Evans v. Ottimo

• Decision Date: 20 November 2006
• Docket Number: Docket No. 04-6155-BK.
• Citation: 469 F.3d 278
• Parties: Philip EVANS, Plaintiff-Appellee, v. Richard OTTIMO a/k/a Richard J. Ottimo, Joyce Ottimo, a/k/a Joyce Ottimo, a/k/a Joyce Decarlo Ottimo, Defendants-Appellants.
• Court: U.S. Court of Appeals — Second Circuit

469 F.3d 278

Philip EVANS, Plaintiff-Appellee, v. Richard OTTIMO a/k/a Richard J. Ottimo, Joyce Ottimo, a/k/a Joyce Ottimo, a/k/a Joyce Decarlo Ottimo, Defendants-Appellants.

Docket No. 04-6155-BK.

United States Court of Appeals, Second Circuit.

Argued: January 31, 2006.

Decided: November 20, 2006.

Robert E. Sokolski, Esq., Sokolski & Zekaria., P.C., New York, NY, for Plaintiff-Appellee.

Ronald D. Weiss, P.C., Melville, NY, for Defendants-Appellants.

Before: CABRANES and B.D. PARKER, Circuit Judges, PRESKA, District Judge.^*

B.D. PARKER, JR., Circuit Judge:

Richard and Joyce Ottimo (the "Ottimos"), debtors in bankruptcy, appeal from a judgment of the United States District Court for the Eastern District of New York (Seybert, J.), which barred them from relitigating in bankruptcy court the fraudulent nature of debts owed to Appellee Phillip Evans, one of their creditors. In prior New York state court proceedings, the court, following a default judgment and an inquest, found the Ottimos to have committed fraud and imposed substantial compensatory and punitive damages. The district court, reversing an order of the United States Bankruptcy Court for the Eastern District of New York (Cyganowski, J.), held that collateral estoppel barred them from relitigating in bankruptcy court the issue of whether the debt was nondischargeable under § 523(a) of the Bankruptcy Code. Because we conclude that the Ottimos were afforded a fair opportunity to litigate the issue of fraud and because the state court necessarily decided the issue, we affirm.

BACKGROUND

In April 1997, Evans sued the Ottimos and two companies they controlled, J-Ran Carriers, Inc. and J-Ran Transportation, Inc., in the Supreme Court, State of New York, County of Suffolk, on a variety of causes of action, including breach of contract and fraud. Evans' suit arose from various business transactions involving him, the Ottimos, and J-Ran Carriers, Inc. It is not disputed that the Ottimos were properly served in the state court action and, in fact, met with Evans regarding a possible settlement of the law suit. The Ottimos defaulted, and in December 1997, the state court held an inquest, which the Ottimos again elected not to attend. At the proceeding, the court received testimony from Evans concerning his dealings with the Ottimos and examined evidence, including copies of numerous cancelled checks. The evidence established that the Ottimos, in their capacities as the principle executive officers of J-Ran Carriers, Inc., over a number of months improperly diverted hundreds of thousands of dollars through the use of a secret account and checks signed by them and made payable to a check cashing company.

At the conclusion of the proceeding, the state court found that the Ottimos had committed fraud. Specifically, the court found that there had been "a very definite element of fraud and deceit in this matter." The court awarded Evans approximately $350,000 in compensatory damages, imposed punitive damages of approximately $50,000, and entered judgment against the Ottimos. Prior to the proceeding in bankruptcy court, the Ottimos never appealed or otherwise attempted to contest the state court's judgment.

In 2002, five years after the entry of the default judgment, the Ottimos filed a Chapter 7 bankruptcy petition. Evans then commenced an adversary proceeding and moved for summary judgment. He contended that the state court's judgment, grounded in a finding of fraud and an award of punitive damages, collaterally estopped the Ottimos from relitigating whether their debt was based on fraud and, consequently, was nondischargeable under 11 U.S.C. § 523(a).¹ The bankruptcy court denied the motion, concluding that "collateral estoppel cannot be applied in instances such as this, where the prior judgment obtained in the non-bankruptcy action was obtained by default."

Evans appealed to the district court, which reversed. The district court concluded that, for collateral estoppel to apply, the issue of fraud need not have been actually litigated and that the Ottimos needed only to have been afforded — and were afforded — the opportunity to litigate the issue. This appeal followed.

DISCUSSION

Review of an order of a district court acting in its capacity as an appellate court in a bankruptcy proceeding is plenary. In re DeTrano, 326 F.3d 319, 320 (2d Cir.2003) (internal citations omitted). Thus, we review the bankruptcy court's factual determinations and legal conclusions independently. "The bankruptcy court's findings of fact are reviewed for clear error, and its conclusions of law are reviewed de novo." Id.

In order to give "honest but unfortunate" debtors a fresh start, the Bankruptcy Code discharges preexisting debts. Cohen v. de la Cruz, 523 U.S. 213, 217, 118 S.Ct. 1212, 140 L.Ed.2d 341 (1998). However, the fresh start policy does not apply to all debts and debtors, and numerous Code provisions establish limitations on discharge. These exceptions deny relief to debts resulting from certain types of undesirable behavior such as fraud. See 11 U.S.C. § 523(a)(2).

