Court Opinion

ID: 854465
Source: CourtListenerOpinion
Date Created: 2013-03-07 01:01:03.876241+00
Date Added: 2024-06-11T13:22:27.371322
License: Public Domain

FILED
 1                                                       MAR 06 2013
                                                      SUSAN M SPRAUL, CLERK
 2                                                      U.S. BKCY. APP. PANEL
                                                        OF THE NINTH CIRCUIT

 3                  UNITED STATES BANKRUPTCY APPELLATE PANEL
 4                            OF THE NINTH CIRCUIT
 5   In re:                             )    BAP No. CC-12-1118-PaMkBe
                                        )
 6   KEVIN WASKO and CASSONDRA DEHAY,   )    Bankr. No. 07-10845-MT
                                        )
 7                   Debtors.           )    Adv. Proc. 07-01136-MT
     ___________________________________)
 8                                      )
     STUART H. KAPLAN, M.D.;            )
 9   MOONDANCE, LLC,                    )
                                        )
10                   Appellants,        )
                                        )
11   v.                                 )    M E M O R A N D U M1
                                        )
12   KEVIN WASKO; CASSONDRA DEHAY,      )
                                        )
13                   Appellees.         )
     ___________________________________)
14
                    Argued and Submitted on November 15, 2012,
15                           at Pasadena, California
16                            Filed - March 6, 2013
17               Appeal from the United States Bankruptcy Court
                     for the Central District of California
18
              Honorable Maureen Tighe, Bankruptcy Judge, Presiding
19
20   Appearances:     Alan Wayne Forsley of Fredman Knupfer Lieberman LLP
                      argued for appellants Stuart H. Kaplan, M.D. and
21                    Moondance, LLC; Jerome Bennett Friedman of Friedman
                      Law Group, P.C. argued for appellees Kevin Wasko
22                    and Cassondra Dehay.
23
     Before: PAPPAS, MARKELL and BEESLEY,2 Bankruptcy Judges.
24
25
          1
26           This disposition is not appropriate for publication.
     Although it may be cited for whatever persuasive value it may have
27   (see Fed. R. App. P. 32.1), it has no precedential value. See 9th
     Cir. BAP Rule 8013-1.
28        2
             The Honorable Bruce T. Beesley, United States Bankruptcy
     Judge for the District of Nevada, sitting by designation.

                                       -1-
 1        The bankruptcy court granted the motion for summary judgment
 2   of appellants Stuart H. Kaplan, M.D. (“Kaplan”) and Moondance
 3   LLC,3 and determined that their claim under a state court judgment
 4   against chapter 74 debtors Kevin Wasko and Cassondra Dehay
 5   (collectively “Debtors”) for $1,493,569.06 was excepted from
 6   discharge under §§ 523(a)(2), (a)(4) and (a)(6).   The bankruptcy
 7   court declined, however, to grant Kaplan’s motion to amend the
 8   summary judgment to include an exception to discharge for the
 9   state court’s later award against Debtors of $495,642.97 in
10   attorney’s fees.   Kaplan appeals the denial of that motion.        On
11   this record, we VACATE the bankruptcy court’s order and REMAND
12   this matter for further proceedings.
13                                  FACTS
14                          The State Court Action
15        Kaplan is a dermatologist.    Debtors jointly operated
16   nightclubs both before and after their marriage in 2000.      Sometime
17   in 1997 or 1998, Debtors became Kaplan’s patients.   Their
18   professional relationships developed into personal friendships.
19        In 2001, Debtors approached Kaplan with a proposal that he
20   invest in a nightclub they intended to open and and operate in
21   Marbella, Spain, called Luna Azul (the “Property”) through a new
22   company known as Spanish Investments Network (“SIN”).   Debtors
23
24
          3
             Moondance LLC is a company controlled by Kaplan.      For
25   convenience, we refer to both appellants as Kaplan.
26        4
             Unless otherwise indicated, all chapter, section and rule
     references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532, and
27   to the Federal Rules of Bankruptcy Procedure, Rules 1001-9037.
     The Federal Rules of Civil Procedure are referred to as Civil
28   Rules.

                                       -2-
 1   offered Kaplan a 50 percent ownership interest in SIN if he would
 2   give them $500,000.   Kaplan agreed, and on March 6, 2002, wire
 3   transferred the $500,000 to the SIN bank account.    In early April,
 4   2002, Kaplan transferred an additional $250,000 to SIN.   As the
 5   state court judge would later find, a few months after the funds
 6   were transferred, Debtors “ceased all communication with [Kaplan]
 7   and disappeared, without report on the status of the venture or
 8   any explanation.”    Statement of Decision, Kaplan v. Wasko, Case
 9   No. SC082177 (Los Angeles Superior Court, November 22, 2010)
10   (hereafter “SOD”).
11        On June 24, 2004, Kaplan filed suit against Debtors in Los
12   Angeles Superior Court (the “State Court Action”).   Kaplan’s
13   complaint, amended twice, alleged eleven causes of action against
14   Debtors, including fraud and breach of fiduciary duty.    Kaplan
15   sought to recover the $750,000 investment, plus interest, punitive
16   damages, attorney’s fees and costs.
17        On March 19, 2007, Debtors filed a bankruptcy petition.5
18   Their schedule E listed a contingent, unliquidated, disputed debt
19   to Kaplan for $750,000.
20        Shortly thereafter, on March 26, 2007, Debtors caused the
21   State Court Action to be removed to the bankruptcy court.   Despite
22   Debtors’ objection, the bankruptcy court remanded the State Court
23   Action to the state court on June 7, 2007.
24        Few details concerning the subsequent proceedings in the
25   State Court Action were included in the appellate record.
26
27        5
             While Debtors originally sought relief under chapter 11,
     the bankruptcy court granted Debtors’ motion to convert the case
28   to chapter 7 on October 24, 2011.

