Pravati SPV II, LLC v. Pe (In re Pe)
| Decision Date | 27 September 2022 |
| Docket Number | 21-00080-ELG,Adv. Pro. 21-10018-ELG |
| Parties | In re: Alexander X. Pe, Debtor. v. Alexander X. Pe, Defendant. Pravati SPV II, LLC, Plaintiff, |
| Court | United States Bankruptcy Courts – District of Columbia Circuit |
The Court has before it the fully briefed Plaintiff's Motion for Summary Judgment (the "Motion") (ECF No. 12) filed by Pravati SPV II, LLC ("Pravati" or "Plaintiff") in support of its Adversary Complaint for Determination of Dischargability (sic) and Objecting to Dischargeability of Claim Pursuant to Section § 523 of the Bankruptcy Code (the "Complaint") (ECF No. 1) and Motion to Strike Plaintiff Reply (the "Motion to Strike") (ECF No. 15) filed by Alexander Pe (the "Debtor"). The parties submitted the Motion and the Motion to Strike to the Court on the papers. For the reasons stated herein, the Court grants the Motion and denies the Motion to Strike, and a separate order on judgment will follow.
a. Arizona Arbitration and Judgment
Beginning in 2016, the Debtor was a partner with Sam Hensley ("Mr Hensley") in the two-lawyer Maryland law firm of Hensley Pe Law, LLC (the "Firm"). See Pl's Ex D, ECF No. 12-5. In September 2016, the Firm, the Debtor, and Mr. Hensley completed a Law Firm Case Portfolio Funding Application (the "Application") with Advanced Legal Capital LLC (a law firm financing group), and on October 26 2016 entered into a Law Firm Legal Funding Contract and Security Agreement (the "Agreement") with Pravati for a maximum total loan amount of $50,000. Compl. at ¶ 14, ECF No. 1; Pl's. Ex. D, ECF No. 12-5. The Agreement contained an arbitration provision. Pl's Ex. B, ECF No. 12-3. In the Application and in support of the requested loan, the Firm, the Debtor, and Mr. Hensley were required to list current clients and include certain information regarding the Firm's financial status. Pl's Ex. D, ECF No. 12-5. The Application included a list of thirteen separate matters for ten different clients and contained net profit projections of $350,000 for 2017 and $750,000 for 2018. Id. In November 2016, Pravati advanced funds under the terms of the Agreement in the net amount of $43,750. Compl. at ¶ 15, ECF No. 1. No repayments were ever made to Pravati. Id.
In May 2018, Pravati commenced a collection arbitration proceeding before the American Arbitration Association against the Debtor, Mr. Hensley, and the Firm (the "Arbitration"). Id. at ¶ 22. On August 22, 2018, a preliminary hearing was held before an arbitrator after which a final hearing was scheduled for October 16, 2018 (the "Final Hearing"). Pl's Ex. H, ECF No. 12-12; Pl's Ex. B, ECF No. 12-3. At the Final Hearing, the arbitrator found that the Debtor and the Firm had actual notice of Final Hearing. Pl's Ex. B. The arbitrator also found that the Plaintiff provided necessary service and additionally exhausted all reasonable efforts to ensure Mr. Hensley had actual notice of the Final Hearing. Id. Despite notice to all three responding parties, no responding party appeared at the Final Hearing. Id.
The Final Hearing was an evidentiary hearing at which the Plaintiff offered the testimony of one witness. Id. At the conclusion of the Final Hearing, after considering the evidence, the Arbitrator summarily found that the Debtor, the Firm, and Mr. Hensley "fraudulently induced Pravati to enter into the [Agreement] by misrepresenting their current and active cases and financial status to Pravati for underwriting purposes." Id. The Arbitrator thereafter held the Debtor, the Firm, and Mr. Hensley jointly and severally liable to Pravati in the amount of $64,721.91[1] plus post-award interest at the rate of 2.0% per month, collection expenses, and fees (the "Award"). Id. at ¶ 23.
