Italiane v. Jeffrey Catanzarite Family Ltd. P'ship (In re Italiane)

Decision Date04 October 2021
Docket NumberBk. No. 1:11-bk-63503,Adv. No. 1:12-ap-01053,BAP No. EC-20-1247-SGF
Parties IN RE: Frank Lane ITALIANE, Jr. and Alicia Italiane, Debtors. Frank Lane Italiane, Jr., Appellant, v. Jeffrey Catanzarite Family Limited Partnership; Eron Martin; Wolfgang Greinke, Trustee of the Greinke Family Trust; Wesley Larsen; Brian Hicks, Trustee of the Hicks Family Trust U/D/T 10/01/2001; Steven Nazaroff, Trustee of the Steven Nazaroff Retirement Trust; The Nazaroff Family Partnership; Tricia Prentice; Robert Strohbach, Trustee of the Strohbach Living Trust; Cathy Galie-lewis; Leason V. "Chet" Leeds, Trustee of the Leason V. Leeds Trust ; Lynae Arnold; Liz Malone, Trustee of the Malone Family Trust, Appellees.
CourtU.S. Bankruptcy Appellate Panel, Ninth Circuit

Appellant Frank Lane Italiane, Jr. argued pro se;

Joseph Scott Klapach of Klapach & Klapach, P.C. argued for appellees.

Before: SPRAKER, GAN, and FARIS, Bankruptcy Judges.

SPRAKER, Bankruptcy Judge.

INTRODUCTION

Chapter 71 debtor Frank Lane Italiane, Jr. ("Lane") appeals from a judgment excepting a $1.5 million judgment from discharge under § 523(a)(2)(A). During trial in the state court action, Lane consented to entry of the judgment on the claim of fraudulent concealment in favor of investors he induced to invest in his roofing products company. The bankruptcy court determined that the stipulated judgment for fraudulent concealment should be given issue preclusive effect entitling the plaintiff investors to summary judgment on their § 523(a)(2)(A) claim for relief.

The circumstances surrounding the state court's entry of the stipulated judgment support the application of issue preclusion in this case. Accordingly, we AFFIRM.

FACTS2
A. Lane's involvement with ArmorLite Roofing, LLC.

Lane formed ArmorLite Roofing, LLC ("ArmorLite") in 2004 to develop, produce, and sell a patented high-tech roofing system that was both very durable and highly fire resistant. He also served as an officer, director, and manager. In those capacities, he "materially assisted" in the preparation of "Offering Materials" for ArmorLite. Lane and ArmorLite developed the Offering Materials for the purpose of persuading others to invest in the company. Lane knew the Offering Materials would be used for that purpose; he reviewed, revised, and approved the Offering Materials. He also made oral representations to prospective and existing investors at public meetings.

In 2008, Lane suffered a severe stroke

. He partially recovered from the mental disabilities he experienced after a very long convalescence. As a result of his illness, he stepped down as president and chief executive officer of ArmorLite.

In 2009, ArmorLite's board of directors elected to file bankruptcy for the company. According to plaintiffs, ArmorLite went bankrupt because it failed to convert its successful prototypes into a product that could be mass produced and sold at a competitive price. In contrast, Lane insisted that ArmorLite's patented, high-tech, fire-resistant roofing product was "market ready" and that ArmorLite's failure was a product of the Great Recession and his illness. Lane also attributed the company's problems to the mismanagement and hostile takeover machinations of ArmorLite's reconstituted board of directors, which included some of the plaintiffs.

B. ArmorLite's investors sue Lane.

In February 2010, plaintiffs filed a complaint in the Los Angeles County Superior Court against Lane and others for, among other things, securities fraud under California law, fraudulent misrepresentation, fraudulent nondisclosure, and conspiracy to commit fraud. Plaintiffs claimed that Lane fraudulently induced them to acquire roughly $2.4 million in membership interests in ArmorLite based on his affirmative misrepresentations and nondisclosure of material facts regarding ArmorLite's roofing product. The alleged misrepresentations included: (1) that ArmorLite had fully developed a patented, high-technology roofing system that had obtained a Class "A" fire rating — the highest fire resistance rating available; and (2) that ArmorLite was ready to market its Class "A" rated product to contractors and the general public. Plaintiffs additionally alleged that Lane fraudulently failed to disclose that ArmorLite had changed the formula for ArmorLite's roofing product and that the product as modified had not been tested before being mass produced and marketed. Plaintiffs maintained that the modified roofing product ultimately failed to pass the Class "A" rating test when a testing agency later audited the product. Years of litigation followed, including discovery and motion practice.

