In Re: Vincent S. Andrews
Filing
50
ORDER: The decision of the Bankruptcy Court is hereby AFFIRMED. The Clerk shall close this case. It is so ordered. Signed by Judge Alvin W. Thompson on 3/26/2014.(Wang, M.)
UNITED STATES DISTRICT COURT
DISTRICT OF CONNECTICUT
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In re:
:
:
VINCENT ANDREWS MANAGEMENT
:
CORP., ROBERT ANDREWS, and
:
VINCENT ANDREWS
:
:
Debtors.
:
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VINCENT ANDREWS,
:
:
Appellant,
:
v.
:
:
CHRISTOPHER MCCARRON,
:
:
Appellee.
:
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ROBERT ANDREWS,
:
:
Appellant,
:
v.
:
:
CHRISTOPHER MCCARRON,
:
:
Appellee.
:
------------------------------x
VINCENT ANDREWS,
:
:
Appellant,
:
v.
:
:
LAFFIT PINCAY, JR.,
:
:
Appellee.
:
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ROBERT ANDREWS,
:
:
Appellant,
:
v.
:
:
LAFFIT PINCAY, JR.,
:
:
Appellee.
:
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Civ. No. 3:08MC132(AWT)
Civ. No. 3:08CV778(AWT)
Civ. No. 3:08CV779(AWT)
Civ. No. 3:08CV780(AWT)
Civ. No. 3:08CV781(AWT)
RULING ON BANKRUPTCY APPEAL
Vincent Andrews and Robert Andrews (collectively, the “Debtors”
or the “Appellants”) appeal an order of the United States Bankruptcy
Court for the District of Connecticut (the “Bankruptcy Court”)
granting a motion for summary judgment, filed by Christopher McCarron
(“McCarron”) and Laffit Pincay, Jr. (“Pincay”) (collectively, the
“Appellees”), based on collateral estoppel.
For the reasons set forth
below, the Bankruptcy Court’s decision is being affirmed.
I. FACTUAL AND PROCEDURAL BACKGROUND
In 1989, the Appellees filed actions against the Appellants in
the United States District Court for the Central District of
California (the “California District Court”), bringing civil claims
pursuant to the Racketeer Influenced and Corrupt Organizations Act
(“RICO”), 18 U.S.C. § 1962, and state law claims for fraud.
On July
30, 1992, a jury returned verdicts in favor of the Appellees on both
their RICO and state law claims.1
The Appellees were directed to elect
damages, and elected damages based on their RICO claims.
On October
28, 1993, judgment entered accordingly.
On February 28, 1994, the Appellants filed voluntary Chapter 11
bankruptcy petitions in the Bankruptcy Court.
On June 20, 1994, the
Appellees commenced adversary proceedings seeking a determination that
the judgment debts were non-dischargeable under 11 U.S.C.
§ 523(a)(2)(A), which provides that a debtor is not entitled to a
discharge from any debt for money to the extent that it was obtained
by false pretenses, a false representation or actual fraud.
Specifically, the Appellees asserted a claim in the First Amended
Complaint for fraud under § 523(a)(2)(A), described as fraudulent
1
The jury awarded Pincay and McCarron $670,685 and $313,841 in
compensatory damages, respectively, and $2.1 million and $1.18 million
in punitive damages, respectively.
-2-
misrepresentation and concealment, alleging that the Appellants “made
false and fraudulent representations to the [Appellees], and the
[Appellants] falsely and fraudulently concealed information from the
[Appellees].”
2008).
In re Andrews, 385 B.R. 496, 507 (Bankr. D. Conn.
On October 26, 1995, the Bankruptcy Court entered an order
staying the proceedings until final and non-appealable judgments were
entered in the California action.
After further proceedings in the California District Court, that
court entered a final judgment on the Appellees’ RICO claims on
January 9, 1998.
The Appellants appealed to the United States Court
of Appeals for the Ninth Circuit.
On February 6, 2001, the Ninth
Circuit reversed the judgment because the RICO claims were barred by
the statute of limitations, but did not disturb the jury verdicts on
the Appellees’ state law claims.2
See Pincay v. Andrews, 238 F.3d
1106, 1110 (9th Cir. 2001) (“Pincay I”), cert. denied, 534 U.S. 885
(2001).
On July 3, 2002, the California District Court entered
judgment in favor of the Appellees on their state law claims.
Appellants again appealed to the Ninth Circuit.3
The
On March 16, 2005,
the Ninth Circuit affirmed the judgment on the state law claims.
See
2
Specifically, the Ninth Circuit held that no reasonable jury
could have concluded that the Appellees did not have constructive
notice of their injuries based on written disclosures they received as
early as 1980, and thus their claims, which were filed in 1989, were
barred by the four-year statute of limitations for civil RICO actions.
