In re Jung Sup Lee, BAP No. WW-04-1505-JUMAS.

• Decision Date: 09 November 2005
• Docket Number: Bankruptcy No. 03-17022.,Adversary No. 04-01117.,BAP No. WW-04-1505-JUMAS.
• Citation: 335 B.R. 130
• Parties: In re JUNG SUP LEE and Kyung Cha Lee, Debtors. Jung Sup Lee, Appellant, v. Tcast Communications, Inc., Appellee.
• Court: U.S. Bankruptcy Appellate Panel, Ninth Circuit

335 B.R. 130

In re JUNG SUP LEE and Kyung Cha Lee, Debtors Jung Sup Lee, Appellant, v. Tcast Communications, Inc., Appellee.

BAP No. WW-04-1505-JUMAS.

Bankruptcy No. 03-17022.

Adversary No. 04-01117.

United States Bankruptcy Appellate Panel of the Ninth Circuit.

Argued and Submitted July 22, 2005.

Filed November 9, 2005.

Ordered Published December 14, 2005.

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Alan J. Wenokur, Seattle, WA, for appellant.

Patrick F. Hussey, Anderson Hunter Law Firm, P.S., Everett, WA, for appellee.

Before: JURY,¹ MARLAR and SMITH, Bankruptcy Judges.

OPINION

JURY, Bankruptcy Judge.

After Jung Sup Lee ("Lee") and his wife, Kyung Cha Lee, filed for bankruptcy, TCAST Communications, Inc. ("TCAST") filed a complaint against Lee to determine whether a certain debt owed to it was non-dischargeable pursuant to § 523(a)(2)(A).² TCAST moved for summary judgment in the adversary proceeding, which the bankruptcy court granted in its favor. Lee timely appealed.

Based on issue preclusion, claim preclusion, and full faith and credit, we AFFIRM the bankruptcy court's decision.

I. FACTS

Lee operated TTI Telecommunications, Inc. ("TTI"), a Washington corporation which sold long-distance calling cards wholesale to retailers. On October 25, 2000, TTI entered into a written carrier service agreement ("Agreement") with TCAST. Under the Agreement, TTI agreed to pay fees to TCAST in order to provide telephone communication services to TTI. Specifically, TTI agreed to tender a cash deposit in advance based on one month of projected use. TTI also agreed to pay an increased advance deposit as it increased its usage over time. Later, TCAST agreed to allow TTI to pay current charges on a weekly basis in lieu of an increased deposit.

Between May 7 and May 18, 2001, TTI tendered five checks to TCAST, totaling $369,380.84, in payment for its services. The checks bounced due to insufficient funds.

TCAST filed a complaint against TTI and Lee on various causes of action, including fraud and breach of contract, in the Los Angeles County (California) Superior Court. In its complaint, TCAST requested both compensatory and punitive damages against TTI and Lee. Although TCAST specified the amount of compensatory damages in its complaint, it failed to specify an amount for punitive damages.³

Lee, appearing through counsel, filed an answer to the complaint. TCAST served a set of interrogatories on Lee, to which Lee and TTI failed to respond. After issuing two lesser discovery sanctions, the court, upon motion by TCAST, granted terminating sanctions, striking the answer, granting default judgment against TTI and Lee, and awarding compensatory and punitive damages. The court entered the default judgment, awarding both compensatory and punitive damages, on February 14, 2002.

TCAST registered the California default judgment in Washington on June 13, 2002. Lee moved to set aside the California default judgment in the King County (Washington) Superior Court on the grounds that the California court lacked personal jurisdiction and that he had no notice of the discovery requests, claiming he failed to respond due to excusable neglect caused by the negligence of his California counsel. The court denied the motion, finding an insufficient basis for collateral attack and that the California default judgment was entitled to full faith and credit ("Washington judgment").

Lee and his wife filed a voluntary Chapter 11 petition on May 29, 2003, which case was converted to Chapter 7 on October 11, 2003. TCAST filed a non-dischargeability complaint under § 523(a)(2)(A) against Lee on March 11, 2004.⁴ TCAST first moved for summary judgment under the doctrine of issue preclusion (i.e., collateral estoppel) with respect to the compensatory damages portion of the state court judgment. The bankruptcy court granted the motion for summary judgment, reserving the issue of non-dischargeability of the punitive damages portion of the judgment for later determination. The bankruptcy court entered its decree with respect to the compensatory damages ("compensatory damages decree") on June 24, 2004.

