Rutanen v. Baylis

217 F.3d 66

• Court: Court of Appeals for the First Circuit
• Decided: August 16, 2000
• Docket: 99-2352
• Status: Published

Opinion

United States Court of Appeals For the First Circuit

No. 99-2352

IN RE: CARL E. BAYLIS, Debtor,

CONSTANCE B. RUTANEN; ELLA QUEVILLON, BY AND FOR THE ESTATE OF ROBERT S. QUEVILLON; THERESA J. ALEXANDER,

Plaintiffs, Appellees,

v.

CARL E. BAYLIS, INDIVIDUALLY AND IN HIS CAPACITY AS CO-TRUSTEE OF THE ANTONIA QUEVILLON TRUST,

Defendant, Appellant.

APPEAL FROM THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF MASSACHUSETTS

[Hon. Nathaniel M. Gorton, U.S. District Judge]

Before

Torruella, Chief Judge, Stahl and Lipez, Circuit Judges.

David M. Nickless, with whom Nickless & Phillips was on brief for appellant. Christopher S. Wheeler, with whom Robert A. Gelinas and Bulkley, Richardson & Gelinas, LLP, were on brief for appellees. July 6, 2000

STAHL, Circuit Judge. Defendant-appellant Carl Baylis

appeals the district court's decision that a seven-year-old state

probate court finding should be given preclusive effect in the

subsequent adversarial bankruptcy court proceeding. We vacate and

remand.

I.

In October 1969, Baylis, an attorney specializing in taxation

and estate planning, created a trust (the “Trust”) for Antonia

Quevillon. Baylis included in the agreement an exculpatory clause

which provided that the Trustees would be “liable only for [their] own

willful conduct or omissions in bad faith.” The res of the Trust

consisted of two apartment buildings in Worcester, Massachusetts, and

six in Southbridge, Massachusetts. The Trust provided that Quevillon

would serve as trustee and that upon her death, Estelle Ballard and

Baylis would serve as co-trustees. Ballard was one of Quevillon's

daughters and was, along with her siblings--plaintiffs-appellees

Constance Rutanen, Robert Quevillon,1 and Theresa Alexander (the

“plaintiffs”)--an income beneficiary of the Trust. Ballard had agreed

1 The estate of Robert Quevillon is represented in this action by Ella Quevillon.

-2- with her mother to be paid fifty dollars per week for the management of

the properties. Baylis was paid only for specific work he performed

for the Trust.

During the life of the Trust, net income was to be

distributed equally among the beneficiaries. Twenty years after

Antonia Quevillon's death, the Trust was to terminate, and the Trust

property was to be divided equally among the children of her son

Marcel. The Trust terminated on May 20, 1991, and the Trust property

was distributed to Marcel Quevillon's children.

Upon Antonia Quevillon's death in 1971, Ballard and Baylis

sold one of the properties to pay estate taxes. Over the next fifteen

years, the Trust paid the beneficiaries modest amounts. In 1985, the

plaintiffs, concerned because of the minute amounts they were receiving

from the Trust, met with Ballard and Baylis to discuss its operation.

By then, both Worcester buildings had been sold, but the Trust still

held the six Southbridge buildings. At this meeting, it was agreed,

with no objection from Ballard, that the co-trustees would sell the

remaining properties and invest the proceeds in treasury notes.

By January 1986, Ballard and Baylis had received offers for

the properties. A Mr. and Mrs. John Young made an offer for two of the

properties, and Ramshorn Realty Trust (“Ramshorn”) offered to buy the

other four. The total price offered for the six buildings totaled

$1,640,000, which was $300,000 greater than the properties' appraised

-3- values. Ballard then decided not to sell any of the properties,

claiming that she wanted to keep them for herself. Because Baylis

believed that the real estate market had peaked, he urged the sale of

the properties, but Ballard remained steadfast in her refusal to sell.

