In re: Kevin Wasko and Cassondra Dehay, 9th Cir. BAP (2013)

7/25/2019 In re: Kevin Wasko and Cassondra Dehay, 9th Cir. BAP (2013)

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1 Thi s di sposi t i on i s not appr opr i at e f or publ i cat i on.Al t hough i t may be ci t ed f or whatever persuasi ve val ue i t may have( see Fed. R. App. P. 32. 1) , i t has no pr ecedent i al val ue. See 9t hCi r . BAP Rul e 8013- 1.

2 The Honorabl e Br uce T. Beesl ey, Uni t ed St ates Bankr upt cyJ udge f or t he Di st r i ct of Nevada, si t t i ng by desi gnat i on.

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UNITED STATES BANKRUPTCY APPELLATE PANEL

OF THE NINTH CIRCUIT

I n r e: ) BAP No. CC- 12- 1118- PaMkBe)

KEVI N WASKO and CASSONDRA DEHAY, ) Bankr . No. 07- 10845- MT)

Debt or s. ) Adv. Pr oc. 07- 01136- MT___________________________________)

)STUART H. KAPLAN, M. D. ; )MOONDANCE, LLC, )

)Appel l ant s, )

)

v. ) M E M O R A N D U M1

)KEVI N WASKO; CASSONDRA DEHAY, )

)Appel l ees. )

___________________________________)

Argued and Submi t t ed on November 15, 2012,at Pasadena, Cal i f or ni a

Fi l ed - Mar ch 6, 2013

Appeal f r om t he Uni t ed St at es Bankrupt cy Cour tf or t he Cent r al Di st r i ct of Cal i f or ni a

Honorabl e Maur een Ti ghe, Bankr upt cy J udge, Presi di ng

Appear ances: Al an Wayne For sl ey of Fr edman Knupf er Li eber man LLPar gued f or appel l ant s St uar t H. Kapl an, M. D. andMoondance, LLC; J erome Bennet t Fr i edman of Fr i edmanLaw Gr oup, P. C. argued f or appel l ees Kevi n Waskoand Cassondra Dehay.

Bef or e: PAPPAS, MARKELL and BEESLEY, 2 Bankr upt cy J udges.

FILEDMAR 06 2013

SUSAN M SPRAUL, CLERKU.S. BKCY. APP. PANELOF THE NINTH CIRCUIT


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3

Moondance LLC i s a company cont r ol l ed by Kapl an. Forconveni ence, we ref er t o bot h appel l ant s as Kapl an.

4 Unl ess ot her wi se i ndi cat ed, al l chapt er , sect i on and r ul er ef er ences ar e t o t he Bankrupt cy Code, 11 U. S. C. 101- 1532, andt o the Feder al Rul es of Bankrupt cy Pr ocedur e, Rul es 1001- 9037.The Feder al Rul es of Ci vi l Pr ocedur e ar e r ef er r ed t o as Ci vi lRul es.

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The bankrupt cy cour t grant ed t he mot i on f or summar y j udgment

of appel l ant s St uar t H. Kapl an, M. D. ( Kapl an) and Moondance

LLC, 3 and det er mi ned t hat t hei r cl ai m under a st at e cour t j udgment

agai nst chapt er 74 debt or s Kevi n Wasko and Cassondra Dehay

( col l ect i vel y Debt or s) f or $1, 493, 569. 06 was except ed f r om

di schar ge under 523( a) ( 2) , ( a) ( 4) and ( a) ( 6) . The bankrupt cy

cour t decl i ned, however , t o gr ant Kapl an s mot i on t o amend the

summary j udgment t o i ncl ude an except i on t o di schar ge f or t he

st at e cour t s l at er awar d agai nst Debt or s of $495, 642. 97 i n

at t or ney s f ees. Kapl an appeal s t he deni al of t hat mot i on. On

t hi s r ecord, we VACATE t he bankr upt cy cour t s order and REMANDt hi s mat t er f or f ur t her pr oceedi ngs.

FACTS

The Stat e Cour t Act i on

Kapl an i s a der mat ol ogi st . Debt or s j oi nt l y oper at ed

ni ght cl ubs bot h bef or e and af t er t hei r mar r i age i n 2000. Somet i me

i n 1997 or 1998, Debt ors became Kapl an s pat i ent s. Thei r

pr of essi onal r el at i onshi ps devel oped i nt o per sonal f r i endshi ps.

I n 2001, Debt ors appr oached Kapl an wi t h a pr oposal t hat he

i nvest i n a ni ght cl ub t hey i nt ended t o open and and oper at e i n

Mar bel l a, Spai n, cal l ed Luna Azul ( t he Proper t y) t hr ough a new

company known as Spani sh I nvest ment s Net work ( SI N) . Debt ors


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5 Whi l e Debt or s or i gi nal l y sought r el i ef under chapt er 11,t he bankrupt cy cour t gr ant ed Debt or s mot i on t o conver t t he caset o chapt er 7 on Oct ober 24, 2011.

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of f er ed Kapl an a 50 per cent owner shi p i nt er est i n SI N i f he woul d

gi ve t hem $500, 000. Kapl an agr eed, and on March 6, 2002, wi r e

t r ansf er r ed t he $500, 000 t o t he SI N bank account . I n ear l y Apr i l ,

2002, Kapl an t r ansf er r ed an addi t i onal $250, 000 t o SI N. As t he

st at e cour t j udge woul d l at er f i nd, a f ew mont hs af t er t he f unds

wer e t r ansf er r ed, Debt or s ceased al l communi cat i on wi t h [ Kapl an]

and di sappear ed, wi t hout r eport on t he st at us of t he vent ur e or

any expl anat i on. St at ement of Deci si on, Kapl an v. Wasko, Case

No. SC082177 ( Los Angel es Super i or Cour t , November 22, 2010)

( her eaf t er SOD) .

On J une 24, 2004, Kapl an f i l ed sui t agai nst Debt or s i n LosAngel es Super i or Cour t ( t he St at e Cour t Act i on) . Kapl an s

compl ai nt , amended t wi ce, al l eged el even causes of act i on agai nst

Debt or s, i ncl udi ng f r aud and br each of f i duci ar y dut y. Kapl an

sought t o r ecover t he $750, 000 i nvest ment , pl us i nt er est , puni t i ve

damages, at t or ney s f ees and cost s.

On Mar ch 19, 2007, Debt or s f i l ed a bankrupt cy pet i t i on. 5

Thei r schedul e E l i st ed a cont i ngent , unl i qui dat ed, di sput ed debt

t o Kapl an f or $750, 000.

Short l y t her eaf t er , on Mar ch 26, 2007, Debt or s caused t he

St at e Cour t Act i on t o be r emoved t o t he bankrupt cy cour t . Despi t e

Debt or s obj ect i on, t he bankr upt cy cour t r emanded the St at e Cour t

Act i on t o t he st at e cour t on J une 7, 2007.

Few det ai l s concer ni ng the subsequent pr oceedi ngs i n t he

St at e Cour t Act i on wer e i ncl uded i n t he appel l at e r ecor d.


