Carl Follo et al v. Susan C. Morency

Filing 17

Judge William G. Young: ORDER entered. MEMORANDUM AND ORDER: AFFIRMED in part and REMANDED(Paine, Matthew)

UNITED STATES DISTRICT COURT
DISTRICT OF MASSACHUSETTS

CARL FOLLO, FOLLO HOSPITALITY,
INC., and CARPA REAL ESTATE, LLC,
Plaintiffs,
v.
SUSAN C. MORENCY,
Defendant.

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CIVIL ACTION
NO. 13-11217-WGY

YOUNG, D.J.

March 19, 2014

MEMORANDUM AND ORDER

I. INTRODUCTION
Carl Follo, Follo Hospitality, Inc., and Carpa Real Estate,
LLC

(collectively,

“Follo”)

appeal

from

a

judgment

of

the

Bankruptcy Court for the District of Massachusetts (“Bankruptcy
Court”), which held that Susan Morency’s (“Morency”) judgment
debt

was

not

excepted

from

discharge

pursuant

to

either

11

U.S.C. § 523(a)(2)(A) (“Section 523(a)(2)(A)”) or 11 U.S.C. §
523(a)(2)(B) (“Section 523(a)(2)(B)”).
These

proceedings

have

their

origins

in

a

real

estate

transaction fraudulently induced by Morency, a Vermont judgment
subsequently finding Morency liable for common-law fraud, and
1

this bankruptcy filing.

The crux of this appeal is whether the

Vermont judgment can be used to establish the elements necessary
to

sustain

a

non-discharge

of

debt

under

either

Section

523(a)(2)(A) or Section 523(a)(2)(B).
In

the

proceedings

before

the

Bankruptcy

Court,

Follo

alleged that the judgment of the Vermont Supreme Court (“the
Vermont

Judgment”)

precluded

the

Bankruptcy

Court

from

reconsidering the issues necessary to establish non-discharge
under either Section 523(a)(2)(A) or Section 523(a)(2)(B).

The

Bankruptcy Court disagreed, concluding that the Vermont Judgment
did not have preclusive effect and dismissing Follo’s claim. On
appeal Follo argues that the Bankruptcy Court erred when it
ruled that:
(i) . . . [Follo’s] claim is not excepted from
discharge; (ii) . . . the determinations of the
Vermont Supreme Court did not fulfill the requirements
of 11 U.S.C. [sections] 523(a)(2)(B) and/or (a)(2)(A);
and (iii) . . . when it found that Follo is not
entitled to judgment under 11 U.S.C. [sections]
523(a)(2)(B) and/or (a)(2)(A) on the basis of
the
issue preclusive effect of the Vermont determinations
and judgment.

Br. Appellants Carl Follo, Follo Hospitality, Inc. & Carpa Real
Estate, LLC (“Follo Brief”) 2, ECF No. 12.
A. Procedural Posture
On April 5, 2010, Morency filed a petition of relief as per
chapter 7 of the Bankruptcy Code , In re Morency, No. 10-13666-

2

FJB, 2013 WL 1342485, at *1 (Bankr. D. Mass. Apr. 2, 2013)
(Bailey,

Bankr.

J.),

and

on

May

14,

2010,

Follo

filed

an

adversarial complaint objecting to the discharge of its debt,
Bankr. Docket, Adversary Case 10-01122 (“Bankr. Docket”) No. 1,
ECF No. 3.
which

on

This matter proceeded before the Bankruptcy Court,
March

2,

2013,

entered

a

judgment

ordering

the

dismissal of Follo’s complaint and the discharge of Morency’s
judgment debt.

Bankr. Docket No. 92.

Subsequently, on May 20,

2013, Follo filed a notice of appeal, electing to have the case
heard by the United States District Court for the District of
Massachusetts,

Election

Appellants

To

Have

Appeal

Heard

U.S.

District Ct., ECF No. 2, and, on the same date, the appeal was
assigned to this session of the Court.
2013, ECF No. 5.
2013.

Elec. Notice, May 20,

Follo filed the appellant’s brief on June 28,

Follo Brief.

On July 11, Morency filed the appellee’s

brief, Br. Appellee Susan C. Morency (“Morency Brief”), ECF No.
13, and Follo filed a reply on July 25,

Reply Br. Appellants

Carl Follo, Follo Hospitality, Inc. & Carpa Real Estate, LLC
(“Follo Reply”), ECF No. 14.
B. Factual Summary
The facts of this case have been well traversed in prior
decisions and, with this in mind, the Court here provides but a
summary of those facts relevant to the proceeding at hand.

