FILED APR 16 2018 1 NOT FOR PUBLICATION SUSAN M. SPRAUL, CLERK U.S. BKCY. APP. PANEL 2 OF THE NINTH CIRCUIT
3 UNITED STATES BANKRUPTCY APPELLATE PANEL OF THE NINTH CIRCUIT 4 5 In re: ) BAP No. SC-17-1194-LBF ) 6 PAUL Y. JOHNSON and ) Bk. No. 3:16-bk-05753-LT CELESTE C. JOHNSON, ) 7 ) Adv. No. 3:16-ap-90186-LT Debtors. ) 8 ______________________________) ) 9 PAUL Y. JOHNSON; ) CELESTE C. JOHNSON, ) 10 ) Appellants, ) 11 ) v. ) M E M O R A N D U M* 12 ) W3 INVESTMENT PARTNERS, LP, ) 13 ) Appellee. ) 14 ______________________________) 15 Submitted Without Argument on March 22, 2018 at Pasadena, California 16 Filed - April 16, 2018 17 Appeal from the United States Bankruptcy Court 18 for the Southern District of California 19 Honorable Laura S. Taylor, Chief Bankruptcy Judge, Presiding _________________________ 20 Appearances: Kennan E. Kaeder on brief for Appellants; Paul J. 21 Delmore and Daniel W. Towson of Simpson Delmore Greene LLP on brief for Appellee. 22 _________________________ 23 Before: LAFFERTY, BRAND, and FARIS, Bankruptcy Judges. 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 8024-1. 1 The bankruptcy court granted summary judgment to Appellee on 2 its nondischargeability claim under § 523(a)(2)(A).1 In so 3 doing, the court gave issue preclusive effect to a prepetition 4 stipulated judgment entered in state court as part of a 5 litigation settlement. That judgment deemed admitted the facts 6 alleged in the state court complaint, which included allegations 7 supporting a finding of fraud. 8 Appellants’ primary argument is that the bankruptcy court 9 erred in applying issue preclusion to the stipulated judgment 10 because it amounted to an unenforceable prepetition waiver of the 11 discharge. We disagree, and for the reasons set forth below, we 12 AFFIRM. 13 FACTS 14 A. The State Court Litigation 15 Appellants Paul and Celeste Johnson were the principals of 16 Cel J, Inc. Cel J was the general partner of Sushi on the Rock 17 Carlsbad, L.P., which operated a restaurant in Carlsbad, 18 California. Appellee W3 Investment Partners, LP, was a limited 19 partner in Sushi on the Rock, having provided a capital 20 contribution of $575,000. Paragraph VI of the Agreement of 21 Limited Partnership executed by the partners in September 2004 22 provided that Cel J would be paid a management fee of $7,000 per 23 month and that, once the partnership’s operating reserves reached 24 $100,000, the limited partners would receive any excess as 25 1 26 Unless specified otherwise, all chapter and section references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532, all 27 “Rule” references are to the Federal Rules of Bankruptcy Procedure, and all “Civil Rule” references are to the Federal 28 Rules of Civil Procedure.
-2- 1 capital reimbursement and cash distributions in proportion to 2 their investments in the partnership. 3 In 2006, W3 sued Cel J and the Johnsons (collectively, 4 “Defendants”) in San Diego County Superior Court, pleading 5 thirteen causes of action including breach of contract, breach of 6 fiduciary duty, conversion, and three fraud causes of action: 7 intentional misrepresentation, concealment, and false promise. 8 In its first amended state court complaint (“FAC”), W3 alleged 9 that from 2004 to 2006 Defendants (i) intentionally diverted 10 Sushi on the Rock’s revenues and spent the partnership funds for 11 their personal benefit; (ii) intentionally produced inaccurate 12 and misleading financial statements; and (iii) purposefully 13 failed to make required distributions to the limited partners. 14 With respect to the Eighth Cause of Action for Fraud - 15 Intentional Misrepresentation, W3 alleged: 16 74. Pursuant to the Agreement between W3 and CEL J, CEL J represented to W3 that CEL J is required 17 to make certain deposits to the Operating Reserve Account and cause distributions to be made to W3, as 18 described in paragraphs 15(a) - (d). It was further represented to W3 that CEL J would have responsibility 19 for the safekeeping and use of all Sushi on the Rock assets and funds and that it would not use these assets 20 and funds in any manner except for the exclusive benefit of the Sushi on the Rock. 21 75. The representations made to W3 that the 22 required deposits would be made to the Operating Reserve Account, distributions would be made to W3 and 23 that Sushi on the Rock assets and funds would be used exclusively for the benefit of the partnership were all 24 entirely false. Instead, Sushi on the Rock assets and funds were and are being fraudulently used by CEL J, 25 CELESE and P. JOHNSON for their own personal benefit and enjoyment, as evidenced by the fraudulent 26 withdrawals, expenses and transfers described above in paragraphs 16 through 29. 27 76. At the time that the representations were 28 made, CEL J, C. JOHNSON and P. JOHNSON knew they were