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However , i t appear s t hat t he stat e cour t bi f ur cat ed t he i ssues f or

t r i al . The f i r st phase of t he bench t r i al occur r ed f r om

Febr uar y 23 t o Apr i l 28, 2010, and addr essed t he l i abi l i t y and

compensat ory damage i ssues. The st ate cour t i ssued a t ent at i ve

deci si on f i ndi ng i n f avor of Kapl an and agai nst Debt or s on t he

l i abi l i t y i ssues, and det er mi ni ng t hat Kapl an was ent i t l ed t o an

award of compensat ory damages. Whi l e t he st ate cour t expect ed t o

begi n t he second phase of t he t r i al concer ni ng Kapl an s cl ai m f or

puni t i ve damages on Oct ober 27, 2010, t he par t i es s t i pul at ed t o an

award of $100, 000 i n exempl ary damages, whi ch t he st ate cour t

coul d i ncor por at e i n i t s j udgment .The st at e cour t t hen i ssued a det ai l ed st at ement of deci si on,

expl ai ni ng, i n par t , t hat :

The evi dence at t r i al of def endant s' mi sconduct , f r aud andbr eaches of f i duci ar y dut i es est abl i shed t hat t he conduct ofbot h def endant s was wi l l f ul , and t hat each of t hem act edf r audul ent l y and wi t h mal i ce.

SOD at 39. The st ate cour t ent ered a j udgment ( J udgment ) f or

Kapl an and agai nst Debt ors on November 22, 2010. I t gr ant ed

r el i ef t o Kapl an based upon Debt or s negl i gent mi sr epr esent at i on;

decei t and f r aud i n t he i nducement ; br each of f i duci ar y dut y;

money had and r ecei ved; br each of or al cont r act ; conspi r acy; and

embezzl ement . The J udgment awar ded Kapl an $750, 000 i n

compensat or y damages f r om Debt or s pl us i nt er est . Per t he par t i es

st i pul at i on, t he cour t al so awar ded Kapl an $100, 000, pl us

i nt er est , i n exempl ar y damages f or f r aud, br each of f i duci ar y

dut y, conspi r acy and embezzl ement . Debt ors di d not appeal t he

J udgment .

At some l at er dat e not cl ear i n t he r ecor d, Kapl an f i l ed a


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6 Expenses incurred in proving matters whichparty to whom request was directed failed toadmit; When court to require payment

( a) I f a par t y f ai l s t o admi t t he genui neness of anydocument or t he t r ut h of any mat t er when r equest ed t o doso under t hi s chapt er , and i f t he par t y request i ng t hat

admi ssi on t her eaf t er pr oves t he genui neness of t hatdocument or t he t r ut h of t hat mat t er , t he par t yr equest i ng the admi ss i on may move the cour t f or an orderr equi r i ng t he par t y t o whom t he r equest was di r ect ed t opay the r easonabl e expenses i ncur r ed i n maki ng thatpr oof , i ncl udi ng r easonabl e at t or ney' s f ees.

CAL. CODE CI V. PROC. 2033. 420.

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mot i on under Cal . Code Ci v. Proc. 2033. 4206 r equest i ng cost - of -

pr oof sanct i ons agai nst Debt or s f or f ai l i ng t o admi t cer t ai n

Request s f or Admi ssi ons ( t he RFA Mot i on) . The st at e cour t hel d

a hear i ng on t he RFA Mot i on on Febr uary 9, 2011. A hear i ng

t r anscr i pt i s not i ncl uded i n our r ecor d.

Af t er t he hear i ng and suppl ement al br i ef i ng by the par t i es,

on J une 29, 2011, t he st at e cour t ent er ed an or der gr ant i ng

Kapl an s mot i on and i mposi ng sanct i ons agai nst Debt ors under t he

Cal i f or ni a st at ut e ( t he RFA Sanct i ons Or der ) . I n t he or der , t he

cour t f ound t hat Debt or s had each f ai l ed t o admi t t o t he Request s

f or Admi ssi on, and t hat :t hese r equest s sought admi ssi on of mat t er s wi t hi n t heknowl edge of [ Debt or s] , and pl ai nt i f f s ul t i mat el y pr ovedt he subj ect mat t er of t he r equest s t r ue at t r i al .[ Thei r ] f ai l ur e t o admi t t hese r equest s was i n bad f ai t hand par t of a scheme t hat def endant s empl oyed t owr ongf ul l y t ake and conver t pl ai nt i f f s i nvest ment .

RFA Sanct i ons Or der at 2- 3 1- 2. The st ate cour t awarded Kapl an

$495, 642. 97, j oi nt l y and sever al l y agai nst [ Debt or s] , pur suant t o

Code of Ci vi l Pr ocedur e sect i on 2033. 420 f or [ hi s] cost s i n

pr ovi ng t he subj ect mat t er of t he r equest s f or admi ssi on addr essed

by t he mot i on[ . ] RFA Sanct i ons Or der at 7 24. The st at e cour t


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28 7 The RFA Sanct i ons Or der was never appeal ed.

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based t he amount of t he award on the repor t submi t t ed by Kapl an s

at t or ney cont ai ni ng a det ai l ed account i ng of t he number of hour s

spent i n pr ovi ng t he mat t er s r equi r ed t o [ be] pr oved sol el y due t o

Def endant s unr easonabl e and di shonest f ai l ur e to admi t t hese

mat t ers. RFA Sanct i ons Or der at 7 21.

The Adver sar y Pr oceedi ng

I n J une 2007, shor t l y af t er t he bankrupt cy cour t r emanded t he

St ate Cour t Act i on, Kapl an had commenced an adver sar y proceedi ng

agai nst Debt or s seeki ng an except i on t o di schar ge f or hi s cl ai ms

agai nst Debt or s under 523( a) ( 2) ( A) , ( a) ( 4) and ( a) ( 6) . The

bankrupt cy cour t hel d t hi s adver sary pr oceedi ng i n abeyance whi l et he St at e Cour t Act i on pr oceeded t o a concl usi on.

Af t er t he st at e cour t s ent r y of t he J udgment and RFA

Sanct i ons Or der , on J ul y 21, 2011, Kapl an f i l ed a mot i on f or

summar y j udgment i n t he adver sary pr oceedi ng. Speci f i cal l y,

Kapl an ar gued t hat t her e wer e no genui ne i ssues of f act , and t hat

both t he st ate cour t J udgment and RFA Sanct i ons Or der were

pr ecl usi ve and cont r ol l ed t he di sposi t i on of hi s di schar ge

except i on cl ai ms i n t he adver sary pr oceedi ng.

Debt ors f i l ed a l i mi t ed opposi t i on t o t he summary j udgment

mot i on on August 19, 2011. Al t hough t hey di d not cont est Kapl an s

r equest f or an except i on t o di schar ge f or t he J udgment , t hey

argued t hat t he RFA Sanct i ons Or der was not yet a f i nal j udgment

and t hat t hey i nt ended t o appeal t hat or der i n t he st at e cour t

syst em. 7

The bankrupt cy cour t conduct ed a hear i ng on t he Kapl an


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8 Al t hough t he bankr upt cy cour t gr ant ed Kapl an l eave t oamend t he summar y j udgment mot i on, Kapl an moved t o amend t heSummary J udgment Or der . The bankr upt cy cour t di d not f i nd t hi spr ocedur e obj ect i onabl e, nor do we. I n ef f ect , by t hi s mot i on,Kapl an r enewed hi s r equest f or ent r y of a summary j udgmentdetermi ni ng t hat t he award t o Kapl an i n t he RFA Sanct i ons Mot i onwas except ed f r omdi schar ge.

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summary j udgment mot i on on September 1, 2011. Wi t hout opposi t i on,

t he cour t gr ant ed Kapl an an except i on t o di schar ge under

523( a) ( 2) ( A) , ( a) ( 4) and ( a) ( 6) f or $1, 493, 569. 06, t he damages

awar ded t o hi m i n t he J udgment . Agr eei ng wi t h Debt or s, t he

bankr upt cy cour t deni ed t he mot i on as t o t he RFA Sanct i ons Or der

because i t was not yet a f i nal or der of t he st at e cour t ( t he

Summar y J udgment Or der) . The Summar y J udgment Or der gr anted

l eave t o Kapl an t o amend thei r summar y j udgment mot i on when the

RFA Sanct i ons Or der became a f i nal order .