3
Although the appeal was untimely, the California District Court
allowed the Appellants to proceed on the ground of excusable neglect.
That decision was reversed by a panel of the Ninth Circuit. See
Pincay v. Andrews, 351 F.3d 947 (9th Cir. 2003). However, after a
rehearing en banc, the Ninth Circuit upheld the decision of the
California District Court. See Pincay v. Andrews, 389 F.3d 853 (9th
Cir. 2004).
-3-
Pincay v. Andrews, 2005 WL 3782443 (9th Cir. 2005), cert. denied, 546
U.S. 1061 (2005) (“Pincay II”).
On appeal, the Appellants argued that
California’s statute of limitations barred the Appellees’ claims.
However, the Ninth Circuit concluded that the Appellants’ argument was
in substance an untimely attack on the jury’s findings and the jury
instructions.
See id., 2005 WL 3782443, at *2.
On January 13, 2006, the Bankruptcy Court lifted the stay.
On
March 21, 2007, the Appellees filed a motion for summary judgment and
the Appellants filed a cross-motion for summary judgment, all pursuant
to a stipulation entered into by the parties and approved by the
Bankruptcy Court.
On April 8, 2008, the Bankruptcy Court granted the
Appellees’ motion for summary judgment, holding that the subject debts
were non-dischargeable based on the collateral estoppel effect of the
judgment previously entered in the California District Court.
re Andrews, 385 B.R. at 506-510.
See In
Specifically, the Bankruptcy Court
concluded that the issue of whether the Appellants committed fraud was
already litigated and decided in the California action and was
entitled to preclusive effect in the bankruptcy proceedings.4
The
Bankruptcy Court informed the parties that its order constituted a
final, appealable judgment.
4
The Bankruptcy Court also denied the Appellant’s cross-motion
for summary judgment, holding that genuine issues of material fact
existed as to whether the doctrines of judicial estoppel and waiver
barred the Appellants from asserting a defense based on the
untimeliness of the Appellees’ complaint. In re Andrews, 385 B.R. at
501-10. As stipulated and agreed to by the parties, this is not
an issue raised on appeal.
22.)
(See Stipulation and Order, Doc. No.
-4-
II.
STANDARD OF REVIEW
“Generally in bankruptcy appeals, the district court reviews the
bankruptcy court’s factual findings for clear error and its
conclusions of law de novo.”
476, 482-83 (2d Cir. 2012).
In re Charter Commc'n, Inc., 691 F.3d
Findings of fact are not to be set
aside unless they are “clearly erroneous.”
8013.
See Fed. R. Bankr. P.
“A finding is only ‘clearly erroneous’ when although there is
evidence to support it, the reviewing court on the entire evidence is
left with the definite and firm conviction that a mistake has been
committed.”
United States v. Mitchell, 966 F.2d 92, 98 (2d Cir. 1992)
(quoting United States v. United States Gypsum Co., 333 U.S. 364, 395
(1948)).
“A grant of summary judgment is reviewed de novo by the appellate
court.”
Penthouse Media Group, Inc. v. Pachulski Stang Ziehl & Jones
LLP, 406 B.R. 453, 457 (S.D.N.Y. 2009) (citing In re Blackwood
Assocs., L.P., 153 F.3d 61, 67 (2d Cir. 1998)). “The application of
collateral estoppel to a given case is a question of law that [the
court] review[s] de novo.” M.O.C.H.A. Soc’y, Inc. v. City of Buffalo,
689 F.3d 263, 284 (2d Cir. 2012).
III. DISCUSSION
The issue on appeal for this court is whether the Bankruptcy
Court erred in giving collateral estoppel effect to the Appellees’
judgment in the California District Court with respect to the
Appellees’ claim that the California judgment is a non-dischargeable
debt under § 523(a)(2)(A).
“It is well established that federal law on collateral estoppel
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applies to determine the preclusive effect of a prior federal
judgment.”
Purdy v. Zeldes, 337 F.3d 253, 258 n.5 (2d Cir. 2003).
“Under federal law, collateral estoppel applies when (1) the identical
issue was raised in a previous proceeding; (2) the issue was actually
litigated and decided in the previous proceeding; (3) the party had a
full and fair opportunity to litigate the issue; and (4) the
resolution of the issue was necessary to support a valid and final
judgment on the merits.”
Id., 337 F.3d at 258 (quoting Interoceanica
Corp. v. Sound Pilots, Inc., 107 F.3d 86, 91 (2d Cir. 1997) (internal
quotation marks omitted); cf. Brown v. Felsen, 442 U.S. 127, 139 n.9
(1979) (“If, in the course of adjudicating a state-law question, a
state court should determine factual issues using standards identical
to those of § [523], then collateral estoppel, in the absence of
countervailing statutory policy, would bar relitigation of those
issues in the bankruptcy court.”).
