FILED AUG 21 2012 1 SUSAN M SPRAUL, CLERK U.S. BKCY. APP. PANEL OF THE NINTH CIRCUIT 2 UNITED STATES BANKRUPTCY APPELLATE PANEL 3 OF THE NINTH CIRCUIT 4 5 In re: ) BAP No. NC-10-1208-BaJuH ) 6 ANTHONY A. MALFATTI, ) Bk. No. 09-43469 ) 7 Debtor. ) Adv. Pro. No. 09-04318 ______________________________) 8 ) ANTHONY A. MALFATTI, ) 9 ) Appellant, ) 10 ) v. ) M E M O R A N D U M1 11 ) BANK OF AMERICA, N.A.; ) 12 MBNA AMERICAN BANK, N.A., ) ) 13 Appellees. ) ______________________________) 14 Submitted on May 11, 2011 15 at San Francisco, California 16 Filed - August 21, 2012 17 Appeal from the United States Bankruptcy Court for the Northern District of California 18 Honorable Edward D. Jellen, Bankruptcy Judge, Presiding 19 __________________________ 20 Appearances: William F. Abbott, Esq. argued for Appellant; Douglas Boven, Esq. of Reed Smith LLP argued for 21 Appellees. __________________________ 22 Before: JURY, HOLLOWELL, and BARRECA2, Bankruptcy Judges. 23 24 1 This disposition is not appropriate for publication. 25 Although it may be cited for whatever persuasive value it may 26 have (see Fed. R. App. P. 32.1), it has no precedential value. See 9th Cir. BAP Rule 8013-1. 27 2 Hon. Marc L. Barreca, Bankruptcy Judge for the Western 28 District of Washington, sitting by designation. 1 The bankruptcy court granted Plaintiffs’ motion for summary 2 judgment, ruling that the judgment owed by Debtor-Defendant to 3 Plaintiffs was non-dischargeable under Code § 523(a)(6) on the 4 basis of issue preclusion.3 Debtor appealed. 5 The underlying judgment was entered as a penalty default 6 judgment as a discovery sanction in an Alabama state court 7 proceeding. The bankruptcy court applied issue preclusion on the 8 premise that an Alabama state court would have treated the issues 9 as “actually litigated.”4 As there was no controlling Alabama 10 case law on this question, the Panel certified it to the Supreme 11 Court of Alabama. That court answered in the negative. 12 Accordingly, we REVERSE and REMAND. 13 14 I. FACTS 15 Malfatti was one of three principals of TA Financial Group 16 ("TAF"), a Nevada corporation, purportedly designed to assist 17 credit card holders in arbitration of disputes with the card 18 issuers. The arbitration providers were selected by the card 19 holders from a list provided by TAF. Among the arbitration 20 providers was Arbitration Forum of America, Inc. ("AFOA"), an 21 3 22 Absent contrary indication, all “Code,” chapter and section references herein are to the Bankruptcy Code, 11 U.S.C. §§ 101- 23 1532. 4 24 The Supreme Court has applied the Restatement (Second) of Judgments’ substitution of the terms “claim preclusion” and 25 “issue preclusion” for the terms “res judicata” and “collateral 26 estoppel,” respectively. George v. City of Morro Bay, 318 B.R. 729, 733 (9th Cir. BAP 2004), aff’d, 144 Fed. Appx. 636 (9th Cir. 27 2005). Thus, although the parties and Alabama jurisprudence commonly use the term “collateral estoppel,” the term “issue 28 preclusion” is used herein.