-3- 1 false and/or made the representations recklessly and without regard for their truth. 2 77. CEL J, C. JOHNSON and P. JOHNSON intended 3 that W3 rely on these representations in making their Capital Contribution to Sushi on the Rock and intended 4 that W3 rely on these representations after Sushi on the Rock was operational. 5 78. W3 did, in fact, reasonably rely on the above 6 representations in that it would not have executed the Agreement if it had known that deposits would not be 7 made into the Operating Reserve Account, distributions would not be made to W3 and that Sushi on the Rock 8 assets and funds would not be used exclusively for the benefit of the Sushi on the Rock, but rather for the 9 personal benefit of CEL J, C. JOHNSON and P. JOHNSON. 10 79. As a direct and proximate result of the aforementioned acts of CEL J, C. JOHNSON and P. 11 JOHNSON, it is herein alleged that W3 has been damaged in an amount to be proven at trial and has incurred and 12 continues to incur costs and expenses including, but not limited to, consequential damages, litigation costs 13 and reasonable attorneys’ fees as provided under the Agreement. 14 15 Similar allegations supported the Ninth Cause of Action for 16 Fraud - Concealment: 17 82. CEL J, C. JOHNSON and P. JOHNSON intentionally failed to disclose to W3 that they would 18 not make the required deposits into the Operating Reserve Account, would not cause required distributions 19 to be made to W3, as described in paragraphs 15(a) - (d) and that they intended to use Sushi on the Rock 20 assets and funds for their own personal benefit and not for the exclusive benefit of Sushi on the Rock, as 21 described above in paragraphs 16 through 29. 22 83. W3 was unaware of the fact that CEL J, C. JOHNSON and P. JOHNSON intended not make [sic] the 23 required deposits into the Operating Reserve Account, would not cause required distributions to be made to 24 W3, as described in paragraphs 15(a) - (d) and that they intended to use Sushi on the Rock assets and funds 25 for their own personal benefit and not for the exclusive benefit of Sushi on the Rock, as described 26 above in paragraphs 16 through 29. This deception was reasonably relied on by W3. 27 84. CEL J, C. JOHNSON and P. JOHNSON intended to 28 deceive W3 by concealing the above facts in order to
-4- 1 cause W3 to make a Capital Contribution to Sushi on the Rock and to continue its participation in Sushi on the 2 Rock after it became profitable. 3 W3 also alleged a Tenth Cause of Action for Fraud - False 4 Promise, relying on allegations almost identical to those 5 supporting the Ninth Cause of Action for Fraud - Concealment. 6 After litigating the matter for nearly two and a half years, 7 the parties, represented by counsel, reached a settlement whereby 8 Defendants agreed to pay W3 $625,000. The settlement agreement 9 (“Settlement Agreement”) required Defendants to pay at least 10 $2,000 per month for five years; the remaining amount was to be 11 paid in eighteen equal monthly installments of approximately 12 $28,000 each. In Paragraph I.B. of the Settlement Agreement, the 13 Johnsons denied any liability to W3. At the same time, 14 Paragraph III.2., which required the Johnsons to each personally 15 guarantee the obligations of Defendants under the agreement, 16 provided that the Johnsons “have further expressly agreed to and 17 understand that all such obligations under the Agreement and the 18 Stipulated Judgment shall be fully and entirely nondischargeable 19 and shall survive any liquidation proceeding, receivership 20 proceeding, conservatorship proceeding, bankruptcy proceeding 21 and/or any other similar proceeding.” 22 Defendants (and their counsel) also executed a stipulated 23 judgment (“Stipulated Judgment”) that was to be entered if they 24 breached the Settlement Agreement, and the Johnsons each executed 25 personal guarantees of the amounts due under the settlement. The 26 Stipulated Judgment provided, in relevant part: 27 3. Cel J. Inc., Celeste Johnson and Paul Johnson expressly agree, acknowledge and stipulate that the 28 filing and/or entry of this stipulated judgment deems
