In re: Abdul J. Baloch and Tasneem Baloch

• Court: United States Bankruptcy Appellate Panel for the Ninth Circuit
• Decided: February 26, 2014
• Docket: AZ-12-1557-KuDPa
• Status: Unpublished

Opinion

FILED 2/26/2014 1 SUSAN M. SPRAUL, CLERK U.S. BKCY. APP. PANEL 2 OF THE NINTH CIRCUIT UNITED STATES BANKRUPTCY APPELLATE PANEL 3 OF THE NINTH CIRCUIT 4 5 In re: ) BAP No. AZ-12-1557-KuDPa ) 6 ABDUL J. BALOCH and TASNEEM ) Bk. No. 11-11350 BALOCH, ) 7 ) Adv. No. 11-01321 Debtors. ) 8 ______________________________) ) 9 ABDUL J. BALOCH, ) ) 10 Appellant, ) ) 11 v. ) MEMORANDUM* ) 12 SYED BASHIR SHAH, ) ) 13 Appellee. ) ______________________________) 14 Argued and Submitted on January 23, 2014 15 at Tempe, Arizona 16 Filed – February 26, 2014 17 Appeal from the United States Bankruptcy Court for the District of Arizona 18 Honorable Charles G. Case, II, Bankruptcy Judge, Presiding 19 20 Appearances: Nicole S. Sandoval of Campbell & Coombs for appellant Abdul J. Baloch; James P. Wohl for 21 appellee Syed Bashir Shah. 22 Before: KURTZ, DUNN and PAPPAS, Bankruptcy Judges. 23 24 25 26 * 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 INTRODUCTION 2 Debtor Abdul Baloch appeals from a summary judgment in favor 3 of Syed Shah excepting from discharge under 11 U.S.C. 4 § 523(a)(2)(A)1 a debt reduced to judgment in state court. We 5 agree with the bankruptcy court’s determination that Shah was 6 entitled to summary judgment based on the preclusive effect of 7 the state court’s default judgment. Therefore, we AFFIRM. 8 FACTS 9 In 2004, Shah invested $300,000 with Baloch, which Baloch 10 represented that he would use to purchase an automobile 11 dealership. Upon Baloch’s purchase of the dealership, Baloch was 12 supposed to convey to Shah partial ownership of the dealership, 13 and the two of them were to share the profits and losses from the 14 dealership as partners. According to Shah, Baloch also had 15 agreed that, after the purchase of the dealership, Baloch would 16 pay $4,500 per month to Shah, which would constitute an advance 17 against Shah’s share of dealership profits. And if Baloch was 18 unsuccessful in purchasing the dealership, Shah’s $300,000 19 investment was supposed to be treated as a loan, which Baloch was 20 obligated to repay within thirty days of Shah’s demand. 21 Despite repeated requests, Shah never received from Baloch 22 proof that Baloch actually had purchased the dealership or proof 23 of Shah’s partial ownership interest in the dealership, the 24 $4,500 monthly payments/advances against profits, and the 25 repayment of his initial investment. Consequently, Shah filed a 26 27 1 Unless specified otherwise, all chapter and section 28 references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532.

2 1 verified complaint against Baloch and his affiliated entities in 2 the Los Angeles County Superior Court (Case No. BC 371425). 3 The state court complaint contained eight causes of action, 4 including money had and received, breach of contract, 5 constructive fraud, fraud, conversion, bad checks, RICO, and for 6 an accounting. Shah alleged in the fraud cause of action that 7 Baloch explicitly agreed to perform certain promises as described 8 above regarding Shah’s $300,000 investment, but that Baloch at 9 the time he made the promises secretly intended not to perform 10 any of them. According to the fraud cause of action, Baloch’s 11 actual intent in making the false promises was to induce Shah to 12 give him $300,000 so that Baloch could keep the $300,000 for his 13 own personal use and benefit. Shah further alleged that he 14 justifiably relied on Baloch’s false promises and that, as a 15 result, he lost his $300,000 investment. 16 Shah was unsuccessful in his attempts to locate Baloch for 17 the purpose of serving the summons and complaint. Accordingly, 18 the state court granted Shah permission to serve Baloch by 19 publication. Pursuant to the state court’s publication orders, 20 Shah served the complaint by publication in newspapers of general 21 circulation in the states of Washington and California. When 22 Baloch did not respond to the complaint, Shah sought and obtained 23 entry of default against Baloch, and the state court set the 24 matter for a default prove-up hearing, which was held on July 16, 25 2009. 26 At the default prove-up hearing, Shah testified and 27 presented documents tending to show: (1) that he wired $300,000 28 to Baloch; (2) that in exchange for the $300,000, Baloch made a

