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1 This disposition is not appropriate for publication. 

Although it may be cited for whatever persuasive value it may

have (see Fed. R. App. P. 32.1), it has no precedential value. 

See 9th Cir. BAP Rule 8013-1.

2 Hon. Marc L. Barreca, Bankruptcy Judge for the Western

District of Washington, sitting by designation.

UNITED STATES BANKRUPTCY APPELLATE PANEL

OF THE NINTH CIRCUIT

In re: ) BAP No. NC-10-1208-BaJuH

)

ANTHONY A. MALFATTI, ) Bk. No. 09-43469

)

Debtor. ) Adv. Pro. No. 09-04318

______________________________)

)

ANTHONY A. MALFATTI, )

)

Appellant, )

)

v. ) M E M O R A N D U M1

)

BANK OF AMERICA, N.A.; )

MBNA AMERICAN BANK, N.A., )

)

Appellees. )

______________________________)

Submitted on May 11, 2011

at San Francisco, California

Filed - August 21, 2012

Appeal from the United States Bankruptcy Court

for the Northern District of California

Honorable Edward D. Jellen, Bankruptcy Judge, Presiding __________________________

Appearances: William F. Abbott, Esq. argued for Appellant;

Douglas Boven, Esq. of Reed Smith LLP argued for

Appellees. __________________________

Before: JURY, HOLLOWELL, and BARRECA2

, Bankruptcy Judges.

FILED

AUG 21 2012

SUSAN M SPRAUL, CLERK

U.S. BKCY. APP. PANEL

OF THE NINTH CIRCUIT
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3 Absent contrary indication, all “Code,” chapter and section

references herein are to the Bankruptcy Code, 11 U.S.C. §§ 101-

1532.

4 The Supreme Court has applied the Restatement (Second) of

Judgments’ substitution of the terms “claim preclusion” and

“issue preclusion” for the terms “res judicata” and “collateral

estoppel,” respectively. George v. City of Morro Bay, 318 B.R.

729, 733 (9th Cir. BAP 2004), aff’d, 144 Fed. Appx. 636 (9th Cir.

2005). Thus, although the parties and Alabama jurisprudence

commonly use the term “collateral estoppel,” the term “issue

preclusion” is used herein.

2

The bankruptcy court granted Plaintiffs’ motion for summary

judgment, ruling that the judgment owed by Debtor-Defendant to

Plaintiffs was non-dischargeable under Code § 523(a)(6) on the

basis of issue preclusion.3

 Debtor appealed. 

The underlying judgment was entered as a penalty default

judgment as a discovery sanction in an Alabama state court

proceeding. The bankruptcy court applied issue preclusion on the

premise that an Alabama state court would have treated the issues

as “actually litigated.”4 As there was no controlling Alabama

case law on this question, the Panel certified it to the Supreme

Court of Alabama. That court answered in the negative. 

Accordingly, we REVERSE and REMAND.

I. FACTS

Malfatti was one of three principals of TA Financial Group

("TAF"), a Nevada corporation, purportedly designed to assist

credit card holders in arbitration of disputes with the card

issuers. The arbitration providers were selected by the card

holders from a list provided by TAF. Among the arbitration

providers was Arbitration Forum of America, Inc. ("AFOA"), an
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3

Alabama corporation. Once an arbitration award was entered, a

separate company, TAG Services, an Alabama limited liability

company, would file the awards in the Circuit Court of Jackson

County, Alabama, and then reduce the awards to judgments. In

fact, AFOA was not conducting legitimate arbitrations, but

instead was a sham. Every arbitration resulted in an award in

favor of the card holder, which was then reduced to judgment. 

Malfatti claims he was unaware that AFOA's practices and the

judgments stemming therefrom were illegitimate. 

At some time after the card-issuing banks involved learned

of the judgments, they filed cross-complaints against the card

holders in the Circuit Court of Jackson County, Alabama to set

aside the judgments as fraudulently obtained. In September 2005,

the banks, including Bank of America, N.A. (USA) and MBNA America

Bank, N.A.(together, "Banks" or "Appellees"), filed Amended Third

Party Complaints against, among others, Malfatti and TAF,

alleging tortious interference with contract, abuse of process,

wantonness, and civil conspiracy, and seeking an injunction

against further arbitrations. Malfatti and TAF were served with

the complaints in November 2005, and answered the complaints in

January 2006.

Malfatti and TAF actively participated in the state court

proceedings, vigorously contesting personal jurisdiction. They

consistently refused to cooperate with discovery, failing to

respond to interrogatories and requests for production and

failing to appear for noticed depositions. They also failed to

comply with various discovery orders issued by the court.
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4

On March 6, 2007, the court granted the Banks’ motion for

default judgment as a sanction for failure to cooperate with

discovery. On October 4, 2007, the court entered an order

denying Malfatti and TAF's motion to set aside the defaults, and

after a hearing on the Banks’ motion for damages and injunctive

relief, judgment was entered against Malfatti and TAF on

February 19, 2008.

The court found Malfatti and TAF to be jointly and severally

liable for compensatory damages, awarded punitive damages against

Malfatti, and found Malfatti to be liable for punitive damages

awarded against TAF under the alter ego doctrine. Damages

against Malfatti totaled $513,270.35 (the "Judgment"). Malfatti

and TAF moved to "amend, alter, vacate or set aside" the Judgment

and filed for summary judgment on their claims against the Banks. 

