Opinion
Bankruptcy Case No. 696-60747-aer7, Adversary Proceeding No. 96-6153-aer, Bankruptcy Case No. 396-31252-psh7, Adversary Proceeding No. 96-3307-psh/aer.
October 14, 1999.
MEMORANDUM OPINION
Before this court are cross motions for summary judgment in Adversary Proceeding # 96-6153-aer, and Plaintiffs' motion for summary judgment in Adversary Proceeding # 96-3307-aer. These two adversaries (filed in separate main cases) have identical Plaintiffs, overlapping facts and legal theories. Accordingly, the above-referenced motions are hereby resolved in one opinion.
Background
Plaintiffs filed identical complaints (later amended) in both adversaries seeking to have a default judgment entered in Yamhill County Circuit Court (the state court) excepted from discharge under §§ 523(a)(2)(A) and (a)(6).
Unless otherwise noted, all statutory references are to Title 11 of the United States Code.
Plaintiffs moved for summary judgment in both cases. Defendant Ronald Clibborn (Clibborn) filed a cross motion for partial summary judgment on the issues of punitive damages and attorney fees.
This Court heard oral argument on the motions. Limited relief from stay was granted to allow the parties to complete litigation pending in the state court. The motions were held in abeyance pending that completion.
After the state court litigation was completed, this Court convened a status conference on the present motions. A briefing schedule was established. The briefs, as well as supplemental concise statements have been submitted. The motions are now ripe for decision.
Clibborn has also filed a second motion for summary judgment Plaintiffs have responded thereto. Neither party has requested oral argument so that motion is also ripe.
Facts
Based upon the parties' submissions, I find the following material facts:
In September, 1994, Plaintiffs sued Defendants in the state court for common law fraud, failure to register a security under ORS 59.115(1)(a) and deceit in selling a security under ORS 59.115(1)(b) and 59.135.
In substance, the state court complaint alleged that Defendants fraudulently induced Plaintiffs to invest or loan $50,000.00, by representing the investment or loan was secured by valuable historic German bearer bonds. In the state court complaint, Plaintiffs prayed for $50,000.00 in damages, plus prejudgment interest, costs and attorney fees, and $250,000.00 in punitive damages.
Defendants failed to appear for depositions which were scheduled for late June, 1995. Plaintiffs requested sanctions. They also sought $500.00 in attorney fees.
On August 7, 1995, a hearing was held on the Plaintiffs' motion for sanctions. The state court, in its oral ruling, entered a default, and ordered a further hearing on damages.
After a damages hearing was held, the state court entered a default judgment on August 15, 1995 for $314,677.67 plus post judgment interest (at 9% from August 15, 1995 until paid), broken down as follows:
a) $50,000.00 principal;
b) $11,328.12 prejudgment interest;
c) $250,000.00 punitive damages;
d) $3,122.50 attorney fees (including the $500.00 sanction noted above) and
e) $227.00 costs
In late August, 1995, Defendants moved to set aside the judgment under ORCP 71 B(1). On October 25, 1995, the punitive damages and attorney fees portion of the judgment were set aside. The state court ordered the matter set for a further damages hearing.
On February 20, 1996, the reset damages hearing was held. At that hearing the state court announced orally that because of the sanctions motions and consequent default, there had already been a finding that Defendants defrauded the Plaintiffs, as such, $250,000.00 in punitive damages plus attorney fees were awarded. The court instructed Plaintiff's counsel to submit a new form of judgment.
Defendants each filed Chapter 7 petitions on February 27, 1996, before the new judgment could be entered. After limited relief from stay was granted, the state court, on April 4, 1997, re-entered another judgment, identical to the August 15, 1995 judgment referenced above.
Defendants appealed, the Oregon Court of Appeals, on August 5, 1998, affirmed without opinion. Supreme Court review was not sought. The state court judgment is now final.
In the meantime, on May 28, 1996, Plaintiffs filed a proof of claim in Clibborn's Chapter 7 case, for $329,886.65 unsecured (based on the judgment) and $1.00 secured (the alleged value of the German bearer bonds).
In February, 1997, Clibborn's Chapter 7 trustee, Ronald Sticka (the trustee), obtained a court order to sell Clibborn's residence free and clear of liens, with the liens to attach to the proceeds.
In May, 1997, the trustee filed an Adversary Proceeding (#97-6142-aer) naming multiple defendants (including Plaintiffs, and Clibborn) to determine the extent and validity of certain liens on Clibborn's homestead.