The Appellants contend that the requirements for applying
collateral estoppel are not satisfied here because justifiable
reliance is an element that must be established under § 523(a)(2)(A),
but the California District Court, applying California law, did not
use the federal standard for justifiable reliance.
Thus, the
Appellants argue, justifiable reliance within the meaning of
§ 523(a)(2)(A) was not actually litigated and decided in the
California action.
A.
§ 523(a)(2)(A), California Law, and Justifiable Reliance
Section 523(a) enumerates a series of categories of non-
dischargeable debt.
Section 523(a)(2) provides that:
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A discharge under section 727, 1141, 1228(a), 1228(b), or
1328(b) of this title does not discharge an individual debtor
from any debt . . . for money, property, services, or an
extension, renewal, or refinancing of credit, to the extent
obtained by (A) false pretenses, a false representation, or
actual fraud, other than a statement respecting the debtor’s
or an insider’s financial condition; [or] (B) use of a
statement in writing (i) that is materially false; (ii)
respecting the debtor’s or an insider’s financial condition;
(iii) on which the creditor to whom the debtor is liable for
such money, property, services, or credit reasonably relied;
and (iv) that the debtor caused to be made or published with
intent to deceive[.]
(emphasis added).
In Field v. Mans, 516 U.S. 59 (1995), the Supreme Court resolved
“a conflict among the Circuits over the level of reliance that
§ 523(a)(2)(A) requires a creditor to demonstrate.”
516 U.S. at 63.
Section 523(a)(2)(A) “applies expressly when the debt follows a
transfer of value or extension of credit induced by falsity or fraud .
. . .”
Id. at 66.
The Court rejected the government’s position that
the express language concerning reliance in clause (2)(B), contrasted
with the silence with respect to reliance in clause (2)(A), manifested
Congressional intent to limit the requirement of reliance to clause
(2)(B).
See id. at 66-68.
In analyzing “the substantive terms” of
§ 523(a)(2)(A), the Court found that they refer to common–law torts.5
Id. at 69.
The Court stated that the “operative terms” in
§ 523(a)(2)(A) “carry the acquired meaning of terms of art.” Id.
As
common-law terms, “they imply elements that the common law has defined
5
Although the analysis in Field v. Mans was based on conduct
that amounted to fraud, the Court noted that “we do not mean to
suggest that the requisite level of reliance would differ if there
should be a case of false pretense or representation but not of fraud
. . . .” 516 U.S. at 70 n.8.
-7-
them to include.”
Id.
The Court stated further that it “construe[d]
the terms in § 523(a)(2)(A) to incorporate the general common law of
torts, the dominant consensus of common-law jurisdictions, rather than
the law of any particular State.”
Id. at 70 n.9.
The Court began its analysis with the Restatement (Second) of
Torts (1976), and focused on the section dealing with fraudulent
misrepresentation.
See id. at 70.
The Restatement (Second) of Torts
(1976) has a section entitled, “Title C. Justifiable Reliance,” that
starts with § 537 (General Rule) and ends with § 545A (Contributory
Negligence).
The Court referenced Restatement (Second) of Torts
§§ 537, 540, 541 and 545A in the course of its analysis.
referenced Prosser and Keeton on the Law of Torts.
It also
After an analysis
of these authorities, the Court concluded that § 523(a)(2)(A)
“requires justifiable, but not reasonable reliance.”
Id. at 74-75.
The Court referenced three levels of reliance: mere reliance,
justifiable reliance and reasonable reliance.
See id. at 73-74
(citing majority of common-law courts as applying “an intermediate
level of reliance, most frequently referred to as justifiable
reliance”).
Prior to the Supreme Court’s decision in Field v. Mans, the Ninth
Circuit had been using a standard of reliance identical to the
standard of reliance for § 523(a)(2)(A) when applying California law.
In In re Kirsh, 973 F.2d 1454 (9th Cir. 1992), which the Supreme Court
cited to when concluding that § 523(a)(2)(A) requires justifiable
reliance (see Field, 516 U.S. at 75), the Ninth Circuit set out the
elements that a creditor must prove to preclude a debtor’s discharge
-8-
pursuant to § 523(a)(2)(A).
The elements are: “(1) [that] the debtor
made the representations; (2) that at the time he knew they were
false; (3) that he made them with the intention and purpose of
deceiving the creditor; (4) that the creditor relied on such
representations; [and] (5) that the creditor sustained the alleged
loss and damage as the proximate result of the representations having
been made.”
In re Kirsh, 973 F.2d at 1457.
The focus of the Ninth
Circuit was on the fourth element, whether the creditor relied on the
false representations.
