Court Opinion

ID: 2757170
Source: CourtListenerOpinion
Date Created: 2014-12-03 19:08:37.842071+00
Date Added: 2024-06-11T11:26:53.986011
License: Public Domain

FILED
                                                           JAN 12 2012
 1                                                     SUSAN M SPRAUL, CLERK
                                                         U.S. BKCY. APP. PANEL
                                                         OF THE NINTH CIRCUIT
 2
 3                  UNITED STATES BANKRUPTCY APPELLATE PANEL
 4                            OF THE NINTH CIRCUIT
 5   In re:                        )      BAP No.    CC-11-1065-HPaMk
                                   )
 6   MANMOHAN SINGH BIRING,        )      Bk. No.    07-21006
                                   )
 7                  Debtor.        )      Adv. No. 08-01172
     ______________________________)
 8                                 )
     MANMOHAN SINGH BIRING,        )
 9                                 )
                    Appellant,     )
10                                 )
     v.                            )      M E M O R A N D U M1
11                                 )
     YOGESH DHAWAN,                )
12                                 )
                    Appellee.      )
13   ______________________________)
14
                Argued and Submitted on November 16, 2011,
15                        at Pasadena, California
16                          Filed - January 12, 2012
17            Appeal from the United States Bankruptcy Court
                  for the Central District of California
18
          Honorable Peter H. Carroll, Bankruptcy Judge, Presiding
19
20   Appearances:     Gregory M. Salvato, Esq. of Salvato Law Offices
                      argued for the Appellant. Bren Conner, Esq. of
21                    Conner & Associates argued for the Appellee.
22
23   Before: HOLLOWELL, PAPPAS and MARKELL, Bankruptcy Judges.
24
25
26        1
            This disposition is not appropriate for publication.
27   Although it may be cited for whatever persuasive value it may
     have (see Fed. R. App. P. 32.1), it has no precedential value.
28   See 9th Cir. BAP Rule 8013-1.
 1        Creditor Yogesh Dhawan (Dhawan) obtained a default judgment
 2   in California state court and subsequently sued the debtor to
 3   determine the nondischargeability of the debt pursuant to
 4   § 523(a).2   The bankruptcy court granted Dhawan’s motion for
 5   summary judgment, determining that there was no genuine issue of
 6   material fact because of the preclusive effect of the state court
 7   judgment.    We AFFIRM.
 8                                I.   FACTS
 9        The Debtor is a pulmonary and critical care physician,
10   licensed to practice medicine in California.    He has expertise in
11   skin care and other cosmetic treatments.    In 2002, the Debtor
12   created Healthwest, Inc. (Healthwest) to offer and sell licenses
13   for “med spa” clinics (Clinics) that provided laser hair removal,
14   Botox, light treatment and microdermabrasion.   The Debtor,
15   through Healthwest, sold the licenses with options to operate the
16   Clinics in certain exclusive territories.   As part of the
17   purchase, the Debtor would provide necessary support services for
18   the operation of the Clinics.
19        On August 13, 2003, Healthwest filed an application with the
20   California Department of Corporations (CDOC) to register its sale
21   of licenses and options as franchises.    In October or November
22   2003, the Debtor provided Dhawan with its franchise offering.
23   Based on the information and representations provided by the
24   Debtor in connection with the Clinic opportunity, Dhawan
25
26        2
            Unless otherwise specified, all chapter and section
27   references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532, and
     all “Rule” references are to the Federal Rules of Bankruptcy
28   Procedure, Rules 1001-9037.