In June 2019, the Plaintiff timely filed a petition with the Superior Court of the State of Arizona for Maricopa County (the "Arizona Court") to confirm the Award and enter judgment (the "Confirmation Motion"). Compl. at ¶ 26, ECF No. 1. The Debtor was served with a copy of the Confirmation Motion on September 10, 2019. Pl's Ex. F, ECF 12-7. It does not appear that Mr. Hensley was ever served with the Confirmation Motion. Neither the Debtor nor the Firm appeared in the Arizona Court. In April 2020, the Arizona Court granted the Confirmation Motion, and on May 19, 2020 entered a joint and several judgment for Pravati against the Debtor and the Firm in the amount of $89,316.24 with interest to accrue at 2% per month plus an additional $9,294.32 for reasonable attorney fees (the "Arizona Judgment"). Pl's Ex. A, ECF No. 12-2. The Debtor did not appeal the Arizona Judgment. Pl's Mot. Summ. J. at 2, ECF No. 12-1; Pl's Ex. 3, ECF No. 12-11. b. Bankruptcy Court
On March 25, 2021, the Debtor filed a voluntary chapter 7 petition and listed Pravati as a general unsecured creditor on Schedule E/F in the amount of $89,316.24. In re Pe, Case No. 21-00080-ELG, Vol. Pet. at 3 (March 25, 2021), ECF No. 1. On June 28, 2021, Pravati timely commenced this Adversary Proceeding by filing a Complaint seeking an order declaring the Arizona Judgment nondischargeable under Bankruptcy Code[2] §§ 523(a)(2)(A) and/or (B). Compl. at ¶ 6, ECF No. 1; Pl's Proposed Order, ECF No. 12-13. On August 1, 2021, the Debtor filed an Answer. Def's Answer, ECF No. 6. On February 2, 2021, Pravati filed the Motion, and on February 20, 2021 the Debtor filed an objection to the Motion (the "Objection"). Pl's Mot. Summ. J. at 1, ECF No. 12-1., Def's Obj., ECF No. 13. One week later, on February 28, 2022, the Plaintiff filed a reply in support of the Motion (the "Reply"). Pl's Reply, ECF No. 14-1. Shortly thereafter, the Debtor filed the Motion to Strike the Reply, Def's Mot. Strike, ECF No. 15, to which Plaintiff responded. Pl's Obj. Def's Mot. Strike, ECF No. 22. At the hearing held March 9, 2022, the parties submitted the Motion and the Motion to Strike to the Court on the papers and subsequently the Court entered a Pretrial Order setting this case for trial. Order, ECF No. 18. However, on May 11, 2022, due to unexpected delays, the Court entered its Order Continuing Trial pending resolution of the Motion and the Motion to Strike. Order Continuing, ECF No. 30.
c. Motion for Summary Judgment
In its Motion, Pravati asserts that the Arizona Judgment is nondischargeable under § 523(a)(2). Pl's Mot. Summ. J. at 8, ECF No. 12-1. In support of its argument, Pravati points to the arbitrator's summary finding that the Debtor, the Firm, and Mr. Hensley "fraudulently induced Pravati to enter into the [Agreement] by misrepresenting their current and active cases and financial status to Pravati for underwriting purposes" (the "Finding") and the Arizona Court's confirmation of the Award including the Finding. Pl's Mot. Summ. J at 3; Pl's Ex. A, ECF No. 12-2; Pl's Ex. B, ECF No. 12-3. Pravati's argues the Arizona Judgment and the Finding of the Arbitrator are preclusive as to the issue that the Debtor committed actual fraud, and therefore Pravati is entitled to judgment as a matter of law on its § 523(a)(2) nondischargeability claim. See Pl's Mot. Summ. J. at 4-7, ECF No. 12-1.
In his Objection, the Debtor argues that the Arizona Judgment is not entitled to preclusive effect and that there is a genuine issue of material fact such that summary judgment is not appropriate. Def's Obj. at 5, ECF No. 13. The Debtor does not challenge the facts related to the filing, service, occurrence of the arbitration hearing, or entry of the arbitration award, instead arguing that certain facts alleged in support of/as part of the proceeding resulting in the Award are inaccurate. See id. at 2-6. The Debtor argues that the Award should not have preclusive effect because the Debtor did not participate in the arbitration and, thus, there was no "trial on the merits" and the Award and resulting Arizona Judgment for fraud in the inducement under Arizona law are insufficient to meet the elements for nondischargeability under § 523(a)(2)(A). Id. at 2, 3.
The Debtor's Motion to Strike alleges that the Plaintiff's Reply contains misleading information and asks the Court to strike the reply. Debtor's Mot. Strike at 2, ECF No. 15. The principal argument in the Motion to Strike is focused on a fact not referenced by the arbitrator nor relevant to whether the Arizona Judgment has a preclusive effect in this case. Further, the Motion to Strike is devoid of any authority or other legal basis upon which to strike the Reply. Therefore, for the reasons stated herein, the Motion is granted and the Motion to Strike is denied.
This Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 157 and 1334. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(I). Venue is proper before this Court pursuant to 28 U.S.C. §§ 1408 and 1409. Findings of fact shall be construed as conclusions of law and conclusions of law shall be construed as findings of fact where appropriate. See Fed. R. Bankr. P. 7052.
a. Legal Standard
i. Summary Judgment
Summary judgment is proper where "the pleadings, depositions answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P 56(c) (); Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986). A fact is material where it "might affect the outcome of the suit under the governing law," and a dispute is genuine if resolution thereof "could establish an element of a claim or defense and, therefore, affect the outcome of the action." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986); see Celot...
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