Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caed-2_06-cv-01358/USCOURTS-caed-2_06-cv-01358-0/pdf.json

Nature of Suit Code: 422
Nature of Suit: Bankruptcy Appeals Rule 28 USC 158
Cause of Action: 28:0158 Notice of Appeal re Bankruptcy Matter (BAP)

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UNITED STATES DISTRICT COURT

EASTERN DISTRICT OF CALIFORNIA

In re

JAMES M. VERNON,

Debtor.

 /

BILLY B. BRITT,

NO. CIV. S-06-1358 LKK

Plaintiff,

v.

O R D E R

JAMES M. VERNON

Defendant.

 /

Currently pending before the court is plaintiffappellant, Billy B. Britt’s (“Britt”) appeal from the U.S.

Bankruptcy Court (Klein J.). Appellant contends that the

Bankruptcy Court erred when it granted defendant-appellee, James

M. Vernon’s (“Vernon”), motion for summary judgment on the grounds

that Britt’s complaint was barred under the doctrine of res

judicata. 

////

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All facts are derived from the parties' papers and from 1

the Excerpts of Record (“ER”).

 The details of the underlying action are complicated and, 2

for the most part, not relevant to the pending appeal. The court

focuses only on the factual issues relevant to the resolution of

this appeal. 

2

I.

Background 1

A. Proceedings in U.S. District Court for the Northern District

of Texas

In March of 1999, the Securities and Exchange Commission

(“SEC”) initiated an action regarding a “fraudulent scheme to offer

and sell unregistered “prime bank” securities through the United

States.” ER at 177. Robert Burr, and Benjamin Cook, along with 2

several other defendants were accused of convincing individuals to

invest in “private placement opportunities” in which the investor’s

funds were allegedly pooled with other investors funds in overseas

debenture transactions, generating huge guaranteed monthly returns

with zero risk. ER 176; ER 217. 

The case was initiated in United States District Court for the

Northern District of Texas. The District Court authorized Lawrence

J. Warfield to be the Receiver and in this capacity, represent the

interests of the investors whom were defrauded. ER 200.

In May of 2000, the district court authorized the Receiver to

institute an action to recover receivership assets. The case was

known as Lawrence J. Warfield as Receiver for Dennel Finance

Limited v. Robert Burr, et al. 

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In June of 2003, the Receiver filed a supplemental complaint

adding Vernon as a “relief defendant.” Vernon is an attorney who

operates a private practice in Nevada City, California. The

amended complaint alleged that Vernon participated in a civil

conspiracy with Robert Burr. ER 210-239. Specifically, the

complaint alleged that Vernon assisted Burr by making fraudulent

representations to Britt about Burr and the “private placement

opportunities.” ER 221. In reliance on this information, Britt

wired $5 million dollars into Vernon’s trust account, which Vernon

held in escrow for Burr. ER 222. 

Britt was the only creditor of the receivership estate and was

therefore the party on whose behalf the Receiver’s Supplemental

Complaint was filed. ER at 538. The complaint states that these

“relief defendants” (Vernon included) “are used only to perpetrate

a fraud on Burr’s victims, and have no legitimate purpose other

than holding fraudulently obtained assets.” ER 223. 

The Supplemental Complaint listed three claims for relief that

are relevant to the pending appeal. First, the Receiver asserted

a claim for conversion, alleging that Burr and the “relief

defendants” (including Vernon), “wrongfully continue to assert

dominion and control over Receivership Assets.” ER 224. Second,

the Receiver asserted a claim of civil conspiracy. The Receiver

claims that Vernon and Burr made,

false and misleading statements to Bill Britt regarding

the nature, purpose, legitimacy, location, legality and

earning potential for an investment, upon which Mr.

Britt relied. These false statements induced Mr. Britt

to deliver $5 million to Burr, though Vernon ...

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ER 225. 

Finally, the Receiver asserted a claim for fraudulent

transfer. ER 228.

In August of 2003, the Receiver and Vernon entered into a

settlement agreement of the Receivership action. Vernon agreed to

pay $260,000.00 in exchange for a general release of the claims and

a dismissal of the claims brought by the Receiver in the

Supplemental Complaint. By the terms of the settlement, the

$260,000.00 was to go directly to Britt. ER 160-161. The

settlement also included a “mutual release” provision: 

[R]elease, acquit, and forever discharge the Vernon Parties

of and from any and all liabilities, claims, remedies,

demands, suits or causes of action of whatsoever kind or

character, in whole or in part, whether choate or inchoate,

which the Receiver Parties now have or have ever had from the

beginning of time against the Vernon Parties arising from the

actions or inactions of the Vernon Parties, including all

claims against the Vernon Parties which are based upon, or

arise out of the allegations set forth in the Lawsuit.

