Court Opinion

ID: 4584586
Source: CourtListenerOpinion
Date Created: 2020-11-06 23:00:38.257609+00
Date Added: 2024-06-11T13:42:45.290497
License: Public Domain

FILED
                                                                           NOV 4 2020
                           NOT FOR PUBLICATION                        SUSAN M. SPRAUL, CLERK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. SC-20-1066-GFB
LEUCADIA GROUP, LLC,
            Debtor.                                  Bk. No. 3:16-bk-5474-CL

CALDARELLI HEJMANOWSKI PAGE &                        Adv. No. 3:18-ap-90169-CL
LEER LLP,
             Appellant,
v.                                                   MEMORANDUM*
RONALD E. STADTMUELLER, Trustee;
UAS INVESTMENTS, LLC,
             Appellees.

              Appeal from the United States Bankruptcy Court
                    for the Southern District of California
             Christopher B. Latham, Bankruptcy Judge, Presiding

Before: GAN, FARIS, and BRAND, Bankruptcy Judges.

                                 INTRODUCTION

      Appellant Caldarelli Hejmanowski Page & Leer, LLC (“CHPL”)

      *
        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.
appeals the bankruptcy court’s order granting Chapter 71 trustee Ronald E.

Stadtmueller’s (“Trustee”) motion for summary judgment and denying

CHPL’s cross-motion for summary judgment, and the bankruptcy court’s

judgment disallowing CHPL’s claim. The bankruptcy court determined

that CHPL’s claim, which it acquired from UAS Investments, LLC (“UAS”),

was barred by claim preclusion.2 In a prior case in the Georgia state court,

UAS dismissed its contract claims against debtor Leucadia Group, LLC

(“Debtor”) with prejudice. The bankruptcy court properly applied Georgia

law in determining that the claim was barred by claim preclusion. We

AFFIRM.

                                         FACTS

A.     Prepetition Events

       Debtor is a California LLC, formed in 2013 by Robert Miller

(“Miller”) and Sean Frisbee (“Frisbee”) for the purpose of obtaining

commercial and government contract work in aerospace engineering. Until

January 2015, Miller and Frisbee were each 50% owners of Debtor, and

Miller served as president.

       1
        Unless specified otherwise, all chapter and section references are to the
Bankruptcy Code, 11 U.S.C. §§ 101-1532, all “Rule” references are to the Federal Rules
of Bankruptcy Procedure, and all “Civil Rule” references are to the Federal Rules of
Civil Procedure.
       2
         For clarity, we refer to “claim preclusion” rather than “res judicata.” See Taylor
v. Sturgell, 553 U.S. 880, 892 n.5 (2008).

                                             2
      After Debtor was formed, Miller began discussions with Daryl

Moody (“Moody”) about opportunities to invest in Debtor. In December

2013, Debtor entered into an agreement with Moody’s company, Mast

Nine, Inc. (“Mast Nine”), which gave Mast Nine the option to make a

convertible loan of up to $1,575,000, to be secured by Debtor’s assets (the

“Loan Agreement”). Under the Loan Agreement, if Mast Nine loaned the

full $1,575,000, it could convert its debt into a one-third ownership interest.

Mast Nine subsequently assigned its rights under the Loan Agreement to

UAS, a newly formed affiliate controlled by Moody. Pursuant to the Loan

Agreement, UAS loaned Debtor a total of $650,000.

      During 2014, disputes arose between Miller, Frisbee, and Moody over

Debtor’s operation. By the end of 2014, Debtor’s financial condition had

deteriorated, and in January 2015, Miller informed Frisbee and Moody that

Debtor did not have the financial capability to continue operating. Miller

then proposed to UAS that he would dissolve Debtor unless UAS agreed to

take either $50,000 on its $650,000 loan, or an 8% interest in Debtor.

      On January 16, 2015, Frisbee appointed Moody as a director of

Debtor, and together, they removed Miller as president. That same day,

UAS and Frisbee filed a complaint in Georgia state court against Debtor

and Miller for breach of contract and injunctive relief (the “Georgia

Action”). UAS and Frisbee asserted that Miller’s communication to UAS

was an unqualified repudiation of the Loan Agreement and a breach of

                                       3
contract.

      A month later, UAS and Frisbee filed an amended complaint,

removing Debtor and asserting claims against only Miller. The affidavit of

the process server indicated that the summons, complaint, and amended

complaint were served on Miller at his residence on March 14, 2015.

