Dave v. Baessler (In re Baessler)

• Decision Date: 19 July 2018
• Docket Number: ADV. NO. 11-01188-TMD,CASE NO. 11-10670-TMD
• Citation: 589 B.R. 582
• Parties: IN RE: Jeffrey Jay BAESSLER, Debtor. GT Dave, Plaintiff, v. Jeffrey Jay Baessler, Defendant.
• Court: U.S. Bankruptcy Court — Western District of Texas

589 B.R. 582

IN RE: Jeffrey Jay BAESSLER, Debtor.GT Dave, Plaintiff,

v.Jeffrey Jay Baessler, Defendant.

CASE NO. 11-10670-TMD

ADV. NO. 11-01188-TMD

United States Bankruptcy Court, W.D. Texas, Austin Division.

Signed July 19, 2018

Scott D. Dinsmore, Dinsmore & Sandelmann LLP, Manhattan Beach, CA, B. Weldon Ponder, Jr., Austin, TX, for Plaintiff.

James B. Jameson, Houston, TX, William T. Peckham, Law Office of William T. Peckham, for Defendant.

MEMORANDUM OPINION

TONY M. DAVIS, UNITED STATES BANKRUPTCY JUDGE

Three years ago, a California state court found that Baessler, acting with the intent to deceive, made false representations that Dave reasonably relied on to his detriment. Based on that finding, the state court entered judgment on several legal theories, including one theory that did not require proof of an intent to deceive. Does the state court's finding bind the bankruptcy court in a subsequent suit to determine whether the judgment can be discharged?

I. Facts

A. A house in Beverly Hills.

In the fall of 2006, Dave hired Baessler to remodel Dave's house in Beverly Hills, CA.¹ The parties agreed that Dave would pay for the costs of the house, plus a "management fee" of fifteen percent of all house-related expenses.² But things fell apart; not only were the expenses paid by Dave not what Baessler claimed they were, Baessler himself was not what he claimed to be.

B. Dave sues in state court, and wins at trial and on appeal.

After this came to light, Dave sued Baessler in California state court, claiming Baessler had fraudulently overcharged for the house and had misrepresented himself as a licensed contractor.³ After a trial that lasted ten days,⁴ the state court found that Baessler intentionally overcharged Dave in vendor fees and management fees and that Dave had overpaid based on Baessler's misrepresentations.⁵ The court also found that Baessler intentionally misrepresented that he was a licensed contractor, that Dave relied on that representation by hiring Baessler to build the house, and that Baessler's lack of qualification as a contractor led to faulty construction that required costly repairs.⁶

The state court also found that Baessler used these ill-gotten funds for his personal benefit. He built a home in Texas, he bought and remodeled properties in Los Angeles, he bought cars and boats, he invested in retirement accounts, and he paid property taxes.⁷

Based on this set of findings, the state court ruled that Baessler was liable for deceit ( California Civil Code § 1709 ), fraudulent concealment ( California Civil Code § 1710 ), actual fraud ( California Civil Code § 1572 ), and contractor fraud ( California Business and Professions Code § 7160 ).⁸ It then awarded Dave $2.4 million for compensatory damages, $879,000 for attorney's fees, and a separate award of $850,000 for punitive damages, making the total judgment $4.1 million.⁹

On appeal, Baessler challenged the trial court's finding of justifiable reliance and the award of attorney's fees.¹⁰ But the appellate court held that there was substantial evidence of reasonable and justifiable reliance, and substantial evidence to support the award of attorney's fees.¹¹ So it affirmed the trial court's judgment.¹²

C. Meanwhile, Baessler files for bankruptcy.

Amid the state court litigation, Baessler filed for bankruptcy under chapter 7 of the Bankruptcy Code.¹³ Dave then filed this adversary proceeding asserting that his claims against Baessler are nondischargeable.¹⁴ This proceeding was then abated until the state court litigation concluded.¹⁵ After the appellate court affirmed the state court judgment, Dave filed this motion for summary judgment.¹⁶

II. Analysis

In his motion, Dave argues that his claims against Baessler are nondischargeable under section 523(a)(2)(A) based on the doctrine of collateral estoppel.¹⁷ Section 523(a)(2)(A) prevents debtors from discharging "any debt ... for money ... to the extent obtained by ... false pretenses, a false representation, or actual fraud ...."¹⁸

A. Collateral Estoppel

Under the doctrine of collateral estoppel, a party cannot re-litigate an issue already determined by a court in a prior proceeding.¹⁹ Federal courts follow the collateral estoppel rules of the court that issued the prior judgment.²⁰ Under California law, collateral estoppel applies if:

(1) the issue is identical to that in the prior case;