ER 169. The settlement was approved in September of 2003. The

District Court for the Northern District of Texas thereafter

dismissed all claims against Vernon with prejudice. ER at 260.

B. Proceedings before the U.S. Bankruptcy Court for the Eastern

District of California 

In June of 2004, Britt sued Vernon in North Carolina

State Court, alleging counts for fraud and conspiracy to defraud

and seeking to recover the same $ 5 million. Beset by costs of

out-of-state litigation, Vernon filed a Chapter 7 Bankruptcy

petition in the Unites States District Court, Eastern District of

California. See Appellee’s Brief at 2. 

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In turn, Britt filed a complaint for nondischargability of

debt in the same court pursuant to 11 U.S.C.A. 11 U.S.C. sections

523(a)(2)(A), 523(a)(2)(B), 523(a)(4) and 523(a)(6). ER 1-8.

These sections of the U.S. Bankruptcy Code provide that a discharge

under Chapter 7 does not discharge an individual debtor from any

debt that was for money obtained through, among other things,

fraud, misrepresentation, false pretenses or false representations.

See 11 U.S.C.A. § § § 523(a)(2)(A); (A)(2)(b); (a)(4). 

Britt’s complaint alleged, among other things, that Vernon had

made several misrepresentations in an effort to induce Britt to

invest $5 million dollars in Burr’s scheme. Vernon told Britt that

Britt’s money would be safe. Based on this representation, Britt

forwarded $5 million dollars to Vernon. Britt believed that the

funds would be managed and supervised by Vernon as part of the plan

with Burr. ER 4. Britt asserts that Vernon knowingly made

fraudulent misrepresentations and Britt reasonably relied on these

representations when he wired the $5 million dollars. ER 5. 

On June 6, 2006 the Bankruptcy Court ruled from the bench on

Vernon’s Motion for Summary judgment. The Bankruptcy Court

determined that the doctrine of res judicata barred Britt’s

complaint. The Bankruptcy Court found that as a threshold matter,

there were no issues of material fact in dispute. ER 540. The

Bankruptcy Court then applied the traditional res judicata test.

First, the Bankruptcy Court determined that both the action

in Texas and the action in California involved the same parties.

ER at 560. The Bankruptcy Court specifically rejected Britt’s

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argument that Vernon was merely a “relief” defendant in the Texas

action and a named defendant in the California action. The

Bankruptcy Court found that there was unity between Vernon as a

defendant in Texas and Vernon as a defendant in California. 

The Bankruptcy Court also found that Britt was a party in both

actions. The court explained that Britt’s interests were

represented by the Receiver in the Texas action and that therefore,

Britt was a party in the Texas action. The Bankruptcy Court relied

on the Restatement (Second) of Judgements, Section 41 in reaching

this conclusion. 

Second, the Bankruptcy Court determined that the judgment in

Texas constituted a final judgment rendered by a court of competent

jurisdiction, that being the U.S. District Court for the Northern

District of Texas. ER at 513. Third, the same claims were

involved in both cases. The Bankruptcy Court again relied on the

Restatement (Second) of Judgements Section 24 in concluding that

the allegations in both suits were the same. Namely, in both

actions, Vernon was alleged to have defrauded Britt of $5 million

dollars as part of a fraud scheme orchestrated by Burr. 

Britt now appeals the Bankruptcy Court’s decision. 

II.

Standard of Appellate Review 

This court has jurisdiction to review proceedings of the

bankruptcy court pursuant to 28 U.S.C. § 158. The district court

reviews de novo a bankruptcy court's conclusions of law. Matter of

Lockard, 884 F.2d 1171, 1174 (9th Cir. 1989). Findings of fact by

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the bankruptcy judge should not be disturbed unless they are

clearly erroneous. Fed. R. Bank. P. 8013; see In re Perez, 30 F.3d

1209, 1212 (9th Cir. 1994).

III. 

Analysis 

Britt claims that the Bankruptcy Court erred in concluding

that res judicata barred his claim. Despite the complicated nature

of the underlying suit, the appeal presents a straightforward

question: namely, whether Britt’s claim in the Bankruptcy Court is

precluded on the grounds of res judicata by the prior action in

Federal Court in Texas. 

