In re: Andrew Francis and Anne Frances Francis ( 2013 )

FILED
JUL 12 2013
1 SUSAN M SPRAUL, CLERK
U.S. BKCY. APP. PANEL
OF THE NINTH CIRCUIT
2
3 UNITED STATES BANKRUPTCY APPELLATE PANEL
4 OF THE NINTH CIRCUIT
5 In re: ) BAP No. AZ-12-1281-AhJuTa
)
6 ANDREW FRANCIS and ) Bk. No. 11-08988
ANNE FRANCES FRANCIS, )
7 ) Adv. No. 11-01245
Debtors. )
8 ______________________________)
)
9 ANDREW FRANCIS; )
ANNE FRANCES FRANCIS, )
10 )
Appellants, )
11 )
v. ) MEMORANDUM*
12 )
JAMES MCLAUGHLIN and JIM )
13 NYGREN, as Trustees of the )
UFCW Employers Arizona Health )
14 & Welfare Trust; CONSTANTINO )
FLORES, Trustee; UNITED STATES)
15 TRUSTEE, )
)
16 Appellees. )
______________________________)
17
Argued and Submitted on June 21, 2013 at
18 Phoenix, Arizona
19 Filed - July 12, 2013
20 Appeal from the United States Bankruptcy Court
for the District of Arizona
21
Honorable Randolph J. Haines, Chief Bankruptcy Judge, Presiding
22 ___________________________________
23 Appearances: Harold E. Campbell, III of Campbell & Coombs
argued for Appellants Andrew Francis and Anne
24 Frances Francis; Paul E. Steen of Ryan Rapp &
Underwood, P.L.C. argued for Appellees James
25 McLaughlin and Jim Nygren, as Trustees of the
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 8013-1.
1 United Food and Commercial Workers Employers
Arizona Health and Welfare Trust.
2 ___________________________________
3 Before: AHART,** JURY, and TAYLOR, Bankruptcy Judges.
4
5 INTRODUCTION
6 Debtors Andrew and Anne Francis (“Francises”) have appealed
7 a bankruptcy court summary judgment finding a debt
8 nondischargeable in favor of James McLaughlin and Jim Nygren, as
9 Trustees of the United Food and Commercial Workers and Employers
10 Arizona Health and Welfare Trust (“United”). The Francises
11 contend the bankruptcy court erred by giving preclusive effect to
12 an Arizona default judgment. We disagree as to Andrew but agree
13 as to Anne. Therefore we AFFIRM in part and VACATE and REMAND in
14 part.
15 FACTS
16 Andrew Francis is the owner and operator of Medical
17 Management Strategies, LLCP (“MMS”), a medical consulting
18 business. In 2004, based on its alleged right to collect on a
19 medical provider’s accounts receivable, MMS submitted claims for
20 payment for treatments. United is the insurer of the patients
21 who purportedly received such treatments. Throughout 2005, based
22 on the submitted claims, United issued checks totaling
23 $114,085.54 to Dr. Gwen Ladha, the listed treating physician.
24 The checks were indorsed and cashed by “Andrew Francis dba Ladha,
25 M.D.”
26
27
**
Hon. Alan M. Ahart, United States Bankruptcy Judge for the
28 Central District of California, sitting by designation.
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1 After investigation, United came to believe the submitted
2 claims were false and demanded reimbursement from Andrew. On
3 December 18, 2006 United filed suit against MMS and the Francises
4 in the Superior Court of Arizona, Maricopa County (“State Court
5 Action”). The first amended state court complaint (“State Court
6 Complaint”) asserted causes of action for conversion, common law
7 fraud, negligent misrepresentation, and restitution.1
8 The Francises filed numerous pleadings in the State Court
9 Action. These include, but are not limited to, a motion to
10 dismiss on January 17, 2007, an answer on July 20, 2007, a motion
11 to compel discovery on March 29, 2010, a motion for sanctions on
12 April 27, 2010, a motion for summary judgment on May 5, 2010, a
13 response to plaintiff’s motion for summary judgment on July 29,
14 2010, and a motion for judgment on the pleadings on October 5,
15 2010. A minute entry dated August 13, 2010 indicates the state
16 court denied both United’s and the Francises’ cross-motions for
17 summary judgment, concluding questions of fact existed on both
18 the fraud and conversion claims. Trial was scheduled to begin on
19 October 18, 2010, and the parties had submitted pretrial
20 statements and jury instructions.
