In re Cantrell

• Decision Date: 23 October 2001
• Docket Number: BAP No. NC-01-1114-RRyK. Bankruptcy No. 99-49461-TS. Adversary No. 00-4136-AT.
• Citation: 269 BR 413
• Parties: In re Gregory Dewitt CANTRELL, Debtor. Gregory Dewitt Cantrell, Appellant, v. Cal-Micro, Inc.; Cal-Micro, Inc. Employee Stock Option Plan; The Pauline Countryman 1990 Trust, Appellees.
• Court: U.S. Bankruptcy Appellate Panel, Ninth Circuit

269 B.R. 413 (2001)

In re Gregory Dewitt CANTRELL, Debtor.

Gregory Dewitt Cantrell, Appellant, v. Cal-Micro, Inc.; Cal-Micro, Inc. Employee Stock Option Plan; The Pauline Countryman 1990 Trust, Appellees.

BAP No. NC-01-1114-RRyK. Bankruptcy No. 99-49461-TS. Adversary No. 00-4136-AT.

United States Bankruptcy Appellate Panel of the Ninth Circuit.

Argued and Submitted September 21, 2001.

Filed October 23, 2001.

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Jon R. Vaught, Day Law Corporation, Oakland, CA, for Gregory Dewitt Cantrell, appellant.

Brian Gill, Pacific Grove, CA, for Cal-Micro, Inc., Cal-Micro, Inc., Employee Option Plan, The Pauline Countryman 1990 Trust, appellees.

Before RUSSELL, RYAN and KLEIN, Bankruptcy Judges.

OPINION

RUSSELL, Bankruptcy Judge.

The appellees, judgment creditors of the appellant, brought an action in the appellant's bankruptcy case to determine the dischargeability of the judgment debt under § 523(a)(4).¹ The appellees filed a motion for summary judgment, and the appellant filed a cross-motion for summary judgment. The bankruptcy court granted appellees' motion for summary judgment and denied appellant's cross-motion for summary judgment based on the collateral estoppel effect of the appellees' state-court default judgment. In so ruling, the bankruptcy court determined that the appellant was a fiduciary within the meaning of § 523(a)(4). The appellant thereafter filed this appeal. We REVERSE and REMAND.

I. FACTS

In May 1995, the appellees, Cal-Micro, Inc., Cal-Micro, Inc. Employee Stock Option Plan, and The Pauline Countryman 1990 Trust (collectively, the CMI Plaintiffs) filed a complaint in state court against the appellant Gregory Cantrell and others. The CMI Plaintiffs served the complaint on Cantrell by publication rather than by personal service. The complaint alleged twelve separate causes of action including several counts of conversion, fraud, conspiracy, constructive trust, accounting, and breach of fiduciary duty. The complaint sought recovery of compensatory damages in the aggregate amount of $1,271,985, plus additional unascertained amounts, and each of the tort-based claims against Cantrell sought punitive damages.

The claims arose from a failed stock purchase transaction. The complaint alleged that, in June 1993, defendant Omni Enterprises, Inc. ("Omni") purchased from plaintiff The Pauline Countryman 1990 Trust ("Countryman Trust") a controlling percentage of stock in co-plaintiff Cal-Micro, Inc. ("CMI"). The complaint further alleged that Cantrell and another individual named Marvin Wilcher were officers, directors and/or sole stockholders of Omni, and that Cantrell and Wilcher also were officers, directors and/or majority stockholders of CMI, while Omni held the CMI stock. According to the complaint, by August 1994, Omni had defaulted on payments owed under the stock purchase agreement, so the agreement was rescinded and the CMI stock was returned to the Countryman Trust.

The Complaint further alleged that, as officers and/or directors of CMI, and as the alter egos of Omni (the controlling stockholder of CMI), Cantrell and Wilcher owed to plaintiffs fiduciary duties which they breached. According to the complaint, Cantrell and Wilcher engaged in the following conduct in contravention of their fiduciary duties:

A. Expropriated and converted to their own use and purposes . . . corporate funds and assets of plaintiff Cal-Micro, Inc. . . .

B. Made unauthorized loans of corporate funds and assets of plaintiff Cal-Micro, Inc to themselves and to the Defendant Corporations . . .

C. Made and used extensions of credit, credit accounts credit cards of plaintiff Cal-Micro, Inc to procure goods and services for themselves 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. . . .

In April 1996, the CMI Plaintiffs obtained a default judgment against Cantrell for $1,271,985 in compensatory damages and $10,000 in punitive damages, plus attorney's fees, interest and costs. The default judgment neither specified the cause(s) of action on which it was based nor made any express findings of fact concerning the allegations contained in the complaint.

