In re Clayton
| Decision Date | 26 June 1994 |
| Docket Number | Bankruptcy No. 91-57681-ASWSE. Adv. No. 92-5164. |
| Citation | 168 BR 700 |
| Court | U.S. Bankruptcy Court — Northern District of California |
| Parties | In re Cynthia R. CLAYTON and David H. Wolff, Debtors. NORRELL HEALTH CARE, INC., Plaintiff, v. Cynthia R. CLAYTON and David H. Wolff, Defendants. |
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Robert M. White (argued), of White & McMahon, Santa Rosa, CA, for Norrell Health Care, Inc.
Saul M. Weingarten (argued), of Saul Weingarten & Associates, Seaside, CA, for Cynthia R. Clayton and David H. Wolff.
DECISION
In this matter, the Plaintiff and Movant herein, Norrell Health Care, Inc. ("Norrell"), seeks to have $150,000 in punitive damages awarded by an arbitrator declared nondischargeable under 11 U.S.C. § 523(a)(6). Norrell is represented by Robert White, Esq. of the firm of White & McMahon. The Defendants, Cynthia Clayton ("Clayton") and David Wolff ("Wolff)", opposing the motion, are represented by Saul Weingarten, Esq. of Saul Weingarten & Associates. To support its motion, Norrell submitted the declaration of William Holley II, as well as an appendix consisting mainly of the transcript of the prior arbitration hearing between the parties and the resulting decision. Clayton and Wolff submitted a declaration by Cynthia Clayton.
The primary questions before the Court include (1) whether an arbitration award, not supported by any specific findings of fact, can be used via collateral estoppel to provide such findings without further submissions of evidence in the context of an 11 U.S.C. § 523 nondischargeability action, and (2) whether the prior proceedings between the parties were sufficient to merit the use of collateral estoppel in the present action.
Norrell, a Georgia corporation, operates many agencies throughout the United States to provide temporary health care services. In July 1986, Clayton and Wolff agreed to serve as Norrell's agent for the Monterey, California area. However, over the next several years the business relationship deteriorated into charges and counter-charges of fraud, theft and deception.
Norrell invoked the mandatory arbitration clause from the agreement under which Clayton and Wolff had become associated with Norrell. During September and December of 1990, as well as September 1991, the parties contested their dispute before an arbitrator, George Carnall ("Carnall") of the American Arbitration Association. Carnall's decision was later approved by the United States District Court for the Northern District of Georgia, the Hon. Robert H. Hall presiding.
The following allegations are drawn from Norrell's complaint pled to the arbitrator. In the spring of 1990, Clayton and Wolff transferred Norrell customers, employees and assets into a competing entity, while falsely representing to Norrell that they would ensure their return before terminating their agency relationship. Clayton and Wolff diverted and converted funds from clients and established Norrell accounts that were supposed to be Norrell's sole property. Clayton and Wolff consistently deceived Norrell about these actions.
Norrell was represented at the arbitration proceedings by William Holley, Esq. Clayton and Wolff were originally represented by Kenneth Kroopf, Esq. ("Kroopf"), who appeared at the preliminary hearings in the matter. However, Kroopf did not represent Clayton and Wolff at the two-day final arbitration hearing, held September 23-24, 1991, at which all of the live testimony was presented. The only reference in the transcript of the arbitration hearing as to why Kroopf did not appear was a statement by Clayton that she and Kroopf had had a profound disagreement as to how to proceed with the dispute with Norrell. The Court notes that on December 5, Judge Hall granted Kroopf's motion to withdraw as counsel for Clayton and Wolff after Kroopf had declared both that he "had a continuing conflict on how best to represent the interests of defendants" with Clayton and Wolff, and also that Clayton and Wolff were well-behind in paying his fees.
After hearing the allegations, as well as the supporting evidence and testimony of all the parties involved, Carnall issued a final award on October 17, 1991, granting Norrell compensatory damages of $145,635.15, punitive damages of $150,000, and attorney's fees of $150,000. Carnall did not issue any specific findings of fact or conclusions of law. The award was confirmed as a federal court judgment on December 5, 1991, in a hearing not attended by either Clayton or Wolff in person or through a legal representative. Clayton has declared to this Court that she and Wolff did not appear because, acting as they were at that stage without legal counsel, they were not aware that they had any right or obligation to object to the confirmation of the award.
Clayton and Wolff filed Chapter 7 petitions in bankruptcy on December 16, 1991.
