WALTERS et al v. TEHRANI
OPINION. Signed by Judge Kevin McNulty on 4/21/15. (DD, )
UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NEW JERSEY
Tennyson WALTERS and Karlene
Civ. No. 2:13-6544 (KM)
KEVIN MCNULTY, U.S.D.J.:
Appellants Tennyson Walters and Karlene Rawle-Walters appeal
from an order by Judge Rosemary Gambardella of the United States
Bankruptcy Court for the District of New Jersey. (Notice of Appeal, ECF
No. 1.)’ Judge Gambardella granted summary judgment to Appellee
Nahid Tehrani and declared the Walterses’ debt to Tehrani to be nondischargeable based upon a finding of actual fraud by the Walterses.
Judge Gambardella also denied the Walterses’ motions to compel
discovery, to dismiss the case, and to impose sanctions for an alleged
violation of the automatic stay. See Bankr. Dec. 6, 2012 Order, Tehrani v.
Walters et al., Adv. No. 10-1945 (RG), ECF (“Adv. 10-1945 ECF”) No. 23.2
For the reasons set forth below, the decision of the bankruptcy
court is AFFIRMED.
Judge Gambardella’s order was dated December 6, 2012 and entered on
the docket on December 7, 2012.
This entry and other docket entries for the bankruptcy case and for
adversary proceedings thereunder are available through the Bankruptcy Court’s
ECF filing system.
This case arises out of loan transactions between Tehrani and the
Walterses. The Walterses owned several entities that invested in real
estate properties. (Transcript of Oral Bankruptcy Court Opinion (“Bankr.
Op.”) 4:23—25).4 Karlene Walters is an attorney of the State of New Jersey
and the principal of Karlene Rawle-Walters, Attorney at Law, P.C., a
corporation engaging in legal practice and investment activities. Bankr.
Tehrani alleged in bankruptcy court that she made several loans to
the Walterses and their real estate entities. The Walterses allegedly
promised Tehrani that they would secure the loans with a first lien on
properties they purchased with the loan proceeds. Id. 5:17—21. Karlene
Walters, as attorney, allegedly promised to duly record the liens and
obtain title insurance on the properties, but did not do so. Id. 5:21—6:7.
Instead, she deceived Tehrani by, inter alia, sending her fraudulent
notes, mortgages, and insurance policy documents; removing Tehrani’s
name as an insured from policy documents; not recording Tehrani’s
mortgages; and inducing Tehrani to make additional loans by
fraudulently representing that she would hold purchase money
mortgages or first lien positions on certain property. Id. 6:24—7:1; 8:2—4;
8:8—13; 9:10—13; 10:8—17; 10:24—11:2; 11:20—12:6.
The Walterses responded to these allegations by asserting that
Rather than setting forth a Statement of Facts, the Walterses incorporate
by reference the facts set forth in nine different submissions to other courts, as
well as the facts outlined in their Preliminary Statement. (Walterses Br. 18—20.)
Tehrani does not include a distinct statement of facts in her brief. The facts set
forth here are taken from Judge Gambardella’s opinion, and confirmed by
review of the record.
Bankruptcy Judge Rosemary Gambardella read her opinion into the
record on November 16, 2012. The transcript is referred to herein as “Bankr.
Op.” It may be found at Adv. 10-1945 ECF No. 3. (RG).
relevant secured loans were fully repaid and offering various
explanations for their failure to record certain mortgages. Id. 12:11—
B. Procedural history
On March 17, 2008, Tehrani and other parties first brought a
complaint against the Walterses and their real estate entities in the New
Jersey Superior Court, Bergen County, Law Division. Bankr. Op. 13:24—
14:4. In that state court case, the Honorable Elijah J. Miller, J.S.C.,
suppressed the defenses of the Walterses because they had repeatedly
failed to fulfill their discovery obligations.
First, on September 11, 2009, Judge Miller ordered the
suppression of the Walterses’ defenses without prejudice and extended
the discovery deadline. Id. 14:7—9. Then, on November 28, 2009, Judge
Miller issued another order, in which he denied the Walterses’ motion to
vacate his September 11, 2009 order but also denied Tehrani’s motion to
suppress the Walterses’ answers. Id. 14:9—13. Then, in a December 11,
2009 addendum to an order dated November 28, 2009, Judge Miller
noted that the Walterses were “still delinquent in regard to the requested
discovery” and that there was “a bona fide dispute as to the adequacy of
the answers which must be determined before a disposition of either a
dismissal with prejudice or a motion to restore the dismissed pleadings.”
