Court Opinion

ID: 4657148
Source: CourtListenerOpinion
Date Created: 2021-02-03 20:01:19.441097+00
Date Added: 2024-06-11T08:01:11.490166
License: Public Domain

NOT FOR PUBLICATION                                  FILED
                                                                               FEB 2 2021

                                                                    SUSAN M. SPRAUL, CLERK
                                                                         U.S. BKCY. APP. PANEL
                                                                         OF THE NINTH CIRCUIT

           UNITED STATES BANKRUPTCY APPELLATE PANEL
                     OF THE NINTH CIRCUIT

In re:                                                BAP No. CC-20-1002-TGK
GARY E. MOLL,
                     Debtor.                          Bk. No. 2:15-bk-28128-RK

GARY SALZMAN,                                         Adv. No. 2:16-ap-01057-RK
                  Appellant,
v.                                                    MEMORANDUM ∗
LISA WATSON, as Executor of the Estate
of Gary E. Moll, Deceased,
                  Appellee.

                Appeal from the United States Bankruptcy Court
                     for the Central District of California
                 Robert N. Kwan, Bankruptcy Judge, Presiding

Before: TAYLOR, GAN, and KLEIN, ** Bankruptcy Judges.

                                 I. INTRODUCTION

       Gary Salzman unsuccessfully sued Gary Moll in a California state

court. Despite determinations that his claims were time-barred, that he

       ∗
          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 8024-1.
       ** The Honorable Christopher M. Klein, U.S. Bankruptcy Judge for the Eastern

                                             1
failed to provide evidence of compensable damages, and that he was

barred from any recovery against Mr. Moll by the doctrine of unclean

hands, he continued to pursue an adversary proceeding seeking recovery

on a claim identical to one in his state court complaint and seeking a

nondischargeable judgment against Mr. Moll. Even Mr. Moll’s death failed

to deter him.

      The bankruptcy court held a default prove-up hearing, concluded

that claim and issue preclusion barred all of Mr. Salzman’s claims, and

entered judgment against him.

      We AFFIRM.

                                      II. FACTS 1

      Prepetition, Mr. Moll represented Mr. Salzman in state court

litigation against Dawn Phillips, Mr. Salzman’s former girlfriend. The

complaint sought approximately $50,000 in actual damages and punitive

damages under various tort theories arising from her alleged theft of funds

from his credit union account. But after the state court set aside a default

judgment, Mr. Salzman terminated Mr. Moll’s legal representation and

continued to litigate the tort action pro se. Eventually he obtained a

$75,332.18 judgment, which included the amount allegedly stolen, plus

District of California, sitting by designation.
       1 The Panel issued an order dispensing with the appendix and permitting the

appeal to proceed on the original record. We exercise our discretion to review the
bankruptcy court’s dockets, as appropriate. See Woods & Erickson, LLP v. Leonard (In re
AVI, Inc.), 389 B.R. 721, 725 n.2 (9th Cir. BAP 2008).
                                            2
interest, costs, and attorney’s fees, and a $19,246.63 reimbursement from

his credit union. He also benefitted from a $38,307.38 restitution award in

criminal proceedings.

      Notwithstanding ultimate victory, Mr. Salzman filed a state court

legal malpractice and breach of fiduciary duty action against Mr. Moll

(“Case 1”). Mr. Moll then filed his chapter 7 2 case, and Mr. Salzman timely

initiated nondischargeability litigation that eventually included

§§ 523(a)(2), (a)(4), and (a)(6) and breach of fiduciary duty causes of action. 3

In a nutshell, Mr. Salzman alleged that Mr. Moll concealed problems with

his claims against Ms. Phillips to induce him to file litigation against her

and hire Mr. Moll as his counsel.

      Although the state court dismissed Case 1 for lack of prosecution,

Mr. Salzman sought stay relief to proceed with Case 1. Despite his

awkward wording, no one disputes the bankruptcy court’s conclusion that

Mr. Salzman obtained stay relief to broadly litigate his claims against

Mr. Moll in State Court.

