In Re: Morabito

Filing 21

ORDER that the Bankruptcy Court's Order is affirmed; Appellees' motion to strike ECF No. 13 is granted; Clerk directed to strike AER 43 and 44, and strike Section (IV)(F)(9) of Appellant's opening brief ECF Nos. 9 at 27-29, 10 -44, 10 -45; Appellees' motion to substitute parties ECF No. 20 is granted; Clerk directed to substitute Maryanna Herbst, as trustee of the Herbst Family Trust dated December 17, 2002, in place and instead of Jerry Herbst; Clerk directed to forward a copy of this order to the Bankruptcy Court (mailed on 1/22/2019). Signed by Judge Miranda M. Du on 1/22/2019. (Copies have been distributed pursuant to the NEF - KW)

1
2
3

UNITED STATES DISTRICT COURT

4

DISTRICT OF NEVADA

5

***

6

In re:

7

Case No. 3:18-cv-00221-MMD
PAUL A. MORABITO,

8
9

Debtor.
JH, INC., et al.,

10

Plaintiffs,
v.

11
12

PAUL A. MORABITO.,
Defendant.

13
14

ORDER

PAUL A. MORABITO,
Appellant,

15

v.

16

JH, INC., et al.,

17

Appellees.

18
19

I.

SUMMARY

20

Appellant Paul A. Morabito appeals the United States Bankruptcy Court for the

21

District of Nevada’s (“Bankruptcy Court”) April 30, 2018 Judgment on the First and Second

22

Causes of Action and Judgment Re: Fourth Cause of Action (“Order”). (ECF Nos. 1, 9.)

23

The Order primarily found that a debt Appellant owed Appellees was nondischargeable

24

where the allegation of fraud was based upon statements included in a Confession of

25

Judgment (“COJ”) entered into to settle a state court case in which the state court found

26

Appellant committed fraud, even though Appellant had the applicable judgment vacated

27
28

1

as part of the settlement.1 (Id.) Appellees also cross-appeal the portion of the Bankruptcy

2

Court’s Order denying them relief on their fourth cause of action. (ECF No. 11 at 54-55.)

3

Further, Appellees’ motion to strike certain exhibits and motion to substitute parties are

4

also before the Court.2 (ECF Nos. 13, 20.) For the following reasons, the Court affirms the

5

Bankruptcy Court’s Order. As also explained below, the Court will grant the motion to strike

6

(ECF No. 13) and the motion to substitute parties (ECF No. 20).

7

II.

Before addressing the merits of this appeal, the Court first resolves Appellees’

8
9

PRELIMINARY MATTERS

motion to strike (ECF No. 13) and motion to substitute parties (ECF No. 20).

10

A.

Motion to Strike

11

Appellees filed a motion to strike two exhibits attached to Appellant’s opening brief,

12

along with the portion of the opening brief that relies on those exhibits. (ECF No. 13

13

(moving to strike ECF Nos. 9 at 27-29, 10-44, 10-45).) Because these exhibits and portion

14

of Appellant’s opening brief were not considered by the Bankruptcy Court at the time it

15

made the decisions relevant to this appeal, the Court will grant the motion and direct the

16

Clerk of Court to strike those exhibits, along with the corresponding portion of Appellant’s

17

opening brief.

18

The Court is persuaded by Appellees’ argument that these exhibits were created

19

after the motions leading to the decisions on appeal here were fully briefed, and thus they

20

do not properly constitute part of the record on appeal. (See ECF Nos. 10-3 at 3-5, 10-5

21

at 3-5 (declining to mention documents that appear to be the exhibits Appellees now move

22

to strike).) See also Fed. R. App. P. 10(a); Kirshner v. Uniden Corp. of Am., 842 F.2d

23

1074, 1077 (9th Cir. 1988) (“Papers submitted to the district court after the ruling that is

24

challenged on appeal should be stricken from the record on appeal.”). These exhibits—

25
26

The Court has reviewed Appellant’s opening brief (ECF No. 9), Appellees’
answering brief (ECF No. 11), and Appellant’s reply brief (ECF No. 15).
1

27
2

28

The Court has also reviewed the applicable responses and replies. (ECF Nos. 16,

18.)
2

1

ECF Nos. 10-44, 10-45—will therefore be stricken. Further, the portion of Appellant’s brief

2

that relies on them—ECF No. 9 at 27-29—will also be stricken. See Barcamerica Int’l USA

3

Tr. v. Tyfield Importers, Inc., 289 F.3d 589, 595 (9th Cir. 2002) (striking portion of opening

4

brief that relied on exhibits stricken by the court as not properly part of the record).