                                      -3-
 1   However, it appears that the state court bifurcated the issues for
 2   trial.   The first phase of the bench trial occurred from
 3   February 23 to April 28, 2010, and addressed the liability and
 4   compensatory damage issues.   The state court issued a tentative
 5   decision finding in favor of Kaplan and against Debtors on the
 6   liability issues, and determining that Kaplan was entitled to an
 7   award of compensatory damages.   While the state court expected to
 8   begin the second phase of the trial concerning Kaplan’s claim for
 9   punitive damages on October 27, 2010, the parties stipulated to an
10   award of $100,000 in exemplary damages, which the state court
11   could incorporate in its judgment.
12        The state court then issued a detailed statement of decision,
13   explaining, in part, that:
14        The evidence at trial of defendants' misconduct, fraud and
          breaches of fiduciary duties established that the conduct of
15        both defendants was willful, and that each of them acted
          fraudulently and with malice.
16
17   SOD at 39.   The state court entered a judgment (“Judgment”) for
18   Kaplan and against Debtors on November 22, 2010.    It granted
19   relief to Kaplan based upon Debtors’ negligent misrepresentation;
20   deceit and fraud in the inducement; breach of fiduciary duty;
21   money had and received; breach of oral contract; conspiracy; and
22   embezzlement.   The Judgment awarded Kaplan $750,000 in
23   compensatory damages from Debtors plus interest.    Per the parties’
24   stipulation, the court also awarded Kaplan $100,000, plus
25   interest, in exemplary damages for fraud, breach of fiduciary
26   duty, conspiracy and embezzlement.     Debtors did not appeal the
27   Judgment.
28        At some later date not clear in the record, Kaplan filed a

                                      -4-
 1   motion under Cal. Code Civ. Proc. § 2033.4206 requesting cost-of-
 2   proof sanctions against Debtors for failing to admit certain
 3   Requests for Admissions (the “RFA Motion”).      The state court held
 4   a hearing on the RFA Motion on February 9, 2011.      A hearing
 5   transcript is not included in our record.
 6        After the hearing and supplemental briefing by the parties,
 7   on June 29, 2011, the state court entered an order granting
 8   Kaplan’s motion and imposing sanctions against Debtors under the
 9   California statute (the “RFA Sanctions Order”).      In the order, the
10   court found that Debtors had each failed to admit to the Requests
11   for Admission, and that:
12        these requests sought admission of matters within the
          knowledge of [Debtors], and plaintiffs ultimately proved
13        the subject matter of the requests true at trial.
          [Their] failure to admit these requests was in bad faith
14        and part of a scheme that defendants employed to
          wrongfully take and convert plaintiffs’ investment.
15
     RFA Sanctions Order at 2-3 ¶¶ 1-2.       The state court awarded Kaplan
16
     “$495,642.97, jointly and severally against [Debtors], pursuant to
17
     Code of Civil Procedure section 2033.420 for [his] costs in
18
     proving the subject matter of the requests for admission addressed
19
     by the motion[.]”   RFA Sanctions Order at 7 ¶ 24.     The state court
20
21        6
               Expenses incurred in proving matters which
               party to whom request was directed failed to
22             admit; When court to require payment
23        (a) If a party fails to admit the genuineness of any
          document or the truth of any matter when requested to do
24        so under this chapter, and if the party requesting that
          admission thereafter proves the genuineness of that
25        document or the truth of that matter, the party
          requesting the admission may move the court for an order
26        requiring the party to whom the request was directed to
          pay the reasonable expenses incurred in making that
27        proof, including reasonable attorney's fees.
28   CAL. CODE CIV. PROC. § 2033.420.

                                        -5-
 1   based the amount of the award on the report submitted by Kaplan’s
 2   attorney containing “a detailed accounting of the number of hours
 3   spent in proving the matters required to [be] proved solely due to
 4   Defendants’ unreasonable — and dishonest — failure to admit these
 5   matters.”     RFA Sanctions Order at 7 ¶ 21.
 6                           The Adversary Proceeding
 7        In June 2007, shortly after the bankruptcy court remanded the
 8   State Court Action, Kaplan had commenced an adversary proceeding
 9   against Debtors seeking an exception to discharge for his claims
10   against Debtors under § 523(a)(2)(A), (a)(4) and (a)(6).     The
11   bankruptcy court held this adversary proceeding in abeyance while
12   the State Court Action proceeded to a conclusion.
13        After the state court’s entry of the Judgment and RFA
14   Sanctions Order, on July 21, 2011, Kaplan filed a motion for
15   summary judgment in the adversary proceeding.      Specifically,
16   Kaplan argued that there were no genuine issues of fact, and that
17   both the state court Judgment and RFA Sanctions Order were
18   preclusive and controlled the disposition of his discharge
19   exception claims in the adversary proceeding.
20        Debtors filed a limited opposition to the summary judgment
21   motion on August 19, 2011.     Although they did not contest Kaplan’s
22   request for an exception to discharge for the Judgment, they
23   argued that the RFA Sanctions Order was not yet a final judgment
24   and that they intended to appeal that order in the state court
25   system.7
26        The bankruptcy court conducted a hearing on the Kaplan
27
28        7
                The RFA Sanctions Order was never appealed.