On November 15, 2011, Kapl an f i l ed a mot i on to amend t he

Summar y J udgment Or der8

t o add t he award made i n t he RFA Sanct i onsOr der , whi ch was now f i nal . To suppor t t hi s mot i on, Kapl an r el i ed

upon t hi s Panel s deci si ons i n Fl or i da v. Ti cor Ti t l e I ns. Co.

( I n r e Fl or i da) , 164 B. R. 636 ( 9t h Ci r . BAP 1994) and Roussos v.

Mi chael i des ( I n r e Roussos) , 251 B. R. 86 ( 9t h Ci r . BAP 2000) whi ch

he cont ended had hel d t hat a debt f or a cr edi t or s at t or ney s f ees

and cost s awarded under st ate l aw shoul d be except ed f r om

di schar ge i f t hat obl i gat i on ar ose f r om t he same conduct t hat gave

r i se t o t he under l yi ng i ndebt edness. Kapl an ar gued t hat t he RFA

Sanct i ons Or der arose f r omt he same conduct by Debt ors as t hat

gi vi ng r i se t o t he other damages awarded i n t he nondi schar geabl e

J udgment , and t her ef or e, t hat t he at t or ney s f ees awar d shoul d

al so be except ed f r om di schar ge.


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Debtor s r esponded t o Kapl an s mot i on t o amend t he Summar y

J udgment Or der on November 28, 2011. Debt or s ar gued t hat , unl ess

t her e i s an under l yi ng st at ut or y or cont r act ual basi s f or awar di ng

at t or ney s f ees, t hen any awar d, even when anci l l ar y t o the

nondi schar geabl e cl ai m, i s subj ect t o di schar ge.

The bankrupt cy cour t conduct ed a hear i ng on Kapl an s mot i on

t o amend on December 7, 2011. Af t er consi der i ng t he part i es

ar gument s, t he cour t cont i nued t he hear i ng so that i t coul d r evi ew

t he case l aw.

At t he cont i nued hear i ng on Febr uary 15, 2012, t he bankr upt cy

cour t announced i t s deci si on on t he r ecor d. I t deni ed Kapl an smot i on t o amend the summary j udgment t o i ncl ude an except i on t o

di schar ge f or t he at t or neys f ees awar ded i n t he RFA Sanct i ons

Or der because, i n t he wor ds of t he bankrupt cy cour t , t hose f ees

as t hey ve been awar ded bel ow, ar e not di r ect l y consequent i al

f r om t he nondi schar geabi l i t y i ssue. Hr g Tr . 1: 22- 23,

Febr uary 15, 2012.

The bankrupt cy cour t s or der denyi ng Kapl an s mot i on was

ent er ed on Febr uar y 21, 2012 ( t he Second Summar y J udgment

Or der ) . Kapl an f i l ed a t i mel y appeal on Mar ch 6, 2012.

JURISDICTION

The bankrupt cy cour t had j ur i sdi ct i on under 28 U. S. C. 1334

and 157( b) ( 2) ( I ) . We have j ur i sdi ct i on under 28 U. S. C. 158.

ISSUES

Whether t he bankr upt cy cour t err ed when i t deni ed Kapl an s

mot i on f or t o amend the summar y j udgment and det er mi ned that t he

awar d of at t or neys f ees by the st at e cour t i n t he RFA Sanct i ons

Or der was not except ed f r omdi schar ge.


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Whether t he bankrupt cy cour t er r ed i n det er mi ni ng t hat i ssue

pr ecl usi on was not avai l abl e or appl i cabl e t o t he RFA Sanct i ons

Or der .

STANDARDS OF REVIEW

We revi ew de novo t he bankr upt cy cour t s deci si ons concerni ng

summar y j udgment . SNTL Cor p. v. Ct r . I ns. Co. ( I n r e SNTL Cor p. ) ,

571 F. 3d 826, 834 ( 9t h Ci r . 2009) . Wher e no f act ual di sput e

exi st s on an appeal r egar di ng except i on t o di schar ge, t he r evi ew

i s de novo. Waag v. Per mann ( I n r e Waag) , 418 B. R. 373, 376 ( 9t h

Ci r . BAP 2009) .

The avai l abi l i t y of i ssue precl usi on i s r evi ewed de novo.Geor ge v. Ci t y of Mor r o Bay ( I n r e Geor ge) , 318 B. R. 729, 732- 33

( 9t h Ci r . BAP 2004) , af f ' d, 144 F. App' x. 636 ( 9t h Ci r . 2005) .

Once i t i s det er mi ned t hat i ssue pr ecl usi on may be appl i ed, t he

t r i al cour t ' s deci si on t o do so i s r evi ewed f or abuse of

di scr et i on. I d. at 733. I n det er mi ni ng whet her t o appl y i ssue

pr ecl usi on, t he cour t i s t o be gi ven br oad di scret i on i n l i ght of

t he advant ages of avoi di ng bur densome l i t i gat i on and pr omot i ng

j udi ci al economy. Parkl ane Hosi er y Co. v. Shor e, 439 U. S. 322,

321 ( 1979) . Reasonabl e doubt s about what was deci ded i n a pr i or

j udgment ar e r esol ved agai nst appl yi ng i ssue precl usi on. Lopez v.

Emer gency Ser v. Rest or at i on, I nc. ( I n r e Lopez) , 367 B. R. 99,

107- 08 ( 9t h Ci r . BAP 2007) .

DISCUSSION

Summary j udgment shoul d be gr ant ed onl y "i f t he pl eadi ngs,

t he di scover y and di scl osur e mat er i al s on f i l e, and any af f i davi t s

show t hat t her e i s no genui ne i ssue as t o any mat er i al f act and

t hat t he movant i s ent i t l ed t o j udgment as a mat t er of l aw. "


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Ci vi l Rul e 56( c) ( 2) , i ncor por at ed by Rul e 7056; Bar boza v. New

For m, I nc. ( I n r e Bar boza) , 545 F. 3d 702, 707 ( 9t h Ci r . 2008) .

Except i ons t o di schar ge must be st r i ct l y const r ued. Snoke v. Ri so

( I n r e Ri so) , 978 F. 2d 1151, 1154 ( 9t h Ci r . 1992) ( [ G] i ven t he

st r ong f r esh st ar t pol i cy i n t he Code, except i ons t o di schar ge ar e

st r i ct l y const r ued agai nst an obj ect i ng credi t or and i n f avor of

t he debt or . ) ; Ghomeshi v. Sabban ( I n r e Sabban) , 384 B. R. 1, 5

( 9t h Ci r . BAP 2008) , af f ' d, 600 F. 3d 1219, 1222 ( 9t h Ci r . 2010) .

A t r i al cour t may gr ant summary j udgment on t he basi s of i ssue

pr ecl usi on. Gr ani t e Rock Co. v. I nt ' l Bhd. of Teamst er s, Local

287, 649 F. 3d 1067, 1070 ( 9t h Ci r . 2011) .I n t hi s appeal , t he bankr upt cy cour t ef f ect i vel y gr ant ed

summar y j udgment t wi ce. Fi r st , wi t hout opposi t i on f r om Debt or s,

i t determi ned i n t he Summary J udgment Or der t hat , based on i ssue

pr ecl usi on, t he damages awarded by the st ate cour t t o Kapl an i n

t he J udgment were except ed f r omdi schar ge under 523( a) ( 2) ,

( a) ( 4) and ( a) ( 6) . However , i n t he Summary J udgment Or der , t he

bankrupt cy cour t decl i ned t o al l ow an except i on t o di schar ge of

t he at t orney s f ees awarded t o Kapl an i n t he RFA Sanct i ons Or der

because, i t deci ded, t her e was an i ssue of cont ent i on as t o

whether t he RFA Sanct i ons Or der shoul d be gi ven t he same

pr ecl usi ve ef f ect as t hat gi ven t he J udgment . Tent at i ve Rul i ng

( adopt ed i n t he Summary J udgment Or der ) at 2, September 1, 2011.