21 In addition to the civil proceeding, criminal charges had
22 been brought and subsequently dismissed. On the eve of the civil
23 trial, the Francises decided to strike their answer and allow
24
1
We exercise our discretion to take judicial notice of
25 documents filed in the underlying state court case. See
Trigueros v. Adams,658 F.3d 983, 987 (9th Cir. 2011) (“We retain
26 discretion to take judicial notice of documents ‘not subject to
reasonable dispute.’ Fed. R. Evid. 201(b). In particular, we ‘may
27 take notice of proceedings in other courts, both within and
without the federal judicial system, if those proceedings have a
28 direct relation to matters at issue.’”) (citations omitted).
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1 default judgment to be entered against them. On the advice of
2 criminal counsel, Mr. Francis determined he did not want to
3 testify under oath, believing it could result in the re-filing of
4 criminal charges.
5 A damages hearing was held in December 2010, after which the
6 state court drafted a minute entry, dated February 15, 2011,
7 denying United’s request for punitive damages. The state court
8 then entered an amended default judgment (“State Court Judgment”)
9 against the Francises on March 16, 2011. The State Court
10 Judgment set forth the Superior Court’s findings and awarded
11 $114,085.54 on the fraud and conversion claims, interest of
12 $66,138.33, and costs of $1,893.70. The State Court Judgment
13 made findings of fraud and conversion against only Andrew, but
14 entered judgment against both Andrew and Anne.
15 On April 4, 2011, the Francises filed a chapter 72 voluntary
16 petition in the United States Bankruptcy Court for the District
17 of Arizona. On July 11, 2011, United filed a complaint to
18 determine dischargeability of a debt (“Nondischargeability
19 Complaint”). The Nondischargeability Complaint alleged causes of
20 action under 11 U.S.C. §§ 523(a)(2)(A), (a)(2)(B), and (a)(19)
21 and sought to except the State Court Judgment from discharge.
22 Debtors filed an answer on August 25, 2011. On January 16, 2012,
23 United filed a motion for summary judgment, arguing it was
24 entitled to judgment as a matter of law based on the State Court
25
26 2
Unless specified otherwise, all chapter and section
references are to the Bankruptcy Code, 11 U.S.C §§ 101-1532, and
27 all “Rule” references are to the Federal Rules of Bankruptcy
Procedure, Rules 1001-9037. All “FRCP” references are to the
28 Federal Rules of Civil Procedure.
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1 Judgment and res judicata. On February 17, 2012, the Francises
2 filed an opposition to the motion for summary judgment. At the
3 March 5, 2012 status hearing, the bankruptcy court advised United
4 to address issue preclusion in its reply, correctly explaining
5 that res judicata, also known as claim preclusion, cannot apply
6 because state courts do not hear nondischargeability actions
7 under § 523(a)(2). United’s reply was filed on March 26, 2012.
8 On April 5, 2012, the bankruptcy court held a hearing on the
9 motion for summary judgment. The bankruptcy court determined the
10 State Court Judgment would be given preclusive effect and stated
11 in relevant part that “there was active participation by the
12 Defendant in litigating this case.” On April 10, 2012, the
13 bankruptcy court entered a minute entry order granting the motion
14 for summary judgment. On April 24, 2012, the Francises filed a
15 motion for reconsideration, which was denied by an order entered
16 on April 27, 2012. On May 10, 2012, the bankruptcy court entered
17 judgment (“Bankruptcy Court Judgment”) excepting the State Court
18 Judgment from discharge pursuant to § 523(a)(2)(A).
19 On May 23, 2012, the Francises timely filed a notice of
20 appeal to this Panel.
21 JURISDICTION
22 The bankruptcy court had jurisdiction pursuant to 28 U.S.C.
23 §§ 1334 and 157(b)(2)(I). We have jurisdiction under 28 U.S.C.
24 § 158.3
25
3
26 The Nondischargeability Complaint alleged causes of action
under 11 U.S.C. §§ 523(a)(2)(A), (a)(2)(B), and (a)(19). The
27 Bankruptcy Court Judgment found the debt to be nondischargeable
under 11 U.S.C. § 523(a)(2)(A). On July 27, 2012, this Panel
28 (continued...)
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1 ISSUE
2 In granting summary judgment, did the bankruptcy court err
3 in finding that the State Court Judgment satisfied the elements
4 of issue preclusion under Arizona law?
5 STANDARDS OF REVIEW
6 A grant of a motion for summary judgment is reviewed de
7 novo. Younie v. Gonya (In re Younie), 211 B.R. 367, 372 (9th
8 Cir. BAP 1997) (citing Gayden v. Nourbakhsh (In re Nourbakhsh),
9 67 F.3d 798, 800 (9th Cir. 1995)). The evidence must be reviewed
10 in the light most favorable to the nonmoving party to determine
11 if there are any genuine issues of material fact and whether the
12 bankruptcy court correctly applied the substantive law. Fichman
13 v. Media Center, 512 F.3d 1157, 1159 (9th Cir. 2008).
