Court Opinion

ID: 992752
Source: CourtListenerOpinion
Date Created: 2013-07-03 23:57:04.177514+00
Date Added: 2024-06-11T15:10:35.697108
License: Public Domain

UNPUBLISHED

UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

In Re: JAMES L. WAUBEN,
Debtor.

WATERGATE AT LANDMARK
CONDOMINIUM UNIT OWNERS
ASSOCIATION; WATERGATE AT
LANDMARK CONDOMINIUM UNIT
                                                                   No. 96-1427
OWNERS ASSOCIATION BOARD OF
DIRECTORS,
Plaintiffs-Appellees,

v.

JAMES L. WAUBEN,
Defendant-Appellant.

Appeal from the United States District Court
for the Eastern District of Virginia, at Alexandria.
Albert V. Bryan, Jr., Senior District Judge.
(CA-95-1776-A, BK-94-12180-AB)

Argued: January 28, 1997

Decided: August 5, 1997

Before ERVIN and HAMILTON, Circuit Judges, and
PHILLIPS, Senior Circuit Judge.

_________________________________________________________________

Affirmed by unpublished opinion. Senior Judge Phillips wrote the
opinion, in which Judge Ervin and Judge Hamilton joined.

_________________________________________________________________
COUNSEL

ARGUED: Christopher S. Moffitt, LEITNESS & ASSOCIATES,
P.C., Alexandria, Virginia, for Appellant. John Joseph Calkins, SON-
NENSCHEIN, NATH & ROSENTHAL, Washington, D.C., for
Appellees. ON BRIEF: Michael A. Schlanger, Amy L. Bess, SON-
NENSCHEIN, NATH & ROSENTHAL, Washington, D.C., for
Appellees.

_________________________________________________________________

Unpublished opinions are not binding precedent in this circuit. See
Local Rule 36(c).

_________________________________________________________________

OPINION

PHILLIPS, Senior Circuit Judge:

James Wauben, a debtor in bankruptcy, appeals from a district
court judgment affirming a bankruptcy court determination that
because a judgment against him was for a debt for money procured
by fraud, it was nondischargeable under 11 U.S.C.§ 523(a)(2). We
affirm.

I.

In November 1992, Watergate at Landmark Condominium Unit
Owners Association and Watergate at Landmark Condominium Unit
Owners Association Board of Directors ("Watergate") brought an
action in the Circuit Court for the City of Alexandria (Virginia) alleg-
ing that Wauben, Wauben's solely owned business, and two other
corporate defendants had defrauded Watergate in the sale of a tele-
phone system. After amendment, the complaint contained counts for
actual and constructive fraud. Following a bench trial, the state Cir-
cuit Court (Kent, J.) issued a letter ruling which found that Watergate
had been "fraudulently induced" to purchase the telephone system by
Wauben and his solely owned company and had suffered damages in

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the amount of $241,711.50 plus interest and costs. Judgment accord-
ingly was entered against those defendants jointly.

Following an unsuccessful attempt by Wauben to obtain discretion-
ary review of the judgment by the Supreme Court of Virginia, Water-
gate began efforts to collect the judgment. While these efforts were
underway with only limited success, Wauben filed for bankruptcy
under 11 U.S.C. § 7. Watergate thereupon commenced this adversary
proceeding in the bankruptcy court seeking to have the bankruptcy
court declare nondischargeable as a debt for money procured by
actual fraud the $236,210.10 then remaining unpaid on its judgment
against Wauben, invoking 11 U.S.C. § 523(a)(2)(A) which makes
nondischargeable debts for money obtained by "false pretenses, false
representations or actual fraud."

Before the bankruptcy court, Wauben contended that the letter rul-
ing of the Virginia court did not specify whether Wauben's "fraud"
as found by the court was actual or constructive. In support, he argued
that the state court did not make factual findings of actual fraud's
essential elements of knowledge and intent to deceive. Therefore, the
contention went, under applicable preclusion principles the state court
adjudication did not preclude Wauben from litigating the issue of
actual fraud before the bankruptcy court. Wauben then sought leave
to introduce evidence that he did not commit actual fraud, specifically
by proving that Watergate's witnesses misrepresented the facts at the
state trial.