      After entry of the stay relief order, Mr. Salzman filed another state

      2  Unless specified otherwise, all chapter and section references are to the
Bankruptcy Code, 11 U.S.C. §§ 101–1532.
       3 By the time Mr. Salzman filed his first amended complaint, Mr. Moll’s chapter 7

trustee had filed a report of no distribution. Thus, Mr. Salzman’s breach of fiduciary
claim is not recoverable from Mr. Moll’s bankruptcy estate; obtaining a reversal of the
bankruptcy court’s dismissal of this claim would be a hollow victory. Further, the claim
can be fully liquidated as part of the nondischargeability claims. Notwithstanding, we
will separately address it because Mr. Salzman and the bankruptcy court treated it as a
stand-alone claim.
                                           3
court action against Mr. Moll seeking recovery on theories of fraud,

intentional infliction of emotional distress, violations of California Business

& Professions Code § 17200 et seq., and breach of fiduciary duty (“Case 2”).

The bankruptcy court allowed the adversary proceeding to lie dormant

pending the resolution of that state court action.

      Mr. Moll was inactive in Case 2, but, after a default prove-up hearing,

the state court entered judgment in Mr. Moll’s favor (“State Court

Judgment”). The state court reasoned that the entire action was actually a

malpractice claim and that the applicable statute of limitations barred it. It

also found that Mr. Salzman failed to prove damages and that the doctrine

of unclean hands further barred any recovery. The court of appeal affirmed

the State Court Judgment; the California Supreme Court denied review.

      With the State Court Judgment in hand, Mr. Moll pressed the

bankruptcy court to dismiss. But the bankruptcy court, instead, considered

the matter through another “default prove-up” hearing. It required Mr.

Salzman to provide evidence of his entitlement to a default judgment and

to specifically address the impact of the State Court Judgment on his

claims.

      After considering Mr. Salzman’s written and oral submissions, the

bankruptcy court determined that Mr. Salzman was not entitled to

judgment under any circumstances because he could not establish the

existence of an enforceable obligation under non-bankruptcy law based on

the issue- and claim-preclusive effect of the State Court Judgment.

                                       4
Specifically, the bankruptcy court determined that: (1) claim preclusion

barred Mr. Salzman’s breach of fiduciary duty claim; and (2) issue

preclusion barred Mr. Salzman’s § 523 claims.

      Thus, the bankruptcy court entered judgment denying and

dismissing with prejudice the adversary proceeding.

      Mr. Salzman timely appealed.

                            III. JURISDICTION

      The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334 and

157(b)(1) and (b)(2)(I). We have jurisdiction under 28 U.S.C. § 158.

                                  IV. ISSUE

      Did the bankruptcy court err in denying Mr. Salzman a default

judgment and dismissing the adversary proceeding with prejudice?

                       V. STANDARDS OF REVIEW

      We review a bankruptcy court’s denial of a default judgment for an

abuse of discretion. Oregon v. Mcharo (In re Mcharo), 611 B.R. 657, 660 (9th

Cir. BAP 2020). A bankruptcy court abuses its discretion if it applies the

wrong legal standard, misapplies the correct legal standard, or makes

factual findings that are illogical, implausible, or without support in

inferences that may be drawn from the facts in the record. See United States

v. Hinkson, 585 F.3d 1247, 1262 (9th Cir. 2009) (en banc).

      We review de novo a bankruptcy court’s conclusions of law. Cacique,

Inc. v. Robert Reiser & Co, 169 F.3d 619, 622 (9th Cir. 1999). We also review

de novo a bankruptcy court’s determination that claim preclusion and

                                       5
issue preclusion are available. Frank v. United Airlines, Inc., 216 F.3d 845,

849-50 (9th Cir. 2000). If issue preclusion is available, we review its

application for an abuse of discretion. Black v. Bonnie Springs Fam. Ltd.

