In re Lopez

• Citation: 367 B.R. 99
• Decision Date: 27 March 2007
• Docket Number: Bankruptcy No. SV 04-15351-KT.,Adversary No. SV 04-01464-KT.,BAP No. CC-06-1048 JKPa.,BAP No. CC-06-1049 JKPa.
• Parties: In re Everett LOPEZ, Debtor. Everett Lopez, Appellant, v. Emergency Service Restoration, Inc., Appellee.
• Court: Bankruptcy Appellate Panels. U.S. Bankruptcy Appellate Panel, Ninth Circuit

367 B.R. 99

In re Everett LOPEZ, Debtor.

Everett Lopez, Appellant, v. Emergency Service Restoration, Inc., Appellee.

BAP No. CC-06-1048 JKPa.

BAP No. CC-06-1049 JKPa.

Bankruptcy No. SV 04-15351-KT.

Adversary No. SV 04-01464-KT.

United States Bankruptcy Appellate Panel of the Ninth Circuit.

Argued and Submitted on January 17, 2007.

Filed March 27, 2007.

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Geraldine A. Valdez, San Diego, CA, for Appellee.

Rocky W. Dorcy, Van Nuys, CA, for Appellant.

Before: JAROSLOVSKY,¹ KLEIN and PAPPAS, Bankruptcy Judges.

OPINION

JAROSLOVSKY, Bankruptcy Judge.

On summary judgment, the bankruptcy court conflated the so-called Rooker-Feldman doctrine with rules of claim and issue preclusion and thought it lacked authority to make an independent determination of whether a debt based on a state court judgment was excepted from discharge under 11 U.S.C. § 523(a)(6). We hold Rooker-Feldman is irrelevant to preclusion analysis, which entails a two-step process in which a trial court first determines the legal question of whether preclusion is available to be applied, and in the second step, a trial court is required to exercise discretion about whether to apply preclusion. Hence, we VACATE and REMAND for the court to apply the correct standards of preclusion analysis and publish to clarify that the Supreme Court's recent disapproval of expansive use of Rooker-Feldman saps that doctrine of utility in bankruptcy and operates to overrule prior BAP precedents applying that doctrine.

FACTS

Prior to bankruptcy, debtor and appellant Everett Lopez was sued by plaintiff and appellee Emergency Service Restoration, Inc. ("ESR"), in state court on several claims including misappropriation of trade secrets. The state court judge determined, over Lopez's objection, that the matter was to be tried without a jury. After a contentious trial in which Lopez's counsel allegedly engaged in "screaming matches" with the judge, damages of $800,000.00 were awarded against Lopez, together with $386,367.53 in attorneys' fees for misappropriating ESR's customer list. The state court judge's statement of decision stated, "The Court further finds that Lopez/Febertech's misappropriation of ESR's customer list trade secret was willful and malicious and that ESR is the prevailing party in this action. Therefore, ESR shall recover reasonable attorney's fees and costs incurred in this action." (Citation omitted.)

Although Lopez appealed the state court judgment, he abandoned that appeal. The state court judgment was final for all purposes before he commenced his chapter 7 case.

After Lopez filed his chapter 7 bankruptcy petition, ESR filed a complaint for determination that the judgment was nondischargeable. ESR then filed a motion for summary judgment, arguing that the state court findings had preclusive effect and the judgment was accordingly nondischargeable under sections 523(a)(4) and 523(a)(6) of the Bankruptcy Code. The bankruptcy court granted summary judgment to ESR, finding that "[t]he Debtor may not attack the State Court Judgment under the Rooker-Feldman Doctrine" and concluding that the judgment against Lopez was nondischargeable under § 523(a)(6). The court rejected Lopez's argument that it had the "equitable power" to disregard the state court judgment, stating that "I don't agree that I have the authority to ignore what the state court did." Lopez appeals from the order granting summary judgment and the judgment.

ISSUES

1. Whether the bankruptcy court erred when it decided that the Rooker-Feldman doctrine required it to give preclusive effect to the state court findings.

2. Whether the bankruptcy court erred when it decided it lacked discretion over whether to apply issue preclusion.

STANDARD OF REVIEW

We exercise de novo review of the granting of summary judgment. Conestoga Serv. Corp. v. Executive Risk Indem., Inc., 312 F.3d 976, 980 (9th Cir. 2002). Likewise, the availability of issue preclusion is reviewed de novo. Krishnamurthy v. Nimmagadda (In re Krishnamurthy), 209 B.R. 714, 718 (9th Cir. BAP 1997), aff'd, 125 F.3d 858 (9th Cir.1997). If issue preclusion is available, the decision to apply it is reviewed for abuse of discretion. Dias v. Elique, 436 F.3d 1125, 1128 (9th Cir.2006); George v. City of Morro Bay (In re George), 318 B.R. 729, 733 (9th Cir. BAP 2004), aff'd, 144 Fed.Appx. 636 (9th Cir.2005), cert. denied, ____ U.S. ____, 126 S.Ct. 1068, 163 L.Ed.2d 861 (2006).

