FILED JUN 19 2020 ORDERED PUBLISHED 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. CC-19-1230-TaFS
CHAD PAUL DELANNOY, Bk. No. 8:17-bk-10423-ES Debtor. Adv. No. 8:17-bk-01073-ES CHAD PAUL DELANNOY,
Appellant,
v. OPINION
WOODLAWN COLONIAL, L.P., a California Limited Partnership,
Appellee.
Appeal from the United States Bankruptcy Court for the Central District of California Honorable Erithe A. Smith, Bankruptcy Judge, Presiding
APPEARANCES: Charity J. Manee of Goe & Forsythe, LLP argued for appellant; Howard M. Bidna of Bidna & Keys, APLC, argued for appellee.
Before: TAYLOR, FARIS, AND SPRAKER, Bankruptcy Judges. TAYLOR, Bankruptcy Judge:
INTRODUCTION
Chad Paul Delannoy lost his position as captain of the luxury yacht
Alessa Leigh when his employer discovered his acts of theft; this led to
criminal charges and an adverse civil judgment based on conversion. While
his appeal of the judgment was pending, he filed a chapter 71 bankruptcy.
The Trustee promptly seized the helm in his appeal. Delannoy was no
longer the master of his appellate fate.
Over Delannoy’s objection, the Trustee sold Delannoy’s appeal rights
to his adversary, Woodlawn Colonial, L.P. (“Woodlawn”), which then
dismissed the appeal to render the judgment final. The bankruptcy court
determined that the then-final judgment was issue preclusive as to
Woodlawn’s § 523(a)(6) claim and granted Woodlawn summary judgment.
Delannoy appealed. We AFFIRM.
We publish this decision primarily to dispel any misconception
regarding what a creditor is purchasing when it buys a chapter 7 debtor’s
right to appeal a California judgment. The creditor is not securing certain
victory in asserting the preclusive effect of the judgment in a
nondischargeability action. At most, the creditor is purchasing the
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 possibility of obtaining the finality of the judgment necessary to then argue
that issue preclusion could and should apply. The creditor must prove that
all elements of issue preclusion are met. And the application of issue
preclusion remains a discretionary decision by the bankruptcy court based
on a public policy analysis.
FACTS2
The Prepetition State Court Proceedings
The State Court Trial
Prepetition, Delannoy’s employer, Alessa Leigh LLC, and its
member, R. Scott Bell (“Plaintiffs”), sued Delannoy for conversion and
money had and received under California law. Plaintiffs’ conversion claim
allegations, including the last allegation that Delannoy’s acts “were willful,
malicious, and oppressive and were undertaken with the intent to cause
injury and damage to Plaintiffs, therefore justifying an award of exemplary
and punitive damages,” were incorporated in their money had and
received claim.
After commencement of the civil suit, Delannoy pleaded guilty to
Cal. Penal Code § 487(a) grand theft and admitted that he unlawfully and
2 We heavily borrow from our decision, Delannoy v. Woodlawn Colonial, L.P. (In re Delannoy), BAP No. CC-17-1334-SKuL, 2018 WL 4190874 (9th Cir. BAP Aug. 31, 2018) (“Delannoy I”). We take judicial notice of documents filed in Delannoy I, the appeal therefrom (No. 18-60057), the bankruptcy case, and the adversary proceeding. Atwood v. Chase Manhattan Mortg. Co. (In re Atwood), 293 B.R. 227, 233 n.9 (9th Cir. BAP 2003).
3 fraudulently appropriated, converted, stole, and embezzled Bell’s property.
But at the civil trial, he denied taking Plaintiffs’ property. The state court
found his testimony not credible and, at times, evasive. It also accepted his
admission that he made checks payable to cash drawn on Plaintiffs’ bank
accounts and deposited those checks in his personal bank account. The trial
record well supports the state court’s conclusion that Delannoy was liable
on both theories of recovery.