                                       -2-
 1   purchased a license to operate a Clinic and entered into a
 2   Licensing Servicing Agreement, a Management Support Services
 3   Agreement, and an Asset Purchase Agreement with the Debtor and
 4   Healthwest.
 5        On July 7, 2004, the CDOC finalized its review of Healthwest
 6   and denied its franchise registration application, finding that
 7   Healthwest had advertised and sold the Clinics by means of
 8   fraudulent misrepresentation.   It found that “the offer or sale
 9   of [the] franchises in California would constitute
10   misrepresentation, deceit and fraud on the purchasers,” for
11   reasons including that the Debtor and Healthwest sold multiple
12   licenses for the same territories.
13        On September 24, 2004, Dhawan filed a complaint against the
14   Debtor and Healthwest in California state court alleging thirteen
15   causes of action including fraud, fraudulent inducement to
16   contract, negligent misrepresentation, breach of contract, unfair
17   competition and unfair business practices in connection with his
18   purchase of the Clinic (the State Court Complaint).   Dhawan
19   alleged that the Debtor, individually and as the sole shareholder
20   and officer of Healthwest, fraudulently induced him to invest in
21   the Clinic and enter into the associated agreements, and then
22   systematically breached those agreements by not delivering what
23   was promised.   The State Court Complaint incorporated the
24   findings of the CDOC.   Dhawan sought general, special, and
25   punitive damages in an unspecified amount.
26        Although the Debtor and Healthwest were properly served with
27   the State Court Complaint, neither answered.   Default judgments
28   were entered against the Debtor and Healthwest on February 8,

                                     -3-
 1   2005.    Dhawan submitted evidence and testimony concerning the
 2   claims made in the State Court Complaint to support the amount of
 3   his resulting damages at a “prove up” hearing held on
 4   September 12, 2005.    Although the Debtor admits he received both
 5   the State Court Complaint and the statement of damages, he did
 6   not appear at the prove up hearing.
 7           On September 12, 2005, the state court entered a
 8   $1,924,008.64 judgment jointly and severally against the Debtor
 9   and Healthwest (the Judgment).    The state court awarded damages
10   based on the “oral testimony and other evidence presented by
11   [Dhawan], including [his] written declaration, and supporting
12   exhibits.”    It found that “consistent with this action and the
13   evidence presented,” Dhawan “sustained damages as alleged in the
14   complaint.”    The Judgment specified the damages:
15           1) $85,000 for Mr. Dhawan’s initial payment for the
             [Clinic] and options pursuant to the License Agreement,
16           which has been rendered useless by the Defendants’
17           misrepresentations and breaches of contract to aid in
             the operation of the [Clinic];
18
             2) $225,000 for the lost value of the options on the
19           . . . territories . . . pursuant to both the parties’
20           Option Agreement and Asset Purchase Agreement for which
             Mr. Dhawan was denied his opportunity to exercise the
21           options due to the breaches and fraudulent conduct as
             evidenced and identified by the Department of
22           Corporations;
23
             3) $129,000 in the amount that Mr. Dhawan became
24           obligated, and now remains obligated on the promissory
             note executed in connection with the Asset Purchase
25           Agreement, but which Defendants breached by failing to
26           provide the assets promised;

27           4) $198,990 to purchase the equipment and other assets
28

                                       -4-
 1        that should have been provided by Defendants . . .
          pursuant to the Asset Purchase Agreement;
 2
 3        5) $245,343.64 in losses and additional expenditures
          . . . due to Defendants’ failure to provide the
 4        support, training and marketing efforts that had been
          promised in both the Licensing Agreement and Marketing
 5        Agreement;
 6
          6) $510,000 in lost profits . . . ;
 7
          7) $510,000 which represents the net income for [the
 8        Clinics] that had been optioned as was set forth in the
 9        profit and loss statements which were used by the
          Defendants to induce Mr. Dhawan’s reliance;
10
          8) costs in the amount of $675; and,
11
12        9) $20,000 in relocation and related expenses for
          Plaintiff’s family.
13
14        On November 28, 2007, the Debtor filed a voluntary petition
15   under chapter 7.   Dhawan filed an adversary proceeding on
16   February 26, 2008, to have the Judgment declared nondischargeable
17   under § 523(a)(2), (a)(4) and (a)(6) (the Nondischargeability
18   Complaint).   Like the State Court Complaint, the
19   Nondischargeability Complaint alleged that the Debtor
20   fraudulently induced him to invest in the Clinic.   Dhawan
21   contended that the Debtor knew that the information in the
22   franchise offering was false and never intended to perform on the
23   agreements in connection with the Clinic as promised.    He
24   asserted that the offering and sale of the Clinic was part of a
25   scheme to defraud him.
26        Dhawan filed a motion for summary judgment on the basis that
27   the Judgment had preclusive effect on the issue of whether the
28   Debtor committed fraud under § 523(a)(2)(A).   The Debtor filed an

