In re: Menelaos Saridakis and Lisa Saridakis

• Court: United States Bankruptcy Appellate Panel for the Ninth Circuit
• Decided: December 10, 2013
• Docket: CC-13-1028-PaTaD CC-13-1029-PaTaD (Consolidated)
• Status: Unpublished

Opinion

FILED DEC 10 2013 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 Nos. CC-13-1028-PaTaD 6 MENELAOS SARIDAKIS and ) CC-13-1029-PaTaD LISA SARIDAKIS, ) (Consolidated) 7 ) Debtors. ) Bk. No. 10-24580-BR 8 ___________________________________) ) Adv. No. 11-01499-BR 9 JAN JANURA; CAROL ANDERSON; ) JAN JANURA as trustees of the ) 10 Janura-Anderson Revocable Trust; ) CAROL ANDERSON as trustee of the, ) 11 Janura-Anderson Revocable Trust, ) ) 12 Appellants, ) ) 13 v. ) M E M O R A N D U M1 ) 14 MENELAOS SARIDAKIS; ) LISA SARIDAKIS, ) 15 ) Appellees. ) 16 ) ___________________________________) 17 Argued and Submitted on November 22, 2013 18 at Pasadena, California 19 Filed - December 10, 2013 20 Appeal from the United States Bankruptcy Court for the Central District of California 21 Honorable Barry Russell, Bankruptcy Judge, Presiding 22 23 Appearances: Michael David Franco, Esq. argued for appellants; Stephen B. Goldberg, Esq. of Spierer Woodward 24 Cobalis & Goldberg APC argued for appellees. 25 Before: PAPPAS, TAYLOR and DUNN, Bankruptcy Judges. 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. See 9th 28 Cir. BAP Rule 8013-1.

-1- 1 Appellants Jan Janura and Carol Anderson, as individuals and 2 as trustees of the Janura-Anderson Revocable Trust (“Appellants”), 3 appeal the bankruptcy court’s judgment denying an exception to 4 discharge as to the debt owed them by Lisa and Menelaos Saridakis 5 (“Debtors”) under § 523(a)(2)(A), (a)(4) and (a)(6), and the order 6 denying Appellants’ motion for a new trial based on newly 7 discovered evidence. We AFFIRM. 8 FACTS 9 Appellants entered into a contract to purchase a condominium 10 unit in Redondo Beach, California (the “Property”) from Debtors, 11 who were both the builders and sellers of the Property. After the 12 September 2008 closing, and upon taking possession, Appellants 13 discovered numerous building defects, only some of which were 14 repaired or resolved by Debtors. Appellants sued Debtors and 15 their construction company, Saridakis Construction, Inc., in state 16 court.2 The action was stayed when, on April 15, 2010, Debtors 17 filed a chapter 7 bankruptcy petition. 18 Appellants sought relief from the automatic stay in the 19 bankruptcy case to proceed with the state court action, which 20 relief was granted by the bankruptcy court on August 19, 2011. 21 The state court action progressed to the point where Appellants 22 sought entry of a default judgment against both Debtors 23 individually and their company on February 2, 2012. Appellants 24 submitted a proposed default judgment to the state court on 25 July 27, 2012, as to Debtors individually, and on August 14, 2012, 26 as to their corporation. After a lengthy delay, during which it 27 2 Esplande Redondo, LLC fka Jan Janura and Carol Anderson v. 28 Williams Campbell, et al., Cal. Superior Ct. Case No. YC065041.