The Tentative Statement of Decision
After trial, the state court first entered a tentative statement of
decision (“TSOD”). It held Delannoy liable for $59,550.07 for the value of
the converted personal property other than cash plus pre-judgment
interest. As for the cash he took, the state court noted that “[m]oney cannot
be the subject of a cause of action for conversion unless there is a specific,
identifiable amount involved” and stated that “[h]ere, identifiable amounts
are involved.” Thus, it additionally held Delannoy liable for $722,530 for
the value of “converted” cash and prejudgment interest. Finally, it found,
by clear and convincing evidence, that Delannoy’s takings were “done with
fraud, if not malice,” and concluded that punitive damages and a second
stage of the trial would be appropriate.
The Minute Order
After the punitive damages trial, the state court issued a minute
order (“Minute Order”), awarding Plaintiffs $60,000 in punitive damages
4 under Cal. Civ. Code § 3294 based on its finding that Delannoy acted with
fraud, malice, and an intent to cause economic injury. It reiterated that its
$59,550.07 award was “on the conversion cause of action.” Then, after
reciting the elements for a money had and received claim, it clarified that
“[i]t was under this theory of recovery that the Court intended to award
the cash plus prejudgment interest. Since judgment has not been entered
yet, the Court may correct or clarify its [TSOD] accordingly, and now does
so.” The Minute Order directed Plaintiffs’ counsel to prepare the judgment.
The State Court Judgment and the Appeal
The state court entered judgment against Delannoy (“Judgment”)
consistent with the TSOD and Minute Order in all but two respects: (1) it
described the converted property as inclusive of the cash taken by
Delannoy; and (2) it provided that Delannoy shall pay Alessa Leigh LLC
damages for the cash taken under both the conversion and money had and
received theories of recovery. The state court handwrote on the Judgment
that “[t]he court notes that no objections to proposed judgment were filed.”
The Judgment was assigned to Woodlawn and appealed by Delannoy
(“State Court Appeal”).
The Postpetition Proceedings
The Sale of Delannoy’s State Court Appeal Rights and the
Conclusion of the State Court Appeal
Before the conclusion of the State Court Appeal, Delannoy
5 commenced his chapter 7 case. Woodlawn responded with a
nondischargeability complaint seeking to have the Judgment debt excepted
from discharge under §§ 523(a)(2), (4), and (6). Delannoy answered and
counterclaimed for damages for alleged automatic stay violations.
And Woodlawn capitalized on an advantage arising directly from
Delannoy’s decision to file a chapter 7 case; the Trustee filed a motion to
sell Delannoy’s appeal rights (“Appeal Rights”) to Woodlawn for $7,500,
subject to overbid. In addition to analyzing the sale of the Appeal Rights to
Woodland under § 363, the Trustee analyzed it as a Rule 9019 compromise.
He maintained it was a fair and reasonable settlement and that a successful
prosecution of the State Court Appeal was highly unlikely.
Delannoy opposed the sale. Not surprisingly, he expressed a more
optimistic view of his chances in the State Court Appeal and alleged,
among other things, that the sale would be used to terminate his State
Court Appeal. Thus, he contended that it amounted to an impermissible
waiver of his right to a discharge in violation of § 524(c). He also filed a
motion to compel abandonment of the Appeal Rights.
The overbid auction of the Appeal Rights resulted in their sale to
Woodlawn for $10,000. Delannoy all but discarded his abandonment
motion and instead participated as a bidder. In the process of approving
the sale, the bankruptcy court twice referred to the State Court Appeal as a
“longshot.” It also described Delannoy’s chance of completely prevailing as
6 “probably highly unlikely.”
It then entered an order authorizing the sale, which expressly
authorized Woodlawn to dismiss the State Court Appeal.3
Delannoy appealed the order, and we affirmed.4 At no point in that
appeal did he challenge the bankruptcy court’s finding that his chances in
the State Court Appeal were a “longshot.”
The Dismissal of the State Court Appeal
Thereafter, in the State Court Appeal, the California Court of Appeal
added Woodlawn as the “appellant,” dismissed the appeal pursuant to
Woodlawn’s request, and issued a remittitur deeming the Judgment final.
The Nondischargeable Judgment
Woodlawn then filed a motion for summary judgment or summary
adjudication on its nondischargeability complaint based on the preclusive
effect of the now final Judgment. Delannoy opposed and contended that
summary adjudication on the § 523(a)(6) claim would be improper because,
he argued, the state court erred in awarding Plaintiffs damages for cash
taken under both of Plaintiffs’ theories of recovery—rather than only under
the money had and received theory—per the Minute Order.
