In re Cantrell

• Decision Date: 28 May 2003
• Docket Number: No. 01-17358.,01-17358.
• Citation: 329 F.3d 1119
• Parties: In re Gregory Dewitt CANTRELL, Debtor, Cal-Micro, Inc.; Cal-Micro, Inc., Employee Stock Option Plan; The Pauline Countryman 1990 Trust, Appellants, v. Gregory Dewitt Cantrell, Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

329 F.3d 1119

In re Gregory Dewitt CANTRELL, Debtor,

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

No. 01-17358.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted November 5, 2002.

Filed May 28, 2003.

COPYRIGHT MATERIAL OMITTED

Brian Fortune Gill, The Gill Law Offices, Pacific Grove, CA, argued the cause and filed briefs for the appellants.

Jon R. Vaught, Vaught & Boutris, LLP, Oakland, CA, argued the cause and filed a brief for the appellee.

Appeal from the Ninth Circuit, Bankruptcy Appellate Panel; Russell, Klein and Ryan, Bankruptcy Judges, Presiding. BAP No. NC-01-01114-RRyK.

Before STAPLETON,^* O'SCANNLAIN and FERNANDEZ, Circuit Judges.

O'SCANNLAIN, Circuit Judge.

We must decide whether a corporate officer who is personally liable for corporate fraud may discharge such debt in bankruptcy.

I

In May 1995, Cal-Micro, Inc., the Cal-Micro, Inc. Employee Stock Option Plan, and the Pauline Countryman 1990 Trust (collectively "Cal-Micro") filed a complaint in California Superior Court alleging, inter alia, that Gregory Cantrell breached fiduciary duties owed to Cal-Micro while serving as an officer of the corporation. In addition to several other claims, the complaint alleged that Cantrell expropriated corporate funds and assets of Cal-Micro for his own personal use and failed to use Cal-Micro's assets for the payment of the corporation's business and operational expenses.

After publication of the summons and complaint, and failing to receive an answer from Cantrell, Cal-Micro duly filed a request for entry of default judgment. On April 12, 1996, the state court granted Cal-Micro default judgment against Cantrell for $1,271,985 in compensatory damages, $10,000 in punitive damages, $4,670 in attorney's fees, and $463.75 in costs and post-judgment interest. The judgment order did not specify the causes of action upon which entry of default judgment was based.

Over two years later, Cantrell filed a motion to set aside the default judgment. In support of this motion, Cantrell claimed that he was never personally served with the summons and complaint. Cantrell did admit that in November 1997 he was notified by the Alameda County Clerk-Recorder that a $1,287,118.75 state court judgment lien had been recorded against him and that Cal-Micro was listed as a primary lien holder. Cal-Mirco thus argued that the motion to set aside was time barred because Cantrell, despite having actual notice of the default judgment, filed the motion after the two-year limitations period provided by California Code of Civil Procedure § 473.5 had expired. The state court agreed with Cal-Micro, and its denial of Cantrell's motion to set aside was subsequently upheld by the California Court of Appeals.

Soon thereafter, Cantrell filed a voluntary Chapter 7 bankruptcy petition. In response, Cal-Micro filed a complaint in bankruptcy court to enforce its state court default judgment as non-dischargeable under 11 U.S.C. § 523(a)(4). Cal-Micro also filed a motion for summary judgment arguing that under the doctrine of collateral estoppel the bankruptcy court was required to give preclusive effect to the default judgment. In a cross-motion for partial summary judgment, Cantrell argued that the state court complaint, which supported the subsequent default judgment, merely alleged a breach of fiduciary duty while Cantrell served as an officer of Cal-Micro, and failed to state a cause of action under § 523(a)(4) for defalcation in a fiduciary capacity. Cantrell contended that as a matter of law he was not a fiduciary within the meaning of § 523(a)(4), and therefore he was entitled to summary judgment on Cal-Micro's non-dischargeability claim.

After the bankruptcy court granted Cal-Micro's motion for summary judgment and denied Cantrell's cross-motion for summary judgment, the Bankruptcy Appellate Panel ("BAP") reversed. See Cantrell v. Cal-Micro, Inc. (In re Cantrell), 269 B.R. 413 (9th Cir. BAP 2001). The BAP concluded that Cantrell in his role as a corporate officer was not a fiduciary within the meaning of § 523(a)(4). Because the BAP concluded there was no alternative basis under which the bankruptcy court could find that Cantrell was a § 523(a)(4) fiduciary, the BAP reversed the bankruptcy court's grant of summary judgment to Cal-Micro, and remanded to the bankruptcy court for entry of summary judgment in favor of Cantrell.

