Ansari, In re

• Citation: 113 F.3d 17
• Decision Date: 08 May 1997
• Docket Number: No. 96-1519,96-1519
• Parties: Bankr. L. Rep. P 77,362 In re Ahmad Ali Massoud ANSARI, Debtor. Reza PAHLAVI; Medina Development Company, Plaintiffs-Appellees, v. Ahmad Ali Massoud ANSARI, Defendant-Appellant.
• Court: United States Courts of Appeals. United States Court of Appeals (4th Circuit)

Page 17

113 F.3d 17

Bankr. L. Rep. P 77,362

In re Ahmad Ali Massoud ANSARI, Debtor Reza PAHLAVI; Medina Development Company, Plaintiffs-Appellees, v. Ahmad Ali Massoud ANSARI, Defendant-Appellant.

No. 96-1519.

United States Court of Appeals Fourth Circuit.

Argued April 7, 1997.

Decided May 8, 1997.

ARGUED: Steven Brett Ramsdell, Tyler, Bartl, Burke & Albert, P.L.C., Alexandria, VA, for Appellant. Robert Houghwout Loftus, McCandlish & Lillard, P.C., Fairfax, VA, for Appellees. ON BRIEF: Thomas P. Gorman, Tyler, Bartl, Burke & Albert, P.L.C., Alexandria, VA, for Appellant.

Before RUSSELL, WILKINS, and MOTZ, Circuit Judges.

Affirmed by published opinion. Judge MOTZ wrote the opinion, in which Judge RUSSELL and Judge WILKINS joined.

OPINION

DIANA GRIBBON MOTZ, Circuit Judge:

The question presented here is whether the district court properly held that a default judgment entered by a Virginia state court was entitled to collateral estoppel effect in a subsequent federal bankruptcy case. Because the law of the state where the original litigation occurred controls the preclusive effect of its judgments in federal court and because Virginia law would allow collateral estoppel in these circumstances, we affirm the judgment of the district court.

I.

In April 1990, Reza Pahlavi, the son and heir of the former Shah of Iran, and his corporation, Medina Development Company (collectively "Pahlavi"), filed suit against Pahlavi's former financial adviser, Ahmad Ali Massoud Ansari ("Ansari"), in the Circuit Court of Fairfax County, Virginia. Pahlavi asserted that Ansari had committed fraud and breached his fiduciary duties, and sought an accounting and damages. After the parties engaged in discovery, in February 1991, that court issued an order finding that Ansari did act as a fiduciary for Pahlavi and referring the case to a commissioner for an accounting.

The parties continued to engage in discovery and the Commissioner held numerous hearings. However, Ansari's dilatory tactics stalled any accounting. Eventually, on October 24, 1991, the state court issued an opinion letter, in which it found that Ansari had willfully disregarded multiple discovery orders and entered a default judgment for Pahlavi. The state court referred the case back to a commissioner for a calculation of compensatory damages; in doing so, the court ordered that all of the allegations in Pahlavi's complaint be taken as true.

Following more hearings, the commissioner issued a detailed report recommending that Pahlavi be awarded over six million dollars in compensatory damages. On September 2, 1992, after considering exceptions to that report, the state court confirmed it and awarded Pahlavi $7,277,425.56 in compensatory damages. Two months later, the state court held an evidentiary hearing as to punitive damages and at its conclusion awarded Pahlavi an additional $2,000,000 in punitive damages. The final decree awarding the compensatory and punitive damages was entered on February 26, 1993.

A month later, in March 1993, Ansari filed a petition for voluntary bankruptcy under Chapter 7. Pahlavi then filed this adversary proceeding in the bankruptcy case, seeking a declaration that the damages awarded in the state court judgment were non-dischargeable in the bankruptcy action.

The bankruptcy court granted Pahlavi summary judgment as to the compensatory damages award, finding that the award was entitled to collateral estoppel effect in the bankruptcy proceedings. The court concluded that the default judgment established that Ansari's debt to Pahlavi arose from fraud or defalcation, which Ansari committed while acting as a fiduciary to Pahlavi. Thus, the court held that the compensatory damage award was nondischargeable under 11 U.S.C. § 523(a)(4) (1994), which prohibits the discharge of any debt "for fraud or defalcation while acting in a fiduciary capacity." The court denied summary judgment as to the punitive damages award, finding that it needed further evidence to determine whether that award was also nondischargeable. The bankruptcy court then entered final judgment as to the compensatory damage award, staying all other claims pending resolution of the appeal of its determination on that issue. On appeal, the district court affirmed.

II.

Ansari maintains that the bankruptcy court and the district court erred in applying the collateral estoppel doctrine. He asserts that state court default judgments cannot act as collateral estoppel in subsequent federal bankruptcy dischargeability proceedings.