At this point, Watergate moved for a stay of discovery and for an
order allowing it to seek in the state trial court an order clarifying the
latter court's letter ruling concerning Wauben's knowledge and intent,
hence whether his fraud, as found by the state court, was constructive
or actual. The bankruptcy court granted Watergate's motion, and
Watergate then filed in the state trial court a motion under Va. Code.
Ann. § 8.01-428(B) for clarification of that court's letter ruling
respecting the nature of Wauben's fraud. At a hearing on this motion,
the state court made comments which Wauben now concedes indi-
cated that the court considered that its judgment was entered on the
basis of actual fraud. J.A. 421; Appellant's Br. at 4. Notwithstanding
these oral indications, the state court, however, declined to make a

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formal clarification as sought by Watergate. Specifically, the court
opined by letter that:

            The Plaintiffs are seeking an order of this Court modifying
            a final decree entered on March 8, 1994, under the provi-
            sions of § 8.01-428B of the Code. The Court finds that this
            Code provision is inapplicable since there was no oversight
            or inadvertent omission in the letter opinion or order. It is
            clear from the record, letter opinion and order that the
            defendant was found liable on the basis of fraud. This Court
            is without authority to enter any further order.

J.A. 431.

Following this non-ruling, Watergate moved in the bankruptcy
court for summary judgment on the basis that under collateral estop-
pel principles and as a matter of law on the record now before the
court, the judgment debt was established by the state court judgment
as one for money procured by actual fraud, hence was nondischarge-
able in bankruptcy. In support, Watergate relied upon the pleadings
and evidence in the state case, including the two letter rulings of the
state court and the comments of Judge Kent both at trial and on
Watergate's motion to clarify.

The bankruptcy court granted Watergate's motion, concluding as
a matter of law that the Virginia court had found actual fraud, thereby
preclusively determining that the judgment debt was nondischarge-
able. In so concluding, the bankruptcy court expressly relied upon the
state trial court record, Judge Kent's comments in connection with
Watergate's post-judgment clarification motion, and the fact that
Judge Kent's "fraudulently induced" language--as contained in his
letter ruling on the merits--clearly articulated a finding of actual
fraud. On Wauben's appeal from the resulting judgment declaring the
unpaid portion of the judgment debt nondischargeable, the district
court affirmed, holding that the record supported the bankruptcy
court's judgment and that that court properly considered "extrinsic
evidence" in determining the preclusive effect of the state court's
finding of actual fraud.

This appeal followed.

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II.

The issue is whether the bankruptcy court (as affirmed by the dis-
trict court) properly held that, as a matter of law,"actual fraud" for
§ 523(a)(2)(A) purposes was conclusively established by the state
court judgment. Reviewing that ruling de novo , we affirm it.

It is well settled that in determining whether a debt is nondischar-
geable under § 523(a)(2)(A) as one for money procured by "actual
fraud," a bankruptcy court may apply principles of collateral estoppel
to find that fact preclusively established in a state court action that
imposed the debt by judgment. See Grogan v. Garner, 498 U.S. 279,
284 n.11 (1991); Combs v. Richardson, 838 F.2d 112, 115 (4th Cir.
1988); In re Kochekian, 175 B.R. 883, 889 (Bankr. M.D.N.C. 1995).
In such a situation, as generally when a state court judgment is
invoked as the basis for collateral estoppel in a federal action, the fed-
eral court must apply the judgment state's law of collateral estoppel.
See In re Kugler, 170 B.R. 291, 297 (Bankr. E.D. Va. 1994) ("[28
U.S.C.] § 1738 requires a federal court`to refer to the preclusion law
of the state in which judgment was rendered'") (quoting Marrese v.
American Academy of Orthopaedic Surgeons, 470 U.S. 373, 380
(1985)). Under Virginia law, which controls on that matter here, "the
doctrine of collateral estoppel precludes the same parties from litigat-
ing in a subsequent proceeding any issue of fact that was actually liti-
gated and essential to a final judgment in the first proceeding."
Glasco v. Ballard, 452 S.E. 2d 854, 855 (Va. 1995); see also 1
Restatement (Second) of Judgments § 27 (1982) (same, as to general
rule). There is no dispute between the parties as to these principles
nor to their general applicability to this case. Nor is there dispute that
there was an identity of parties in the two actions at issue and that in
the first action actual fraud was actually litigated. There is only
dispute--and this is the point dispositive of this appeal--as to
whether the issue of actual fraud was indeed determined by the state
court and, relatedly, whether its resolution was, in any event, neces-
sary to that court's judgment.

Wauben says "actual fraud" was neither determined by the state
court nor was such a determination necessary to its judgment in view
of the alternative ground of constructive fraud. And, he says, not hav-
ing been determined in the state court, the issue is subject to relitiga-

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tion in the bankruptcy proceeding where actual fraud must be
established in the first instance to support a nondischargeable ruling.1
Watergate says to the contrary that actual fraud was both determined
by the state court and was necessary to its judgment against Wauben.

As to whether actual fraud was indeed determined by the state
court, Wauben says (1) that in making that inquiry the bankruptcy
court could not properly consider anything the state trial judge said
after entry of that court's judgment imposing liability upon Wauben,
and (2) that so restricted, it is impossible to determine whether liabil-
ity was imposed for "actual fraud" or only for"constructive fraud,"
both having been pleaded and litigated, and either sufficing as a basis
for the liability imposed. We disagree with both of these contentions.