At the start of its discussion, quoting Grogan v. Garner, 498
U.S. 279 (1991), the Ninth Circuit noted:
We think it unlikely that Congress, in fashioning the standard
of proof that governs the applicability of these provisions,
would have favored the interest in giving perpetrators of
fraud a fresh start over the interest in protecting victims of
fraud. . . . This suggests to us that the Court had the usual
common law standard in mind, rather than some exotic standard
designed to give more protection to the perpetrators of fraud.
Nor is there any reason to believe that Congress itself
intended to alter the common law when it adopted section
523(a)(2)(A).
Kirsh, 973 F.2d at 1457-58 (citation omitted).
The Ninth Circuit then
stated:
If common law is to apply, it is important to identify the
content of that law. We turn to two of the best sources of
that law, the well-known Prosser and Keeton on the Law of
Torts and the Restatement (Second) of Torts. They make it
quite clear that at common law the justifiable reliance
standard is the proper one.
Id. at 1458.
With respect to the Restatement (Second) of Torts, the
Ninth Circuit, like the Supreme Court in Field v. Mans, referenced the
justifiable reliance sections of the Restatement, specifically §§ 537,
540, 541 and 545A.
The Ninth Circuit then stated:
-9-
While, as we have said, we are applying federal, not state
law, it is worth noting that California, where the Kirshes’
acts took place, follows the rules we have just explicated.
Its law was defined over fifty years ago when Justice Traynor
wrote Seeger v. Odell, 18 Cal.2d 409, 115 P.2d 977 (1941).
Kirsh, 973 F.2d at 1459.
Quoting Seeger, the Ninth Circuit summarized California law as
follows:
A plaintiff must show that “he was justified in his reliance,”
but negligence in failing to discover an intentional
misrepresentation is no defense. Moreover, “[t]he fact that
an investigation would have revealed the falsity of the
misrepresentation will not alone bar his recovery, and it is
well established that he is not held to constructive notice of
a public record which would reveal the true facts.” “Nor is
the plaintiff held to the standard of precaution or of minimum
knowledge of a hypothetical reasonable man.” It is only if
“the conduct of the plaintiff in the light of his own
intelligence and information was manifestly unreasonable” that
he will be denied recovery — a person cannot purport to rely
on preposterous representations or close his eyes “to avoid
discovery of the truth. . . .”
Kirsh, 973 F.2d at 1459 (citations to Seeger omitted).
The court then
reviewed the decisions of various United States Courts of Appeal
concerning what the standard for reliance should be under
§ 523(a)(2)(A).
Id. at 1459 (“Having outlined the common law, it
remains to us to consider the cases which have spoken to the reliance
issue in the bankruptcy context.”).
The Ninth Circuit stated:
[W]e conclude that a creditor must prove justifiable reliance
upon the representations of the debtor. In determining that
issue, the court must look to all of the circumstances
surrounding the particular transaction, and must particularly
consider the subjective effect of those circumstances upon the
creditor.
Kirsh, 973 F.2d at 1460.
Thus, both the Supreme Court in Field v. Mans and the Ninth
Circuit in In re Kirsh, relied on the Restatement (Second) Torts and
-10-
Prosser and Keeton on the Law of Torts in articulating the standard
for justifiable reliance as it would apply in the context of
§ 523(a)(2)(A).
Section 537 on justifiable reliance in the Restatement (Second)
of Torts, provides, as a general rule, that “[t]he recipient of a
fraudulent misrepresentation can recover against its maker for
pecuniary loss resulting from it if, but only if, (a) he relie[d] on
the misrepresentation in acting or refraining from action, and (b) his
reliance is justifiable.”
Section 538 provides, as to materiality of
misrepresentation, in pertinent part, that “[r]eliance upon a
fraudulent misrepresentation is not justifiable unless the matter
misrepresented is material.”
Section 540 provides, as to a duty to
investigate, that “[t]he recipient of a fraudulent misrepresentation
of fact is justified in relying upon its truth, although he might have
ascertained the falsity of the representation had he made an
investigation.”
Section 541 provides, as to a representation known to
be or obviously false, that “[t]he recipient of a fraudulent
misrepresentation is not justified in relying upon its truth if he
knows that it is false or its falsity is obvious to him.”
The section
on justifiable reliance ends with § 545A, which provides, as to
contributory negligence, that “[o]ne who justifiably relies upon a
fraudulent misrepresentation is not barred from recovery by his
contributory negligence in doing so.”
With respect to Prosser and Keeton on the Law of Torts, the
Supreme Court stated in Field v. Mans:
[J]ustifiable reliance is the standard applicable to a
victim’s conduct in cases of alleged misrepresentation and
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that “[i]t is only where, under the circumstances, the facts
should be apparent to one of his knowledge and intelligence
from a cursory glance, or he has discovered something which
should serve as a warning that he is being deceived, that he
is required to make an investigation of his own.”