In February 1986, in an attempt to complete the transactions before an

increase in the federal capital gains tax became effective, Baylis

first offered Ballard a chance to buy all the property, which she was

unable to do because she lacked financing, and then offered her an

additional management fee of either $75,000 or $133,667 if she would

assent to the sale. She refused. Nevertheless, despite her refusal,

Baylis presented unsigned purchase and sale agreements to the Youngs in

May 1986 and to Ramshorn in June 1986. Both parties executed and

returned the agreements to Baylis.

After he received the signed purchase and sale agreements,

Baylis attempted to garner Ballard's signature on them. She refused,

prompting Baylis to propose to her that the Trust would sell the two

properties earmarked for the Youngs to her instead. In return, she was

to assent to the sale of the other four properties to Ramshorn, resign

as co-trustee, and agree to a trustee fee for Baylis. Ballard agreed.

In December 1986, when the Youngs became aware of this

arrangement, they sued Baylis for fraud and Ballard and Baylis, in

their capacities as co-trustees, for specific performance. Ballard

-4- then withdrew her agreement with Baylis and refused to sell the four

properties to Ramshorn. The properties, therefore, remained unsold.

Ballard and Baylis used Trust funds to finance their defense of the

Young litigation. Jointly, they spent approximately $12,000 in

defending themselves as co-trustees, with Baylis spending approximately

$7000 to defend himself against the fraud claim. Finally, to settle

its litigation the Trust paid $15,000 to the Youngs in connection with

their fraud claim against Baylis.

That same December, Baylis filed with the probate court a

petition for a license to sell the properties on behalf of the Trust.

The probate court decided to defer acting on the petition until Ballard

gave her consent to sell. She never did. Baylis thereafter failed to

pursue the petition even though he believed that Ballard's reason for

refusing to sell was baseless and that her refusal constituted a breach

of fiduciary duty. Consequently, the property was not sold. Within a

short time, property values in the area fell, and the value of the

Trust was diminished.

In May 1988, the plaintiffs sued Ballard and Baylis in

Massachusetts Probate Court. The plaintiffs sought an accounting and

alleged breach of fiduciary duty, conversion, fraud, and negligent

misrepresentation. After a bench trial, the court found that Baylis

had acted negligently in failing to prevent Ballard from fulfilling her

fiduciary duties. In addition, it found that the exculpatory clause in

-5- the Trust Agreement was unenforceable and that, in failing to sell the

properties, Ballard and Baylis had acted in bad faith. The trial court

entered judgment for $330,079.95 against Ballard and Baylis.

The Massachusetts Appeals Court affirmed the judgment of the

probate court with respect to both its negligence and bad faith

determinations. The Supreme Judicial Court of Massachusetts (“SJC”)

granted Ballard and Baylis's application for further appellate review

and affirmed. In so doing, however, the court expressly refused to

reach the issue of bad faith, stating that a finding of negligent

breach of fiduciary duty would suffice to affirm the judgment. Baylis

subsequently filed a petition for rehearing in which he requested,

inter alia, that the SJC reverse the trial court's finding of bad

faith. The SJC denied the petition.

Following the SJC's affirmance, Baylis filed for bankruptcy.

The plaintiffs opposed the discharge of his judgment debt to them and

brought an adversary action pursuant to 11 U.S.C. § 523(a). This

section of the Bankruptcy Code prohibits the discharge of any debt

arising from “defalcation while acting in a fiduciary capacity,” id.

§ 523(a)(4), or from “willful and malicious injury,” id. § 523(a)(6).

The parties filed cross-motions for summary judgment,2 agreeing to be

bound by the probate court's factual findings, except for the finding

2Although they styled their motions as ones for “summary judgment,” it is evident that they expected the bankruptcy court simply to resolve the case on a stipulated record.

