Court Opinion

ID: 3032389
Source: CourtListenerOpinion
Date Created: 2015-10-13 22:47:42.859859+00
Date Added: 2024-06-11T11:48:17.962669
License: Public Domain

FOR PUBLICATION
  UNITED STATES COURT OF APPEALS
       FOR THE NINTH CIRCUIT

ARTHUR G. MUEGLER, JR.,                   
                       Appellant,                No. 03-15259
                v.
                                                  D.C. No.
                                                CV-02-00632-JAT
DAVID J. BENING; ALFRED W.
HARRE,                                             OPINION
                       Appellees.
                                          
         Appeal from the United States District Court
                  for the District of Arizona
         James A. Teilborg, District Judge, Presiding

                    Argued and Submitted
          April 13, 2005—San Francisco, California

                       Filed June 24, 2005

        Before: Donald P. Lay,* Betty B. Fletcher, and
           Michael Daly Hawkins, Circuit Judges.

                      Opinion by Judge Lay

   *The Honorable Donald P. Lay, Senior United States Circuit Judge for
the Eighth Circuit, sitting by designation.

                                7561
7564                 MUEGLER v. BENING

                        COUNSEL

Arthur G. Muegler, Jr., Pro se, St. Louis, Missouri, for the
appellant.

David G. Waltrip and Chad S. Stockel, St. Louis, Missouri,
for the appellees.
                      MUEGLER v. BENING                       7565
                          OPINION

LAY, Circuit Judge:

   Appellant Arthur G. Muegler, Jr., was found guilty in fed-
eral district court for committing intentional fraud under Mis-
souri law. A jury awarded David J. Bening and Alfred W.
Harre (“Creditors”) compensatory and punitive damages.
Muegler sought to discharge his debt to Creditors via bank-
ruptcy proceedings in Arizona. Creditors filed a complaint,
arguing that the debt owed to them by Muegler was procured
by fraud and was thus nondischargeable under 11 U.S.C.
§ 523(a)(2)(A). Furthermore, Creditors argued, because the
elements of fraud under Missouri law were identical to the
elements of fraud under § 523(a), Muegler was collaterally
estopped from re-litigating the issue of fraud in bankruptcy
court.

   The bankruptcy court held that the elements of fraud under
Missouri law and § 523(a) were identical, and found that
Muegler was collaterally estopped from challenging the fraud
ruling in bankruptcy court. The bankruptcy court granted
summary judgment to Creditors, holding that Muegler could
not discharge his debt due to fraud. The district court
affirmed.

  Under Missouri law, four factors must be satisfied for the
application of collateral estoppel:

    1.   whether the issue decided in the prior adjudica-
         tion was identical with the issue presented in the
         present action;

    2.   whether the prior adjudication resulted in a judg-
         ment on the merits; . . .

    3.   whether the party against whom collateral estop-
         pel is asserted was a party or in privity with a
         party to the prior adjudication; [and]
7566                      MUEGLER v. BENING
      4.    whether the party against whom collateral estop-
            pel is asserted had a full and fair opportunity to
            litigate the issue in the prior suit.

Hartsfield v. Barkley, 856 S.W.2d 342, 345 (Mo. Ct. App.
1993). On appeal, Muegler argues that factors one, “identity
of issues,” two, a “judgment on the merits,” and four, a “full
and fair opportunity to litigate,” were not satisfied by the
fraud judgment against him under Missouri law.1

                       A.    Identity of Issues

   Muegler presents two reasons why the “identity of issues”
prong of Missouri’s collateral estoppel test was not met. First,
Muegler argues that under § 523(a)(2)(A), an essential ele-
ment of the crime of fraud is whether he “obtained a direct or
indirect benefit” from his misrepresentations. This “receipt of
benefits” element is an additional element not present under
Missouri law. Second, Muegler argues that § 523(a)(6)
requires that he “willfully caused injury” to Creditors, while
Missouri law only requires a finding that he recklessly caused
injury to Creditors.

   Section 523(a)(2)(A) provides that:

      (a)   A discharge . . . does not discharge an individ-
            ual debtor from any debt— . . .

            (2)   for money, property, services, or an
  1
    Muegler also argues that the jury instructions in the original judgment
were ambiguous. However, because Muegler did not raise this claim in the
district court or bankruptcy court, Muegler has waived his right to make
this claim on appeal. Marx v. Loral Corp., 87 F.3d 1049, 1055 (9th Cir.
1996). We also note that Muegler challenged the jury instructions in a
prior appeal, and those instructions were found unambiguous by a panel
of the Eighth Circuit Court of Appeals. Harre v. Muegler, 113 F.3d 909
(8th Cir. 1997).
                      MUEGLER v. BENING                     7567
               extension, renewal, or refinancing of
               credit, to the extent obtained by—

            (A)   false pretenses, a false representa-
                  tion, or actual fraud, other than a
                  statement respecting the debtor’s or
                  an insider’s financial condition.