Id. 14:14—19. He ordered the Walterses to “provide more specific answers
within 25 days hereof.
or face sanctions under R. 4:23-2b.” Id. 14:20—
23. Finally, in an order filed January 22, 2010, Judge Miller suppressed
the Walterses’ defenses with prejudice for failure to comply with
discovery obligations and for failing to serve Tehrani with fully responsive
answers to her discovery request. Id. 14:24—15:6.
In an addendum to that January 22, 2010 Order, Judge Miller
explained the Walterses’ bad faith failures to comply with discovery
orders as follows:
This matter arises out of a breach of contract action in
regard to a real estate closing. The Court would like to note
that the discovery end date in this matter was November 17,
2009 and that a trial date has not been scheduled in this
matter. This is the second time the defendants have
submitted a motion requesting that the Court vacate the
September 11, 2009 suppression order and reinstate the
defendants’ defenses. Further, this Court directed
defendants to provide more specific answers within 21 days
of this Court’s November 20, 2009 order or face sanctions.
However, to date, the defendants are still delinquent in
regard to the requested discovery and the defendants’
moving papers again failed to include an affidavit reciting
that the discovery asserted to have been withheld has been
fully and responsively provided. Critically, defendants have
failed to provide an accounting which this Court agreed with
plaintiffs is a material deficiency. This matter arises out of a
contract dispute regarding a real estate closing and funds
which are allegedly due to the plaintiffs. An accounting is
arguably necessary to make such a determination.
Id. 15:7—16:2. The Walterses moved for reconsideration of Judge Miller’s
order suppressing their defenses with prejudice, and Judge Miller denied
their motion on March 5, 2010. Id. 16:3—6; see Super. Ct. Mar. 5, 2010
Order, Tehrani v. Pembroke Holdings, LLC, et al., No. BER-L-2160-08
(“Super. Ct. Mar. 5, 2010 Order”).
On April 21, 2010, the Walterses filed a Chapter 7 petition in
Judge Miller’s decisions here are consonant with the procedures
prescribed by the New Jersey Rules of Court. Initially, a discovery default may
lead to dismissal or suppression without prejudice. If the default remains, the
aggrieved party may move for an order of dismissal or suppression with
prejudice, which may be granted if the adversary does not respond with an
affidavit demonstrating that the discovery has been furnished or, after due
diligence, cannot be furnished. N.J. Ct. R. 4:23-5.
A copy of Judge Miller’s order was attached as Exhibit 58 to the
Walterses’ Response to Tehrani’s Motion for Summary Judgment, dated June
14, 2011, in the adversary proceeding before Judge Gambardella, available
through the Bankruptcy Court’s ECF filing system: Adv. 10-1945, ECF No. 126.
bankruptcy court, which automatically stayed the pending state court
proceedings. Id. 16:7—11. In the Schedules to their petition, the Walterses
listed the pending state court lawsuit as well as properties related to the
state court litigation and loan obligations owed to Tehrani. Id. 16:21—24.
On June 10, 2010, Tehrani moved for the bankruptcy court to abstain in
favor of the pending state court proceedings, arguing that the relevant
issues could be fairly resolved in state court. Id. 17:16—22. The Walterses
opposed the motion, arguing that Tehrani was improperly attempting to
forum shop and that the bankruptcy court should resolve the issues
raised in the state court case. Id. 17:24—18:2.
The bankruptcy court granted the abstention motion and, on July
16, 2010, lifted the automatic stay to allow the state court case to
proceed to final judgment. Id. 18:3—5; see Bankr. Pet. 10-22037 ECF No.
25. In that order, Judge Gambardella specified that
the enforcement of any Final Judgment and the issue of non
dischargeability as to any conclusions of law and findings of
fact made in determining the Final Judgment are reserved by
the Bankruptcy Court for final adjudication, and Tehrani will
not proceed in any forum but for the Bankruptcy Court with
respect to any action taken after the entry of Final Judgment
by Judge Miller.
Bankr. Pet. 10-22037 ECF No. 25; Bankr. Op. 18:5—12.
On August 25, 2010, in the state proceeding, Judge Miller
conducted a proof hearing on the issues of damages and fraud. Bankr.
