In re Cantrell

• Decision Date: 13 February 2001
• Docket Number: Bankruptcy No. 99-49461 TS. Adversary No. 00-4136 AT.
• Parties: In re Gregory Dewitt CANTRELL, Debtor. Cal-Micro, Inc., etc., et al., Plaintiffs, v. Gregory Dewitt Cantrell, Omni Enterprises, Inc., etc., Defendants.
• Court: United States Bankruptcy Courts. Ninth Circuit. U.S. Bankruptcy Court — Northern District of California

258 B.R. 756 (2001)

In re Gregory Dewitt CANTRELL, Debtor.

Cal-Micro, Inc., etc., et al., Plaintiffs, v. Gregory Dewitt Cantrell, Omni Enterprises, Inc., etc., Defendants.

Bankruptcy No. 99-49461 TS. Adversary No. 00-4136 AT.

United States Bankruptcy Court, N.D. California.

February 13, 2001.

COPYRIGHT MATERIAL OMITTED

Jon R. Vaught, Vaught & Boutris, LLP, Oakland, CA, for Debtor.

Brian Fortune Gill, The Gill Law Offices, Pacific Grove, CA, for Creditors.

MEMORANDUM OF DECISION

LESLIE TCHAIKOVSKY, Bankruptcy Judge.

In this adversary proceeding, Plaintiffs Cal-Micro, Inc. ("Cal-Micro"), Cal-Micro, Inc. Employee Stock Option Plan ("Cal-Micro ESOP"), and The Pauline Countryman 1990 Trust (the "Countryman Trust") (collectively "Plaintiffs") seek a nondischargeable judgment against the above-captioned debtor Gregory DeWitt Cantrell (the "Debtor") pursuant to 11 U.S.C. § 523(a)(4) in the amount of $769,973.88.¹ Plaintiffs filed a motion for summary judgment on the ground of collateral estoppel based on a pre-petition state court default judgment. The Debtor opposed the motion and filed a cross-motion for summary judgment. For the reasons stated below, the Court finds for Plaintiffs and holds that Plaintiffs' judgment claim is excepted from the Debtor's discharge under 11 U.S.C. § 523(a)(4).²

SUMMARY OF FACTS

In May 1995, the Plaintiffs filed a complaint in state court against the Debtor, Omni Enterprises, and others (the "State Court Complaint"). The Ninth Cause of Action of the State Court Complaint alleged that the Debtor, among others, breached his fiduciary duty to the Plaintiffs. The Debtor failed to file an answer, and, on April 12, 1996, the Plaintiffs obtained a default judgment against the Debtor for $1,271,985 in compensatory damages, $10,000 in punitive damages, $4,670 in attorney's fees, $463.75 in costs and post-judgment interest (the "Default Judgment"). The Default Judgment did not specify the causes of action upon which it was based. On March 18, 1999, the Plaintiffs obtained an Order Amending Judgment Nunc Pro Tunc, correcting the misspelling of the Debtor's name from Cantrel to Cantrell. On December 9, 1999, the Debtor filed this chapter 7 case.

DISCUSSION

A. LAW GOVERNING COLLATERAL ESTOPPEL

In their motion for summary judgment, Plaintiffs contend that the Default Judgment entitles them to a nondischargeable judgment against the Debtor in the amount specified in the Default Judgment pursuant to 11 U.S.C. § 523(a)(4) based on the doctrine of collateral estoppel. The doctrine of collateral estoppel clearly applies in dischargeability proceedings. Grogan v. Garner, 498 U.S. 279, 284 & n. 11, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991). It is also clear that, when the prior judgment was issued by a state court, 28 U.S.C., § 1738 requires a bankruptcy court to give a judgment "full faith and credit" by giving it the same collateral estoppel effect it would be given by a state court. In re Bugna, 33 F.3d 1054, 1057 (9th Cir.1994).

Under California law, the doctrine of collateral estoppel bars relitigation of an issue when: (1) the issue presented in the current litigation is the same issue that was decided in the prior action, (2) there was a final judgment on the merits in the prior action, and (3) the party against whom the doctrine is sought to be applied was a party to the prior action. In re Bugna, 33 F.3d at 1057, citing Garrett v. City and County of San Francisco, 818 F.2d 1515, 1520 (9th Cir.1987). California law gives the same collateral estoppel effect to a default judgment that it gives to a judgment after trial. In re Younie, 211 B.R. 367, 375 (9th Cir. BAP 1997), aff'd w/o op'n 163 F.3d 609, 1998 WL 668120 (1998). Where a complaint alleges alternative theories of recovery and the default judgment does not specify on which theories it is based, the judgment must be deemed to have been based on all theories alleged in the complaint. Harmon v. Kobrin, 242 B.R. 183, 187-188 (E.D.Cal.1999) (distinguishing a default judgment from a judgment after trial based on alternative grounds, which has no collateral estoppel effect as to any of the grounds).

The Plaintiffs contend that each of the required elements necessary for collateral estoppel is satisfied here. Clearly, two of the elements have been satisfied: (1) the Default Judgment is a final judgment on the merits and (2) the Debtor and the Plaintiffs were both parties to the State Court Action. The only element in doubt is whether the issues presented in this adversary proceeding were decided in the State Court Action. To determine whether this element has been satisfied, the Court must compare the elements required to establish a nondischargeable claim under 11 U.S.C. § 523(a)(4) with the issues determined in the State Court Action.