At the hearing on Woodland’s motion, among other things, the
3 The bankruptcy court also entered an order denying the abandonment motion, which Delannoy did not appeal. 4 Delannoy appealed to the Ninth Circuit. That appeal is pending without a stay.
7 bankruptcy court took judicial notice of the TSOD, Minute Order, and
Judgment but stated that, in determining the actual ruling of the state
court, it relied on the Judgment and considered the TSOD and Minute
Order solely for the purpose of determining whether or not particular
issues had been litigated. Under this framework, the bankruptcy court
denied summary judgment on Woodlawn’s §§ 523(a)(2) and (4) claims but
determined that the entire Judgment was nondischargeable under
§ 523(a)(6). It relied on the Judgment’s findings of conversion and fraud
and malice in support of the punitive damages award.
In so ruling, it rejected Delannoy’s argument that the Judgment could
not be given preclusive effect due to its deviations from the Minute Order.
It emphasized that it had no reason to believe that the state court was in
error; the state court had apparently reviewed the Judgment as evidenced
by its handwritten notation thereon. The bankruptcy court also rejected
Delannoy’s argument that Woodlawn’s purchase of his Appeal Rights
destroyed the privity necessary to apply issue preclusion.
The bankruptcy court entered its order granting Woodlawn summary
adjudication as to its § 523(a)(6) claim and later, pursuant to Woodlawn’s
motion, entered an order dismissing Woodlawn’s §§ 523(a)(2) and
(4) claims and certifying under Civil Rule 54(b) that there was no just
reason for delay in entering judgment on Woodlawn’s § 523(a)(6) claim.5
The bankruptcy court then entered its judgment excepting from
5 The counterclaim for alleged stay violations remained pending.
8 Delannoy’s discharge the amount of $846,089.65, together with post-
judgment interest, under § 523(a)(6). Delannoy timely appealed.
JURISDICTION
The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334 and
157(b)(2)(I). We have jurisdiction under 28 U.S.C. § 158, notwithstanding
that the bankruptcy court’s judgment did not adjudicate all of the claims,
because the bankruptcy court certified that there was no just reason to
delay entry of judgment on Woodlawn’s § 523(a)(6) claim under Civil
Rule 54(b) and because Delannoy’s remaining counterclaim would not
require an appellate court to re-examine the issues and facts supporting
judgment on Woodlawn’s § 523(a)(6) claim. See Cutter v. Seror (In re Cutter),
398 B.R. 6, 16 (9th Cir. BAP 2008), aff’d, 468 F. App’x 657 (9th Cir. 2011).
ISSUE
Did the bankruptcy court err in granting summary judgment on
Woodlawn’s § 523(a)(6) claim based on issue preclusion?
STANDARDS OF REVIEW
We review de novo a bankruptcy court’s grant of summary judgment
and exception of a debt from discharge under § 523. See Black v. Bonnie
Springs Family Ltd. P’ship (In re Black), 487 B.R. 202, 210 (9th Cir. BAP 2013).
We also review de novo a bankruptcy court’s determination that issue
preclusion is available. Id. If issue preclusion is available, we review its
application for an abuse of discretion. Id. A bankruptcy court abuses its
9 discretion if it applies the wrong legal standard, misapplies the correct
legal standard, or its factual findings are illogical, implausible, or without
support in inferences that may be drawn from the facts in the record. See
TrafficSchool.com, Inc. v. Edriver Inc., 653 F.3d 820, 832 (9th Cir. 2011).
We may affirm on any basis supported by the record. In re Black,
487 B.R. at 211.
DISCUSSION
Summary judgment is appropriate when the pleadings and
supplemental materials show that there is no genuine issue as to any
material fact on the claims and the moving party is entitled to judgment as
a matter of law. Roussos v. Michaelides (In re Roussos), 251 B.R. 86, 91
(9th Cir. BAP 2000). A properly-supported summary judgment motion
cannot be defeated by the mere existence of some alleged factual dispute.