-2- 1 appears the proposed judgments were lost, Appellants resubmitted 2 the proposed default judgments and, on November 7, 2012, the 3 default judgment was entered against the corporation. Unbeknownst 4 to the parties, a default judgment also apparently was entered 5 against Debtors individually on November 7, 2012. The default 6 judgment against Debtors specifically found that Debtors engaged 7 in fraud, and awarded damages to Appellants totaling $272,905.10.3 8 On February 10, 2011, Appellants commenced an adversary 9 proceeding in the bankruptcy court against Debtors seeking a 10 determination that the judgment debt was excepted from discharge 11 under § 523(a)(2)(A), (a)(4) and (a)(6). A trial occurred on 12 3 While Appellants contend there was a default judgment against Debtors in place at the time the bankruptcy court 13 conducted the trial, we have concerns about the accuracy of that representation. The record on appeal includes a copy of the 14 default judgment against Debtors, dated November 7, 2012, as well as a copy of the state court’s docket. Curiously, the judgment 15 does not appear in the docket. The docket instead indicates that only one default judgment was entered, against the corporation, 16 dated November 7, 2012, and provides: “Default Judgment (FOR PLAINTIFFS VS. SARIDAKIS CONSTRUCTION, INC. FOR A TOTAL MONETARY 17 JUDGMENT OF $272,905.10 – JUDGMENT SIGNED BY JUDGE GRAY).” At trial in the bankruptcy court, Appellants’ counsel acknowledged 18 that this judgment was against the corporation only. To add to the confusion, the Panel questions the continuing 19 validity of the default judgment against the corporation on the date the bankruptcy court trial was conducted. Fed. R. Evid. 20 201(b)(2) authorizes a bankruptcy court to take judicial notice of facts which may be accurately and readily determined from sources 21 whose accuracy may not reasonably be questioned. Pursuant to this authority, we have independently checked the state court’s docket, 22 which shows, as to the default judgment against the corporation, that “**JUDGMENT VACATED PURSUANT TO COURT’S 11/15/12 ORDER **.” 23 However, no order dated November 15, 2012 appears on the docket to explain this addendum. 24 The import of all this is perplexing. It is possible that the state court entered a default judgment against Debtors on 25 November 7, 2012, as it appears in the record on appeal, but for some reason, this judgment was not entered in the state court’s 26 docket. There are other possible scenarios about which we will not speculate. However, because the record contains a copy of a 27 default judgment against Debtors dated November 7, 2012, for purposes of this appeal, the Panel assumes it was validly entered 28 on that date.

-3- 1 November 14, 2012, at which the bankruptcy court determined that 2 the state court had entered a default judgment against the 3 corporation only. After hearing the parties’ evidence, the 4 bankruptcy court ruled that Appellants had not shown that Debtors 5 knew of the defects and concealed them. In light of this 6 determination, during the oral ruling following the trial, the 7 bankruptcy court vacated its prior stay relief order, indicating 8 that it did not want a second judgment to be entered by the state 9 court. The bankruptcy court’s oral ruling was followed up with a 10 written order, filed November 16, 2012, vacating the prior stay 11 relief order. 12 On January 9, 2013, Appellants filed an Application/Motion 13 for New Trial on the Basis of Newly Discovered Evidence. In the 14 motion, Appellants argued that the default judgment that had been 15 entered against Debtors in state court on November 7, 2012, was 16 new evidence which could not have been discovered prior to trial 17 by due diligence. To prove this allegation, Appellants pointed to 18 the Declaration of Robert Duzey, their counsel in the state court 19 proceedings, filed on November 14, 2012, the same date as the 20 trial in bankruptcy court. In that Declaration, Mr. Duzey 21 declared that, while a state court default judgment against the 22 Debtors should be forthcoming, it had not yet been entered. 23 Attached to the declaration was a copy of the state court docket 24 printed the day before, November 13, 2012. Appellants asserted to 25 the bankruptcy court that had the default judgment been entered, 26 its fraud findings would be entitled to preclusive effect, likely 27 resulting in a judgment in their favor in the adversary 28 proceeding, making this newly discovered evidence highly relevant.

-4- 1 The bankruptcy court denied Appellants’ motion the following 2 day, January 10, 2013, in an order entered without a hearing. On 3 January 14, 2013, the bankruptcy court entered a judgment in 4 Debtors’ favor, in which it concluded that Appellants failed to 5 prove the elements for an exception to discharge under 6 § 523(a)(2), (a)(4), and (a)(6). 7 On January 24, 2013, Debtors filed timely appeals of the 8 Order Denying Motion for New Trial on the Basis of Newly 9 Discovered Evidence, and the Judgment. The Panel ordered the 10 appeals consolidated on March 29, 2013. 11 JURISDICTION 12 The bankruptcy court had jurisdiction over the adversary 13 proceeding under 28 U.S.C. §§ 1334 and 157(b)(2)(I). We have 14 jurisdiction under 28 U.S.C. § 158. 15 ISSUE ON APPEAL 16 Whether the bankruptcy court erred in denying Appellants’ 17 Motion for New Trial and granting a judgment in Debtors’ favor. 18 STANDARD OF REVIEW 19 “We review a [bankruptcy] court’s order denying a motion for 20 a new trial made on the ground of newly discovered evidence for 21 abuse of discretion.” United States v. Hinkson, 585 F.3d 1247, 22 1259 (9th Cir. 2009) (en banc) (quoting United States v. Reyes- 23 Alvarado, 963 F.2d 1184, 1188 (9th Cir. 1992)). 24 A bankruptcy court abuses its discretion if its decision is 25 based on an incorrect legal rule, or if its findings of fact were 26 illogical, implausible, or without support in the record. Hinkson, 27 585 F.3d at 1262. 28