-5- 1 all allegations, statements and facts contained in the first-amended complaint to be true and accurate. 2 4. Cel J., Inc, Celeste Johnson and Paul Johnson 3 expressly agree, acknowledge and stipulate that this stipulated judgment is directly related to and arises 4 solely out of their fraudulent conduct, including their breaches of fiduciary duty, as specifically alleged in 5 the first-amended complaint. 6 At a hearing before the settlement judge on April 23, 2008, 7 the settlement terms were put on the record. Those terms 8 included that the amounts due under the personal guarantees would 9 not be dischargeable in bankruptcy and that in the event of a 10 default a stipulated judgment could be entered. Debtors 11 indicated at that hearing that they understood the terms of the 12 settlement and were willing to be bound by its terms. 13 Defendants made payments under the Settlement Agreement for 14 five years but thereafter defaulted. As a result, W3 sought 15 entry of the Stipulated Judgment in state court. For reasons 16 that were never fully explained, the state court did not enter 17 the Stipulated Judgment but rather a form judgment in the 18 principal amount of $516,000 (the “Form Judgment”). The Form 19 Judgment included the following language: “Defendants have 20 stipulated/ agreed that his [sic] judgment: (i) deems the first- 21 amended complaint true and accurate; and (ii) it arises solely 22 out of their fraudulent conduct, including breaches of fiduciary 23 duties.” 24 B. The Nondischargeability Proceeding 25 The Johnsons filed a chapter 7 petition on September 20, 26 2016, listing the judgment in favor of W3 on Schedule F in the 27 amount of $558,147. W3 filed a timely adversary proceeding 28 seeking to except its claim from discharge under §§ 523(a)(2)(a),
-6- 1 (a)(4), and (a)(6). In May 2017, W3 filed a motion seeking 2 summary judgment on its claims under §§ 523(a)(2)(A) and (a)(4) 3 only, based on the issue preclusive effect of the state court 4 judgment. 5 Debtors opposed the motion. They pointed out that the state 6 court entered the Form Judgment, not the Stipulated Judgment. 7 They also argued that the stipulation of nondischargeability of 8 the amounts due under the settlement was void as against public 9 policy and that the fraud issues were not actually litigated, 10 pointing out that the Settlement Agreement itself contained 11 neither any admission of liability nor any facts supporting a 12 fraud finding. In support of their opposition, Debtors submitted 13 declarations from Mr. and Ms. Johnson. Ms. Johnson testified 14 that neither she nor her husband had done anything alleged in the 15 complaint. She stated that W3 misunderstood that the Johnsons 16 had taken the $7,000 monthly management fee from the partnership 17 in increments as it was able to pay and that she had a ledger of 18 what had been taken for that fee. She further stated that “[t]he 19 idea that myself or Paul entered into the limited partnership 20 with an intent to defraud [W3] is simply absurd. Shawn Nevitt of 21 W3 was a customer in our La Jolla location. He heard about the 22 project and asked Paul if he could invest.” Ms. Johnson also 23 pointed out that a receiver appointed during the state court 24 litigation had monitored the partnership and, after three months, 25 had found nothing wrong. She further stated that she felt 26 bullied by the settlement judge into settling the lawsuit because 27 he told her she had no chance of winning, and the Johnsons had no 28 money to keep litigating. Mr. Johnson’s declaration essentially
-7- 1 agreed with everything stated by Ms. Johnson. 2 At the hearing on summary judgment, W3’s counsel stated that 3 he did not know why the state court judge had entered the Form 4 Judgment rather than the Stipulated Judgment because the 5 associate who had handled the matter was no longer with his firm. 6 The bankruptcy court asked W3's counsel to look into the matter 7 and submit a declaration explaining what was submitted to the 8 state court in support of the request to enter the Stipulated 9 Judgment: “whatever documents were put before Judge Prager that 10 formed the basis for his determination that – and I’m using his 11 words – that the judgment arises solely out of their, plural, 12 fraudulent conduct.” Thereafter, W3’s counsel, Paul Delmore, 13 filed a declaration2 stating in relevant part: 14 [O]n October 18, 2013, we provided Judge Prager with the fully executed Confidential Settlement Agreement, 15 which included as exhibits the First Amended Complaint, the Stipulated Judgment executed by Defendants, and the 16 Guaranty of Obligations and Payments signed by Defendants. 17 6. We also included a Judicial Counsel [sic] 18 Judgment form JUD-100 together with a copy of the Stipulated Judgment that Defendants executed as part of 19 the settlement. . . . [T]he Judicial Counsel [sic] Judgment form mistakenly did not reference or 20 incorporate the Stipulated Judgment signed by Defendants. Hence, when the Superior Court Clerk filed 21 the Judgment form signed by Judge Prager on October 29, 2013, the Clerk did not include the Stipulated Judgment 22 signed by Defendants as part of the entered judgment. 23 The bankruptcy court denied the motion as to the § 523(a)(4) 24 claim but granted it as to the § 523(a)(2)(A) claim, finding that 25 issue preclusion applied to the facts stipulated to by the 26 27 2 Debtors erroneously stated in their opening brief that W3 28 did not provide the requested declaration.