We have previously explored the proper approach to this question, explaining:

In Grogan v. Garner, [498 U.S. 279, 284 & n. 11, 111 S.Ct. 654, 658 n. 11, 112 L.Ed.2d 755 (1991) ] the Supreme Court concluded explicitly that principles of collateral estoppel apply in dischargeability proceedings in bankruptcy. In determining the preclusive effect of a state-court judgment, the federal courts must, as a matter of full faith and credit, apply the forum state's law of collateral estoppel.... "Congress has specifically required all federal courts to give preclusive effect to state-court judgments whenever the courts of the State from which the judgments emerged would do so."

Hagan v. McNallen (In re McNallen), 62 F.3d 619, 624 (4th Cir.1995) (quoting Allen v. McCurry, 449 U.S. 90, 96, 101 S.Ct. 411, 415-16, 66 L.Ed.2d 308 (1980)). Thus, in order to determine whether the bankruptcy court correctly applied collateral estoppel principles, we must examine the law of Virginia, where the judgment relied upon originated.

A.

The Virginia Supreme Court recently defined the elements of collateral estoppel in Transdulles Center, Inc. v. Sharma, 252 Va. 20, 472 S.E.2d 274 (1996):

For [collateral estoppel] to apply, the parties to the two proceedings, or their privies, must be the same; the factual issue sought to be litigated actually must have been litigated in the prior action and must have been essential to the prior judgment; and the prior action must have resulted in a valid, final judgment against the party sought to be precluded in the present action. Glasco v. Ballard, [249 Va. 61, 452 S.E.2d 854, 855 (Va.1995) ]. Additionally, collateral estoppel in Virginia requires mutuality....

Transdulles, 472 S.E.2d at 275.

Ansari does not dispute that the state court default judgment against him meets the majority of Virginia's requirements for collateral estoppel: identical parties, a valid, final judgment, and mutuality. Ansari argues, however, that because the state court judgment was a default judgment entered as a discovery sanction, the parties never "actually litigated" Ansari's fiduciary status or whether a defalcation occurred, and, in any event, determination of those issues was not "essential" to the state court's judgment.

In Transdulles, the Virginia Supreme Court discussed at length whether and under what circumstances a default judgment can be regarded as "actual litigation" of "essential" issues in a prior action for collateral estoppel purposes. Therefore, Transdulles controls our inquiry here.

In Transdulles, a landlord brought suit against a tenant for possession of commercial property and for delinquent rent and fees. Transdulles, 472 S.E.2d at 275. The tenant did not appear in court at the scheduled trial, and the landlord "presented testimonial evidence and exhibits in the tenant's absence." Id. The trial court entered a default judgment against the tenant for back rent and fees, as well as awarding possession to the landlord. Id. The tenant did not appeal and the judgment became final. Id. A year later the landlord sued the tenant again for the rent that had accrued under the lease since the previous judgment. The state court refused to apply collateral estoppel to the issue of the tenant's liability for the rent, and entered judgment for the landlord; it held that "a default judgment does not actually litigate issues for the purposes of collateral estoppel." Id.

On appeal to the Virginia Supreme Court, the tenant argued that, as evidenced by the Restatement of Judgments, "[a] default judgment cannot be used for collateral estoppel purposes, because no issues are 'actually litigated.' " Id. at 276 (quoting United States v. Ringley, 750 F.Supp. 750, 759 (W.D.Va.1990), and citing Restatement (Second) of Judgments § 27 cmt. e (1982)). The Virginia Supreme Court, however, expressly rejected the "view typified by the Restatement." Transdulles, 472 S.E.2d at 276. It concluded that "Virginia law does not support a blanket exemption from the application of collateral estoppel in the case of a default judgment." Id. The tenant also contended that because he had not personally appeared in court before entry of the default judgment, no issue had been actually litigated. Again, the Virginia Supreme Court "disagree[d] with the tenant's argument." Id. Rather, it reasoned that because "documentary evidence was presented ex parte in the district court hearing" the necessary issues had been actually litigated. Id. Accordingly, the Transdulles court concluded that the default judgment did act as collateral estoppel in the second action, and reversed the trial court's contrary holding.

With controlling Virginia law in mind, we turn to the case at hand.

B.

In order to prove a debt is non-dischargeable under § 523(a)(4) of the Bankruptcy Code, a creditor must prove the debtor committed " fraud or defalcation while acting in a fiduciary capacity." 11 U.S.C. § 523(a)(4). Ansari argues that neither of these issues were actually litigated in state court, let alone "essential" to the state court's judgment. He maintains that the only issue litigated in state court, and essential to its judgment, was whether he violated the court's discovery orders. Ansari is mistaken.

The question of whether Ansari acted as a fiduciary for Pahlavi was actually litigated and resolved early in the case. Pahlavi continually asserted that Ansari was his fiduciary and submitted...