5

Conversely, the Court is not persuaded by Appellant’s contention that the Court

6

may take judicial notice of these exhibits (ECF No. 16 at 2-3)—because their contents are

7

subject to reasonable dispute. See Fed. R. Evid. 201(b) (providing that only facts not

8

subject to reasonable dispute may be judicially noticed). The exhibits that Appellees seek

9

to strike attempt to introduce a new theory based on allegedly newly-discovered facts that

10

it was Appellees, rather than Appellant, who committed fraud. That contention goes to the

11

heart of the dispute between the parties, and this new theory has not been established

12

such that it is not subject to reasonable dispute. Further, this newly-discovered fraud

13

theory was not before the Bankruptcy Court as relevant to the decisions on appeal here,

14

and thus is not properly part of this appeal.

15

In addition, the Court declines to exercise its inherent discretion to supplement the

16

record with these exhibits. See Lowry v. Barnhart, 329 F.3d 1019, 1024 (9th Cir. 2003)

17

(“Save in unusual circumstances, we consider only the district court record on appeal.”).

18

Rather than attempt to examine and rule on the entire, sprawling dispute between the

19

parties, the Court will concentrate its review on the issues actually on appeal here. The

20

Court will thus disregard the challenged exhibits and briefing (ECF Nos. 9 at 27-29, 10-

21

44, 10-45) in deciding this appeal, and accordingly will not further discuss them below.

22

B.

Motion to Substitute Parties

23

Unfortunately, Appellee Jerry Herbst (“Herbst) passed away. (ECF No. 19

24

(suggestion of death).) Following his death, Appellees moved to substitute Maryanna

25

Herbst (his wife), as trustee of the Herbst Family Trust dated December 17, 2002, in his

26

place. (ECF No. 20 (motion to substitute).) Appellant’s deadline to file any response to this

27

motion has passed, and he has filed no response. Appellees have complied with the

28
3

1

procedural requirements for substitution here. See Fed. R. App. P. 43; see also Fed. R.

2

Civ. P. 25(a). Accordingly, the Court will grant Appellees’ motion to substitute.

3

III.

BACKGROUND

4

The Court summarizes only the facts relevant to this appeal. Corporate entities

5

controlled by Appellant sold a chain of convenience stores and related assets to corporate

6

entities controlled by Herbst. (ECF Nos. 9 at 16 n.2; 11 at 10.) This sale was governed by

7

an amended and restated stock purchase agreement (“ARSPA”). (ECF No. 9 at 16.) The

8

ARSPA required that Appellant submit a working capital estimate to Herbst, which would

9

determine the amount of cash Herbst would have to pay Appellant at closing. (Id. at 17.)

10

Herbst thought the working capital estimate Appellant submitted was much too low. (Id.)

11

Thus, Herbst refused to pay Appellant additional money. (Id.)

12

Appellant filed suit against Herbst in state court to compel him to pay money

13

Appellant believed he was owed under the ARSPA, and Herbst counterclaimed, alleging,

14

among other things, that Appellant’s low working capital estimate was the result of

15

Appellant’s fraud. (Id. at 17-18; see also ECF No. 11 at 11.) That case went to trial. (ECF

16

Nos. 9 at 18, 11 at 11.)

17

Following the trial, the trial court entered a written order finding that the low working

18

capital estimate was a result of Appellant’s fraud, and that Appellant had committed fraud

19

because the ARSPA set up an arrangement making Appellant “Construction Manager” of

20

certain projects, which Appellees had to pay him for, but Appellant had no intention of ever

21

serving as “Construction Manager” or doing anything that might entitle him to that money.

22

(ECF Nos. 9 at 18-19, 11 at 11-16.) The trial court awarded Appellees approximately $150

23

million in damages, of which approximately $85 million were compensatory damages for

24

Appellant’s fraud in the inducement—inducing Appellees to enter into the transaction to

25

buy the company. (ECF No. 11 at 15-16.)