It is well settled that preclusion principles apply in bankruptcy proceedings. In Grogan v. Garner, the Supreme Court held that where a judgment entailed proof of fraud, the debtor was estopped in a subsequent nondischargeability proceeding from relitigating whether the underlying debt was obtained by fraud. 498 U.S. 279, 285-91, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991). Similarly, we have held that "[w]here the debt in question is a judgment entered after a claim of fraud has been adjudicated, either party to a subsequent adversary proceeding on nondischargeability can invoke collateral estoppel to establish that the debt is or is not dischargeable under the relevant nondischargeability provision." In re DeTrano, 326 F.3d at 322 (internal citations omitted).

We apply the preclusion law of New York. See Marrese v. Am. Acad. of Orthopaedic Surgeons, 470 U.S. 373, 380, 105 S.Ct. 1327, 84 L.Ed.2d 274 (1985). Under New York law, collateral estoppel bars relitigation of an issue when (1) the identical issue necessarily was decided in the prior action and is decisive of the present action, and (2) the party to be precluded from relitigating the issue had a full and fair opportunity to litigate the issue in the prior action. Kaufman v. Eli Lilly & Co., 65 N.Y.2d 449, 455-56, 492 N.Y.S.2d 584, 482 N.E.2d 63 (1985) (citations omitted); see also Khandhar v. Elfenbein, 943 F.2d 244, 247 (2d Cir.1991). "The party seeking the benefit of collateral estoppel has the burden of demonstrating the identity of the issues . . . whereas the party attempting to defeat its application has the burden of establishing the absence of a full and fair opportunity to litigate the issue." Kaufman, 65 N.Y.2d at 456, 492 N.Y.S.2d 584, 482 N.E.2d 63 (citations omitted). Applying these principles, we conclude that the state court's default judgment, grounded in a finding of fraud and imposing punitive damages, bars relitigation in bankruptcy court of the fraudulent character of the debt.

A. Full and Fair Opportunity to Litigate

We first consider whether a litigant must have answered the complaint or actually appeared in the proceeding in order to have been afforded the requisite "full and fair opportunity" to litigate the issue. Khandhar, 943 F.2d at 247 (citing Kaufman, 65 N.Y.2d at 455, 492 N.Y.S.2d 584, 482 N.E.2d 63). The Ottimos do not dispute that they were properly served in state court and afforded the opportunity to contest Evans' allegations of fraud, but then failed to answer the complaint, participate in the inquest, or appeal the judgment directly.

As we stated in Kelleran v. Andrijevic, "[i]n New York, when a party defaults by failure to answer . . . the defaulting litigant may not further contest the liability issues." 825 F.2d 692, 694 (2d Cir.1987) (citing Amusement Bus. Underwriters v. Am. Int'l Grp., 66 N.Y.2d 878, 498 N.Y.S.2d 760, 489 N.E.2d 729 (1985)). In Kelleran, after the defendant failed to answer counterclaims and the state court entered a default judgment, the defendant commenced a bankruptcy proceeding and attempted to relitigate the issue of liability. Id. at 694. We held that the "bankruptcy court[] was bound to the liability determination in the state [default] judgment unless an exception existed," such as "where the judgment was procured by collusion or fraud, or where the rendering court lacked jurisdiction." Id. (internal citation omitted). "Bankruptcy proceedings may not be used to re-litigate issues already resolved in a court of competent jurisdiction." Id. at 695. Therefore, we conclude that, for the purposes of applying collateral estoppel, the Ottimos were afforded a full and fair opportunity to litigate the issue of fraud in state court.

B. Identical to an Issue Necessarily Decided and Decisive of the Present Action

The more difficult question is whether the issue of fraud under § 523(a) of the Bankruptcy Code was identical to an issue that necessarily was decided by the state court. See Kaufman, 65 N.Y.2d at 455, 492 N.Y.S.2d 584, 482 N.E.2d 63; Grogan, 498 U.S. at 284-85, 111 S.Ct. 654; Metromedia Co. v. Fugazy, 983 F.2d 350, 365 (2d Cir.1992). Generally, under New York law, "collateral estoppel effect will only be given to matters actually litigated and determined in a prior action," because "[i]f an issue has not been litigated, there is no identity of issues." Kaufman, 65 N.Y.2d at 456, 492 N.Y.S.2d 584, 482 N.E.2d 63 (citations omitted) (noting in dicta that an issue is not actually litigated if there has been a default); see also D'Arata v. N.Y. Cent. Mut. Fire Ins. Co., 76 N.Y.2d 659, 666-67, 563 N.Y.S.2d 24, 564 N.E.2d 634 (1990). "[F]or a question to have been actually litigated so as to satisfy the identity requirement, it must have been properly raised by the pleadings or otherwise placed in issue and actually determined in the prior proceeding." D'Arata, 76 N.Y.2d at 667, ...