14 Mixed questions of law and fact are reviewed de novo.
15 Carrillo v. Su (In re Su), 290 F.3d 1140, 1142 (9th Cir. 2002).
16 Whether issue preclusion is available is a mixed question of law
17 and fact. Stephens v. Bigelow (In re Bigelow), 271 B.R. 178, 183
18 (9th Cir. BAP 2001).
19
20
21
22
3
23 (...continued)
issued a Clerk’s Order, stating that the Bankruptcy Court
24 Judgment appeared to be an interlocutory order because the
remaining causes of action were still pending. An appeal of an
25 interlocutory order requires leave of the Panel. See 28 U.S.C.
§ 158(a)(3) and Rule 8003. In response, on August 13, 2012, the
26 Francises filed a motion to amend, requesting the bankruptcy
court amend the Bankruptcy Court Judgment to include dismissal of
27 United’s claims under 11 U.S.C. §§ 523(a)(2)(B) and (a)(19).
United did not object and the bankruptcy court entered an order
28 on September 12, 2012 dismissing the remaining causes of action.
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1 DISCUSSION
2 A. Standard for Summary Judgment
3 Summary judgment is appropriate when the facts presented
4 show there is no genuine issue as to any material fact and that
5 movant is entitled to judgment as a matter of law. FRCP 56(c),
6 made applicable to the bankruptcy court by Rule 7056. An issue
7 is “genuine” if the evidence is such that a reasonable jury could
8 return a verdict for the nonmoving party. Anderson v. Liberty
9 Lobby, Inc., 477 U.S. 242, 248 (1986). A dispute is “material”
10 only if it could affect the outcome of the suit. Id. At the
11 summary judgment stage, the judge’s function is not to weigh the
12 evidence and determine the truth of the matter, but to determine
13 whether there is a genuine issue for trial, or whether it is so
14 one-sided that one party must prevail as a matter of law. Id. at
15 243-244.
16 B. Standard for Issue Preclusion
17 The doctrine of issue preclusion, or collateral estoppel,
18 prohibits relitigation of issues that have been adjudicated in a
19 prior action.4 Child v. Foxboro Ranch Estates, LLC (In re
20 Child), 486 B.R. 168, 172 (9th Cir. BAP 2013) (citing Lopez v.
21 Emergency Serv. Restoration, Inc. (In re Lopez), 367 B.R. 99, 104
22 (9th Cir. BAP 2007)). The party asserting issue preclusion bears
23 the burden of proof as to all elements and must introduce a
24 sufficient record to reveal the controlling facts and the exact
25
26
4
The preferred terminology is “issue preclusion” rather than
27 “collateral estoppel” and “claim preclusion” rather than “res
judicata.” Syverson v. Int’l Bus. Machs. Corp., 472 F.3d 1072,
28 1078 n.8 (9th Cir. 2007).
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1 issues litigated. Child, 486 B.R. at 172 (citing Kelly v. Okoye
2 (In re Kelly), 182 B.R. 255, 258 (9th Cir. BAP 1995)).
3 The doctrine of issue preclusion applies in
4 nondischargeability proceedings. Grogan v. Garner, 498 U.S. 279,
5 284-85 n.11 (1991). Under 28 U.S.C. § 1738, the federal full
6 faith and credit statute, federal courts must give state court
7 judgments the same preclusive effect that those judgments would
8 receive from another court of the same state. Far Out
9 Productions, Inc. v. Oskar, 247 F.3d 986, 993 (9th Cir. 2001).
10 Accordingly, Arizona law determines any preclusive effect of the
11 State Court Judgment. Nourbakhsh, 67 F.3d at 800.
12 In Arizona, there are four requirements for the application
13 of issue preclusion: (1) the same issue or fact was actually
14 litigated in a previous suit, (2) a final judgment was entered,
15 (3) the party against whom the doctrine is to be invoked had a
16 full opportunity to litigate the matter and actually did litigate
17 it, and (4) the issue or fact was essential to the prior
18 judgment. See Chaney Bldg. Co. v. City of Tucson, 716 P.2d 28,
19 30 (Ariz. 1986).