26
27
28
4

1

Both parties filed appeals and cross-appeals of this judgment. (ECF Nos. 9 at 19,

2

11 at 16.) While these appeals were pending, the parties participated in mediation, and

3

subsequently agreed to settle their dispute. (ECF No. 9 at 19-20, 11 at 16.)

4

The settlement agreement had several components. First, both parties dismissed

5

their appeals. Second, Appellant agreed to pay Appellees some money and assume some

6

of their liabilities. Third, Appellant agreed to indemnify and hold harmless Appellees in

7

certain legal proceedings, and sell a property Appellant owned in Reno for Appellee’s

8

benefit. Fourth, the parties agreed—following the state court’s approval—to have the state

9

court judgment vacated and placed under seal. Fifth, Appellant agreed to execute the COJ

10

in the amount of $85 million that Appellees could file with the state court (and thus make

11

enforceable) without prior notice to Appellant, in the event he defaulted on his payment

12

obligations under the settlement agreement. As relevant here, Appellees basically copied-

13

and-pasted the portions of the state court’s written order following trial finding that

14

Appellant committed fraud into the COJ. Further, the COJ also stated that it would not be

15

dischargeable in the event Appellant filed for bankruptcy.3 (ECF Nos. 9 at 19-21, 11 at 16-

16

17; see also ECF No. 11 at 18-22.)

17

Appellant defaulted on his obligations under the settlement agreement when he

18

failed to make a required $4 million payment on time. (ECF Nos. 9 at 22, 11 at 17.)

19

Appellant then asked Appellees to hold off on enforcing their rights under the settlement

20

agreement to give him more time to come up with the money. (ECF No. 11 at 17.)

21

Appellees agreed, and the parties entered into a forbearance agreement. (Id.) But then

22

Appellant also defaulted on the forbearance agreement. (Id.)

23

After Appellant defaulted on the forbearance agreement, Appellees filed the COJ

24

in state court. (ECF No. 11 at 18.) The clerk of the state court entered the judgment, and

25

the state court found the COJ complied with applicable state law. (Id.) The Nevada

26
27
3

28

Apparently, Appellant was concerned about the COJ at the time he signed it, but
he never told Herbst or the other Appellees about his concerns. (ECF No. 9 at 21.)
5

1

Supreme Court denied Appellant’s challenges to the COJ, and his time to otherwise

2

appeal it expired. (Id.)

3

Shortly thereafter, Appellees filed an involuntary bankruptcy petition against

4

Appellant. (ECF Nos. 9 at 22, 11 at 22.) As most relevant here, Appellees also filed a

5

complaint against Appellant in Bankruptcy Court seeking to establish that the $85 million

6

COJ was nondischargeable (the “Nondischarge Proceeding”). (ECF Nos. 9 at 22, 11 at

7

23.) The Nondischarge Proceeding led to this appeal.

8

Appellant filed an answer in the Nondischarge Proceeding stating that all of the

9

statements he agreed to in the COJ relating to how he committed fraud (which, again,

10

mirrored the state court’s written decision) were false, and he knew they were false at the

11

time he certified they were all true. (ECF Nos. 9 at 22-23, 11 at 24.) In response to this

12

answer, Appellees amended their complaint to include a fourth cause of action seeking—

13

in the alternative event that they failed on their first and second causes of action based on

14

the COJ—the difference between the approximately $150 million state court judgment

15

they won and the $85 million COJ. (ECF No. 9 at 23, 11 at 24.) Appellees apparently

16

amended their complaint on the theory that, if Appellant had lied in the COJ by signing

17

onto untrue statements, he had fraudulently induced them to allow their state court

18

judgment to be vacated in exchange for owing a lesser amount under the COJ. (ECF No.

19

9 at 23, 11 at 24.) Appellant filed another answer in response to that amended complaint

20

containing similar statements as his first answer. (ECF No. 9 at 23, 11 at 24.)

21

Appellees first filed a motion for partial summary judgment on their first through

22

third causes of action, arguing that the COJ was nondischargeable because Appellant

23

affirmed in the COJ various facts establishing that he had committed fraud, and Appellees

24

had both reasonably relied on, and were harmed by, his fraudulent misrepresentations.

25

(ECF No. 11 at 24-25.) Appellant filed an opposition, to which he attached a declaration

26

disavowing his statements in the COJ (“Appellant’s Declaration”). (ECF No. 9 at 24.)