Then, af t er t he RFA Sanct i ons Or der became f i nal , at t he

hear i ng on Febr uary 15, 2012, t he bankr upt cy cour t not onl y deni ed

Kapl an s mot i on to amend t he Summary J udgment Or der t o i ncl ude an

except i on t o di schar ge f or t he RFA Sanct i ons Or der , but t he cour t

ef f ect i vel y hel d t hat t he at t or ney s f ees awar ded by the st at e


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cour t wer e i ndeed di schar ged. Accor di ng t o t he bankrupt cy cour t :

[ T] he Fl or i da case i s actual l y not cont r ol l i ng her ebecause t he at t orney f ees, as t hey ve been awardedbel ow, ar e not di r ect l y consequent i al f r om t henondi schar geabi l i t y i ssue. . . . And t hedi schar geabi l i t y st at us depends on t he pr i mar y debtt hat s nondi schar geabl e. . . . [ T] hi s i s on [ ] gi vi ngpr ecl usi ve ef f ect t o an ear l i er j udgment , and t he Cour tneeds t o eval uat e al l t he f act or s on whet her i t s a f ai rand good pol i cy t o gi ve pr ecl usi ve ef f ect . I t doesn t i t s not suppor t ed.

Hr g Tr . 1: 212: 11, Febr uar y 15, 2012.

As near as we can di scer n, t he bankrupt cy cour t appar ent l y

deci ded t hat i ssue pr ecl usi on shoul d not be appl i ed t o t he st at e

cour t s f i ndi ngs i n t he RFA Sanct i ons Or der i n deci di ng whet hert he at t or ney s f ees i t awar ded coul d be di schar ged. I n i t s or al

r ul i ng, t he bankr upt cy cour t di d not cl ear l y ar t i cul at e why i t

decl i ned t o appl y i ssue pr ecl usi on, nor di d i t i dent i f y al l t he

f act or s i t consi der ed i n r eachi ng i t s concl usi on. As expl ai ned

bel ow, t hese omi ssi ons are pr obl emat i c.

Avai l abi l i t y of I ssue Pr ecl usi on

Si mpl y st at ed, i ssue pr ecl usi on "bar s successi ve l i t i gat i on

of an i ssue of f act or l aw t hat was act ual l y l i t i gat ed and

r esol ved i n a val i d cour t det er mi nat i on essent i al t o t hat pr i or

j udgment , ' even i f t he i ssue r ecur s i n t he cont ext of a di f f er ent

cl ai m. " Tayl or v. St ur gel l , 553 U. S. 880, 892 ( 2008) ( quot i ng New

Hampshi r e v. Mai ne, 532 U. S. 742, 748- 49 ( 2001) ) . The pur pose of

i ssue pr ecl usi on i s t o conser ve j udi ci al r esour ces and f ost er

conf i dence i n t he out come of adj udi cat i ons by pr ovi di ng f i nal i t y

and avoi di ng i nconsi st ent r ul i ngs. See Tayl or , 553 U. S. at 892.

I t i s set t l ed t hat i ssue pr ecl usi on may be appl i ed i n except i on t o

di schar ge pr oceedi ngs. Gr ogan v. Gar ner , 498 U. S. 279, 284- 85


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( 1991) .

The RFA Sanct i on Or der was ent er ed by a Cal i f or ni a st at e

cour t . To det er mi ne t he pr ecl usi ve ef f ect of a Cal i f or ni a st at e

cour t ' s f i ndi ngs i n a j udgment or or der , t he bankrupt cy cour t must

f i r st det er mi ne i f i ssue pr ecl usi on i s avai l abl e under Cal i f or ni a

pr ecl usi on l aw. 28 U. S. C. 1738 ( t he Ful l Fai t h and Cr edi t

St at ut e) ; Mar r ese v. Am. Acad. of Or t hopaedi c Sur geons, 470 U. S.

373, 380 ( 1985) . When st at e pr ecl usi on l aw cont r ol s, t he

di scr et i on t o appl y t he doct r i ne i s exer ci sed i n accor dance wi t h

st at e and f eder al l aw. Khal i gh v. Hadegh ( I n r e Khal i gh) ,

338 B. R. 817, 823 ( 9t h Ci r . BAP 2006) , af f ' d, 506 F. 3d 956( 9t h Ci r . 2007) .

Under Cal i f or ni a l aw, t he par t y asser t i ng i ssue pr ecl usi on

has t he bur den of est abl i shi ng t he f ol l owi ng " t hr eshol d"

r equi r ement s f or i t s avai l abi l i t y:

Fi r st , t he i ssue sought t o be pr ecl uded f r omr el i t i gat i on must be i dent i cal t o t hat deci ded i n af ormer pr oceedi ng. Second, t hi s i ssue must have beenact ual l y l i t i gat ed i n t he f or mer pr oceedi ng. Thi r d, i tmust have been necessar i l y deci ded i n t he f ormerpr oceedi ng. Four t h, t he deci si on i n t he f or merpr oceedi ng must be f i nal and on t he mer i t s. Fi nal l y,t he par t y agai nst whom pr ecl usi on i s sought must be t hesame as, or i n pr i vi t y wi t h, t he par t y to t he f or merpr oceedi ng.

Harmon v. Kobr i n ( I n re Harmon) , 250 F. 3d 1240, 1245 (9t h Ci r .

2001) ( t he Harmon r equi r ement s) .

Here, t here does not appear t o be any di sput e that some of

t he Har mon cr i t er i a ar e sat i sf i ed by t he RFA Sanct i ons Or der . I t

was a f i nal or der , and t he par t i es and t hei r adver sar i al posi t i ons

i n st at e cour t wer e t he same as i n t hi s l i t i gat i on. What i s

di sput ed i n t hi s appeal , however , i s whet her t he i ssue deci ded i n


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stat e court , i . e. , Debt ors l i abi l i t y f or at t orneys f ees to

Kapl an under Cal . Code Ci v. Proc. 2033. 420, was i dent i cal ,

actual l y l i t i gat ed, and necessar i l y deci ded i n r el at i on t o t he

i ssues bef or e t he bankrupt cy cour t , i . e. , whet her t hat debt

ar ose f r om conduct of t he t ype gi vi ng r i se t o an except i on t o

di schar ge under 523( a) ( 2) , ( a) ( 4) and/ or ( a) ( 6) .

I n r eachi ng i t s deci si on, t her e i s no i ndi cat i on i n t he

r ecor d bef ore us t hat t he bankr upt cy cour t conduct ed a r evi ew of

t he RFA Sanct i ons Or der t o addr ess t he t hr ee quest i onabl e Harmon

f act or s. I nst ead, t he bankrupt cy cour t appear s t o have r ul ed t hat

i ssue pr ecl usi on woul d not be appl i ed f or r easons of publ i cpol i cy: [ T] hi s i s on [ ] gi vi ng pr ecl usi ve ef f ect t o an ear l i er

j udgment , and t he Cour t needs t o eval uat e al l t he f act or s on

whet her i t ' s a f ai r and good pol i cy t o gi ve pr ecl usi ve ef f ect [ t o

t he RFA Sanct i ons Or der . ] I t doesn' t i t ' s not suppor t ed. Hr g

Tr . 27- 11, Februar y 15, 2012.