                                     -5-
 1   opposition.    After a hearing on December 21, 2010, the bankruptcy
 2   court issued a memorandum decision determining that the Debtor
 3   had a full and fair opportunity to litigate the State Court
 4   Complaint and that because the issue of his fraudulent conduct
 5   was necessarily decided in the state court, he was precluded from
 6   relitigating Dhawan’s fraud claim in bankruptcy.           The bankruptcy
 7   court entered a judgment on January 19, 2011, declaring the
 8   Judgment nondischargeable pursuant to § 523(a)(2).           The Debtor
 9   timely appealed.
10                                II.    JURISDICTION
11        The bankruptcy court had jurisdiction under 28 U.S.C.
12   § 157(b)(2)(A), (I), (O) and § 1334.            We have jurisdiction under
13   28 U.S.C. § 158.
14                                      III.     ISSUE
15        Did the bankruptcy court err in granting summary judgment
16   excepting from discharge the $1,924,008 in damages awarded by the
17   state court?
18                          IV.    STANDARDS OF REVIEW
19        We review de novo the bankruptcy court’s grant of summary
20   judgment.   Ghomeshi v. Sabban (In re Sabban), 600 F.3d 1219,
21   1221-22 (9th Cir. 2010); Cutter v. Seror (In re Cutter), 398 B.R.
22   6, 16 (9th Cir. BAP 2008).
23        We review de novo a bankruptcy court’s determination that
24   issue preclusion is available.            Lopez v. Emerg. Serv.
25   Restoration, Inc. (In re Lopez), 367 B.R. 99, 103 (9th Cir. BAP
26   2007); Khaligh v. Hadaegh (In re Khaligh), 338 B.R. 817, 823
27   (9th Cir. BAP 2006).    Once we determine that issue preclusion is
28   available, we review whether applying it was an abuse of

                                               -6-
 1   discretion.   In re Lopez, 367 B.R. at 103; In re Khaligh,
 2   338 B.R. at 823; Miller v. County of Santa Cruz, 39 F.3d 1030,
 3   1032 (9th Cir. 1994).    A bankruptcy court abuses its discretion
 4   when it applies the incorrect legal rule or its application of
 5   the correct legal rule is “(1) illogical, (2) implausible, or
 6   (3) without support in inferences that may be drawn from the
 7   facts in the record.”    United States v. Loew, 593 F.3d 1136, 1139
 8   (9th Cir. 2010) (quoting United States v. Hinkson, 585 F.3d 1247,
 9   1261-62 (9th Cir. 2009)(en banc))(internal quotation marks
10   omitted).
11                              V.   DISCUSSION
12   A.   Summary Judgment
13        In reviewing the bankruptcy court’s decision on a motion for
14   summary judgment, we apply the same standards as the bankruptcy
15   court.   Summary judgment may be granted “if the pleadings, the
16   discovery and disclosure materials on file, and any affidavits
17   show that there is no genuine issue as to any material fact and
18   that the movant is entitled to judgment as a matter of law.”
19   Fed. R. Civ. P. 56(a) (incorporated by Rule 7056); Barboza v. New
20   Form, Inc. (In re Barboza), 545 F.3d 702, 707 (9th Cir. 2008).
21        The party seeking summary judgment bears the initial burden
22   of establishing the absence of a genuine issue of material fact.
23   Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986).    A dispute
24   is genuine if there is sufficient evidence for a reasonable fact-
25   finder to hold in favor of the non-moving party, and a fact is
26   “material” if it might affect the outcome of the case.   Far Out
27   Prods., Inc. v. Oskar,    247 F.3d 986, 992 (9th Cir. 2001) (citing
28   Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248-49 (1986)).