3 1 number of promises to Shah regarding the safekeeping and use of 2 the funds, regarding Shah receiving a partial ownership interest 3 in an automobile dealership to be purchased with the funds, and 4 regarding the payment of $4,500 per month to Shah once the 5 dealership was purchased; (3) that he wired the $300,000 to 6 Baloch because he believed Baloch’s promises at the time they 7 were made; (4) that Baloch did not fulfill any of these promises; 8 and (5) that he now believes Baloch never intended to fulfill any 9 of these promises. Shah further testified that Baloch told him 10 that he had acquired a dealership known as Mitsubishi Gilroy in 11 or around July 2005, but he never saw any proof of this purchase 12 or proof that the $300,000 was used for this purported purchase. 13 The state court ruled at the conclusion of the prove-up 14 hearing, “It appears to me that you have sufficiently proved 15 these matters.” Hr’g Tr. (July 16, 2009) at 23:26-27. Based on 16 this ruling, the state court stated that Shah was entitled to a 17 default judgment in the form he proposed. In turn, the default 18 judgment expressly found for Shah and against Baloch on Shah’s 19 breach of contract cause of action and on his fraud cause of 20 action. Baloch never appealed the default judgment, nor did he 21 ever take any other action in the state court seeking relief from 22 the default judgment. 23 Baloch and his spouse commenced their chapter 7 case in 24 April 2011, and Shah filed an adversary complaint against Baloch 25 in July 2011, alleging the same facts and dealings on which Shah 26 had based his state court complaint. The adversary complaint 27 further alleged that the state court judgment debt was 28 nondischargeable under §§ 523(a)(2), (4) and (6). Shah then

4 1 moved for summary judgment. In his summary judgment motion, Shah 2 contended that, based on the issue preclusive effect of the state 3 court judgment, he was entitled to summary judgment. 4 Baloch opposed the summary judgment motion, arguing that he 5 did not have a full and fair opportunity to litigate the issues 6 raised in the state court because the complaint was served by 7 publication and because he did not actually learn of the 8 litigation or the default judgment until April 2010, roughly nine 9 months after the entry of the default judgment, when he received 10 some papers regarding Shah’s efforts to domesticate the 11 California default judgment in Arizona. Baloch further argued 12 that the elements of fraud were not actually litigated or 13 necessarily decided in the state court litigation because the 14 state court did not explicitly find that each fraud element 15 existed. Baloch acknowledged that the explicit finding 16 requirement is deemed waived when the prior court implicitly and 17 necessarily decided the requisite issues, but he maintained that 18 the fraud elements had not been implicitly and necessarily 19 decided by the state court. 20 In the alternative, Baloch argued that it was impossible to 21 attribute any particular amount of the state court’s damages 22 award to Shah’s fraud cause of action because the default 23 judgment did not specify, as between fraud and breach of 24 contract, which type of conduct caused Shah’s damages. 25 The bankruptcy court rejected all of Baloch’s arguments and 26 held that the state court judgment was entitled to issue 27 preclusive effect. Based on the preclusive effect of the state 28 court judgment, the bankruptcy court granted summary judgment on

5 1 Shah’s § 523(a)(2)(a) claim for relief. On October 17, 2012, the 2 bankruptcy court entered summary judgment in Shah’s favor, and on 3 October 30, 2012, Baloch timely appealed. 4 JURISDICTION 5 The bankruptcy court had jurisdiction pursuant to 28 U.S.C. 6 §§ 1334 and 157(b)(2)(I). We have jurisdiction under 28 U.S.C. 7 § 158.2 8 ISSUE 9 Did the bankruptcy court commit reversible error by applying 10 issue preclusion to the state court judgment and granting Shah 11 summary judgment on his § 523(a)(2)(A) claim? 12 STANDARDS OF REVIEW 13 We review de novo the bankruptcy court’s grant of summary 14 judgment. Boyajian v. New Falls Corp. (In re Boyajian), 564 F.3d 15 1088, 1090 (9th Cir. 2009); Lopez v. Emergency Serv. Restoration, 16 Inc. (In re Lopez), 367 B.R. 99, 103 (9th Cir. BAP 2007). We 17 also review de novo the issue of the nondischargeability of a 18 specific debt. Peklar v. Ikerd (In re Peklar), 260 F.3d 1035, 19 1037 (9th Cir. 2001); Honkanen v. Hopper (In re Honkanen), 20 446 B.R. 373, 378 (9th Cir. BAP 2011). 21 Our review of the bankruptcy court’s decision to apply issue 22 preclusion is a two-step process. First, we review de novo the 23 bankruptcy court's determination that issue preclusion was 24 25 2 While the bankruptcy court’s summary judgment left 26 unresolved Shah’s claims for relief under §§ 523(a)(4) and (a)(6), the finality defect arising from these unresolved claims 27 was cured by the bankruptcy court’s subsequent dismissal of the remaining claims. See Long Beach Area Chamber of Commerce v. 28 City of Long Beach, 603 F.3d 684, 691 (9th Cir. 2010).