Although Miller was purportedly removed as Debtor’s president in

January 2015, he was listed as the service agent for Debtor with the

California Secretary of State and remained so until May 7, 2015. Frisbee

later dismissed all his claims in the action without prejudice and was

removed as a plaintiff.

      Miller then moved to disqualify UAS’s counsel based on asserted

conflicts arising from its prior representation of Miller and its concurrent

involvement in defending Debtor in a separate California suit. He argued

that omitting Debtor from the amended complaint was insufficient under

Georgia law to remove Debtor as a defendant.

      In response, UAS filed an unopposed motion to dismiss Debtor

pursuant to Ga. Code § 9-11-41 and submitted a proposed order dismissing

Debtor with prejudice. The state court entered the order dismissing all

claims against Debtor with prejudice in May 2015.

      In October 2017, the state court granted partial summary judgment in

favor of Miller. UAS and Miller then entered into a settlement and

dismissed the remainder of the case with prejudice in July 2018.

                                       4
B.    The Bankruptcy Case And Adversary Proceeding

      While the Georgia Action was pending, UAS filed an involuntary

chapter 11 petition against Debtor. The bankruptcy court entered an order

for relief and converted the case to chapter 7 in March 2017. UAS filed a

proof of claim for $716,010.61 based on the Loan Agreement.3 UAS later

partially assigned its claim to CHPL.

      In September 2018, Trustee filed an adversary complaint against UAS

and CHPL seeking disallowance of the claims arising from the Loan

Agreement.4 Trustee asserted that Debtor’s obligations under the Loan

Agreement were extinguished because UAS dismissed Debtor with

prejudice in the Georgia Action.

      CHPL filed an answer denying the allegations. Trustee and UAS then

entered into a stipulation whereby UAS agreed to not defend the action

and to allow entry of a default and entry of judgment consistent with any

eventual judgment against CHPL.

C.    The Summary Judgment Motions And The Court’s Ruling

      In November 2018, Trustee filed a motion for summary judgment,

      3
       UAS asserted that its claim was secured in the amount of $696,010.61 and
unsecured in the amount of $20,000.
      4
         Trustee also sought to avoid UAS’s UCC-1 financing statement under §§ 544
and 548, and a declaration that the security interest was unenforceable due to an
insufficient collateral description. Because the bankruptcy court disallowed the entire
claim, it did not determine whether any part of the claim was secured.

                                            5
asserting that UAS’s claim was barred by claim preclusion. Trustee argued

that Debtor’s liability under the Loan Agreement was at issue in the

Georgia Action because UAS treated the purported repudiation as an

immediate breach of contract. Trustee also argued that dismissal with

prejudice operated as an adjudication on the merits and, under Georgia

law, UAS was precluded from asserting claims against Debtor based on the

Loan Agreement.

        CHPL opposed the motion and filed a cross motion for summary

judgment. CHPL argued that claim preclusion was inapplicable because

Debtor was not served with the complaint, never appeared in the Georgia

Action, and therefore was not a party. CHPL also argued that at the time of

dismissal no claims against Debtor were pending because the complaint

had been amended, and by effectively removing Miller and dropping its

claims against Debtor, UAS manifested an intent to continue performance

under the Loan Agreement. Finally, CHPL argued that if UAS’s claim was

barred, the bankruptcy court should dismiss the involuntary bankruptcy

case.

        The bankruptcy court issued a tentative ruling stating its intention to

grant Trustee’s motion. At the hearing, the bankruptcy court focused on

whether Debtor was a “party” in the Georgia Action and whether the state

court had personal jurisdiction for purposes of claim preclusion. The court

determined that CHPL’s request to dismiss the case should be filed in the

                                        6
main case, not an adversary proceeding, and denied the request without

prejudice. The bankruptcy court then requested additional briefing on the

issues of whether Georgia law required personal jurisdiction for purposes

of claim preclusion and whether Debtor was served with the summons and

complaint such that the state court had personal jurisdiction.

      After the parties submitted their briefs, the bankruptcy court entered

a comprehensive written order granting summary judgment in favor of

Trustee, and entered judgment disallowing the claim of UAS and its

assignee, CHPL. The court determined that Miller was Debtor’s registered

agent and therefore, under Georgia law, actual service on Miller was

sufficient to confer personal jurisdiction over Debtor and make it a party to

the case. CHPL timely appealed.

