, that “[a]ccording to Texas law, the issues were properly raised
and actually litigated; accordingly, we find they were fully and fairly
litigated for collateral estoppel purposes”), abrogation on other grounds
recognized in Caton v. Trudeau (In re Caton), 157 F.3d 1026 (5th Cir. 1998).
2. The Judgment’s reference to admissions is irrelevant.
Mr. Zuckerman argues that the record raises a material question as to
whether the Judgment was actually the result of an uncontested trial
because it referenced his deemed admissions of certain conclusions of law
and, he argues, the state court relied on such admissions in the face of
insufficient evidence at trial. We reject these arguments.
As an initial matter, the bankruptcy court was not required to
question how the state court reached its decision; that type of inquiry
would amount to an impermissible collateral attack on the Judgment. See
Lopez v. Emerg. Serv. Restoration, Inc. (In re Lopez), 367 B.R. 99, 106 (9th Cir.
BAP 2007) (“Under state law, a litigant may not collaterally attack a final
judgment for nonjurisdictional errors.”). But see Younie v. Gonya (In re
15
Younie), 211 B.R. 367, 375 (9th Cir. BAP 1997) (“A state court judgment is
subject to collateral attack if the judgment was procured by extrinsic
fraud.”). Mr. Zuckerman squandered his opportunities to challenge the
Admissions Order and Judgment in that regard—he failed to timely:
(1) seek relief from the deemed admissions; (2) move for relief from
judgment or a new trial; or (3) prosecute his appeal. See CCP §§ 473(b), 657,
659(a), and 2033.300.
Moreover, the Judgment does not make clear that all the fraud causes
of action were decided on the sole basis of the deemed admissions; it
merely recites that the Admissions Order deemed Mr. Zuckerman to have
admitted to fraudulent intentional misrepresentation, fraudulent
concealment, fraudulent promise without intent to perform, and
conspiracy to defraud, all as alleged in the second amended complaint.6
Further, to the extent that the state court relied solely on admitted
conclusions of law, Mr. Zuckerman provided no authority that would
foreclose the application of issue preclusion on that basis under California
law.7 We see no reason why it would be foreclosed. California law provides
6
In his reply brief, Mr. Zuckerman untimely argues for the first time that the
Judgment improperly relied on the Admissions Order because the second amended
complaint was superseded by a third amended complaint. However, the latter
complaint apparently contained nearly identical allegations, except that it alleged
damages in dollar amounts. And again, challenges to the validity of the Judgment
should have been made long ago.
7
In fact, he asserts in his reply brief that “it is unclear whether under California
law admissions obtained as a result of a procedural penalty in a contested action (rather
than a default judgment), are sufficient to satisfy the ‘actually litigated’ requirement.”
16
that a party may, in writing, “request that any other party to the action
admit . . . the truth of specified matters of fact, opinion relating to fact, or
application of law to fact. A request for admission may relate to a matter that
is in controversy between the parties.” CCP § 2033.010 (emphasis added).
Any matter so admitted “is conclusively established against the party
making the admission in the pending action[.]” CCP § 2033.410(a). A
judgment can be properly entered based on admitted conclusions of law.
See Wilcox v. Birtwhistle, 21 Cal. 4th 973, 982-83 (1999) (“Parties often
propound requests for admission covering the ultimate facts of the case
that, if admitted, are outcome determinative. The propounding party who
gets ‘lucky’ and receives no response then notices a motion for a deemed
admitted order . . . . If the propounding party does not receive a response
by the hearing . . . he ‘hits the jackpot’ and ‘wins’ an irrevocable deemed
admitted order disposing of the lawsuit.”); see also Grace v. Mansourian, 240
Cal. App. 4th 523, 528-29 (2015). And a judgment rendered based on
deemed admissions can be given preclusive effect in subsequent
proceedings. As explained by a California Court of Appeal in the context of
a defensive application of issue preclusion,
[the defendant would] not [be] seeking to utilize the request for
admissions and failure to respond [by plaintiffs], but rather it
[would be] utilizing the former [judgment] establishing that
[defendant] was not liable to plaintiffs. The request for
admissions and failure to respond are not truly relevant to the
present motion for summary adjudication of issues since there
is presently no issue as to their effect. That issue was
determined in a prior proceeding.
