Carl Follo, Follo Hospitality, Inc. v. Morency

• Decision Date: 19 March 2014
• Docket Number: Civil Action No. 13–11217–WGY.
• Citation: 507 B.R. 421
• Court: U.S. District Court — District of Massachusetts
• Parties: Carl FOLLO, Follo Hospitality, Inc., and Carpa Real Estate, LLC, Plaintiffs, v. Susan C. MORENCY, Defendant.

507 B.R. 421

Carl FOLLO, Follo Hospitality, Inc., and Carpa Real Estate, LLC, Plaintiffs,

v.Susan C. MORENCY, Defendant.

Civil Action No. 13–11217–WGY.

United States District Court, D. Massachusetts.

Signed March 19, 2014.

Charles R. Bennett, Jr., John C. Elstad, Natalie Wong–Brink, Murphy & King, PC, Lynne F. Riley, Casner & Edwards, Natalie B. Sawyer, Hanify & King, Boston, MA, for Plaintiffs.

David Koha, Casner & Edwards LLP, Boston, MA, for Defendant.

MEMORANDUM AND ORDER

YOUNG, District Judge.

I. INTRODUCTION

Carl Follo, Follo Hospitality, Inc., and Carpa Real Estate, LLC (collectively, “Follo”) appeal from a judgment of the Bankruptcy Court for the District of Massachusetts (“Bankruptcy Court”), which held that Susan Morency's (“Morency”) judgment debt was not excepted from discharge pursuant to either 11 U.S.C. § 523(a)(2)(A) (“Section 523(a)(2)(A)”) or 11 U.S.C. § 523(a)(2)(B) (“Section 523(a)(2)(B)”).

These proceedings have their origins in a real estate transaction fraudulently induced by Morency, a Vermont judgment subsequently finding Morency liable for common-law fraud, and this bankruptcy filing. The crux of this appeal is whether the Vermont judgment can be used to establish the elements necessary to sustain a non-discharge of debt under either Section 523(a)(2)(A) or Section 523(a)(2)(B).

In the proceedings before the Bankruptcy Court, Follo alleged that the judgment of the Vermont Supreme Court (“the Vermont Judgment”) precluded the Bankruptcy Court from reconsidering the issues necessary to establish non-discharge under either Section 523(a)(2)(A) or Section 523(a)(2)(B). The Bankruptcy Court disagreed, concluding that the Vermont Judgment did not have preclusive effect and dismissing Follo's claim. On appeal Follo argues that the Bankruptcy Court erred when it ruled that:

(i) ... [Follo's] claim is not excepted from discharge; (ii) ... the determinations of the Vermont Supreme Court did not fulfill the requirements of 11 U.S.C. [sections] 523(a)(2)(B) and/or (a)(2)(A); and (iii) ... when it found that Follo is not entitled to judgment under 11 U.S.C. [sections] 523(a)(2)(B) and/or (a)(2)(A) on the basis of the issue preclusive effect of the Vermont determinations and judgment.

Br. Appellants Carl Follo, Follo Hospitality, Inc. & Carpa Real Estate, LLC (“Follo Brief”) 2, ECF No. 12.

A. Procedural Posture

On April 5, 2010, Morency filed a petition of relief as per chapter 7 of the Bankruptcy Code, In re Morency, No. 10–13666–FJB, 2013 WL 1342485, at *1 (Bankr.D.Mass. Apr. 2, 2013) (Bailey, Bankr. J.), and on May 14, 2010, Follo filed an adversarial complaint objecting to the discharge of its debt, Bankr.Docket, Adversary Case 10–01122 (“Bankr. Docket”) No. 1, ECF No. 3. This matter proceeded before the Bankruptcy Court, which on March 2, 2013, entered a judgment ordering the dismissal of Follo's complaint and the discharge of Morency's judgment debt. Bankr.Docket No. 92. Subsequently, on May 20, 2013, Follo filed a notice of appeal, electing to have the case heard by the United States District Court for the District of Massachusetts, Election Appellants To Have Appeal Heard U.S. District Ct., ECF No. 2, and, on the same date, the appeal was assigned to this session of the Court. Elec. Notice, May 20, 2013, ECF No. 5. Follo filed the appellant's brief on June 28, 2013. Follo Brief. On July 11, Morency filed the appellee's brief, Br. Appellee Susan C. Morency (“Morency Brief”), ECF No. 13, and Follo filed a reply on July 25, Reply Br. Appellants Carl Follo, Follo Hospitality, Inc. & Carpa Real Estate, LLC (“Follo Reply”), ECF No. 14.

B. Factual Summary

The facts of this case have been well traversed in prior decisions and, with this in mind, the Court here provides but a summary of those facts relevant to the proceeding at hand.

In 2008 Follo purchased an inn (“the Inn”) and an adjacent cottage from Morency and Paul Florindo (“Florindo”). Morency, 2013 WL 1342485, at *3. During the negotiations, Follo was presented with a number of documents, including informationregarding the financial status of the Inn, tax returns and room occupancy information, upon which it relied. See Follo v. Florindo, 185 Vt. 390, 395, 410, 970 A.2d 1230 (2009). Following Follo's purchase it became apparent that this information was incorrect. Id. at 396, 970 A.2d 1230. Consequently, Follo commenced proceedings in the Windham (Vermont) Superior Court against Morency, Florindo, and others for a series of offences, including common law fraud and violations of Vermont's Consumer Fraud Act. Id. at 394, 396, 970 A.2d 1230. Although punitive damages are appropriate in Vermont where there is “an intentional act with a specific intent to defraud the buyer,” the Vermont Superior Court ruled punitive damages were not proper as matter of law and accordingly did not put this issue to the jury. Id. at 413, 970 A.2d 1230. The jury found Morency and Florindo liable on both the aforementioned claims and assessed compensatory damages of $645,000. See id. at 397–98, 970 A.2d 1230. The trial judge ordered a remittitur reducing these damages to $295,000. Id. at 398, 970 A.2d 1230.