Op. 18:18—20:2. After that hearing, Judge Miller found that the Walterses
had engaged in a pattern of fraudulent activity, transferring properties
among family members and their owned entities for as little as $10 and
violating their promises to Tehrani. Id. 19:12—21:7. Judge Miller reasoned
that “clearly [this fraud] requires penetrating the corporate veil and
proceeding against [the Walterses] personally and individually and
severally.” Id. 21:15—19 (citing Tr. of Super. Ct. of N.J. Hr’g, Tehrani et al.
v. Pembroke Holdings, LLC, et al., Civ. No. L-2160-08, Aug. 25, 2010)
(“Proof Hearing Tr.”). As for the Walterses’ debt, Judge Miller found it to
be “possibly if not completely non-dischargeable, citing the bankruptcy
code 11 U.S.C. Section 523(a)(2).” Id. 20:22—21:3.
On September 7, 2010, Judge Miller issued an order of final
judgment by default. Id. 21:9—il 8 Judge Miller held that the Walterses,
along with the other defendants, were jointly and severally liable to
Tehrani for compensatory damages (1) based on breach of contract,
piercing the corporate veil, and fraud, for $1,827,337.34, plus costs of
suit; and (2) based on professional negligence (legal malpractice), piercing
the corporate veil, and fraud, for $1,747,026.50, plus costs of suit. Id.
21:11—25. Judge Miller also ordered the Walterses and their professional
associates to pay costs and attorneys’ fees in the amount of $42,764.72.
Meanwhile, on July 27, 2010, in bankruptcy court, Tehrani had
filed an adversary proceeding against the Walterses seeking to have the
debt declared non-dischargeable. Bankr. Op. 18:13—17; see Adv. 10-1945
ECF No. 1. Tehrani alleged (1) that the Walterses’ “conduct constituted a
breach of the note and mortgage for non-payment of the monthly
mortgage payments, as well as breach of the implied covenant of good
faith and fair dealing”; (2) that the Walterses intentionally breached their
duty to ensure that Tehrani’s mortgage loans would receive a first lien
The transcript of the hearing before Judge Miller was attached as
Exhibits P53-i, P53-2, P53-3, and P-53-4 to the Certification of Joseph V.
Meyers, dated June 6, 2011, submitted in support of Tehrani’s motion for
summary judgment in the adversary proceeding before Judge Gambardella:
Adv. 10-1945 ECF No. 8-16, 8-17, 8-18, 8-19. I will refer to it as the “Proof
A copy of Judge Miller’s order was attached as Exhibit P-52 to the
Certification of Joseph V. Meyers, dated June 6, 2011, submitted in support of
Tehrani’s motion for summary judgment in the adversary proceeding before
Judge Gambardella, available through the Bankruptcy Court’s ECF filing
system: Adv. 10-1945 ECF No. 8-15.
priority and title insurance; (3) that Karlene Walters knowingly breached
her duty to Tehrani by misappropriating funds from an attorney trust
account contrary to her promises to Tehrani and professional legal
obligations to Tehrani; and (4) that the Walterses “have concealed,
destroyed, mutilated, falsified or failed to keep or preserve recorded
information,” including “an accounting of monies loaned to them.”
Bankr. Op. 23:15—24:24. Tehrani sought an order of non-dischargeability
of the Walterses’ debt under 11 U.S.C.
727(a)(2)(A) & (B), and (a)(3)—(5),
as well as attorneys’ fees and costs. Id. 24:25—3.
The Walterses generally denied the first, second, and third counts.
They responded to the fourth by alleging that Tehrani and her attorney,
Joseph V. Meyers, misled the state court by falsely claiming that the
Walterses had not provided Tehrani with accounting information, when
in fact the Walterses had provided that information. Id. 25:13—22.
On May 6, 2011, in the adversary proceeding, Tehrani filed for
summary judgment, seeking to have the Walterses’ debt declared nondischargeable. Her motion attached the record from Judge Miller’s proof
hearing. Id. 26:12—17. Tehrani argued that the bankruptcy court should
give collateral estoppel effect to Judge Miller’s finding of fraud. Id. 26—2 7.
The Walterses argued that: (1) collateral estoppel should not be
given to the state court findings because they were based on information
that Tehrani and her attorney either misrepresented or withheld, id.
29:14—22; (2) the state court findings were invalid because Judge Miller
did not consider the Walterses’ motion to vacate judgment, id. 30: 1—9;
On September 3, 2010, the Walterses filed a motion asking Judge
Gambardella to “Allow State Court to View Opposition Papers and Debtors to
Appeal State Courts Order.” Bankr. Pet. 10-22037 ECF No. 44. “Opposition
papers” seems to be a reference to the Walterses’ proposed state court motion
for relief from judgment pursuant to N.J. Ct. R. 4:50-1. See id. ECF No. 44-4.