17
Allis-Chalmers Corp. v. Super. Ct., 168 Cal. App. 3d 1155, 1159 (1985). Cf.
Johnson v. W3 Inv. Partners (In re Johnson), BAP No. SC-17-1194-LBF, 2018
WL 1803002, at *9 (9th Cir. BAP Apr. 16, 2018) (deemed admissions in a
stipulated judgment may be given preclusive effect in a § 523(a)(2)(A)
proceeding).
Mr. Zuckerman’s best argument would be to analogize to federal
preclusion law under which a judgment’s reliance on deemed admissions
is problematic if the admissions were obtained from a wholly inactive
litigant. For example, in Internal Revenue Service v. Palmer (In re Palmer), 207
F.3d 566 (9th Cir. 2000), the Ninth Circuit considered “whether a fraud
determination by the Tax Court, which resulted from a [debtor’s] failure to
controvert the Commissioner’s allegations of fraud and otherwise to
participate in the proceedings, collaterally estop[ped him] from contesting
the fraud in a subsequent bankruptcy proceeding.” Id. at 567. The debtor
had initiated proceedings to obtain a redetermination of his tax liability,
and the IRS filed an answer that included affirmative allegations of tax
fraud. Id. The debtor did nothing thereafter. He fatally failed to respond to
the fraud allegations and oppose the IRS’s motion for an order deeming the
allegations admitted. The Tax Court granted the IRS’s motion. The IRS then
moved for summary judgment, which the debtor also failed to oppose. The
Tax Court granted summary judgment and found that the debtor had
18
engaged in tax fraud based on the deemed admissions. When the debtor
subsequently sought to discharge his income tax debts in bankruptcy, the
IRS asserted issue preclusion as a bar. The Ninth Circuit concluded that
issue preclusion was not available because the debtor’s “‘deemed
admissions’ came at too incipient a stage of litigation that he had
abandoned at the outset to permit a conclusion that the fraud issue was
‘actually litigated.’” Id. at 568.
But in this case, Mr. Zuckerman did not abandon the State Court
Action. He participated in the litigation by filing an answer with
affirmative defenses, a cross-complaint, demurrers, and other motions, and
by appearing telephonically or through counsel at case conferences and at
the commencement of trial. Therefore, his failure to contest the discovery
sanctions motion, to seek to set aside the deemed admissions, and to
personally appear at trial should not impact the preclusive effect of the
Judgment. See Thomas, 2005 WL 6136432, at *12 n.39.
3. The “express findings” rule is inapplicable.
Mr. Zuckerman also argues that issue preclusion cannot be applied
because the state court failed to make “express findings” as to each element
necessary under § 523(a)(2)(A). Issues are “actually litigated” in a default
judgment scenario only where either (1) the record shows an express
finding upon an allegation for which preclusion is sought; or (2) the court
in the prior proceeding necessarily decided the issue. See Baldwin v.
19
Kilpatrick (In re Baldwin), 249 F.3d 912, 919 (9th Cir. 2001). This “express
findings” doctrine is inapplicable; the Judgment is not a default judgment.
C. The issues were “necessarily decided.”
Even if it were a default judgment, we need not address the
sufficiency of the state court’s findings because it necessarily decided the
issues. Id. The Judgment provides at several places that Mr. Zuckerman is
liable for fraud and awarded punitive damages. The Judgment “necessarily
included a determination of all of the facts required for actual fraud under
California law.” In re Younie, 211 B.R. at 374.
Because the identical issues were actually litigated and necessarily
decided, we conclude that the bankruptcy court did not err in determining
issue preclusion was available.
D. Applying preclusion does not contravene public policy.
Neither did the bankruptcy court abuse its discretion in applying
issue preclusion. “[T]hree fundamental policies . . . support the application
of issue preclusion in appropriate cases: ‘preservation of the integrity of the
judicial system, promotion of judicial economy, and protection of litigants
from harassment by vexatious litigation.’“ Bouzaglou v. Haworth (In re
Bouzaglou), BAP No. CC-17-1253-SKuF, 2018 WL 4062299, at *8 (9th Cir.
