Richard Yin-Ching Houng v. Tatung Co. (In re Richard Yin-Ching Houng)
| Decision Date | 11 September 2013 |
| Docket Number | CASE NO. SACV 12-01341 MMM,BANKRUPTCY NO. BK 10-18712 ES |
| Court | U.S. District Court — Central District of California |
| Parties | In Re: RICHARD YIN-CHING HOUNG aka RICHARD HOUNG Debtor. RICHARD YIN-CHING HOUNG aka RICHARD HOUNG, Appellant, v. TATUNG COMPANY, LTD., a Taiwan limited company, Appellee. |
In Re: RICHARD YIN-CHING HOUNG aka RICHARD HOUNG Debtor.
RICHARD YIN-CHING HOUNG aka RICHARD HOUNG, Appellant,
v.
TATUNG COMPANY, LTD., a Taiwan limited company, Appellee.
CASE NO. SACV 12-01341 MMM
BANKRUPTCY NO. BK 10-18712 ES
UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA
DATED: September 11, 2013
Appellant Richard Houng ("Houng"), the debtor in a pending Chapter 7 bankruptcy case, appeals from the judgment of the bankruptcy court entered August 1, 2012.1 Appellee Tatung Company, Ltd. ("Tatung") asserts that judgment was correctly entered.2
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A. Factual Background
From September 29, 2003 to April 2, 2010, Houng was the Chief Executive Officer ("CEO") of Westinghouse Digital Electronics, LLC ("WDE").3 From 2007 to 2008, Tatung, a Taiwan-based assembler of LCD televisions, was party to a Product Supply Agreement ("PSA") with WDE, pursuant to which it was assemble and supply LCD televisions and digital photo frames.4 WDE was current on its obligations to Tatung under the PSA until late 2008, when it stopped making the required payments.5 In 2010, WDE ceased operations.6
B. The Arbitration
Tatung initiated an arbitration proceeding against WDE pursuant to the PSA on February 13, 2009, asserting various breach of contract claims.7 On January 11, 2010, Tatung amended its arbitration demand, adding Houng as a respondent.8 Tatung sought to impose liability on Houng as WDE's alter ego.
On May 7, 2010, the arbitrator issued a statement of decision on "Phase I" of the arbitration, finding WDE liable to Tatung for $21, 962,034.9 The arbitrator also made an interim finding that the principal amount of Houng's alter ego liability would be $17 million if Tatung
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established Houng's alter ego liability in "Phase II" of the arbitration.10
On August 17, 2011, the arbitrator struck Houng's answer to Tatung's arbitration demand and entered terminating sanctions based on a finding that Houng had committed willful discovery violations.11 On November 10, 2011, the arbitrator issued an award against Houng and in favor of Tatung; he found Houng liable to Tatung as WDE's alter ego in the amount of $25,742,854 plus interest.12 The arbitrator made numerous factual findings to support the conclusion that Houng was liable as an alter ego and reach a reasoned award.13 Specifically, he found that as an officer and manager of WDE, Houng owed Tatung a fiduciary duty as a result of WDE's insolvency, and that he breached that duty by diverting $98.65 million of WDE's assets for his personal benefit.14 The arbitrator also found that Houng had committed actual fraud against Tatung.15
On December 12, 2012, the Orange County Superior Court confirmed the arbitration award in its entirety,16 and entered a $27,601,208.48 judgment in favor of Tatung on its claim against Houng.17
C. The Bankruptcy Proceedings
On June 25, 2010, Houng filed a petition for relief under Chapter 11 of the United States
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Bankruptcy Code.18 On October 4, 2010, Tatung filed a complaint against Houng in the bankruptcy court. The bankruptcy court granted Tatung's motion for relief from the automatic stay under 11 U.S.C. § 362(d)(1) so that it could complete the arbitration proceeding on February 11, 2011.19 On July 29, 2011, the bankruptcy court converted the case to a Chapter 7 proceeding.20
Subsequently, Tatung filed first amended complaint, which sought an order that Houng's debt to it was nondischargeable under 11 U.S.C. §§ 523(a)(2)(A), 523(a)(4) and § 523(a)(6).21 On April 17, 2012, Tatung filed a motion for summary judgment on its first and second claims for relief.22 Houng opposed the motion.23 The bankruptcy court announced an intention to grant the motion on June 25, 2012.24
On August 1, 2012, the bankruptcy court entered its Findings of Fact and Conclusions of Law.25 The bankruptcy court adopted the following findings made by the arbitrator:
a. WDE was insolvent at all times during the course of the relationship between it and Tatung;
b. Houng, as an officer and manager of WDE, at all times owed a fiduciary
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duty to Tatung during the course of its relationship with WDE, consistent with the California Trust Fund Doctrine;
c. The fiduciary duty Houng owed to Tatung due to WDE's insolvency gave rise to an express trust under which Houng owed a duty, among other things, not to dissipate or divert the assets of WDE for his own benefit, or otherwise to engage in acts of self dealing;
d. Houng breached his duty to Tatung by, among other things, diverting $98.65 million of WDE's assets for Houng's personal benefit without consideration;
The court found that the arbitrator's findings were issue preclusive,26 and established each of the requisite elements of nondischargeability prescribed by §§ 523(a)(2)(A) and (a)(4).27 It therefore entered a judgment finding that Houng's $25,742,854.00 debt to Tatung was not dischargeable.28
D. The Bankruptcy Appeal
On January 24, 2013, the court heard argument on this appeal and took the matter under submission.29 The court also directed counsel to file supplemental briefs addressing whether state or federal law governed the preclusive effective, if any, of the arbitrator's ruling.30 The court noted that Ninth Circuit authority suggested an unconfirmed arbitration award did not have preclusive effect under the circumstances of this case. Tatung represented that it had obtained a state court judgment confirming the arbitration award, but acknowledged that the order confirming the arbitration award was not in the record. Tatung stated, therefore, that it would file a request for judicial notice of the confirmation order.
