Backlund v. Stanley-Snow (In Re Stanley-Snow)Backlund v. Stanley-Snow (In Re Stanley-Snow)
Daisy L. Stanley-Snow (the “Debtor”) appeals from the bankruptcy court’s order granting summary judgment in favor of David Baeklund and Sharon Backhand (the “Plaintiffs”) on their claim that a state court judgment in favor of the Plaintiffs was nondischargeable pursuant to § 523(a)(2)(A).
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The Debtor argues that
Background
Prior to this bankruptcy case, the Plaintiffs and the Debtor were neighbors. The Debtor lived with her husband, Kevin Snow, her son, Kevin Snow, Jr., and her sister, Martha Stanley. The Debtor owned the driveway paving business known as Main Street Paving, which was operated by her husband. During 2001 and 2002, the Plaintiffs made substantial payments to the Debtor, either directly or through Main Street Paving, or to other family members. The Plaintiffs, who are mentally challenged, assert that they were scammed into making payments for a variety of reasons, including unnecessary driveway paving and landscaping services, the building of a post-9/11 bomb shelter, and several bogus demands for ransom, to obtain the release of the Debtor and her husband from falsely contrived kidnapping situations. The Debtor claimed that the payments were either gifts or payments for services actually rendered.
In 2003, the Plaintiffs brought suit in Essex County Superior Court (the “state court”) against the Debtor, her husband, and her sister (the “Defendants”), alleging unjust enrichment, fraud/misrepresentation, conversion, conspiracy, and violation of the Consumer Protection Act, Mass. Gen. Laws ch. 93A (“Chapter 93A”). The Debtor filed an answer to the complaint, the parties conducted extensive discovery, and the matter was set for a trial. When the defendants failed to appear on the first day of trial (although they were subpoenaed by the Plaintiffs, and despite their counsel’s repeated attempts to contact them), the state court defaulted each of the Defendants on all five counts of the complaint. The case then proceeded before a jury for the assessment of damages on the first four counts, with the state court reserving decision on the fifth count, which alleged Chapter 93A violations. Only the Debtor appeared and testified at the damages trial. The jury returned a verdict in favor of the Plaintiffs in the amount of $58,275.00. As to the fifth count, the state court trial judge concluded that the Defendants had violated Chapter 93A, and that treble damages, attorneys’ fees and costs were warranted. Accordingly, judgment was entered against each of the Defendants in the amount of $474,703.46, which included damages, interest, costs, attorneys’ fees and punitive damages (the “State Court Judgment”). The state court also issued an order of execution against each of the Defendants.
In its Findings and Rulings regarding the Chapter 93A count, the state court made the following specific findings:
1. “Main Street Paving” was merely a “d/b/a” for the Debtor. ’
2. The three individual defendants (including the Debtor), “were engaged in willful and knowing common scheme of unfair and deceptive practices designed to steal as much money as they could from the mentally challenged plaintiffs and put it in their own pockets.”
3. “Defendant Kevin Snow and Martha Stanley were overt actors and perpetrators of fraudulent schemes to separate the plaintiffs from their money.” Kevin Snow “unduly influenced and eventually frightened” the plaintiffs into giving him money for the building of a “bomb shelter” for their safety after the events of September 11, 2001, and ultimately built a “worthless structure.” In addition, “Kevin Snow pressured the plaintiffs into having their asphalt driveway resurfaced at an outrageous cost when such work was not required.” Kevin Snow and Martha Stanley also participated in a scheme to extract monies from the plaintiffs for ransom to free the Debtor and her husband from “phony kidnapping situations.”
4. “Defendants Kevin Snow and [the Debtor] either enlisted or encouraged their son to participate in scamming the plaintiffs by having him convince the plaintiffs that they needed a further resurfacing of their driveway at additional cost.”
5. The Debtor “obtained the d/b/a/ Main Street Paving to allow [her husband] to perform paving projects under that name” and her d/b/a “assisted [her husband] in his efforts to defraud the plaintiffs concerning the bomb shelter and paving work.”
6. “[The Debtor] bears responsibility to the [plaintiffs] for allowing Kevin Snow to operate under the d/b/a name when she knew that Kevin Snow was extracting unexplained large sums of money from the [plaintiffs] at' a time when Kevin Snow was feeding a drug habit.”