                                       -6-
 1   summary judgment motion on September 1, 2011.   Without opposition,
 2   the court granted Kaplan an exception to discharge under
 3   § 523(a)(2)(A), (a)(4) and (a)(6) for $1,493,569.06, the damages
 4   awarded to him in the Judgment.    Agreeing with Debtors, the
 5   bankruptcy court denied the motion as to the RFA Sanctions Order
 6   because it was not yet a final order of the state court (the
 7   “Summary Judgment Order”).    The Summary Judgment Order granted
 8   leave to Kaplan to amend their summary judgment motion when the
 9   RFA Sanctions Order became a final order.
10        On November 15, 2011, Kaplan filed a motion to amend the
11   Summary Judgment Order8 to add the award made in the RFA Sanctions
12   Order, which was now final.   To support this motion, Kaplan relied
13   upon this Panel’s decisions in Florida v. Ticor Title Ins. Co.
14   (In re Florida), 164 B.R. 636 (9th Cir. BAP 1994) and Roussos v.
15   Michaelides (In re Roussos), 251 B.R. 86 (9th Cir. BAP 2000) which
16   he contended had held that a debt for a creditor’s attorney’s fees
17   and costs awarded under state law should be excepted from
18   discharge if that obligation arose from the same conduct that gave
19   rise to the underlying indebtedness.    Kaplan argued that the RFA
20   Sanctions Order arose from the same conduct by Debtors as that
21   giving rise to the other damages awarded in the nondischargeable
22   Judgment, and therefore, that the attorney’s fees award should
23   also be excepted from discharge.
24
25        8
             Although the bankruptcy court granted Kaplan leave to
     amend the summary judgment motion, Kaplan moved to amend the
26   Summary Judgment Order. The bankruptcy court did not find this
     procedure objectionable, nor do we. In effect, by this motion,
27   Kaplan renewed his request for entry of a summary judgment
     determining that the award to Kaplan in the RFA Sanctions Motion
28   was excepted from discharge.

                                       -7-
 1        Debtors responded to Kaplan’s motion to amend the Summary
 2   Judgment Order on November 28, 2011.     Debtors argued that, unless
 3   there is an underlying statutory or contractual basis for awarding
 4   attorney’s fees, then any award, even when ancillary to the
 5   nondischargeable claim, is subject to discharge.
 6        The bankruptcy court conducted a hearing on Kaplan’s motion
 7   to amend on December 7, 2011.   After considering the parties’
 8   arguments, the court continued the hearing so that it could review
 9   the case law.
10        At the continued hearing on February 15, 2012, the bankruptcy
11   court announced its decision on the record.    It denied Kaplan’s
12   motion to amend the summary judgment to include an exception to
13   discharge for the attorneys fees awarded in the RFA Sanctions
14   Order because, in the words of the bankruptcy court, those fees
15   “as they’ve been awarded below, are not directly consequential
16   from the nondischargeability issue.”     Hr’g Tr. 1:22-23,
17   February 15, 2012.
18        The bankruptcy court’s order denying Kaplan’s motion was
19   entered on February 21, 2012 (the “Second Summary Judgment
20   Order”).   Kaplan filed a timely appeal on March 6, 2012.
21                                JURISDICTION
22        The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334
23   and 157(b)(2)(I).    We have jurisdiction under 28 U.S.C. § 158.
24                                   ISSUES
25        Whether the bankruptcy court erred when it denied Kaplan’s
26   motion for to amend the summary judgment and determined that the
27   award of attorneys fees by the state court in the RFA Sanctions
28   Order was not excepted from discharge.

                                      -8-
 1        Whether the bankruptcy court erred in determining that issue
 2   preclusion was not available or applicable to the RFA Sanctions
 3   Order.
 4                           STANDARDS OF REVIEW
 5        We review de novo the bankruptcy court’s decisions concerning
 6   summary judgment.   SNTL Corp. v. Ctr. Ins. Co. (In re SNTL Corp.),
 7   571 F.3d 826, 834 (9th Cir. 2009).     Where no factual dispute
 8   exists on an appeal regarding exception to discharge, the review
 9   is de novo.   Waag v. Permann (In re Waag), 418 B.R. 373, 376 (9th
10   Cir. BAP 2009).
11        The availability of issue preclusion is reviewed de novo.
12   George v. City of Morro Bay (In re George), 318 B.R. 729, 732-33
13   (9th Cir. BAP 2004), aff'd, 144 F.App'x. 636 (9th Cir. 2005).
14   Once it is determined that issue preclusion may be applied, the
15   trial court's decision to do so is reviewed for abuse of
16   discretion.   Id. at 733.   In determining whether to apply issue
17   preclusion, the court is to be given broad discretion in light of
18   the advantages of avoiding burdensome litigation and promoting
19   judicial economy.   Parklane Hosiery Co. v. Shore, 439 U.S. 322,
20   321 (1979).   Reasonable doubts about what was decided in a prior
21   judgment are resolved against applying issue preclusion.    Lopez v.
22   Emergency Serv. Restoration, Inc. (In re Lopez), 367 B.R. 99,
23   107-08 (9th Cir. BAP 2007).
24                                 DISCUSSION
25        Summary judgment should be granted only "if the pleadings,
26   the discovery and disclosure materials on file, and any affidavits
27   show that there is no genuine issue as to any material fact and
28   that the movant is entitled to judgment as a matter of law."