6 1 available. See In re Lopez, 367 B.R. at 103; Khaligh v. Hadaegh 2 (In re Khaligh), 338 B.R. 817, 823 (9th Cir. BAP 2006). And 3 second, if we determine that issue preclusion was available, we 4 then review the bankruptcy court’s decision to apply it for an 5 abuse of discretion. In re Lopez, 367 B.R. at 103; In re 6 Khaligh, 338 B.R. at 823. 7 The bankruptcy court abused its discretion only if it 8 applied the incorrect legal rule or its application of the 9 correct legal rule was illogical, implausible, or without support 10 in the record. United States v. Hinkson, 585 F.3d 1247, 1261–62 11 (9th Cir. 2009)(en banc). 12 DISCUSSION 13 A bankruptcy court may grant summary judgment when the 14 pleadings and evidence demonstrate “that there is no genuine 15 issue as to any material fact and that the moving party is 16 entitled to a judgment as a matter of law.” Celotex Corp. v. 17 Catrett, 477 U.S. 317, 322 (1986). The issue preclusive effect 18 of a prior state court judgment may serve as the basis for 19 granting summary judgment. See In re Khaligh, 338 B.R. at 832; 20 see also Grogan v. Garner, 498 U.S. 279, 284 (1991) (holding that 21 the doctrine of issue preclusion applies in bankruptcy court 22 actions seeking to except debts from discharge). 23 We must apply California issue preclusion law to determine 24 the preclusive effect of Shah’s California state court judgment. 25 See Gayden v. Nourbakhsh (In re Nourbakhsh), 67 F.3d 798, 800 26 (9th Cir. 1995); see also 28 U.S.C. § 1738 (requiring federal 27 courts to give "full faith and credit" to state court judgments). 28 Under California issue preclusion law, the proponent must

7 1 establish the following: 2 1) the issue sought to be precluded . . . must be identical to that decided in the former proceeding; 3 2) the issue must have been actually litigated in the former proceeding; 3) it must have been necessarily 4 decided in the former proceeding; 4) the decision in the former proceeding must be final and on the merits; 5 and 5) the party against whom preclusion is being sought must be the same as the party to the former 6 proceeding. 7 In re Honkanen, 446 B.R. at 382; Lucido v. Super. Ct., 51 Cal.3d 8 335, 341 (1990). 9 In addition, before applying issue preclusion, the 10 bankruptcy court also must determine "whether imposition of issue 11 preclusion in the particular setting would be fair and consistent 12 with sound public policy." In re Khaligh, 338 B.R. at 824-25 13 (citing Lucido, 51 Cal.3d at 342-43). 14 The party asserting issue preclusion has the burden of proof 15 to establish each of the above requirements. See Harmon v. 16 Kobrin (In re Harmon), 250 F.3d 1240, 1245 (9th Cir. 2001). To 17 satisfy this burden, the moving party “must introduce a record 18 sufficient to reveal the controlling facts” and must “pinpoint 19 the exact issues litigated in the prior action.” Kelly v. Okoye 20 (In re Kelly), 182 B.R. 255, 258 (9th Cir. BAP 1995), aff'd, 21 100 F.3d 110 (9th Cir. 1996). Any reasonable doubt regarding 22 what the prior court decided is resolved against the moving 23 party. See id. 24 In this appeal, we are confronted with the question of the 25 preclusive effect of a default judgment. Most jurisdictions do 26 not consider a default judgment capable of satisfying the 27 requirements for the application of issue preclusion. See 28 Murray v. Alaska Airlines, Inc., 522 F.3d 920, 924 (9th Cir.