3

In 2008 Follo purchased an inn (“the Inn”) and an adjacent
cottage from Morency and Paul Florindo (“Florindo”).
2013 WL 1342485, at *3.
presented

with

a

Morency,

During the negotiations, Follo was

number

of

documents,

including

information

regarding the financial status of the Inn, tax returns and room
occupancy

information,

Florindo,

185

Vt.

390,

upon

which

395,

410

it

relied.

(2009).

See

Follo

Following

v.

Follo’s

purchase it became apparent that this information was incorrect.
Id. at 396.

Consequently, Follo commenced proceedings in the

Windham (Vermont) Superior Court against Morency, Florindo, and
others for a series of offences, including common law fraud and
violations of Vermont’s Consumer Fraud Act.

Id. at 394, 396.

Although punitive damages are appropriate in Vermont where there
is “an intentional act with a specific intent to defraud the
buyer,” the Vermont Superior Court ruled punitive damages were
not proper as matter of law and accordingly did not put this
issue to the jury.

Id. at 413.

The jury found Morency and

Florindo liable on both the aforementioned claims and assessed
compensatory damages of $645,000.

See id. at 397-98.

The trial

judge ordered a remittitur reducing these damages to $295,000.
Id. at 398.
Both parties appealed.

The Vermont Supreme Court affirmed,

but reversed the Superior Court’s exclusion of punitive damages
as matter of law.

Id. at 394.
4

Following the decision of the Vermont Supreme Court, but
before the quantum of punitive damages owed had been determined,
Morency filed for bankruptcy.

See In re Morency, 2013 WL

1342485, at *4.
II. JURISDICTION
This Court has jurisdiction to hear appeals from “final
judgments, orders, and decrees” of the bankruptcy court.
U.S.C. § 158(a)(1).

28

Here the Bankruptcy Court has entered a

final decision on the merits, see In re Morency, 2013 WL 1342485
at *13, and thus this Court has jurisdiction to consider the
appeal.
III. ANALYSIS
A. Standard of Review
A district court reviewing the decisions of a bankruptcy
court reviews all legal conclusions under a de novo standard,
and

all

factual

findings

for

clear

error.

Palmacci

v.

Umpierrez, 121 F.3d 781, 785 (1st Cir. 1997).
B. Scope of the Exception to Discharge
In all bankruptcy proceedings there is a strong presumption
in favor of discharge.
234, 244-45 (1934).

See Local Loan Co. v. Hunt, 292 U.S.

The Bankruptcy Code is intended to provide

“honest but unfortunate debtor[s],” Grogan v. Garner, 498 U.S.
279, 286-87 (1991), with a fresh start -- “a new opportunity in
life . . . unhampered by the pressure and discouragement of
5

preexisting debt.” In re Spigel, 260 F.3d 27, 31-32 (quoting
Hunt, 292 U.S. at 244); see, e.g. In re O’Donnell, 728 F.3d at
42.
Nonetheless,

section

523(a)(2)

of

the

Bankruptcy

Code

provides two complementary but distinct exceptions to discharge
for some debts incurred as a result of the debtor’s fraudulent
conduct.

See

523(a)(2)(A)

11 U.S.C. § 523(a)(2).

excepts

from

discharge

Specifically, Section

debts

obtained

by

“false

pretenses, a false representation, or actual fraud, other than a
statement

respecting

condition.”

the

debtor’s

or

an

11 U.S.C. § 523(a)(2)(A).

insider’s

financial

By contrast, Section

523(a)(2)(B) excepts from discharge those debts obtained by a
false,

written

statement

“respecting

the

debtor’s

financial condition.” 11 U.S.C. § 523(a)(2)(B)(iii).

.

.

.

In light

of the policy behind the Bankruptcy Code and the consequent
strong

presumption

exceptions

are

in

favor

narrowly

of

construed

discharge,
--

party

however,

these

objecting

to

discharge bears the burden of demonstrating, by a preponderance
of the evidence, Grogan v. Garner, 498 U.S. 279, 291 (1991),
that its claim falls “squarely within an exception enumerated in
Bankruptcy Code [section] 523(a).” In re Spigel, 260 F.3d at 32
(quoting In re Menna, 16 F.3d 7, 9 (1st Cir. 1994)).

6

Follo

argued

before

the

Bankruptcy

Court

that

Morency’s

debt obligation was excepted from discharge pursuant to Section
523(a)(2) and (a)(6).

See Follo Brief 2.

C. Collateral Estoppel
The

key

question

here

is

whether

giving

the

Vermont

Judgment collateral effect has the effect of excepting Morency’s
judgment debt from discharge under either Section 523(a)(2)(A)
or Section 523(a)(2)(B).
The principles of collateral estoppel, also called issue
preclusion,

apply

bankruptcy

in

court,

most

adversary

including

proceedings

nondischargeabilty

before

a

proceedings.