2 1 Alabama corporation. Once an arbitration award was entered, a 2 separate company, TAG Services, an Alabama limited liability 3 company, would file the awards in the Circuit Court of Jackson 4 County, Alabama, and then reduce the awards to judgments. In 5 fact, AFOA was not conducting legitimate arbitrations, but 6 instead was a sham. Every arbitration resulted in an award in 7 favor of the card holder, which was then reduced to judgment. 8 Malfatti claims he was unaware that AFOA's practices and the 9 judgments stemming therefrom were illegitimate. 10 At some time after the card-issuing banks involved learned 11 of the judgments, they filed cross-complaints against the card 12 holders in the Circuit Court of Jackson County, Alabama to set 13 aside the judgments as fraudulently obtained. In September 2005, 14 the banks, including Bank of America, N.A. (USA) and MBNA America 15 Bank, N.A.(together, "Banks" or "Appellees"), filed Amended Third 16 Party Complaints against, among others, Malfatti and TAF, 17 alleging tortious interference with contract, abuse of process, 18 wantonness, and civil conspiracy, and seeking an injunction 19 against further arbitrations. Malfatti and TAF were served with 20 the complaints in November 2005, and answered the complaints in 21 January 2006. 22 Malfatti and TAF actively participated in the state court 23 proceedings, vigorously contesting personal jurisdiction. They 24 consistently refused to cooperate with discovery, failing to 25 respond to interrogatories and requests for production and 26 failing to appear for noticed depositions. They also failed to 27 comply with various discovery orders issued by the court. 28
3 1 On March 6, 2007, the court granted the Banks’ motion for 2 default judgment as a sanction for failure to cooperate with 3 discovery. On October 4, 2007, the court entered an order 4 denying Malfatti and TAF's motion to set aside the defaults, and 5 after a hearing on the Banks’ motion for damages and injunctive 6 relief, judgment was entered against Malfatti and TAF on 7 February 19, 2008. 8 The court found Malfatti and TAF to be jointly and severally 9 liable for compensatory damages, awarded punitive damages against 10 Malfatti, and found Malfatti to be liable for punitive damages 11 awarded against TAF under the alter ego doctrine. Damages 12 against Malfatti totaled $513,270.35 (the "Judgment"). Malfatti 13 and TAF moved to "amend, alter, vacate or set aside" the Judgment 14 and filed for summary judgment on their claims against the Banks. 15 The court denied both motions. 16 Malfatti filed for chapter 7 bankruptcy on April 27, 2009. 17 On July 30, 2009, the Banks filed an adversary proceeding 18 alleging the debt owed to them by Malfatti was nondischargeable 19 pursuant to § 523(a)(6). On March 3, 2010, the Banks moved for 20 summary judgment, alleging that the Alabama Judgment was 21 nondischargeable by virtue of issue preclusion. Malfatti opposed 22 the summary judgment on the basis that the Judgment was a default 23 judgment, arguing that Alabama law does not grant issue 24 preclusive effect to default judgments. The bankruptcy court 25 granted summary judgment, finding all amounts owed to the Banks 26 to be nondischargeable. 27 The bankruptcy court applied issue preclusion on the premise 28 that an Alabama state court would do so when the prior proceeding
4 1 was resolved by a penalty default judgment, as opposed to a 2 simple default judgment. As there was no controlling precedent 3 under Alabama law, the Panel certified the following question to 4 the Supreme Court of Alabama: 5 In Alabama, is a "default" judgment premised upon discovery sanctions or other post-answer conduct of the 6 defendant sufficient to support the application of issue preclusion in a later proceeding? 7 8 That court issued its opinion on June 29, 2012, answering 9 this question in the negative. 10 11 II. JURISDICTION 12 The bankruptcy court had jurisdiction pursuant to 28 U.S.C. 13 § 1334 and § 157(b)(1) and (b)(2)(I). The Panel has jurisdiction 14 pursuant to 28 U.S.C. § 158(c). 15 16 III. ISSUE 17 Whether the bankruptcy court erred in granting summary 18 judgment on the basis of issue preclusion where the underlying 19 Alabama state court judgment was issued by “default” premised 20 upon discovery sanctions. 21 22 IV. STANDARD OF REVIEW 23 A bankruptcy court’s order granting summary judgment is 24 reviewed de novo. Abdul-Jabbar v.