                                       -7-
 1   Once the moving party has met its initial burden, the non-moving
 2   party must show specific facts establishing the existence of
 3   genuine issues of fact for trial.      Id., at 256.
 4   B.     Issue Preclusion
 5          Issue preclusion applies in nondischargeability proceedings
 6   to bar the relitigation of factual issues that were determined in
 7   a prior state court action.   Grogan v. Garner, 498 U.S. 279, 284-
 8   85 n.11 (1991).   To determine the issue-preclusive effect of a
 9   California state court’s judgment, we apply California preclusion
10   law.   28 U.S.C. § 1738; Marrese v. Am. Acad. of Orthopaedic
11   Surgeons, 470 U.S. 373, 380 (1985); Gayden v. Nourbakhsh (In re
12   Nourbakhsh), 67 F.3d 798, 800 (9th Cir. 1995).        Under California
13   law, the party asserting issue preclusion has the burden of
14   establishing the following “threshold” requirements:
15        (1) the issue sought to be precluded must be identical to
     that decided in a former proceeding;
16
17        (2) the issue must have been actually litigated in the
     former proceeding;
18
          (3) it must have been necessarily decided in the former
19   proceeding;
20
          (4) the decision in the former proceeding must be final and
21   on the merits; and,
22        (5) the party against whom preclusion is sought must be the
23   same as, or in privity with, the party to the former proceeding.

24   Harmon v. Kobrin (In re Harmon), 250 F.3d 1240, 1245 (9th Cir.

25   2001); In re Lopez, 367 B.R. at 104.

26          Additionally, the application of issue preclusion requires a

27   “mandatory ‘additional’ inquiry into whether imposition of issue

28   preclusion would be fair and consistent with sound public

                                      -8-
 1   policy.”   In re Khaligh, 338 B.R. at 824-25.    As stated by the
 2   California Supreme Court:
 3        We have repeatedly looked to the public policies
          underlying the doctrine before concluding that
 4        collateral estoppel should be applied in a particular
          setting. . . . Accordingly, the public policies
 5        underlying collateral estoppel - preservation of the
          integrity of the judicial system, promotion of judicial
 6        economy, and protection of litigants from harassment by
          vexatious litigation - strongly influence whether its
 7        application in a particular circumstance would be fair
          to the parties and constitutes sound judicial policy.
 8
 9   Lucido v. Super. Ct., 51 Cal.3d 335, 342-43 (1990)(internal
10   citations omitted); see also In re Lopez, 367 B.R. at 108.
11        To meet its burden, the moving party must have pinpointed
12   the exact issues litigated in the prior action and introduced a
13   record revealing the controlling facts.    Kelly v. Okoye (In re
14   Kelly), 182 B.R. 255, 258 (9th Cir. BAP 1995), aff’d, 100 F.3d
15   110 (9th Cir. 1996).    Reasonable doubts about what was decided in
16   the prior action are resolved against the party seeking
17   preclusion.   Id.
18   C.   Section 523(a)(2)(A)
19        The Bankruptcy Code excepts from discharge any debt for
20   money, property, services, or credit obtained by false pretenses,
21   a false representation, or actual fraud.    11 U.S.C.
22   § 523(a)(2)(A).     To prevail on a claim under § 523(a)(2)(A), a
23   creditor must demonstrate five elements: (1) misrepresentation,
24   fraudulent omission or deceptive conduct by the debtor;
25   (2) knowledge of the falsity or deceptiveness of the debtor’s
26   statement or conduct; (3) an intent to deceive; (4) justifiable
27   reliance by the creditor on the debtor’s statement or conduct;
28   and (5) damage to the creditor proximately caused by its reliance