BAP Aug. 13, 2018) (quoting Lucido, 51 Cal. 3d at 343). “[T]he trial court’s
decision to apply issue preclusion ultimately is a matter of discretion,
which turns on whether its application is consistent with these policies.” Id.20
Mr. Zuckerman asserts that the bankruptcy court’s application of
issue preclusion contravened public policy because his attorney
“abandoned” him at trial. And he urges (for the first time in his reply brief)
that due process militates against giving preclusive effect to the Judgment
due to the “abandonment.” But “[d]ue process demands only that litigants
have the opportunity to be heard, not that they avail themselves of that
opportunity. The due process rights to notice and hearing prior to a civil
judgment are subject to waiver.”Garamendi v. Golden Eagle Ins. Co., 116 Cal.
App. 4th 694, 706 n.4 (2004) (citation and internal quotation marks
omitted).
Here, the record suggests that Mr. Zuckerman was aware of
Mr. Garcia’s strategy at trial (i.e., to move for a case stay or dismissal) and
chose to gamble that Mr. Garcia would prevail, obviating his obligation to
attend trial. But he lost that bet. The court stated that it believed
Mr. Garcia’s exit was a “tactical maneuver, which he may have discussed
or not discussed with Mr. Zuckerman, to confound the court proceedings
for whatever reason they might have.” Such maneuvering was consistent
with Messrs. Zuckerman and Garcia’s prior delay tactics.
Based on this record, the bankruptcy court correctly noted that
[e]ven if [Mr. Zuckerman] was unaware that Mr. Garcia would
move to withdraw at the time, there was a risk that trial would
proceed, yet [he] decided not to appear. Disregarding a
judgment on this basis would improperly encourage
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defendants not to appear at trial and subsequently to attack the
judgment on the basis that they did not have an opportunity to
litigate their defense.
Thus, applying issue preclusion preserved the integrity of the judicial
system and did not violate Mr. Zuckerman’s due process rights. He has, at
best, a potential malpractice claim against Mr. Garcia. See Las Vegas Land &
Dev. Co., LLC v. Wilkie Way, LLC, 219 Cal. App. 4th 1086, 1093 (2013).
Further, Appellees would be prejudiced if they were required to retry
the issues after litigating the State Court Action for seven years. Moreover,
the integrity of the judicial system depends on federal courts giving full
faith and credit to state court judgments. It would be a waste of judicial
resources for the bankruptcy court to conduct yet another trial.
For all these reasons, the bankruptcy court did not abuse its
discretion in applying issue preclusion to the Judgment.
E. Summary judgment in favor of all Appellees was proper.
Mr. Zuckerman claims that the bankruptcy court erred in granting
summary judgment in favor of fourteen of the Appellees (“14 Appellees”)
who allegedly either were dismissed from the State Court Action or
assigned their claims to Richard Abel—a plaintiff in a separate
nondischargeability action against Mr. Zuckerman. In opposing summary
judgment, Mr. Zuckerman first argued that judgment was not proper as to
the 14 Appellees on the alleged basis that they had been dismissed from the
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State Court Action prior to entry of the Judgment. But the record before the
bankruptcy court did not support his argument.8 The record merely
consisted of: (1) the 14 Appellees’ 2012 request for voluntary dismissal; and
(2) the state court’s 2014 order denying Mr. Zuckerman’s demurrer in
which it noted that certain unnamed plaintiffs had transferred their claims
to Mr. Abel, but that the assignments had no effect on the viability of such
claims as held by Mr. Abel.