Grogan, 498 U.S. at 284 n.11; In re Spigel, 260 F.3d at 33
(citing Fed. Deposit Ins. Corp. v. Shearson-American Express,
Inc., 996 F.2d 493, 497 (1st Cir. 1993)).
of

a

state

court

judgment

in

a

The preclusive effect

subsequent

federal

court

proceeding is determined according to the law of the state in
which the judgment was rendered.
Dist.

Bd.

of

Educ.,

465

U.S.

Migra v. Warren City School
75,

81

(1984).

In

Vermont,

“[c]ollateral estoppel, or issue preclusion, bars the subsequent
relitigation of an issue that was actually litigated and decided
in a prior case where that issue was necessary to the resolution
of the dispute.”

Alpine Haven Prop. Owners Ass'n v. Deptula,

175 Vt. 559, 562 (2003).

More precisely, preclusion in Vermont

is appropriate where:
7

(1) preclusion is asserted against one who was a party
. . . in the earlier action; (2) the issue was
resolved by a final judgment on the merits; (3) the
issue is the same as the one raised in the later
action; (4) there was a full and fair opportunity to
litigate the issue in the earlier action; and (5)
applying preclusion in the later action is fair.

In re P.J., 185 Vt. 606, 608 (2009)(alteration in original)
(quoting Trepanier v. Getting Organized, Inc., 155 Vt. 259, 265
(1990))
however,

(internal
is

quotation

confined

to

marks

issues

determined in a prior action.”
(2010)

(quoting

State

v.

omitted).

“necessarily

The
and

doctrine,
essentially

In re R.H., 189 Vt. 15, 30

Pollander,

167

(1997))(internal quotation marks omitted).

Vt.

301,

305

Of these elements,

only the third -- that the issues raised in the initial judgment
are the same as those in the later case, is contentious.

See,

e.g., Follo Brief 7; Morency Brief 8.
The applicability of collateral estoppel is matter of law,
Pollander, 167 Vt. at 304 (citing Emich Motors Corp. v. General
Motors Corp., 340 U.S. 558, 571 (1951)), and thus this Court
reviews de novo the Bankruptcy Court’s preclusion rule.
1. Identity of Parties
For the doctrine of collateral estoppel to apply the party
against whom preclusion is claimed must have been a party in the
original action.

Trepanier, 155 Vt. at 265.

8

This is undisputed

-- Morency was a party in the proceeding before the Vermont
Supreme Court.
2. Valid Final Judgment
Vermont law requires that the relevant issues have been
resolved by a final judgment on the merits.

Id.

Prima facie,

as the Vermont trial decision was reversed in part on appeal and
the action remanded to the trial court, see Follo, 185 Vt. at
413,

there

is

unavailable.

no

final

Section

judgment
13

of

and

the

collateral

estoppel
(Second)

Restatement

is
of

Judgments, however, recognizes some flexibility for the purposes
of issue preclusion, and “[where] the decision to be carried
over was adequately deliberated and firm, . . . the parties were
fully heard, . . . the court supported its decision with a
reasoned opinion, . . . [and] the decision was subject to appeal
or was in fact reviewed on appeal . . . support[] the conclusion
that

the

decision

is

final

for

the

purpose

of

preclusion.”

Restatement (Second) of Judgments § 13 cmt. g (1982); see In re
Armitage, 181 Vt. 241, 245-46 (2006) (stating that a “decision
was

a

final

judgment

because

it

was

conclusive,

not

merely

tentative, and was procedurally definite” and citing Restatement
(Second) of Judgments § 13 cmt. g); Scott, 177 Vt. at 495-96
(citing Restatement (Second) of Judgments § 13 cmt. g).
Though

the

original

decision

was

remanded

to

the

trial

court for a jury determination of the punitive damages, if any,
9

to be awarded, see Follo, 185 Vt. at 413, each of the issues
relevant

to

a

relevant

to

determination

of

the

fraud,

proceeding

before

and

the

thus

each

Bankruptcy

issue

Court,

affirmed against all challenges raised by Morency.

was

See id. at

411 (“The evidence fairly and reasonably supports the charges of
common-law fraud against both defendants”).

The decision of the

trial court was not tentative and the only possible consequence
of the Vermont Supreme Court’s decision to remand the action
affects

the

potential

damages

impact

to

be

upon

the

awarded

to

substantive

regarding the issue of common-law fraud.
purposes

of

collateral

Follo

estoppel,

there

–

there

conclusions

is

no

reached

Consequently, for the
exists

a

valid

final

judgment.
3. Necessity of Determination of Relevant Issues
Under Vermont law, preclusion applies only to those issues
“necessarily and essentially determined in a prior action.”

