Harris v. Jayo (In re Harris), 19-11286

• Decision Date: 14 July 2021
• Docket Number: No. 19-11286,19-11286
• Citation: 3 F.4th 1339
• Parties: IN RE: Kevin HARRIS, Debtor. Kevin Harris, Plaintiff - Appellant, v. James F. Jayo, Defendant - Appellee.
• Court: U.S. Court of Appeals — Eleventh Circuit

3 F.4th 1339

IN RE: Kevin HARRIS, Debtor.Kevin Harris, Plaintiff - Appellant,

v.James F. Jayo, Defendant - Appellee.

No. 19-11286

United States Court of Appeals, Eleventh Circuit.

July 14, 2021

Kevin Christopher Gleason, Florida Bankruptcy Group, LLC, Hollywood, FL, for Plaintiff-Appellant.

James F. Jayo, Fernandina Beach, FL, Pro Se.

Jesse Panuccio, Boies Schiller & Flexner, LLP, Fort Lauderdale, FL, for Amicus Curiae Jesse Panuccio.

Before JORDAN, MARCUS, and GINSBURG,^* Circuit Judges.

JORDAN, Circuit Judge.

The Bankruptcy Code contains a number of exemptions from discharge. One is for "any debt ... for money ... to the extent obtained by ... false pretenses, a false representation, or actual fraud." 11 U.S.C. § 523(a)(2)(A). The main question presented in this appeal is whether a Florida default judgment against a debtor, based on a multi-count complaint, can satisfy the requirements of § 523(a)(2)(A) through the doctrine of collateral estoppel.¹

I

The United States experienced a financial crisis (some would say meltdown) in 2008. See generally Andrew Ross Sorkin, Too Big to Fail (2009); Nat'l Comm'n on the Causes of the Financial Crisis in the United States, The Financial Crisis Inquiry Report (2011); Ben S. Bernanke, Timothy F. Geithner, & Henry M. Paulson, Jr., Firefighting: The Financial Crisis and Its Lessons (2018). That year, while the S&P 500 was losing 37% of its value, Kevin Harris promised James Jayo a 15% annual rate of return if he invested in his two companies—Wall Street Precious Metals, Inc., and International Bullion and Coin Exchange, Inc. Mr. Jayo agreed to invest, and in exchange for ownership interests in the companies, he gave Mr. Harris more than $600,000 (in direct investments and loans) over a five-year period. He also allowed Mr. Harris to use his American Express card to purchase over $300,000 in inventory, and he personally guaranteed some loans taken out by the companies.

Given that this case ended up in court, no one will be surprised to learn that by 2015 Mr. Jayo had recouped a little less than $60,000 of his outlay. But according to Mr. Jayo, his misfortune was not simply the result of a poor investment or the global economic downturn. He claimed that Mr. Harris had essentially converted or stolen the companies’ assets for his own personal benefit. So he sued Mr. Harris (and Marc Spiewak) in a Florida state court, asserting a number of claims, including fraudulent misrepresentation, negligent misrepresentation, breach of fiduciary duty, conversion, unjust enrichment, investment fraud in violation of Fla. Stat. § 517.301, unfair and deceptive trade practices in violation of Fla. Stat. § 501.21 et seq, and conspiracy to defraud.

Mr. Harris answered the complaint, but then engaged in some questionable conduct, such as lying to the state court about having suffered a heart attack in order to obtain a continuance or delay of the proceedings. The state court eventually struck his answer and entered a $1.8 million default judgment against him as a sanction for his behavior. Neither the order granting a default nor the default judgment (which was general in nature) said anything about Mr. Jayo's claims or specified which of the claims supported the monetary award. See D.E. 7-3, 7-4.

When Mr. Harris filed for Chapter 7 bankruptcy protection, Mr. Jayo (proceeding pro se ) filed an adversary proceeding seeking to have the debt created by the default judgment declared non-dischargeable under 11 U.S.C. § 523(a)(2)(A). Following a bench trial, the bankruptcy court relied on In re Bush , 62 F.3d 1319 (11th Cir. 1995) (involving a federal court default judgment), applied collateral estoppel, and ruled that the debt created by the Florida default judgment was non-dischargeable. Mr. Jayo had in part alleged fraud on the part of Mr. Harris in the Florida action, and the state court had entered a default judgment in which it accepted all of Mr. Jayo's allegations as true.

Mr. Harris appealed to the district court, challenging the § 523(a)(2)(A) determination as well as certain evidentiary rulings made by the bankruptcy court. In two separate orders, the district court affirmed. As to nondischargeability, the district court also relied on Bush and concluded that the elements of Mr. Jayo's fraud-based claims were conclusively established by the default judgment. As a result, the debt was not dischargeable under § 523(a)(2)(A). See D.E. 20 at 5. With respect to the bankruptcy court's evidentiary rulings, the district court noted that Mr. Harris may not have preserved all of his objections, but even if he did the bankruptcy court had not abused its discretion. See D.E. 27 at 4.