-8- 1 Johnsons, and those facts supported a finding of 2 nondischargeability under § 523(a)(2)(A).3 3 The Johnsons 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. 8 ISSUE 9 Whether the bankruptcy court erred in granting summary 10 judgment to W3 by giving issue preclusive effect to the state 11 court judgment as to the § 523(a)(2)(A) nondischargeability 12 claim. 13 STANDARDS OF REVIEW 14 We review de novo the bankruptcy court’s decision to grant 15 summary judgment. Plyam v. Precision Dev., LLC (In re Plyam), 16 530 B.R. 456, 461 (9th Cir. BAP 2015). We also review de novo 17 the bankruptcy court’s determination that issue preclusion was 18 available. Id. If issue preclusion was available, we review the 19 bankruptcy court’s application of issue preclusion for an abuse 20 of discretion. Id. A bankruptcy court abuses its discretion if 21 it applies the wrong legal standard, misapplies the correct legal 22 standard, or if its factual findings are illogical, implausible, 23 or without support in inferences that may be drawn from the facts 24 in the record. TrafficSchool.com, Inc. v. Edriver Inc., 653 F.3d 25 26 3 On June 28, 2017, W3 filed a first amended complaint to 27 eliminate the § 523(a)(4) and (a)(6) claims; accordingly, the bankruptcy court’s order granting summary judgment on the 28 § 523(a)(2)(A) claim is final.
-9- 1 820, 832 (9th Cir. 2011) (citing United States v. Hinkson, 2 585 F.3d 1247, 1262 (9th Cir. 2009) (en banc)). 3 DISCUSSION 4 A. Summary Judgment Standard 5 Summary judgment may be granted “if the movant shows that 6 there is no genuine issue as to any material fact and the movant 7 is entitled to judgment as a matter of law.” Civil Rule 56(a), 8 incorporated via Rule 7056; Barboza v. New Form, Inc. (In re 9 Barboza), 545 F.3d 702, 707 (9th Cir. 2008). The trial court may 10 not weigh evidence in resolving such motions, but rather 11 determines only whether a material factual dispute remains for 12 trial. Covey v. Hollydale Mobilehome Estates, 116 F.3d 830, 834 13 (9th Cir. 1997), opinion amended on denial of rehr’g, 125 F.3d 14 1281 (Mem.). A dispute is genuine if there is sufficient 15 evidence for a reasonable fact finder to hold in favor of the 16 non-moving party, and a fact is “material” if it might affect the 17 outcome of the case. Far Out Prods., Inc. v. Oskar, 247 F.3d 18 986, 992 (9th Cir. 2001) (citing Anderson v. Liberty Lobby, Inc., 19 477 U.S. 242, 248–49 (1986)). The initial burden of showing 20 there is no genuine issue of material fact rests on the moving 21 party. Margolis v. Ryan, 140 F.3d 850, 852 (9th Cir. 1998). 22 B. Issue Preclusion 23 In applying issue preclusion to a state court judgment, the 24 bankruptcy court must apply the forum state’s law of issue 25 preclusion. Harmon v. Kobrin (In re Harmon), 250 F.3d 1240, 1245 26 (9th Cir. 2001); In re Plyam, 530 B.R at 462. In California, 27 application of issue preclusion requires that: (1) the issue 28 sought to be precluded from relitigation is identical to that
-10- 1 decided in a former proceeding; (2) the issue was actually 2 litigated in the former proceeding; (3) the issue was necessarily 3 decided in the former proceeding; (4) the decision in the former 4 proceeding is final and on the merits; and (5) the party against 5 whom preclusion is sought was the same as, or in privity with, 6 the party to the former proceeding. In re Plyam, 530 B.R. at 462 7 (citing Lucido v. Super. Ct., 51 Cal. 3d 335, 341 (1990)). In 8 addition, California courts apply issue preclusion only if 9 application of the doctrine furthers the public policies 10 underlying the doctrine. In re Harmon, 250 F.3d at 1245. Those 11 policies include “preservation of the integrity of the judicial 12 system, promotion of judicial economy, and protection of 13 litigants from harassment by vexatious litigation . . . .” 14 Lucido, 51 Cal. 3d at 770-71. 15 It is undisputed that the issues deemed decided in the state 16 court litigation were identical to those presented in the 17 nondischargeability proceeding, that the parties were identical, 18 and that the state court judgment was final and on the merits. 19 Additionally, the bankruptcy court concluded that Debtors’ 20 coercion argument did not raise a public policy challenge to 21 issue preclusion. Debtors do not challenge this conclusion on 22 appeal, except to the extent they argue that the settlement 23 documents constituted an unenforceable waiver of the discharge. 24 Thus, the only element in dispute in this appeal is the 25 “actually litigated” requirement (and, by implication, the 26 27 28