8 1 2008) (citing Restatement (Second) Judgments § 27, cmt. e). 2 However, California courts have adopted a different view. In 3 California, issue preclusion may apply to a default judgment so 4 long as two conditions are met. These conditions supplement the 5 standard issue preclusion requirements and are as follows: 6 (1) the defendant must have had “actual notice of the proceedings 7 and a ‘full and fair opportunity to litigate,’” Cal–Micro, Inc. 8 v. Cantrell (In re Cantrell), 329 F.3d 1119, 1123–24 (9th Cir. 9 2003) (citing In re Harmon, 250 F.3d at 1247 n.6); and (2) the 10 material factual issues must have been raised in the pleadings 11 and must have been necessary to sustain the judgment.3 12 Here, Baloch contends that, because the summons was served 13 by publication, and because he did not learn of the litigation 14 and the default judgment until roughly nine months after the 15 default judgment was entered, he did not have sufficient notice 16 of the litigation or a full and fair opportunity to litigate for 17 issue preclusion purposes. We disagree. In re Cantrell 18 addressed this same issue. Relying on California law, 19 In re Cantrell held that, when, as here, the defendant learns of 20 the default judgment in time to seek relief therefrom under 21 California Code of Civil Procedure (“CCCP”) § 473.5,4 the 22 3 23 Conceptually, the second condition is a variation on the actually litigated requirement, which must be met for issue 24 preclusion to apply to any prior judgment – not just default judgments. See In re Harmon, 250 F.3d at 1247. Additionally, in 25 the default judgment context, if a particular issue has been 26 necessarily decided, that issue also has been actually litigated. See id. at 1248. 27 4 CCCP § 473.5(a) provides: 28 (continued...)

9 1 defendant has been given sufficient notice of the default 2 judgment and a full and fair opportunity to litigate for issue 3 preclusion purposes. Baloch here has admitted that he learned of 4 the litigation and the default judgment roughly fifteen months 5 before the deadline expired to seek relief under CCCP § 473.5. 6 Notwithstanding his actual knowledge of the default judgment, 7 Baloch did not avail himself of the opportunity to seek relief 8 from the default judgment under CCCP § 473.5(a). Accordingly, 9 following In re Cantrell, we hold that the first condition is met 10 for applying issue preclusion to the state court’s default 11 judgment. 12 Baloch also contends that the factual issues underlying 13 Shah’s fraud cause of action were not actually litigated. Citing 14 both In re Cantrell and In re Harmon, Baloch points out that a 15 California default judgment does not actually litigate an issue 16 unless that issue was alleged in the complaint and unless the 17 court explicitly rendered a finding on that issue. However, 18 Baloch concedes that the explicit finding requirement is deemed 19 waived if the court implicitly rendered a finding on that issue 20 21 4 (...continued) When service of a summons has not resulted in actual 22 notice to a party in time to defend the action and a 23 default or default judgment has been entered against him or her in the action, he or she may serve and file 24 a notice of motion to set aside the default or default judgment and for leave to defend the action. The 25 notice of motion shall be served and filed within a 26 reasonable time, but in no event exceeding the earlier of: (i) two years after entry of a default judgment 27 against him or her; or (ii) 180 days after service on him or her of a written notice that the default or 28 default judgment has been entered.

10 1 and if that implicit finding was necessary to support the court’s 2 decision. See In re Cantrell, 329 F.3d at 1124 (citing 3 In re Harmon, 250 F.3d at 1248). That is precisely what happened 4 here. In its judgment, the state court explicitly found in 5 Shah’s favor and against Baloch on Shah’s fraud cause of action. 6 While the state court did not make explicit findings on each of 7 the fraud elements, it could not have rendered a finding on the 8 ultimate issue of Baloch’s fraud (as it did) unless it implicitly 9 found that each of the fraud elements had been established. 10 Simply put, the state court implicitly found all of the 11 underlying fraud elements, and these findings were necessary to 12 support the state court’s explicit fraud finding. Baloch has not 13 and cannot argue that Shah did not allege all of the fraud 14 elements.5 In light of Shah’s fraud allegations and the state 15 court’s implicit findings on the fraud elements, we hold that the 16 state court necessarily decided all of the requisite fraud 17 elements. Consequently, the fraud elements also were actually 18 litigated, resulting in a judgment in Shah’s favor. 19 Baloch alternately contends that it is impossible to tell 20 from the state court’s judgment whether the state court 21 attributed any damages to Baloch’s fraud or instead attributed 22 all of the damages to Baloch’s breach of contract. Citing 23 In re Kelly, 182 B.R. at 258, Baloch claims that any doubt must 24 25 5 As mentioned above, Shah alleged in the state court 26 complaint false promises without an intent to perform, justifiable reliance and damages proximately caused by the false 27 promises. These allegations were sufficient under California law to state a fraud cause of action. See Lazar v. Super. Ct., 28 12 Cal.4th 631, 638-39 (1996).

