Portal Invs., LLC v. Johnson (In re Johnson), Bankruptcy No. 16–30199

Decision Date29 January 2018
Docket NumberAdversary No. 16–07020,Bankruptcy No. 16–30199
Parties IN RE: Douglas L. JOHNSON, a/k/a Doug Johnson, Debtor. Portal Investments, LLC, Plaintiff, v. Douglas L. Johnson, Defendant.
CourtU.S. Bankruptcy Court — District of North Dakota

584 B.R. 895

IN RE: Douglas L. JOHNSON, a/k/a Doug Johnson, Debtor.

Portal Investments, LLC, Plaintiff,
Douglas L. Johnson, Defendant.

Bankruptcy No. 16–30199
Adversary No. 16–07020

United States Bankruptcy Court, D. North Dakota.

Signed January 29, 2018

584 B.R. 898

Michael Gust, Anderson, Bottrell, Sanden & Thompson, Fargo, ND, for Plaintiff.

Sheldon A. Smith, Smith & Armstrong, Bismarck, ND, for Defendant.


Shon Hastings, Judge, United States Bankruptcy Court

Plaintiff Portal Investments, LLC, filed a Complaint seeking a determination that Defendant/Debtor Douglas L. Johnson's debts to it are excepted from discharge under sections 523(a)(2), (4) and (6) of the Bankruptcy Code. Doc. 1. Debtor denies the allegations. Doc. 7.

Portal Investments filed a Motion for Summary Judgment on October 31, 2017. Doc. 26. In support of its motion, Portal Investments offered a number of documents related to a JAMS Arbitration Case,1 including a Corrected Final Order and Award dated October 12, 2017. Doc. 28, exhibits 1–5. Portal Investments asserts the findings and conclusions included in the Corrected Final Order and Award collaterally estop Debtor from litigating the issues determined in the arbitration in this bankruptcy adversary proceeding. Doc. 27. Debtor resists the motion, but does not dispute the authenticity or admissibility of the Corrected Final Order and Award. Doc. 32. Rather, Debtor argues that whether the arbitrator's findings of fact support a finding of nondischargeability in bankruptcy is a question that was not addressed in the arbitration. Consequently, Debtor maintains that whether his debt to Portal Investments is excepted from discharge has not been "actually and necessarily" decided and therefore litigation of this issue is not precluded by collateral estoppel. Id. at 4. Debtor also argues summary judgment is inappropriate because questions of fact remain regarding the sum of damages attributable to Portal Investments' nondisclosure claim as compared to its breach of fiduciary duty claim. Id. at 5–6. He maintains that if the Court finds the debt he owes to Portal Investments excepted from discharge under only one theory of liability, it would be impossible for the Court to allocate the award between the two causes of action and determine exactly what portion is nondischargeable. Id.

For the reasons stated below, the Court concludes that Portal Investments met its burden of showing that Debtor is collaterally

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estopped from relitigating the issues actually and necessarily decided in the arbitration proceedings and that the arbitrator's findings satisfy the elements of Portal Investments' section 523(a)(2)(A) cause of action. Portal Investments' Motion for Summary Judgment is GRANTED.


The interim orders and Corrected Final Order and Award entered by the arbitrator provide the factual background for this opinion. The orders are incorporated by reference. See Docs. 28–1, 28–2, 28–3, 28–4.


A. Summary Judgment Standard

Summary judgment is appropriate if, viewing all facts and drawing all reasonable inferences in favor of the nonmoving party, there is no genuine issue as to any material fact and the movant is entitled to judgment as a matter of law. Blocker v. Patch (In re Patch ), 526 F.3d 1176, 1180 (8th Cir. 2008) ; see Fed. R. Civ. P. 56(a) made applicable by Fed. R. Bankr. P. 7056. The initial burden is on the movant to establish the lack of any genuine issue of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). If the movant meets its burden, the nonmoving party must then "go beyond the pleadings and by her own affidavits, or by the ‘depositions, answers to interrogatories, and admissions on file,’ designate ‘specific facts showing that there is a genuine issue’ " of fact making trial necessary. Id. at 324, 106 S.Ct. 2548 (citing Fed. R. Civ. P. 56). The existence of some factual dispute will not overcome an otherwise properly supported summary judgment motion. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248–50, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). "If the evidence is merely colorable or not significantly probative, summary judgment may be granted." Id. at 249–50, 106 S.Ct. 2505.