Id. The requirement is that there be no genuine issue of material fact.
Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-48 (1986). Only disputes
over facts that might affect the outcome of the lawsuit may defeat a
summary judgment motion. Id. at 248.
The bankruptcy court may grant summary judgment in a
dischargeability proceeding based on the issue preclusive effect of a
judgment. See Grogan v. Garner, 498 U.S. 279, 284-85 & n.11 (1991). It “must
give to a state-court judgment the same preclusive effect as would be given
that judgment under the law of the State in which the judgment was
10 rendered.” Migra v. Warren City Sch. Dist. Bd. of Educ., 465 U.S. 75, 81 (1984).
In California, issue preclusion prevents a party from re-litigating a
previously decided issue in a second suit if: (1) the issue is identical to that
decided in the first suit; (2) the issue was actually litigated in the first suit;
(3) the issue was necessarily decided in the first suit; (4) the decision in the
first suit is final and on the merits; and (5) the party is the same as, or in
privity with, the party to the first suit. Lucido v. Super. Ct., 51 Cal. 3d 335,
341(1990). Even if these five requirements are met, its application must be
consistent with the public policies of “preservation of the integrity of the
judicial system, promotion of judicial economy, and protection of litigants
from harassment by vexatious litigation.” Id. at 343.
The party asserting issue preclusion must prove all the criteria for its
application by introducing a record sufficient to reveal the controlling facts
and the exact issues litigated in the first suit. Kelly v. Okoye (In re Kelly),
182 B.R. 255, 258 (9th Cir. BAP 1995). Reasonable doubt as to what was
decided in the first suit will weigh against applying issue preclusion. Id.
Delannoy asserts that none of the six criteria for issue preclusion
exist. He argues that the identical issues were not actually litigated and
necessarily decided by the state court because Plaintiffs’ claims did not
require proof of intent to harm and their money had and received claim
was not an intentional tort. He argues that the Judgment was neither on the
merits nor obtained by a party in privity with him because his adversary
11 purchased his Appeal Rights and dismissed the State Court Appeal to
render the Judgment final. And he argues that the bankruptcy court erred
in failing to engage in a public policy analysis. We disagree.
A. We find no reversible error in the bankruptcy court’s failure to
conduct a public policy analysis.
Even where the five threshold criteria for issue preclusion are met, a
bankruptcy court must conduct an “inquiry into whether imposition of
issue preclusion in the particular setting would be fair and consistent with
sound public policy” before applying issue preclusion. Khaligh v. Hadaegh
(In re Khaligh), 338 B.R. 817, 824-25 (9th Cir. BAP 2006), aff’d, 506 F.3d 956
(9th Cir. 2007). Three fundamental policies should be considered:
“preservation of the integrity of the judicial system, promotion of judicial
economy, and protection of litigants from harassment by vexatious
litigation.” Lucido, 51 Cal. 3d at 343. A bankruptcy court’s decision to apply
issue preclusion ultimately is a discretionary matter, turning on whether its
application is consistent with these policies. Id. at 343-44.
Delannoy argues that (1) the bankruptcy court erred by not explicitly
assessing whether the application of issue preclusion was consistent with
public policy; and (2) the application was not consistent with public policy
because he could not prosecute his State Court Appeal. We agree that the
record does not reflect that the bankruptcy court explicitly conducted a
public policy inquiry directly in connection with Woodlawn’s summary
12 judgment motion. But we do not perceive this oversight as reversible error
because we can do so in the first instance given that the record allows a
complete understanding of these issues. Swanson v. Levy, 509 F.2d 859, 861
(9th Cir. 1975). And we conclude that the application of issue preclusion
did not contravene public policy.
In discussing public policy, Woodlawn overstates the import of the
bankruptcy court’s sale and compromise order and our affirmance of the
order in Delannoy I. Specifically, it posits that the order—so far upheld on
appeal—conclusively established that the application of issue preclusion is
consistent with public policy pursuant to the “law of the case” doctrine.