11 1 be decided against the application of issue preclusion and that, 2 because the damages all might have been attributable to his 3 breach of contract, the bankruptcy court should not have applied 4 issue preclusion to determine that his fraud caused Shah’s 5 damages. 6 But Baloch’s damages contention is based on a false premise. 7 Baloch wrongly assumes that only one or the other cause of 8 action, but not both, could be the source of Shah’s damages. We 9 are convinced that Shah’s damages are attributable to both causes 10 of action. On this record, it is clear that Shah suffered a 11 single loss and that fraud and breach of contract were pled as 12 alternate theories of relief based on the same loss.6 Thus, we 13 have no doubt that all of Shah’s damages properly are 14 attributable to Baloch’s fraud. 15 We can readily ascertain in this case all of California’s 16 issue preclusion elements. Baloch has not disputed that the 17 default judgment was a final judgment on the merits or that the 18 same parties were involved in both the state court litigation and 19 6 20 In his appeal brief, Baloch attempts to argue that the state court erred by granting Shah judgment on both his fraud and 21 contract causes of action. Baloch argues that the state court violated the election of remedies doctrine in doing so. 22 Generally speaking, California’s election of remedies doctrine is 23 considered a form of estoppel that precludes a litigant from obtaining judgment on a particular legal theory if that litigant 24 already has taken action against the other party based on an alternate legal theory arising from the same facts. See Roam v. 25 Koop, 41 Cal. App. 3d 1035, 1039-40 (1974). We do not understand 26 how assertion of the election of remedies doctrine benefits Baloch in this appeal. If Baloch believed that the state court 27 erred in granting judgment based on both Shah’s fraud and breach of contract causes of action, he should have raised this issue in 28 the state court.

12 1 in the nondischargeability action. And Baloch has not and cannot 2 seriously dispute that the issues involved in the state court 3 fraud cause of action were not identical to the elements for 4 nondischargeability under § 523(a)(2)(A). See Am. Express Travel 5 Related Servs. Co. Inc. v. Hashemi (In re Hashemi), 104 F.3d 6 1122, 1125 (9th Cir. 1996) (stating that the nondischargeability 7 elements under § 523(a)(2)(A) “mirror the elements of common law 8 fraud”); Younie v. Gonya (In re Younie), 211 B.R. 367, 373–74 9 (9th Cir. BAP 1997), aff'd, 163 F.3d 609 (9th Cir. 1998) (same). 10 As for actually litigated and necessarily decided, we have 11 addressed and rejected, above, Baloch’s contentions that the 12 state court default judgment did not actually litigate and 13 necessarily decide the fraud elements. 14 This leaves only public policy concerns to consider. Baloch 15 did not make any explicit public policy argument in the 16 bankruptcy court; nonetheless, the bankruptcy court explicitly 17 addressed the public policy issue and determined that the 18 imposition of issue preclusion here promoted the public policy 19 goals of fostering judicial economy and integrity and 20 discouraging vexatious litigation. 21 Baloch has not directly challenged on appeal the bankruptcy 22 court’s public policy determination but instead reiterates his 23 contention that he did not have a full and fair opportunity to 24 litigate in light of the fact that he did not know of the state 25 court litigation or the default judgment until several months 26 after the state court entered the default judgment. In essence, 27 Baloch complains that he never had an opportunity to raise any 28 substantive defenses to Shah’s fraud cause of action and this,

13 1 according to him, violated the public policy favoring decisions 2 on the merits. We agree with Baloch that having a full and fair 3 opportunity to litigate is an appropriate public policy concern. 4 See In re Harmon, 250 F.3d at 1247 n.6. However, as discussed 5 above, we disagree with Baloch’s argument that he did not have a 6 full and fair opportunity to litigate the fraud issue. By way of 7 CCCP § 473.5, California has afforded defendants like Baloch a 8 means of obtaining relief from default judgments when they do not 9 know about the litigation before entry of the default judgment 10 and if they desire to defend against the merits of the 11 litigation. But Baloch chose not to seek relief under 12 CCCP § 473.5. As a result, it is disingenuous for Baloch to 13 complain that the California courts did not afford him the 14 opportunity to address the merits of Shah’s fraud cause of 15 action. 16 Having determined that the bankruptcy court identified the 17 correct legal standard for applying issue preclusion and having 18 found nothing in the record suggesting any misapplication of that 19 legal standard, we conclude that the bankruptcy court did not 20 commit reversible error in granting summary judgment on the basis 21 of the preclusive effect of the state court’s default judgment. 22 CONCLUSION 23 For the reasons set forth above, we AFFIRM the bankruptcy 24 court’s summary judgment in favor of Shah. 25 26 27 28