II

Cal-Micro first argues on appeal that the BAP erred by not giving preclusive effect to the state court default judgment. The Supreme Court has held that "collateral estoppel principles do indeed apply in discharge exception proceedings pursuant to § 523(a)." Grogan v. Garner, 498 U.S. 279, 284 n. 11, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991). In addition, 28 U.S.C. § 1738 requires us, as a matter of full faith and credit, to apply the pertinent state's collateral estoppel principles. Gayden v. Nourbakhsh (In re Nourbakhsh), 67 F.3d 798, 800 (9th Cir.1995).

A

Under California law, collateral estoppel only applies if certain threshold requirements are met:

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.

Harmon v. Kobrin (In re Harmon), 250 F.3d 1240, 1245 (9th Cir.2001) (citation omitted).¹

The mere fact that "judgment was secured by default does not warrant the application of a special rule." Williams v. Williams (In re Williams' Estate), 36 Cal.2d 289, 223 P.2d 248, 252 (1950). California law does, however, place two limitations on this general principle. The first is that collateral estoppel applies only if the defendant "has been personally served with summons or has actual knowledge of the existence of the litigation." In re Harmon, 250 F.3d at 1247 (quoting Williams, 223 P.2d at 254). Collateral estoppel, therefore, only applies to a default judgment to the extent that the defendant had actual notice of the proceedings and a "full and fair opportunity to litigate." Id. at 1247 n. 6.

The second limitation, in the context of a default judgment, is that a decision has a preclusive effect in later proceedings "only where the record shows an express finding upon the allegation" for which preclusion is sought. Williams, 223 P.2d at 254. But, as we recognized in In re Harmon, "the express finding requirement can be waived if the court in the prior proceeding necessarily decided the issue." 250 F.3d at 1248. In such circumstances, an express finding is not required because "if an issue was necessarily decided in a prior proceeding, it was actually litigated." Id.

B

Here, the BAP determined that the notice requirement was not satisfied because Cantrell was neither personally served with summons nor had actual knowledge of the existence of the litigation before default judgment was entered. However, California Code of Civil Procedure § 473.5 provides that a defendant without actual notice of the proceedings can file a motion to set aside the default judgment and defend the action if it is brought within "two years after entry of a default judgment against him or her."

Cantrell received actual knowledge of the default judgment with nearly six months remaining to file a timely motion to set aside. Because the stated purpose of the notice requirement is to ensure that a defendant has a full and fair opportunity to litigate the allegations set forth in the complaint, the mere fact that Cantrell was neither personally served with process nor aware of the litigation until after the default judgment had been entered is not dispositive.

Indeed, in a case cited favorably by the California Supreme Court, see Williams, 223 P.2d at 254, a California court held that where a party was served by publication, but had full opportunity to seek relief under Section 473,² he was barred from attacking the judgment. Stone v. Stone, 58 Cal.App. 415, 208 P. 993, 994 (1922). Accordingly, because it is undisputed that Cantrell had actual knowledge of the default judgment during the two-year interval provided by Section 473.5, we follow the holding in Stone and conclude that Cantrell had a full and fair opportunity to litigate the state court default judgment.

C

For purposes of collateral estoppel, the remaining question is whether the "express finding requirement" was either satisfied or waived. While the state court failed to make any express findings when it granted default judgment, Cal-Micro contends that the requirement was waived because the default judgment implicitly and necessarily decided that Cantrell breached his fiduciary duties to the corporation.

In In re Harmon, we held that a defendant was not barred from litigating his alleged fraudulent conduct in a non-dischargeability action in bankruptcy because "the state court could have entered a default judgment ... without finding that he had committed fraud." 250 F.3d at 1248. On this basis, Cantrell argues that he is not precluded from defending against the claims brought against him in Cal-Micro's non-dischargeability action.

In re Harmon, however, did not involve punitive damages. In contrast, the state court here awarded Cal-Micro $10,000 on its claim for punitive damages. Under California law, a plaintiff may recover punitive damages "[i]n an action for the breach of an obligation not arising from contract" upon a finding of "oppression, fraud, or malice." Cal. Civ.Code § 3294(a). Therefore, in awarding punitive damages to Cal-Micro in the default judgment, the state court seemingly decided that Cantrell acted in a fraudulent...