On December 1, 2010, Judge Gambardella denied the Walterses’ motion. See
Bankr. Pet. 10-22037 ECF No. 49. No direct appeal was filed from that denial,
(3) res judicata and collateral estoppel should not apply because the
state court judgment was not on the merits, because Judge Miller had
suppressed the Walterses’ defenses based on bad faith conduct in
discovery, icZ. 30:21—31:14; and (4) issues of material fact remained,
including whether the Walterses committed fraud and whether Tehrani
and her counsel acted illegally or perpetrated a “cover-up” to obtain the
state court judgment, id. 30:10—20. The Walterses asserted that they did
not commit fraud and that Tehrani’s loans were all repaid in full. Id.
The Walterses also cross-moved for Judge Gambardella (1) “to
compel discovery or dismiss the case for failure to provide discovery or
for entry of default and default judgment, and for contempt of court,
sanctions and damages for failure to provide discovery”; (2) “for contempt
of court, sanctions and damages, against Nahid Tehrani and Joseph V.
Meyers Esq., for violation of the automatic stay and for violation of Judge
Gambardella’s bankruptcy court order dated 7/16/10”; and (3) “for relief
from judgment or order.” Id.; see Adv. 10-1945 ECF No. 11.
Judge Gambardella granted summary judgment for Tehrani and
entered an order declaring the Walterses’ debts to be non-dischargeable.
In so doing, Judge Gambardella gave collateral estoppel effect to the
findings of the state court. Judge Gambardella also denied the Walterses’
STANDARDS OF REVIEW
This District Court has jurisdiction to hear appeals of final
judgments and orders of the Bankruptcy Court pursuant to 28 U.S.C.
158(a)(1). A district court reviews “the bankruptcy court’s legal
determinations de novo, its factual findings for clear error and its
but the Walterses contend that it rendered reliance on the state court findings
unfair. I discuss that contention at p. 20, infra.
exercise of discretion for abuse thereof.”’ In re American Pad & Paper Co.,
478 F.3d 546, 551 (3d Cir. 2007) (quoting In re United Healthcare Sys.,
Inc., 396 F.3d 247, 249 (3d Cir. 2005) (quotation and citation omitted)). A
district must separately analyze mixed findings of fact and conclusions of
law, and appropriately apply the applicable standards—clearly erroneous
or de novo—to each component. Meridian Bank v. Alten, 958 F.2d 1226,
1229 (3d Cir. 1992) (citing In re Sharon Steel Corp., 871 F.2d 1217, 1222
(3d Cir. 1989) and Universal Minerals, Inc. v. C.A. Hughes & Co., 669 F.2d
98, 102—03 (3d Cir. 1981)). “The district court..
may affirm, modify, or
reverse a bankruptcy judge’s judgment, order, or decree or remand with
instructions for further proceedings.” Fed. R. Bankr. p. 8013.
“Because the applicability vel non of collateral estoppel is a
question of law, we ordinarily exercise plenary review over a district
court’s collateral estoppel analysis.” Howard Hess Dental Laboratories
Inc. v. Dentsply Intern., Inc., 602 F.3d 237, 247 n.3 (3d Cir. 2010) (in
context of summary judgment). An award of summary judgment is
likewise given de novo review, employing the same standard that applied
in the trial-level court. See Torre v. Liberty Mut. Fire Ins. Co., No. 142733, 2015 WL 1344684 at *1 n.3 (3d Cir. Mar. 26, 2015) (citing Suopys
v. Omaha Prop. & Cas., 404 F.3d 805, 809 (3d Cir. 2005)). That standard
provides that a court “shall grant summary judgment if the movant
shows that there is no genuine dispute as to any material fact and the
movant is entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(a);’°
see also Anderson v. Liberty Lobby, Inc., 477 U.s. 242, 248 (1986);
Daniels v. Sch. Dist. Of Phila., No. 14-1503, 2015 WL 252428, at *6 (3d
Cir. Jan. 20, 2015).
A motion for sanctions is generally reviewable for abuse of
discretion, but the issue here is primarily one of law as to the scope of
Fed. R. Civ. p. 56 is made applicable to the bankruptcy court by Fed. R.