Where multiple issues are litigated in a prior action and in a later
action one of the parties relies on the judgment in the first action as
conclusive of one of the issues, that party must indeed show that the
issue was determined in the prior action. Id. cmt. g. To decide
whether such an issue was indeed determined in the prior action, a
court may of course look to the pleadings and other materials of
record in the prior action, and if those be inconclusive, to extrinsic
evidence for further aid. Id. cmt. f. Here, in deciding that the judg-
ment was based on a finding of actual fraud, the bankruptcy court
considered the pleadings, other materials in the state trial record, most
critically the court's letter ruling imposing liability, and the comments
made by Judge Kent in response to Watergate's post-judgment
motion for clarification of the state judgment.

We agree with Watergate that the bankruptcy court properly ruled
that the state trial record conclusively demonstrated that that court
found "actual fraud" by Wauben. There are various indications, of
which we note only the most critical. In his closing argument to the
_________________________________________________________________
1 Wauben is of course correct that if the collateral estoppel inquiry had
determined that actual fraud had not been found by the state court,
Watergate would then have to prove it--subject to Wauben's disproof--
in the bankruptcy court. See In re Pigge, 539 F.2d 369 (4th Cir. 1976).
Here, however, the inquiry determined, properly we conclude, that actual
fraud had been conclusively determined by the state court, so that Wau-
ben's attempted disproof was properly excluded.

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state judge sitting as trier-of-fact, counsel for Watergate clearly differ-
entiated between actual and constructive fraud under Virginia law and
deliberately undertook proof of the more difficult--actual fraud.
"[T]his case," he said, "is about fraudulent misrepresentation" requir-
ing proof "by clear and convincing evidence" of "a false and material
misrepresentation of material fact that was intentionally and know-
ingly made with no intent to mislead." And, he added, "constructive"
fraud, which involves merely innocent or negligent misrepresenta-
tions which, though not intended to mislead, nevertheless did, was
pled in the alternative. J.A. 203. At this point, the judge inquired:
"This isn't a constructive fraud case is it?" To which counsel for
Watergate responded: "[W]e pled that in the alternative, but we
believe this is an actual fraud case . . . ." J.A. 203; Tr. 951-52. Later,
in response to the argument of Wauben's counsel that Wauben should
not be held personally liable for representations made by his wholly-
owned company, the judge remarked that "[i]f it's an actual fraud
case he's personally liable." J.A. 216; Tr. 1031. The court's judgment
then imposed judgment against both the Wauben Company and Wau-
ben personally. Finally, the court's letter ruling imposing liability
stated that "the Court is satisfied by clear and convincing evidence
that the plaintiff was fraudulently induced to purchase telephone
equipment . . . falsely represented as an Ericson system . . . ." J.A.
218 (emphasis added). As indicated, it is plain from the state court
record that the state judge was well aware of the requirements for
proving "actual" as opposed to merely "constructive" fraud. And it is
therefore equally plain to us, as it was to the bankruptcy court, that
"fraudulent inducement" connoted for the court"knowing misrepre-
sentations made with the intent to deceive" rather than merely inno-
cent or negligent misrepresentations not intended to mislead that
nevertheless caused damage. It is inconceivable to us that the court
would have used "fraudulent inducement" to connote merely innocent
or negligent misstatements not intended to deceive. 2
_________________________________________________________________
2 Because we conclude that these indications from the state trial record
suffice for the purpose, we need not address Wauben's extended chal-
lenge to the bankruptcy court's also taking into account Judge Kent's
cryptic post-judgment comments in declining to clarify his letter ruling.
There is a line beyond which the general license to consider extrinsic evi-
dence in applying collateral estoppel cannot be taken in evoking post-hoc
reconstructions by jurors and trial judges. See generally 18 Wright, Mil-
ler & Cooper, Federal Practice and Procedure: Jurisdiction § 4420, at

                  7
Once it has been properly concluded that the state court found
actual fraud, it is beyond question that, for collateral estoppel pur-
poses, that determination was necessary to the judgment imposing lia-
bility on Wauben. There is no suggestion here that the state court
rested its judgment on alternative findings of actual and constructive
fraud. Had that been the case, there might well have been a real ques-
tion whether the finding of actual fraud was necessary to the judg-
ment. See 1 Restatement (Second) of Judgments § 27, cmt. i. Where,
however, as here, the only fraud found was actual fraud, that finding
obviously was necessary (not mere dicta) as a basis for the judgment.

AFFIRMED
_________________________________________________________________
189-190 (1981). The parties here argue extensively over whether Judge
Kent's post-judgment comments fall on one side of the line or the other,
but, as indicated, we need not resolve that question.

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