In re Cole
| Decision Date | 27 October 1998 |
| Docket Number | Adversary No. 94-4748-AT.,Bankruptcy No. 94-45829-TS,BAP No. NC-97-1857-RYJUR |
| Citation | 226 BR 647 |
| Parties | In re Richard A. COLE, Debtor. James S. HAYHOE, Appellant, v. Richard A. COLE, Appellee. |
| Court | U.S. Bankruptcy Appellate Panel, Ninth Circuit |
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David J. Cook, Cook, Perkiss Professional Law Corporation, San Francisco, CA, for James S. Hayhoe.
Irving J. Kornfield, Kornfield, Paul & Bupp, Oakland, CA, for Richard A. Cole.
Before RYAN, JURY,1 and RUSSELL, Bankruptcy Judges.
Creditor James S. Hayhoe ("Appellant") filed a complaint (the "Complaint") to determine the dischargeability of a debt pursuant to Bankruptcy Code (the "Code")2 § 523(a)(2)(A).3 Appellant relied solely on a state court stipulation (the "Stipulated Judgment") whereby debtor Richard A. Cole ("Appellee") stipulated that if he attempted to discharge in bankruptcy the debt that he owed Appellant, the debt would be deemed nondischargeable under § 523(a)(2)(A).
Appellant subsequently filed a motion for summary judgment (the "Motion"), arguing that the Stipulated Judgment and admissions in his answer set forth sufficient undisputed facts to require the court to grant the Motion. Appellee opposed the Motion and filed a counter motion for summary judgment (the "Counter Motion"), arguing that the Complaint failed to state sufficient grounds to support the § 523(a)(2)(A) claim. The bankruptcy court denied the Motion and granted the Counter Motion. The bankruptcy court held that the Stipulated Judgment could not be used to prove liability under § 523(a)(2)(A) because it was an impermissible attempt to waive the bankruptcy discharge. Also, collateral estoppel did not apply because the Stipulated Judgment did not establish the factual or legal basis for the nondischargeability of the underlying debt. We AFFIRM.
In 1991, Appellant and Appellee entered into a business relationship to promote an auto racing team to compete in various auto races (the "Business"). As part of his contribution to the Business, Appellee executed a promissory note (the "Note") on his residence in favor of Appellant in the amount of $286,282 plus interest at three percent per annum.4
In May 1993, Appellant filed a complaint in the state court for nonpayment of the Note and other related causes of action. Shortly thereafter, Appellant obtained an ex parte writ of attachment (the "Writ of Attachment").
In July 1993, Appellee filed a cross complaint, alleging numerous causes of action, including breach of contract and fraud. Appellee also asserted that he owned part of the Business and that Appellant had breached their agreement by excluding him from involvement in the Business.
On August 20, 1993, the parties agreed that Appellant would release the Writ of Attachment and Appellee would release and transfer his interest in the Business to Appellant. Appellee also agreed to dismiss the cross complaint with prejudice.
The parties later agreed to the Stipulated Judgment which provided that Appellant had a judgment for $298,134.84 (the "Debt"), that the Debt would be paid per a schedule with interest of ten percent per annum, and that, as long as Appellee complied with the Stipulated Judgment, Appellee would be entitled to commissions earned on all sponsorship income that he obtained for the Business. Appellee also dismissed the cross complaint with prejudice.
The Stipulated Judgment also provided that: (1) Appellant agreed not to list the Debt in any bankruptcy petition or request that the Debt be discharged; (2) Appellee represented that he had sufficient monies to pay the Debt and Appellant relied on the representation in releasing the Writ of Attachment; (3) the Debt was nondischargeable pursuant to § 523(a)(2)(B); (4) Appellant would not have released the Writ of Attachment "but for the specific representations made by Appellee in relationship to the non-dischargeability of this debt"; and (5) "if, for any reason, Appellee attempts to discharge this debt through bankruptcy, Appellee hereby acknowledges, covenants and agrees that Appellee obtained a release of Appellant's security for this debt under false pretenses (and thus, this debt would be non-dischargeable under § 523(a)(2)(A) . . . )." Stipulation for Entry of J. and Order Thereon, at 6.
On August 29, 1994, Appellee filed a chapter 7 bankruptcy petition. On December 5, 1994, Appellant filed the Complaint. At trial, the bankruptcy court excluded certain testimony and documents disclosed in Appellant's late filings. This left Appellant with only his testimony in evidence. Appellee then moved for dismissal under Federal Rule of Civil Procedure ("FRCP") 41, which the court granted.