I n shor t , t he bankrupt cy cour t acknowl edges t hat i t was

conduct i ng an i ssue pr ecl usi on anal ysi s of t he RFA Sanct i ons

Or der . However , t he cour t di d not expl ai n what f act or s i t was

eval uat i ng or why i t was not f ai r and good pol i cy to gi ve

pr ecl usi ve ef f ect t o t he RFA Sanct i ons Or der . Fur t her , i t woul d

appear t hat t he cour t conf l at ed whet her i ssue pr ecl usi on was i n

f act avai l abl e wi t h t he second par t of t he anal ysi s, whet her i t

shoul d be appl i ed.

Appl i cat i on of I ssue Pr ecl usi on i n Except i ons t o Di schar ge

Bankrupt cy cour t s have excl usi ve j ur i sdi ct i on t o det er mi ne

di schar geabi l i t y of debt s under 523( a) ( 2) ( f r aud and

decept i on) ; ( a) ( 4) ( f i duci ar y f r aud, embezzl ement , or l ar ceny) ;


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and ( a) ( 6) ( wi l l f ul and mal i ci ous i nj ur y to per son or pr oper t y) .

Acker man v. Eber ( I n r e Eber ) , 687 F. 3d 1123, 1128 ( 9t h Ci r .

2012) ; see 523( c) ( 1) . The ef f ect of t hi s rul e i s t hat t he

bankrupt cy cour t i s not conf i ned t o a r evi ew of t he j udgment and

r ecor d i n t he pr i or st at e- cour t pr oceedi ngs when consi der i ng t he

di schar geabi l i t y of [ a credi t or s] debt . Br own v. Fel sen,

442 U. S. 127, 129- 30 ( 1979) . I n ot her wor ds, f i nal j udgment s i n

st at e cour t s are not necessar i l y pr ecl usi ve i n Uni t ed St at es

bankrupt cy cour t s. " Sasson v. Sokol of f ( I n r e Sasson) , 424 F. 3d

864, 872 ( 9t h Ci r . 2005) .

Ther ef or e, al t hough al l f eder al cour t s have broaddi scr et i on i n a deci si on t o appl y i ssue pr ecl usi on based on a

st at e cour t j udgment , Par kl ane Hosi er y Co. , 439 U. S. at 331, t hat

di scret i on i s par t i cul ar l y expansi ve i n except i ons t o di schar ge

under 523( a) ( 2) , ( a) ( 4) and ( a) ( 6) . Comer v. Comer

( I n r e Comer ) , 723 F. 2d 737, 740 ( 9t h Ci r . 1984) ( hol di ng t hat a

bankrupt cy j udge shoul d not r el y sol el y on st at e cour t j udgment s

when determi ni ng the natur e of a debt f or pur poses of

di schar geabi l i t y, i f doi ng so woul d pr ohi bi t t he bankrupt cy cour t

f r om exer ci si ng i t s excl usi ve j ur i sdi cti on t o det er mi ne

di schar geabi l i t y. )

The Panel has previ ousl y provi ded gui del i nes f or bankrupt cy

cour t s on how t o sat i sf y t hei r i ndependent r esponsi bi l i t y t o

det er mi ne i f t he f i ndi ngs of a st at e cour t j udgment shoul d be

appl i ed t o j ust i f y an except i on t o di schar ge based on i ssue

pr ecl usi on. I n r e Lopez, 367 B. R. at 99. Obser vi ng t hat , at i t s

hear t , t he deci si on t o appl y i ssue pr ecl usi on ent ai l s a measur e of

di scret i on and f l exi bi l i t y, i d. at 107, t he Panel not ed t hat


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bankrupt cy cour t s ar e gui ded by t he concept s i ncorpor at ed i n t he

Rest atement ( Second) of J udgment s:

t he need f or f l exi bi l i t y i n t he oper at i ve pr i nci pl es,and t hi s r ecogni t i on has served as t he basi s f or t heexcept i ons t o t he r ul e of i ssue pr ecl usi on set f or t h i n 28. " RESTATEMENT ( SECOND) OF J UDGMENTS, Ti t l e E,I nt r oduct or y Not e ( 1980) . The except i ons t o t he gener alr ul e of i ssue pr ecl usi on t hat ar e set out i n Rest at ement( Second) 28 i ncl ude such f l exi bl e concept s as: changei n appl i cabl e l egal cont ext ; avoi di ng i nequi t abl eadmi ni st r at i on of l aws; di f f er ences i n qual i t y orext ensi veness of pr ocedur es; and l ack of adequat eoppor t uni t y or i ncent i ve t o obt ai n a f ul l and f ai radj udi cat i on i n t he i ni t i al act i on. I d. 28( 2) , ( 3) &(5) .

I d. ; see al so Par kl ane Hosi er y Co. , 439 U. S. at 327 n. 6, 330 n. 13,

331 n. 14, 333 n. 21, 353, 354 n. 22 ( where the Supr eme Cour t ci t est he Rest at ement and Rest atement ( Second) of J udgment s r epeat edl y

as aut hor i t at i ve on quest i ons of i ssue pr ecl usi on) .

Al t hough t he Lopez panel r ecogni zed t hat appl i cat i on of i ssue

pr ecl usi on i n except i on t o di schar ge cases i s pr i nci pal l y a

quest i on of f eder al l aw, i t under st ood t hat , wher e a st at e l aw

j udgment i s avai l abl e f or i ssue precl usi on, st at e ( Cal i f or ni a) l aw

st i l l must be t aken i nt o consi der at i on. For t unat el y,

Cal i f or ni a l aw i s consi st ent wi t h f eder al l aw on t hequest i on of di scret i onar y appl i cat i on of i ssuepr ecl usi on. I n Cal i f or ni a, i ssue pr ecl usi on i s notappl i ed aut omat i cal l y or r i gi dl y, and cour t s ar eper mi t t ed t o decl i ne t o gi ve i ssue pr ecl usi ve ef f ect t opr i or j udgment s i n def er ence of count er vai l i ngconsi der at i ons of f ai r ness. The cour t bal ances " t heneed t o l i mi t l i t i gat i on agai nst t he r i ght of a f ai radver sary pr oceedi ng i n whi ch a par t y may f ul l y pr esentt he f act s. " Thus, pol i cy consi der at i ons may l i mi t use ofi ssue pr ecl usi on i n any par t i cul ar i nst ance.

I n r e Lopez, 367 B. R. at 108 ( ci t at i ons omi t t ed) ; see al so,

Khal i gh v. Hadaegh ( I n r e Khal i gh) , 338 B. R. 817, 828 ( 9t h Ci r .

BAP 2006) , af f d 506 F. 3d 956 ( 9t h Ci r . 2007) ( not i ng t hat t he

Cal i f or ni a cour t s t ake i nt o account t he consi der at i ons


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9 To det er mi ne i f an i ssue i s i dent i cal t o t he i ssue bef or et he cour t deci di ng pr ecl usi on and whet her i t has been act ual l yl i t i gat ed, we ar e r equi r ed t o exami ne t he r ecor d i n t he pr i orcour t s case. Uni t ed St at es v. Her nandez, 572 F. 2d 218, 222 ( 9t hCi r . 1978) . Based on what has been submi t t ed t o us, i t may be

t hat t he bankr uptcy cour t had an i nadequate recor d t o make t hatdet er mi nat i on. I n essence, t he bankr upt cy cour t was gi ven onl yt he RFA Sanct i ons Or der , whi ch i mposed at t orney' s f ees on Debt orsbecause of t hei r f ai l ur e t o admi t as f act mat t er s speci f i ed i n t heRFAs t hat Kapl an was l at er r equi r ed t o pr ove at t r i al . The RFASanct i ons Or der l i st s 27 RFAs t hat Wasko f ai l ed t o answer, and 30RFAs t hat Dehay f ai l ed t o answer. However , t he RFA Sanct i ons

( cont i nued. . . )

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ar t i cul at ed i n Rest at ement ( Second) of J udgment s. ) .