In April 1998, Cantrell filed a motion to set aside the default judgment. In the motion to set aside, Cantrell claimed he was never personally served with the summons and complaint; rather, the CMI Plaintiffs had obtained leave to serve the complaint on Cantrell by publication. In their opposition to the motion to set aside, the CMI Plaintiffs argued that Cantrell's motion to set aside was time barred. According to the opposition, Cantrell admitted to receiving actual notice of the default judgment in November 1997, when there was still enough time to bring a timely motion, but Cantrell waited to bring his motion until April 1998, after the two-year limitations period had run for bringing his motion to set aside. The state court denied Cantrell's motion to set aside.

In December 1999, Cantrell filed a voluntary chapter 7 bankruptcy petition, and in March 2000, the CMI Plaintiffs filed their complaint to determine the dischargeability of their state-court default judgment against Cantrell under §§ 523(a)(2) and (4).² The CMI Plaintiffs thereafter filed their motion for summary judgment, and Cantrell filed a cross-motion for summary judgment.

On February 13, 2001, the bankruptcy court issued its Memorandum of Decision on the cross-motions for summary judgment. The court determined that the same issues presented by the dischargeability action were decided in the state-court lawsuit and gave the CMI Plaintiffs' default judgment preclusive effect. The bankruptcy court therefore granted the CMI Plaintiffs' motion for summary judgment and denied Cantrell's cross-motion for summary judgment.

In making its determination, the bankruptcy court relied heavily on Ragsdale v. Haller, 780 F.2d 794 (9th Cir.1986). Based largely on Ragsdale, the court concluded that, as a matter of California law, Cantrell's alleged position as a director, officer or controlling shareholder of CMI made Cantrell the type of fiduciary covered by § 523(a)(4):

The Ragsdale court apparently found that, given partners\' fiduciary duties to each other, a partner\'s ability to exercise control over the partnership property made the partner a trustee of a statutory trust for purposes of 11 U.S.C. § 523(a)(4). The Court sees no principled basis for distinguishing between a partner, on the one hand, and a director, officer, or controlling shareholder, on the other, in this respect. Therefore, the Court concludes that an officer, director, or controlling shareholder is the trustee of a statutory trust to the extent his position gives him the power to exercise control over corporate assets.

In re Cantrell 258 B.R. 756, 764 (Bankr. N.D.Cal.2001).

The bankruptcy court thereafter entered a judgment of nondischargeability against Cantrell, and Cantrell timely filed this appeal.

II. ISSUES

A. Whether the bankruptcy court properly gave collateral estoppel effect to the CMI Plaintiffs' state court default judgment.

B. Whether the bankruptcy court properly concluded that the appellant was a "fiduciary" within the meaning of § 523(a)(4) by virtue of his position as an officer, director and/or majority shareholder.

III. STANDARD OF REVIEW

We review a summary judgment de novo. In re Baldwin, 245 B.R. 131, 134 (9th Cir. BAP 2000), aff'd, 249 F.3d 912 (9th Cir.2001).

We also review de novo the bankruptcy court's decision on the availability of collateral estoppel. Id.

Whether a person is a "fiduciary" within the meaning of § 523(a)(4) is a question of law, which we also review de novo. In re Stanifer, 236 B.R. 709, 713 (9th Cir. BAP 1999).

IV. DISCUSSION

A. Preclusive Effect of Default Judgment

Collateral estoppel, or issue preclusion, applies in dischargeability proceedings. Grogan v. Garner, 498 U.S. 279, 284 & n. 11, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991). In determining the preclusive effect of a state court judgment, 28 U.S.C. § 1738 requires federal courts, as a matter of full faith and credit, to apply that state's collateral estoppel principles. In re Nourbakhsh, 67 F.3d 798, 800 (9th Cir. 1995).

Under California law, five "threshold requirements" must be met for collateral estoppel to apply:

First, the issue sought to be precluded from relitigation must be identical to that decided in a former proceeding. Second, this issue must have been actually litigated in the former proceeding. Third, it must have been necessarily decided in the former proceeding. Fourth, the decision in the former proceeding must be final and on the merits. Finally, the party against whom preclusion is sought must be the same as, or in privity with, the party to the former proceeding. . . . The party asserting collateral estoppel bears the burden of establishing these requirements.

In re Harmon, 250 F.3d 1240, 1245 (9th Cir.2001) (quoting Lucido v. Superior Court, 51 Cal.3d 335, 341, 272 Cal.Rptr. 767, 795 P.2d 1223 (1990)). If all of the threshold requirements are met, the court then must decide whether application of collateral estoppel would "further the policy interests underlying the doctrine." Harmon, 250 F.3d at 1247, n. 6 (citing Lucido, 51 Cal.3d at 342-43, 272 Cal.Rptr. 767, 795 P.2d 1223).

When a party seeks to invoke collateral estoppel based on a default judgment, California mandates two threshold requirements. First, for a default judgment to have preclusive effect, the defaulting defendant must have had a "full and fair opportunity" to litigate the issues determined by the default judgment. Harmon, 250 F.3d at 1247, n. 6 (citing Williams v. Williams, 36 Cal.2d 289, 295, 223 P.2d 248 (1950)). Accordingly, a defaulting defendant will not be...