Both parties appealed. The Vermont Supreme Court affirmed, but reversed the Superior Court's exclusion of punitive damages as matter of law. Id. at 394, 970 A.2d 1230.

Following the decision of the Vermont Supreme Court, but before the quantum of punitive damages owed had been determined, Morency filed for bankruptcy. See In re Morency, 2013 WL 1342485, at *4.

II. JURISDICTION

This Court has jurisdiction to hear appeals from “final judgments, orders, and decrees” of the bankruptcy court. 28 U.S.C. § 158(a)(1). Here the Bankruptcy Court has entered a final decision on the merits, see In re Morency, 2013 WL 1342485 at *13, and thus this Court has jurisdiction to consider the appeal.

III. ANALYSISA. Standard of Review

A district court reviewing the decisions of a bankruptcy court reviews all legal conclusions under a de novo standard, and all factual findings for clear error. Palmacci v. Umpierrez, 121 F.3d 781, 785 (1st Cir.1997).

B. Scope of the Exception to Discharge

In all bankruptcy proceedings there is a strong presumption in favor of discharge. See Local Loan Co. v. Hunt, 292 U.S. 234, 244–45, 54 S.Ct. 695, 78 L.Ed. 1230 (1934). The Bankruptcy Code is intended to provide “honest but unfortunate debtor[s],” Grogan v. Garner, 498 U.S. 279, 286–87, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991), with a fresh start—“a new opportunity in life ... unhampered by the pressure and discouragement of preexisting debt.” In re Spigel, 260 F.3d 27, 31–32 (1st Cir.2001) (quoting Hunt, 292 U.S. at 244, 54 S.Ct. 695);see, e.g. In re O'Donnell, 728 F.3d at 42.

Nonetheless, section 523(a)(2) of the Bankruptcy Code provides two complementary but distinct exceptions to discharge for some debts incurred as a result of the debtor's fraudulent conduct. See11 U.S.C. § 523(a)(2). Specifically, Section 523(a)(2)(A) excepts from discharge debts obtained by “false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor's or an insider's financial condition.” 11 U.S.C. § 523(a)(2)(A). By contrast, Section 523(a)(2)(B) excepts from discharge those debts obtained by a false, written statement “respecting the debtor's ... financial condition.” 11 U.S.C. § 523(a)(2)(B)(iii). In light of the policy behind the Bankruptcy Code and the consequent strong presumption in favor of discharge, however, these exceptions are narrowly construed—party objecting to discharge bears the burden of demonstrating, by a preponderance of the evidence, Grogan v. Garner, 498 U.S. 279, 291, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991), that its claim falls “squarely within an exception enumerated in Bankruptcy Code [section] 523(a).” In re Spigel, 260 F.3d at 32 (quoting In re Menna, 16 F.3d 7, 9 (1st Cir.1994)).

Follo argued before the Bankruptcy Court that Morency's debt obligation was excepted from discharge pursuant to Section 523(a)(2) and (a)(6). See Follo Brief 2.

C. Collateral Estoppel

The key question here is whether giving the Vermont Judgment collateral effect has the effect of excepting Morency's judgment debt from discharge under either Section 523(a)(2)(A) or Section 523(a)(2)(B).

The principles of collateral estoppel, also called issue preclusion, apply in most adversary proceedings before a bankruptcy court, including nondischargeability proceedings. Grogan, 498 U.S. at 284 n. 11, 111 S.Ct. 654;In re Spigel, 260 F.3d at 33 (citing Fed. Deposit Ins. Corp. v. Shearson–American Express, Inc., 996 F.2d 493, 497 (1st Cir.1993)). The preclusive effect of a state court judgment in a subsequent federal court proceeding is determined according to the law of the state in which the judgment was rendered. Migra v. Warren City School Dist. Bd. of Educ., 465 U.S. 75, 81, 104 S.Ct. 892, 79 L.Ed.2d 56 (1984). In Vermont, “[c]ollateral estoppel, or issue preclusion, bars the subsequent relitigation of an issue that was actually litigated and decided in a prior case where that issue was necessary to the resolution of the dispute.” Alpine Haven Prop. Owners Ass'n v. Deptula, 175 Vt. 559, 562, 830 A.2d 78 (2003). More precisely, preclusion in Vermont is appropriate where:

(1) preclusion is asserted against one who was a party ... in the earlier action; (2) the issue was resolved by a final judgment on the merits; (3) the issue is the same as the one raised in the later action; (4) there was a full and fair opportunity to litigate the issue in the earlier action; and (5) applying preclusion in the later action is fair.

In re P.J., 185 Vt. 606, 608, 969 A.2d 133 (2009) (alteration in original) (quoting Trepanier v. Getting Organized, Inc., 155 Vt. 259, 265, 583 A.2d 583 (1990)) (internal quotation marks omitted). The doctrine, however, is confined to issues “necessarily and essentially determined in a prior action.” In re R.H., 189 Vt. 15, 30, 14 A.3d 267 (2010) (quoting State v....