I n t hi s appeal , our abi l i t y t o r evi ew t he bankr upt cy cour t s

deci si on i s hamper ed by the br evi t y of i t s anal ysi s i n i t s or al

r ul i ng. The cour t di d not engage i n an anal ysi s concer ni ng

whet her t he RFA Sanct i ons Or der sat i sf i ed t he f i ve Har mon f act or s.

I f t he bankrupt cy cour t r ul ed t hat i ssue pr ecl usi on was not

avai l abl e under st at e l aw, i t was unnecessary t o reach t he

di scret i onar y quest i on of i t s appl i cat i on i n t hi s case. As not ed

above, t he cour t seemi ngl y decl i ned t o appl y i ssue pr ecl usi on f or

pol i cy r easons, but di d not expl ai n what f act or s or consi der at i ons

i t r el i ed upon f or i t s deci si on.Gi ven t hi s r ecor d, we must r emand t hi s mat t er t o t he

bankrupt cy cour t wi t h i nst r uct i ons t hat i t conduct an adequat e

i ssue pr ecl usi on anal ysi s concer ni ng t he st at e cour t s RFA

Sanct i ons Or der . To do so, i t shoul d f i r st exami ne t he f i ve

Har mon f act or s payi ng par t i cul ar at t ent i on t o t he t hr ee f act or s i n

di sput e whet her t he i ssues deci ded by t he st at e cour t i n t he RFA

Sanct i ons Or der wer e i dent i cal , actual l y l i t i gat ed, and

necessar i l y deci ded i n r el at i on t o t he except i on t o di schar ge

i ssues bef or e the bankrupt cy cour t . 9 Then, i f t he bankrupt cy


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9( . . . cont i nued)Or der di d not expl ai n what f act s t hose RFAs speci f i cal l yaddressed. We have exami ned t he docket and i t does not appeart hat t he bankrupt cy cour t was ever gi ven copi es of t he RFAs.

Addi t i onal l y, counsel f or Debt or s of f er ed t o pr ovi de t hebankrupt cy cour t wi t h a t r anscr i pt of t he hear i ng wher e t he st at ecour t expl ai ned i t s r easons f or gr ant i ng t he at t or ney' s f ee awar di n t he RFA Sanct i ons Or der , but t her e i s no i ndi cat i on t hat t het r anscr i pt was ever pr ovi ded, nor does i t appear i n t he cour t ' sdocket . Hr ' g Tr . 6: 16- 20, Dec. 7, 2011. On r emand, t o per f or m apr oper i ssue pr ecl usi on anal ysi s, t he bankrupt cy cour t may wi sh t oobt ai n copi es of t he RFAs and t he st at e cour t hear i ng t r anscr i pt .

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cour t det er mi nes t hat i ssue pr ecl usi on i s avai l abl e, i t shoul d

exer ci se i t s i ndependent dut y to det er mi ne i f i ssue pr ecl usi on

shoul d appl y i n t hi s case, gui ded by t he f eder al and Cal i f or ni a

gui del i nes di scussed above.

I n l i ght of t he f act s of t hi s case and t he case l aw, an i ssuepr ecl usi on anal ysi s of t he RFA Sanct i ons Or der was r equi r ed.

The RFA Sanct i ons Or der and t he Summar y J udgment Or der wer e

separat e order s. I n t he Summary J udgment Or der , based upon

Debt or s pr ebankrupt cy conduct i n t hei r deal i ngs wi t h Kapl an, t he

bankr upt cy cour t f ound t hat t he st ate cour t had made the necessary

f i ndi ngs of f act t o suppor t an except i on t o di schar ge i n Kapl an sf avor under 523( a) ( 2) ( A) , ( a) ( 4) and ( a) ( 6) . Debt or s have not

chal l enged the bankrupt cy cour t s deci si on.

On remand, t he bankrupt cy cour t must al so det ermi ne whet her

t he RFA Sanct i ons Or der pr ecl usi vel y est abl i shes an except i on t o

di schar ge. As Debt ors note, i n cont r ast t o t he Summary J udgment

Or der , t he RFA Sanct i ons Or der r esul t ed sol el y f r om t hei r post -

bankrupt cy f ai l ur e t o compl y wi t h di scover y rul es i n t he st at e

cour t l i t i gat i on. I n ot her wor ds, t he at t or neys f ee awar d i n t he

RFA Sanct i ons Or der di d not di r ect l y r esul t f r om t he same conduct


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gi vi ng r i se t o t he J udgment . Because t he t wo st at e cour t or der s

wer e based ost ensi bl y on conduct occur r i ng at di f f er ent t i mes i n

r el at i on t o Debt or s bankr upt cy f i l i ng, a det er mi nat i on t hat t he

J udgment i s excepted f r om di schar ge woul d not necessar i l y r equi r e

t hat t he amount s awarded t o Kapl an under t he st ate cour t s second,

i ndependent or der , wer e al so nondi schar geabl e.

As not ed above, t her e i s a st r ong bankrupt cy pol i cy that

except i ons t o di schar ge ar e t o be st r i ct l y const r ued so as t o

ef f ect uat e t he Congr essi onal pol i cy of per mi t t i ng debt or s a

f i nanci al f r esh st ar t and agai nst t he credi t or . I n r e Ri so,

978 F. 2d at 1154; I n r e Rahm, 641 F. 2d 755, 756- 57 ( 9t h Ci r .1981) ; I n r e Sabban, 384 B. R. at 5. Despi t e t hi s, Kapl an ar gues,

case l aw suppor t s hi s posi t i on t hat once i t i s establ i shed t hat

speci f i c money or pr oper t y has been obt ai ned by f r aud . . . any

debt ar i si ng t her ef r om i s except ed f r om di schar ge. Kapl an s Op.

Br . at 7 ( quot i ng Cohen v. De l a Cr uz, 523 U. S. 213, 218 ( 1998) ) .

Kapl an s ar gument i mpl i es t hat , once a bankrupt cy cour t deci des t o

except a debt f r om di schar ge based on i ssue pr ecl usi on, any

at t or ney s f ees associ at ed wi t h t hat debt ar e al so except ed f r om

di schar ge, wi t hout t he need f or a separ at e i ssue pr ecl usi on

i nqui r y. We di sagr ee wi t h Kapl an s readi ng of Cohen t hat no

separ at e i ssue pr ecl usi on i nqui r y i s necessar y.