A. Standard for Res Judicata

The doctrine of res judicata provides that a final judgment

on the merits bars further claims by parties or their privies based

on the same cause of action. Headwaters, Inc. v. United States

Forest Serv., 399 F.3d 1047, 1052 (9th Cir. 2005). Thus, to

establish res judicata, a defendant must establish three elements:

(1) an identity of claims; (2) a final judgment on the merits; and

(3) privity between parties. Id. at 1052-53. 

“The doctrines of res judicata...serve[s] two objectives. [It]

limit[s] to one the number of times a defendant can be vexed by the

same claim or issue and [it] promote efficiency in the judicial

system by putting an end to litigation.” Gilbert v. Ben-Asher, 900

F.2d 1407, 1410 (9th Cir. 1990). Moreover, “[t]he normal rules

of res judicata and collateral estoppel apply to the decisions of

bankruptcy courts.” Katchen v. Landy, 382 U.S. 323, 334 (1966).

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B. Identity of Claims 

In determining whether there is an identity of claims between

the first and second adjudications, “the central criterion is

‘whether the two suits arise out of the same transactional nucleus

of facts.’” Frank v. United Airlines, Inc., 216 F.3d 845, 851 (9th

Cir. 2000) (citation omitted). Other factors are also considered:

 (1) whether rights or interests established in the prior

judgment would be destroyed or impaired by prosecution of the

second action; (2) whether substantially the same evidence is

presented in the two actions; (3) whether the two suits

involve infringement of the same right; and (4) whether the

two suits arise out of the same transactional nucleus of

facts. The last of these criteria is the most important.

 Headwaters, 399 F.3d at 1052 (citing Costantini v. Trans

World Airlines, 681 F.2d 1199, 1201-02 (9th Cir.1982)). Moreover,

“[t]he fact that res judicata depends on an ‘identity of claims’

does not mean that an imaginative attorney may avoid preclusion by

attaching a different legal label to an issue that has, or could

have, been litigated.” Tahoe Sierra Preservation Council, Inc. v.

Tahoe Regional Planning Agency, 322 F.3d 1064, 1077-1078 (9th Cir.

2003)

In the case at bar, the Bankruptcy Court concluded that the

allegations in both the complaint filed in Texas and the complaint

filed in California were the same and were “all part of the same

transaction.” ER 537. The Bankruptcy Court went on to explain

that the civil conspiracy allegations present in the Texas

complaint are identical to and “subsume the entire dispute” that

is before the court in California. Id. The Bankruptcy Court

specifically made reference to the Restatement (Second) of

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Judgements, Section 24(1), which states that:

When a valid and final judgment rendered in an action

extinguishes the plaintiff's claim pursuant to the rules of

merger or bar (see §§ 18, 19), the claim extinguished

includes all rights of the plaintiff to remedies against the

defendant with respect to all or any part of the transaction,

or series of connected transactions, out of which the action

arose.

Restatement (Second) of Judgements, § 24(1). 

The record supports the Bankruptcy Court’s finding. The record

reveals that the two complaints “clearly arise from the same

transactional nucleus of facts.” Frank, 216 F.3d at 851.

Both the complaint filed in Texas and in California pertain

to one transaction, namely, Britt wiring $5 million dollars to

Vernon’s trust account for the proposed “Private Placement

Investment.” See Texas Compl. ¶ 40 (ER 222); California Compl.

¶ 19 (ER 4). Both complaints allege that Vernon made false

representations to Britt, assuring Britt that his money would be

safe. Britt then relied on this misrepresentations in his decision

to wire the money to Vernon. See Texas Compl. ¶ 38 (ER 222);

California Compl. ¶ 17 (ER 4). Both complaints focus exclusively

on the fraudulent investment scheme which Vernon participated in

and to which Britt fell victim. 

Both complaints also list similar claims. Although the claims

have different legal titles, the allegations are identical. For

example, in the California complaint, Britt’s first and second

claim for relief is based on the allegation that Vernon obtained

money, property, services or an extension, renewal or refinancing

of credit through “false pretenses, a false representation, or

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actual fraud.” California Compl. ¶ ¶ 31 & 33. ER 7 (emphasis

added). Britt’s third claim for relief alleges that Vernon

“engaged in fraud or defalcation while acting in a fiduciary

capacity, embezzlement, or larceny.” California Compl. ¶ 35. 

Similarly, the Texas complaint alleges claims for conversion,

civil conspiracy and fraudulent transfer. Within the claim for

civil conspiracy, the complaint alleges that Vernon “made false and

misleading statements to Bill Britt regarding the nature, purpose,

legitimacy, location, legality and earning potential for an

investment, upon which Mr. Britt relied.” Texas Compl. ¶ 49, ER

225. The complaint goes on to alleges that Vernon unlawfully

exercised dominion and control over these funds.” Id. 