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On January 31, 2013, Tatung filed a request for judicial notice of the Orange County Superior Court's confirmation of the arbitration award.31 The same day, Tatung filed a supplemental brief, arguing that California preclusion law applies.32 On February 1, 2013, Houng filed a notice of non-opposition to Tatung's supplemental brief.33
A. Standard of Review
The district court has jurisdiction to hear appeals from final judgments, orders or decrees of the bankruptcy court. 28 U.S.C. § 158(a). When reviewing a decision of the bankruptcy court, a district court functions as an appellate court and applies the standard of review generally applied in the federal courts of appeal. In re Webb, 954 F.2d 1102, 1103-04 (5th Cir. 1992); In Re Adv. Packaging & Prods. Co., 426 B.R. 806, 816 (C.D. Cal. 2010) ("When reviewing a decision of the bankruptcy court, a district court functions as an appellate court and applies the standards of review generally applied in federal courts of appeal"). The court thus reviews the decision of the bankruptcy court to grant summary judgment de novo. In re Bakersfield Westar Ambulance, Inc., 123 F.3d 1243, 1245 (9th Cir.1997); In re Fiene, No. CV 10-09586-VAP, 2012 WL 3867337, *3 (C.D. Cal. Sept. 5, 2012).
The court also reviews de novo "the bankruptcy court's determination that issue preclusion is available; that is, that findings in one proceeding may preclude litigation of the same issues in another." Fiene, 2012 WL 3867337 at *3 (citing Dias v. Elique, 436 F.3d 1125, 1128 (9th Cir. 2006); In re Lopez, 367 B.R. 99, 103 (9th Cir. BAP 2007)). Thus here, the court reviews de
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novo whether the bankruptcy court properly concluded that the arbitration award had preclusive effect. In re Khaligh, 338 B.R. 817, 823 (9th Cir. BAP 2006). "Once it is determined that issue preclusion is available, however, the bankruptcy court's decision to apply it is discretionary, and will be reversed only if the bankruptcy court somehow abused its discretion." Fiene, 2012 WL 3867337 at *3 (citing Dias, 436 F.3d at 1128 (in turn citing Miller v. Cnty. of Santa Cruz, 39 F.3d 1030, 1032 (9th Cir. 1994)); see also George v. City of Morro Bay (In re George), 318 B.R. 729, 733 (9th Cir. BAP 2004), aff'd, 144 Fed. Appx. 636 (9th Cir. Aug. 10, 2005) (Unpub. Disp.), cert. denied, 546 U.S. 1094 (2006).
B. Whether the Arbitration Award Had Preclusive Effect
The parties appear to agree that the bankruptcy court should have given the arbitrator's award the preclusive effect it would have been accorded by a California state court.34 As a result, they rely on California preclusion law in their briefs.35
California preclusion law would certainly apply if this were a diversity action, see Jacobs v. CBS Broadcasting, Inc., 291 F.3d 1173, 1177 (9th Cir. 2002); Priest v. Am. Smelting & Red Co., 409 F.2d 1229, 1231 (9th Cir. 1969), or if the arbitrator's award had been confirmed by a California state court, Khaligh, 338 B.R. at 828 n. 2; see also Caldeira v. County of Kauai, 866 F.2d 1175, 1178 (9th Cir. 1989).
This is not a diversity action, however. The bankruptcy court had jurisdiction over this action under 28 U.S.C. §§ 1334 and 157(b)(2)(I), not 28 U.S.C. § 1332. Tatung's complaint, moreover, asserted only federal claims under § 523(a). See In re Carlson, 464 Fed. Appx. 845, 849 (11th Cir. Mar. 30, 2012) (Unpub. Disp.) ("the district court correctly found that it had federal question jurisdiction over the non-dischargeability claims pursuant to 28 U.S.C. § 1331"); In re Morrison, 555 F.3d 473, 478 (5th Cir....
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