In re Malfatti, No. 09-43469-EDJ (Bankr. N.D. Cal. 6/7/2010)
| Decision Date | 07 June 2010 |
| Docket Number | Adv. No. 09-04318 AJ.,No. 09-43469-EDJ.,09-43469-EDJ. |
| Parties | In re ANTHONY A. MALFATTI, Chapter 7, Debtor. BANK OF AMERICA, N.A. (USA), a National Bank and MBNA AMERICA BANK, N.A., a National Bank Plaintiffs, v. ANTHONY A. MALFATTI, Defendant. |
| Court | U.S. Bankruptcy Court — Northern District of California |
Plaintiffs Bank of America, N.A. (USA) ("BofA") and MBNA America Bank, N.A. ("MBNA"), (jointly, "Plaintiffs") have moved for summary judgment in this adversary proceeding. By their motion, Plaintiffs seek a determination that, through the application of collateral estoppel, the liability of defendant Anthony A. Malfatti the above debtor ("Malfatti"), under a pre-bankruptcy judgment issued by the Circuit Court of Jackson County, Alabama, is nondischargeable under Bankruptcy Code § 523(a)(6) (). The court will grant Plaintiffs' motion.
The relevant facts are undisputed, and are set forth in a Declaration of John W. Scott, Plaintiffs' counsel of record in Civil Action No. CV-04-308 Circuit Court of Jackson County, Alabama. (Action No. CV-04-308, together with various other actions with which it was consolidated is hereafter referred to as the "Alabama Action".)
Plaintiffs filed their First Amended Third Party Complaints in the Alabama Action on September 2, 2005, seeking damages and injunctive relief against Malfatti, TA Financial Group ("TAF"), Arbitration Forum of America ("AFOA"), and others. In short, these complaints alleged that: (a) Malfatti was an officer and founding principal of TAF, which he ostensibly established as a non-profit corporation to provide educational services to credit card holders; (b) that Malfatti and TAF engaged in a fraudulent debt elimination scheme by which: (i) they manufactured a dispute with Plaintiffs and other credit card issuers, (ii) they produced documents by which the credit card agreements between the cardholders and Plaintiffs were unilaterally modified by the cardholders to permit them to arbitrate the "dispute" with AFOA, (iii) AFOA issued sham arbitration awards in favor of the cardholders, and (iv) such awards were submitted to Circuit Court of Jackson County, Alabama to be confirmed as judgments.
After they filed their original third party complaints, Plaintiffs filed motions to vacate the sham arbitration awards, which the Circuit Court granted on September 3, 2005.
On January 19, 2006, Malfatti and TAF, through their counsel, filed: (a) motions to dismiss Plaintiffs' complaints, which the Circuit Court denied, and (b) answers to the complaints, which included a one-line general denial of the allegations and an objection by Malfatti to the Circuit Court's jurisdiction.
Through his counsel, Malfatti then proceeded to file a complex series of motions and jurisdictional and other objections, none of which were successful. Malfatti and TAF also refused to provide documents in discovery or to attend duly noticed and re-noticed depositions. On November 21, 2006, Plaintiffs moved for entry of a default judgment against Malfatti and TAF, alleging numerous discovery and other abuses, and violations of Circuit Court orders over the course of the litigation. Through counsel, Malfatti filed opposition.
On March 6, 2007, the Circuit Court entered its order granting Plaintiffs' motion. On March 27, 2007, Malfatti and TAF filed a motion to set aside this order. The Circuit Court denied the motion. Malfatti and TAF also filed a Petition for Mandamus with the Supreme Court of Alabama, challenging the order. The Alabama Supreme Court denied the petition.
Malfatti's discovery abuses continued.
On February 4, 2008, the Circuit Court held an evidentiary hearing regarding damages. Through counsel, Malfatti filed a brief in opposition, and appeared at the hearing. On February 19, 2008, the Circuit Court entered its Judgment (the "Judgment") awarding BofA compensatory damages against Malfatti and TAF in the sum of $103,464.97, plus punitive damages against Malfatti in the sum of $100,000, for a total of $203,464.97, plus punitive damages against TAF in the sum of $50,000. The Judgment awarded MBNA compensatory damages against Malfatti and TAF in the sum of $109,805.38, plus punitive damages against Malfatti in the sum of $100,000, for a total of $209,805.38, plus punitive damages against TAF in the sum of $50,000. The Judgment also provided that, under the doctrine of piercing the corporate veil, Malfatti was personally liable for the judgment against TAF. The Judgment also granted Plaintiffs the injunctive relief they had requested.1
Following entry of the Judgment, Malfatti and TAF filed a motion to amend, alter, or vacate the Judgment, which the Circuit Court denied.