-11- 1 “necessarily decided” requirement).4 Ordinarily, stipulated 2 judgments are not given preclusive effect because the issues were 3 not actually litigated and thus this element could not be 4 satisfied. Berr v. FDIC (In re Berr), 172 B.R. 299, 306 (9th 5 Cir. BAP 1994). Where the record or judgment evidences an intent 6 by the parties for a stipulated judgment to be preclusive, 7 however, a court may give effect to that judgment. Id.; see 8 Hayhoe v. Cole (In re Cole), 226 B.R. 647, 655 (9th Cir. BAP 9 1998) (“[I]f the parties stipulated to the underlying facts that 10 support a finding of nondischargeability, the Stipulated Judgment 11 would then be entitled to collateral estoppel application.”). 12 Where a party admits liability in a stipulated judgment, that 13 party may be precluded from relitigating that liability. Cal. 14 State Auto. Ass’n Inter-Ins. Bureau v. Superior Ct., 50 Cal. 3d 15 658, 664-65 (1990).5 16 Here, Debtors contend that the bankruptcy court should not 17 have given issue preclusive effect to the Form Judgment because 18 it and the other settlement documents constituted an 19 unenforceable prepetition waiver of the discharge. While Debtors 20 are correct that the settlement documents contain language that 21 22 4 If an issue was necessarily decided in a prior proceeding, 23 it was actually litigated, but an issue may be actually litigated without being necessarily decided. In re Harmon, 250 F.3d at 24 1248 & n.9. 25 5 Similarly, under California law, courts may apply issue 26 preclusion to a default judgment so long as the defendant was personally served or had actual knowledge of the litigation, the 27 issue was properly raised and submitted to the court, and the court actually determined the issue. In re Harmon, 250 F.3d at 28 1246-47.
-12- 1 could be so construed (Paragraph III.2. of the Settlement 2 Agreement), they also contain language deeming admitted the fraud 3 allegations contained in the FAC (e.g., the Stipulated Judgment 4 and the Form Judgment entered by the state court). The 5 bankruptcy court correctly disregarded the general 6 nondischargeability language but found that the Debtors’ deemed 7 admission of the facts establishing fraud liability was entitled 8 to preclusive effect. 9 1. The settlement documents deemed admitted the facts supporting a finding of nondischargeability and thus 10 did not constitute an unenforceable prepetition waiver of discharge. 11 12 A prepetition waiver of discharge is unenforceable as 13 against public policy. Bank of China v. Huang (In re Huang), 14 275 F.3d 1173, 1177 (9th Cir. 2002); In re Cole, 226 B.R. at 654. 15 But a party may stipulate to facts that the bankruptcy court can 16 apply in a nondischargeability action. In re Cole, 226 B.R. at 17 655 (citing Klingman v. Levinson, 831 F.2d 1292, 1296 n.3 (7th 18 Cir. 1987)). In certain narrow circumstances, however, the 19 bankruptcy court should not give preclusive effect to stipulated 20 facts. See Wank v. Gordon (In re Wank), 505 B.R. 878 (9th Cir. 21 BAP 2014). 22 In Wank, the parties settled prepetition state court 23 litigation and stipulated that if the agreed-upon sum was not 24 paid timely, a $1.1 million judgment would be entered against the 25 defendant. Id. at 881-82. The judgment provided that the 26 obligations arising from the settlement agreement would be 27 nondischargeable in bankruptcy. Id. at 882. The defendant 28 executed a declaration which stated that its purpose was to
-13- 1 provide a factual basis to further the intent of the parties to 2 ensure that he could not discharge the debt in bankruptcy. Id. 3 Defendant testified in the declaration that (i) he had made false 4 representations to the creditors to induce them to place funds in 5 his trust account and to permit defendant to act as their primary 6 investor; (ii) he told creditors the investment would be safe and 7 that he was an attorney with expertise in such matters; and 8 (iii) he knew at the time he executed the contracts and accepted 9 the funds that there was a possibility funds could be lost but 10 did not inform creditors. Id. The settlement agreement provided 11 that the declaration would be kept in a sealed envelope by an 12 escrow agent, to be unsealed and submitted to the bankruptcy 13 court in the event defendant defaulted on the settlement and 14 filed bankruptcy. Id. at 882-83. 