P'ship (In re Black), 487 B.R. 202, 210 (9th Cir. BAP 2013).

                                 VI. DISCUSSION

      On appeal, Mr. Salzman broadly claims that the bankruptcy court

applied the incorrect legal standard in employing the principles of claim

preclusion and issue preclusion. While we liberally construe his pro se

brief, Nordeen v. Bank of Am., N.A. (In re Nordeen), 495 B.R. 468, 483 (9th Cir.

BAP 2013), he fails to present any fact or legal argument supporting

reversal.

A. The applicable legal standards

      A bankruptcy court gives a state court judgment the same preclusive

effect as would another court of that state. Marrese v. Am. Acad. of

Orthopaedic Surgeons, 470 U.S. 373, 380 (1985). Thus, California preclusion

law applies here.

      In California, claim preclusion prevents a party from relitigating the

same claim against the same party when that claim proceeded to a final

judgment on the merits in a prior action. Adam Bros. Farming, Inc. v. Cnty. of

Santa Barbara, 604 F.3d 1142, 1148-1149 (9th Cir. 2010) (citing Mycogen

Corp. v. Monsanto Co., 28 Cal. 4th 888, 896 (2002)).4

      4  Mr. Salzman asserts that the bankruptcy court could not give preclusive effect
to the State Court Judgment because the adversary proceeding was filed before the
                                            6
       And in California, issue preclusion prevents relitigation of issues

argued and decided in a prior proceeding if six criteria are met: (1) the

issue to be precluded from relitigation is identical to that decided in a

former proceeding; (2) the issue to be precluded was actually litigated in

the former proceeding; (3) the issue to be precluded was necessarily

decided in the former proceeding; (4) the decision in the former proceeding

was final and on the merits; (5) the party against whom preclusion is

sought was the same as, or in privity with, the party to the former

proceeding; and (6) application of issue preclusion is consistent with the

public policies of preservation of the integrity of the judicial system,

promotion of judicial economy, and protection of litigants from harassment

by vexatious litigation. Lucido v. Superior Court, 51 Cal. 3d 335, 341 & 343

(1990).

B. The bankruptcy court did not err in applying claim preclusion.

       The bankruptcy court correctly articulated the legal standards for

claim preclusion, addressed each of the required claim preclusion

elements, and then correctly determined that claim preclusion barred

Mr. Salzman’s breach of fiduciary duty claim. 5 As explained by the

judgment was entered. He misunderstands the law. Under California law, “where
parallel litigation is pending in different tribunals, the first case to reach final judgment
is accorded preclusive effect, regardless of the order in which the cases were filed.”
Sosa v. DIRECTTV, Inc., 437 F.3d 923, 928 (9th Cir. 2006) (citations omitted).
        5 Mr. Salzman contends that the bankruptcy court erred by applying claim

preclusion to his nondischargeability claims. He is mistaken; the bankruptcy court only
applied issue preclusion to his nondischargeability claims.
                                              7
bankruptcy court, the breach of fiduciary duty claim is essentially a

verbatim re-allegation of Mr. Salzman’s Case 2 breach of fiduciary duty

claim. Thus, given that the State Court Judgment was final, adverse to

Mr. Salzman, and on the merits, he was not entitled to any relief on this

claim.

C. The bankruptcy court did not err in applying issue preclusion.

      The bankruptcy court likewise did not err or abuse its discretion in

determining that issue preclusion was available and should be applied to

Mr. Salzman’s claims for nondischargeability of debt under §§ 523(a)(2)(A),

(a)(4), and (a)(6).

      Mr. Salzman does not contest the bankruptcy court’s determination

that his nondischargeability claims are premised on allegations of fraud

and breach of fiduciary duty. But mere allegations are not enough; he was

required to prove damages caused by Mr. Moll’s alleged fraud or fiduciary

duty breach. See Ormsby v. First Am. Title Co. of Nev. (In re Ormsby), 591 F.3d

1199, 1206 (9th Cir. 2010) (regarding § 523(a)(6) elements); Banks v. Gill

Distrib. Ctrs., Inc. (In re Banks), 263 F.3d 862, 870 (9th Cir. 2001) (regarding

§ 523(a)(4) elements); Turtle Rock Meadows Homeowners Ass'n v. Slyman (In

re Slyman), 234 F.3d 1081, 1085 (9th Cir. 2000) (regarding § 523(a)(2)

elements).