The parties to that adversary proceeding reached a settlement following a settlement conference at which the Honorable Frank R. Alley, III presided. The settlement agreement provided in pertinent part that the balance (at least $24,352.40) of the Clibborn home proceeds (after other parties were paid) would be paid to Plaintiffs. The settlement also provided that the Plaintiffs did not waive their rights to proceed in these adversaries to determine the dischargeability of their claims.
The trustee noticed the settlement on January 30, 1998. No one objected; as such, the order approving it became self-executing. The trustee then moved to dismiss Adversary Proceeding No. 97-6142, with prejudice, based on the settlement. The settlement agreement was attached to the Motion. On April 16, 1998, an order was entered dismissing that adversary. At some point, Plaintiffs were paid $25,153.70 from the proceeds of the Clibborn home.
On January 22, 1999, the trustee objected to Plaintiffs' proof of claim, on the basis that it was "settled and paid in full according to agreement." He recommended allowance as a general unsecured claim for $25,153.70. Plaintiffs did not request a hearing on the objection, so the order thereon became selfexecuting.
Discussion
Summary Judgment Standards:
On a motion for summary judgment, the moving party has the burden to establish the absence of a material issue of fact for trial. FRCP 56(c). With regard to its own claims or defenses, (i.e. those elements for which the moving party bears the burden of proof at trial) the movant must support its motion with evidence-using any of the materials specified in Rule 56(c)-that would entitle it to a directed verdict if not controverted at trial.Celotex Corporation v. Catrett, 477 U.S. 317, 106 S.Ct. 2548, 2557, 91 L.Ed. 265 (1986) (Brennan, J) (dissent). There must be more than a "scintilla", indeed the evidence must be "significantly probative." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 106 S.Ct. 2505, 2511, 91 L.Ed.2d 202 (1986). The motion must in any case meet the requirements of FRCP 56(c). In re Rogstad, 126 F.3d 1224 (9th Cir. 1997).
As to the burden of proof regarding assertion of collateral estoppel,
The party contending that an issue has been conclusively litigated and determined in a prior action has the burden of proving that contention. That party must place into evidence sufficient portions of the prior record to enable the bankruptcy court to decide if an issue was actually litigated.
Washington County Agency on Aging v. Goodrich ( In Re Goodrich), Case # 90-3571-S (Bankr. D. Or. May 22,1991) (unpublished) (Sullivan, J.) (internal citations omitted).
However, a party asserting an exception to the normal rules of collateral estoppel has the burden of proof to prove the exception. In Re Dutton, 1995 WL 759031 (Bankr D. Or. 1995) (not reported in B.R.).
If the movant makes the requisite affirmative showing, the burden of production shifts to the non-moving party to produce evidentiary materials that demonstrate the existence of a "genuine issue" for trial, or to submit an affidavit requesting additional time for discovery. Celotex, supra at 2557(Brennan dissent). Conclusory arguments, unsupported by factual statements or evidence do not meet this burden. In Re Lewis, 97 F.3d 1182 (9th Cir. 1996). More specifically, conclusory, self-serving affidavits, lacking detailed facts and any supporting evidence are insufficient to create a genuine issue of material fact. FTC v. Publishing Clearing House, Inc., 104 F.3d 1168 (9th Cir. 1996).
All inferences drawn from the underlying facts must be viewed in the light most favorable to the nonmoving party. Simone v. Manning, 930 F. Supp. 1434 (D. Or. 1996). When different ultimate inferences can be reached summary judgment is not appropriate. Id. Preclusive Effect of State Court Judgment:
Plaintiffs seek a declaration that the state court judgment is excepted from discharge under §§ 523(a)(2)(A) and (a)(6). § 523(a)(2)(A) Claim:
Originally, Plaintiffs' First Claim for relief sought to have the portions of the default judgment that had not been set aside, excepted from discharge under §§ 523(a)(2)(A) and (a)(6). Plaintiffs' Second Claim sought a judgment for $250,000.00 in punitive damages, for reasonable attorney fees in obtaining the judgment, for interest from the date of the judgment, and for attorney fees in the action as a whole, and that the judgment be declared excepted from discharge under §§ 523(a)(2)(A) and (a)(6).
Since the Second Claim was filed, the state court has reentered a judgment for punitive damages, attorney fees and post judgment interest, in the same document as the $50,000.00 principal as noted in the First Claim. As such, the Second Claim has merged into the First.
In order to establish a claim under § 523(a)(2)(A) the Plaintiffs must show that:
1. the Debtor made representations;
2. at the time he knew the representations were false, or they were made with reckless disregard for their truth;
3. he made them with the intention and purpose of deceiving the creditor;
4. the creditor justifiably relied on the representations; and
5. the creditor sustained the alleged loss and damage as a proximate result of the representations having been made.