-6- that Baylis acted in bad faith. The plaintiffs argued that the

bankruptcy court should accord this finding preclusive effect, but the

court disagreed. The court went on to find neither willful and

malicious injury nor defalcation. Therefore, the court held that

Baylis's debt to the plaintiffs was dischargeable and entered judgment

to Baylis in the adversary action.

The plaintiffs appealed to the district court, arguing that

the bankruptcy court had erred in its determination that issue

preclusion did not apply to the probate court's determination of bad

faith. In a Memorandum and Order dated October 29, 1999, the district

court reversed the holding of the bankruptcy court, holding that issue

preclusion did apply. It further held that the finding of bad faith

under Massachusetts law required concomitant findings of defalcation

and willful and malicious injury under the Bankruptcy Code.

Consequently, it reversed and ordered that judgment be entered in favor

of the plaintiffs. This appeal followed.

II.

The sole issue before us is whether the district court was

correct in ruling that the bankruptcy court should have given

preclusive effect to the probate court's finding that Baylis had acted

in bad faith. We review this ruling de novo. See IRS v. Cousins (In

re Cousins), 209 F.3d 38, 40 (1st Cir. 2000); Prebor v. Collins (In re

I Don't Trust), 143 F.3d 1, 3 (1st Cir. 1998).

-7- The plaintiffs argue that the issue of bad faith was fully

and fairly litigated in the state probate court and, as such, should

have preclusive effect in the bankruptcy proceeding. In doing so, they

point out that the probate court found Baylis to have acted in bad

faith and that the appeals court affirmed this finding. Further, they

argue that this finding of bad faith suffices to prove that Baylis

committed defalcation and inflicted willful and malicious injuries on

the plaintiffs. Baylis responds that because the probate court

alternatively found that Baylis was negligent and had acted in bad

faith and because the SJC affirmed only on the negligence ground, there

was no preclusive final judgment on the issue of bad faith. Thus, we

must decide whether issue preclusion applies when a trial court's

judgment, which rests on alternative grounds, is affirmed by the

intermediate appeals court on both grounds, but by the court of last

resort on only one ground.

It is well-settled that a previously litigated issue between

two parties should not be relitigated. See Montana v. United States,

440 U.S. 147, 153 (1979); Miles v. Aetna Cas. & Sur. Co., 589 N.E.2d

314, 316-17 (Mass. 1992). The principles of issue preclusion apply to

nondischargeability proceedings in bankruptcy. See Grogan v. Garner,

498 U.S. 279, 285 n.11 (1991). By federal statute, judicial

proceedings in state court “shall have the same full faith and credit

in every court within the United States . . . as they have by law or

-8- usage in the courts of such State.” 28 U.S.C. § 1738. Therefore, in

a case such as this, we employ Massachusetts issue preclusion law. See

Kyricopoulos v. Town of Orleans, 967 F.2d 14, 16 (1st Cir. 1992) (per

curiam). And, as we previously have noted, Massachusetts courts follow

the traditional rules for the doctrine of issue preclusion. See

Willhauck v. Halpin, 953 F.2d 689, 705 (1st Cir. 1991) (citing Martin

v. Ring, 514 N.E.2d 663, 664 (Mass. 1987)).

For an issue to receive preclusive effect in a later

proceeding under Massachusetts law, the following four elements must be

present: (1) the issue sought to be precluded must be identical to that

in the prior litigation; (2) the parties actually must have litigated

the issue; (3) the judgment regarding the issue must have been binding

and valid; and (4) the issue's determination must have been essential

to the judgment. See Martin, 514 N.E.2d at 664; see also Keystone

Shipping Co. v. New England Power Co., 109 F.3d 46, 51 (1st Cir. 1997)

(noting that these four elements are required both by Massachusetts

courts and by the First Circuit).