-5- 1 DISCUSSION 2 A trial court may grant a motion to alter or amend a judgment 3 under Civil Rule 59(e) where the moving party has established 4 “(1) manifest error of fact, (2) manifest error of law, or 5 (3) newly discovered evidence.” Hale v. U.S. Trustee 6 (In re Basham), 208 B.R. 926, 934 (9th Cir. BAP 1997), aff’d, 7 152 F.3d 924 (9th Cir. 1998). In this appeal, Appellants assert 8 the presence of newly discovered evidence, and contend that the 9 evidence is of such magnitude that it warrants a new trial. To 10 establish that the bankruptcy court abused its discretion in 11 denying the motion for a new trial based upon newly discovered 12 evidence, Appellants must demonstrate: “(1) the evidence was 13 discovered after trial, (2) the exercise of due diligence would 14 not have resulted in the evidence being discovered at an earlier 15 stage, and (3) the newly discovered evidence is of such magnitude 16 that production of it earlier would likely have changed the 17 outcome of the case.” Defenders of Wildlife v. Bernal, 204 F.3d 18 920, 929 (9th Cir. 2000). 19 As to the first Bernal factor, the record supports a finding 20 that Appellants discovered the new evidence, the default judgment 21 against Debtors, after the trial. The day before trial, 22 Appellants’ counsel had examined the docket of the state court 23 action and determined that no judgment against Debtors had yet 24 been entered. Moreover, it seems clear from the comments of 25 counsel for the parties at trial that they were both unaware that 26 the default judgment had been entered against Debtors 27 individually. There is no evidence in our record to show when, 28 exactly, the parties actually received notice of the default

-6- 1 judgment entered against Debtors individually, but it clearly did 2 not occur prior to trial. 3 The second factor is also met. Counsel for Appellants had 4 not received a copy of the signed default judgment in the mail, 5 nor did it appear on the state court’s docket; indeed, it still 6 does not appear on that docket. Thus, there was no reason to 7 believe the judgment had been entered against Debtors. 8 Application of the third factor is more complex. That factor 9 instructs us to consider whether the newly discovered evidence was 10 of such magnitude that, had it been discovered earlier, the 11 outcome of the case would likely have been different. If the 12 bankruptcy court would have been compelled to give preclusive 13 effect to the default judgment concerning Debtors’ alleged fraud, 14 this element would very likely be met. But we conclude that the 15 bankruptcy court was not required to give the default judgment 16 preclusive effect. 17 The doctrine of collateral estoppel4 applies in 18 dischargeability proceedings to preclude the relitigation of state 19 court findings relevant to exceptions to discharge. Harmon v. 20 Kobrin (In re Harmon), 250 F.3d 1240, 1245 (9th Cir. 2001); T & D 21 Moravits & Co. v. Munton (In re Munton), 352 B.R. 707, 712 (9th 22 Cir. BAP 2006). Under the Full Faith and Credit Act,5 we apply 23 4 We recognize that the preferred term is “issue 24 preclusion,” rather than collateral estoppel. However, since the parties and the other courts cited here employ the latter term, we 25 will also do so. 5 26 The Full Faith and Credit Act requires federal courts to give state judicial proceedings “the same full faith and credit 27 . . . as they have by law or usage in the courts of [the] State . . . from which they are taken.” 28 U.S.C. § 1738. In practical 28 (continued...)

-7- the preclusion law of the state in which the judgment originates. 1 In re Harmon, 250 F.3d at 1245; In re Munton, 352 B.R. at 712. 2 Under California law, five threshold requirements must be met in 3 order for issue preclusion to apply: 4 First, the issue sought to be precluded from 5 relitigation must be identical to that decided in a former proceeding. Second, this issue must have been 6 actually litigated in the former proceeding. Third, it must have been necessarily decided in the former 7 proceeding. Fourth, the decision in the former proceeding must be final and on the merits. Finally, 8 the party against whom preclusion is sought must be the same as, or in privity with, the party to the former 9 proceeding. 10 In re Harmon, 250 F.3d at 1245 (citing Lucido v. Super. Ct., 11 51 Cal.3d 335, 337 (1990)). The party asserting collateral 12 estoppel bears the burden of proof on each of these requirements. 13 In re Harmon, 250 F.3d at 1245. 14 In the state court complaint, Appellants alleged that Debtors 15 committed actual fraud. Thus, for purposes of § 523(a)(2)(A), the 16 first criterion is met. This is not the case for § 523(a)(4) and 17 (a)(6), as there were no allegations in the state court complaint 18 that Debtors were fiduciaries, nor that they willfully and 19 maliciously injured Appellants. 20 With regard to the second requirement, it is settled under 21 California law that a default judgment fulfills the criterion 22 requiring that the issues be actually litigated in the earlier 23 proceeding: 24 [A default judgment is] conclusive to the issues tendered by the complaint as if it had been rendered 25 26 5 (...continued) terms, this act requires federal courts to apply the res judicata 27 rules of a particular state to judgments issued by courts of that state. Parsons Steel, Inc. v. First Alabama Bank, 474 U.S. 518, 28 519 (1986).