I n Cohen, t he Supr eme Cour t hel d t hat , f or pur poses of

523( a) ( 2) , any debt ar i si ng f r om a j udi ci al det er mi nat i on of

f r aud i s l i kewi se except ed f r om di schar ge, and i n t hat case, any

debt i ncl uded t he t r ebl e damages, at t or ney s f ees and ot her

r el i ef awar ded t o t he credi t or under st at e l aw. I d. at 223. I n

t hat case t he cour t agr eed wi t h t he bankrupt cy cour t t hat , because


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10 The t wo st at ut es ci t ed i n t he Cohen deci si on wer e:

N.J. Stat. 56:8-2. Fraud, etc., in connection with sale oradvertisement of merchandise or real estate as unlawful practice

The act , use or empl oyment by any per son of anyunconsci onabl e commer ci al pr act i ce, decept i on, f r aud,f al se pr et ense, f al se pr omi se, mi sr epr esent at i on, or t heknowi ng conceal ment , suppr essi on, or omi ss i on of anymat er i al f act wi t h i nt ent t hat ot her s r el y upon suchconceal ment , suppr essi on or omi ssi on, i n connect i on wi t ht he sal e or adver t i sement of any merchandi se or r ealest at e, or wi t h t he subsequent per f or mance of suchper son as af or esai d, whet her or not any per son has i nf act been mi sl ed, decei ved or damaged t hereby, i sdecl ar ed t o be an unl awf ul pr act i ce[ . ]

N.J. Stat. 56:8-19. Action, counterclaim by injured person;recovery of damages, costs

Any person who suf f ers any ascert ai nabl e l oss of moneysor pr oper t y, r eal or per sonal , as a resul t of t he use orempl oyment by anot her per son of any met hod, act , orpr act i ce decl ar ed unl awf ul under t hi s act or t he acthereby amended and suppl emented may br i ng an act i on orasser t a count er cl ai m t her ef or i n any cour t of compet entj ur i sdi ct i on. I n any act i on under t hi s sect i on t he cour tshal l , i n addi t i on t o any ot her appr opr i at e l egal orequi t abl e r el i ef , awar d t hr eef ol d t he damages sust ai ned

by any per son i n i nt er est . I n al l act i ons under t hi ssect i on, i ncl udi ng t hose br ought by t he At t or neyGener al , t he cour t shal l al so awar d r easonabl eat t or neys' f ees, f i l i ng f ees and r easonabl e cost s ofsui t .

These ar e t he t ext s of t he st at utes i n ef f ect i n 1998 whent he Supr eme Cour t i ssued i t s deci si on i n Cohen.

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t he cr edi t or s nondi schar geabl e cl ai m agai nst t he debt or ar ose

under New J er sey s r ent cont r ol st at ut e, an awar d t o t he cr edi t or

under a r el at ed st at ut e pr ovi di ng f or r ecover y of at t or ney s f ees

i n act i ons f or vi ol at i ons of t he st at ut or y r ent cont r ol s was al so

except ed f r om di schar ge. 10 Cohen, 523 U. S. at 218. St r i ct l y

speaki ng, t hen, t he r ul e announced i n Cohen deal t onl y wi t h

except i ons t o di schar ge f or at t or ney s f ees wher e t her e was a

connect i on bet ween a st at ut e aut hor i zi ng t he f ee awar d, and t he


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11 As t he case l aw demonst r ates, where t here i s a cont r act ualbasi s f or t he awar d of at t or ney s f ees awar ded i n anondi schargeabl e j udgment , such f ees may al so be except ed f r omdi schar ge. J or dan v. Se. Nat ' l Bank ( I n r e J or dan) , 927 F. 2d 221,

226- 28 ( 5t h Ci r . 1991) ( f i ndi ng t hat a debt except ed f r omdi schar ge " i ncl udes st at e- appr oved cont r act ual l y r equi r edat t or ney' s f ees" ) ( quot i ng Mar t i n v. Bank of Ger mant own ( I n r eMar t i n) , 761 F. 2d 1163, 1168 ( 6t h Ci r . 1985) ) . Because t her e wasno wr i t t en cont r act bet ween t he par t i es i n t hi s case pr ovi di ng f oran awar d of at t orney f ees t o the pr evai l i ng par t y, we need notconsi der t hat case l aw her e.

12 There was al so some di scussi on i n t he bankr upt cy cour t ofa l ess numer ous, mi nor i t y l i ne of deci si ons espousi ng a so- cal l ed"st at us- dependent " appr oach to det er mi ne whet her at t or ney' s f eesawar ds ar e subj ect t o di schar ge i n t hi s cont ext . As expl ai ned i nt hese deci si ons, whet her t her e i s a cont r act ual or st at ut or y basi s

f or t he awar d of at t or ney' s f ees i s not det er mi nat i ve. I nst ead,"t he di schar geabi l i t y of anci l l ar y obl i gat i ons such as at t or ney' sf ees t ur n[ s] on t he di schar geabi l i t y of t he under l yi ng debt . . . "DuPhi l y v. DuPhi l y, 52 B. R. 971, 978 ( D. Del . 1985) ( ci t i ngI n r e Chamber s, 36 B. R. 42 ( Bankr . D. Wi s. 1984) ; I n r e Sposa,31 B. R. 307 ( Bankr . E. D. Va. 1983) ) . As di scussed bel ow, t hePanel has adopt ed t he stat ut or y/ cont r act ual posi t i on i n our


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st at ut es est abl i shi ng t he debt or s l i abi l i t y f or t he credi t or s

cl ai m.

Appl yi ng Cohen, f our cour t s of appeal s have adopt ed what t he

par t i es i n t hi s appeal descr i be as a "st at ut or y/ cont r act ual basi s"

anal ysi s i n t hi s cont ext . Under t hi s appr oach t o const r ui ng

523( a) , at t or ney f ee awar ds ar e except ed f r om di schar ge onl y

when based on a st atut e or cont r act 11 r el at ed t o t he credi t or s

under l yi ng cl ai m. Tr ansout h Fi n. Cor p of Fl a. v. J ohnson,

931 F. 2d 1505, 1509 ( 11t h Ci r . 1991) ; Uni t ed Merchant s and

Manuf act ur er s I nc. v. Equi t abl e Li f e Assur ance Soci et y of t he

Uni t ed St at es ( I n r e Uni t ed Mer chant s and Manuf act ur er s) , 674 F. 2d134 ( 2nd Ci r . 1982) ; Fry v. Di nan ( I n r e Di nan) , 448 B. R. 775, 778

( 9t h Ci r . BAP 2011) ; Fl or i da v. Ti cor Ti t l e I ns. Co.

( I n r e Fl or i da) , 164 B. R. 636, 639 ( 9t h Ci r . BAP 1994) . 12


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12( . . . cont i nued)publ i shed deci si on I n r e Fl or i da and t hus we do not consi der t hi sal t er nat i ve vi ew.

13

18 U. S. C. 1964( c) pr ovi des t hat :Any per son i nj ur ed i n hi s busi ness or pr oper t y by r easonof a vi ol at i on of sect i on 1962 of [ t he RI CO st at ut e] maysue t her ef or i n any appr opr i at e Uni t ed St at es di st r i ctcour t and shal l r ecover t hr eef ol d t he damages hesust ai ns and t he cost of t he sui t , i ncl udi ng ar easonabl e at t or ney' s f ee[ . ]

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Bot h Kapl an and Debt or s i n t hi s appeal ci t e to t he Panel s

opi ni on i n I n r e Fl or i da t o suppor t t hei r posi t i ons. As t he

bankrupt cy cour t cor r ect l y det er mi ned, but f or possi bl y di f f er ent

r easons t han our own, I n r e Fl or i da i s not cont r ol l i ng on t he

avai l abi l i t y of i ssue pr ecl usi on i n t hi s case. However , si nce

I n r e Fl or i da was a publ i shed opi ni on, and we are bound by i t s

hol di ngs, we wi l l exami ne i t i n det ai l .

I n I n r e Fl or i da, bef or e bankr upt cy, Ti cor sued Al vi n Fl or i da

i n U. S. di str i ct cour t . Af t er a bench t r i al , t he di str i ct cour t

f ound t hat Fl or i da, i n at t empt i ng t o sel l cer t ai n pr oper t y, had

f or ged a r el ease of an I . R. S. l i en. Because Ti cor had i nsur edt i t l e t o t he pr oper t y f r ee of t he I . R. S. l i en, i t was f or ced t o

pay i t s i nsured when t he rel ease was di scover ed and then r evoked

by t he I . R. S. The di st r i ct cour t f ound Ti cor ' s actual l oss was

$153, 922, t r ebl ed t hese damages pur suant t o t he RI CO st atut e,

18 U. S. C 1961 et seq. , and awarded at t orney s f ees of $124, 950

t o Ti cor pur suant t o the remedi es provi si on of RI CO, 18 U. S. C.