We disagree. “Under the ‘law of the case’ doctrine, a court is
ordinarily precluded from reexamining an issue previously decided by the
same court, or a higher court, in the same case.” Richardson v. United States,
841 F.2d 993, 996 (9th Cir. 1988) (citations omitted), amended, 860 F.2d 357
(9th Cir. 1988). For the doctrine to apply, “the issue in question must have
been decided explicitly or by necessary implication in the previous
disposition.” United States v. Lummi Indian Tribe, 235 F.3d 443, 452 (9th Cir.
2000) (internal quotation marks and citation omitted). We reject the notion
that the sale and compromise order or Delannoy I resolved, either explicitly
or by necessary implication, whether issue preclusion could or should
apply.
In approving the sale and compromise, the bankruptcy was not
13 obliged to consider the effect of a transfer of the Appeal Rights to
Woodlawn on its nondischargeability claims. Neither were we so obliged
in our review of the sale and compromise order. Approval of the sale
hinged on whether the Trustee proposed the sale in good faith and for a
proper purpose, the sale was in the best interests of the estate, and the sale
yielded optimal value for the estate under the circumstances. See Simantob
v. Claims Prosecutor, LLC (In re Lahijani), 325 B.R. 282, 288 (9th Cir. BAP
2005); 240 N. Brand Partners, Ltd. v. Colony GFP Partners, L.P. (In re 240 N.
Brand Partners, Ltd.), 200 B.R. 653, 658 (9th Cir. BAP 1996). And approval of
the compromise depended on whether the compromise was fair and
equitable after consideration of the probability of success in the State Court
Appeal, the difficulties in collection, the complexity, expense,
inconvenience, and delay in prosecuting the appeal, and the paramount
interest of creditors. Goodwin v. Mickey Thompson Entm’t Grp., Inc. (In re
Mickey Thompson Entm’t Grp., Inc.), 292 B.R. 415, 420 (9th Cir. BAP 2003).
To the extent that either the bankruptcy court or we considered the
effect of the sale and compromise on the availability of issue preclusion in
the nondischargeability action, such consideration occurred within the
context of assessing the value of the sale and compromise to the estate and
addressing Delannoy’s assertion that the sale would impermissibly waive
his right to a discharge. Neither the bankruptcy court’s order nor our
Delannoy I decision determined that Woodlawn would be able to
14 successfully assert issue preclusion as a consequence of its purchase of the
Appeal Rights. That remained an open issue until the bankruptcy court
adjudicated Woodlawn’s summary judgment motion. At most, Woodlawn
purchased the possibility of obtaining the finality necessary to then argue
that issue preclusion could and should apply. It did not secure certain
victory in asserting issue preclusion.
Delannoy likewise overstates the import of the sale and compromise
order. He argues that the judicial system’s integrity is harmed when a
party of means, such as Woodlawn, can purchase its desired result in
litigation, rather than by “full and fair” litigation on the merits. But, that is
not what happened here. Delannoy defended against Plaintiffs’ claims in
state court up until the adverse Judgment was entered. Rather than
prosecute his State Court Appeal to completion, he voluntarily filed a
chapter 7 bankruptcy, thereby relinquishing his Appeal Rights to the
Trustee. Woodlawn then purchased the Appeal Rights through a judicially
supervised bankruptcy sale. This process was neither improper nor unfair;
it did not call into question the judicial system’s integrity.
As for judicial economy, application of issue preclusion would
prevent the unnecessary retrial of issues already fully and finally
determined by the state trial court. Baldwin v. Kilpatrick (In re Baldwin),
249 F.3d 912, 920 (9th Cir. 2001).
Finally, with respect to the protection of parties from vexatious
15 litigation, Delannoy has not shown that he was denied a full and fair
opportunity to litigate the issues in state court. Rather, he simply disagrees
with the outcome and would like another chance to re-litigate the issues.
And, importantly, in the process of granting the Trustee’s sale and
compromise motion, the bankruptcy court referred to the State Court
Appeal as a “longshot” and described his chance of prevailing as “probably
highly unlikely.” It would have been unfair to Woodlawn to require it to
re-litigate the willful and malicious injury issues in the bankruptcy court
when Plaintiffs had already successfully done so in state court and the
State Court Appeal likely had little or no merit. Id.