B. Collateral Estoppel

Collateral estoppel, also known as issue preclusion, is a legal doctrine that bars the relitigation of factual or legal issues that were determined in a prior court action. Osborne v. Stage (In re Stage ), 321 B.R. 486, 491 (8th Cir. BAP 2005) (citing Johnson v. Miera (In re Miera ), 926 F.2d 741, 743 (8th Cir. 1991) ). Portal Investments and Debtor litigated fraudulent nondisclosure and breach of fiduciary duty issues in the previous arbitration proceedings. The Corrected Final Order and Award was not confirmed by either a state or federal court. Nevertheless, Portal Investments asks the Court to give collateral estoppel effect to the arbitration orders.

In McDonald v. City of West Branch, the United States Supreme Court determined that arbitration is not a "judicial proceeding" and ruled that arbitration proceedings are not entitled to full faith and credit under 28 U.S.C. § 1738. 466 U.S. 284, 287–88, 104 S.Ct. 1799, 80 L.Ed.2d 302 (1984). Accordingly, it found that federal courts were not required by statute to give collateral estoppel effect to an unappealed arbitration award. Id. at 288, 104 S.Ct. 1799. The Court observed that any rule precluding relitigation of issues decided in arbitration proceedings "would necessarily be judicially fashioned." Id. The Court then considered whether to grant preclusive effect to arbitration awards brought pursuant to a collective bargaining agreement in a 42 U.S.C. § 1983 action. Id. at 292, 104 S.Ct. 1799. It declined to do so. Id.

A short time after McDonald, the Supreme Court reversed a lower court decision declining to compel arbitration. See

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Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 105 S.Ct. 1238, 84 L.Ed.2d 158 (1985). It held that "the Arbitration Act requires district courts to compel arbitration of pendent arbitrable claims when one of the parties files a motion to compel, even where the result would be the possibly inefficient maintenance of separate proceedings in different forums." Id. at 217, 105 S.Ct. 1238. In Byrd, the Court addressed a concern regarding the preclusive effect of arbitration proceedings. The Court noted:

Significantly, McDonald also establishes that courts may directly and effectively protect federal interests by determining the preclusive effect to be given to an arbitration proceeding. Since preclusion doctrine comfortably plays this role, it follows that neither a stay of the arbitration proceedings, nor a refusal to compel arbitration of state claims, is required in order to assure that a precedent arbitration does not impede a subsequent federal-court action....

* * *

... Suffice it to say that in framing preclusion rules in this context, courts shall take into account the federal interests warranting protection. As a result, there is no reason to require that district courts decline to compel arbitration, or manipulate the ordering of the resulting bifurcated proceedings, simply to avoid an infringement of federal interests.

Id. at 223, 105 S.Ct. 1238 (emphasis in original). Since McDonald and Byrd, federal courts have routinely exercised their discretion to give preclusive effect to arbitration decisions where there were no federal interests or the federal interests did not rise to a level warranting protection, and the elements of collateral estoppel were met. See, e.g., Cook v. Knight (In re Knight ), 574 B.R. 800, 809 (Bankr. N.D. Ga. 2017) ; Ferris v. Rhodes (In re Rhodes ), 2008 WL 4876765, at *2–5 (Bankr. W.D. Mo. 2008) ; Graybar Elec. Co., Inc. v. Fed. Ins. Co., 567 F.Supp.2d 1116, 1125 (E.D. Mo. 2008) ; Stulberg v. Intermedics Orthopedics, Inc., 997 F.Supp. 1060, 1065–70 (N.D. Ill. 1998) ; Swanson v. Tam (In re Tam ), 136 B.R. 281, 285 (Bankr. D. Kan. 1992).

The federal interest at issue in this case is the discharge of Debtor's debts. In Grogan v. Garner, the United States Supreme Court ruled that collateral estoppel may be applied to establish the factual basis for an exception to discharge under section 523(a) of the Bankruptcy Code. Grogan v. Garner, 498 U.S. 279, 284 n.11, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991) ; see also Roussel v. Clear Sky Props., LLC, 829 F.3d 1043, 1047 (8th Cir. 2016). Since Grogan, many courts have applied collateral estoppel principles, granting preclusive effect to judicial proceedings and arbitration awards in subsequent bankruptcy litigation regarding exceptions to discharge. See, e.g., Roussel v. Clear Sky Props., LLC, 829 F.3d at 1047 (judicial proceeding); Khaligh v. Hadaegh (In re Khaligh ), 338 B.R. 817, 830 (9th Cir. BAP 2006) (arbitration); PLM Lake & Land Mgmt. Corp. v. Duy (In re Duy ), 484 B.R. 742, 759 (Bankr. D. Minn. 2012) (judicial proceeding); Caruso v. Harmon (In re Harmon ), 404 B.R. 521, 531 (Bankr. W.D. Mo. 2009) (judicial proceeding). Courts frequently apply collateral estoppel, even in...

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