“If 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,” and neither

receives preclusive effect. 1 Restatement (Second) of Judgments § 27

cmt. i [hereinafter Restatement]; see also York Ford, Inc. v. Building

-9- Inspector & Zoning Adm'r, 647 N.E.2d 85, 87-88 (Mass. App. Ct. 1995)

(adopting the rule of comment i to section 27). If, however, “the

appellate court” affirms both grounds of the holding, each ground

receives preclusive effect. 1 Restatement § 27 cmt. o; see also York

Ford, Inc., 647 N.E.2d at 88 n.7 (adopting the rule of comment o to

section 27). On the other hand, if “the appellate court” affirms on

one ground and passes on the other, “the judgment is conclusive [only]

as to the first determination.” 1 Restatement § 27 cmt. o.

In this case, each determination of the court of first

instance was affirmed by the appeals court, but the SJC affirmed one

determination and explicitly passed on the other. This result appears

to generate a novel complication, but because of the role the SJC plays

when reviewing cases in this posture, the general tenets of comment o

apply. Strictly speaking, when the SJC reviews cases that originate in

probate court, its concern is not with the decision of the

Massachusetts Appeals Court; rather, the SJC reviews the disposition of

the probate court as if the appeal came directly to it. See, e.g., In

re Adoption of Hugo, 700 N.E.2d 516, 520-21 (Mass. 1998) (noting that

the SJC reviews the findings of the probate court for clear errors of

law), cert. denied, 526 U.S. 1034 (1999); White v. White, 76 N.E.2d 15,

16-17 (Mass. 1947) (“All questions of law, fact and discretion are open

for our decision, and we can find facts contrary to the [probate]

judge's findings if convinced that he is plainly wrong.”). In this

-10- sense, when the SJC hears a case that originated in the probate court,

its ruling supercedes that of the Massachusetts Appeals Court for the

purposes of issue preclusion and assumes the role of “the appellate

court” to which comment o refers.3 The SJC's determination that the bad

faith finding was unnecessary to decide the case thus vitiates any

argument that the finding should receive preclusive effect.

The SJC's skeptical view of the evidence of bad faith, which

it found to be “questionable,” Rutanen v. Ballard, 678 N.E.2d 133, 140

(Mass. 1997), adds additional support to our conclusion. Alternative

holdings from a court of first instance receive no preclusive effect

until affirmed by the appellate court in part because the court of

first instance may not have considered each determination “as carefully

or rigorously” as it would have if each had been essential to the

result. 1 Restatement § 27 cmt. i. Once the losing party has obtained

an appellate decision on the issue, however, “the balance weighs in

favor of preclusion” because the appellate court has reviewed and

upheld the determinations of the court of first instance. 1 id.

3Moreover, an opinion of the Massachusetts Appeals Court is not a “decision” binding on the parties until its rescript issues to the lower court. See Commonwealth v. Aboulaz, 688 N.E.2d 1374, 1377 (Mass. App. Ct.), review denied, 692 N.E.2d 963 (Mass. 1998). But in this case, the rescript of the appeals court never issued to the probate court because “[i]f an application of further appellate review is granted the rescript of the Appeals Court shall not issue to the lower court.” Mass. R. App. P. 23. Because the appeals court's opinion never became a binding decision, the SJC is the relevant appellate court for issue preclusion purposes.

-11- cmt. o. In other words, the alternative determination cannot have

preclusive effect until the appellate court analyzes it and decides

that the court of first instance correctly resolved it. Here, the

relevant appellate court not only failed to endorse the correctness of

the finding, but it explicitly questioned it.4 Under these

circumstances, issue preclusion should not apply.

III.

For the foregoing reasons, the decision of the district court

is vacated, and the case is remanded for further action consistent with

this opinion. No costs.

4 Furthermore, comments i and o to section 27 are not meant as exceptions to the general rule of issue preclusion stated in that section. Instead, they elucidate one of the basic elements of that rule, that the determination must have been “essential to the judgment.” In this case, however, the SJC explicitly said that the finding of Baylis's bad faith was not essential to the judgment. The failure to meet that element means that the finding is not entitled to preclusive effect.

-12-