                                       -9-
 1   on the debtor’s statement or conduct.   Candland v. Ins. Co. of N.
 2   Am. (In re Candland), 90 F.3d at 1466, 1469 (9th Cir. 1996);
 3   Turtle Rock Meadows Homeowners Ass’n v. Slyman (In re Slyman),
 4   234 F.3d 1081, 1085 (9th Cir. 2000).    The elements of
 5   § 523(a)(2)(A) mirror common law fraud.   Field v. Mans, 516 U.S.
 6   59, 61 (1995).   The creditor bears the burden of proving each
 7   element of § 523(a)(2)(A) by a preponderance of the evidence.
 8   Grogan v. Garner, 498 U.S. at 287.
 9   D.   Application of Issue Preclusion
10        The Debtor argues that issue preclusion should not apply in
11   this case because the issue of fraud, including the element of
12   intent to deceive, was not actually litigated or necessarily
13   decided in the state court since it was the result of a default.
14        However, while in the minority, California law accords
15   preclusive effect to default judgments, “at least where the
16   judgment contains an express finding on the allegations.”
17   Gottlieb v. Kest, 141 Cal.App.4th 110, 149 (Cal. Ct. App. 2006);
18   Green v. Kennedy (In re Green), 198 B.R. 564, 566 (9th Cir. BAP
19   1996).   The rationale behind finding that default judgments can
20   be preclusive is that defendants who are served with a summons
21   and complaint but fail to respond are presumed to admit all the
22   facts pled in the complaint.   In re Harmon, 250 F.3d at 1247.
23   Therefore, a default judgment:
24        conclusively establishes, between the parties so far as
          subsequent proceedings on a different cause of action
25        are concerned, the truth of all material allegations
26        contained in the complaint in the first action, and
          every fact necessary to uphold the default judgment
27        . . . .
28

                                      -10-
 1   Gottlieb v. Kest, 141 Cal.App.4th at 149 (internal citations
 2   omitted).
 3        For a default judgment to be “actually litigated,” the
 4   material factual issues must have been both raised in the
 5   pleadings and necessary to uphold the default judgment.     Id.
 6   Therefore, the record in the prior proceeding must show an
 7   express finding upon the allegation for which preclusion is
 8   sought.    However, “the express finding requirement can be waived
 9   if the court in the prior proceeding necessarily decided the
10   issue.”    Cantrell v. Cal-Micro, Inc. (In re Cantrell), 329 F.3d
11   1119, 1124 (9th Cir. 2003).    “In such circumstances, an express
12   finding is not required because if an issue was necessarily
13   decided in a prior proceeding, it was actually litigated.”     Id.
14   (internal citations omitted).
15        There is no dispute here that the Debtor received notice of
16   the State Court Complaint, as well as the default judgment and
17   Dhawan’s filed statement of damages and notice of the “prove up”
18   hearing.    Nevertheless, the Debtor asserts that the issue of
19   fraud was not actually litigated because the Judgment did not
20   contain express findings of fraud.      He contends that the issue of
21   fraud was not necessarily decided because the damages that were
22   awarded could have been based on Dhawan’s claims for negligent
23   misrepresentation or breach of contract rather than fraud.
24        The Debtor relies on In re Harmon to support his position.
25   250 F.3d 1240.   In that case, the plaintiff sued the debtor for
26   conversion, contract violations and damages for restitution and
27   dissolution of partnership in connection with a failed joint
28   venture in an Ostrich ranch.    After the state court judgment