In

re

at

R.H.,

189

Vt.

at

30

(quoting

Pollander,

167

Vt.

305)(internal quotation marks omitted).

Where a “judgment of a

court

determinations

of

issues,

first
either

instance
of

which

is

based
standing

on

independently

of

two

would

be

sufficient to support the result, the judgment is not conclusive
with respect to either issue standing alone.”

Pollander, 167

Vt. at 305 (quoting Restatement (Second) of Judgments § 27 cmt.
i).

Here, the judgment in the Vermont Superior Court rested
10

upon two independent bases: common law fraud and a violation of
the Vermont Consumer Fraud Act, see Follo, 185 at 397, and thus,
pursuant to Pollander, the judgment entered after trial does not
conclusively determine either claim.
Where,

however,

as

in

this

Pollander 167 Vt. at 305.

case,

a

matter

with

multiple

independent grounds is appealed and the “appellate court upholds
one

of

these

determinations

as

sufficient

and

refuses

to

consider whether or not the other is sufficient and accordingly
affirms the judgment, the judgment is conclusive as to the first
determination.”

Restatement (Second) of Judgments § 27 cmt. o.1

Here, the judgment entered after trial was appealed to the
Vermont

Supreme

Court.

That

court

did

not

consider

the

sufficiency of the Consumer Fraud Act claim, ruling that it had
been

procedurally

defaulted.

Follo,

1

185

Vt.

at

403.

The

This specific comment to the Restatement (Second) of
Judgments has not been cited by the Vermont Supreme Court,
although it has favourable cited other comments within section
27 on a number of occasions. See, e.g., Scott, 177 Vt. at 493;
Alpine Haven Property Owners Ass’n, 175 Vt. at 563; Stevens v.
Stearns, 175 Vt. 428, 433-34 (2003); Lamb v. Geovjian, 165 Vt.
375, 381 (1996); Berlin Convalescent Center, Inc. v. Stoneman,
159 Vt. 53, 60 (1992).
Further, the conclusion that it is unreasonable to give
preclusive effect to determinations of lower courts, but
reasonable to do so where an appellate court considers the
issue, makes sense: while a court of first instance may not have
“carefully
or
rigorously”
considered
non-essential
determinations, once an appellate court has so considered, there
is sufficient directed analysis to justify preclusion.
In re
Baylis, 217 F.3d 66, 72 (1st Cir. 2000)(internal quotation marks
omitted).

11

Vermont Supreme Court did, however, affirm the jury finding that
Morency

was

liable

discussion.

for

common

Id. at 403-11.

law

fraud

after

a

thorough

The ruling of the Vermont Supreme

Court is thus conclusive of this determination.
The finding of common law fraud, however, rests upon two
separate communications Follo received from Morency: tax return
and other financial documentation, and the Inn occupancy rate
information.

Id. at 406-07.

Thus, it is also necessary to

establish that both these communications were essential to and
necessarily determined in the Vermont proceedings.

See In re

R.H.,

at

189

Vt.

at

30

(quoting

Pollander,

167

Vt.

305)).2

Though, as before, a prima facie analysis would indicate that
neither was conclusively determined, again recourse to Section
27

of

the

Restatement

(Second)

of

Judgments

provides

an

exception - where a “judgment of the court of first instance was
based on a determination of two issues, either of which standing
independently would be sufficient to support the result, and the
appellate
sufficient

court
.

.

upholds
.

the

both
judgment

of
is

these

determinations

conclusive

as

to

as
both

determinations.” Restatement (Second) of Judgments § 27 cmt. o.

2

This is necessary since, while the jury may have concluded
that both the tax return and the occupancy information were
sufficient to establish liability, it is equally possible that
the jury only considered one of these misrepresentations to be
sufficient.
12

The

Vermont

Supreme

Court

carefully

and

separately

considered the evidence concerning the financial information and
the

occupancy

information

and

concluded

that

there

was

sufficient evidence presented at trial for the jury’s finding
based on either statement.