-8- after answer filed and trial had on the allegations 1 denied by the answer. . . . Such a judgment is res judicata as to all issues aptly pleaded in the complaint 2 and defendant is estopped from denying in a subsequent action any allegations contained in the former 3 complaint. 4 Younie v. Gonya (In re Younie), 211 B.R. 367, 375 (9th Cir. BAP 5 1997) (citing In re Moore, 186 B.R. 962, 971 (Bankr. N.D.Cal. 6 1995) (quoting Fitzgerald v. Herzer, 78 Cal.App. 2d 127, 129 7 (1947))).6 Thus, in California, a default judgment satisfies the 8 “actually litigated” requirement for the application of collateral 9 estoppel. In re Younie, 211 B.R. at 375 (citing Lake v. Capps 10 (In re Lake), 202 B.R. 751, 757 & n.6 (9th Cir. BAP 1996); Green 11 v. Kennedy (In re Green), 198 B.R. 564, 566 (9th Cir. BAP 1996)). 12 The third criterion is also met, as the issue of actual fraud was 13 necessarily decided according to the allegations of the complaint. 14 As to the fourth requirement, a default judgment is “final” 15 at the conclusion of the sixty-day appeal period. McKee v. Nat’l 16 Union Fire Ins. Co., 15 Cal. App.4th 282, 289 (1993) (“A judgment 17 is not ‘final’ for res judicata purposes until the appeal is 18 concluded or the time within which to appeal has passed”); Cal. 19 Rules of Ct., Rule 8.104. Thus, the default judgment became 20 final at the earliest on January 6, 2013, three days before 21 Appellants filed their motion for new trial, although it was not 22 final when the bankruptcy court conducted its trial. 23 The parties in the state court and the bankruptcy court are 24 the same for purposes of the fifth requirement. 25 It would appear, then, aside from the question of the 26 6 We observe in passing, however, that California is in the 27 minority, and most states do not afford preclusive effect to default judgments. See Murray v. Alaska Airlines, Inc., 522 F.3d 28 920, 924 (9th Cir. 2008)(citing Restatement (Second) of Judgments § 27, cmt. e).

-9- finality of the judgment against Debtors, that the default 1 judgment could have been afforded preclusive effect in the 2 dischargeability proceeding. The bankruptcy court seemed to 3 acknowledge this at the trial, in a colloquy with counsel: 4 GOLDBERG (Debtors’ counsel): What I would expect is if 5 there is a fraud judgment, which might even be used as collateral estoppel in this Court — 6 THE COURT: Oh, it would be if – I’ve read their papers 7 here — if the judge signs that, there would be a pretty good chance of it. 8 9 Trial Tr. 9:20-25, November 14, 2012. 10 However, even if collateral estoppel otherwise would be 11 available to a bankruptcy court, under both federal bankruptcy law 12 and California law, the bankruptcy court retains discretion 13 whether to apply it, because “issue preclusion is not applied 14 automatically or rigidly, and courts are permitted to decline to 15 give issue preclusive effect to prior judgments in deference of 16 countervailing considerations of fairness.” In re Lopez, 367 B.R. 17 99, 108 (9th Cir. BAP 2007). Put another way, even if all five 18 requirements are met, California courts will give preclusive 19 effect to a judgment “only if application of preclusion furthers 20 the public policies underlying the doctrine.” In re Harmon, 21 250 F.3d at 1245. When asked to give a judgment preclusive 22 effect, the trial court should balance “the need to limit 23 litigation against the right of a fair adversary proceeding in 24 which a party may fully present the facts.” Id. (quoting 1 Ann 25 Taylor Schwing, CAL. AFFIRMATIVE DEFENSES 2d § 15:8 (2006)); see also 26 Direct Shopping Network, LLC, 206 Cal. App. 4th 1551, 1562 (2012) 27 (quoting Smith v. ExxonMobil Oil Corp. 153 Cal. App. 4th 1407, 28 1414 (2007)) (“[E]ven where the technical requirements are all

