In re Roussos
Decision Date | 07 July 2000 |
Docket Number | BAP No. CC-99-1351-MaMeB. Bankruptcy No. SV93-31261-AG. Adversary No. SV94-03765-AG. |
Citation | 251 BR 86 |
Parties | In re Harry ROUSSOS; Theodosios Roussos, dba Roussos Investments, Debtors. Harry Roussos; Theodosios Roussos, Appellants, v. Lula Michaelides, Appellee. |
Court | U.S. Bankruptcy Appellate Panel, Ninth Circuit |
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David R. Haberbush, Haberbush & Campbell, Long Beach, CA, for Harry Roussos, Theodosios Roussos, appellants.
Bennett L. Spiegel, Wynne, Spiegel, Itkin, Los Angeles, CA, for Lula Michaelides, appellee.
Before MARLAR, MEYERS, and BRANDT, Bankruptcy Judges.
In a nondischargeability proceeding concerning fraud by a fiduciary (§ 523(a)(4)), and willful and malicious injury (§ 523(a)(6)),1 the bankruptcy court granted summary judgment to the creditor, Lula Michaelides ("the appellee"). A state court judgment had been rendered in the appellee's favor against Harry Roussos and Theodosios Roussos (the "debtors") for breach of fiduciary duty and fraud. In determining the debt to be nondischargeable, the bankruptcy court applied collateral estoppel to the state court judgment.
The state court had calculated the compensatory damages according to a contractual "benefit-of-the-bargain" method, which is allowable under California law, whereas fraud damages typically are determined by "out-of-pocket" loss.2 Thus, the debtors sought a trial in bankruptcy court on the issues of causation and damages. The debtors have appealed the bankruptcy court's decision to apply collateral estoppel, and contend that the state court never determined the amount of the damages attributable to the debtors' fraud.
The appellee is the executrix of the estate of August K. Michaelides. Mr. Michaelides was a partner of the debtors in the investment and operation of rental properties. The debtors breached their fiduciary duties, owed to Michaelides, by failing to account and pay over to Michaelides, and subsequently to his estate, partnership properties and monies, and by concealing the misappropriation of partnership funds for their personal use. The factual findings showed that the debtors received more than $1.7 million in cash proceeds from refinancing the partnership properties, none of which were paid over to Michaelides or the appellee. In addition, the debtors sent unrecorded grant deeds to Michaelides to create the false impression that Michaelides was on title to the partnership properties when, in fact, the debtors never had any intention of putting him on title.
The partnership was dissolved by operation of law when Michaelides died in 1990. In 1992, the appellee filed a lawsuit in state court against the debtors and for dissolution. The state court found the debtors to be liable on the plaintiff's claims for: (1) an accounting; (2) breach of contract; (3) breach of fiduciary duty; and (4) breach of the implied covenant of good faith and fair dealing. It awarded punitive damages.
The state court trial was bifurcated. The first phase was to determine an accounting of partnership interests and whether there was a breach of contract. Following an eight-day trial, the state court determined that the value of Michaelides's share of the partnership and property was $619,018, plus prejudgment interest. The court also found that the debtors breached the contract, resulting in damages of the same amount — $619,018.
The second phase included the determination of whether the debtors committed fraud and breach of fiduciary duty, and the amount of damages incurred by the plaintiff. Before the second phase commenced, however, the debtors filed chapter 11 petitions on June 13, 1993. In September, 1993, the appellee obtained stay relief to continue the state court proceedings.
Statement of Decision, March 2, 1994, p. 5, lines 6-12.
The evidence also showed, and the state court further found, that the debtors had committed actual fraud, by deceit, including the suppression of facts. Cal.Civ.Code §§ 1572(1)(3)(5), 1740. Section 1709 of the Civil Code provides that damages for "fraudulent deceit" shall be "any damage which the injured deceived person thereby suffers." Cal.Civ.Code § 1709.
To prevent a double recovery for the breach of fiduciary duty as well as the fraud count, the appellee's counsel proposed that the same damages should apply to both phases, as well as to all theories of recovery. The debtors did not object.