      In the State Court Judgment, the state court characterized

Mr. Salzman’s five state court claims as arising from alleged legal

malpractice. Mr. Salzman argues that the state court never ruled on his

                                        8
fraud and breach of fiduciary duty claims and that his re-labeled theories

of recovery remain unadjudicated. He is wrong.

      All of Mr. Salzman’s claims, both in the state court and in the

adversary proceeding, arise from the same nucleus of common facts related

to Mr. Moll’s actions as his attorney in the Phillips litigation. And the state

court found that Mr. Salzman failed to prove that Mr. Moll’s actions

damaged him, and he had more than mitigated his alleged damages by

ultimately obtaining a default judgment. The court of appeal affirmed,

determining that “the judgment in favor of Moll is proper because Salzman

has not demonstrated he is entitled to recover any damages against Moll.”

Salzman v. Watson, No. B284969, 2018 WL 5862789, at *3 (Cal. Ct. App. Nov.

9, 2018), as modified on denial of reh’g (Nov. 30, 2018), review denied (Jan. 23,

2019). Moreover, the court of appeal arrived at this conclusion

notwithstanding Mr. Salzman’s argument that the state court erred in

“analyzing [Case 2] as one for legal malpractice only and failing to address

his causes of action for fraud, intentional infliction of emotional distress,

and unfair competition[.]” Id. Accordingly, we agree with the bankruptcy

court that the issue of a debt for Mr. Salzman’s fraud and breach of

fiduciary duty claims was “actually litigated” and “necessarily decided” by

the state court through its findings, which were upheld on appeal.

      Nevertheless, Mr. Salzman contends that the bankruptcy court erred

by failing to recognize that it had discretion in giving preclusive effect to

the State Court Judgment. Not so; the bankruptcy court was mindful that it

                                         9
had discretion and applied issue preclusion only after concluding that its

application was consistent with the public policies of preservation of the

integrity of the judicial system, promotion of judicial economy, and

protection of litigants from harassment by vexatious litigation.

      Here, the record indicates that Mr. Salzman was afforded a full and

fair opportunity to prove his case before the California courts 6 and to

challenge the preclusive effect of the State Court Judgment in the

bankruptcy court. He failed in both regards. 7

      Mr. Salzman’s last ditch defense on appeal rests on arguments that

the State Court Judgment was “oppressive.” Among other things, he

contends that the state court improperly engaged in an independent

investigation regarding the criminal case against Ms. Phillips and

otherwise ignored certain evidence. But he waived these arguments by

failing to make them before the bankruptcy court. Smith v. Marsh, 194 F.3d

1045, 1052 (9th Cir. 1999). And we are unable to find any evidentiary

support for the arguments; the record evidences that they were raised

before, and dismissed as baseless by, one or both of the state court and

      6  The court of appeal determined that “the trial court gave Salzman notice that it
found the evidence supporting his damages claims to be insufficient, and the court
provided Salzman an opportunity to submit additional evidence. Salzman did not
submit sufficient evidence entitling him to relief.” Id. at *4.
       7 While Mr. Salzman complained that the judgment he obtained against

Ms. Phillips proved unrecoverable, an attorney is not a guarantor of collection.
Therefore, the only damages that appear to be appropriately alleged were for excessive
fees paid to Mr. Moll. Indeed, the state court so found. And as to attorney’s fees
allegedly paid, the state court found that Mr. Salzman failed to present any competent
                                           10
state court of appeal.

                         VII. CONCLUSION

      Based on the foregoing, we AFFIRM.

supporting evidence.
                                  11