B. ELEMENTS OF NONDISCHARGEABILITY UNDER 11 U.S.C. § 523(a)(4)

Section 523(a)(4) of the Bankruptcy Code provides, in pertinent part, that an individual's chapter 7 discharge does not discharge a debt "for fraud or defalcation while acting in a fiduciary capacity. . . ."³ Despite the apparent simplicity of this phrase, 11 U.S.C. § 523(a)(4) has proved difficult to construe. Federal bankruptcy law determines whether the debtor was a "fiduciary" for purposes of 11 U.S.C. § 523(a)(4). The debtor qualifies as such only if the debtor was the trustee of an express or statutory trust. State law determines whether such a trust existed. However, the trust in question must have been one that existed before any wrongdoing. Ragsdale v. Haller, 780 F.2d 794, 796 (9th Cir.1986). Finally, federal law determines what constitutes a "defalcation" for purposes of § 523(a)(4). In this context, a defalcation means a "`misappropriation of trust funds or money held in any fiduciary capacity; the failure to properly account for such funds.'" In re Niles, 106 F.3d 1456, 1460 (9th Cir.1997) quoting Black's Law Dictionary 417 (6th ed.1990).

With these standards in mind, the allegations of the State Court Complaint must be examined to determine whether the Default Judgment established the necessary elements of an 11 U.S.C. § 523(a)(4) nondischargeability claim. Clearly, for the reasons discussed above, the fact that the State Court Complaint alleged a cause of action against the Debtor for breach of fiduciary duty under state law and that the Default Judgment granted Plaintiffs' judgment on this cause of action is insufficient to establish that the Plaintiffs' judgment claim is entitled to be excepted from the Debtor's discharge under 11 U.S.C. § 523(a)(4).

C. ALLEGATIONS OF STATE COURT COMPLAINT

The first section of the State Court Complaint is entitled "General Allegations." In this section, among other things, the State Court Complaint alleged that, in June 1993, the Debtor and another individual ("Wilcher") were the sole shareholders of Omni. It further alleged that, in June 1993, Omni purchased a controlling percentage of the stock of Cal-Micro from the Countryman Trust (one of the Plaintiffs herein and in the State Court Complaint). The State Court Complaint alleged that, in August 1994, due to Omni's defaults under the stock purchase agreement, the agreement was rescinded, the stock was "returned" to the Countryman Trust, and the Countryman Trust became the sole shareholder of Cal Micro.

Paragraph 18 of the State Court Complaint alleged the following:

. . . between June 1, 1993, and on or about August 11, 1994, defendants WILCHER, CANTREL, and DOE XI through DOE XX, inclusive, and each of them were the duly elected and/or authorized, and/or purported and/or ostensible officers and directors of defendants OMNI ENTERPRISES, INC., and plaintiff CAL-MICRO, INC., and . . . as majority stockholders and/or officers and/or directors of said OMNI ENTERPRISES, INC. and CAL-MICRO, INC. owed to plaintiffs fiduciary duties which they breached, as hereinafter alleged.

The second section of the State Court Complaint is entitled "Alter-Ego Allegations." In this section, among other things, the Plaintiffs alleged that Omni was the alter ego of the Debtor. As such, the prior allegation that, during the period from June 1, 1993 to August 11, 1994 (the "Pre-Rescission Period"), Omni was the majority shareholder of Cal-Micro may be read to allege that, during the Pre-Rescission Period, the Debtor was the majority shareholder of Cal-Micro and as such owed a fiduciary duty to the Plaintiffs which he breached.

The State Court Complaint then alleged twelve separate causes of action. The Ninth Cause of Action was for breach of fiduciary duty. This section incorporated by reference the first and second sections of the State Court Complaint: i.e., the General Allegations and the Alter-Ego Allegations as described above. It then alleged that, during the Pre-Rescission Period, the Debtor, without corporate authority or the Plaintiffs' consent, did or permitted to be done, the following things in breach of his fiduciary duty:

A. Expropriated and converted to . . . his own uses and purposes, and to the uses and benefit of the Defendant Corporations, corporate funds and assets of plaintiff CAL-MICRO, INC. . . . .

B. Made unauthorized loans of corporate funds and assets of plaintiff CAL-MICRO, INC. to . . . himself and to the Defendant Corporations, without the consent of plaintiffs herein. . . .

C. Made and used extensions of credit, credit accounts credit cards of plaintiff CAL-MICRO, INC. to procure goods and services for . . . himself and the Defendant Corporations. . . .

D. Failed to use the corporate funds, income and accounts receivable of plaintiff CAL-MICRO, INC. for the payment of said plaintiff\'s operational expenses, accounts payable, payroll expenses, and expenses of taxes and insurance. . . .

The Ninth Cause of Action further alleged that, in doing or permitting these acts to be done, the Debtor "did not exercise the care required of directors and officers of plaintiff CAL-MICRO, INC., in good faith, in a manner which was in the best...