Under Fed.R.Civ.P. 56, incorporated into adversary proceedings through Fed R.Bankr.P. 7056, it must be demonstrated that no material issues of fact remain to be decided, as well as that the moving party is entitled to judgment as a matter of law. See Celotex Corporation v. Catrett, 477 U.S. 317, 321-23, 106 S.Ct. 2548, 2552, 91 L.Ed.2d 265 (1986); Matsushita Electric Industrial Co., Ltd. v. Zenith Radio Corporation, 475 U.S. 574, 584-88, 106 S.Ct. 1348, 1355-56, 89 L.Ed.2d 538 (1986). Material issues under 11 U.S.C. § 523 are judged by a preponderance of the evidence. Grogan v. Garner, 498 U.S. 279, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991)("Grogan"). All inferences must be drawn in favor of the non-moving party. Adickes v. S.H. Kress & Co., 398 U.S. 144, 158-59, 90 S.Ct. 1598, 1608-09, 26 L.Ed.2d 142 (1970); United States v. Diebold, Inc., 369 U.S. 654, 655, 82 S.Ct. 993, 994, 8 L.Ed.2d 176 (1962)("Diebold").
Through this motion, Norrell seeks to have solely the punitive damages element of its arbitration award declared nondischargeable under 11 U.S.C. § 523(a)(6). Norrell acknowledges that due to the lack of specific findings of fact in the arbitration award, it cannot be used to obtain summary judgment on the claims for the actual damages and attorneys fees, as those damages may have been awarded in response to causes of action in Norrell's arbitration complaint that did not allege facts sufficient to sustain a violation of 11 U.S.C. § 523.
In the Ninth Circuit, the definition of "willful and malicious conduct" in terms of 11 U.S.C. § 523(a)(6) is set forth in the cases of Impulsora Del Territorio Sur, S.A. v. Cecchini (In re Cecchini), 780 F.2d 1440 (9th Cir.1986)("Cecchini") and Transamerica Commercial Finance Corporation v. Littleton (In re Littleton), 942 F.2d 551 (9th Cir.1991)("Littleton"). For "willful", "when a wrongful act ... done intentionally, necessarily produces harm and is without just cause or excuse, it is `willful and malicious' even absent proof of a specific intent to injure." Cecchini, 780 F.2d at 1443. "Necessarily produces harm" means that the Littleton, 942 F.2d at 555. Punitive damages may be declared nondischargeable under 11 U.S.C. § 523(a)(6), even when the compensatory damages in the original action were claimed as a result of fraud under 11 U.S.C. § 523(a)(2). Palmer v. Levy (In re Levy), 951 F.2d 196 (9th Cir.1991), cert. denied, ___ U.S. ___, 112 S.Ct. 2965, 119 L.Ed.2d 586 (1992); Moraes v. Adams et al. (In re Adams), 761 F.2d 1422 (9th Cir.1985).
To prove the elements of 11 U.S.C. § 523(a)(6) without re-litigating the case, Norrell proffers the arbitration proceeding to collaterally estop Clayton and Wolff from raising material issues of fact. Collateral estoppel will preclude relitigation of issues that have already been litigated in a prior judgment and were necessary to that judgment. Parklane Hosiery Co. v. Shore, 439 U.S. 322, 326 n. 5, 99 S.Ct. 645, 649 n. 5, 58 L.Ed.2d 552 (1979) ("Parklane Hosiery"); Mendoza v. United States, 672 F.2d 1320, 1325 (9th Cir.), reversed on other grounds, 464 U.S. 154, 104 S.Ct. 568, 78 L.Ed.2d 379 (1984). It is generally available in discharge proceedings. Grogan, 498 U.S. at 285 n. 11, 111 S.Ct. at 658 n. 11.
Davis & Cox v. Summa Corp., 751 F.2d 1507, 1519 (9th Cir.1985). However, even if the doctrine is legally available to the moving party, the actual application of collateral estoppel is subject to the discretion of the court. Parklane Hosiery, 439 U.S. at 331, 99 S.Ct. at 651-52; Dixie National Life Insurance Company, etc. v. McWhorter et al. (In the Matter of McWhorter), 887 F.2d 1564, 1566 (11th Cir. 1989) ("McWhorter"). The party seeking to invoke collateral estoppel bears the burden of proving that the necessary elements have been satisfied. Merrill v. Walter E. Heller & Company of Alabama (In the Matter of Merrill), 594 F.2d 1064, 1067 (5th Cir.1979).
It is undisputed that a state court judgment, let alone one of another federal court, must be given the same preclusive effect in a federal action as it would have been given under the law in which it was rendered. 28 U.S.C. § 1738; Migra v. Warren City School District Board of Education, 465 U.S. 75, 80-82, 104 S.Ct. 892, 895-96, 79 L.Ed.2d 56 (1984) ("Migra"). Exceptions only exist where specifically mandated, such as the prohibition on the use of res judicata in nondischargeability hearings. See Brown v. Felsen, 442 U.S. 127, 99 S.Ct. 2205, 60 L.Ed.2d 767 (1979).
However, it has been disputed whether arbitration awards should similarly be given full faith and credit in terms of bankruptcy discharge hearings. Compare Sixteen Twenty Eight Bellevue Limited Partnership...
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