27
28
6

1

The Bankruptcy Court granted Appellees’ motion for partial summary judgment as

2

to their first and second causes of action, finding that the COJ was both claim and issue

3

preclusive that Appellant committed fraud—and therefore that the COJ was

4

nondischargeable because it was a debt incurred as a result of fraud. (ECF Nos. 9 at 24,

5

11 at 25.) In granting summary judgment to Appellees, the Bankruptcy Court discounted

6

Appellant’s Declaration under the sham affidavit doctrine. (ECF No. 9 at 24.) Further, the

7

Bankruptcy Court later declined to reconsider its decision or amend its judgment on

8

Appellees’ first and second cause of action. (ECF No. 10-3.) However, the Bankruptcy

9

Court granted summary judgment in Appellant’s favor on Appellees’ third cause of action,

10

finding that a stipulation in the COJ waiving the COJ’s discharge in the event of Appellant’s

11

bankruptcy was an unenforceable pre-bankruptcy waiver of the discharge. (ECF No. 9 at

12

25.) The Bankruptcy Court severed the unenforceable discharge waiver from the rest of

13

the COJ. (ECF No. 10-5 at 20.) Thus, the Bankruptcy Court granted judgment to Appellees

14

on their first and second cause of action. (ECF No. 10-2.)

15

Appellees then elected to proceed to trial on their fourth cause of action, which

16

argued in the alternative from their first and second causes of action that Appellant

17

committed fraud when he signed the COJ even though he thought the factual statements

18

included in it were not true. Following a bench trial, the Bankruptcy Court found that,

19

“[g]iven the Court’s granting a final judgment in favor of the [Appellees] on the First and

20

Second causes of action in their Amended Complaint, the relief sought alternatively by the

21

[Appellees] in their Fourth Cause of Action is not necessary, therefore the Court finds in

22

favor of [Appellant].” (ECF No. 10-4 at 3.)

23

Appellant appeals the Bankruptcy Court’s decisions with respect to the first and

24

second causes of action, and Appellees cross-appeal the Bankruptcy Court’s decision with

25

respect to the fourth cause of action. Appellant argues that the Bankruptcy Court should

26

neither have given issue or claim preclusive effect to the COJ, nor should it have

27

disregarded Appellant’s Declaration under the sham affidavit doctrine. (ECF No. 9.)

28
7

1

Appellees urge affirmance of the Bankruptcy Court’s decision that the COJ is

2

nondischargeable, and cross appeal that their fourth cause of action was not merely in the

3

alternative and therefore unnecessary—they believe they are additionally entitled to

4

approximately $65 million, the difference between the COJ and the judgment they won in

5

state court. (ECF No. 11.)

6

IV.

LEGAL STANDARD

7

A bankruptcy court’s conclusions of law are reviewed de novo, “including its

8

interpretation of the Bankruptcy Code,” and its factual findings are reviewed for clear error.

9

In re Rains, 428 F.3d 893, 900 (9th Cir. 2005); In re Salazar, 430 F.3d 992, 994 (9th Cir.

10

2005). The bankruptcy court’s factual findings are clearly erroneous only if the findings

11

“leave the definite and firm conviction” that the bankruptcy court made a mistake. In re

12

Rains, 428 F.3d at 900. “A bankruptcy court abuses its discretion if it applies the law

13

incorrectly or if it rests its decision on a clearly erroneous finding of a material fact.” In re

14

Brotby, 303 B.R. 177, 184 (B.A.P. 9th Cir. 2003). In reviewing a bankruptcy court’s

15

decision, this Court ignores harmless errors. In re Mbunda, 484 B.R. 344, 355 (B.A.P. 9th

16

Cir. 2012). The Court may affirm the bankruptcy court’s decision “on any ground fairly

17

supported by the record.” In re Warren, 568 F.3d 1113, 1116 (9th Cir. 2009).

18

The Bankruptcy Court’s decision finding Appellant’s $85 million debt based on the

19

COJ nondischargeable is subject to de novo review. See In re Plyam, 530 B.R. 456, 461

20

(B.A.P. 9th Cir. 2015). As specifically regards the key issue before the Court on this

21

appeal, the Bankruptcy Court’s determination that issue preclusion was available is

22

subject to de novo review, but its application of the issue preclusion doctrine to the facts

23

of this case is reviewed for an abuse of discretion. See id. The Court also reviews the

24

Bankruptcy Court’s invocation of the sham affidavit rule for abuse of discretion. See

25

Yeager v. Bowlin, 693 F.3d 1076, 1079 (9th Cir. 2012). “A bankruptcy court abuses its

26

discretion if it applies the wrong legal standard, misapplies the correct legal standard, or

27
28
8

1

if its factual findings are illogical, implausible, or without support in inferences that may be

2

drawn from the facts in the record.” In re Plyam, 530 B.R. at 461-62.