In accordance with California law, the compensatory damages for fraudulent breach of fiduciary duty were calculated using the "benefit of the bargain" rule, as set forth in the general tort statute, Cal. Civ.Code § 3333 (emphasis added):
For the breach of an obligation not arising from contract, the measure of damages, except where otherwise expressly provided by this Code, is the amount which will compensate for all the detriment proximately caused thereby, whether it could have been anticipated or not.
Consequently, damages for the debtors' fraud and breach of fiduciary duty were determined to be $619,018 (plus prejudgment interest), the amount already found, in the first phase, to be the value of the appellee's partnership interest.
The state court further determined that punitive damages were justified,3 pursuant to Cal.Civ.Code § 3294-4(c)(1)(2)(3), in that "malice, oppression and fraud (committed by each defendant) . . . had been established by clear and convincing evidence." In this regard, the state court found that the debtors' conduct was "egregious," they were "unusually incredible witnesses," and their testimony was "untruthful in several respects."4 The amount of punitive damages was first determined to be $500,000 as to each debtor, but was later adjusted downward to $200,000 as to each debtor.
The amended judgment was filed on June 15, 1994. The separate damages calculation was attached:
Compensatory damages $619,018.00* Interest per Judgment 162,996.77* Costs 10,000.00* Punitive damages 200,000.00** Punitive damages 200,000.00** * Joint and several liability with Harry or Theodosios Roussos ** Individual liability
The debtors appealed the state court judgment, and argued, inter alia, that the punitive damage judgment, based on their fraud, was not supported by the evidence. The judgment was affirmed in its entirety in an unpublished decision dated August 28, 1998. The judgment is now final.
The appellee filed a timely complaint to determine that the judgment was nondischargeable in the debtors' bankruptcy cases. On or about January 3, 1995, the appellee filed a Motion for Summary Judgment in the adversary proceeding in which she argued that the bankruptcy court should apply collateral estoppel to the state court's findings.
The motion was heard on March 26, 1999. The debtors' counsel summed up their positions as objecting to the application of collateral estoppel only as to the damages portion of the judgment. They conceded that all of the substantive elements of § 523(a)(4) and (a)(6) were satisfied by application of collateral estoppel to the state court findings.5
The bankruptcy court's ruling was succinct. In relevant part, it provided:
If the federal court looks to state law in determining damages for fraud and under state law the benefit of the bargain approach is acceptable, then this Court must give full faith and credit to that. And if giving full faith and credit to that then that sic, as far as this Court was concerned, must give collateral estoppel effect to it, because the Court finds that the issue of damages was actually litigated and state law was applied for purposes of fraud. And that was reviewed by the state court on appeal and it was — that was sustained.
Transcript of March 26, 1999, p. 40.
The bankruptcy court granted summary judgment in favor of the appellee. Its Order and separate Findings of Fact and Conclusions of Law were entered on May 28, 1999. The bankruptcy court ruled that the entire state court judgment was nondischargeable, including (1) compensatory damages totaling $792,014.77, plus postjudgment interest at 10 percent from the entry date of the state court judgment, and (2) punitive damages in the total amount of $400,000, plus postjudgment interest at 10 percent from the entry date of the state court judgment.
1. Whether material factual issues existed such that the bankruptcy court was required to conduct a trial to determine the actual damages caused by the debtors' wrongful conduct (out-of-pocket), or if the bankruptcy court correctly applied collateral estoppel to the state court's award of damages based on a benefit-of-the-bargain formula, which is appropriate under California law.
2. Whether the debtors' demand for a redetermination of the fraud damages is barred by the Rooker-Feldman doctrine.
We review a summary judgment de novo, making all reasonable inferences in favor of the nonmovant to determine whether there exists any genuine issue of material fact. In re Johnston, 21 F.3d 323, 326 (9th Cir.1994). Summary judgment is appropriate when the pleadings and supplemental materials present no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. Fed.R.Bankr.P. 7056/Fed.R.Civ.P. 56(c); Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 2552, 91 L.Ed.2d 265 (1986). A...
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