Chad Delannoy v. Woodlawn Colonial, L.P. ( 2021 )

NOT FOR PUBLICATION FILED
UNITED STATES COURT OF APPEALS MAY 13 2021
MOLLY C. DWYER, CLERK
U.S. COURT OF APPEALS
FOR THE NINTH CIRCUIT
In re: CHAD PAUL DELANNOY, No. 20-60030
Debtor, BAP No. 19-1230
------------------------------
MEMORANDUM*
CHAD PAUL DELANNOY,
Appellant,
v.
WOODLAWN COLONIAL, L.P.,
Appellee.
Appeal from the Ninth Circuit
Bankruptcy Appellate Panel
Taylor, Faris, and Spraker, Bankruptcy Judges, Presiding
Submitted May 11, 2021**
Pasadena, California
Before: OWENS, R. NELSON, and BADE, Circuit Judges.
Chad Paul Delannoy (“Delannoy”) appeals the Bankruptcy Appellate
*
This disposition is not appropriate for publication and is not precedent
except as provided by Ninth Circuit Rule 36-3.
**
The panel unanimously concludes this case is suitable for decision
without oral argument. See Fed. R. App. P. 34(a)(2).
Panel’s (“BAP”) opinion affirming the bankruptcy court’s entry of a non-
dischargeable judgment pursuant to 11 U.S.C. § 523(a)(6) in favor of creditor
Woodlawn Colonial, L.P. (“Woodlawn”) after Woodlawn moved for summary
judgment on its claim for non-dischargeable debt. Delannoy contends that the
bankruptcy court improperly applied issue preclusion to a state court judgment
awarding Delannoy’s former employer compensatory and punitive damages for its
claims for conversion and “money had and received.” Delannoy’s former
employer assigned all right, title and interest in the state court judgment to
Woodlawn. We have jurisdiction under 28 U.S.C. § 158(d). We review de novo
the bankruptcy court’s grant of summary judgment and its determination that issue
preclusion is available, and we review its decision to apply issue preclusion to the
state court’s judgment for abuse of discretion. Dias v. Elique, 436 F.3d 1125, 1128
(9th Cir. 2006). We affirm.
The doctrine of issue preclusion applies to proceedings seeking exceptions
from discharge under § 523(a). Grogan v. Garner, 498 U.S. 279, 284 n.11 (1991).
Issue preclusion, or collateral estoppel, bars relitigation of factual issues that have
been adjudicated in a prior action. “Under the Full Faith and Credit Act, 28 U.S.C.
§ 1738, the preclusive effect of a state court judgment in a subsequent bankruptcy
proceeding is determined by the preclusion law of the state in which the judgment
was issued.” In re Harmon, 250 F.3d 1240, 1245 (9th Cir. 2001). Accordingly,
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we apply California law to determine the preclusive effect of the state court
judgment.
Under California law, the party asserting issue preclusion bears the burden
of establishing five threshold requirements:
First, the issue sought to be precluded from relitigation must be
identical to that decided in a former proceeding. Second, this issue
must have been actually litigated in the former proceeding. Third, it
must have been necessarily decided in the former proceeding. Fourth,
the decision in the former proceeding must be final and on the merits.
Finally, the party against whom preclusion is sought must be the same
as, or in privity with, the party to the former proceeding.
Lucido v. Superior Ct., 795 P.2d 1223, 1225 (Cal. 1990). Further, the application
of issue preclusion must be fair and consistent with public policy considerations,
including the “preservation of the integrity of the judicial system, promotion of
judicial economy, and protection of litigants from harassment by vexatious
litigation.” Id. at 1227. Delannoy contends that the last three requirements are not
met in this case, and that the application of issue preclusion fails to comport with
these fairness and public policy considerations. We disagree.