7. The Debtor’s testimony on the second day of trial, that she knew nothing of her husband’s and sister’s schemes “was not credible,” that “she cashed substantial checks written by the plaintiffs to her ...” and that “she knew what was going on and was perfectly accepting of it and was a willing participant and beneficiary of the plan to separate [the plaintiffs] from their money.”
8.The defendants’ conduct “was unscrupulous, unconscionable and violates all sense of decency and acceptable community standards.”
Shortly thereafter, the Debtor filed a chapter 7 petition. The bankruptcy judge granted the Debtor’s motion to avoid the Plaintiffs’ judicial lien, thereby converting the Plaintiffs’ secured claim into a general unsecured claim.
The Plaintiffs filed an adversary proceeding against the Debtor seeking: (1) a determination that the debt owed to the Plaintiffs as a result of the State Court Judgment is non-dischargeable under § 523(a)(2)(A); (2) an order denying the Debtor a discharge pursuant to § 727(a)(4)(A); (3) a judgment against the Debtor in the amount of $474,703.46, plus legal fees and costs; and (4) an order allowing the Plaintiffs to attach the Debt- or’s real estate for any judgment issued by the bankruptcy court. The Debtor filed an answer to the complaint, discovery ensued, and the Plaintiffs filed a motion for summary judgment on the first four counts of their complaint, which the Debtor opposed.
After a hearing, the bankruptcy judge in a bench ruling, made his findings and conclusions on the record, holding that: (1) the Debtor was collaterally estopped from challenging the State Court Judgment and findings of the state court; and (2) the damages awarded by the state court were nondischargeable under § 523(a)(2). The bankruptcy judge then issued an order granting summary judgment in favor of the Plaintiffs on the first four counts of the
Although the Debtor filed a timely notice of appeal, the Panel dismissed the appeal as interlocutory, as the judgment did not resolve the issues set forth in Count V, regarding whether the Debtor should be denied a discharge pursuant to § 727(a)(4)(A). The Plaintiffs eventually withdrew the remaining count, and the bankruptcy court granted the Plaintiffs’ request for entry of a final judgment. This appeal followed.
Jurisdiction
The Panel may hear appeals from “final judgments, orders and decrees [pursuant to 28 U.S.C. § 158(a)(1)] or with leave of the court, from interlocutory orders and decrees [pursuant to 28 U.S.C. § 158(a)(3)].”
Fleet Data Processing Corp. v. Branch (In re Bank of New England Corp.),
Standard of Review
The Panel generally reviews findings of fact for clear error and conclusions of law
de novo. See TI Fed. Credit Union v. DelBonis,
Discussion
I. The Summary Judgment Standard
A motion for summary judgment in an adversary proceeding under § 523(a)(2)(A) to have a debt declared nondischargeable is governed by the same standards applicable to motions under Fed.R.Civ.P. 56. See Fed. R. Bankr.P. 7056. Summary judgment is appropriate “if 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).
The moving party bears the initial burden of demonstrating that “there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(c);
see also Razzaboni v. Schifano (In re Schifano),
II. Collateral Estoppel
The Debtor argues that the bankruptcy court erred in concluding that she was collaterally estopped from challenging the State Court Judgment and findings of the state court.
The doctrine of collateral estop-pel applies in bankruptcy dischargeability proceedings.
See Grogan v. Garner,
The Debtor argues that the first and third elements of collateral estoppel were not met. First, she alleges that there was not a final judgment
on the merits
in the state court action because the State Court Judgment was entered by default, and, therefore, she did not have a full and fair
A. Final judgment on the merits-actually litigated in state court
It is within a court’s discretion to apply collateral estoppel to a default judgment.
See Int’l Strategies Group, Ltd. v. Pomeroy (In re Pomeroy),
We can, for example, envision circumstances in which a litigant may so utilize our court system in pretrial procedures, but nonetheless be defaulted for some reason, that the principle and rationale behind collateral estoppel would apply. See, e.g., Matter of Gober,100 F.3d 1195 (5th Cir.1996) (holding that default judgment based on failure to answer does not support issue preclusion but where default issued as discovery sanction against defendant debtor after two years of litigation in which defendant had answered and denied all allegations of complaint, collateral estoppel applied); In re Bush,62 F.3d 1319 , 1324 (11th Cir.1995) (applying collateral estoppel effect to prior default judgment against debtor based on fraud, where debtor “actively participated” in adversary process for almost one year through filing answer, counterclaim, and discovery requests).