20 C. Application to the Instant Case
21 Same issue was litigated
22 The second count of United’s State Court Complaint alleged
23 common law fraud. In Arizona, an action for common law fraud
24 requires the concurrence of the following elements: a
25 representation, its falsity, its materiality, the speaker’s
26 knowledge of its falsity or ignorance of its truth, intent that
27 it should be acted upon by the person and in a manner reasonably
28 contemplated, the hearer’s ignorance of its falsity, his rightful
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1 reliance thereon, and his consequent injury. Nielson v.
2 Flashberg, 419 P.2d 514, 518 (Ariz. 1966).
3 To except a debt from discharge under § 523(a)(2)(A) of the
4 Bankruptcy Code, a creditor must show: the debtor made
5 representations that at the time the debtor knew to be false, the
6 debtor made the representations with the intention and purpose of
7 deceiving the creditor, the creditor justifiably relied on the
8 representations, and the creditor sustained losses as a proximate
9 result. Turtle Rock Meadows Homeowners Ass’n v. Sylman
10 (In re Sylman), 234 F.3d 1081, 1085 (9th Cir. 2000) (citing
11 Am. Express Travel Related Servs. Co. v. Hashemi (In re Hashemi),
12 104 F.3d 1122, 1125 (9th Cir. 1996)).
13 Because the elements to establish common law fraud under
14 Arizona law overlap with and mirror the elements for a
15 nondischargeability determination under § 523(a)(2)(A), the same
16 issues in the Nondischargeability Complaint were actually
17 litigated in the State Court Action.
18 Final judgment
19 Issue preclusion does not apply to determinations that are
20 not final judgments. A judgment is final in Arizona if it is
21 sufficiently firm as to be accorded conclusive effect. Campbell
22 v. SZL Properties, Ltd., 62 P.3d 966, 969 (Ariz. App. Div. 1
23 2003) (citing Restatement (Second) of Judgments § 13) (1982)).
24 There is nothing on the record that would indicate otherwise, and
25 it appears the parties would agree the State Court Judgment
26 constitutes a final judgment.
27
28
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1 Opportunity to and actually litigated the matter
2 It is also clear that the Francises had the opportunity to
3 litigate in state court. The Francises participated in the State
4 Court Action for over four years. They filed multiple motions,
5 conducted discovery, and appear to have participated in numerous
6 status conferences. Moreover, the Francises’ request that their
7 answer be stricken immediately before the trial was the sole
8 reason default was entered. Accordingly, the Francises had, but
9 chose not to avail themselves of, the opportunity to litigate.
10 The Francises argue that, because the State Court Judgment
11 resulted from a default, the issues were not actually litigated.
12 We disagree with the characterization of the State Court Judgment
13 as a default. Although titled as such, we do not exalt form over
14 substance, and the context of the State Court Action makes clear
15 this was not a mere default, as it was litigated up until the
16 trial date. See Prudential Real Estate Affiliates, Inc. V. PPR
17 Realty, Inc., 204 F.3d 867, 880 (9th Cir. 2000) (“[T]he label
18 attached to a motion does not control its substance.”). Further,
19 while Chaney states that generally a default judgment does not
20 constitute actual litigation of any issues, there is authority
21 concluding that a default judgment may meet the actual litigation
22 requirement. In Kirkland v. Barnes (In re Kirkland), 2008 WL
23 8444824 (9th Cir. BAP 2008), this Panel upheld a bankruptcy
24 court’s decision to give preclusive effect to a default judgment
25 issued by an Arizona state court, noting it was appropriate to
26 look into a party’s reasons for not litigating. Id. at *9. The
27 Debtor in Kirkland participated in the state court proceedings,
28
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1 but committed discovery violations that led to state court
2 sanctions, including striking his answer and entering default.
3 In Bell v. Bell (In re Bell), 2008 WL 2277875 (D. Ariz.
4 2008), the district court affirmed a bankruptcy court’s
5 application of issue preclusion to an Arizona state court
6 judgment issued after the debtors’ untimely response to a
7 creditor’s motion for summary judgment was not considered by the
8 court. Finding the debtors did not give up and merely accept
9 default, but instead pursued their case ineffectively, the
10 district court determined the issues to be actually litigated.
11 See also Child, 486 B.R. 168 (citing Kirkland and Bell, but
12 declining to apply issue preclusion because the debtor did not
13 substantially participate in the prior proceeding).