15 After the defendant defaulted on the settlement agreement 16 and creditors caused the stipulated judgment to be entered in 17 state court, defendant filed a chapter 7 petition. Id. at 883. 18 Creditors filed an adversary proceeding seeking to except from 19 discharge the amount due under the stipulated judgment. In that 20 proceeding, the defendant filed a second declaration in which he 21 contended that he had signed the first declaration under duress 22 and while he was under the influence of anxiety medication and 23 that he had objected to the statements but had signed the first 24 declaration because the settlement represented a substantial 25 discount from the damages alleged in the lawsuit and permitted 26 him to pay over time. He also stated that he believed his 27 statements could not be enforced against him. Id. at 884. 28 The bankruptcy court granted creditors’ motion for summary
-14- 1 judgment on the § 523(a)(2)(A) claim, stating that although it 2 had disregarded the general nondischargeability language in the 3 settlement agreement and first declaration, debtor’s factual 4 admissions in his first declaration sufficiently supported the 5 § 523(a)(2)(A) claim to warrant summary judgment. Id. at 885-86. 6 On appeal, the Panel held that, under the unique 7 circumstances of that case, the bankruptcy court erred in giving 8 defendant’s statements preclusive effect. This was because the 9 “singular goal” of the first declaration, as set forth in the 10 document itself, was to provide a factual basis to further the 11 intention of the parties to ensure that defendant could not 12 discharge the stipulated judgment in bankruptcy. Id. at 889-90. 13 The Panel thus concluded that: 14 the reliability of the factual statements [in the first declaration] are potentially tainted by the 15 [creditors’] motives. The document was solely intended to ensure that Wank could not obtain effective relief 16 in bankruptcy. While, perhaps, some of Wank’s factual statements could be trusted, to do so would require the 17 bankruptcy court to weigh the credibility of those statements against the circumstances under which the 18 First Declaration was executed. 19 Id. at 890. 20 The Panel also noted that the first declaration was not part 21 of the stipulated judgment, but rather was “a standalone document 22 that was . . . only to be used in the event of a bankruptcy 23 filing to provide grounds for an exception to discharge.” Id. at 24 891.6 The Panel vacated the judgment and remanded. 25 6 26 The Panel also found that the bankruptcy court had impermissibly weighed evidence and made credibility 27 determinations in the summary judgment context and noted that no evidence in the record supported the justifiable reliance element 28 (continued...)
-15- 1 Debtors contend that this case is analogous to Wank and that 2 their factual admissions were akin to an unenforceable 3 prepetition waiver of bankruptcy protections. The bankruptcy 4 court rejected this contention, finding that Wank was 5 distinguishable. Specifically, the court found that Debtors’ 6 stipulation to the facts in the state court complaint was made at 7 the time of settlement and was relied upon by the state court 8 when it entered the judgment, while the declaration in Wank was 9 only to be unsealed and presented if the debtor filed for 10 bankruptcy. 11 The bankruptcy court found that this case was more akin to 12 Son v. Park, No. C 10-00085 MHP, 2010 WL 4807089 (N.D. Cal. 13 Nov. 19, 2010). In Son, the debtor defaulted on a prepetition 14 litigation settlement and filed a bankruptcy petition. The 15 bankruptcy court lifted the stay to permit the creditor to seek 16 entry of a stipulated judgment per the terms of the settlement. 17 That judgment included fraud findings based on facts admitted by 18 the debtor at the settlement hearing and pursuant to the parties’ 19 agreement that the judgment would include a fraud finding. Id. 20 at *2. In the creditor’s subsequent nondischargeability action, 21 the bankruptcy court gave issue preclusive effect to the 22 stipulated judgment, finding that it established four of the five 23 elements of a § 523(a)(2)(A) claim. The court held a trial on 24 the fifth element and entered judgment finding the debt 25 nondischargeable. Id. at *3. On appeal, the District Court held 26 27 6 (...continued) 28 of the § 523(a)(2)(A) claim. Id. at 891-95.