                               JURISDICTION

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

157(b)(2)(B). We have jurisdiction under 28 U.S.C. § 158(a).

                                     ISSUE

      Whether the bankruptcy court erred by granting Trustee’s summary

judgment motion.

                          STANDARD OF REVIEW

      We review the bankruptcy court’s grant of summary judgment de

novo. Lewis v. Kaelin (In re Cresta Tech. Corp.), 583 B.R. 224, 227 (9th Cir. BAP

2018). We also review the bankruptcy court’s application of claim

                                        7
preclusion de novo. Alonso v. Summerville (In re Summerville), 361 B.R. 133,

139 (9th Cir. BAP 2007). Under a de novo review, we look at the matter

anew, giving no deference to the bankruptcy court’s determinations. In re

Cresta Tech. Corp., 583 B.R. at 227.

                                 DISCUSSION

      Civil Rule 56(a), made applicable by Rule 7056, provides that

summary judgment is appropriate when “there is no genuine dispute as to

any material fact and the movant is entitled to judgment as a matter of

law.” We must view the evidence in the light most favorable to the

non-moving party and draw all justifiable inferences in favor of the

non-moving party. Fresno Motors, LLC v. Mercedes Benz USA, LLC, 771 F.3d
1119, 1125 (9th Cir. 2014) (citing Cty. of Tuolumne v. Sonora Cmty. Hosp., 236
F.3d 1148, 1154 (9th Cir. 2001); Anderson v. Liberty Lobby, Inc., 477 U.S. 242,

255 (1986)).

      CHPL argues that the bankruptcy court erred by granting summary

judgment in favor of Trustee and by denying its motion for summary

judgment, because under Georgia law, UAS and CHPL were not barred by

claim preclusion from asserting their claim against Debtor.

      The Full Faith and Credit Act, 28 U.S.C. § 1738, requires bankruptcy

courts to give the same preclusive effect to a state court judgment that the

judgment would have in the courts of the state in which it was rendered.

Matsushita Elec. Indus. Co. v. Epstein, 516 U.S. 367, 369 (1996). Georgia law

                                        8
therefore determines the preclusive effect of the dismissal in the Georgia

Action. If Georgia law precludes UAS from filing a subsequent suit against

Debtor based on the Loan Agreement, UAS’s claim in the bankruptcy case

must be disallowed.

      Under Georgia law, a voluntary dismissal with prejudice “operates as

an adjudication upon the merits and bars the right to bring another action

on the same claim.” Fowler v. Vinyard, 405 S.E.2d 678, 680 (Ga. 1991)

(citations omitted). An order dismissing a defendant with prejudice is not a

judgment, but it does adjudicate the “non-liability of that defendant to the

plaintiff.” Hedquist v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 528 S.E.2d
508, 510 (Ga. 2000).

      “As far as the parties involved in the voluntary dismissal with

prejudice are concerned, the dismissal constitutes a final disposition of the

action so dismissed, and [claim preclusion] will bar any attempt . . . to

litigate the dismissed claim against the dismissed party under another

guise.” Id. at 511. Dismissal with prejudice bars relitigation of “all questions

which might have been litigated in the action and is a final disposition,

barring the right to bring another action on the same claim.” Hutcheson

Med. Ctr. v. Scealf, 422 S.E.2d 20, 22 (Ga. App. 1992).

      The record is clear that UAS voluntarily dismissed all claims against

Debtor with prejudice. Those claims included contract claims based on the

Loan Agreement. Therefore it is barred under Georgia law from relitigating

                                        9
those claims.

      CHPL argues that because voluntary dismissals are not required to

be made with prejudice under Ga. Code § 9-11-41, UAS’s dismissal with

prejudice was a mistake. However, a voluntary dismissal with prejudice

bars relitigation of claims even if the plaintiff could have dismissed

without prejudice. Dep’t of Transp. v. Revco Disc. Drug Ctrs., Inc., 746 S.E.2d
631, 634 (Ga. App. 2013) (“[A] simple mistake by a party as to the . . . legal

result of an act which he performs, is no ground for either defensive or

affirmative relief.”) (citation omitted).

A.    The Dismissal Order In the Georgia Action Is Sufficient For
      Purposes of Claim Preclusion

      Three elements must be satisfied to apply claim preclusion under

Georgia law: (1) an identity of the cause of action; (2) an identity of the

parties or their privies; and (3) a previous adjudication on the merits by a

court of competent jurisdiction. Coen v. CDC Software Corp., 816 S.E.2d 670,

675 (Ga. 2018).