To conclude that an issue was “necessarily decided,” the third threshold
requirement, California courts require “only that the issue not have been ‘entirely
unnecessary’ to the judgment in the initial proceeding.” Id. at 1226. In awarding
punitive damages to Delannoy’s former employer, Woodlawn’s assignor, the state
trial court found that Delannoy engaged in acts of conversion with fraud, malice,
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and an intent to cause economic injury, and that his acts showed a “pattern or
practice, and involved trickery and/or deceit.” Not only do these findings
demonstrate that Delannoy’s conversion constituted a “willful and malicious
injury” for purposes of § 523(a)(6), see Kawaauhau v. Geiger, 523 U.S. 57, 61
(1998); In re Barboza, 545 F.3d 702, 706 (9th Cir. 2008), but they were certainly
not “entirely unnecessary” to the award of punitive damages in the state
proceeding, Lucido, 795 P.2d at 1226. We further reject Delannoy’s contention
that the judgment is “not conclusive as to the finding of conversion,” based on
Comment i to the Restatement (Second) of Judgments § 27 (Am. Law Inst.
1982)—a provision that it is not clear the California courts even follow. See
Zevnik v. Superior Ct., 70 Cal. Rptr. 3d 817, 822 (Ct. App. 2008).
On the fourth requirement, the state appellate court did not hear and decide
the merits of Delannoy’s appeal, but that does not militate against the bankruptcy
court’s application of issue preclusion because Delannoy chose to file a chapter 7
petition, which voluntarily relinquished to the trustee the right to pursue any appeal
from the state court judgment. The bankruptcy code provides that legal interests
are considered property of a debtor’s estate, 11 U.S.C. § 541(a)(1), and we have
held that a bankruptcy trustee has the exclusive right to raise legal claims on behalf
of the estate, Estate of Spirtos v. One Bernardino Cnty. Superior Ct., 443 F.3d
1172, 1175–76 (9th Cir. 2006). Although California recognizes an exception to
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issue preclusion when the “party against whom preclusion is sought could not, as a
matter of law, have obtained review of the judgment in the initial action,”
Restatement (Second) of Judgments § 28(1) (Am. L. Inst. 1982), that exception
does not apply in cases, such as here, where a litigant waives or forfeits its ability
to secure appellate review, id. cmt. a; Samara v. Matar, 419 P.3d 924, 930 (Cal.
2018).
On the fifth threshold requirement, “[w]hether someone is in privity with the
actual parties requires close examination of the circumstances of each case,” and
“depends upon the fairness of binding appellant with the result obtained in earlier
proceedings in which it did not participate.” Rodgers v. Sargent Controls &
Aerospace, 38 Cal. Rptr. 3d 528, 535 (Ct. App. 2006) (internal quotation marks
and citation omitted). But here, Delannoy himself was a party to the state court
proceedings at all times leading up to entry of judgment. See Ayers v. City of
Richmond, 895 F.2d 1267, 1271 (9th Cir. 1990) (“Privity exists where the party
against whom collateral estoppel is asserted was a party to the prior adjudication
where the issue to be estopped was finally decided.”). Although he was not a party
when the state court of appeal’s judgment became final, he remained involved and
asserted his own interests in the appeal even after he voluntarily relinquished his
appellate rights to the bankruptcy trustee, who, in turn, sold them to Woodlawn.
Thus, there is no “fairness” problem in binding Delannoy to the result obtained in
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the state trial court proceedings; Delannoy set the sale of his appeal rights in
motion by voluntarily filing for bankruptcy before he could litigate his appeal to
completion. Rodgers, 38 Cal. Rptr. 3d at 535.
Finally, the bankruptcy court’s failure to conduct the requisite fairness and
public policy analysis is not reversible error because “a complete understanding of
the issues . . . may be had from the record on appeal.” Swanson v. Levy, 509 F.2d
859, 861 (9th Cir. 1975). Although Delannoy contends that the manner in which
the judgment became final following the entry of the sale order was unfair or
violated public policy, we previously concluded that the bankruptcy court did not
abuse its discretion in allowing the sale of Delannoy’s appellate rights to
Woodlawn. See In re Delannoy, 833 F. App’x 116, 118–20 (9th Cir. 2020).
Because no public policy factors weigh against application of the doctrine of
issue preclusion, and Woodlawn met its burden of establishing each of the
threshold requirements, the bankruptcy court and the BAP did not abuse their
discretion in applying the doctrine.
AFFIRMED.
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