Id., 516 U.S. at 71 (quoting W. Prosser, Law of Torts § 108, at 718
(4th ed. 1971)). In In re Kirsh, the Ninth Circuit explained that:
[T]he standard [for justifiable reliance] is not that of the
average person. It is a more subjective standard which takes
into account the knowledge and relationship of the parties
themselves.
Thus, “a person of normal intelligence,
experience and education . . . may not put faith in
representations which any such normal person would recognize
at once as preposterous. . . .”
At the same time, the
standard does protect the ignorant, the gullible, and the
dimwitted, for “‘no rogue should enjoy his ill-gotten plunder
for the simple reason that his victim is by chance a fool.’”
On the other hand, if a person does have “special knowledge,
experience and competence” he may not be permitted to rely on
representations that an ordinary person would properly accept.
Kirsh, 973 F.2d at 1458 (internal citations omitted) (quoting W. Page
Keeton et al., Prosser and Keeton on the Law of Torts § 108, at 749-50
(5th ed. 1984)).
B.
Collateral Estoppel Effect
As noted above, collateral estoppel applies only if, inter alia,
the issue sought to be precluded is identical to the issue decided in
the earlier proceeding and was actually litigated and necessarily
decided.
To determine whether the issue of fraud, as litigated and
decided in the California District Court, is identical to the issue of
fraud under § 523(a)(2)(A), the court reviews the jury instructions
and verdict forms6 for the jury trial in the California District Court.
The jury instructions discuss the various claims that the
6
There was a verdict form for each plaintiff.
-12-
Appellees had to prove by a preponderance of the evidence, including
“[t]hat defendants defrauded plaintiffs through intentional
misrepresentations, concealments and[/]or negligent
misrepresentations.”
(Record at A728.)
The California District Court
began with a discussion of the plaintiffs’ burden to prove each of
their claims and the defendants’ burden to prove that the plaintiffs’
claims were barred by statute of limitations.
then discussed the law on conspiracy.
The jury instructions
The jury instructions then
turned to the separate claims and the elements of each claim brought
by the plaintiffs, i.e., breach of contract, breach of fiduciary duty,
fraud by intentional misrepresentation, fraud by intentional
concealment, RICO, and negligent misrepresentation; the jury
instructions discussed the elements of each claim separately.
The
jury instructions then returned to a discussion of the statute of
limitations, and its applicability to the plaintiffs’ claims and the
plaintiffs’ discovery of the fraud.
Thus, the jury instructions
contain a discussion of the two fraud-related claims that are relevant
to the adversary proceedings in the Bankruptcy Court: intentional
misrepresentation and intentional concealment. (See Record at A738,
A740.)
With respect to the intentional misrepresentation claim, the jury
instructions7 provided:
Each plaintiff in this action also seeks to impose liability
against [] defendants for intentional misrepresentation.
7
The jury instructions use the singular form of plaintiff and
defendant when listing the elements of each claim, and used the plural
form otherwise.
-13-
. . . .
In order to establish fraud based on intentional false
misrepresentation, a plaintiff must establish:
1. The defendant made a representation as to a past or
existing material fact;
2. The representation was false;
3. The defendant knew that the representation was false
when made, or that the representation was made recklessly
without knowing whether it was true or false or the
representation was made without any reasonable ground for
believing it to be true;
4. The defendant made the representation with an intent
to defraud the plaintiff, that is, the defendant must have
made the representation for the purpose of inducing the
plaintiff to rely upon it and to act or to refrain from acting
in reliance thereon;
5. The plaintiff was unaware of the falsity of the
representations he acted in reliance upon the truth of the
representation and he was justified in relying upon the
representation;
6. And, finally, as a result of his reliance upon the
truth of the representation, the plaintiff sustained some
damage. The amount of damage is not before you at this time.
. . . .
A party claiming to have been defrauded by a false
representation must have relied upon the representations; that
is, the representation must have been a legal cause of his
conduct in entering into the transaction and without such
representation he would not have entered into such
transaction.
Reliance upon a representation may be shown by direct evidence
or may be inferred from the circumstances.
A party claiming to have been defrauded by a false
representation must not only have acted in reliance thereon
but must have been justified in such reliance, that is, the
situation must have been such as to make it reasonable for
him, in the light of the circumstances and his intelligence,
experience and knowledge, to accept the representation without
making an independent inquiry or investigation.
(Record at A738-40) (emphasis added.)
With respect to the intentional concealment claim, the jury
instructions provided:
Plaintiffs also contend that defendant[s], during the course
-14-
of their relationship with plaintiffs committed fraud by
intentionally concealing material facts from plaintiff[s] by
failing to disclose to plaintiffs that defendants were
receiving fees and other compensation from the partnerships in
which plaintiffs’ money was invested.