-10- 1 met, the [collateral estoppel] doctrine is to be applied ‘only 2 where such application comports with fairness and sound public 3 policy.’”). As this Panel has noted, “the preferable approach 4 . . . in the federal courts is not to preclude the use of 5 offensive collateral estoppel, but to grant trial courts broad 6 discretion to determine when it should be applied.” In re Lopez, 7 367 B.R. at 107-08 (quoting Parklane Hosiery Co. v. Shore, 8 439 U.S. 322, 331 & nn.14-16 (1979)). 9 Here, while the bankruptcy court acknowledged that the 10 default judgment could potentially be given preclusive effect, it 11 instead exercised its discretion and declined to do so in favor of 12 conducting a live trial. The court repeatedly expressed a dislike 13 for default judgments, stating “this is a very good example of why 14 I personally do not like default judgments. Because you only see 15 one side, and it’s fairly easy to get them.” Trial Tr. 121:18-20. 16 The court reiterated this theme in the order denying Appellants’ 17 motion for a new trial: 18 It is true that at the time of trial, this Court and the parties were unaware of the November 7, 2012 default 19 judgment of the superior court, but it would be an incredible injustice to grant the motion for a new 20 trial. Although the circumstances are unusual, this is a court of equity and, as stated above, it would be an 21 incredible injustice to give preclusive effect to the state court judgment. Default judgments are disfavored 22 for many reasons, including that such a judgment is a one-sided story without an opportunity for defendants to 23 tell their side of the story. Before us is a classic example that given a full and fair trial, the truth will 24 prevail. 25 The bankruptcy court’s decision not to give preclusive effect 26 to the state court judgment under the circumstances of this case 27 is consistent with longstanding Ninth Circuit policy that default 28 judgments are disfavored because “cases should be decided upon

-11- 1 their merits whenever reasonably possible.” Westchester Fire Ins. 2 Co. v. Mendez, 585 F.3d 1183, 1189 (9th Cir. 2009). In commenting 3 on application of California collateral estoppel, the Ninth 4 Circuit recognized that whether the parties had the opportunity to 5 fully litigate a dispute could be considered by the bankruptcy 6 court in the decision to apply collateral estoppel: 7 Under California law, the presence or absence of a full and fair opportunity to litigate usually is relevant not 8 to the threshold inquiry, but rather to the public policy inquiry[.] 9 10 In re Harmon, 250 F.3d at 1247 n.6 (internal citations omitted). 11 The bankruptcy court concluded that it would be unjust to 12 give preclusive effect to the newly discovered state court default 13 judgment under the circumstances. The bankruptcy court previously 14 conducted a trial on the merits which included evidence and 15 testimony, and after which it issued oral findings and 16 conclusions. Indeed, in its oral findings of fact and conclusions 17 of law, the bankruptcy court repeatedly stated there was no 18 evidence “whatsoever” of fraud, and found that Appellants “[had] 19 not even come close to meeting” the burden of proof required. 20 Trial Tr. 122:8-9, 14; 123:7-9, 16-18; 124:11-13. Given these 21 facts, the bankruptcy court did not abuse its discretion when it 22 declined to give preclusive effect to a default judgment 23 discovered only post-trial. 24 Accordingly, we conclude that the existence of a state court 25 default judgment against Debtors would not constitute evidence of 26 such magnitude that it would change the outcome of the case. 27 Appellants’ request for an exception to discharge was rejected 28 after a trial on the merits. Moreover, even if the bankruptcy

-12- 1 court had given preclusive effect to the default judgment, such 2 would not guarantee a victory for Appellants. Rather, the 3 bankruptcy court would have had to consider whether all of the 4 required elements of § 523(a) had been met through the default 5 judgment. In other words, even if given preclusive effect, the 6 default judgment may have limited the issues for trial, but it 7 would not necessarily have dictated the outcome. 8 In short, because dischargeability is unique to the 9 bankruptcy arena, and because in California application of the 10 preclusion doctrine must comport with overall fairness, the 11 bankruptcy court had the discretion to deny preclusive effect to 12 the state court default judgment under these facts. Since 13 Appellants failed to establish the preclusive effect of the state 14 court judgment, they failed in their burden of proof to establish 15 an exception to discharge under § 523(a)(2)(A). 16 CONCLUSION 17 We AFFIRM the bankruptcy court’s order denying Appellants’ 18 motion for a new trial and the judgment. 19 20 21 22 23 24 25 26 27 28

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