Accordingly, we find there is substantial evidence in the record
demonstrating that application of issue preclusion on the facts before the
bankruptcy court was consistent with sound and fair public policy.
B. The issues were identical.
Issue preclusion requires a comparison of the issues presented in the
bankruptcy case and in the state court action. The bankruptcy court held
that the Judgment constituted a nondischargeable debt under § 523(a)(6),
which exempts from discharge a debt “for willful and malicious injury by
the debtor to another entity or to the property of another entity.”
§ 523(a)(6).
The “willful” injury and “malicious” injury requirements of
§ 523(a)(6) are separate and distinct from one another. Ormsby v. First Am.
16 Title Co. of Nev. (In re Ormsby), 591 F.3d 1199, 1206 (9th Cir. 2010). The
“willful injury requirement is met only when the debtor has a subjective
motive to inflict injury or when the debtor believes that injury is
substantially certain to result from his own conduct.” Carrillo v. Su (In re
Su), 290 F.3d 1140, 1142 (9th Cir. 2002). “A ‘malicious’ injury involves ‘(1) a
wrongful act, (2) done intentionally, (3) which necessarily causes injury,
and (4) is done without just cause or excuse.’” Id. at 1146-47 (quoting
Petralia v. Jercich (In re Jercich), 238 F.3d 1202, 1209 (9th Cir. 2001)).
Debts incurred by conversion of another’s property may qualify as
nondischargeable under § 523(a)(6). Del Bino v. Bailey (In re Bailey), 197 F.3d
997, 1000 (9th Cir. 1999).“A conversion, under California law, establishes
the debtor’s wrongful exercise of dominion over the personal property of
another, but it does not necessarily decide the type of wrongful intent on
the part of the debtor that is necessary for the damages to be a
nondischargeable debt under § 523(a)(6).” Thiara v. Spycher Bros. (In re
Thiara), 285 B.R. 420, 429 (9th Cir. BAP 2002) (internal citations and
quotation marks omitted). Thus, a debt for conversion under California law
is excepted from discharge under § 523(a)(6) only if the injury was willful
and malicious. Id. at 427.
In this case, the Judgment awarded all compensatory damages “for
conversion.” While the Judgment did not include the words “willful” or
“malicious” to describe the conversion, the punitive damages
17 award—which was necessarily requested and predicated on Delannoy’s
conversion6—was supported by the requisite findings of intent to cause
injury and satisfied the willful and malicious injury requirements of
§ 523(a)(6). It was based on findings that Delannoy took Plaintiffs’ cash and
other personal property with fraud, malice, and an intent to cause
economic injury, and that Delannoy’s “acts showed a pattern or practice,
and involved trickery and/or deceit.” Such language collectively
demonstrates that Delannoy’s conversion constituted a willful and
malicious injury under § 523(a)(6).7
The bankruptcy court did not err in finding an identity of issues.
C. The issues were actually litigated.
Neither did it err in finding that the issues were actually litigated.
Under California law, “an issue was actually litigated in a prior proceeding
if it was properly raised, submitted for determination, and determined in
6 Punitive damages were not recoverable on Plaintiffs’ alternative money had and received claim. Steiner v. Rowley, 35 Cal. 2d 713, 720 (1950). 7 In analyzing the “identity of issues” criterion for issue preclusion, we need not decide whether Plaintiffs’ money had and received claim entailed the same issues as those underlying a § 523(a)(6) claim because all damages awarded by the state court either exclusively or alternatively arose from and related to Delannoy’s conversion of Plaintiffs’ property. And, while we need not, and do not, decide the issue, we observe that there may be an identity of issues stemming from the quasi-contractual money had and received claim. A debt resulting from an intentional breach of contract claim accompanied by tortious conduct that results in willful and malicious injury is excepted from discharge under § 523(a)(6). In re Jercich, 238 F.3d at 1205.
18 that proceeding.” Hernandez v. City of Pomona, 46 Cal. 4th 501, 511 (2009)
(citations omitted). Delannoy argues that his intent to harm was not
actually litigated because it was not clearly raised in the pleadings. Not so.
Plaintiffs alleged in both their claims that his acts were “willful, malicious,
and oppressive and were undertaken with the intent to cause injury and
damage to Plaintiffs, therefore justifying an award of exemplary and
punitive damages.”