14 Further, as Kirkland noted, Arizona courts follow the
15 approach taken in the Restatement (Second) of Judgments § 27
16 (1982). See e.g., Airfreight Expt. Ltd v. Evergreen Air Center,
17 Inc., 158 P.3d 232, 237 (Ariz. App. Div. 2 2007); Special Fund
18 Div., Industrial Com’n v. Tabor, 32 P.3d 14, 17 (Ariz. App. Div 1
19 2001). Chaney quoted Comment d. to this Restatement as follows:
20 “When an issue is properly raised by the pleadings or otherwise,
21 and is submitted for determination, and is determined, the issue
22 is actually litigated.” Chaney, 716 P.2d at 30. Comment e. to
23 § 27 of the Restatement (Second) of Judgments provides: “It is
24 true that it is sometimes difficult to determine whether an issue
25 was actually litigated; even if it was not litigated, the party’s
26 reasons for not litigating the prior action may be such that
27 preclusion would be appropriate.”
28
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1 As with the cases above, the Francises substantially
2 participated in the State Court Action. Any failure to litigate
3 was due to the Francises’ voluntary tactical decision, the
4 consequences of which they must now face. A finding that the
5 issues were actually litigated conforms with Comments d. and e.
6 of the Restatement and is in accord with the principle that a
7 refusal to testify in a civil proceeding is done at one’s own
8 peril and does not preclude an adverse inference. Baxter v.
9 Palmigiano, 425 U.S. 308, 318 (1976).
10 Finally, though Arizona courts have not specifically
11 addressed whether an issue is actually litigated when a party
12 invokes the Fifth Amendment privilege, our position comports with
13 the majority view in other jurisdictions that such party has had
14 a full and fair opportunity to litigate for issue preclusion
15 purposes. See e.g., Manty v. Brown (In re Brown), 427 B.R. 715,
16 719, 721-22 (D. Minn. 2010); FTC v. Abeyta (In re Abeyta),
17 387 B.R. 846, 849, 852-853 (Bankr. D. N.M. 2008); AGP Grain
18 Cooperative v. White (In re White), 315 B.R. 741, 745, 747-49
19 (Bankr. D. Neb. 2004); Miles v. Rutledge (In re Rutledge),
20 245 B.R. 678, 683 (Bankr. D. Kan 1999).
21 Issue was essential
22 The State Court Judgment explicitly found for United on the
23 fraud and conversion claims and stated:
24 7. Andrew Francis made representations
to the Trust by causing his company,
25 Medical Management Strategies, L.L.C.P.,
to submit false claims to the Trust for
26 medical services purportedly provided by
HeartGen Centers, Inc. to Trust
27 beneficiaries;
28
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1 8. Andrew Francis’s representations were
false because the purported medical
2 services set forth in the claims were
never performed by HeartGen;
3
9. Andrew Francis’s representations were
4 material in influencing the Trust to pay
the false claims;
5
10. Andrew Francis knew that the
6 representations were false;
7 11. Andrew Francis intended that the
Trust would act upon the representations
8 in the manner reasonably contemplated by
Andrew Francis, i.e., by paying the
9 false claims;
10 12. The Trust did not know that the
representations were false;
11
13. The Trust relied on the truth of the
12 representations;
13 14. The Trust’s reliance was reasonable
and justified under the circumstances;
14
15. As a result, the Trust was damaged;
15
16. In making the representations,
16 Andrew Francis was acting for the
benefit of his marital community.
17
18 As indicated by the State Court Judgment, the requirements
19 of fraud were necessarily determined and essential to the
20 judgment against Andrew.
21 As noted, though not raised by Appellants until oral
22 argument, the findings of fact in the State Court Judgment as to
23 fraud were made only against Andrew. Generally this Panel will
24 not review an issue not raised below unless necessary to prevent
25 manifest injustice. Komatsu, Ltd. V. States S.S. Co., 674 F.2d
26 806, 810 (9th Cir. 1982). In this case, allowing a
27 nondischargeability judgment against Anne to stand, when there
28
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1 were no findings that she participated in the fraud, would
2 constitute a manifest injustice.
3 This Panel notes that the award in the State Court Judgment
4 was based on both fraud and conversion claims. However, the
5 State Court Complaint expressly sought damages of at least
6 $118,180.54 only under the fraud claim and in the prayer for
7 relief. As such, it is clear the damages awarded by the State
8 Court Judgment can be attributed to the fraud claim.
9 As the doctrine of issue preclusion was properly applied to
10 Andrew, the elements to declare a debt nondischargeable under
11 § 523(a)(2)(A) have been shown and are not subject to material
12 dispute. Accordingly, summary judgment was appropriate as to
13 Andrew.
14 CONCLUSION
15 For all of the reasons set forth above, we AFFIRM the
16 bankruptcy court’s judgment declaring the State Court Judgment
17 nondischargeable pursuant to 11 U.S.C. § 523(a)(2)(A) as to
18 Andrew Francis. We VACATE the bankruptcy court’s judgment as to
19 Anne Francis and REMAND for further proceedings.
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