                                      -9-
 1   Civil Rule 56(c)(2), incorporated by Rule 7056; Barboza v. New
 2   Form, Inc. (In re Barboza), 545 F.3d 702, 707 (9th Cir. 2008).
 3   Exceptions to discharge must be strictly construed.   Snoke v. Riso
 4   (In re Riso), 978 F.2d 1151, 1154 (9th Cir. 1992) (“[G]iven the
 5   strong fresh start policy in the Code, exceptions to discharge are
 6   strictly construed against an objecting creditor and in favor of
 7   the debtor.); Ghomeshi v. Sabban (In re Sabban), 384 B.R. 1, 5
 8   (9th Cir. BAP 2008),   aff'd, 600 F.3d 1219, 1222 (9th Cir. 2010).
 9   A trial court may grant summary judgment on the basis of issue
10   preclusion.   Granite Rock Co. v. Int'l Bhd. of Teamsters, Local
11   287, 649 F.3d 1067, 1070 (9th Cir. 2011).
12        In this appeal, the bankruptcy court effectively granted
13   summary judgment twice.   First, without opposition from Debtors,
14   it determined in the Summary Judgment Order that, based on issue
15   preclusion, the damages awarded by the state court to Kaplan in
16   the Judgment were excepted from discharge under §§ 523(a)(2),
17   (a)(4) and (a)(6).   However, in the Summary Judgment Order, the
18   bankruptcy court declined to allow an exception to discharge of
19   the attorney’s fees awarded to Kaplan in the RFA Sanctions Order
20   because, it decided, there was an “issue of contention” as to
21   whether the RFA Sanctions Order should be “given the same
22   preclusive effect as that given the Judgment.”   Tentative Ruling
23   (adopted in the Summary Judgment Order) at 2, September 1, 2011.
24        Then, after the RFA Sanctions Order became final, at the
25   hearing on February 15, 2012, the bankruptcy court not only denied
26   Kaplan’s motion to amend the Summary Judgment Order to include an
27   exception to discharge for the RFA Sanctions Order, but the court
28   effectively held that the attorney’s fees awarded by the state

                                     -10-
 1   court were indeed discharged.   According to the bankruptcy court:
 2        [T]he Florida case is actually not controlling here
          because the attorney fees, as they’ve been awarded
 3        below, are not directly consequential from the
          nondischargeability issue. . . . And the
 4        dischargeability status depends on the primary debt
          that’s nondischargeable. . . . [T]his is on [] giving
 5        preclusive effect to an earlier judgment, and the Court
          needs to evaluate all the factors on whether it’s a fair
 6        and good policy to give preclusive effect. It doesn’t —
          it’s not supported.
 7
 8   Hr’g Tr. 1:21–2:11, February 15, 2012.
 9        As near as we can discern, the bankruptcy court apparently
10   decided that issue preclusion should not be applied to the state
11   court’s findings in the RFA Sanctions Order in deciding whether
12   the attorney’s fees it awarded could be discharged.    In its oral
13   ruling, the bankruptcy court did not clearly articulate why it
14   declined to apply issue preclusion, nor did it identify “all the
15   factors” it considered in reaching its conclusion.    As explained
16   below, these omissions are problematic.
17                     Availability of Issue Preclusion
18        Simply stated, issue preclusion "bars ‘successive litigation
19   of an issue of fact or law that was actually litigated and
20   resolved in a valid court determination essential to that prior
21   judgment,' even if the issue recurs in the context of a different
22   claim."   Taylor v. Sturgell, 553 U.S. 880, 892 (2008) (quoting New
23   Hampshire v. Maine, 532 U.S. 742, 748-49 (2001)).     The purpose of
24   issue preclusion is to conserve judicial resources and foster
25   confidence in the outcome of adjudications by providing finality
26   and avoiding inconsistent rulings.     See Taylor, 553 U.S. at 892.
27   It is settled that issue preclusion may be applied in exception to
28   discharge proceedings.   Grogan v. Garner, 498 U.S. 279, 284-85

                                     -11-
 1   (1991).
 2        The RFA Sanction Order was entered by a California state
 3   court.    To determine the preclusive effect of a California state
 4   court's findings in a judgment or order, the bankruptcy court must
 5   first determine if issue preclusion is available under California
 6   preclusion law.    28 U.S.C. § 1738 (the Full Faith and Credit
 7   Statute); Marrese v. Am. Acad. of Orthopaedic Surgeons, 470 U.S.
 8   373, 380 (1985).    When state preclusion law controls, the
 9   discretion to apply the doctrine is exercised in accordance with
10   state and federal law.    Khaligh v. Hadegh (In re Khaligh),
11   338 B.R. 817, 823 (9th Cir. BAP 2006), aff'd, 506 F.3d 956
12   (9th Cir. 2007).
13            Under California law, the party asserting issue preclusion
14   has the burden of establishing the following "threshold"
15   requirements for its availability:
16        First, the issue sought to be precluded from
          relitigation must be identical to that decided in a
17        former proceeding. Second, this issue must have been
          actually litigated in the former proceeding. Third, it
18        must have been necessarily decided in the former
          proceeding. Fourth, the decision in the former
19        proceeding must be final and on the merits. Finally,
          the party against whom preclusion is sought must be the
20        same as, or in privity with, the party to the former
          proceeding.
21
22   Harmon v. Kobrin (In re Harmon), 250 F.3d 1240, 1245 (9th Cir.
23   2001) (the “Harmon” requirements).
24        Here, there does not appear to be any dispute that some of
25   the Harmon criteria are satisfied by the RFA Sanctions Order.     It
26   was a final order, and the parties and their adversarial positions
27   in state court were the same as in this litigation.    What is
28   disputed in this appeal, however, is whether the issue decided in