D. The issues were necessarily decided.
Delannoy also contests that the issue of his conversion of Plaintiffs’
cash was necessarily decided because the damages award for the cash he
took from Plaintiffs is based on determinations of both conversion and
money had and received, either of which standing independently would be
sufficient to support the result. And he claims that a judgment for money
had and received cannot satisfy a § 523(a)(6) claim.8 He cites to Comment i
to the Restatement (Second) of Judgments § 27 (Am. Law Inst. 1982)
(“Comment I”) in support, which states that “[i]f a judgment of a court of
first instance is based on determinations of two issues, either of which
standing independently would be sufficient to support the result, the
judgment is not conclusive with respect to either issue standing alone.” We
8 As we noted supra, the money had and received findings may match the elements of a § 523(a)(6) claim. To the extent they do, Delannoy’s argument here is utterly lacking.
19 disagree for a number of reasons.
First, it is not clear that California courts follow Comment I. See
Flying J, Inc. v. Pistacchio, No. CV-F-03-6706 OWW/GSA, 2008 WL 906396, at
*42 (E.D. Cal. Mar. 31, 2008), aff’d, 351 F. App’x. 236 (9th Cir. 2009)
(“Independent research reveals no reported California decision discussing
or applying comment i to Section 27.”); Zevnik v. Super. Ct., 159 Cal. App.
4th 76, 83 (2008) (“We have found no California opinion on point dated
after the Restatement Second.”). In fact, when given the opportunity to
clarify whether California follows Comment I, the Supreme Court of
California expressly “caution[ed]... that [it takes] no position on the
significance of an independently sufficient alternative ground reached by
the trial court and not challenged on appeal.” Samara v. Matar, 5 Cal. 5th
322, 337 (2018). It did so after commenting that “[c]ourts have understood
the necessarily decided prong to require only that the issue not have been
entirely unnecessary to the judgment in the initial proceeding—leaving
room for a decision based on two grounds to be preclusive as to both.” Id.
at 327 (internal quotation marks and citation omitted).
Second, before the Restatement was adopted, California courts
followed a different rule set forth in Comment n to Restatement (First) of
Judgments § 68 (Am. Law Inst. 1942), which provided that issue preclusion
could bar re-litigation of an issue when a judgment is based on alternative
grounds. See, e.g., Evans v. Horton, 115 Cal. App. 2d 281 (1953).
20 Third, even if California courts embrace Comment I, one of its
rationales is that “a determination in the alternative may not have been as
carefully or rigorously considered as it would have if it had been necessary
to the result, and in that sense it has some of the characteristics of dicta.”
See Comment I, illus. 15. It does not necessarily address a scenario where
one set of facts supports liability under multiple claims. Here, the state
court found a unitary set of facts that supported two claims, each premised
on Delannoy’s takings done with fraud and intentional malice. Thus, the
Judgment should be given preclusive effect even if California courts
embrace Comment I.
Fourth, one of Comment I’s rationales is that “a determination in the
alternative may not have been as carefully or rigorously considered as it
would have if it had been necessary to the result, and in that sense it has
some of the characteristics of dicta.” Comment I. And it acknowledges that
“there may be causes where” alternative grounds may be given preclusive
effect “because of the fullness with which the issue was litigated and
decided in the first action.” Id. Such is the case here because the two claims
relied on identical factual predicates. Thus, Delannoy had incentive and
opportunity to fully litigate the issues at trial.
E. The issues were decided on the merits.
Delannoy contends that the bankruptcy court erred in concluding
that the Judgment was final and on the merits because it “evaded appellate
21 review” when Woodlawn purchased his Appeal Rights to dismiss the State
Court Appeal. He relies on a California Supreme Court decision, Samara,
5 Cal. 5th 322. But Samara provides no basis for reversal.
In Samara, the court held that when a trial court has ruled against a
party on alternative grounds and an appellate court affirms the judgment
on one ground without reviewing the merits of the alternative ground, the
judgment does not have preclusive effect in a subsequent action that is
based on the unreviewed ground. In that situation, the “preclusive effect of
the judgment should be evaluated as though the trial court had not relied
on the unreviewed ground.” Id. at 326.