3

V.

DISCUSSION

4

The Court first addresses Appellant’s appeal of the Bankruptcy Court’s Order with

5

respect to the first and second causes of action, finding that the COJ is nondischargeable,

6

and then addresses Appellees’ cross-appeal with respect to the fourth cause of action.
Appellant’s Appeal

7

A.

8

Appellant raised many arguments in his appeal. (ECF No. 9 at 30-62.) As many of

9

them are specious, the Court only addresses herein the arguments that are dispositive of

10

this appeal. The Court finds that the Bankruptcy Court properly applied the sham affidavit

11

doctrine, and did not err in finding the COJ nondischargeable because it was entitled to

12

issue preclusive effect. Thus, the Court will affirm the Bankruptcy Court’s Order with

13

respect to the first and second causes of action.

14

1.

Sham Affidavit Doctrine

15

The Bankruptcy Court invoked the sham affidavit doctrine in order to discount

16

Appellant’s Declaration. (ECF No. 10-5 at 13.) Appellant contends this was improper

17

because the sham affidavit doctrine may only be used when an affidavit contradicts earlier

18

deposition testimony. (ECF No. 9 at 39-42.) Appellees counter that the Bankruptcy Court

19

did not abuse its discretion in invoking the sham affidavit doctrine under the unique

20

circumstances of this case, and the sham affidavit doctrine is not exclusively limited to a

21

later-filed declaration that contradicts previous deposition testimony. (ECF No. 11 at 42-

22

43.) As explained below, the Court agrees with Appellees.

23

“The general rule in the Ninth Circuit is that a party cannot create an issue of fact

24

by an affidavit contradicting his prior deposition testimony.” Yeager, 693 F.3d at 1080

25

(citation and internal quotation marks omitted). This doctrine is, indeed, normally used in

26

the context of an affidavit that contradicts prior deposition testimony, and should be applied

27

with caution “because it is in tension with the principle that the court is not to make

28
9

1

credibility determinations when granting or denying summary judgment.” Id. (citations

2

omitted). “In order to trigger the sham affidavit rule, the district court must make a factual

3

determination that the contradiction is a sham, and the inconsistency between a party’s

4

deposition testimony and subsequent affidavit must be clear and unambiguous to justify

5

striking the affidavit.” Id.

6

The Bankruptcy Court applied the sham affidavit rule to credit the COJ over the

7

later-filed declaration. The Court finds that the Bankruptcy Court complied with the

8

requirements of the sham affidavit rule, and did not abuse its discretion in invoking it under

9

the unique circumstances of this case. See Yeager, 693 F.3d at 1079 (stating that

10

applicable standard of review is abuse of discretion).

11

Regarding the Bankruptcy Court’s technical compliance with the sham affidavit rule,

12

it made a specific factual finding that Appellant’s Declaration was a sham. (ECF No. 10-5

13

at 13.) The Bankruptcy Court also explained the clear and unambiguous contradiction

14

between the COJ and the later-filed declaration. (Id. at 13-14.) There is no dispute that

15

Appellant’s statements in Appellant’s Declaration squarely contradicted the factual content

16

of the COJ. As the Bankruptcy Court explained, Appellant never contested the truth of the

17

statements establishing his fraud in the COJ until after he defaulted on two agreements

18

with Appellees, and they, as was their right under the settlement agreement, moved to

19

enforce the COJ. “It was only after those events and the commencement of this bankruptcy

20

case that Morabito [Appellant] sought to disavow the facts he stipulated to and affirmed.

21

The [Bankruptcy] Court finds that to be unacceptable and a sham.” (Id. at 14.) The

22

Bankruptcy Court also noted the unusual circumstances here allowing it to draw the

23

inference that the later filed declaration was a sham: the statements in the COJ Appellant

24

sought to disavow in his declaration were basically copied-and-pasted from the vacated

25

state court decision, meaning those statements as to Appellant’s fraud were established

26

by a neutral arbiter after several years of litigation and a multi-week bench trial. (Id. at 13.)

