Westgate-California Corp., In re

• Decision Date: 23 March 1981
• Docket Number: No. 78-2603,WESTGATE-CALIFORNIA,78-2603
• Citation: 642 F.2d 1174,7 BCD 705
• Parties: , Bankr. L. Rep. P 67,939 In reCORPORATION, a Nevada Corporation et al., Debtors, Curvin J. TRONE, Jr., Trustee and Herbert Kunzel, Additional Trustee, etc., Plaintiffs, v. Helen SMITH, aka Helen Hill and Helen Smith, dba International Interior Designs, Defendant/Appellant.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1174

642 F.2d 1174

7 Bankr.Ct.Dec. 705, Bankr. L. Rep. P 67,939

In re WESTGATE-CALIFORNIA CORPORATION, a Nevada Corporation et al., Debtors Curvin J. TRONE, Jr., Trustee and Herbert Kunzel, Additional Trustee, etc., Plaintiffs, v. Helen SMITH, aka Helen Hill and Helen Smith, dba International Interior Designs, Defendant/Appellant.

No. 78-2603.

United States Court of Appeals Ninth Circuit.

Argued and Submitted Oct. 21, 1980.

Decided March 23, 1981.

Paul D. Engstrand, George J. Berger, Jennings, Engstrand & Henrikson, P. C., San Diego, Cal., for defendant-appellant.

Jeffrey L. Levine, Wyman, Bautzer, Rothman & Kuchel, Los Angeles, Cal., argued for plaintiffs; Rauer L. Meyer, Wyman, Bautzer, Rothman & Kuchel, Los Angeles, Cal., on brief.

Appeal from the United States District Court for the Southern District of California.

Before BROWNING and POOLE, Circuit Judges, and SOLOMON, ^* District Judge.

POOLE, Circuit Judge:

Mrs. C. Arnholt Smith has appealed the summary judgment order entered in the Chapter X reorganization of Westgate-California Corp., by which all of her claims were subordinated. Appellant acted as the interior decorator for Westgate pursuant to an agreement with her husband, who then controlled Westgate. She purchased and oversaw the handling of many valuable antique furnishings. She lived with her husband in the penthouse apartment of the Westgate Plaza Hotel without paying rent and without a rental agreement until shortly before Mr. Smith lost control of Westgate. At that time, appellant signed a lease.

Appellant's claims against Westgate fall into two general categories: those for money and those for furniture which appellant claims was only lent to Westgate. The money claims are primarily for decoration services. The trustees objected to all of the claims.

While the reorganization was pending, two separate actions were commenced by Westgate's receiver. The first concerned appellant's claimed ownership of furniture on Westgate premises, and the second was an unlawful detainer action to recover possession of the penthouse. These actions were consolidated for trial before a U.S. magistrate. Federal Deposit Insurance Corporation v. Westgate Plaza Hotel, et al., No. CV 74-50-E; California Little America Corporation, et al. v. Helen Smith, No. CV 74-576-E. The magistrate made lengthy findings of fact, including findings that appellant had engaged in conversion, fraud, breach of fiduciary duty and falsification of records. He found that nearly all of the controverted furniture was the property of Westgate, and he ordered appellant to pay the value of converted furniture, to pay the rent owing under the lease and to vacate the apartment. These findings and the order were adopted by the district court and have been affirmed by this Court. California Little America Co., et al. v. Smith, Nos. 76-2753, 76-2754 (9th Cir. unpublished opinion, 1980).

The trustees then filed a motion for partial summary judgment in the bankruptcy court seeking to place all of appellant's claims into a subordinate class that had been established for the claims of those "insiders and other parties who participated in the Westgate fraud." The motion was based upon the findings from the furniture litigation that appellant had engaged in rather gross inequitable conduct. Initially, the bankruptcy judge ordered subordination of all of appellant's claims. On subsequent motions, however, he modified the order to subordinate only the claims for furniture. On appeal, the district court ordered subordination of all claims.

Because this is an appeal from a summary judgment order, we must determine first, whether there exists a genuine issue of material fact as to appellant's inequitable conduct, and second, whether that conduct will justify subordination of all her claims.

I

Appellant first contends that the findings of inequitable conduct made in the furniture litigation are not proper subjects for collateral estoppel, and hence that there exists a genuine issue of material fact as to whether she acted inequitably.

The doctrine of collateral estoppel is generally stated as follows:

Where there is a second action between parties, or their privies, who are bound by a judgment rendered in a prior suit, but the second action involves a different claim, cause, and demand, the judgment in the first suit operates as a collateral estoppel as to, but only as to, those matters or points which were in issue or controverted and upon the determination of which the initial judgment necessarily depended.

1B J. Moore, Federal Practice, P 0.441(2) (2d ed. 1974). It is uncontested that the present parties were parties or privies of parties to the furniture litigation. Hence, the issues here are whether appellant's inequitable conduct was in issue in the furniture litigation and whether the magistrate's disposition of that case depended upon it.

One of the actions involved in the furniture litigation was an unlawful detainer proceeding against appellant as tenant of the penthouse apartment. In order to resolve that case, it was necessary for the magistrate to determine whether appellant's lease to the premises was valid. Plainly, any fraud in procuring that lease would be material to his determination. Appellant contends, however, that she cannot be collaterally estopped by the magistrate's determination that she committed fraud. She argues that, because the magistrate posed alternative grounds upon which he might rest his decision that the lease was void, his finding of fraud was not essential to the judgment. This contention is contrary to the established rule:

(E)ven though the court rests its judgment alternatively upon two or more grounds, the judgment concludes each adjudicated issue that is necessary to support any of the grounds upon which the judgment is rested.

Id. at P 0.443(5). Thus, the magistrate's finding that appellant committed fraud in connection with the lease is a proper subject for collateral estoppel.

The other action involved in the furniture litigation concerned ownership of various items of furniture. The manner in which these properties came into Westgate's possession was so poorly documented that the magistrate found it necessary to resort to other means to determine their ownership. It was clear that all of the properties had been purchased by appellant; the magistrate therefore sought to determine whether appellant had acted on her own account as an independent contractor, or on behalf of Westgate as its agent. He found that she had acted as Westgate's agent and that therefore the properties belonged to Westgate. Plainly the subject of this finding was in issue and controverted in the furniture litigation, and a determination of it was essential to the judgment. Appellant is therefore estopped to deny that she was Westgate's agent.

The magistrate found not only that appellant was Westgate's agent, with all of the legal duties that relationship entails; he also found that appellant had breached those duties. She had, he determined, failed in her duty to maintain proper accounts for Westgate, failed to segregate Westgate property from her own, and had, in fact, compiled false and misleading records in favor of herself. Appellant urges that these findings, in the language of classic collateral estoppel theory, amount to "evidentiary" rather than "ultimate" facts. However, a more functional approach to this problem is appropriate. It is clear that appellant's duties and actions in relation to the accounts were before the court and were fully litigated and that evidence concerning the possessor's accounts would be of unquestioned relevance and importance in an action to determine ownership of property. Further, in order for the magistrate to rule as he did, he must have found and did find that the accounts were inadequate to prove ownership by either party, and that appellant's proffered records were not credible. In fact, he determined that they had been fabricated. Inasmuch as appellant's breach of her fiduciary duties was fully litigated before the magistrate and determination of it was essential to his determination of the action, further litigation on the question is not required.

The magistrate also found appellant liable for the conversion of a large amount of valuable furniture belonging to Westgate. Appellant claims...