See Follo, 185 Vt. at 410 (“the

trial provided sufficient clear and convincing evidence that Ms.
Morency knowingly or recklessly made false statements regarding
the Inn's occupancy and revenues”).
conclude

that

independently

both

It is thus appropriate to

intentional

sufficient,

and

thus,

misrepresentations
as

per

the

are

Restatement,

conclusive as to the Vermont Supreme Court’s determination.
4. Identity of Issues
The central contested issue in this appeal is whether there
is the necessary identity of issues between the jury’s findings
as to common law fraud and the elements of Section 523(a)(2)(A)
or Section 523(a)(2)(B).
a. Section 523(a)(2)(A)
Pursuant

to

Section

523(a)(2)(A),

an

otherwise

dischargeable debt obligation will not be discharged where it
was obtained by “false pretenses, a false representation, or
actual

fraud,

other

than

[by]

a

statement

respecting

debtor’s or an insider’s financial condition.”
523(a)(2)(A).
proceedings

the

11 U.S.C. §

The Bankruptcy Court concluded that the Vermont
did

not

involve

all
13

the

necessary

elements

of

Section 523(a)(2)(A) and thus did not have preclusive effect.
Specifically, the Bankruptcy Court concluded that both “the tax
return and the statements in the brochure about occupancy rates
concerned the Inn’s income and overall income flow,” and were,
therefore, statements respecting Morency’s financial condition.
In

re

2013

Morency,

WL

1342485,

at

*13.

Thus,

Section

523(a)(2)(A) could not operate to prevent the discharge of the
judgment debt.3
conceded
Morency’s

that

In response, Follo appears to have implicitly
the

tax

financial

return

was

a

statement

condition,

but

it

contends

respecting
that

the

occupancy information was not such a statement, and thus Section
523(a)(2)(A)
judgment debt.

may

operate

to

prevent

the

discharge

of

the

See Follo Brief 9.
i. Statement Respecting Financial Condition

To except a debt pursuant to Section 523(a)(2)(A) the debt
must be one which was obtained by a statement “other than [one]
respecting . . . an insider’s financial condition.” 11 U.S.C. §
523(a)(2)(A) (emphasis added).4

This phrase, “respecting the . .

3

It is uncontested that the entity to which the tax return
and occupancy information relate, e.g., the parent corporation
of the Inn, was an “insider” of Morency pursuant to 11 U.S.C.
section 101(31)(A)(iv).
4

This is an odd inquiry -- to determine whether Section
523(a)(2)(A) is applicable, it is first necessary to determine
whether the operative part of Section 523(a)(2)(B), namely
whether the debt was obtained via a false statement “respecting
the
debtor’s
.
.
.
financial
condition,”
11
U.S.C.
14

.

insider’s

financial

condition,”

is

not

defined

by

the

Bankruptcy Code and its breadth is the subject of considerable
disagreement among the courts.

See In re Kosinski, 424 B.R.

599, 608-09 (B.A.P. 1st Cir. 2010).

At one pole is an argument

for interpreting the phrase so broadly as to include any and all
statements

which

bear

insider or debtor.
a

communication

upon

Id.

the

financial

condition

of

the

This broad interpretation “posits that

addressing

the

status

of

a

single

asset

or

liability qualifies as respecting the debtor’s . . . financial
condition.”

In re Joelson, 427 F.3d 700, 705 (10th Cir. 2005)

(quoting In re Chivers, 275 B.R. 606, 614 (Bankr. D. Utah 2002))
(internal quotations omitted).

At the other extremity is the

view that only statements which relate to a debtor or insider’s
overall

financial

health

are

to

be

considered,

though

these

documents need not be restricted to formal financial statements.
In re Bogdanovich, 292 F.3d 104, 112 (2nd Cir. 2002) (citing In
re Ransford, 202 B.R. 1, 4 (Bankr. D. Mass. 1996)) (Boroff,
Bankr. J.); see also In re Kosinski, 424 B.R. at 609 (concluding
narrow view is limited to “statement’s providing information as
to a debtor [or insider’s] net worth, overall financial health,
or an equation of assets and liabilities”).

523(a)(2)(B)(ii),
does not apply.

applies.

If

15

it

does,

Section

523(a)(2)(A)

Though

both

positions

have

their

support,

the

emerging

trend favors a narrow, rather than broad interpretation of the
phrase.

See In re Joelson, 427 F.3d at 711-12; (citing In re

Chivers, 275 B.R. at 615-16).

The First Circuit Bankruptcy

Appellate Panel, considering this question in In re Kosinski,
424 B.R. at 609, was not required to determine where on the
spectrum courts within this Circuit fell,5
approach
District.

has

been

adopted

by

a

though the narrow

Bankruptcy

Judge

in

this

See In re Alexander, 427 B.R. 183, 195 (Bankr. D.

Mass. 2010) (Bailey, Bankr. J.).

Whether a strict or broad - or

somewhere in between - approach is ultimately adopted by the
First

Circuit,

given

the

particular

factual

scenario

present

here, the Court need not express an opinion on this issue.

Even

under a narrow interpretation, all relevant representations by
Morency are statements respecting her financial condition.
The

tax

return

is

certainly

a

statement

regarding

Morency’s financial condition, see, e.g., In re Swan, 499 B.R.
118, 124 (Bankr. D. Mass. 2013) (Bailey, Bankr. J.); therefore
the sole issue before the Court is whether the guest information
and room assignment records are also such statements.