Id. (emphasis added). Muegler argues that the word “ob-
tained” adds an additional element to a fraud offense under
§ 523(a)(2). According to Muegler, the use of “obtained”
means that creditors must show that he obtained a direct or
indirect benefit from his fraudulent conduct, or that some por-
tion of the Creditors’ claim was actually transferred to
Muegler. Because this element was lacking in the original
judgment — the jury did not have to find that Muegler
obtained a direct or indirect benefit from his fraud — Muegler
argues that there is no “identity of issues” between the present
suit and the original judgment.

   [1] It is true that this circuit and others have held that the
debtor must have received a direct or indirect benefit from his
or her fraudulent activity in order to make out a violation of
§ 523(a)(2)(A). See, e.g., In re Arm, 87 F.3d 1046, 1049 (9th
Cir. 1996) (“We make clear . . . that the indirect benefit to the
debtor from a fraud in which he participates is sufficient to
prevent the debtor from receiving the benefits that bankruptcy
law accords the honest person.”); In re Bilzerian, 100 F.3d
886, 891 (11th Cir. 1996) (“In light of persuasive circuit
authority, we conclude in this case that the district court prop-
erly applied the ‘receipt of benefits’ theory in concluding that
Bilzerian’s debt . . . was subject to the § 523(a)(2)(A) excep-
tion to discharge.”); Matter of Luce, 960 F.2d 1277, 1283 (5th
Cir. 1992) (“[T]he Code dictates that a particular debt is non-
dischargeable ‘[i]f the debtor benefits in some way’ from the
money, property, services, or credit obtained through decep-
tion.”). However, these rulings were made before the
7568                    MUEGLER v. BENING
Supreme Court’s decision in Cohen v. De La Cruz, 523 U.S.
213, 223 (1998).

   In Cohen, the creditor in a bankruptcy case was awarded
treble damages, attorney’s fees, and costs. Id. at 215-16. The
debtor argued that attorney’s fees, treble damages, and costs
should not be deemed nondischargeable under § 523(a)(2)(A)
because § 523(a)(2)(A) only encompasses the value of the
money, property, or services a debtor obtains from fraud. Id.
at 217-18. Therefore, to the extent that punitive or compensa-
tory damages exceed the amount actually obtained by the
debtor from fraud, the award is not subject to § 523(a)(2)(A).

   [2] The Supreme Court found that the overriding purpose
of § 523 is to protect victims of fraud. Id. at 222-23. There-
fore, without any indication from Congress in § 523(a)(2)(A)
itself, the Court found it unlikely that a debtor would be held
responsible only for restitutionary damages arising from
fraud. Id. at 223. The Court held that

    [T]he text of § 523(a)(2)(A), the meaning of parallel
    provisions in the statute, the historical pedigree of
    the fraud exception, and the general policy underly-
    ing the exceptions to discharge all support our con-
    clusion that ‘any debt . . . for money, property, or
    services, or . . . credit, to the extent obtained by’
    fraud encompasses any liability arising from money,
    property, etc., that is fraudulently obtained, includ-
    ing treble damages, attorney’s fees, and other relief
    that may exceed the value obtained by the debtor.

Id. (emphasis added).

   [3] Although the Court’s opinion in Cohen did not address
the precise issue presented in this case — whether a debtor
must have obtained some benefit from the fraud for a debt to
be held nondischargeable under § 523(a)(2)(A) — the Court’s
analysis in Cohen indicates that a finding of debt due to fraud
                      MUEGLER v. BENING                     7569
is all that is necessary to satisfy § 523(a)(2)(A). Id. The Fifth
Circuit and Fourth Circuit have found as much in two cases
since Cohen was decided. In re M.M. Winkler & Assocs., 239
F.3d 746, 749 (5th Cir. 2001); In re Pleasants, 219 F.3d 372,
375 (4th Cir. 2000) (stating that the language of Cohen is
“broad enough to encompass a situation in which no portion
of a creditor’s claims was literally transferred to the fraudu-
lent debtor”). As the Fifth Circuit noted, “Cohen indicates that
whether the debt arises from fraud is the only consideration
material to nondischargeability. It also indicates that we
should not read requirements like receipt of benefits into
§ 523(a)(2)(A) and that the discharge exceptions protect fraud
victims rather than debtors.” Winkler, 239 F.3d at 749.

   [4] In light of Cohen, the Fourth and Fifth Circuit’s analy-
sis of the “obtained by” language in § 523(a)(2)(A) is sound,
and should be adopted. It is only the fact of an adverse fraud
judgment, and nothing more, that is required for a debt to be
nondischargeable. Accordingly, we find that in light of
Cohen, the receipt of a benefit is no longer an element of
fraud under § 523(a)(2)(A).