Appellant appealed the dismissal order to the district court. The district court held that the bankruptcy court abused its discretion in dismissing the case because dismissal was too severe a sanction for the inadvertent violation of the local rule and vacated and remanded the case.
Appellant then filed the Motion contending that the statements set forth in the Stipulated Judgment, in addition to the allegations in the Complaint and the admissions in the answer, constituted a sufficient basis for entry of summary judgment in his favor.
Appellee filed the Counter Motion, asserting that the provisions in the Stipulated Judgment constituted an impermissible agreement to waive the dischargeability of the Debt, and thus, was void as against public policy. Appellee argued that the doctrine of collateral estoppel was inapplicable because the action on the Note was strictly a contract dispute and not a debt based on false pretenses, false representation, or actual fraud. Appellee also argued that Appellant failed to establish that any part of the Debt was obtained by false representation, false pretenses, or actual fraud. Finally, Appellee requested sanctions for having to defend against the Motion.
On September 4, 1997, the bankruptcy court denied the Motion and granted the Counter Motion. The court determined that the Stipulated Judgment was an unenforceable attempt to prospectively waive the bankruptcy discharge. In addition, the parties conceded that the state court complaint did not allege fraud in connection with the Note and there was no allegation or evidence of fraud in connection with the Stipulated Judgment and the Debt. The court also denied the Counter Motion as to unplead claims for relief and permitted Appellant to file an amended complaint.5 In the event that Appellant did not file a timely amended complaint, the bankruptcy court held that Appellee could file a proposed order disposing of the entire case.
On November 19, 1997, after Appellant failed to file an amended complaint, the bankruptcy court entered an order (the "Order") granting the Counter Motion and denying the Motion in its entirety.
On November 26, 1997, Appellant filed a timely notice of appeal.
A. Whether the bankruptcy court erred when it determined that the prospective waiver of discharge was void as against public policy.
B. Whether the bankruptcy court erred when it denied the Motion and granted the Counter Motion on the basis that the Stipulated Judgment was not entitled to collateral estoppel application and the Complaint failed to state a claim for relief under § 523(a)(2)(A).
We review the bankruptcy court's findings of fact for clear error and the court's conclusions of law de novo. See Neben & Starrett, Inc. v. Chartwell Fin. Corp. (In re Park-Helena Corp.), 63 F.3d 877, 880 (9th Cir. 1995), cert. denied, 516 U.S. 1049, 116 S.Ct. 712, 133 L.Ed.2d 667 (1996) (citing Sousa v. Miguel (In re United States Trustee), 32 F.3d 1370, 1372 (9th Cir.1994)). We review the bankruptcy court's application of collateral estoppel de novo. See Lake v. Capps (In re Lake), 202 B.R. 751, 755 (9th Cir. BAP 1996); Gayden v. Nourbakhsh (In re Nourbakhsh), 67 F.3d 798, 800 (9th Cir.1995).
Similarly, we review rulings on summary judgment de novo. See Bank of Los Angeles v. Official PACA Creditors' Comm. (In re Southland + Keystone), 132 B.R. 632, 637 (9th Cir. BAP 1991).
The bankruptcy court held that the Stipulated Judgment was "nothing but an attempt to waive the bankruptcy discharge prospectively, and was therefore . . . unenforceable." Tr. of Proceedings, Mot. for Summary J. (Sept. 4, 1997), at 3. No appellate court has expressly ruled on the validity of prepetition waivers of the bankruptcy discharge. However, the Seventh Circuit, in Klingman v. Levinson, 831 F.2d 1292, 1296 n. 3 (7th Cir. 1987), stated in dictum that a debtor cannot contract away his right to a discharge. In Levinson, a creditor filed a nondischargeability action against the debtor alleging that a state court consent judgment was nondischargeable. The bankruptcy court granted summary judgment in favor of the creditor and the debtor appealed. The district court affirmed. In affirming, the Seventh Circuit held that the stipulated judgment established fiduciary defalcation for purposes of § 523(a)(4). Id. at 1292-96. In a footnote, the court stated in dictum that, Id. at 1296 n. 3. Because the stipulated facts in the judgment established all of the elements of the § 523(a)(4) cause of action, the court held that collateral estoppel applied. Id. at 1295-96. The court did not rely on the purported waiver of discharge for its affirmance. Id. at 1296 n. 3.
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Yang v. Fund Mgmt. Int'l, LLC (In re Yang)
...for holding that facts stipulated by a party in one case could bind that party in a different case. Cf. Hayhoe v. Cole (In re Cole), 226 B.R. 647, 655 (B.A.P. 9th Cir. 1998). Under California law, stipulated facts in one case may be given preclusive effect in a different case only "when the......