Spagnuolo v. Brooke-Petit

• Decision Date: 03 March 2014
• Docket Number: Civil Action No. 13–11694–DJC.
• Citation: 506 B.R. 1
• Court: U.S. District Court — District of Massachusetts
• Parties: Robert SPAGNUOLO, Jr., Appellant, v. Edwina BROOKE–PETIT, Appellee.

506 B.R. 1

Robert SPAGNUOLO, Jr., Appellant,

v.Edwina BROOKE–PETIT, Appellee.

Civil Action No. 13–11694–DJC.

United States District Court, D. Massachusetts.

Filed March 3, 2014.

Laurel E. Bretta, Bretta & Grimaldi, PA, Medford, MA, for Appellant.

Bill N. Jacob, Bill N. Jacob, Esq., Herbert Weinberg, Rosenberg & Weinberg, North Andover, MA, for Appellee.

MEMORANDUM OF DECISION

CASPER, District Judge.

I. Introduction

Debtor–Appellant Robert Spagnuolo, Jr. (“Spagnuolo”) now appeals the order of the Bankruptcy Court allowing the motion for summary judgment of Plaintiff–Appellee Edwina Brooke–Petit (“Brooke–Petit”). For the reasons set forth below, this Court AFFIRMS IN PART and VACATES IN PART the order and REMANDS the case for further findings on a limited issue.

II. Factual BackgroundA. Brooke–Petit Obtains a State Court Judgment Against Spagnuolo

In 2005, Brooke–Petit engaged Spagnuolo to perform and supervise renovations at her home in Mashpee, Massachusetts. Petit v. Spagnuolo (In re Spagnuolo), 491 B.R. 1, 4 (Bankr.D.Mass.2013). Brooke–Petit made various allegations regarding the deficiencies of this work in a lawsuit in Middlesex Superior Court. Id. The state court instructed the jury on breach of contract, damages for breach of contract, damages for breach of a construction contract, fraud, damages for fraud and violations of Mass. Gen. L. c. 93A and c. 142A. Id. at 4–5.

In instructing the jury on fraud, the court identified five elements that must be established by a preponderance of the evidence: 1) “that [the defendant] made a false statement or statements to the plaintiff, and that statement ... or those statements concerned some fact that a reasonable person would consider important to the decision that the plaintiff was about to make;” 2) that “when [the defendant] made the statement, the defendant either knew that the statement was false or recklessly made the statement by willfully disregarding its truth or falsity;” 3) the defendant “made the false statement with the intention that the plaintiff would rely on that statement in making her decision;” 4) “in making her decision, [the plaintiff] did in fact rely upon the defendant's statement as true and that ... her reliance was reasonable under the circumstances;” and 5) “that the plaintiff suffered some financial loss as a result of relying on the defendant's false statement.” D. 15–1 at 69–71.

The state court then proceeded to define each of these elements in more detail, including the second element:

Mr. Spagnuolo is liable if he made a false statement of fact knowing it to be false. Likewise, if he made an unqualified statement about facts, the truth or falsity of which he could've determined with certainty and gave [the plaintiff] the reasonable impression that he was speaking of his knowledge, [then the defendant] is not excused from liability if he didn't in fact know whether the statement was true or false. The law regards such willful disregard of the facts as equivalent to an intentional misrepresentation. Actual intent to deceive need not be proven.

Id. at 73. As to damages, the court instructed that “if you reach the issue of damages, award [the plaintiff] a sufficient amount of money to put her in the position that she would've been in if the situation had been as represented by ... the defendant.” Id. at 75.

On August 24, 2010, the jury found Spagnuolo liable on each of Brooke–Petit's claims and on a special verdict form indicated its findings that 1) a contract existed between the parties; 2) the defendant breached the contract; 3) the defendant committed fraud, deceit, and/or misrepresentation by any means, in connection with the services provided; and 4) the defendant violated Mass. Gen. L. c. 142A. D. 15–2 at 22–26. The verdict form instructed that a finding of liability on c. 142A automatically led to a finding of liability on Brooke–Petit's c. 93A claim. Id. at 24. ¹ The jury declined to award multiple damages under Mass. Gen. L. c. 93A, § 9. Id. at 25.

III. Procedural Background

Spagnuolo filed a voluntary Chapter 7 bankruptcy petition on February 1, 2011. No. 11–br–10844, D. 1. Brooke–Petit opened an adversary proceeding on September 28, 2011. No. 11–ap–01290, D. 1. Brooke–Petit moved for summary judgment on November 15, 2012. Id. at D. 42. The Bankruptcy Court heard the parties on March 6, 2013, id. at D. 67, and entered summary judgment in Brooke–Petit's favor on May 15, 2013. Id. at D. 81. This appeal followed.²

IV. Standard of Review

On appeal, the “district court ... may affirm, modify, or reverse a bankruptcy judge's judgment, order or decree or remand with instructions for further proceeding.” Fed. R. Bankr.P. 8013. In its review, the district court reviews the Bankruptcy Court's conclusions of law de novo, but must accept its findings of fact unless they were clearly erroneous. TI Fed. Credit Union v. DelBonis, 72 F.3d 921, 928 (1st Cir.1995); Fed. R. Bankr.P. 8013. Accordingly, as to the Bankruptcy Court's findings of fact, they “are to be set aside only if, on the entire evidence, [the Court is] ‘left with the definite and firm conviction that a mistake has been committed.’ ” In re Tully, 818 F.2d 106, 109 (1st Cir.1987) (quoting United States v. United States Gypsum Co., 333 U.S. 364, 395, 68 S.Ct. 525, 92 L.Ed. 746 (1948)). Questions of nondischargeability involve a legal question and are reviewed de novo. In re Baylis, 313 F.3d 9, 16 (1st Cir.2002).