27
28
10

1

Thus, the Bankruptcy Court found that statements in the later-filed, self-serving4

2

declaration were entitled to less weight than the COJ.

3

Even though the Bankruptcy Court applied the sham affidavit rule beyond

4

deposition testimony, it did not abuse its discretion in doing so under the unique

5

circumstances of this case. Indeed, the same principle that supports application of the

6

sham affidavit doctrine to deposition testimony applies to statements made in a confession

7

of judgment. Statements made in a confession of judgment to be filed with a court in the

8

event of default are a party’s stipulation that the statements are true and must be given

9

with candor, just like deposition testimony given under oath. A party cannot represent one

10

thing to a court to avoid the consequences of a court ruling and then file an affidavit in a

11

later proceeding disavowing his representation in the same way that a party cannot offer

12

a statement that contradicts his earlier deposition testimony.

13

Because the Court finds the Bankruptcy Court did not abuse its discretion in

14

invoking the sham affidavit rule, the Court need not, and does not, address any other

15

purported issue with the Bankruptcy Court’s decision not to credit Appellant’s Declaration.

16

Once the Bankruptcy Court found the later-filed declaration was a sham, it simply did not

17

need to consider it.
2.

18

Whether the $85 Million Debt is Dischargeable

19

Appellant’s core contention on appeal is that the Bankruptcy Court erred in finding

20

the COJ issue preclusive with respect to Appellant’s fraud, thus finding the $85 million

21

debt in the COJ nondischargeable. (ECF No. 9 at 30, 35-38.) Appellees counter that the

22

Bankruptcy Court’s finding that the COJ precluded a new trial on whether Appellant

23

committed fraud was correct because the COJ satisfied the required elements of issue

24

preclusion. (ECF No. 11 at 30.) The Court agrees with Appellees. The Bankruptcy court

25
26
4

27
28

The later-filed declaration was self-serving because Appellant faced actually
having to pay the $85 million he owes Appellees under the COJ if he lost at summary
judgment, which would incentivize him to disavow the statements he previously signed
onto in the COJ.
11

1

did not err in giving the facts in the COJ issue preclusive effect and finding the debt in the

2

COJ nondischargeable.

3

The parties—and the Court—agree that Nevada law governs the issue preclusion

4

analysis here, and agree as to the appropriate standard. (ECF Nos. 9 at 35, 11 at 30.)

5

Four factors “are necessary for application of issue preclusion: (1) the issue decided in the

6

prior litigation must be identical to the issue presented in the current action; (2) the initial

7

ruling must have been on the merits and have become final; (3) the party against whom

8

the judgment is asserted must have been a party or in privity with a party to the prior

9

litigation; and (4) the issue was actually and necessarily litigated.” Five Star Capital Corp.

10

v. Ruby, 194 P.3d 709, 713 (Nev. 2008) (internal quotations marks and citations omitted).

11

The Court agrees with the Bankruptcy Court that the COJ is entitled to issue

12

preclusive effect here. This finding is again driven by the unique circumstances present in

13

this case. Here, a court found that Appellant committed fraud. And even though those

14

findings were later vacated, they were transmuted into the COJ, which Appellant then

15

signed. Further, there can be no genuine dispute that the parties are not the same, or that

16

the issue—fraud—was the same in both proceedings. Thus, the Court affirms the

17

Bankruptcy Court’s finding that the COJ debt is nondischargeable based on the

18

Bankruptcy Court’s issue preclusion analysis. (Id. at 11-24.) See also In re Warren, 568

19

F.3d 1113, 1116 (9th Cir. 2009) (holding that the Court may affirm the bankruptcy court’s

20

decision “on any ground fairly supported by the record.”).

21

The Court is not persuaded by the various subsidiary arguments that Appellant

22

raised in his appeal. The Court notes that many of Appellant’s arguments were presented

23

to, and correctly rejected by, the Bankruptcy Court. For example, Appellant argues that

24

the Bankruptcy Court erred in giving the state court findings evidentiary weight, especially

25

because the state court decision was vacated. (ECF No. 9 at 31-33.) But as the

26

Bankruptcy Court pointed out, Appellant misses the point with those arguments. (ECF No.