-16- 1 that the bankruptcy court had not erred in applying issue 2 preclusion to the stipulated judgment, nor was the judgment an 3 impermissible prepetition waiver of the discharge, because the 4 debtor had agreed at the settlement hearing that the admission of 5 fraud and findings of fact supporting fraud would be included in 6 the stipulated judgment. Id. at *7. 7 Debtors argue that, unlike the debtor in Son, they did not 8 stipulate to any liability or facts supporting fraud at the time 9 of settlement. They contend that the bankruptcy court erred when 10 it stated that Debtors’ stipulation to the facts in the state 11 court complaint were made at the time of the settlement because 12 they did not admit liability at that time. In fact, Debtors 13 explicitly denied liability in the settlement agreement. Debtors 14 also point out that no facts were stipulated to at the settlement 15 conference and that the operative settlement documents (the 16 Settlement Agreement, Stipulated Judgment, and Guarantees) “came 17 later.” 18 The facts of this case do not precisely mirror those 19 presented in Son (or in Wank), but the salient question is 20 whether the circumstances surrounding the settlement or the 21 judgment itself evidence the parties’ intent for the Stipulated 22 Judgment to have preclusive effect. In re Berr, 172 B.R. at 306. 23 Those circumstances include stipulating to facts that support a 24 finding of nondischargeability. In re Cole, 226 B.R. at 655. 25 In paragraph 9 of his declaration in support of W3's motion 26 for summary judgment, W3's counsel testified that the parties 27 intended that the settlement would be nondischargeable in 28 bankruptcy and that W3 had
-17- 1 specifically negotiated this language with Defendants with the intent that if Defendants breached the 2 Settlement Agreement, the Stipulated Judgment entered against them would clearly set forth a finding of fraud 3 and breach of fiduciary duty. We specifically required these admissions from Defendants so that in the event 4 they proceeded to bankruptcy, the admission of fraudulent conduct would prove to render the judgment 5 non-dischargeable. 6 Debtors provided no evidence to refute this testimony. Although 7 they testified in their declarations that they felt pressured to 8 settle, they did not testify that they did not understand the 9 terms of the Settlement Agreement or the Stipulated Judgment, 10 which they and their attorney signed as part of the settlement. 11 Those documents evidence their intent for the state court 12 judgment to have preclusive effect. 13 For these reasons, the bankruptcy court did not err in 14 concluding that the Stipulated Judgment was not an unenforceable 15 prepetition waiver of the discharge but was instead evidence that 16 the Debtors intended the findings incorporated into that judgment 17 to have preclusive effect in any future bankruptcy case. 18 Accordingly, the actually litigated requirement was met. 19 Although the bankruptcy court did not explicitly address the 20 “necessarily decided” requirement, the record reflects that this 21 element was also met. The Form Judgment explicitly states that 22 the judgment arose solely from Debtors’ fraudulent conduct as 23 described in the FAC. Accordingly, the bankruptcy court did not 24 err in applying issue preclusion to the state court judgment. 25 2. Debtors have not presented any other meritorious argument supporting the conclusion that the bankruptcy 26 court erred in applying issue preclusion to the state court judgment. 27 28 Debtors also argue that the Stipulated Judgment should not
-18- 1 have been given preclusive effect because that judgment was never 2 entered. Instead, the state court entered the Form Judgment. 3 The Form Judgment, however, contained essentially equivalent 4 language deeming the FAC true and accurate and indicating that 5 the judgment arose solely from Debtors’ fraudulent conduct. 6 Moreover, as the bankruptcy court found, and as evidenced by 7 Mr. Delmore’s declaration testimony, Debtors’ stipulation to the 8 allegations in the FAC was before the state court when it entered 9 the Form Judgment. 10 Debtors contend that this case is similar to Cole, in which 11 the BAP held that a stipulated judgment was not entitled to 12 preclusive effect because it was based on the occurrence of 13 future events. 