5

Like the decision of
bankruptcy appellate panel
precedential effect.
See
(Bankr. D. Mass.) (Kenner,

a district judge, the decision of a
is persuasive only. It has no binding
In re Virden, 279 B.R. 401, 409n.12
Bankr. J.).
16

Under
statements

either
of

the

narrow

“financial

or

broad

condition,”

interpretation

statements

about

of
an

“entity’s overall financial health,” In re Alexander, 427 B.R.
at 195 (quoting In re Sansoucy, 136 B.R. 20, 23 (Bankr D.N.H.
1992)), including its ability to produce income, are statements
of “financial condition.” See In re Joelson 427 F.3d at 714
(concluding that the identical phrase in Section 523(a)(2)(A)
includes those statements “that purport to present a picture of
the debtor’s overall financial health . . . [which included]
those analogous to balance sheets, income statements, statements
of changes in overall financial position, or income and debt
statements”) (emphasis added).

Here, the occupancy of the Inn

was critical to its ability to generate income, see Follo, 185
Vt. at 394-95, and consequently its “overall financial health.”
In re Alexander, 427 B.R. at 195 (quoting In re Sansoucy, 136
B.R. at 23).

Thus, this Court concludes, as the Bankruptcy

Court did, In re Morency, 2013 WL 1342845 at *14, that, even
according to the narrow interpretation of such statements, this
statement is one respecting Morency’s financial condition and
thus Follo is unable to have the judgment debt excepted under
Section 523(a)(2)(A).
b. Section 523(a)(2)(B)
Pursuant

to

Section

523(a)(2)(B),

a

debt

will

not

be

discharged under the Bankruptcy Code where it was obtained by
17

“use of a statement in writing - (i) that is materially false;
(ii) respecting . . . an insider’s financial condition; (iii) on
which the creditor to whom the debtor is liable . . . reasonably
relied; and (iv) that the debtor caused to be made or published
with intent to deceive.”

11 U.S.C. § 523(a)(2)(B).

It is

uncontested that the proceedings in the Vermont courts concluded
that

the

relevant

communications

false, written statements.
10.

of

Morency

were

materially

See Follo, 185 Vt. at 406-07, 409-

The issue is whether the Vermont jury found both that the

“creditor [Follo] . . .

reasonably relied” upon the statements

and that “the debtor [Morency] caused [the statement] to be made
or

published

with

an

intent

to

deceive.”

11

U.S.C.

§

523(a)(2)(B).
Whilst,

after

a

careful

analysis,

the

Bankruptcy

Court

concluded that Follo failed to establish that either reasonable
reliance or an intent to deceive had been adequately addressed
by the proceedings in Vermont, In re Morency, 2013 WL 1342485,
at *13-14, for the following reasons this Court, respectfully,
disagrees.
i. Reasonable Reliance
For Morency’s debt to be excepted from discharge, Follo’s
reliance

upon

objectively

her

false

reasonable,

11

communications
U.S.C.

§

must

have

523(a)(2)(B);

been
In

re

Kosinski, 424 B.R. at 610 (citing In re Flaherty, 335 B.R. 481,
18

490-91

(Bankr.

D.

Mass.

2005)(Feeney,

Bankr.

J.)),

and

this

determination must therefore have been an element of the state
proceedings.
The sole item of evidence Follo submitted to the Bankruptcy
Court

in

support

of

its

argument

for

preclusion

published opinion of the Vermont Supreme Court.
2013

WL

1342485,

considered

that

at
it

*3.
was

The

Bankruptcy

confined

to

a

was

the

In re Morency,

Court

consequently

consideration

of

this

document when forming its judgment as to whether the Vermont
proceedings had issue preclusive effect.
reaching

the

considering

conclusion
whether

that

Follo’s

the

Id. at *3 n.1.

jury

was

reliance

was

not

In

charged

with

reasonable,

the

Bankruptcy Court relied upon an extract of the trial judge’s
charge to the jury, embedded at pages 404 to 405 of the Vermont
Supreme Court’s opinion, where the jury was instructed that:
In order to prove fraud, plaintiffs must demonstrate
by clear and convincing evidence each of the following
essential
elements.
One,
that
defendants
misrepresented an existing fact which affected the
essence
of
the
transaction
with
plaintiffs
or
knowingly
allowed
another
to
make
such
a
representation
on
defendants’
behalf;
two,
that
defendants did so intentionally; three, that the
misrepresentation was false when made and known at the
time to be false by a defendant, or that the
representation was recklessly made as being within the
defendants’ own knowledge without defendant in fact
knowing whether it was true or not.