Mr. Abel proffered the only evidence regarding potential
assignments or dismissals. The bankruptcy court ruled much of this
evidence inadmissible. And to the extent admissible, the evidence predated
the Judgment. It was not improper for the bankruptcy court to rely on the
face of the Judgment, which unequivocally determined Mr. Zuckerman
liable to the 14 Appellees for fraud. Mr. Abel, who is not a party to this
appeal but who has timely filed his own nondischargeability action, must
seek relief before the state court to address any mistake he perceives in the
Judgment regarding assigned claims. The dispute regarding who owns the
claims is between the 14 Appellees and Mr. Abel, not Mr. Zuckerman.
F. Mr. Zuckerman’s request to file a supplemental brief is denied.
After oral argument, Mr. Zuckerman filed a request to file a
supplemental brief. Rule 8014(f) governs such a request. We deny the
8
Mr. Zuckerman had ample time to proffer evidence in support of his argument;
the court continued the hearing for that purpose.
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request because we did not ask for supplemental briefing, the request does
not meet the requirements of Rule 8014(f), and the supplemental brief does
not bring any new legal authority to the attention of the Panel.
Even if we were to consider the briefing, it would not change any of
the conclusions that we have reached in this memorandum. In the briefing,
Mr. Zuckerman implores us to conclude that the bankruptcy court erred in
giving the Judgment preclusive effect because Appellees did not include in
their summary judgment motion their state court complaint upon which
the Judgment was entered. He argues that by omitting the complaint from
the summary judgment papers, Appellees failed to meet their burden to
show that there was no genuine issue that the state court found
Mr. Zuckerman liable for actual fraud as opposed to some other type of
fraud that may not require proof of the same elements as § 523(a)(2)(A)
fraud. We disagree.
As the moving party, Appellees bore the initial burden of production
as to each material fact upon which they had the burden of persuasion at
trial; their showing must have been sufficient for the bankruptcy court to
hold that no reasonable trier of fact could find other than for them. See
Anderson, 477 U.S. at 248. They met this burden by introducing a 14-page
Judgment that contained detailed findings that Mr. Zuckerman was liable
for intentional misrepresentation, concealment (fraud), promises without
intent to perform, conspiracy to defraud, and elder abuse and that awarded
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Appellees compensatory and California Civil Code § 3294 punitive
damages for such fraud.
Where, as here, “the moving party has carried its burden under Civil
Rule 56(c), its opponent must do more than simply show that there is some
metaphysical doubt as to the material facts.” Matsushita Elec. Indus. Co., Ltd.
v. Zenith Radio Corp., 475 U.S. 574, 586 (1986). “The mere existence of a
scintilla of evidence . . . will be insufficient; there must be evidence on
which the jury could reasonably find for [the opposing party].” Anderson,
477 U.S. at 252. The opposing party cannot “rest upon the mere allegations
or denials of [its] pleading but must instead produce evidence that sets
forth specific facts showing that there is a genuine issue for trial.” Estate of
Tucker ex rel. Tucker v. Interscope Records, Inc., 515 F.3d 1019, 1030 (9th Cir.
2008) (internal citation and quotation marks omitted). And inferences are
not drawn out of thin air; the opposing party must produce a factual
predicate from which the inference may be drawn. Richards v. Nielsen
Freight Lines, 602 F. Supp. 1224, 1244-45 (E.D. Cal. 1985), aff’d, 810 F.2d 898,
902 (9th Cir. 1987).
Here, Mr. Zuckerman inadequately opined that the fraud determined
in the Judgment could have been based on constructive fraud, vicarious
liability/alter ego, or joint venture/agency without providing any evidence
that the Judgment was for anything other than actual fraud. If Appellees in
fact had pleaded a species of fraud other than actual fraud in their
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operative state court complaint, then Mr. Zuckerman could have, should
have, and almost certainly would have submitted the complaint to the
bankruptcy court in opposition to Appellees’ summary judgment motion.
Without doing so, he simply raised an unsupported “metaphysical doubt”
as to the nature of the fraud determined by the state court in the face of
overwhelming evidence that it is for actual fraud. He therefore failed to
meet his burden to show that there was a genuine dispute as to this issue.
CONCLUSION
For the foregoing reasons, we conclude that the bankruptcy court did
not commit reversible error in granting summary judgment on the basis of
the preclusive effect of the Judgment. We AFFIRM the Order.
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