      CHPL argues that Debtor was not served with the summons and

complaint and did not appear in the Georgia Action, and therefore, it was

not a “party,” and the state court was not a “court of competent

jurisdiction” because it lacked personal jurisdiction over Debtor.

                                        10
      1.    The Dismissal Order Bars UAS From Asserting Claims
            Against Debtor Regardless of Whether Debtor Was Served In
            the Georgia Action

      CHPL argues that Georgia law requires service on a defendant in

order for a judgment entered against that defendant to support claim

preclusion. But, because a dismissal with prejudice bars the plaintiff and

not the defendant, it is not evident that Georgia law would require the

defendant to be served or make an appearance in order to make the

dismissal effective against the plaintiff in a future action.

      Voluntary dismissals are governed by Ga. Code § 9-11-41 and can be

effected either through a notice or stipulation filed by the plaintiff, or by a

court order. Ga. Code § 9-11-41(a)(1)-(2). Although voluntary dismissals

under § 9-11-41 may be with or without prejudice, the filing of a second

notice of dismissal operates as an adjudication on the merits and is with

prejudice. Ga. Code § 9-11-41(a)(3). Regardless of under which provision of

§ 9-11-41(a) the dismissal is made, “a dismissal ‘with prejudice’ should

have the same effect.” Fowler, 405 S.E.2d at 680.

      Under the “two-dismissal rule,” when a plaintiff files a second notice

of dismissal, “the controlling factor is the [second] voluntary dismissal of

the same cause of action rather than the named party defendants.” Walker

v. Mecca, 739 S.E.2d 450, 451 (Ga. App. 2013) (quoting Belco Elec. v. Bush, 420
S.E.2d 602 (Ga. App. 1992) (applying prior version of the statute)). A

                                       11
second notice of dismissal bars the plaintiff from asserting the dismissed

claims regardless of whether the defendant was served, whether the court

had personal jurisdiction over the defendant, or even whether the

defendant was named in the complaint. See id. at 451; Harris v. Sampson, 290
S.E.2d 165, 167 (Ga. App. 1982) (“[I]t is the mere filing of the complaint

followed by a voluntary dismissal that brings the statute into play, not that

a defendant must be served and be forced to answer or suffer default.”).

      The result should be no different where the dismissal with prejudice

is by court order on plaintiff’s motion rather than by the two-dismissal

rule. See Fowler, 405 S.E.2d at 680 (reasoning that a voluntary dismissal with

prejudice operates as res judicata whether by order of the court or by

statute under the two-dismissal rule).

      But, even if Georgia law were to require service on a defendant in

order to make the voluntary dismissal with prejudice binding on the

plaintiff, improper service and personal jurisdiction are affirmative

defenses which are waivable by the defendant. See Burch v. Dines, 600
S.E.2d 374, 377 n.5 (Ga. App. 2004) (lack of personal jurisdiction based on

defective process and insufficient service may be waived); Ga. Code § 9-11-

8(c); (12)(1)(B).

      If Debtor was not served and did not waive its affirmative defenses, it

retains those defenses and the ability to waive them. Focus Healthcare Med.

Ctr., Inc. v. O’Neal, 558 S.E.2d 818, 820 (Ga. App. 2002). Until such time as

                                       12
the court rules on an asserted affirmative defense, the action may be

voidable, but it is not void. Hedquist, 528 S.E.2d at 512; see also Harris, 290
S.E.2d at 167 (“The mere fact that a recovery may not have been authorized

under the dismissed actions does not render the suit void where the trial

court had jurisdiction of the cause of action.”).

      If Debtor was not served in the Georgia Action as CHPL argues, then

Debtor, and not CHPL, retains the right to assert—or waive—the defenses

of insufficient service and lack of personal jurisdiction.

      2.    Service Was Effective On Debtor and the State Court Had
            Jurisdiction

      Although service on Debtor was unnecessary for the state court to

enter an order dismissing the claims with prejudice, the bankruptcy court

did not err by determining that Debtor was served under Georgia law.

