Bean v. Farrar (In re Farrar)
| Decision Date | 10 February 2012 |
| Docket Number | Adv. No. 11-5347,Case No. 11-41244 |
| Parties | In re: JOANNE FARRAR, Debtor. ELIZABETH BEAN, Plaintiff, v. JOANNE FARRAR, Defendant. |
| Court | U.S. Bankruptcy Court — Eastern District of Michigan |
On November 30, 2011, this Court issued an Order Granting Plaintiff's Motion for Summary Judgment on the grounds that the doctrine of collateral estoppel precluded Defendant from litigating dischargeability under § 523(a)(2) in the Bankruptcy Court.
On December 14, 2011, Defendant filed a Motion for Reconsideration of the Court's Order, claiming that the Court did not apply the proper standard when it gave collateral estoppel effect to the default judgment entered by the Arizona state court. Specifically, Defendant argues that this Court applied Michigan law when it should have applied Arizona law.
This Court agrees that Arizona law applies. However, this Court denies Defendant's Motion for Reconsideration because, even if the Court applies Arizona law,it is proper to give collateral estoppel effect to the default judgment entered in the Arizona state court case.
On May 16, 2007, Plaintiff Elizabeth Bean filed suit alleging fraud, negligence and breach of fiduciary duty against Defendant Joanne Farrar and her husband David Farrar in the Arizona state court. (Plaintiff's Exhibit A, Complaint). The Complaint alleged that Defendant, acting as Plaintiff's accountant, obtained in excess of $650,000.00 from Plaintiff by fraudulently billing for her services, performing and billing for unnecessary services, and providing false and misleading tax advice. (Plaintiff's Exhibit A, Complaint; Plaintiff's Exhibit B, Answer and Counterclaim; and Plaintiff's Exhibit C, Answer to Counter Claim).
The Arizona state court case was litigated for nearly four (4) years. (Plaintiff's Exhibit F, Docket from State Court case). The case was set for trial on January 18, 2011. As part of Plaintiff's case, Plaintiff obtained an expert's report dated September 2, 2009 which states, in part:
14. In my opinion, based upon the information I have read and analyzed, the interviews conducted and the deposition I attended, it appears that Farrar breached her responsibilities and duties as a certified public accountant by overcharging Bean for services and displaying a lack of due professional care and diligence. Further, it appears that she used her position of trust as a CPA to her own personal benefit in not only the excessive size of her invoices, but obtaining gifts or entering into transactions that were favorable to her and to the detriment of Bean. The loss estimated above contemplated an overcharging of services at five to ten time normal CPA billing amounts.
(Plaintiff's Exhibit E, Expert Report). On the date of trial, Defendant's husband DavidFarrar appeared, but Defendant failed to appear and a default was entered. (Plaintiff's Exhibit G, Trial Minute Entry). The Arizona state court took proofs as to damages and instructed Plaintiff to submit a judgment for entry. (Id.). That same day, Defendant filed for Chapter 7 bankruptcy in the Eastern District of Michigan.
On March 25, 2011, with the permission of the Bankruptcy Court, the Judgment was entered by the Arizona state court stating that Defendant committed fraud, was negligent and breached her fiduciary duty in her representation of Plaintiff. (Plaintiff's Exhibit H, Arizona Judgment). The pertinent language of the Judgment provides:
(Id. at pp. 2-3). The Arizona state court entered an award of damages in favor of Plaintiff, and against Defendant, in the amount of $788,540.82. (Id).
On April 25, 2011, Plaintiff initiated this adversary proceeding, seeking to havethis Court determine that the amounts awarded to Plaintiff pursuant to the Arizona state court Judgment against Defendant are non-dischargeable pursuant to 11 U.S.C. § 523(a)(2)(A), (4) and (6).
On October 14, 2011, Plaintiff filed a Motion for Partial Summary Judgment pursuant to 11 U.S.C. § 523(a)(2)(A) alleging that the amounts award to Plaintiff from Defendant pursuant to the Arizona state court judgment are non-dischargeable under the doctrine of collateral estoppel.
