Opinion ID: 199555
Heading Depth: 2
Heading Rank: 2

Heading: The relationship between the debt and the fraudulent conduct.

Text: 13 In seeking to demonstrate that Spigel's debt is nondischargeable, the McCrorys rely exclusively upon the collateral estoppel effect of the judgment in the Rhode Island Superior Court that created the debt. The ordinary rules of collateral estoppel and res judicata apply in most actions in the bankruptcy court, including adversary proceedings under § 523(a) to except debts from discharge. FDIC v. Shearson-American Express, Inc., 996 F.2d 493, 497 (1st Cir. 1993); Grogan v. Garner, 498 U.S. 279, 284 n.11 (1991). But see Brown, 442 U.S. at 138 (casting doubt upon the applicability of res judicata in § 523(a) actions). We look to state law to determine the preclusive effect of a prior state court judgment. New Hampshire Motor Transp. Ass'n v. Town of Plaistow, 67 F.3d 326, 328 (1st Cir. 1995). Under Rhode Island law, for collateral estoppel, or issue preclusion, to apply, there must be an identity of issues; the prior proceeding must have resulted in a final judgment on the merits; and the party against whom collateral estoppel is sought must be the same as or in privity with the party in the prior proceeding. Commercial Union Ins. Co. v. Pelchat, 727 A.2d 676, 680 (R.I. 1999) (quoting State v. Chase, 588 A.2d 120, 122 (R.I. 1991)); see also Casco Indem. Co. v. O'Conner, 755 A.2d 779, 782 (R.I. 2000). The first of these requirements, the identity of issues in both actions, creates the controversy in this case. 14 Both the BAP and the McCrorys focus their attention on the question of whether the Superior Court judgment established any fraud. In reversing the bankruptcy court, the BAP concluded that 15 the essential elements of an exception to discharge under Section 523(a)(2)(A), false representations, false pretenses, or actual fraud, were not plead, litigated in, or determined by the state court. The McCrorys' state court complaint does not mention fraud, false representations, false pretenses, misrepresentation or deceit as a basis for indemnification. Moreover, neither party, in the summary judgment pleadings and in oral argument before the state court, argued fraud. . . . The judgment of the state court established the debtor's liability under equitable indemnification principles, not fraud. 16 Consequently, the BAP found that neither res judicata or collateral estoppel was appropriate in this case. 17 We have reservations about this analysis and its close attention to the labels describing the legal theories underlying the Superior Court judgment. Indeed, the McCrorys point to the Superior Court's declaration that the transaction between Spigel and Tarbox bore no indicia of legitimacy as a demonstration that they proved in the state court that Spigel engaged in fraud. We agree. The Superior Court found that Spigel held himself out during the sale to Tarbox as an agent of Frenchtown and provided a New Jersey title for the car he sold to Tarbox indicating that Frenchtown had been a buyer of the car. Both of these statements were patently false. Spigel himself acknowledged that his authority to act as an agent for Frenchtown extended only to selling cars at auction or off the Frenchtown lot. The Tarbox sale, however, took place on the Tarbox lot. Moreover, it is undisputed that Frenchtown had never owned the cars. 18 However, this showing in the Superior Court action of fraudulent conduct by Spigel is not identical to the fraud showing required by § 523(a)(2)(A). The finding of the Rhode Island Superior Court that Spigel engaged in fraudulent conduct is, at most, identical only to the first two elements of the Palmacci test, i.e., that Spigel made a false statement with an intent to deceive. That finding does not demonstrate that the McCrorys' claim arises as a direct result of the debtor's misrepresentations or malice, Century 21 Balfour Real Estate, 16 F.3d at 10, as required by the remaining four elements of Palmacci and the identity of issues element of collateral estoppel. We explain. 19 In attempting to recover from Spigel the sum of their liability to Tarbox, the McCrorys proceeded on a theory of equitable indemnification, a theory that allows one exposed to liability solely as the result of a wrongful act of another . . . to recover from that party. Muldowney v. Weatherking Prods., Inc., 509 A.2d 441, 443 (R.I. 1986); see also Helgerson v. Mammoth Mart, Inc., 335 A.2d 339, 341 (R.I. 1975) (allowing indemnification where one person is exposed to liability by the wrongful act of another in which he does not join). The McCrorys had to prove three elements for the Superior Court to resolve that claim in their favor: 1) that they, as the parties seeking indemnification, are liable to a third party, Tarbox, 2) that the prospective indemnitor, Spigel, is also liable to that third party, and 3) that as between the two, equity demands that the indemnitor discharge the obligation. Wilson v. Krasnoff, 560 A.2d 335, 341 (R.I. 1989). The McCrorys satisfied the third element of their equitable indemnification claim by proving that Spigel had wronged Tarbox while they were blameless for that loss. They did not prove, nor were they required to, that Spigel had intended to harm them. See, e.g., id. (One situation satisfying this third element is when a potential indemnitor is at fault and the prospective indemnitee is blameless.). 20 Because the Superior Court was not asked to find, and did not find, any wrongdoing by Spigel directed at the McCrorys in the creation of his indebtedness to them, its judgment simply does not establish that the claim of the McCrorys is one which arises as a direct result of the debtor's misrepresentations or malice. Century 21 Balfour Real Estate, 16 F.3d at 10. All of Spigel's actions were directed at Tarbox. There is no finding by the Superior Court that Spigel intended to induce the McCrorys to rely on his false statements. Indeed, there was no evidence before that court to support any such findings. Spigel did not make any statements to the McCrorys at all about the Tarbox transaction, much less false statements that the McCrorys justifiably relied upon, with that reliance causing the debt. 21 All six of the Palmacci elements, however, and thus the direct link between the fraud and the debt, are arguably present between Spigel and Tarbox. Thus, if the Superior Court judgment for equitable indemnification permitted the McCrorys to succeed to Tarbox's position with respect to the transaction, they might be able to cure the defect we have identified here. The McCrorys have not shown, as they must, that they stand in Tarbox's shoes. It is far from clear that Rhode Island law permits the McCrorys as equitable indemnitees to succeed to Tarbox's position; most likely, it does not. Silva v. Home Indemnity Co., 416 A.2d 664, 668 (R.I. 1980); Hawkins v. Gadoury, 713 A.2d 799, 803 (R.I. 1998) (noting that though statute of limitations in subrogation action runs from the date of the original injury, equitable indemnification causes of action accrue upon the discharge from common liability). Consequently, we conclude that the collateral estoppel effect of the Superior Court judgment was an insufficient basis for demonstrating that Spigel's debt was nondischargeable under § 523(a)(2)(A).