Treglia,
In addition, most federal courts of appeal have recognized an exception to the general rule that collateral estoppel does not apply to a default judgment.
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These
We conclude that the present case involves the type of circumstances contemplated by the Supreme Judicial Court of Massachusetts in Treglia. This is not a typical default case, i.e., one in which no answer was filed and the defendant’s participation was on the periphery of the case. Rather, the Debtor participated extensively in the prior state court litigation for two years. She filed an answer to the complaint, participated in written discovery, gave a deposition and filed papers with the court. She participated up until the trial, at which time her counsel appeared, but she did not. She was subpoenaed to appear and her counsel made repeated attempts to contact her. No explanation was offered as to why the Debtor did not appear at the trial on the merits.
The Debtor ultimately appeared and testified at the damages portion of the trial. In fact, the Debtor’s participation in the proceedings was significant enough that at the conclusion of the trial, the state court made detailed and specific findings of fact regarding her conduct and her credibility. For example, the state court found:
Although [the Debtor], who did decide to appear at the second day of trial, testified that she knew nothing of her husband’s and sister’s schemes, her testimony is not credible. She had meals with her husband, sister and son on a frequent and regular basis. She cashed substantial checks written by the plaintiffs to her, her husband (Kevin Snow) and her son and yet disclaims no [sic] knowledge of the nature of the work for which the checks were written. Knowing the plaintiffs’ limitations, [the Debt- or] had to think that there was something inappropriate about the activities of her husband and son which generated the plaintiffs issuing such large checks. The court concludes that she knew what was going on and was perfectly accepting of it and was a willing participant and beneficiary of the plan to separate [the Plaintiffs] from their money.
Because, in the opinion of the Panel, the “substantial participation” principle is applicable to the present case, that exception has been triggered, and we therefore conclude that the “already litigated” element of the collateral estoppel doctrine has been satisfied.
B. Same Issues Litigated
The Debtor also argues that the third element of collateral estoppel — whether the issues in the two proceedings are identical — was not met. Specifically, she asserts that the essential elements of a § 523(a)(2)(A) nondischargeability claim were not established in the state court action.
Pursuant to § 523(a)(2)(A), a monetary debt is nondischargeable to the extent the debt is obtained by “false pretenses, a false representation, or actual fraud.” We note that many courts treat the phrases as “functionally equivalent.”
See Bombardier Capital, Inc. v. Baietti (In re Baietti),
[a]ctual fraud by definition, consists of any deceit, artifice, trick, or design involving direct and active operation of the mind, used to circumvent and cheat another — something said, done or omitted with the design of perpetrating what is known to be a cheat or deception.
5 Collier on Bankruptcy Art. 532.08[l][e]. Whereas, to establish that a debt is non-dischargeable under this section based on false pretenses or false representations, a creditor must show that: (1) the debtor made a knowingly false representation or one made in reckless disregard of the truth; (2) the debtor intended to deceive; (3) the debtor intended to induce the creditor to rely upon the false statement; (4) the creditor actually relied upon the misrepresentation; (5) the creditor’s reliance was justifiable; and (6) the reliance upon the false statement caused damage.
Spigel,
The parties disagree over whether the State Court Judgment established false representation or fraud by thé Debtor. The Debtor argues that the State Court Judgment cannot have preclusive effect in this proceeding, as the essential elements of an exception to discharge under § 523(a)(2)(A) — namely, false representations, false pretenses, or actual fraud— were not litigated in or determined by the state court. The Plaintiffs argue that the state court’s specific findings and conclusions on the Chapter 93A count are determinative of the Debtor’s fraudulent conduct for purposes of § 523(a)(2)(A). 6
Notwithstanding, this does not mean that a Chapter 93A judgment may not be given preclusive effect in a § 523(a)(2)(A) nondischargeability proceeding. To the contrary, collateral estop-pel is appropriate where, as here, the record so amply supports the state court’s conclusions in the State Court Judgment based on the Debtor’s fraudulent conduct.