On November 30, 2011, this Court issued a bench opinion and an Order Granting Plaintiff's Motion for Summary Judgment. In the bench opinion, this Court relied on Sixth Circuit law when it found that collateral estoppel could apply to certain default judgments. On December 14, 2011, Defendant filed a Motion for Reconsideration alleging that collateral estoppel does not apply to default judgments under Arizona law and that this Court erred in applying Michigan rather than Arizona law to the facts of this case.
Motions for reconsideration are governed by L.B.R. 9024-1, which states in part:
(3) Grounds. Generally, and without restricting the discretion of the court, a motion for reconsideration that merely presents the same issues ruled upon by the court, either expressly or by reasonable implication, will not be granted. The movant shall not only demonstrate a palpable defect by which the court and the parties have been misled but also show that a different disposition of the case must result from the correction thereof.
(emphasis added). Thus, even if the Court erred in relying on Michigan, rather thanArizona, law, L.B.R. 9024-1 requires that a motion for reconsideration be granted only if Defendant demonstrates that a different disposition of this case would result from a correction of that error.
In this case, this Court erred in relying on Michigan law when determining the collateral estoppel effect of a default judgment. Because the state court judgment was entered in Arizona, Arizona law controls the preclusive effect of the state court judgment. Under Arizona law, some default judgments may collaterally estop a party from relitigating issues in a subsequent case. Accordingly, even though this Court incorrectly applied Michigan law when it found that collateral estoppel prevented the re-litigation of this case, this Court finds that a different disposition of this case does not result from the application of the Arizona law. Therefore, for the reasons fully set forth below Defendant's Motion for Reconsideration is DENIED.
The doctrine of collateral estoppel, also known as issue preclusion, prohibits relitigation of issues that have been adjudicated in a prior action. Lopez v. Emergency Serv. Restoration, Inc. (In re Lopez), 367 B.R. 99, 104 (9th Cir. BAP 2007). The party asserting issue preclusion bears the burden of proof as to all elements and must introduce a sufficient record to reveal the controlling facts and the exact issues litigated. Kelly v. Okoye (In re Kelly), 182 B.R. 255, 258 (9th Cir. BAP 1995).
The doctrine of collateral estoppel applies in nondischargeability litigation. Grogan v. Garner, 498 U.S. 279, 284-285 (1991). Under the federal full faith and creditstatute, a federal court must give a state court judgment the same preclusive effect that another court of that state would give the judgment. 28 U.S.C. § 1738; Far Out Prods., Inc. v. Oskar, 247 F.3d 986, 993 (9th Cir. 2001). Accordingly, Arizona law on issue preclusion applies in this case. Gayden v. Nourbakhsh (In re Nourbakhsh), 67 F.3d 798, 800 (9th Cir. 1995) (citing Marrese v. Am. Acad. of Orthopaedic Surgeons, 470 U.S. 373, 380 (1985)).
Under Arizona law, the doctrine of collateral estoppel, otherwise referred to as "issue preclusion", may bar subsequent litigation between the same parties when the following elements are present:
the issue or fact to be litigated was actually litigated in a previous suit, a final judgment was entered, and the party against whom the doctrine is to be invoked had a full opportunity to litigate the matter and actually did litigate it, provided such issue or fact was essential to the prior judgment. Industrial Park Corp. v. U.S.I.F. Palo Verde Corp., supra, 26 Ariz.App. at 209, 547 P.2d at 61; Moore Drug Co. v. Schaneman, 10 Ariz.App. 587, 589, 461 P.2d 95, 97 (1969); Restatement (Second) of Judgments § 27.
Chaney Bldg. Co. v. City of Tucson, 716 P.2d 28, 30 (Ariz. 1986)(en banc). The question raised by Defendant's Motion for Reconsideration is whether, under Arizona law, the elements of collateral estoppel may ever be satisfied if the first state court judgment is...
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