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FILED AUG 21 2012 1 SUSAN M SPRAUL, CLERK U.S. BKCY. APP. PANEL OF THE NINTH CIRCUIT 2 UNITED STATES BANKRUPTCY APPELLATE PANEL 3 OF THE NINTH CIRCUIT 4 5 In re: ) BAP No. NC-10-1208-BaJuH ) 6 ANTHONY A. MALFATTI, ) Bk. No. 09-43469 ) 7 Debtor. ) Adv. Pro. No. 09-04318 ______________________________) 8 ) ANTHONY A. MALFATTI, ) 9 ) Appellant, ) 10 ) v. ) M E M O R A N D U M1 11 ) BANK OF AMERICA, N.A.; ) 12 MBNA AMERICAN BANK, N.A., ) ) 13 Appellees. ) ______________________________) 14 Submitted on May 11, 2011 15 at San Francisco, California 16 Filed - August 21, 2012 17 Appeal from the United States Bankruptcy Court for the Northern District of California 18 Honorable Edward D. Jellen, Bankruptcy Judge, Presiding 19 __________________________ 20 Appearances: William F. Abbott, Esq. argued for Appellant; Douglas Boven, Esq. of Reed Smith LLP argued for 21 Appellees. __________________________ 22 Before: JURY, HOLLOWELL, and BARRECA2, Bankruptcy Judges. 23 24 1 This disposition is not appropriate for publication. 25 Although it may be cited for whatever persuasive value it may 26 have (see Fed. R. App. P. 32.1), it has no precedential value. See 9th Cir. BAP Rule 8013-1. 27 2 Hon. Marc L. Barreca, Bankruptcy Judge for the Western 28 District of Washington, sitting by designation. 1 The bankruptcy court granted Plaintiffs’ motion for summary 2 judgment, ruling that the judgment owed by Debtor-Defendant to 3 Plaintiffs was non-dischargeable under Code § 523(a)(6) on the 4 basis of issue preclusion.3 Debtor appealed. 5 The underlying judgment was entered as a penalty default 6 judgment as a discovery sanction in an Alabama state court 7 proceeding. The bankruptcy court applied issue preclusion on the 8 premise that an Alabama state court would have treated the issues 9 as “actually litigated.”4 As there was no controlling Alabama 10 case law on this question, the Panel certified it to the Supreme 11 Court of Alabama. That court answered in the negative. 12 Accordingly, we REVERSE and REMAND. 13 14 I. FACTS 15 Malfatti was one of three principals of TA Financial Group 16 ("TAF"), a Nevada corporation, purportedly designed to assist 17 credit card holders in arbitration of disputes with the card 18 issuers. The arbitration providers were selected by the card 19 holders from a list provided by TAF. Among the arbitration 20 providers was Arbitration Forum of America, Inc. ("AFOA"), an 21 3 22 Absent contrary indication, all “Code,” chapter and section references herein are to the Bankruptcy Code, 11 U.S.C. §§ 101- 23 1532. 4 24 The Supreme Court has applied the Restatement (Second) of Judgments’ substitution of the terms “claim preclusion” and 25 “issue preclusion” for the terms “res judicata” and “collateral 26 estoppel,” respectively. George v. City of Morro Bay, 318 B.R. 729, 733 (9th Cir. BAP 2004), aff’d, 144 Fed. Appx. 636 (9th Cir. 27 2005). Thus, although the parties and Alabama jurisprudence commonly use the term “collateral estoppel,” the term “issue 28 preclusion” is used herein.
2 1 Alabama corporation. Once an arbitration award was entered, a 2 separate company, TAG Services, an Alabama limited liability 3 company, would file the awards in the Circuit Court of Jackson 4 County, Alabama, and then reduce the awards to judgments. In 5 fact, AFOA was not conducting legitimate arbitrations, but 6 instead was a sham. Every arbitration resulted in an award in 7 favor of the card holder, which was then reduced to judgment. 8 Malfatti claims he was unaware that AFOA's practices and the 9 judgments stemming therefrom were illegitimate. 10 At some time after the card-issuing banks involved learned 11 of the judgments, they filed cross-complaints against the card 12 holders in the Circuit Court of Jackson County, Alabama to set 13 aside the judgments as fraudulently obtained. In September 2005, 14 the banks, including Bank of America, N.A. (USA) and MBNA America 15 Bank, N.A.(together, "Banks" or "Appellees"), filed Amended Third 16 Party Complaints against, among others, Malfatti and TAF, 17 alleging tortious interference with contract, abuse of process, 18 wantonness, and civil conspiracy, and seeking an injunction 19 against further arbitrations. Malfatti and TAF were served with 20 the complaints in November 2005, and answered the complaints in 21 January 2006. 22 Malfatti and TAF actively participated in the state court 23 proceedings, vigorously contesting personal jurisdiction. They 24 consistently refused to cooperate with discovery, failing to 25 respond to interrogatories and requests for production and 26 failing to appear for noticed depositions. They also failed to 27 comply with various discovery orders issued by the court. 28
3 1 On March 6, 2007, the court granted the Banks’ motion for 2 default judgment as a sanction for failure to cooperate with 3 discovery. On October 4, 2007, the court entered an order 4 denying Malfatti and TAF's motion to set aside the defaults, and 5 after a hearing on the Banks’ motion for damages and injunctive 6 relief, judgment was entered against Malfatti and TAF on 7 February 19, 2008. 8 The court found Malfatti and TAF to be jointly and severally 9 liable for compensatory damages, awarded punitive damages against 10 Malfatti, and found Malfatti to be liable for punitive damages 11 awarded against TAF under the alter ego doctrine. Damages 12 against Malfatti totaled $513,270.35 (the "Judgment"). Malfatti 13 and TAF moved to "amend, alter, vacate or set aside" the Judgment 14 and filed for summary judgment on their claims against the Banks. 15 The court denied both motions. 16 Malfatti filed for chapter 7 bankruptcy on April 27, 2009. 17 On July 30, 2009, the Banks filed an adversary proceeding 18 alleging the debt owed to them by Malfatti was nondischargeable 19 pursuant to § 523(a)(6). On March 3, 2010, the Banks moved for 20 summary judgment, alleging that the Alabama Judgment was 21 nondischargeable by virtue of issue preclusion. Malfatti opposed 22 the summary judgment on the basis that the Judgment was a default 23 judgment, arguing that Alabama law does not grant issue 24 preclusive effect to default judgments. The bankruptcy court 25 granted summary judgment, finding all amounts owed to the Banks 26 to be nondischargeable. 27 The bankruptcy court applied issue preclusion on the premise 28 that an Alabama state court would do so when the prior proceeding