In Re Anastas, 94 F.3d 1280 (9th Cir. 1996).
Plaintiffs argue that all these elements were determined by virtue of the state court judgment, and thus, under principles of collateral estoppel, defendants are precluded from contesting them here.
Collateral estoppel (i.e. "issue preclusion") principles apply in dischargeability proceedings under § 523. Grogan v. Garner, 498 U.S. 279, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991). In determining the preclusive effect of a state court judgment in a subsequent federal suit (including dischargeability proceedings), the court looks to the collateral estoppel law of the state that rendered the judgment. In re Nourbakhsh, 67 F.3d 798 (9th Cir. 1995).
By contrast, the doctrine of claim preclusion does not apply in dischargeability litigation. Brown v. Felsen, 442 U.S. 127, 99 S.Ct. 2205, 60 L.Ed.2d 767 (1979).
In Oregon, issue preclusion precludes relitigation of an issue when that issue or fact has been determined by a valid and final determination in a prior proceeding. McCall v. Dynic USA Corp., 138 Or. App. 1, 906 P.2d 295 (1995). The requirements are:
1) the issue in the two proceedings is identical;
2) the issue was actually litigated and was essential to the final decision on the merits in the prior proceeding;
3) the party sought to be precluded had a full and fair opportunity to be heard on that issue;
4) the party sought to be precluded was a party, or was in privity with a party to the prior proceeding; and
5) the prior proceeding was the type of proceeding to which the court will give preclusive effect.
Id.
Defendants argue that they never "actually litigated" any of the elements of fraud.
Overholser's submissions for the most part address the merits of the underlying fraud claims, which have already been reduced to judgment.
In Oregon, principles of collateral estoppel apply to default judgments. Gwynn v. Wilhelm, 226 Or. 606, 360 P.2d 312 (1961). Default judgments have the same "solemn character as judgments entered after trial." Watson v. State, 71 Or. App. 734, 738, 694 P.2d 560, 562 (1985) rev. withdrawn 299 Or. 204, 701 P.2d 432 (1985). A default judgment establishes the truth of all material factual allegations of the complaint. Rajneesh Foundation International v. McGreer, 303 Or. 139, 734 P.2d 871 (1987); Fitch v. Singleton, (In re Singleton), Case #96-6003-fra (Bankr. D. Or. Oct. 4, 1996) (unpublished) (Alley, J.). As such, this court concludes that the elements of fraud were "actually litigated."
The only case going the other way on this issue is In Re Hubbard, 167 B.R. 969 (Bankr. D. New Mex. 1994) a case out of New Mexico applying Oregon law, and by which this Court is not bound.
Defendants also argue that they were denied a full and fair opportunity to litigate the issue of fraud. Specifically, Clibborn argues such denial was a result of the state court striking his answer as a sanction for a discovery violation. He cites no authority, however, which distinguishes this type of default from the general doctrine that default judgments are entitled to collateral estoppel effect. In Re Younie, 211 B.R. 367 (9th Cir. BAP (Cal.) 1997), aff'd, 163 F.3d 609 (1998) (TABLE, TEXT IN WESTLAW) (under California law, a default is a default, no matter how obtained).
Overholser has submitted a sworn statement that his attorney told both he and Clibborn they did not have to appear at the depositions. However, Overholser does not expressly argue, and certainly cites no authority, that advice of one's own counsel is an adequate ground to argue denial of a full and fair opportunity to litigate.
Given that the state court judgment has collateral estoppel effect, it appears clear from both the state court's finding of "fraud" as recited at the February 20, 1997 hearing and its award of punitive damages, that the judgment is based, at least in part, on Plaintiffs' common law fraud claim. In Oregon, common law fraud essentially mimics the § 523(a)(2)(A) elements set out above. See, Meade v. Cedarapids, Inc., 164 F.3d 1218 (9th Cir. 1999) (applying Oregon law).
Punitive damages were not recoverable on the statutory claims. See ORS 59.115(2)(a) and Foelker v. Kwake, 279 Or. 379, 568 P.2d 1369 (1977) (damages awarded in excess of those provided for in ORS 59.115(2) is reversible error).
As attorney fees are not awardable for common law fraud, it appears that the judgment was also based in part on the statutory deceit claims. See ORS 59.115(10) providing for attorney fees to the prevailing party in a statutory securities claim.
Accordingly, Plaintiffs' motions should be granted on their § 523(a)(2)(A) claims, and the full amount of the judgment, including the punitive damages and attorney fees award, is excepted from discharge. Cohen v. De La Cruz, 523 U.S. 213, 118 S.Ct. 1212, 140 L.Ed.2d 341 (1998)) (all debt associated with fraud is nondischargeable under § 523(a)(2)(A)).