II

Although collateral estoppel may bar the relitigation of "issues previously decided in state court," the "ultimate issue of dischargeability is a legal question to be addressed by the bankruptcy court in the exercise of its exclusive jurisdiction to determine dischargeability." In re St. Laurent , 991 F.2d 672, 676 (11th Cir. 1993) (citing In re Halpern , 810 F.2d 1061, 1064 (11th Cir. 1987) ). See also In re Collins , 946 F.2d 815, 816 (11th Cir. 1991) (exercising plenary review as to dischargeability determination under § 523(a)(2)(B) ). Our review, therefore, is plenary.

A

St. Laurent , which involved the application of collateral estoppel to a Florida judgment in determining whether a debt was non-dischargeable under § 523(a)(2)(A), resolves a number of preliminary questions. First, as a matter of federal law, "[c]ollateral estoppel principles apply to dischargeability proceedings [under § 523(a)(2)(A) ]." St. Laurent , 991 F.2d at 675. See also Grogan v. Garner , 498 U.S. 279, 284 n.11, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991) ("We now clarify that collateral estoppel principles do indeed apply in discharge exception proceedings pursuant to § 523(a)."). Second, because the default judgment against Mr. Harris was issued by a Florida court, we apply the collateral estoppel law of Florida to determine "the judgment's preclusive effect." St. Laurent , 991 F.2d at 676. See also Marrese v. Am. Acad. of Orthopaedic Surgeons , 470 U.S. 373, 380, 105 S.Ct. 1327, 84 L.Ed.2d 274 (1985) (holding that the full faith and credit statute, 28 U.S.C. § 1738, "directs a federal court to refer to the preclusion law of the State in which judgment was rendered").

The bankruptcy court and the district court relied on our decision in Bush , but that reliance was in part misplaced. Bush was decided under federal preclusion principles because the underlying judgment there had been issued by a federal court. See Bush , 62 F.3d at 1321-22. As noted, we must apply Florida preclusion law in this case.²

The wrinkle here is that the Florida judgment against Mr. Harris was a general default judgment based on Mr. Jayo's multi-count complaint. Because we have left open what effect to give a state-court default judgment in a § 523(a)(2)(A) dischargeability proceeding, see Bush , 62 F.3d at 1323 n.6, we need to determine how Florida courts treat default judgments and how they apply collateral estoppel to such judgments. Before doing that, we summarize the requirements of § 523(a)(2)(A).

B

"The statutory provisions [of the Bankruptcy Code] governing nondischargeability reflect a congressional decision to exclude from the general policy of discharge certain categories of debts," on the theory that some categories of debt "outweigh[ ] the debtors’ interest in a complete fresh start." Grogan , 498 U.S. at 287, 111 S.Ct. 654. Fraud is one such category of debt, and "[c]ourts have generally interpreted § 523(a)(2)(A) to require the traditional elements of common law fraud." In re Bilzerian , 153 F.3d 1278, 1281 (11th Cir. 1998) ( Bilzerian II ). As the creditor, Mr. Jayo had to prove the following by a preponderance of the evidence to establish nondischargeability under § 523(a)(2)(A) : (1) that Mr. Harris used false pretenses, or made a false representation, or committed actual fraud; (2) that he relied on Mr. Harris’ conduct; (3) that his reliance was justified; and (4) that Mr. Harris’ conduct caused his loss. See id. ; In re Bilzerian , 100 F.3d 886, 892 (11th Cir. 1996) ( Bilzerian I ). See also Field v. Mans , 516 U.S. 59, 74-75, 116 S.Ct. 437, 133 L.Ed.2d 351 (1995) (" § 523(a)(2)(A) requires justifiable, but not reasonable, reliance").

Consistent with our decision in Bilzerian II , a leading bankruptcy treatise explains that the false pretense and false representation prongs of § 523(a)(2)(A) each require an "intentional wrong"—the false pretense or the false representation "must have been knowingly and fraudulently made." 4 Collier on Bankruptcy, ¶ 523.08[1][d] (16th ed. 2018) (collecting circuit and district court cases). "Such a construction ... is consonant with equity, and consistent with the object and intention of Congress in enacting a general law by which the honest citizen may be relieved from the burden of hopeless insolvency." Neal v. Clark , 95 U.S. 704, 709, 24 L.Ed. 586 (1877).

The actual fraud prong "encompasses forms of fraud, like fraudulent conveyance schemes, that can be effected without a false representation. ... [A]nything that counts as ‘fraud’ and is done with wrongful intent is ‘actual fraud.’ " Husky Int'l Electronics, Inc. v. Ritz , 578 U.S. 356, 136 S. Ct. 1581, 1586, 194 L.Ed.2d 655 (2016). See also id. at 1587 (declining to set out a definition of fraud "for all times and circumstances"). As relevant here, " § 523(a)(2)(A) prevents the discharge of all liability arising from fraud, and ... an award of treble damages therefore falls within the scope of the [exemption]." Cohen v. de la Cruz , 523 U.S. 213, 215, 118 S.Ct. 1212, 140 L.Ed.2d 341 (1998).

Neither Mr. Jayo nor Mr. Harris take issue with any of these general principles. We decide this case, therefore, on the understanding that Mr. Jayo had to show intentional misconduct on the part of Mr. Harris.

"[T]he issue of nondischargeability [is] a matter of federal law governed...