226 B.R. at 655. But Cole is factually 14 distinguishable: there, the underlying state court complaint did 15 not allege fraud in connection with the promissory note giving 16 rise to the debt at issue. The stipulated judgment in that case 17 provided that (i) defendant would not list the debt in any 18 bankruptcy petition or request that the debt be discharged, 19 (ii) defendant had the funds to pay the debt and plaintiff relied 20 on that representation in releasing its writ of attachment, 21 (iii) the debt was nondischargeable under § 523(a)(2)(B), 22 (iv) plaintiff would not have released the writ of attachment but 23 for the defendant’s representations of nondischargeability; and 24 (v) any attempt by defendant to discharge the debt would be an 25 admission that he obtained the release of the writ of attachment 26 under false pretenses and thus the debt would be nondischargeable 27 under § 523(a)(2)(A). Id. The Panel held that the bankruptcy 28 court did not err in declining to give issue preclusive effect to
-19- 1 the stipulated judgment because the stipulated facts had nothing 2 to do with the merits of the state court lawsuit and would have 3 had no evidentiary effect in a § 523(a)(2) action. Id. at 656. 4 Here, in contrast, the factual admissions incorporated into 5 the state court judgment directly relate to the merits of the 6 fraud claim. Accordingly, Debtors’ reliance on Cole is 7 misplaced. 8 C. The bankruptcy court did not err in concluding that the deemed admissions supported a finding of nondischargeability 9 under § 523(a)(2)(A). 10 Under § 523(a)(2)(A), a debt for money obtained by the 11 debtor under “false pretenses, a false representation, or actual 12 fraud” may be excepted from discharge. Summary judgment is 13 proper in considering an exception to discharge under 14 § 523(a)(2)(A) if the movant is able to show that there is no 15 genuine issue of material fact as to each of the five elements of 16 exception to discharge under that provision: 17 (1) misrepresentation, fraudulent omission or deceptive conduct 18 by the debtor; (2) knowledge of the falsity or deceptiveness of 19 his statement or conduct; (3) an intent to deceive; 20 (4) justifiable reliance by the creditor on the debtor’s 21 statement or conduct; and (5) damage to the creditor proximately 22 caused by its reliance on the debtor’s statement or conduct. 23 Turtle Rock Homeowners Ass'n v. Slyman (In re Slyman), 234 F.3d 24 1081, 1085 (9th Cir. 2000). 25 Debtors’ admissions establish all of the elements of a 26 § 523(a)(2)(A) claim. Those admissions are: (1) Cel J and the 27 Johnsons made representations to W3 that they would make the 28 required deposits into the operating reserve account and that
-20- 1 funds would be used for the exclusive benefit of the partnership, 2 and failed to disclose that the Johnsons intended to use Sushi on 3 the Rock assets and funds for their own personal benefit (false 4 representation); (2) at the time the representations were made, 5 defendants knew they were false and/or made the representations 6 recklessly and without regard for their truth (knowledge of 7 falsity); (3) Defendants intended to deceive W3 by concealing 8 their intent to not make the required deposits and distributions 9 and intended that W3 rely on their representations in making 10 their capital contribution to Sushi on the Rock (intent to 11 deceive); (4) W3 reasonably relied on the above representations 12 in that it would not have executed the partnership agreement if 13 it had known that the deposits and distributions would not be 14 made and that assets and funds would be used for the personal 15 benefit of Defendants (justifiable reliance);7 and (5) as a 16 direct and proximate result of the aforementioned acts, W3 has 17 been damaged in an amount to be proven at trial (damage 18 proximately caused by debtor’s statement or conduct). 19 Debtors do not dispute that, once the bankruptcy court 20 concluded that it was appropriate to give preclusive effect to 21 the state court judgment, the relevant allegations of the FAC – 22 which were deemed admitted – established all the elements of a 23 § 523(a)(2)(A) claim. And we find no error in the bankruptcy 24 court’s application of the law to the facts. 25 7 26 Reasonable reliance is a more exacting standard than justifiable reliance; accordingly, a finding of reasonable 27 reliance meets the lower standard of justifiable reliance. Tallant v. Kaufman (In re Tallant), 218 B.R. 58, 69 n.15 (9th 28 Cir. BAP 1998).
-21- 1 CONCLUSION 2 For the reasons explained above, we AFFIRM the bankruptcy 3 court’s grant of W3's motion for summary judgment on its 4 § 523(a)(2)(A) claim. 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28
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