19

Id.

at

*12

(quoting

Follo,

185

Vt.

at

404-05).

From

this

extract it does not appear that, in holding Morency liable for
common law fraud, the jury was required to conclude that Carl
Follo’s

reliance

upon

the

tax

statement

information was objectively reasonable.

and

occupancy

The Bankruptcy Court

properly so concluded.
It must be emphasized, however, that the full Vermont Trial
Transcript was not submitted in evidence, nor was the Bankruptcy
Court, at any stage, requested to take judicial notice of it.
more

extensive

available.

excerpt

of

the

Trial

Transcript

is,

A

however,

It includes the entire charge to the jury, not just

the extract quoted in the opinion of the Vermont Supreme Court.
I’ve read it.
The

full

Superior

Court

charge

makes

clear

that

the

Bankruptcy Court’s conclusion – based only on the extract in the
Vermont Supreme Court opinion - is flat wrong.
What to do?
Though the nature of our adversary system of justice would
generally make this Court reluctant to take judicial notice of
facts available but not produced at trial, see, e.g., Fleischer
Studios, Inc. v. A.V.E.L.A., Inc., 654 F.3d 958, 966 (9th Cir.
2011) (“a plaintiff may not cure her failure to present the
trial court with facts sufficient to establish the validity of
her claim by requesting that this court take judicial notice of
20

such facts”) (quoting Jespersen v. Harrah’s Operating Co., 444
F.3d

1104,

1110

(9th

Cir.

2006)(en

banc))(internal

quotation

mark omitted); Tamari v. Bache & Co. (Lebanon) S.A.L., 838 F.2d
904, 907 (7th Cir. 1988) (Posner, J.) (“A litigant cannot put in
part of his case in the trial court and then, if he loses, put
in

the

rest

on

appeal.”),

in

these

circumstances

general

principles of justice and this Court’s duty to accord judgments
of

other

courts

“full

faith

and

credit”,

28

U.S.C.

§

1738,

militate in favor of a contrary conclusion.
Here, were this Court simply to affirm, the two opinions of
the Bankruptcy Court and the Vermont Supreme Court could easily
be read to support the proposition that the decisional law of
Vermont with respect to common law fraud will not support the
exception under Section 523(a)(2)(B) when the contrary is true.
This

will

not

do.

So

it

is

that

in

this

exceptional

circumstance, I will go outside the trial record and do what I
would excoriate an appellate court for doing.
Pursuant to Rule 201(c) of the Federal Rules of Evidence, a
“court may take judicial notice [of an adjudicative fact] at any
stage of the proceeding.” Fed. R. Evid. 201(d)(emphasis added);
see also Massachusetts v. Westcott, 431 U.S. 322, 323 n.2 (1977)
(taking judicial notice of state government license by appellate
court); United States v. Mercado 412 F.3d 243, 247 (1st Cir.
2005)(taking judicial notice of state court record by appellate
21

court); Torréns v. Lockheed Martin Servs. Grp., Inc., 396 F.3d
468, 473 (1st Cir. 2005)(taking judicial notice of government
records by appellate court).
that

can

be

“accurately

The Trial Transcript is a document

and

readily

determined

from

sources

whose accuracy cannot reasonably be questioned” and is thus not
subject

to

“reasonable

dispute”.

Fed.

R.

Evid.

201(b).

Consequently this Court may take judicial notice of it.6

See

Fed. R. Evid. 201(b)(2).
Thus, this Court takes judicial notice of the full Trial
Transcript

and

consequently

concludes

Follo’s

reasonable

reliance was necessary to find Morency liable in the Vermont
Superior Court.

Here’s why.

In relevant part, the Vermont Superior Court charged the
jury:
In order to prove fraud, Plaintiffs must demonstrate
by clear and convincing evidence each of the following
essential
elements.
One,
that
Defendants
misrepresented an existing fact which affected the
essence
of
the
transaction
with
Plaintiffs
or
knowingly
allowed
another
to
make
such
a
representation
on
Defendants’
behalf;
two,
that
Defendants did so intentionally; three, that the
misrepresentation was false when made and known at the
time to be false by a Defendant, or that the
6

Rule 201(e) of the Federal Rules of Evidence provides that
“a party is entitled to be heard on the propriety of taking
judicial notice and the nature of the fact to be noticed.” Fed.
R. Evid. 201(e). In light of this requirement, on February 20,
2014, the Court issued an order announcing its intention to take
judicial notice of the Vermont Superior Court trial transcript.
Order, Feb. 20, 2014, ECF No. 16. Neither party responded this
notification.
22

representation was recklessly made as being within the
Defendants’ own knowledge without Defendant in fact
knowing whether it was true or not.
Four, that the correct information was not
available to Plaintiffs notwithstanding their duty to
make
reasonable
inquiry;
five,
that
Plaintiffs
reasonably relied on the misrepresentation to their
detriment; and six, that Plaintiffs suffered financial
harm as a result of the misrepresentation.