                                      -11-
 1   became final, the plaintiff sought to have it declared
 2   nondischargeable under § 523(a)(2)(A).    The Ninth Circuit held
 3   that the state court did not provide express findings of fraud
 4   (or anything else) in the judgment and because fraud could not be
 5   interpreted from the basis of the complaint, the issue of fraud
 6   had not been actually litigated.
 7        Here, however, the State Court Complaint, like the
 8   Nondischargeability Complaint, alleged fraud in connection with
 9   the offer and sale of the Clinics.     While the Debtor asserts that
10   the State Court Complaint alleged many causes of action that were
11   non-fraud related, the causes of action were, in fact, all
12   related to the Debtor’s alleged fraud in the offer and sale of
13   the Clinic franchises.   The State Court Complaint alleged facts
14   supporting Dhawan’s claims that the Debtor falsely represented to
15   Dhawan the profits available from the Clinic, the exclusiveness
16   of operations, and the support available from the Debtor.    Dhawan
17   alleged that the Debtor fraudulently induced him to enter the
18   Licensing Servicing Agreement and the Asset Purchase Agreement.
19   He alleged that he relied on the Debtor’s misrepresentations in
20   purchasing the Clinic and entering into the agreements as part of
21   the transaction.   Finally, Dhawan alleged that the Debtor
22   breached those agreements by intentionally failing to perform as
23   promised.
24        In entering the Judgment, the state court expressly found
25   that Dhawan presented evidence consistent with the allegations in
26   the State Court Complaint and awarded Dhawan the damages
27   sustained as a result.   Additionally, the Judgment referenced the
28   CDOC findings that the Debtor had engaged in fraudulent conduct

                                     -12-
 1   with respect to the offer and sale of the Clinics and in selling

 2   exclusive operating territories under its agreements.

 3        Thus, the Debtor’s fraud underlies all of the state court

 4   claims.    Simply because the Judgment did not expressly identify

 5   that each component of the $1,924,008 award was based on the

 6   fraudulent conduct of the Debtor, it does not mean that there was

 7   a “reasonable doubt as to what was decided.”    See In re Kelly,

 8   182 B.R. at 258.   The Judgment cannot be sustained, as the Debtor

 9   argues, on solely the non-fraud breach of contract claims because

10   the agreements themselves were found to be the result of the

11   Debtor’s fraudulent conduct.3

12        Because the factual issues supporting fraud were raised in

13   the State Court Complaint and necessary to the Judgment, the

14   State Court Complaint was “actually litigated” and necessarily

15   decided.   Id.; see Younie v. Gonya (In re Younie), 211 B.R. 367,

16   374-75 (9th Cir. BAP 1997).     There is no question that the

17   parties to the bankruptcy action are the same as those that

18   participated in the state court.    The State Court Complaint and

19   the Nondischargeability Complaint alleged the same set of facts

20   and circumstances, and the Judgment was a final decision on the

21   merits.    Thus, the threshold requirements for the application of

22   issue preclusion are satisfied.    The bankruptcy court did not err

23
          3
24          The bankruptcy court relied on the state court’s oral
     ruling that Dhawan was entitled to an award of punitive damages,
25   although punitive damages were ultimately not reduced to
     judgment, as a basis for determining that the issue of fraud was
26
     necessarily decided. In this case, regardless of the punitive
27   damage award, the evidence in the record is sufficient to
     demonstrate that the issue of fraud was necessary to uphold the
28   Judgment.
                                     -13-
 1   in concluding that the issue of whether the Debtor committed

 2   fraud within the meaning of § 523(a)(2)(A) was precluded by the

 3   Judgment and could not be relitigated in the bankruptcy court.

 4   We perceive no abuse of discretion in the bankruptcy court’s

 5   decision to apply issue preclusion in this case.

 6        Because of the preclusive effect of the Judgment, Dhawan

 7   satisfied his burden of demonstrating that there were no genuine

 8   issues of material fact as to the elements of fraud.   As a

 9   result, the bankruptcy court did not err in granting Dhawan

10   summary judgment on his Nondischargeability Complaint.

11                             VI.   CONCLUSION

12        The bankruptcy court did not err in giving preclusive effect

13   to the Judgment.   For that reason, we AFFIRM the bankruptcy

14   court’s grant of summary judgment to Dhawan.

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                                      -14-