DISCUSSION

I. Rooker-Feldman Doctrine

The dischargeability proceeding in bankruptcy court was not the same action as the one tried in state court. While some of the findings made by the state court may be given preclusive effect in the bankruptcy action, that does not mean that the actions themselves are identical. See Sasson v. Sokoloff (In re Sasson), 424 F.3d 864, 871 (9th Cir.2005), cert. denied, ____ U.S. ____, 126 S.Ct. 2890, 165 L.Ed.2d 917 (2006).

The Rooker-Feldman doctrine has no application to this case, which is an action filed by the victor in state court to determine the discharge status of that judgment under 11 U.S.C. § 523(a)(6). This is a separate federal question over which the bankruptcy court has exclusive jurisdiction. Brown v. Felsen, 442 U.S. 127, 138-39, 99 S.Ct. 2205, 60 L.Ed.2d 767 (1979). It is settled that a nondischargeability claim is an independent federal claim as to which the effect of a prior state court judgment is governed by principles of preclusion. Grogan v. Garner, 498 U.S. 279, 284 n. 11, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991); Brown, 442 U.S. at 132-39, 99 S.Ct. 2205.

The Supreme Court severely constrained Rooker-Feldman in Exxon Mobil Corp. v. Saudi Basic Indus. Corp., 544 U.S. 280, 293, 125 S.Ct. 1517, 161 L.Ed.2d 454 (2005)("Preclusion, of course, is not a jurisdictional matter."). During its next term, the Court also made clear in Lance v. Dennis, 546 U.S. 459, 126 S.Ct. 1198, 1201-03, 163 L.Ed.2d 1059 (2006), that it is error to conflate preclusion with Rooker-Feldman:

In Exxon Mobil, decided last Term, we warned that the lower courts have at times extended Rooker-Feldman "far beyond the contours of the Rooker and Feldman cases, overriding Congress' conferral of federal-court jurisdiction concurrent with jurisdiction exercised by state courts, and superseding the ordinary application of preclusion law pursuant to 28 U.S.C. § 1738." 544 U.S., at 283, 125 S.Ct. 1517. Rooker-Feldman, we explained, is a narrow doctrine, confined to "cases brought by state-court losers complaining of injuries caused by. state-court judgments rendered before the district court proceedings commenced and inviting district court review and rejection of those judgments." 544 U.S. at 284, 125 S.Ct. 1517.

. . . .

The District Court erroneously conflated preclusion law with Rooker-Feldman. Whatever the impact of privity principles on preclusion rules, Rooker-Feldman is not simply preclusion by another name. The doctrine applies only in "limited circumstances," Exxon Mobil, supra, at 291, 125 S.Ct. 1517, where a party in effect seeks to take an appeal of an unfavorable state-court decision to a lower federal court. The Rooker-Feldman doctrine does not bar actions by nonparties to the earlier state-court judgment simply because, for purposes of preclusion law, they could be considered in privity with a party to the judgment.

Lance v. Dennis, 126 S.Ct. at 1201-02 (footnote omitted).²

In this case, Lopez is not seeking to reverse the state court judgment. Lopez merely argues that principles of issue preclusion should not be applied to keep him from demonstrating that his conduct was not willful and malicious for purposes of § 523(a)(6) and that the judgment is therefore dischargeable. Dischargeability was not at issue in the state court.

The Rooker-Feldman doctrine does not override or supplant issue and claim preclusion doctrines. Exxon Mobil, 544 U.S. at 284, 125 S.Ct. 1517; Henrichs v. Valley View Dev., 474 F.3d 609, 613 (9th Cir.2007). It was accordingly error for the bankruptcy court to conclude that the Rooker-Feldman doctrine required it to give the state court's judgment preclusive effect in the dischargeability action.

II. Issue Preclusion

Issue preclusion bars relitigation of issues that have been actually litigated. The doctrine is intended to avoid inconsistent judgments and the related misadventures associated with giving a party a second bite at the apple. Issue preclusion bars relitigation of an issue of fact or issue that: (1) is identical to a fact or issue determined in an earlier proceeding, (2) was actually decided by a court in an earlier action, (3) the issue was necessary to the judgment in such action, (4) there was a final judgment on the merits, and (5) the parties are the same. Harmon v. Kobrin (In re Harmon), 250 F.3d 1240, 1245 (9th Cir.2001).

The Full Faith and Credit. Act requires that the federal courts give state court judgments the same preclusive effect those judgments would enjoy under the law of the state in which the judgment was rendered. 28 U.S.C § 1738; Lee v. TCAST Commc'ns, Inc. (In re Lee), 335 B.R. 130, 138 (9th Cir. BAP 2005).³

Although somewhat rambling and imprecise, Lopez argues that the "willful and malicious" issue was never actually decided by the state court. The state court made findings on the record, which did not expressly find that Lopez's conduct was willful and malicious. However, the state court's written statement of decision, filed after the trial, does contain an express finding of willful and malicious conduct. Lopez attacks the state court's written statement of decision as having been "concocted" by counsel for ESR and void because the findings in the written statement of decision exceeded the findings made on the record.

While the adoption by the, court of findings written by counsel for the prevailing party may lead to confusion and may not be a favored practice,⁴ it is common in state court bench trials and...