Appellant’s App., Follo v. Florindo Trial Tr., vol. 6 (“Trial
Tr.”), 193:24-194:17, May 1, 2007, at App. No. 0083-84 (emphasis
added).7
On

appeal,

the

Vermont

finding of common law fraud.

Supreme

Court

affirmed

the

Follo, 185 Vt. at 410-11.

jury
As a

consequence of this affirmation, the conclusion of the jury in
the Vermont Superior Court that Follo reasonably relied upon
Morency’s communications precludes reconsideration of this issue
in the present proceeding.
ii. Intention to Deceive
Section

523(a)(2)(B)

also

requires

that

the

debtor,

Morency, “caused [the statements] to be made or published with
intent

to

deceive.”

11

U.S.C.

§

523(a)(2)(b)(iv).

The

Bankruptcy Court concluded that Follo had failed to establish
that the jury was instructed that fraud required a showing of
“intent to induce reliance” and that this requirement is not

7

The Court was only provided with a paper copy of the full
appendix; the Appendix’s table of contents has been filed on the
electronic docket at ECF No. 12-1.

23

present in Vermont law.

In re Morency, 2013 WL 1342485, at *14.

The Bankruptcy Court did not, however, reach a conclusion on
whether the jury’s finding of fraud in this case necessitates
the conclusion that Morency had acted with an intent to deceive.
It may well be true, as the Bankruptcy Court concluded,
that Vermont law does not expressly require proof of “intent to
induce reliance,” id., but that is of no consequence here where
the

actual

jury

charge

required

proof

of

the

requisite

Bankruptcy Code “intent to deceive” (though this jury charge was
perhaps more favorable to Morency than that to which she was
entitled).
The Trial Transcript evidences that the jury in the Vermont
Superior Court was instructed that, to find Morency liable for
common law fraud, it was essential that she have intentionally
misrepresented an existing fact which was then relied upon by
Follo.

See Trial Tr., 194:1-17, at App. No. 0084.

Whether

these instructions are equivalent to a direct requirement that
Morency be shown to have acted with a specific intent to deceive
is unclear.
briefing,

Here, however, the Vermont Supreme Court, upon full

affirmed

the

Vermont Superior Court.

verdict

of

the

jury

sitting

in

the

In so doing, it declared that common

law fraud in Vermont is “an intentional act with a specific
intent to defraud the buyer” and thus necessarily determined
that Morency had such specific intent.
24

Follo, 185 Vt. at 413

(emphasis added).

Given that the Vermont Supreme Court is the

final arbiter of the law of Vermont, Erie R. Co. v. Tompkins,
304

U.S.

64,

78-79

(1938),

and

determinations

of

fact

are

preclusive, Yates v. United States, 354 U.S. 298, 337-38, (1957)
overruled in part on other grounds by Burks v. United States,
437 U.S. 1 (1978), this affirmation by the Vermont Supreme Court
evidences

that

a

demonstration

of

an

intent

to

deceive

was

necessary for Morency to be held liable for common law fraud.
To

determine

whether

Morency’s

liability

for

common

law

fraud required evidence of intent to deceive it is necessary to
establish

whether

an

intent to defraud.

intent

to

deceive

is

equivalent

to

an

This question is remanded to the Bankruptcy

Court to determine at the first instance.
IV CONCLUSION
For the forgoing reasons this Court AFFIRMS in part the
Bankruptcy Court and REMANDS the matter for further proceedings
in light of the more complete record established in this opinion
so

that

instance,

the

Bankruptcy

whether

issue

Court

can

preclusion

consider,
is

in

appropriate

the

first

in

these

circumstances and, if it is, whether Follo has thus established
his claim for the exception to discharge provided in Section
523(a)(2)(B).
The

Bankruptcy

permissibility

of

Court

[Follo]

may

of

.

.

.
25

course

now

advancing

“address

arguments

the
under

subsection

523(a)(2)(B)

when

they

made

no

mention

subsection in the Joint Pretrial Memorandum”.
2013 WL 1342485, at *14 n.16.

of

that

In re Morency,

It may also consider whether

Follo is procedurally defaulted for its failure to submit the
complete

Trial

Transcript

in

evidence

before

the

Bankruptcy

Court.
In any event, its opinion will no doubt make clear whether
its decision is on the merits or on procedural grounds.

AFFIRMED IN PART AND REMANDED.

/s/ William G. Young
WILLIAM G. YOUNG
DISTRICT JUDGE

26