      CHPL argues that Debtor was not served because (1) service on

Miller did not effect service on Debtor under the holdings of Chrison v. H &

H Interiors, Inc., 500 S.E.2d 41 (Ga. App. 1998) and All Risk Insurance Agency,

Inc. v. Rockbridge Sanitation Co., 319 S.E.2d 527 (Ga. App. 1984); and (2) the

summons was not directed to Debtor and Debtor never received notice of

service of process.

      Under Georgia law, service on a corporation can be made by

delivering a copy of the summons and complaint to the registered agent of

the entity. Ga. Code § 9-11-4(e)(1). The record is clear that Miller was

                                        13
served at his personal address and at the time of service, he was Debtor’s

registered agent. Miller’s personal residence was the proper address for

serving Debtor’s registered agent.

      Neither Chrison nor All Risk Insurance required the bankruptcy court

to determine that service was not proper. In Chrison, there was no listing

with the Secretary of State and the summons was left with a regional

manager at the entity’s place of business in Tennessee. 500 S.E.2d at 42. As

a result, the court found that the entity was not served at all. Id. at 45 n.7. In

All Risk Insurance, the individual was served at his address in North

Carolina, but because the service address for the corporate defendant’s

agent was in Georgia, service on the individual was not effective as to the

corporation. 319 S.E.2d at 528.

      The bankruptcy court also properly determined that despite the fact

that the process server’s affidavit indicated that only Miller and not Debtor

was served, “it is the fact of service which confers jurisdiction, and not the

return, and the latter may be amended to speak the truth.” Montgomery v.

USS Agri-Chem. Div., 270 S.E.2d 362, 365 (Ga. App. 1980). If “the fact of

service appears, and the officer’s return is irregular or incomplete, it should

not be treated as no evidence, but rather as furnishing defective proof of

the fact of service.” Id. at 364. The process server’s affidavit evidences the

fact of service on Debtor’s registered agent at the address listed with the

Secretary of State. This is sufficient to confer jurisdiction under Georgia law

                                        14
and to provide Debtor with notice of the Georgia Action.

B.    The Bankruptcy Claim Is the Same Claim as the Georgia Action

      CHPL argues that the bankruptcy claim is not identical to the claim

in the Georgia Action because UAS amended its complaint to remove

Debtor before serving it on Miller. CHPL contends that unlike a claim in

bankruptcy, the Georgia Action was based on an anticipatory breach which

required an absolute and unqualified refusal to perform. CHPL reasons

that once it became clear to UAS that Frisbee intended for Debtor to

perform under the Loan Agreement, UAS amended the complaint to drop

its claims against Debtor.

      For purposes of claim preclusion under Georgia law, a cause of action

is “‘the entire set of facts which give rise to an enforceable claim,’ with

special attention given to the ‘wrong’ alleged.” Coen, 816 S.E.2d at 675

(quoting Morrison v. Morrison, 663 S.E.2d 714, 719 (Ga. 2008)). If the

operative facts required to state a claim in the prior case encompass the

operative facts required to state a claim in the second case, the causes of

action are identical. Id.

      In the Georgia Action, UAS alleged that Debtor and Miller breached

the Loan Agreement by repudiating the contract and by failing to pay

according to its terms. Under Georgia law, repudiation of a contract gives

the innocent party an election of remedies—either keep the contract in

force or immediately sue for damages. Szabo Assocs. Inc. v. Peachtree-

                                       15
Piedmont Assocs., 234 S.E.2d 119, 120 (Ga. App. 1977). UAS immediately

sued, thereby electing to treat the repudiation as an anticipatory breach of

contract.

      It is immaterial that UAS amended its complaint because claim

preclusion prevents relitigation of claims “which have already been

adjudicated, or which could have been adjudicated” between the same

parties. Crowe v. Elder, 723 S.E.2d 428, 430 (Ga. 2012). The order dismissing

Debtor from the Georgia Action expressly stated that “all claims” against

Debtor were dismissed with prejudice.

      The “wrong” alleged by UAS in the Georgia Action was Debtor’s

failure to pay under the Loan Agreement. Debtor’s obligation to pay under

the Loan Agreement is precisely what UAS asserted in its bankruptcy

claim. Because the “entire set of facts” giving rise to UAS’s claim in the

Georgia Action encompassed Debtor’s liability under the Loan Agreement,

the causes of action are identical for purposes of claim preclusion.

                               CONCLUSION

      For the reasons set forth above, we AFFIRM the bankruptcy court’s

order granting Trustee’s motion for summary judgment and disallowing

CHPL’s claim.

                                      16