On April 27, 2009, Malfatti filed his voluntary petition herein under chapter 7 of the Bankruptcy Code. Plaintiffs' complaint and the summary judgment motion now before the court followed.
"Summary judgment is properly granted when there is no genuine issue of material fact and moving party is entitled to judgment as a matter of law." Clipper Express v. Rocky Mountain Motor Tariff Bureau Bankruptcy Inc., 690 F.2d 1240, 1250 (9th Cir. 1982), cert. denied, 459 U.S. 1227 (1983). Fed.R.Civ.P. 56, applicable herein via Fed.R.Bankr.P. 7056.
Bankruptcy Code § 523(a)(6) provides There can be no dispute that the extensive findings by the Circuit Court in the Alabama Litigation establish that Malfatti's debt to Plaintiffs resulted from Malfatti's causing them a willful and malicious injury within the meaning of Bankruptcy Code § 523(a)(6). See, generally, Kawaauhau v. Geiger, 523 U.S. 57, 118 S.Ct. 974 (1998).
This is established by the provisions of the Judgment assessing punitive damages against Malfatti, and reciting the facts that
Bank of America and MNBA . . . (collectively, "Third Party Plaintiffs") have suffered and are suffering and will continue to suffer immediate and irreparable harm to their business as a proximate result of these third party defendants' wrongdoing. If these Third Party Defendants [which included Malfatti] are not enjoined from promoting, facilitating, and conducting sham debt elimination schemes and facilitating sham arbitration proceedings, Third Party Plaintiffs rights will be irreparably harmed.. . .
Third Party Plaintiffs have no adequate remedy at law because issuance of appropriate injunctive relief is the only means by which this fraudulent scheme can effectively be stopped and prevented from recurring.
The major issue before the court is whether the findings by the Circuit Court are entitled to collateral estoppel effect in this adversary proceeding. The parties agree that collateral estoppel may apply to nondischargeability proceedings under Bankruptcy Code § 523(a). Grogan v. Garner, 498 U.S. 279, 284-85, 111 S.Ct. 654, 658 n. 11 (1991); In re Nourbakhsh, 67 F.3d 798, 801 (9th Cir. 1995). The parties also agree that under the federal full faith and credit statute, 28 U.S.C. § 1738,2 this court must look to the collateral estoppel rules of the State of Alabama to make its determination. Nourbakhsh, 67 F.3d at 800; In re Bugna, 33 F.3d 1054, 1057 (1994).
The court turns, then, to Alabama law. In Wheeler v. First Alabama Bank of Birmingham, 364 So.2d 1190, 1199 (Ala. 1978), the Alabama Supreme Court set forth Alabama's requirements for collateral estoppel as follows:
Collateral estoppel operates where the subsequent suit between the same parties is not on the same cause of action. Requirements for collateral estoppel to operate are (1) issue identical to one involved in previous suit (2) issue actually litigated in prior action; and
(3) resolution of the issue was necessary to the prior judgment. . . . If these elements are present, the prior judgment is conclusive as to those issues actually determined in the prior suit.
See also Dairyland Ins. Co. v. Jackson, 566 So.2d 723, 726 (Ala. 1990).
Here, as to the "same parties" requirement, there is no dispute that Malfatti and Plaintiffs, the parties now before this court, were parties to the Alabama Litigation. With reference to the "identical issue" requirement, Malfatti does not dispute that the factual elements needed to prove a "willful and malicious" injury within the meaning of Bankruptcy Code § 523(a)(6) were at issue in the Alabama Litigation. Nor can he reasonably dispute, with reference to the final requirement, that resolution of those factual elements was necessary to the Judgment in the Alabama Litigation.
Malfatti's main argument, then, is that, because the Judgment is a default judgment, the matters determined by the Circuit Court were not "actually litigated," and thus, that this requirement for the application of collateral estoppel under Alabama law has not been met. Plaintiffs disagree.
Here, the court concludes that the Judgment is entitled to collateral estoppel effect under Alabama law. The court bases its conclusion on Malfatti's extensive participation in the Alabama Litigation with the assistance of legal counsel, his severe misconduct therein, and the case law hereinafter cited. This conclusion follows from the foregoing, whether or not Alabama would give collateral estoppel effect to findings in connection with a default judgment entered in a case in which the defaulting party did not extensively participate.
It is unclear whether, as an abstract proposition, Alabama courts permit application of collateral estoppel in a case, unlike the present case, where a court had entered a judgment by default on account of the defaulting party's failure to answer a complaint or defend an action. Malfatti has cited a...
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