Plaintiffs further
contend that defendants were engaging in undisclosed conflicts
of interest whereby defendants placed plaintiffs’ money in
partnerships from which defendants would be receiving fees and
other income.
Plaintiffs contend they would not have employed defendants or
invested in the partnerships had these facts not been
concealed from them.
Defendants deny these contentions and contend their receipt of
fees and other income from partnerships were fully and
adequately disclosed to and authorized by plaintiffs.
Defendants also contend that they did not intentionally
conceal any material facts from [] plaintiffs as shown by
their sending partnership documents to [] plaintiffs fully
disclosing the payment of fees in those instances where fees
were paid to them for the services they provided to the
partnerships.
Where material facts are known to one party and not to the
other, failure to disclose them is not actionable fraud,
otherwise known as intentional concealment, unless there is
some relationship between the parties which gives rise to a
duty to disclose such known facts.
A duty to disclose known material facts arises where the party
having knowledge of the facts is in a fiduciary or a
confidential relationship which imposes on him a duty of
disclosure.
A duty to disclose known facts arises, in the absence of a
fiduciary or a confidential relationship, when one party knows
of material facts and also knows that such facts are neither
known nor readily accessible to the other party.
(Record at A740-41.)
Each verdict form addresses each of the plaintiffs’ state law
claims in a separate section. Each section sets forth first the
question of whether the claim is barred by the statute of limitations,
followed by a separate question for each element the plaintiffs had to
prove to establish that claim.
With respect to the intentional
-15-
misrepresentation claim, the jury answered in the negative, “Is [the
plaintiff’s] claim for intentional misrepresentation time barred by
the statute of limitations?” (Record at A786, A818.)
The jury
answered in the affirmative the following questions:
Question No. 11: As to each defendant identified below, did
the defendant intentionally make a false representation that
[the plaintiff] would pay no more than 5% of his gross
earnings from riding in return for [the] defendant[’]s
service[s], including investment services?
. . . .
Question No. 12: As to each defendant you answered “Yes” in
response to Question No. 11, did the defendant know that the
misrepresentation was false at the time it was made or,
alternatively, did the defendant make the misrepresentation
recklessly without reasonable grounds for believing it to be
true?
. . . .
Question No. 13: As to each defendant you answered “Yes” in
response to Question No. 12, did the defendant intend to
induce [the plaintiff] to rely on the false representation?
. . . .
Question No. 14: As to each defendant [you] answered “Yes”
in response to Question No. 13, was [the plaintiff] unaware
the false representation at the time it was made and did
justifiably rely on the truth of the representation
deciding to employ [the] defendant and to invest his money
partnerships?
to
of
he
in
in
. . . .
Question No. 15: As to each defendant you answered “Yes” in
response to Question No. 14, did [the plaintiff] sustain
damage as a legal result of an intentional misrepresentation
made by the defendant?
(Record at A787-89, A819-21) (emphasis added.)
With respect to the intentional concealment claim, the jury
answered in the negative, “Is [the plaintiff’s] claim for intentional
concealment time barred by the statute of limitations?” (Record at
-16-
A789-90, A822.)
The jury answered in the affirmative the following
questions:
Question No. 17: As to each defendant identified below, did
the defendant intentionally conceal material facts from [the
plaintiff] that [the] defendant was receiving fees and
compensation from the partnership [the plaintiff] was
investing in or that [the] defendant was engaging in conflicts
of interest with respect to those partnerships?
. . . .
Question No. 18: As to each defendant you answered “Yes” in
responses to Question No. 17 was the defendant either in a
fiduciary relationship with [the plaintiff] or did the
defendant know that the concealed facts were neither known nor
readily accessible to [the plaintiff]?
. . . .
Question No. 19: As to each defendant you answered “Yes” in
response to Question No. 18, at the time of the concealment,
did the defendant conceal these facts with the intent to
defraud [the plaintiff]?
. . . .
Question No. 20: As to each defendant you answered “Yes” in
response to Question No. 19, was [the plaintiff] unaware of
the concealment and if he had known of the concealed facts
would not have invested as he did regarding any of the
partnership investments?
(Record at A790-92, A822-24.)
Consistent with the California District Court’s jury
instructions, “[t]he elements of a cause of action for fraud in
California are: (a) misrepresentation (false representation,
concealment, or nondisclosure); (b) knowledge of falsity (or
‘scienter’); (c) intent to defraud, i.e., to induce reliance; (d)
justifiable reliance; and (e) resulting damage.”
Co., 567 F.3d 1120, 1126 (9th Cir. 2009).
Kearns v. Ford Motor
See also, Stewart v.
Ragland, 934 F.2d 1033, 1043 (9th Cir. 1991)(“Under California law, a
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fraud action requires: 1) misrepresentation; 2) knowledge of the
falsity of the representation; 3) intent to induce reliance; 4)
justifiable reliance; and 5) damages.”).