                                       -12-
 1   state court, i.e., Debtors’ liability for attorneys’ fees to
 2   Kaplan under Cal. Code Civ. Proc. § 2033.420, was identical,
 3   actually litigated, and necessarily decided in relation to the
 4   issues before the bankruptcy court, i.e., whether that “debt”
 5   arose from conduct of the type giving rise to an exception to
 6   discharge under § 523(a)(2), (a)(4) and/or (a)(6).
 7        In reaching its decision, there is no indication in the
 8   record before us that the bankruptcy court conducted a review of
 9   the RFA Sanctions Order to address the three questionable Harmon
10   factors.   Instead, the bankruptcy court appears to have ruled that
11   issue preclusion would not be applied for reasons of public
12   policy:    “[T]his is on [] giving preclusive effect to an earlier
13   judgment, and the Court needs to evaluate all the factors on
14   whether it's a fair and good policy to give preclusive effect [to
15   the RFA Sanctions Order.]   It doesn't — it's not supported.”   Hr’g
16   Tr. 27-11, February 15, 2012.
17        In short, the bankruptcy court acknowledges that it was
18   conducting an issue preclusion analysis of the RFA Sanctions
19   Order.    However, the court did not explain what factors it was
20   evaluating or why it was not “fair and good policy to give
21   preclusive effect” to the RFA Sanctions Order.   Further, it would
22   appear that the court conflated whether issue preclusion was in
23   fact available with the second part of the analysis, whether it
24   should be applied.
25       Application of Issue Preclusion in Exceptions to Discharge
26        Bankruptcy courts “have exclusive jurisdiction to determine
27   dischargeability of debts under §§ 523(a)(2) (fraud and
28   deception); (a)(4) (fiduciary fraud, embezzlement, or larceny);

                                      -13-
 1   and (a)(6) (willful and malicious injury to person or property).”
 2   Ackerman v. Eber (In re Eber), 687 F.3d 1123, 1128 (9th Cir.
 3   2012); see § 523(c)(1).     The effect of this rule is that “the
 4   bankruptcy court is not confined to a review of the judgment and
 5   record in the prior state-court proceedings when considering the
 6   dischargeability of [a creditor’s] debt.”    Brown v. Felsen,
 7   442 U.S. 127, 129-30 (1979).    In other words, “final judgments in
 8   state courts are not necessarily preclusive in United States
 9   bankruptcy courts."   Sasson v. Sokoloff (In re Sasson), 424 F.3d
10   864, 872 (9th Cir. 2005).
11        Therefore, although all federal courts have “broad
12   discretion” in a decision to apply issue preclusion based on a
13   state court judgment, Parklane Hosiery Co., 439 U.S. at 331, that
14   discretion is particularly expansive in exceptions to discharge
15   under § 523(a)(2), (a)(4) and (a)(6).    Comer v. Comer
16   (In re Comer), 723 F.2d 737, 740 (9th Cir. 1984) (holding that a
17   bankruptcy judge should not “rely solely on state court judgments
18   when determining the nature of a debt for purposes of
19   dischargeability, if doing so would prohibit the bankruptcy court
20   from exercising its exclusive jurisdiction to determine
21   dischargeability.”)
22        The Panel has previously provided guidelines for bankruptcy
23   courts on how to satisfy their independent responsibility to
24   determine if the findings of a state court judgment should be
25   applied to justify an exception to discharge based on issue
26   preclusion.   In re Lopez, 367 B.R. at 99.    Observing that, “at its
27   heart, the decision to apply issue preclusion entails a measure of
28   discretion and flexibility,” id. at 107, the Panel noted that

                                       -14-
 1   bankruptcy courts are guided by the concepts incorporated in the
 2   Restatement (Second) of Judgments:
 3        “the need for flexibility in the operative principles,
          and this recognition has served as the basis for the
 4        exceptions to the rule of issue preclusion set forth in
          § 28." RESTATEMENT (SECOND) OF JUDGMENTS, Title E,
 5        Introductory Note (1980). The exceptions to the general
          rule of issue preclusion that are set out in Restatement
 6        (Second) § 28 include such flexible concepts as: change
          in applicable legal context; avoiding inequitable
 7        administration of laws; differences in quality or
          extensiveness of procedures; and lack of adequate
 8        opportunity or incentive to obtain a full and fair
          adjudication in the initial action. Id. §§ 28(2), (3) &
 9        (5).
10   Id.; see also Parklane Hosiery Co., 439 U.S. at 327 n.6, 330 n.13,
11   331 n.14, 333 n.21, 353, 354 n.22 (where the Supreme Court cites
12   the Restatement and Restatement (Second) of Judgments repeatedly
13   as authoritative on questions of issue preclusion).
14        Although the Lopez panel recognized that application of issue
15   preclusion in exception to discharge cases is principally a
16   question of federal law, it understood that, where a state law
17   judgment is available for issue preclusion, state (California) law
18   still must be taken into consideration.   Fortunately,
19        California law is consistent with federal law on the
          question of discretionary application of issue
20        preclusion. In California, issue preclusion is not
          applied automatically or rigidly, and courts are
21        permitted to decline to give issue preclusive effect to
          prior judgments in deference of countervailing
22        considerations of fairness. The court balances "the
          need to limit litigation against the right of a fair
23        adversary proceeding in which a party may fully present
          the facts." Thus, policy considerations may limit use of
24        issue preclusion in any particular instance.
25   In re Lopez, 367 B.R. at 108 (citations omitted); see also,
26   Khaligh v. Hadaegh (In re Khaligh), 338 B.R. 817, 828 (9th Cir.
27   BAP 2006), aff’d 506 F.3d 956 (9th Cir. 2007) (noting that the
28   California courts “take into account the considerations