Likewise, Clibborn's first cross motion for summary judgment should be denied on the issues of punitive damages and attorney fee (as they relate to those awarded by the state court). § 523(a)(6) Claim:
As distinguished by the attorney fees incurred in this action which are not recoverable. See discussion infra.
In order to establish a claim under § 523(a)(6), the plaintiffs must show that the defendants intended the injury itself, not just the act that resulted in the injury. Kawaauhau v. Geiger, 523 U.S. 57, 118 S.Ct. 974, 140 L.Ed.2d 90 (1998). In addition, the injury must be malicious, meaning that the conduct must be without just cause or excuse. Sheble Aviation v. Sheble (In Re Sheble), Adv. # RS98-1113-MJ/EP (Bankr. S.D. Cal. October 29, 1998) (unpublished letter opinion) (Perris, J.).
Judge Perris, recognizing the current split as to whetherGeiger subsumed the concept of malice into the concept of willfulness, held that willful and malicious are two separate requirements, that Geiger addressed the meaning of willfulness and not of malice, and that Geiger did not disturb the formulation set out in Tinker v. Colwell, 193 U.S. 473 (1904) that malice requires that conduct be without just cause or excuse. Id. at f.n. #1.
Plaintiffs argue that the state court judgment, including the award of punitive damages, is sufficient to meet the above standards, as such, Defendants are precluded from contesting Plaintiffs' § 523(a)(6) claims. As noted above, the default judgment has collateral estoppel effect.
Regarding the punitive damages award, the 9th Circuit has stated, "[u]nder Oregon Law, punitive damages are available when there is evidence of malicious or wanton conduct." Central Office Telephone, v. American Telephone and Telegraph Co., 108 F.3d 981, 993 (9th Cir. 1997) rev'd on other grounds, 524 U.S. 214, 118 S.Ct. 1956, 141 L.Ed.2d 222 (1998) (internal citation omitted). It further noted "[t]he Oregon Supreme Court has sanctioned the award of punitive damages whenever there was evidence of a wrongful act done intentionally, with knowledge that it would cause harm to a particular person or persons."Id. at 994, f.n. #17(internal quotation omitted).
Currently ORS 18.537 (effective 1995) imposes the standards for an award of punitive damages. However, the state court suit was commenced before ORS 18.537 became effective, so pre-adoption law is applied. Howard, supra, at 140, f.n. #2, 935 P.2d at 434.
Standing alone, it might be arguable whether the award of punitive damages meets the Geiger standard. Here, however, the state court complaint, at ¶ 18, alleged that both Clibborn and Overholser's actions "were malicious, criminal in nature, and calculated and done with the intention of taking plaintiffs' money with no intention of honoring the security." This allegation is deemed true in a default situation, Rajneesh Foundation International, supra., and is sufficient, especially in light of the award of punitive damages, to meet the § 523(a)(6) standard.
Attorney Fees For Litigating Dischargeability Issues:
Attorney fees for litigating the dischargeability issues at bar are not recoverable. In Re Hashemi, 104 F.3d 1122 (9th Cir. 1997). On this issue, Plaintiffs' motions should be denied, and Clibborn's cross motion, granted. Effect of Claims Order:
In his second motion for summary judgment, Clibborn argues the self-effectuating order disallowing the balance of Plaintiffs' claim above $25,153.70, renders the alleged debt satisfied, even if nondischargeable. The Court construes this as a "mootness" argument. If the underlying claim has been satisfied, its dischargeability is irrelevant. The argument is disingenuous.
The trustee's claims objection was grounded on the fact that the claim had been "settled and paid in full according to agreement." It recommended allowance of $25,153.70 as a general unsecured claim. The self-effectuating order incorporates that recommendation. A fair interpretation of the order would also incorporate the basis for the recommendation, which was the settlement "agreement" referenced therein and the order approving that settlement. It is undisputed that, under the settlement agreement, Plaintiffs' claims in these adversary proceedings would not be prejudiced.
On the satisfaction/mootness issue, Clibborn's second motion should be denied, (and Plaintiffs should be granted summary judgment) with the exception that $25,153.70 should be applied as a credit against the balance due on the state court judgment.
Conclusion
There is no genuine issue of material fact. Plaintiffs are entitled to judgment as a matter of law on the §§ 523(a)(2)(A) and (a)(6) claims except as they relate to attorney fees for litigating this case. Clibborn's motions should be denied except as they relate to attorney fees for litigating this case and a $25,153.70 credit against the state court judgment.
This opinion constitutes the Court's findings of fact and conclusions of law under FRBP 7052. They shall not be separately stated.