While the titles of the California claims are distinct from

the titles of the claims raised in the Texas complaint, this is of

little import. Rather, the court analyzes whether the two suits

arise out of the same transactional nucleus of facts. Tahoe Sierra

Preservation Council, 322 F.3d at 1077-1078. 

Here, it is evident that the two complaints arise out of the

same transactional nucleus of facts, that being the $5 million

dollar transfer from Britt to Vernon. Moreover, both complaints

rely on “substantially the same evidence is presented in the two

actions [and]... involve infringement of the same right.”

Headwaters, 399 F.3d at 1052.

C. Final judgment on the Merits

It is well established that a “stipulated dismissal of an

action with prejudice in a federal district court generally

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 The court also notes that Britt failed to discuss this 3

issue in his opening brief or reply brief. 

11

constitutes a final judgment on the merits” for the purposes of res

judicata. Headwaters, 399 F.3d at 1052; see also Hells Canyon

Preservation Council v. United States Forest Serv., 403 F.3d 683,

686 (9th Cir. 2005) (“Final judgment on the merits" is synonymous

with "dismissal with prejudice.”). 

This is consistent with basic civil procedure principals. 

Federal Rule of Civil Procedure 41(b) states that “unless the court

in its order for dismissal otherwise specifies, a dismissal under

this subdivision and any dismissal not provided for in this rule,

other than a dismissal for lack of jurisdiction, for improper

venue, or for failure to join a party under Rule 19, operates as

an adjudication upon the merits.” Fed. R. Civ. P. 41 (b).

In the case at bar, the Bankruptcy Court concluded that the

dismissal with prejudice of the Texas complaint as to Vernon, was

a final judgment for purposes of claim preclusion. ER 534. This

court agrees. The Receiver’s complaint against Vernon was clearly

dismissed with prejudice as part of the settlement agreement

between Vernon and the Receiver. Moreover, the Texas District

Court specifically issued an order dismissing the entire complaint

against Vernon with prejudice. As discussed above, it is well

established that a dismissal with prejudice constitutes final

judgment for purposes of res judicata.3

D. Privity between Parties 

The court next examines whether the two actions were between

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the same parties or their privies. “ ‘Privity’...is a legal

conclusion ‘designating a person so identified in interest with a

party to former litigation that he represents precisely the same

right in respect to the subject matter involved.’ ” In Re

Schimmels, 127 F.3d 875, 881 (9th Cir. 1997) (citations omitted).

See also United States v. ITT Rayonier, Inc., 627 F.2d 996, 1003

(9th Cir. 1980)( “doctrine of privity extends the conclusive effect

of a judgment to nonparties who are in privity with parties in an

earlier action.”).

As this Circuit has explained, “federal courts will bind a

non-party whose interests were represented adequately by a party

in the original suit.” Schimmels, 127 F.3d at 881. Indeed,

“‘privity’ has been found where there is a ‘substantial identity’

between the party and nonparty, where the nonparty ‘had a

significant interest and participated in the prior action,’; and

where the interests of the nonparty and party are ‘so closely

aligned as to be ‘virtually representative’”. Id. (citations

omitted). 

“A non-party can be bound by the litigation choices made by

his virtual representative,” only if certain criteria are met: “[A]

close relationship, substantial participation, and tactical

maneuvering all support a finding of virtual representation;

identity of interests and adequate representation are necessary to

such a finding.” Headwaters, 399 F.3d at 1053(citing Irwin v.

Mascott, 370 F.3d 924 (9th Cir.2004)). 

In the case at bar, the Bankruptcy Court determined that

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privity existed between the parties in both cases. First, the

Bankruptcy Court found that Vernon was a defendant in both cases.

The Bankruptcy Court concluded that although Vernon was named as

a “relief defendant” in the Texas action, the title was

insignificant. The Bankruptcy Judge explained that: 

I have never heard of that [a relief defendant] in my life.

I have never read it in a case. I have never read it in the

statutes. I’ve never read it in a rule or procedure.

ER 525. Britt fails to explain in his opening brief how

Vernon’s status as a “relief defendant” in Texas versus Vernon’s

status as a defendant in California would affect res judicata.

Britt also fails to cite to any cases or any facts in the record

which suggests that Vernon should not be considered a defendant in

both actions. For these reasons, this court agrees with the

findings of the Bankruptcy Court. 