(2) the issue was actually litigated;

(3) the issue was necessarily decided;

(4) the decision was final and on the merits; and

(5) the party sought to be bound by the prior proceeding was the same or in privity with the party in the former proceeding.²¹

And a prior determination only binds a party if consistent with the underlying policies of collateral estoppel.²²

Here, the only elements Baessler challenges are the "necessarily decided" element and the public policy element.²³

To begin, the fraud findings of the state court, the elements of section 523(a)(2)(A), and the elements of California fraud, called deceit, are

State court findings of fraud 11 U.S.C. § 523(a)(2)(A) California common law
                fraud; deceit
                (1) Baessler made                 (1) The debtor made a                 (1) misrepresentation (false
                representations about the         representation;                       representation, concealment, or
                amounts due and that he was a                                           nondisclosure)
                qualified general contractor
                (2) Baessler knew the              (2) the debtor knew the               (2) knowledge of falsity
                representations were false;       representation was false
                (3) Baessler made the             (3) the debtor made the               (3) intent to defraud — to induce
                representations with the          representation with the intent        reliance
                intention and purpose of          to deceive the creditor
                deceiving Plaintiff and
                inducing him to pay the
                overcharges
                (4) Dave reasonably24 relied on     (4) the creditor actually and         (4) justifiable reliance
                those representations by          justifiably relied on the
                paying the overcharges;           representation;
                (5) Dave suffered losses as a25     (5) the creditor sustained a loss26     (5) resulting damage.27
                proximate result of Baessler's     as a proximate result of its
                representations.                   reliance.
                

[Editor's Note : The preceding image contains the reference for footnote^{24 ,25 ,26 ,27} ]

Since the elements of deceit "closely mirror" those required to determine whether a debt is nondischargeable under section 523(a)(2)(A),²⁸ the findings that support Baessler's liability for deceit also support a finding that the debt is nondischargeable in his bankruptcy case.

But Baessler says that collateral estoppel shouldn't apply because the state court's judgment was also supported by several other independent grounds including contractor fraud, and contractor fraud doesn't require an intent to deceive.²⁹ And in fact, California's contractor fraud statute reads, "any person who is induced to contract for a work of improvement ... in reliance on false or fraudulent representations or false statements knowingly made , may sue and recover from such contractor ...."³⁰

As a "false statement knowingly made" would not require a finding of intent to deceive, Baessler argues that such a finding was not "necessarily decided" and should not have collateral estoppel effect.³¹ In other words, the intent to deceive finding wasn't necessary because the state court could have hypothetically reached the same judgment by merely finding "a false statement knowingly made."³²

1. Judgments based on alternative grounds; doubts about the approach taken by the Restatement (Second) of Judgments.

Baessler's argument, that judicial estoppel is unavailable when a judgment is based on alternative grounds, is supported by Comment i to Restatement (Second) of Judgments.³³ And California courts often look to this Restatement when applying collateral estoppel rules.³⁴ Yet before the adoption of the Second Restatement, if a judgment in a prior proceeding was based on alternative grounds, collateral estoppel could bar re-litigation of both grounds.³⁵ California followed this approach while the Restatement (First) of Judgments was in effect.³⁶

Then, the Second Restatement departed from the first by adopting the Second Circuit's reasoning of Halpern v. Shwartz.³⁷ In Halpern , the court held that "[w]hen the prior judgment rested on several ... independent, alternative grounds" none of the independent grounds has preclusive effect in later adjudication.³⁸ The Halpern court took this approach for two reasons.³⁹ First, it reasoned that if the trial court was sure enough about one ground, it might not rigorously consider an alternative ground.⁴⁰ Second, it reasoned that a litigant who lost on alternative grounds might not appeal an erroneous finding because "even if his claim of error were sustained, the judgment would be affirmed on one of the other grounds."⁴¹

Persuaded by this reasoning, Comment i of the Second Restatement states "[i]f a judgment of a court of first instance is based on determinations of two issues, either of which standing independently would be sufficient to support the result, the judgment is not conclusive with respect to either issue standing alone."⁴²

Despite a general acceptance of the Second Restatement, several courts have shown a strong preference for the First Restatement's approach to judgements based on alternative grounds, some expressly rejecting Comment i and the Halpern reasoning.⁴³ For example, the bankruptcy court in In re Livingston applied collateral estoppel to bar re-litigation of a prior state court judgment resting on alternative grounds, one of which was fraud. The court stated "it cannot be said either that the adjudication of fraud was somehow incidental to the judgment or that it was not able to be given scrutiny by an appellate court."⁴⁴

A California appellate court offered this instruction: "[I]n applying collateral estoppel, courts...