It is well established that
to prove that a debt is non-dischargeable under § 523(a)(2)(A), the
“five elements, each of which the creditor must demonstrate by a
preponderance of the evidence, are: (1) misrepresentation, fraudulent
omission or deceptive conduct by the debtor; (2) knowledge of the
falsity or deceptiveness of his statement or conduct; (3) an intent to
deceive; (4) justifiable reliance by the creditor on the debtor’s
statement or conduct; and (5) damage to the creditor proximately
caused by its reliance on the debtor’s statement or conduct.”
Slyman, 234 F.3d 1081, 1085 (9th Cir. 2000).
In re
See also In re DePinna,
450 B.R. 337, 360 (Bankr. D. Conn. 2011)(“To establish
nondischargeability on the basis of ‘false representation’ it must be
proved that: (1) the debtor made representations; (2) knowing them to
be false; (3) with the intent and purpose of deceiving the creditor;
(4) upon which representations the creditor actually and justifiably
relied; and (5) which proximately caused the alleged loss or damage
sustained by the creditor.”).
After reviewing the jury instructions and verdict forms for the
trial in the California District Court, the elements of a claim for
fraud under California law, and the elements that must be proven to
establish that a debt is non-dischargeable under § 523(a)(2)(A), the
court concludes that the Bankruptcy Court properly held that the
subject debts were non-dischargeable based on the collateral estoppel
effect of the judgment entered in the California District Court
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because the issue of whether the Appellants committed fraud had
already been litigated and decided in the California action and that
determination was entitled to preclusive effect in the bankruptcy
The court notes that in analyzing whether collateral
proceeding.
estoppel should be applied, the Bankruptcy Court relied solely on the
intentional misrepresentation claim that was litigated and decided by
the jury in California District Court; the Bankruptcy Court declined
to consider the intentional concealment claim.
The issues in the two proceedings are identical.
The elements of
a cause of action for fraud under California law are the same as the
five elements a creditor must prove to establish that a debt is nondischargeable under § 523(a)(2)(A).
Compare Kearns, 567 F.3d at 1126
(setting forth elements of fraud action under California law), and
Stewart, 934 F.2d at 1043 (same), with In re Slyman, 234 F.3d at 1085
(setting forth elements that must be proven to establish nondischargeability of debt under § 523(a)(2)(A)), and In re DePinna, 450
B.R. at 360 (same).
The record reflects that the issue was actually
litigated and decided in the California action, that the parties here
are the parties who litigated that action, and that the Appellants had
a full and fair opportunity to litigate the issue.
Specifically, each
verdict form required the jury to state a separate finding with
respect to each element of intentional misrepresentation, including
with respect to the issue of justifiable reliance; the jury responded
in the affirmative with respect to each element, including justifiable
reliance.
Finally, a finding with respect to each of the five
elements was necessary to support a valid and final judgment on the
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merits, which was entered.
The Appellants argue that because the Bankruptcy Court “made no
reference to the Supreme Court’s Field v. Mans requirement that [the]
Appellees ‘use [their] senses’ and their ‘opportunity to make a
cursory examination or investigation’” (Appellant’s Brief, Doc. No.
25, at 36) and the jury instructions in the California action
eliminated “any notion of ‘making an independent inquiry or
investigation’” (id.), the Bankruptcy Court failed to recognize that
the California jury never determined that the Appellees acted with
justifiable reliance for purposes of § 523(a)(2)(A). However, the
Appellants fail to put in context the language in Field v. Mans, which
is a quotation from a comment to § 541 of the Restatement (Second) of
Torts, pertaining to the need
investigation.” 516 U.S. at 71.
“to make a cursory examination or
While the Court quotes that comment
for the proposition that a person “cannot recover if he blindly relies
upon a misrepresentation the falsity of which would be patent to him
if he had utilized his opportunity to make a cursory examination or
investigation,” id., the Court next states, quoting Prosser, that
“[i]t is only where, under the circumstances, the facts should be
apparent to one of knowledge and intelligence from a cursory glance,
or he has discovered something which should serve as a warning that he
is being deceived, that he is required to make an investigation of his
own.”
Id.
The Court then cites to another treatise:
[S]ee also 1 F. Harper & F. James, Law of Torts § 7.12, pp.
581–583
(1956)
(rejecting
reasonableness
standard
in
misrepresentation cases in favor of justifiability and stating
that “by the distinct tendency of modern cases, the plaintiff
is entitled to rely upon representations of fact of such a
character as to require some kind of investigation or
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examination on his part to discover their falsity, and a
defendant who has been guilty of conscious misrepresentation
can not offer as a defense the plaintiff's failure to make the
investigation or examination to verify the same”)(footnote
omitted)[.]