The court denied both motions.

Malfatti filed for chapter 7 bankruptcy on April 27, 2009. 

On July 30, 2009, the Banks filed an adversary proceeding

alleging the debt owed to them by Malfatti was nondischargeable

pursuant to § 523(a)(6). On March 3, 2010, the Banks moved for

summary judgment, alleging that the Alabama Judgment was

nondischargeable by virtue of issue preclusion. Malfatti opposed

the summary judgment on the basis that the Judgment was a default

judgment, arguing that Alabama law does not grant issue

preclusive effect to default judgments. The bankruptcy court

granted summary judgment, finding all amounts owed to the Banks

to be nondischargeable. 

The bankruptcy court applied issue preclusion on the premise

that an Alabama state court would do so when the prior proceeding
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was resolved by a penalty default judgment, as opposed to a

simple default judgment. As there was no controlling precedent

under Alabama law, the Panel certified the following question to

the Supreme Court of Alabama: 

In Alabama, is a "default" judgment premised upon

discovery sanctions or other post-answer conduct of the

defendant sufficient to support the application of

issue preclusion in a later proceeding?

That court issued its opinion on June 29, 2012, answering

this question in the negative.

II. JURISDICTION

The bankruptcy court had jurisdiction pursuant to 28 U.S.C.

§ 1334 and § 157(b)(1) and (b)(2)(I). The Panel has jurisdiction

pursuant to 28 U.S.C. § 158(c). 

III. ISSUE

Whether the bankruptcy court erred in granting summary

judgment on the basis of issue preclusion where the underlying

Alabama state court judgment was issued by “default” premised

upon discovery sanctions.

IV. STANDARD OF REVIEW

A bankruptcy court’s order granting summary judgment is

reviewed de novo. Abdul-Jabbar v. General Motors Corp.,

85 F.3d 407, 410 (9th Cir. 1996); Jung Sup Lee v. TCAST Commc’n.,

Inc., 335 B.R. 130, 135 (9th Cir. BAP 2005). Viewing the

evidence in the light most favorable to the non-moving party, the

Panel must determine whether there are genuine issues of material
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fact and whether the bankruptcy court correctly applied relevant

substantive law. See Bishop, Baldwin, Rewald, Dillingham, &

Wong, Inc. v. Brooks, 819 F.2d 214, 215 (9th Cir. 1987).

V. DISCUSSION

Issue preclusion may be applied in non-dischargeability

proceedings under Bankruptcy Code § 523(a). Grogan v. Garner,

498 U.S. 279, 284-85, 111 S. Ct. 654, 658 n.11 (1991). A state

court judgment is entitled to issue preclusive effect in a

subsequent federal court proceeding to the same extent that it

would be entitled to issue preclusive effect in a court of the

state which entered the judgment. Gayden v. Nourbakhsh, 67 F.3d

798, 800 (9th Cir. 1995). Thus, the bankruptcy court, and this

Panel, must look to state law to determine whether application of

issue preclusion is appropriate.

In Alabama, 

Collateral estoppel operates where the subsequent suit

between the same parties is not on the same cause of

action. Requirements for collateral estoppel to

operate are (1) issue identical to one involved in

previous suit; (2) issue actually litigated in prior

action; and (3) resolution of the issue was necessary

to the prior judgment. . . . If these elements are

present, the prior judgment is conclusive as to those

issues actually determined in the prior suit.

Wheeler v. First Alabama Bank of Birmingham, 364 So. 2d 1190,

1199 (Ala. 1978) (emphasis added).

Here, there is no dispute that the parties are the same, the

issues are the same, and the resolution of the issues was

necessary to the prior judgment. Further, Malfatti does not

dispute that the factual elements needed to prove a willful and

malicious injury per § 523(a)(6) were at issue in the Alabama
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litigation. Indeed, punitive damages were awarded against

Malfatti and TAF in a separate, contested evidentiary hearing. 

Malfatti argues on appeal that because a default was entered

against him on the basis of procedural sanctions, the “actually

litigated” requirement has not been satisfied, and therefore

issue preclusion cannot be applied under Alabama law.

The Supreme Court of Alabama agrees. That court, while

acknowledging other jurisdictions’ application of an exception to

the general rule that default judgments are not entitled to

preclusive effect, concluded that its precedents leave no room

for such an exception:

For purposes of determining whether an issue is

precluded by the doctrine of collateral estoppel,

Alabama law makes no distinction between a simple

default and a penalty default. There are “clear

controlling precedents in the decisions,” Rule 18, Ala.

R. App. P., of this Court adhering to the traditional

federal view denying preclusive effect to all default

judgments on the ground that preclusive effect should

not be given to claims that were not actually litigated

in a prior action. Accordingly, we answer the question

certified to us by the BAP in the negative.

Malfatti v. Bank of America, N.A., ___ So. 3d ___, 2012 WL

2477945, at *6 (Ala. June 29, 2012) (citations omitted).

VI. CONCLUSION

Because the bankruptcy court incorrectly applied the

relevant substantive law, it erred in granting summary judgment

on the basis of issue preclusion. We REVERSE and REMAND for

further proceedings in accordance with this disposition.