Delannoy wishes us to conclude from Samara that whenever an
appellate court does not hear and decide the merits of a debtor’s appeal of
a judgment based on alternative grounds, the judgment is not final and on
the merits for issue preclusion purposes. But that is not the holding in
Samara. Although the procedural setting in the present case materially
diverges from the situation in Samara, the court’s rationale is instructive:
[t]he availability of a direct appeal reflects a sensible determination that the process culminating in a trial court’s disputed decision is not sufficient to resolve litigation conclusively. Of course, a litigant’s ability to secure appellate review may be waived or forfeited, as when a litigant fails to file a timely notice of appeal or fails to make an objection in the trial court. But when a litigant properly seeks appellate review of a ground underlying a trial court’s determination, the fortuity that the judgment may be sustained on some other ground should not
22 imbue the challenged ground with final and conclusive effect. The challenged ground is no more reliable—no more deserving of finality—merely because it need not be evaluated to resolve the appeal.
Id. at 333 (emphasis added).
Delannoy timely appealed the Judgment, objected to the Trustee’s
sale of his Appeal Rights to Woodlawn, and sought abandonment of the
Appeal Rights to him so that he could continue the State Court Appeal. In
that regard, he facially does not appear to have waived, forfeited, or
untimely sought to enforce his Appeal Rights. But his efforts came too late
because he set the wheels in motion for the Trustee to sell his Appeal
Rights by filing a chapter 7 case before completing his State Court Appeal.
His prepetition Appeal Rights necessarily became property of his
bankruptcy estate subject to the Trustee’s exclusive administration, which
may (and did) include a sale of the Appeal Rights to Delannoy’s adversary
under § 363 and Rule 9019. See Delannoy I, 2018 WL 4190874, at *7.
In that regard, his bankruptcy filing was the functional equivalent of
a relinquishment of his Appeal Rights. Thus, we conclude that the fact that
the state appellate court did not hear and decide the merits of his appeal
does not militate against the bankruptcy court’s application of issue
preclusion because he chose to file a chapter 7 petition and thereby
voluntarily relinquished to the chapter 7 trustee the right to pursue, or not
pursue, the appeal.
23 F. Privity exists.
Delannoy finally argues that issue preclusion was not available
because privity was lacking. “Privity exists where the party against whom
collateral estoppel is asserted was a party to the prior adjudication where
the issue to be estopped was finally decided.” Ayers v. City of Richmond,
895 F.2d 1267, 1271 (9th Cir. 1990). In addition, privity
refers to a mutual or successive relationship to the same rights of property, or to such an identification in interest of one person with another as to represent the same legal rights and, more recently, to a relationship between the party to be estopped and the unsuccessful party in the prior litigation which is “sufficiently close” so as to justify application of the doctrine of collateral estoppel. This requirement of identity of parties or privity is a requirement of due process of law.
Even if these threshold requirements are satisfied, the doctrine will not be applied if such application would not serve its underlying fundamental principles. The determination whether a party is in privity with another for purposes of collateral estoppel is a policy decision. Privity is essentially a shorthand statement that collateral estoppel is to be applied in a given case assuming the other requirements are satisfied; there is no universally applicable definition of privity. In the final analysis, the determination of privity depends upon the fairness of binding appellant with the result obtained in earlier proceedings in which it did not participate. Whether someone is in privity with the actual parties requires close examination of the circumstances of each case.
Rodgers v. Sargent Controls & Aerospace, 136 Cal. App. 4th 82, 90-91 (2006), as
modified (Feb. 7, 2006) (emphasis added) (internal quotation marks and
24 citations omitted).
Privity exists here. Delannoy was a party to the state court action at
all times leading up to entry of the Judgment. While he was not a party
when the Judgment became final, he voluntarily relinquished his Appeal
Rights to the Trustee upon his bankruptcy filing. This was tantamount to
an assignment of his interests. He cites to no case law that persuades us
that his surrender of his Appeal Rights to a third party after participating
in the case as a party until entry of Judgment destroyed privity.
CONCLUSION
Based on the foregoing, we AFFIRM.