                                    -15-
 1   articulated in Restatement (Second) of Judgments.”).
 2        In this appeal, our ability to review the bankruptcy court’s
 3   decision is hampered by the brevity of its analysis in its oral
 4   ruling.   The court did not engage in an analysis concerning
 5   whether the RFA Sanctions Order satisfied the five Harmon factors.
 6   If the bankruptcy court ruled that issue preclusion was not
 7   available under state law, it was unnecessary to reach the
 8   discretionary question of its application in this case.   As noted
 9   above, the court seemingly declined to apply issue preclusion for
10   policy reasons, but did not explain what factors or considerations
11   it relied upon for its decision.
12        Given this record, we must remand this matter to the
13   bankruptcy court with instructions that it conduct an adequate
14   issue preclusion analysis concerning the state court’s RFA
15   Sanctions Order.   To do so, it should first examine the five
16   Harmon factors paying particular attention to the three factors in
17   dispute — whether the issues decided by the state court in the RFA
18   Sanctions Order were identical, actually litigated, and
19   necessarily decided in relation to the exception to discharge
20   issues before the bankruptcy court.9   Then, if the bankruptcy
21
          9
22           To determine if an issue is identical to the issue before
     the court deciding preclusion and whether it has been actually
23   litigated, we are required to examine the record in the prior
     court’s case. United States v. Hernandez, 572 F.2d 218, 222 (9th
24   Cir. 1978). Based on what has been submitted to us, it may be
     that the bankruptcy court had an inadequate record to make that
25   determination. In essence, the bankruptcy court was given only
     the RFA Sanctions Order, which imposed attorney's fees on Debtors
26   because of their failure to admit as fact matters specified in the
     RFAs that Kaplan was later required to prove at trial. The RFA
27   Sanctions Order lists 27 RFAs that Wasko failed to answer, and 30
     RFAs that Dehay failed to answer. However, the RFA Sanctions
28                                                        (continued...)

                                     -16-
 1   court determines that issue preclusion is available, it should
 2   exercise its independent duty to determine if issue preclusion
 3   should apply in this case, guided by the federal and California
 4   guidelines discussed above.
 5     In light of the facts of this case and the case law, an issue
        preclusion analysis of the RFA Sanctions Order was required.
 6
 7        The RFA Sanctions Order and the Summary Judgment Order were
 8   separate orders.    In the Summary Judgment Order, based upon
 9   Debtors’ prebankruptcy conduct in their dealings with Kaplan, the
10   bankruptcy court found that the state court had made the necessary
11   findings of fact to support an exception to discharge in Kaplan’s
12   favor under §§ 523(a)(2)(A), (a)(4) and (a)(6).   Debtors have not
13   challenged the bankruptcy court’s decision.
14        On remand, the bankruptcy court must also determine whether
15   the RFA Sanctions Order preclusively establishes an exception to
16   discharge.   As Debtors note, in contrast to the Summary Judgment
17   Order, the RFA Sanctions Order resulted solely from their post-
18   bankruptcy failure to comply with discovery rules in the state
19   court litigation.   In other words, the attorneys fee award in the
20   RFA Sanctions Order did not directly result from the same conduct
21
22
          9
           (...continued)
23   Order did not explain what facts those RFAs specifically
     addressed. We have examined the docket and it does not appear
24   that the bankruptcy court was ever given copies of the RFAs.
     Additionally, counsel for Debtors offered to provide the
25   bankruptcy court with a transcript of the hearing where the state
     court explained its reasons for granting the attorney's fee award
26   in the RFA Sanctions Order, but there is no indication that the
     transcript was ever provided, nor does it appear in the court's
27   docket. Hr'g Tr. 6:16-20, Dec. 7, 2011. On remand, to perform a
     proper issue preclusion analysis, the bankruptcy court may wish to
28   obtain copies of the RFAs and the state court hearing transcript.

                                      -17-
 1   giving rise to the Judgment.   Because the two state court orders
 2   were based ostensibly on conduct occurring at different times in
 3   relation to Debtors’ bankruptcy filing, a determination that the
 4   Judgment is excepted from discharge would not necessarily require
 5   that the amounts awarded to Kaplan under the state court’s second,
 6   independent order, were also nondischargeable.
 7        As noted above, there is a strong bankruptcy policy that
 8   exceptions to discharge are to be strictly construed so as to
 9   effectuate the Congressional policy of permitting debtors a
10   financial fresh start and against the creditor. In re Riso,
11   978 F.2d at 1154; In re Rahm, 641 F.2d 755, 756-57 (9th Cir.
12   1981); In re Sabban, 384 B.R. at 5.    Despite this, Kaplan argues,
13   case law supports his position that “once it is established that
14   “specific money or property has been obtained by fraud . . . any
15   debt arising therefrom is excepted from discharge.”   Kaplan’s Op.
16   Br. at 7 (quoting Cohen v. De la Cruz, 523 U.S. 213, 218 (1998)).
17   Kaplan’s argument implies that, once a bankruptcy court decides to
18   except a debt from discharge based on issue preclusion, any
19   attorney’s fees associated with that debt are also excepted from
20   discharge, without the need for a separate issue preclusion
21   inquiry.   We disagree with Kaplan’s reading of Cohen that no
22   separate issue preclusion inquiry is necessary.
23        In Cohen, the Supreme Court held that, for purposes of
24   § 523(a)(2), “any debt” arising from a judicial determination of
25   fraud is likewise excepted from discharge, and in that case, “any
26   debt” included the “treble damages, attorney’s fees and other
27   relief” awarded to the creditor under state law.   Id. at 223.   In
28   that case the court agreed with the bankruptcy court that, because