4 1 was resolved by a penalty default judgment, as opposed to a 2 simple default judgment. As there was no controlling precedent 3 under Alabama law, the Panel certified the following question to 4 the Supreme Court of Alabama: 5 In Alabama, is a "default" judgment premised upon discovery sanctions or other post-answer conduct of the 6 defendant sufficient to support the application of issue preclusion in a later proceeding? 7 8 That court issued its opinion on June 29, 2012, answering 9 this question in the negative. 10 11 II. JURISDICTION 12 The bankruptcy court had jurisdiction pursuant to 28 U.S.C. 13 § 1334 and § 157(b)(1) and (b)(2)(I). The Panel has jurisdiction 14 pursuant to 28 U.S.C. § 158(c). 15 16 III. ISSUE 17 Whether the bankruptcy court erred in granting summary 18 judgment on the basis of issue preclusion where the underlying 19 Alabama state court judgment was issued by “default” premised 20 upon discovery sanctions. 21 22 IV. STANDARD OF REVIEW 23 A bankruptcy court’s order granting summary judgment is 24 reviewed de novo. Abdul-Jabbar v. General Motors Corp., 25 85 F.3d 407, 410 (9th Cir. 1996); Jung Sup Lee v. TCAST Commc’n., 26 Inc., 335 B.R. 130, 135 (9th Cir. BAP 2005). Viewing the 27 evidence in the light most favorable to the non-moving party, the 28 Panel must determine whether there are genuine issues of material
5 1 fact and whether the bankruptcy court correctly applied relevant 2 substantive law. See Bishop, Baldwin, Rewald, Dillingham, & 3 Wong, Inc. v. Brooks, 819 F.2d 214, 215 (9th Cir. 1987). 4 5 V. DISCUSSION 6 Issue preclusion may be applied in non-dischargeability 7 proceedings under Bankruptcy Code § 523(a). Grogan v. Garner, 8 498 U.S. 279, 284-85, 111 S. Ct. 654, 658 n.11 (1991). A state 9 court judgment is entitled to issue preclusive effect in a 10 subsequent federal court proceeding to the same extent that it 11 would be entitled to issue preclusive effect in a court of the 12 state which entered the judgment. Gayden v. Nourbakhsh, 67 F.3d 13 798, 800 (9th Cir. 1995). Thus, the bankruptcy court, and this 14 Panel, must look to state law to determine whether application of 15 issue preclusion is appropriate. 16 In Alabama, 17 Collateral estoppel operates where the subsequent suit between the same parties is not on the same cause of 18 action. Requirements for collateral estoppel to operate are (1) issue identical to one involved in 19 previous suit; (2) issue actually litigated in prior action; and (3) resolution of the issue was necessary 20 to the prior judgment. . . . If these elements are present, the prior judgment is conclusive as to those 21 issues actually determined in the prior suit. 22 Wheeler v. First Alabama Bank of Birmingham, 364 So. 2d 1190, 23 1199 (Ala. 1978) (emphasis added). 24 Here, there is no dispute that the parties are the same, the 25 issues are the same, and the resolution of the issues was 26 necessary to the prior judgment. Further, Malfatti does not 27 dispute that the factual elements needed to prove a willful and 28 malicious injury per § 523(a)(6) were at issue in the Alabama
6 1 litigation. Indeed, punitive damages were awarded against 2 Malfatti and TAF in a separate, contested evidentiary hearing. 3 Malfatti argues on appeal that because a default was entered 4 against him on the basis of procedural sanctions, the “actually 5 litigated” requirement has not been satisfied, and therefore 6 issue preclusion cannot be applied under Alabama law. 7 The Supreme Court of Alabama agrees. That court, while 8 acknowledging other jurisdictions’ application of an exception to 9 the general rule that default judgments are not entitled to 10 preclusive effect, concluded that its precedents leave no room 11 for such an exception: 12 For purposes of determining whether an issue is precluded by the doctrine of collateral estoppel, 13 Alabama law makes no distinction between a simple default and a penalty default. There are “clear 14 controlling precedents in the decisions,” Rule 18, Ala. R. App. P., of this Court adhering to the traditional 15 federal view denying preclusive effect to all default judgments on the ground that preclusive effect should 16 not be given to claims that were not actually litigated in a prior action. Accordingly, we answer the question 17 certified to us by the BAP in the negative. 18 Malfatti v. Bank of America, N.A., ___ So. 3d ___, 2012 WL 19 2477945, at *6 (Ala. June 29, 2012) (citations omitted). 20 21 VI. CONCLUSION 22 Because the bankruptcy court incorrectly applied the 23 relevant substantive law, it erred in granting summary judgment 24 on the basis of issue preclusion. We REVERSE and REMAND for 25 further proceedings in accordance with this disposition. 26 27 28