Id. at 72.
Thus, as explained in Field v. Mans, the duty to inquire
arises only under certain circumstances.8
These principles are
reflected in the jury instructions, which state that justifiable
reliance is where “the situation must have been such as to make it
reasonable for [a plaintiff], in the light of the circumstances and
his intelligence, experience and knowledge, to accept the
representation without making an independent inquiry or
investigation.”9
(Record at A740.)
Therefore, the jury instructions
accurately state the element of justifiable reliance as explained in
Field v. Mans because the instructions did not “eliminate any duty to
8
Similarly, § 540 of the Restatement (Second) of Torts provides,
as a duty to investigate, that “[t]he recipient of a fraudulent
misrepresentation is justified in relying upon its truth, although he
might have ascertained the falsity of the representation had he made
an investigation.”
9
Both parties make arguments relating to whether there was
sufficient evidence for the jury in the California action to support
its verdict with respect to the element of justifiable reliance under
the standard in Field v. Mans. (See Appellees’ Brief, Doc. No. 43, at
5 (“[T]he Appellants have no basis to have this [c]ourt re-review
select parts of the record in the California action to determine, in
effect that judgments for intentional misrepresentation cannot stand
because ‘justifiable reliance’ was found against what they view as the
weight of the evidence.”); Appellants’ Reply Brief, Doc. No. 44, at 2
(“The Appellants described the record in order to show . . . that
there was evidence before the jury that would have allowed it to reach
a different result had it been asked to apply the Field v. Mans
standard that bankruptcy law requires.”).) The issue relevant in the
instant appeal is whether the standard for justifiable reliance as set
forth in the jury instructions comports with Field v. Mans, not
whether the jury in the California action had evidence that could have
led it to reach a different result on the issue of justifiable
reliance, or had sufficient evidence to support the result it reached.
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inquire” (Appellants’ Brief, Doc. No. 25, at 36), as the Appellants
contend, but rather instructed that an independent inquiry or
investigation is not required if it was reasonable for the plaintiff
to accept the false representation.
The Appellants also argue that the statute of limitations
instructions together with the instructions for the intentional
concealment claim misled the jury into applying the wrong law when it
was considering the elements of common law fraud.10
This argument is
untimely and inappropriate because any objections to the jury
instructions the Appellants have were required to be raised with the
California District Court and on appeal from the judgment entered by
that court, not in an appeal of the Bankruptcy Court’s decision to
apply collateral estoppel to preclude issues already decided by the
jury in the California action.
Moreover, there is nothing in the record to suggest that the jury
in the California action was misled or applied the incorrect law to
any specific claim.
The jury instructions and the verdict forms
separately address each claim and each element of the claim.
Specifically, the instructions concerning the intentional
misrepresentation claim begin on A738 with the element of justifiable
10
The Appellees state that the Appellants “did not take issue
with [the] Appellees’ position that their intentional
misrepresentation claim was not asserted as a claim for ‘fiduciary
fraud’ under California law.” (Appellees’ Sur-Reply Brief, Doc. No.
49, at 3.) The court understands the Appellants to be arguing that
while the intentional misrepresentation claim is referred to as such
in the California judgment, it is in substance a fiduciary fraud claim
because of the jury instructions, i.e., if there is a fiduciary
relationship, then a plaintiff is not under a duty to inquire. (See
Appellants’ Brief, Doc. No. 25, at 36; Appellants’ Reply Brief, Doc.
No. 44, at 5.)
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reliance being explained on A740, the instructions concerning the
intentional concealment claim begin on A740, and the instructions
concerning the statute of limitations begin 11 pages later, on A751.
In addition, Question No. 18 of each verdict form addresses the
intentional concealment claim, which does not have justifiable
reliance as an element, and comes after Question No. 14, which
addresses justifiable reliance.
Nothing in the record suggests that
the jury misapplied the standard for justifiable reliance when
answering Question No. 14 because, as the Appellants argue, a later
question instructs the jury “[to] assume that [the] Appellees [] make
no examination (because they [are] ‘under no duty of inquiry’).”
(Appellants’ Reply Brief, Doc. No. 44, at 7.)
Considering the
instructions as a whole, there is no reasonable ground to depart from
the general presumption that the jury properly followed the
instructions it was provided for each individual claim.
See, e.g.,
Honda Motor Co., Ltd. v. Oberg, 512 U.S. 415, 443-44 (1994)(“[T]his
Court has often acknowledged, and generally respected, the presumption
that juries follow the instructions they are given.”).
V.
CONCLUSION
For the reasons set forth above, the decision of the Bankruptcy
Court is hereby AFFIRMED.
The Clerk shall close this case.
It is so ordered.
Dated this 26th day of March 2014 at Hartford, Connecticut.
/s/
Alvin W. Thompson
United States District Judge
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