                                     -18-
 1   the creditor’s nondischargeable claim against the debtor arose
 2   under New Jersey’s rent control statute, an award to the creditor
 3   under a related statute providing for recovery of attorney’s fees
 4   in actions for violations of the statutory rent controls was also
 5   excepted from discharge.10   Cohen, 523 U.S. at 218.   Strictly
 6   speaking, then, the rule announced in Cohen dealt only with
 7   exceptions to discharge for attorney’s fees where there was a
 8   connection between a statute authorizing the fee award, and the
 9
10        10
               The two statutes cited in the Cohen decision were:
11   N.J. Stat. § 56:8-2. Fraud, etc., in connection with sale or
     advertisement of merchandise or real estate as unlawful practice
12
          The act, use or employment by any person of any
13        unconscionable commercial practice, deception, fraud,
          false pretense, false promise, misrepresentation, or the
14        knowing concealment, suppression, or omission of any
          material fact with intent that others rely upon such
15        concealment, suppression or omission, in connection with
          the sale or advertisement of any merchandise or real
16        estate, or with the subsequent performance of such
          person as aforesaid, whether or not any person has in
17        fact been misled, deceived or damaged thereby, is
          declared to be an unlawful practice[.]
18
     N.J. Stat. § 56:8-19. Action, counterclaim by injured person;
19   recovery of damages, costs
20        Any person who suffers any ascertainable loss of moneys
          or property, real or personal, as a result of the use or
21        employment by another person of any method, act, or
          practice declared unlawful under this act or the act
22        hereby amended and supplemented may bring an action or
          assert a counterclaim therefor in any court of competent
23        jurisdiction. In any action under this section the court
          shall, in addition to any other appropriate legal or
24        equitable relief, award threefold the damages sustained
          by any person in interest. In all actions under this
25        section, including those brought by the Attorney
          General, the court shall also award reasonable
26        attorneys' fees, filing fees and reasonable costs of
          suit.
27
          These are the texts of the statutes in effect in 1998 when
28   the Supreme Court issued its decision in Cohen.

                                     -19-
 1   statutes establishing the debtor’s liability for the creditor’s
 2   claim.
 3        Applying Cohen, four courts of appeals have adopted what the
 4   parties in this appeal describe as a "statutory/contractual basis"
 5   analysis in this context.   Under this approach to construing
 6   § 523(a), attorney fee awards are excepted from discharge only
 7   when based on a statute or contract11 related to the creditor’s
 8   underlying claim.   Transouth Fin. Corp of Fla. v. Johnson,
 9   931 F.2d 1505, 1509 (11th Cir. 1991); United Merchants and
10   Manufacturers Inc. v. Equitable Life Assurance Society of the
11   United States (In re United Merchants and Manufacturers), 674 F.2d
12   134 (2nd Cir. 1982); Fry v. Dinan (In re Dinan), 448 B.R. 775, 778
13   (9th Cir. BAP 2011); Florida v. Ticor Title Ins. Co.
14   (In re Florida), 164 B.R. 636, 639 (9th Cir. BAP 1994).12
15
          11
16           As the case law demonstrates, where there is a contractual
     basis for the award of attorney’s fees awarded in a
17   nondischargeable judgment, such fees may also be excepted from
     discharge. Jordan v. Se. Nat'l Bank (In re Jordan), 927 F.2d 221,
18   226-28 (5th Cir. 1991) (finding that a debt excepted from
     discharge "includes state-approved contractually required
19   attorney's fees")(quoting Martin v. Bank of Germantown (In re
     Martin), 761 F.2d 1163, 1168 (6th Cir. 1985)). Because there was
20   no written contract between the parties in this case providing for
     an award of attorney fees to the prevailing party, we need not
21   consider that case law here.
          12
22           There was also some discussion in the bankruptcy court of
     a less numerous, minority line of decisions espousing a so-called
23   "status-dependent" approach to determine whether attorney's fees
     awards are subject to discharge in this context. As explained in
24   these decisions, whether there is a contractual or statutory basis
     for the award of attorney's fees is not determinative. Instead,
25   "the dischargeability of ancillary obligations such as attorney's
     fees turn[s] on the dischargeability of the underlying debt. . ."
26   DuPhily v. DuPhily, 52 B.R. 971, 978 (D. Del. 1985) (citing
     In re Chambers, 36 B.R. 42 (Bankr. D. Wis. 1984); In re Sposa,
27   31 B.R. 307 (Bankr. E.D. Va. 1983)). As discussed below, the
     Panel has adopted the statutory/contractual position in our
28                                                       (continued...)

                                     -20-
 1        Both Kaplan and Debtors in this appeal cite to the Panel’s
 2   opinion in In re Florida to support their positions.     As the
 3   bankruptcy court correctly determined, but for possibly different
 4   reasons than our own, In re Florida is not controlling on the
 5   availability of issue preclusion in this case.    However, since
 6   In re Florida was a published opinion, and we are bound by its
 7   holdings, we will examine it in detail.
 8        In In re Florida, before bankruptcy, Ticor sued Alvin Florida
 9   in U.S. district court.    After a bench trial, the district court
10   found that Florida, in attempting to sell certain property, had
11   forged a release of an I.R.S. lien.     Because Ticor had insured
12   title to the property free of the I.R.S. lien, it was forced to
13   pay its insured when the release was discovered and then revoked
14   by the I.R.S.    The district court found Ticor's actual loss was
15   $153,922, trebled these damages pursuant to the RICO statute,
16   18 U.S.C § 1961 et seq., and awarded attorney’s fees of $124,950
17   to Ticor pursuant to the remedies provision of RICO, 18 U.S.C.
18   § 1964(c).13    Finding that the forgery was "malicious, fraudulent
19   and oppressive," the district court awarded a coextensive judgment
20   to Ticor against Florida consisting of $153,922 in compensatory
21
22
          12
           (...continued)
23   published decision In re Florida and thus we do not consider this
     alternative view.
24
          13
               18 U.S.C. § 1964(c) provides that:
25
          Any person injured in his business or property by reason
26        of a violation of section 1962 of [the RICO statute] may
          sue therefor in any appropriate United States district
27        court and shall recover threefold the damages he
          sustains and the cost of the suit, including a
28        reasonable attorney's fee[.]