Second, the Bankruptcy Court concluded that there was privity

between Britt and the Receiver. The Bankruptcy Court relied on the

Restatement (Second) of Judgements § 41, which states in pertinent

part: 

A person who is not a party to an action but who is

represented by a party is bound by and entitled to the

benefits of a judgment as though he were a party. A person is

represented by a party who is: .... The executor,

administrator, guardian, conservator, or similar fiduciary

manager of an interest of which the person is a beneficiary

...or... An official or agency invested by law with authority

to represent the person's interests....A person represented

by a party to an action is bound by the judgment even though

the person himself does not have notice of the action, is not

served with process, or is not subject to service of process.

Restatement (Second) of Judgements § 41. The Bankruptcy Court

determined that Britt was represented by the Receiver in the Texas

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 A receiver is “a disinterested person appointed by a court, 4

or by a corporation or other person, for the protection or

collection of property that is the subject of diverse claims.”

BLACK'S LAW DICTIONARY (8th ed. 2004). 

14

case. The Bankruptcy Court explained:

He unquestionably had notice regarding the action, and

actually participated. The subject matter of the action was

within the interest of him. That’s the whole conspiracy. I

mean, that’s the $5 million flowing out of the action. And

the receiver was, you know, suing for all damages available

in a civil conspiracy action.

ER 538-539. The record and the law support the Bankruptcy

Court’s conclusion. 

As a threshold matter, it is well established that Receivers

commonly represent the interests of the investors. A receiver may 4

be appointed on behalf of a corporation or its shareholders. “It

is a general rule that a receiver stands in the position of a

representative and a protector of the interests of creditors,

shareholders, and depositors, in the property in receivership.”

65 AM. JUR. 2d RECEIVERS § 83 citing Camerer v. California Savings &

Commercial Bank of San Diego 4 Cal. 2d 159 (1935) (“It is

fundamental that a liquidating receiver represents the interests

of depositors and creditors.”) 

It is presumed that a receiver will adequately represent the

interests he is charged with. Moreover, finding privity between

receivers and investors is common. For example, in S.E.C. v. TLC

Investments and Trade Co., 147 F. Supp. 2d 1031 (C.D. Cal. 2001),

defendant companies were accused by the Securities and Exchange

Commission of engaging in a scheme of defrauding investors. A

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receiver was appointed to represent the many investors’ interests.

Subsequently, hundreds of investors moved to either intervene as

plaintiffs or to compel the receiver to administer the estate as

a trustee. 

In denying the investors’ motions to intervene, the court

found that the investors were unable to show that their interests

were not adequately represented by the Receiver. Id. at 1042-43.

In order to show inadequate representation, the shareholders would

have had to show divergent fundamental goals from the Receiver’s.

Relevant to the case at bar was the court’s finding that the

investors and Receiver shared the same “ultimate goal”. Id. at

1042 fn. 7. This common goal was enough to create the presumption

of adequate representation and bar investors from intervening.

As applied to the case at bar, Britt fails to demonstrate that

he had different ultimate goals than the Receiver in the Texas

action. This is especially true in light of the fact that he was

the only creditor named by the Receiver. 

The facts in the record support also the Bankruptcy Court’s

conclusion. First, the Texas Court specifically explained that the

Receiver represented not only the entity in receivership, but also

the interests of its creditors, such as Britt. S.E.C. v. Cook,

2001 WL 256172, *2(N.D. Tex. 2001). Second, Britt was the only

creditor named in the Receiver’s Supplemental Complaint. ER 211-

234. Third, Britt participated in the Receivership action by

providing various affidavits and live testimony in support of the

Receiver’s complaint. These affidavits and depositions

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specifically addressed the allegations that Vernon made various

misrepresentations to Britt and that in reliance on these

misrepresentations, Britt wired $5 million dollars to Vernon. See

ER 61-89; ER 124-154, & ER 299. 

Fourth, and perhaps most important, Britt accepted the

settlement proceeds from Vernon. As discussed previously, Vernon

settled with the Receiver and agreed to pay $260,000.00. ER 243.

Moreover, the approval of the settlement depended on the District

Court in Texas approving Britt as a creditor of the receivership

estate. Id. Ultimately, the District Court did officially find

that Britt was the creditor and approved the settlement agreement.

Based on well established case law and the facts in the

record, it appears that Britt’s “interests were represented

adequately” by the receiver. In re Schimmels, 127 F.3d at 881.

In sum, this court finds ample reason to affirm the Bankruptcy

Court’s finding that res judicata bars Britt’s current complaint

for nondischarability. Accordingly, the decision of the Bankruptcy

Court is AFFIRMED. 

IT IS SO ORDERED. 

DATED: October 2, 2006.

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