1964( c) . 13 Fi ndi ng t hat t he f or ger y was "mal i ci ous, f r audul ent

and oppr essi ve, " t he di st r i ct cour t awar ded a coext ensi ve j udgment

t o Ti cor agai nst Fl or i da consi st i ng of $153, 922 i n compensator y


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14 Ot her t han not i ng t hat t he di scover y sanct i on was f or$15, 000, l i t t l e i nf or mat i on about i t i s pr ovi ded i n t he Fl or i dadeci si on. I t was, however , awar ded under t he RI CO cl ai m, I n r e Fl or i da, 164 B. R. at 639, and t hus was awar ded, l i ke t heat t or ney s f ees, on t he basi s of a st at ut e.

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damages and $307, 844 i n puni t i ve damages, and a smal l di scovery

sanct i on. 14 The j udgment was af f i r med on appeal .

Af t er Fl or i da f i l ed f or bankr upt cy, Ti cor sought an except i on

t o di schar ge of i t s debt under 523( a) ( 2) and ( 6) . Act i ng on t he

cr edi t or s mot i on f or summary j udgment , t he bankr upt cy cour t

det er mi ned t he debt s t o be except ed f r om di schar ge i n t ot al under

523( a) ( 6) , i ncl udi ng t he amount s repr esent i ng Ti cor ' s l i t i gat i on

expenses i n t he st at e cour t sui t and t he di scover y sanct i on.

On appeal t o t he BAP, Fl or i da chal l enged t he bankrupt cy

cour t s det er mi nat i on t hat t he di scover y sanct i on and at t or ney s

f ees wer e except ed f r om di schar ge. The Panel r ul ed,Fl or i da cont ends t hat al l damages awarded under t he RI COcl ai m, i ncl udi ng t he di scover y sanct i on and at t or ney' sf ees, ar e puni t i ve. Fl or i da' s descr i pt i on of t heseel ement s as puni t i ve damages somewhat mi schar act er i zest hem. The bankrupt cy cour t f ound t hat t hose por t i ons oft he cl ai m based on at t or ney' s f ees and cost s and t hedi scover y sanct i on wer e debt s whi ch wer e anci l l ar y t ot he under l yi ng debt and par t ook of i t s char act er .

I d. at 639.

I n t hi s case, t he par t i es have di f f er i ng vi ews about how t he

at t or ney s f ees awar ded i n Fl or i da par t ook of t he char act er of

t he nondi schar geabl e debt , and whet her t hat par t i ci pat i on

j ust i f i ed except i on t o di schar ge f or t he at t or ney s f ee awar d.

However , t he f ul l cont ext of t he Panel s deci si on r eveal s t hat t he

at t or ney s f ees wer e awar ded f or vi ol at i on of t he RI CO st at ut e,

whi ch pr oscr i bed conduct t hat t he Bankr upt cy Code woul d consi der


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15 I ndeed, I n r e Fl or i da caut i ons agai nst r ecogni zi ng ar emot e connect i on bet ween conduct t hat r esul t s i n an except i on todi schar ge j udgment and t he conduct r esul t i ng i n t he award ofat t or ney s f ees: I t may be t hat t he r el at i onshi p of anci l l ar y t o


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gr ounds f or an except i on t o di schar ge. Ther ef or e, l i ke Cohen,

I n r e Fl or i da st ands f or t he pr oposi t i on t hat vi ol at i on of a

st at ut e t hat pr ovi des f or an awar d of at t or ney s f ees f or conduct

whi ch t he Bankr upt cy Code consi ders grounds f or except i on t o

di schar ge may resul t i n deni al of di schar ge f or t hose at t or ney s

f ees.

I n t hi s appeal , t he st atut e on whi ch t he RFA Sanct i ons Or der

was based, Cal . Code Ci v. Pr oc. 2033. 420, sanct i ons t he f ai l ur e

t o respond t o request s f or admi ssi on of f act s t hat t hen r equi r es a

par t y t o pr ove t hem. I n ot her wor ds, under t he st at ut e, an awar d

of at t orney s f ees may be made f or conduct t hat a bankr upt cy cour tmay f i nd does not suppor t an except i on to di schar ge.

On r emand t o t he bankr upt cy cour t , Kapl an i s f r ee t o argue

t hat , l i ke t he st at e cour t appar ent l y f ound, Debt or s f ai l ur e t o

r espond t o t he RFAs was par t of Debt ors scheme t o def r aud hi m.

I n t hat r espect , Kapl an may cont end t hat t her e i s an i dent i t y of

i ssues between t he FRA Sanct i ons Or der and t he bankr upt cy cour t s

det er mi nat i on t hat t he J udgment debt i s except ed f r om di schar ge

under 523( a) ( 2) , ( a) ( 4) or ( a) ( 6) . However , i n l i ght of t he

st r ong pol i cy consi der at i ons i n bankrupt cy l aw t hat except i ons t o

di schar ge ar e nar r owl y const r ued, and t he i ssue pr ecl usi on case

l aw di scussed above, at t or ney s f ees awar ded under a st at ut e wi l l

be except ed f r om di schar ge onl y i f t hat st at ut e pr oscr i bes conduct

t hat vi ol at es one of t he pr ovi si ons of 523( a) . 15 Because an


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15( . . . cont i nued)pr i mar y obl i gat i ons can become so at t enuat ed that i t woul d beunr easonabl e t o char act er i ze t hem as i nt egr al t o t he or i gi nalwi l l f ul and mal i ci ous i nj ur y. 164 B. R. at 639.

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awar d of at t or ney s f ees under Cal . Code Ci v. Pr oc. 2033. 420

does not necessar i l y r esul t f r om conduct pr oscr i bed i n t he

Bankrupt cy Code, an awar d of at t or neys f ees under t hat st at ut e i s

not aut omat i cal l y except ed f r om di schar ge.

CONCLUSION

The bankrupt cy cour t must conduct an anal ysi s of t he

avai l abi l i t y and appl i cabi l i t y of i ssue pr ecl usi on t o t he RFA

Sanct i ons Or der . Even i f t he bankrupt cy cour t deter mi nes that

i ssue pr ecl usi on i s avai l abl e, i t must t hen, as a mat t er of

di scr et i on, deci de whet her t he doct r i ne shoul d or shoul d not be

appl i ed. Assumi ng i ssue pr ecl usi on i s bot h avai l abl e andappl i cabl e, t he bankrupt cy cour t must t hen i ndependent l y deci de

whet her t he conduct gi vi ng r i se to t he awar d of at t or ney s f ees t o

Kapl an i n t hi s case i s suf f i ci ent t o suppor t an except i on t o

di schar ge under 523( a) ( 2) , ( 4) , or ( 6) .

We VACATE t he bankr upt cy cour t ' s or der denyi ng Kapl an' s

mot i on t o amend the summar y j udgment or der t o add an except i on t o

di schar ge f or t he at t or neys f ees awar ded i n t he RFA Sanct i ons

Or der . We REMAND t hi s mat t er t o t he bankr upt cy cour t f or f ur t her

pr oceedi ngs consi st ent wi t h t hi s memorandum.

In re: Kevin Wasko and Cassondra Dehay, 9th Cir. BAP (2013)

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