27

10-5 at 10.) The Bankruptcy Court did not give preclusive effect to the vacated state court

28
12

1

decision—it gave preclusive effect to the COJ and only used the state court decision as

2

further evidence that the COJ was actually litigated for purposes of its issue preclusion

3

analysis. (Id. at 10-11.) Further, Appellant attempts to draw an unpersuasive distinction

4

between fraud and nondischargeability to argue that the Bankruptcy Court erred in its

5

claim preclusion analysis. (ECF No. 9 at 33-35.) But the Bankruptcy Court found the COJ

6

was nondischargeable because Appellant affirmed he committed fraud in it, not, as

7

Appellant seems to argue, that any party other than the Bankruptcy Court found the COJ

8

debt was nondischargeable. (ECF No. 10-5 at 24.)

9
10

In sum, the Court affirms the Bankruptcy Court’s decision that the COJ debt is
nondischargeable.5
Appellees’ Cross-Appeal

11

B.

12

The Bankruptcy Court denied judgment on Appellees’ fourth cause of action

13

following a trial, noting that it was unnecessary because Appellees were pursuing their

14

fourth cause of action in the alternative to their first and second causes of action. (ECF

15

No. 10-4 at 3.) Appellees assert that they were not pursuing alternative relief, and they

16

should be entitled to an additional approximately $65 million from Appellant—the

17

difference between the original state court judgment and the $85 million COJ—because

18

the Bankruptcy Court made the findings necessary to show Appellees were entitled to

19

relief on their fourth cause of action. (ECF No. 11 at 54-55.)

20

Despite the urging of both parties (ECF Nos. 9 at 50-51, 11 at 54-55, 15 at 27-29),

21

the Court declines to disturb the Bankruptcy Court’s ruling on Appellee’s fourth cause of

22
23
24
25
26
27
28

5

By signing the COJ, Appellant agreed that a set of facts was true—a nearly
identical set of facts to those found by a court after extensive litigation and a trial. Those
facts showed that Appellant committed fraud, and Appellees both relied on, and were
harmed by, Appellant’s statements that contributed to that fraud. The COJ was therefore
different than the prepetition waivers of dischargeability at issue in other cases cited by
the parties and the Bankruptcy Court. Said another way, the Court agrees with the
Bankruptcy Court and Appellees that this case is more like In re Johnson, Case No. 3:16AP-90186-LT, 2018 WL 1803002, at *1 (B.A.P. 9th Cir. Apr. 16, 2018), appeal filed IN RE:
PAUL JOHNSON, ET AL V. W3 INVESTMENT PARTNERS, LP, 18-60025 (May 1, 2018),
than In re Wank, 505 B.R. 878. (ECF No. 10-5 at 20-24 (explaining why this case is more
like In re Johnson than In re Wank).)
13

1

action. As noted above, the Court affirms the Bankruptcy Court’s finding that the COJ is

2

nondischargeable. That means Appellant owes Appellees approximately $85 million less

3

any money already paid. Finding that Appellant owes Appellees any more than that would

4

be overreach, especially where, as here, the first and second causes of action require that

5

Appellant’s statements in the COJ are true, and the fourth cause of action requires that

6

they are false. Those alternate realities cannot easily coexist. In sum, the Court affirms

7

the Bankruptcy Court’s Order in this case.

8

VI.

CONCLUSION

9

The Court notes that the parties made several arguments and cited to several cases

10

not discussed above. The Court has reviewed these arguments and cases and determines

11

that they do not warrant discussion as they do not affect the outcome of this appeal.

12

It is therefore ordered that the Bankruptcy Court’s Order is affirmed.

13

It is further ordered that Appellees’ motion to strike (ECF No. 13) is granted. The

14

Clerk of Court is directed to strike AER 43 and 44, and strike Section (IV)(F)(9) of

15

Appellant’s opening brief (ECF Nos. 9 at 27-29, 10-44, 10-45).

16

It is further ordered that Appellees’ motion to substitute parties (ECF No. 20) is

17

granted. The Clerk of Court is also directed to substitute Maryanna Herbst, as trustee of

18

the Herbst Family Trust dated December 17, 2002, in place and instead of Jerry Herbst.

19
20

The Clerk of Court is further directed to forward a copy of this order to the
Bankruptcy Court.

21
22

DATED THIS 22nd day of January 2019.

23
24
MIRANDA M. DU
UNITED STATES DISTRICT JUDGE

25
26
27
28
14