C. Lane files for bankruptcy and the state court action proceeds to trial.

In December 2011, in the midst of this litigation, Lane filed his chapter 7 bankruptcy case. Plaintiffs timely filed their nondischargeability adversary proceeding under § 523(a)(2)(A) based largely on the same allegations stated in their state court action. The bankruptcy court sua sponte entered an order abstaining from adjudicating Lane's liability for fraud based on its conclusion that "it appears that the State Court Action arises out of the same set of facts and includes essentially the same claims for relief as pled in the adversary proceeding." The bankruptcy court granted relief from stay to permit plaintiffs to litigate their fraud claims to final judgment in the state court. The court specifically noted in its abstention order that the nondischargeability action would resume if necessary to determine the dischargeability of any fraud judgment plaintiffs might obtain from the state court. The bankruptcy court further noted that, if the nondischargeability action resumed, it might then consider applying issue preclusion to the state court's findings of fact and conclusions of law if appropriate.

The parties resumed their state court litigation. In September 2013, the state court denied plaintiffs' motion for summary judgment against Lane. As part of the motion, the state court considered extensive evidence presented by both sides. It initially observed that plaintiffs had established a prima facie case of securities fraud under California law. The court explained that the burden then shifted to Lane to establish the existence of a triable issue of material fact. After considering Lane's evidence, the court ultimately concluded that there was a triable issue as to whether he made any material misrepresentations or omissions. The court adopted the exact same reasoning in denying summary adjudication of plaintiffs' misrepresentation, concealment, and conspiracy causes of action.

In September 2015, the parties commenced trial, without a jury. Lane was represented by counsel throughout the trial, which occurred over a 25-day period in late September and early October of 2015. Prior to the conclusion of the trial, the parties reached a settlement. Because the bankruptcy court's later nondischargeability judgment hinges on the settlement and the resulting stipulated judgment, we recount the circumstances surrounding the settlement, and its aftermath, in detail.

D. The parties' settlement of the state court action.

On October 16, 2015, Lane and some of the plaintiffs submitted to the court a handwritten "shortform" settlement agreement. All of the plaintiffs who were present, as well as Lane, signed that written agreement. Plaintiffs' counsel represented that his remaining clients had authorized him to enter into the settlement for them.

Plaintiffs' counsel then explained some of the basic terms. He said that "[t]he stipulated judgment will be for fraudulent concealment" and "[i]t will be nondischargeable in bankruptcy court." He also stated that judgment would not be filed for a period of one year and that the settlement and stipulated judgment would be confidential until the stipulated judgment was filed.

The court then asked Lane a series of questions regarding whether he understood that he could not back out of the settlement once it was entered into on the record. The court also inquired whether he was entering into the settlement agreement freely and voluntarily, and not as a result of duress. Lane answered affirmatively but added that the stipulated judgment was subject to a caveat or condition. According to Lane, if he could obtain "ICC approval" for the current version of ArmorLite's roofing product and thereby resurrect the viability of the roofing product, the stipulated judgment would not be effective, and the fraud litigation would be dismissed. The court and Lane's counsel explained to him that his condition was not part of the settlement. Rather, the settlement provided an immediate end to the fraud litigation in exchange for a $1.5 million stipulated judgment against Lane. They further explained that further negotiations during the year prior to entry of the judgment could lead to an agreement along the lines Lane sought but that was not part of the existing agreement. Moreover, they explained that there were no guaranties that there ever would be any other agreement.

Lane then asked the court whether his condition could be added to the settlement. The court responded that it was not a participant in the settlement negotiations, which were between the parties and their counsel. The court then took a short recess during which the parties discussed the matter. When the hearing resumed, Lane's counsel stated that her client was prepared to agree with the terms of the stipulated judgment and was not going to attempt to "add any terms."

The court then resumed his colloquy with Lane, asking him again whether his agreement was of his own free will, was not the result of duress, and whether he understood that the agreement did not include any condition regarding resurrection of ArmorLite's roofing product. Lane answered each question affirmatively and without hesitation. He further expressed his desire to move forward with the settlement. The court a'lso asked...

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  • Kurtin v. Ehrenberg (In re Elieff)
    • United States
    • U.S. Bankruptcy Appellate Panel, Ninth Circuit
    • March 21, 2022
    ...to the proper construction of the parties’ mutually manifested objective intent in entering into the Settlement Agreement. See In re Italiane , 632 B.R. at 674.In sum, Kurtin has not persuaded us that the bankruptcy court abused its discretion by denying Kurtin's supplemental Civil Rule 56(......

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