See Stoehr,
In assessing damages against the Debtor under Chapter 93A, the state court made specific findings of fact regarding the Debtor’s conduct, i.e., all three Defendants “were engaged in willful and knowing scheme of unfair and deceptive practices designed to steal as much money as they could” from the Plaintiffs, and that the Debtor bore responsibility to the Plaintiffs for allowing her husband to operate under the d/b/a name when she knew that her husband was fraudulently extracting large sums of money from the Plaintiffs. The state court also found that the Debtor (and her husband) either enlisted or encouraged their son to participate in seam-ming the Plaintiffs by having him convince the Plaintiffs that they needed an unnecessary resurfacing of their driveway. The state court found that the Debtor’s testimony, to the effect that she knew nothing of the schemes was not credible, that she cashed substantial checks made out to her, her husband and her son and that “she knew what was going on and was perfectly accepting of it and was a willing partid-
Moreover, numerous false representations were made as to: the necessity of repaving the Plaintiffs driveway; convincing the Plaintiffs to purchase a bomb shelter; and paying ransom for alleged kidnappings that never happened. The state court’s specific findings easily establish that the Debtor was a knowing and active participant in these blatant schemes.
The state court record also supports the conclusion that the Plaintiffs justifiably relied upon the Defendants’ misrepresentations and were damaged as a result. “The burden on the creditor [to show justifiable reliance] is relatively low ... [and] ... the creditor need not prove that he acted consistent with ordinary prudence and care.”
Aoki,
For the foregoing reasons, although a judgment for a Chapter 93A violation does not per se establish that the judgment should be deemed nondischargeable under § 523(a)(2)(6), we conclude that the detailed and carefully worded decision by the state court judge, who found and concluded that the Debtor was an active participant in a scheme to obtain funds from the Plaintiffs, was based on false pretenses and false representations. We also conclude that the state court’s findings and conclusions were sufficient to support the bankruptcy court’s ruling of nondischarge-ability under § 523(a)(2)(A).
Conclusion
The Debtor substantially participated in the prior state court action, thus satisfying the “actually litigated” requirement for the application of collateral estoppel. Moreover, the state court made numerous factual findings of fraudulent conduct and false representations, which satisfied the elements of a nondischargeability claim under § 523(a)(2)(A). Thus, the Debtor was collaterally estopped from relitigating those issues in the bankruptcy court. We conclude that there were no genuine issues of material fact and that the Plaintiffs were entitled to judgment as a matter of law.
Accordingly, the bankruptcy judge’s order granting summary judgment for the Plaintiffs on their dischargeability complaint, is AFFIRMED.
Notes
. Unless expressly státed otherwise, all references to "Bankruptcy Code” or to specific sections shall be to the Bankruptcy Reform' Act of 1978, as amended by the Bankruptcy
. Although the Debtor frames her issues in a slightly different fashion, her argument essentially boils down to a claim that these two elements of collateral estoppel were not met.
. In Treglia, the United States Bankruptcy Appellate Panel for the First Circuit had certified the following question to the Supreme Judicial Court of Massachusetts:
When a defendant appears in a civil action, files a motion seeking interlocutory relief, obtains that relief, but does not thereafter answer or defend; and when, after a damage hearing (in which the defendant does not participate), default judgment enters; does Massachusetts law preclude the defendant's litigation of the substantive elements underlying the default judgment in a subsequent action initiated by the same plaintiffs?
. See, e.g.,
Cornwell v. Loesch (In re Cornwell),
.
See, e.g., Federal Ins. Co. v. Gilson (In re Gilson),
. Section 2 of Chapter 93A provides in relevant part: "(A) Unfair methods of competition and unfair or deceptive acts or practices in the conduct of any trade or commerce are hereby declared unlawful.” Mass. Gen. Laws ch. 93A, § 2(a). Section 9 allows a court to double or treble the actual damages suffered as a result of a violation of section two where the offending conduct was willful or knowing. Mass. Gen. Laws ch. 93A, § 9.