V. DiscussionA. The Bankruptcy Court Correctly Held that Issue Preclusion Barred Re–Litigation of Whether His Conduct, Found to Constitute Fraud by a State Court Verdict, is Nondischargeable Under 11 U.S.C. § 523(a)

Spagnuolo challenges the Bankruptcy Court's finding that issue preclusion barred relitigation of whether Spagnuolo's debt to Brooke–Petit is dischargeable under 11 U.S.C. § 523(a)(2)(A). This statute provides that “[a] discharge under [the bankruptcy code] does not discharge an individual debtor from any debt ... for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by ... false pretenses, a false representation, or actual fraud.” Id. The Bankruptcy Court found that Spagnuolo was “collaterally estopped from contesting his liability under § 523(a)(2)(A) based upon a state trial court jury verdict for fraud.” In re Spagnuolo, 491 B.R. at 4.

“Under federal law, a state court judgment receives the same preclusive effect as it would receive under the law of the state in which it was rendered.” Dillon v. Select Portfolio Servicing, 630 F.3d 75, 80 (1st Cir.2011). Accordingly this Court looks to state law in determining the metes and bounds of issue preclusion. Jennings v. Nathanson, 404 F.Supp.2d 380, 393 (D.Mass.2005) (citing Nottingham Partners v. Trans–Lux Corp., 925 F.2d 29, 32 (1st Cir.1991)). Massachusetts law precludes re-litigation of an issue decided in a prior proceeding “ ‘[w]hen an issue of fact or law is actually litigated and determined by a valid and final judgment, and the determination is essential to the judgment, the determination is conclusive in a subsequent action between the parties, whether on the same or a different claim.’ ” Alba v. Raytheon Co., 441 Mass. 836, 841, 809 N.E.2d 516 (2004) (quoting Martin v. Ring, 401 Mass. 59, 61, 514 N.E.2d 663 (1987)). While Brooke–Petit maintains that her state court judgment precludes re-litigation of the issue of whether Spagnuolo obtained a debt by “actual fraud,” 11 U.S.C. § 523(a)(2)(A), Spagnuolo argues that the existence of the requisite fraudulent intent was not “actually litigated,” Alba, 441 Mass. at 841, 809 N.E.2d 516, in the state court proceeding.

To establish nondischargeability of a debt obtained by fraud, a plaintiff must demonstrate that the debtor “(1) [made] a false representation, (2)[did] so with fraudulent intent, i.e., with ‘scienter,’ (3) [intended] to induce the plaintiff to rely on the misrepresentation, and (4) the misrepresentation [did] induce reliance, (5) which is justifiable, and (6) which cause[d] damage (pecuniary loss).” Palmacci v. Umpierrez, 121 F.3d 781, 786 (1st Cir.1997) (citing 2 F. Harper, et al., Law of Torts § 7.1, at 381 (2d ed. 1986)). “To prove scienter, the plaintiff must show that the debtor acted with an actual intent to mislead or was reckless in disregarding the truth of a representation. Because direct evidence of an intent to mislead or defraud is seldom available, these elements may be proven by the totality of circumstantial evidence.” In re Aoki, 323 B.R. 803, 815 (1st Cir. BAP 2005) (internal citations omitted).

The Bankruptcy Court compared the standard of nondischargeability in § 523(a)(2)(A) with the state court judge's instructions to the jury on Brooke–Petit's fraud count, finding that the jury instructions and verdict “comport[ed] with the requirements for an exception to discharge under § 523(a)(2)(A).” Spagnuolo, 491 B.R. at 16. On appeal, Spagnuolo challenges the Bankruptcy Court's finding as to whether the state court jury's findings as to Spagnuolo's state of mind meet the standard under § 523(a)(2)(A). D. 14 at 14–15. Spagnuolo argues that the state court jury's findings were insufficient because the state court judge instructed the jury that they could find for Brooke–Petit on her fraud count even without finding that Spagnuolo “intended to deceive” her. Id. Indeed, the state court instructed the jury that “[a]ctual intent to deceive need not be proven.” D. 15–1 at 73. Courts interpreting the scienter requirement in § 523(a)(2)(A) have determined that scienter requires that “the debtor intended to deceive.” McCrory v. Spigel (In re Spigel), 260 F.3d 27, 32 (1st Cir.2001) (citing Palmacci, 121 F.3d at 787). Plaintiffs can show this by demonstrating that the debtor: “(a) knows or believes that the matter is not as he represents it to be; (b) does not have the confidence in the accuracy of his representation that he states or implies; or (c) knows that he does not...