   [5] Muegler also argues that there is no “identity of issues”
because the Missouri fraud judgment did not require a finding
that his conduct was “willful or malicious.” Under Missouri
law, a jury may award punitive damages only upon a finding
of evil motive, reckless indifference, or constructive knowl-
edge. Ackmann v. Keeney-Toelle Real Estate Co., 401 S.W.2d
483, 489 (Mo. 1966). However, 11 U.S.C. § 523(a)(6) states
that “a discharge . . . does not discharge an individual debtor
from any debt . . . for willful and malicious injury by the
debtor to another entity or to the property of another entity
. . . .” Under this provision, reckless conduct or evil motive
are insufficient to qualify as “willful and malicious” injury.
Kawaauhau v. Geiger, 523 U.S. 57, 64 (1998). Because puni-
tive damages may be awarded based upon a lower standard
than what is required by § 523(a)(6), Muegler argues that
there is no “identity of issues” between the punitive damages
7570                   MUEGLER v. BENING
award in the original judgment and the present bankruptcy
proceeding.

   [6] Although Missouri law allows a jury to find guilt based
upon a lower standard than that required by § 523(a)(6), in
this case the Missouri jury instructions regarding culpability
clearly required a finding that Muegler intended his misrepre-
sentations to harm the Creditors. The jury found that Muegler
willfully committed fraud, and awarded compensatory dam-
ages to the Creditors based upon its finding. The subsequent
award of punitive damages, moreover, was based upon the
culpability found by the jury in its compensatory damages
award.

   [7] When the awards of compensatory damages and puni-
tive damages are based upon the same conduct, the punitive
damages award will be nondischargeable under § 523(a)(6) if
the compensatory damages award is found to be nondischar-
geable. In re Adams, 761 F.2d 1422, 1428 (9th Cir. 1985).
Because the compensatory damages award is nondischarge-
able and the award of punitive damages was based upon the
same finding of guilt, the standard for a finding of fraud under
Missouri law and § 523(a)(6) are identical for the purposes of
this case. See In re Scarborough, 171 F.3d 638, 644 (8th Cir.
1999) (addressing an almost identical situation under Mis-
souri law).

   [8] We find that the “identity of issues” prong of the Mis-
souri collateral estoppel test has been satisfied in this case. In
the original judgment, the jury found that Muegler committed
fraud within the meaning of § 523(a)(6). Moreover, § 523(a)
(2)(A) does not require a showing that the debtor received a
benefit, whether direct or indirect, from his or her fraudulent
misrepresentation.

                 B.   Judgment on the Merits

  Muegler next contends that the issues pertaining to the
present case were not “actually adjudicated” in the original
                      MUEGLER v. BENING                     7571
trial, and thus the original judgment did not constitute a final
judgment on the merits. Muegler argues that the original adju-
dication was not a final judgment on the merits because of the
discovery and trial sanctions placed upon him by the court —
sanctions that Muegler claims made the original judgment
more like a default judgment, rather than a judgment on the
merits.

   [9] Muegler’s claim must fail. Missouri courts and bank-
ruptcy courts have held that when a debtor files an answer in
the case, thus requiring a trial to prove matters not admitted
in the pleadings, the subsequent judgment is a judgment on
the merits, not a default judgment. In re Day, 137 B.R. 335,
339 (Bankr. W.D. Mo. 1992); DuPont v. Bluestein, 994
S.W.2d 96, 97 (Mo. Ct. App. 1999). Muegler filed an answer
and participated in the trial, and the state court judgment actu-
ally adjudicated each issue relating to the fraud accusations
against Muegler. The sanctions ordered by the district court
were a result of Muegler’s own obstructionist tactics, and did
not affect whether the Missouri judgment constituted a judg-
ment on the merits.

          C.   Full and Fair Opportunity to Litigate

   Lastly, Muegler contends that because of the sanctions lev-
ied against him in the Missouri judgment, he was not afforded
the procedural opportunities that would be available to him in
another forum. See Bi-State Dev. Agency v. Whelan Sec. Co.,
679 S.W.2d 332, 337 (Mo. Ct. App. 1984) (stating that a party
may not have a “full and fair opportunity to litigate” when a
second forum affords procedural opportunities not available
in the original action).

   [10] Again, Muegler’s argument must fail. The relevant
procedural opportunities in this case were the procedural
opportunities available to Muegler at the beginning of the
original trial, not the procedural opportunities taken away
from him due to his abuse of the discovery process. See In re
7572                  MUEGLER v. BENING
Daily, 47 F.3d 365, 368 (9th Cir. 1995) (stating that “the
‘actual litigation’ requirement may be satisfied by substantial
participation in the adversary contest in which the party is
afforded a reasonable opportunity to defend himself on the
merits but chooses not to do so”). Without regard to sanctions
placed upon Muegler due to his own abuses, bankruptcy
courts afford the same procedural opportunities that were
available to Muegler at the beginning of the original district
court trial. Accordingly, we find that Muegler was given a full
and fair opportunity to litigate in the original trial.

                        CONCLUSION

   [11] For the foregoing reasons, we hold that Muegler is col-
laterally estopped from re-litigating the issue of fraud in bank-
ruptcy court, and AFFIRM the judgment of the district court.

  AFFIRMED.