                                      -21-
 1   damages and $307,844 in punitive damages, and a small discovery
 2   sanction.14   The judgment was affirmed on appeal.
 3        After Florida filed for bankruptcy, Ticor sought an exception
 4   to discharge of its debt under § 523(a)(2) and (6).       Acting on the
 5   creditor’s motion for summary judgment, the bankruptcy court
 6   determined the debts to be excepted from discharge in total under
 7   § 523(a)(6), including the amounts representing Ticor's litigation
 8   expenses in the state court suit and the discovery sanction.
 9        On appeal to the BAP, Florida challenged the bankruptcy
10   court’s determination that the discovery sanction and attorney’s
11   fees were excepted from discharge.     The Panel ruled,
12        Florida contends that all damages awarded under the RICO
          claim, including the discovery sanction and attorney's
13        fees, are punitive. Florida's description of these
          elements as punitive damages somewhat mischaracterizes
14        them. The bankruptcy court found that those portions of
          the claim based on attorney's fees and costs and the
15        discovery sanction were debts which were ancillary to
          the underlying debt and partook of its character.
16
17   Id. at 639.
18        In this case, the parties have differing views about how the
19   attorney’s fees awarded in Florida “partook of the character” of
20   the nondischargeable debt, and whether that participation
21   justified exception to discharge for the attorney’s fee award.
22   However, the full context of the Panel’s decision reveals that the
23   attorney’s fees were awarded for violation of the RICO statute,
24   which proscribed conduct that the Bankruptcy Code would consider
25
26        14
             Other than noting that the discovery sanction was for
     $15,000, little information about it is provided in the Florida
27   decision. It was, however, “awarded under the RICO claim,”
     In re Florida, 164 B.R. at 639, and thus was awarded, like the
28   attorney’s fees, on the basis of a statute.

                                     -22-
 1   grounds for an exception to discharge.    Therefore, like Cohen,
 2   In re Florida stands for the proposition that violation of a
 3   statute that provides for an award of attorney’s fees for conduct
 4   which the Bankruptcy Code considers grounds for exception to
 5   discharge may result in denial of discharge for those attorney’s
 6   fees.
 7           In this appeal, the statute on which the RFA Sanctions Order
 8   was based, Cal. Code Civ. Proc. § 2033.420, sanctions the failure
 9   to respond to requests for admission of facts that then requires a
10   party to prove them.    In other words, under the statute, an award
11   of attorney’s fees may be made for conduct that a bankruptcy court
12   may find does not support an exception to discharge.
13           On remand to the bankruptcy court, Kaplan is free to argue
14   that, like the state court apparently found, Debtors’ failure to
15   respond to the RFAs was part of Debtors’ scheme to defraud him.
16   In that respect, Kaplan may contend that there is an identity of
17   issues between the FRA Sanctions Order and the bankruptcy court’s
18   determination that the Judgment debt is excepted from discharge
19   under § 523(a)(2), (a)(4) or (a)(6).     However, in light of the
20   strong policy considerations in bankruptcy law that exceptions to
21   discharge are narrowly construed, and the issue preclusion case
22   law discussed above, attorney’s fees awarded under a statute will
23   be excepted from discharge only if that statute proscribes conduct
24   that violates one of the provisions of § 523(a).15    Because an
25
             15
26           Indeed, In re Florida cautions against recognizing a
     remote connection between conduct that results in an exception to
27   discharge judgment and the conduct resulting in the award of
     attorney’s fees: “It may be that the relationship of ancillary to
28                                                       (continued...)

                                       -23-
 1   award of attorney’s fees under Cal. Code Civ. Proc. § 2033.420
 2   does not necessarily result from conduct proscribed in the
 3   Bankruptcy Code, an award of attorneys fees under that statute is
 4   not automatically excepted from discharge.
 5                                 CONCLUSION
 6        The bankruptcy court must conduct an analysis of the
 7   availability and applicability of issue preclusion to the RFA
 8   Sanctions Order.   Even if the bankruptcy court determines that
 9   issue preclusion is available, it must then, as a matter of
10   discretion, decide whether the doctrine should or should not be
11   applied.   Assuming issue preclusion is both available and
12   applicable, the bankruptcy court must then independently decide
13   whether the conduct giving rise to the award of attorney’s fees to
14   Kaplan in this case is sufficient to support an exception to
15   discharge under § § 523(a)(2), (4), or (6).
16        We VACATE the bankruptcy court's order denying Kaplan's
17   motion to amend the summary judgment order to add an exception to
18   discharge for the attorneys fees awarded in the RFA Sanctions
19   Order.    We REMAND this matter to the bankruptcy court for further
20   proceedings consistent with this memorandum.
21
22
23
24
25
26
          15
           (...continued)
27   primary obligations can become so attenuated that it would be
     unreasonable to characterize them as integral to the original
28   willful and malicious injury.” 164 B.R. at 639.

                                      -24-