TCAST then moved for summary judgment with respect to the punitive damages portion of the judgment under the Rooker-Feldman doctrine and claim preclusion (i.e., res judicata). The bankruptcy court granted the motion, finding that claim preclusion fully applied to the issues actually raised by Lee before the Washington court in its review of the California default judgment, as well as to other issues that Lee could and should have raised at that time. The bankruptcy court also found that the Rooker-Feldman doctrine barred it from reviewing the California and Washington judgments. The bankruptcy court then entered its decree with respect to the punitive damages award ("punitive damages decree") on September 30, 2004. Lee filed his notice of appeal of both decrees on October 6, 2004.

II. JURISDICTION

The bankruptcy court had jurisdiction under 28 U.S.C. § 1334 and § 157(b)(1) and (b)(2). This panel has jurisdiction under 28 U.S.C. § 158(b)(1).

III. ISSUES

(1) Whether the bankruptcy court erred in granting summary judgment for TCAST by finding that issue preclusion rendered the compensatory damages portion of the state court judgment non-dischargeable under § 523(a)(2)(A).

(2) Whether the bankruptcy court erred in granting summary judgment for TCAST by finding that full faith and credit barred it from reviewing the Washington judgment in its consideration of the punitive damages portion of the judgment.

(3) Whether the bankruptcy court erred in granting summary judgment for TCAST by finding that claim preclusion barred Lee from asserting claims he could and should have made before the Washington court in its review of the punitive damages portion of the California default judgment.⁵

IV. STANDARD OF REVIEW

We review the summary judgment of the bankruptcy court de novo. Tobin v. Sans Souci Ltd. P'ship (In re Tobin), 258 B.R. 199, 202 (9th Cir. BAP 2001) (citation omitted). Viewing the evidence in the light most favorable to the non-moving party, we must determine "whether there are any genuine issues of material fact and whether the trial court correctly applied relevant substantive law." Id. (citation omitted).

We review the applicability of issue preclusion de novo. Id. (citation omitted). We review the applicability of claim preclusion de novo. United States v. Schimmels (In re Schimmels), 127 F.3d 875, 880 (9th Cir.1997) (citation omitted).

V. DISCUSSION

A. Compensatory Damages

Lee argues that the bankruptcy court erred in finding that issue preclusion applied to the compensatory damages portion of the default judgment because TCAST failed to establish all the elements of issue preclusion required for § 523(a)(2)(A) non-dischargeability. Specifically, Lee asserts that TCAST did not establish that the issue of fraud was actually litigated and necessarily decided.

Lee contends that § 523(a)(2)(A) requires a creditor to show that the debtor directly obtained its services through fraudulent conduct. Lee asserts, however, that he did not obtain the services of TCAST through his misrepresentations; TCAST had provided its services before Lee issued the bad checks. Furthermore, even if Lee had obtained the services of TCAST by issuing these bad checks, only that portion of the debt incurred through such fraud is non-dischargeable. The California court made no such findings, however. As such, Lee concludes, the issue of whether he obtained the services of TCAST through fraud had not been actually litigated and necessarily decided.

Lee's argument fails, however, because § 523(a)(2)(A) does not require a finding of a receipt of a benefit through the fraudulent conduct. Muegler v. Bening, 413 F.3d 980, 983-84 (9th Cir.2005).

The doctrine of issue preclusion applies to dischargeability proceedings under § 523(a). Grogan v. Garner, 498 U.S. 279, 284 n. 11, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991). When determining the effect of a state court judgment, we must apply, as a matter of full faith and credit, the state's law of issue preclusion. Gayden v. Nourbakhsh (In re Nourbakhsh), 67 F.3d 798, 800 (9th Cir.1995).

Under California law, issue preclusion applies only if all of the following requirements have been met:

(1) The issue sought to be precluded must be identical to that decided in the former proceeding;

(2) The issue must have been actually litigated in the former proceeding;

(3) The issue must have been necessarily decided in the former proceeding;

(4) The decision in the former proceeding must be final and on the merits;

(5) The party against whom issue preclusion is sought must be the same as, or in privity with, the party to the former proceeding.

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

The party asserting issue preclusion has the burden of establishing these requirements. Id. (citation omitted).

Section 523(a)(2)(A) provides that a discharge does not include any debt for money, property, or services "to the extent obtained by false pretenses, a false representation, or actual fraud" (emphasis added). In order to establish that the debt had been obtained through fraud and is thus non-dischargeable under § 523(a)(2)(A), the creditor must demonstrate, by a preponderance of evidence, that:

(1) The debtor made representations;

(2) The debtor knew the representations had been false at the time he or she made them;

(3) The debtor made these representations with the intent and purpose of deceiving the creditor;

(4) The creditor relied on such representations; and

(5) The creditor sustained the alleged loss and damage as a proximate result of these representations.

See American Express Travel Related Services v. Hashemi (In re Hashemi), 104 F.3d 1122, 1125 (9th Cir.1996).

The elements of fraud under § 523(a)(2)(A) match the elements of common law fraud and of actual fraud...