Bankr. P. 7056.
the automatic stay, reviewable de novo. See Koon v. United States, 518
U.s. 81, 100 (1996) (a court “by definition abuses its discretion when it
makes an error of law”); Doeblers’ Pennsylvania Hybrids, Inc. v. Doebler
442 F.3d 812, 819 (3d Cir. 2006) (abuse of discretion may encompass “a
clearly erroneous finding of fact, an errant conclusion of law, or an
improper application of law to fact”).
The Walterses have filed a notice of appeal from Judge
Gambardella’s Order for Final Judgment Declaring the Debt to be NonDischargeable as against Tennyson Walters and Karlene A. Rawle
Walters, dated December 6, 2012. (See Notice of Appeal, ECF No. 1.) In
addition, the Walterses assert that Judge Gambardella’s decisions were
“predetermined,” by which they mean that Judge Gambardella’s rulings
were infected by bias against them. (See, e.g., Walterses Br. 29, ECF No.
The two issues stated in text are the focus of this appeal, as they relate
to the actual order from which the appeal was taken. The Walterses quarrel
with many rulings of the bankruptcy court, which they did not appeal. (See
Walterses Br. 1—3.) Except as they bear on the issues of dischargeability or
judicial bias, I do not address the Walterses’ additional arguments regarding
the following: (1) Judge Gambardella’s order regarding abstention and lifting the
stay of state court proceedings (Walterses Br. 28—29 (“Point II”)); Bankr. Pet. 1022037 ECF No. 25; (2) Judge Gambardella’s order denying the Walterses’
motion to allow the state court to view their opposition papers (Walterses Br.
29—36 (“Point III”)); Bankr. Pet. 10-22037 ECF No. 49; (3) Judge Gambardella’s
failure “to compel [Tehrani] to completely address the allegations of tax fraud
against her and to disclose any attempts to alter her tax liability that would
contribute to spoliation of evidence in this case” (Walterses Br. 40—41 (“Point
VI”)); (4) Judge Gambardella’s refusal to vacate the state court’s judgment
“because legal malpractice judgment in state court is invalid” (Id. 42—45 (“Point
VII”)); and (5) Judge Gambardella’s order denying the Walterses’ “motion to
amend findings or for additional fmdings or to alter or amend judgment” or her
denial of the Walterses’ “motion for reconsideration of judicial decision and to
grant appropriate ruling under Fed. R. Bankr. 7052, 9023, and 9024” (Id. 48—
50); seeAdv. 10-1945 ECF No. 30. The Walterses’ two motions for
reconsideration are also not now on appeal. SeeAdv. 10-1945 ECF Nos. 25, 32.
I note, however, that those motions do not appear to raise any new arguments.
A. Judicial Bias and Disqualification
Because it potentially affects all issues, I first address the
Walterses’ accusation of judicial bias. They claim that Judge
Gambardella was prejudiced, based on her handling of the case and her
familiarity with Tehrani’s attorney. The facts, however, do not raise any
reasonable inference of bias.’
A judge is required to “disqualify [herself] in any proceeding in
which [her] impartiality might reasonably be questioned” or “where [she]
has a personal bias or prejudice concerning a party.” 28 U.S.C.
(b) (1). The Third circuit has explained the standard for evaluating that
issue as follows:
A party seeking recusal need not show actual bias on the
part of the court, only the possibility of bias.
455(a), if a reasonable [person], were [that person] to know
all the circumstances, would harbor doubts about the
judge’s impartiality under the applicable standard, then the
judge must recuse.
Generally, beliefs or opinions which merit recusal must
involve an extrajudicial factor. [O]pinions formed by the
judge on the basis of facts introduced or events occurring in
the course of the current proceedings, or of prior
proceedings, do not constitute a basis for a bias or partiality
motion unless they display a deep-seated favoritism or
antagonism that would make fair judgment impossible.
Selkridge v. United of Omaha Life Ins. Co., 360 F.3d 155, 167 (3d Cir.
2004) (internal quotations and citations omitted). See also Liteky v.
United States, 510 U.S. 540, 555 (1994).
The Walterses argue that “[a] review of the relationships in the
bankruptcy case raises issues of bias and abuse of discretion.”
(Walterses Br. 6.) They cite the following facts: Tehrani’s counsel, Vincent
The Walterses did not move for recusal in the bankruptcy court.
Technically, the argument would be that Judge Garnbardella committed plain
error in not recusing herself sua sponte. I set that aside.
D. Commisa, Esq. (“Attorney Commisa”), is related to the late Vincent J.
Commisa (“Judge Commisa”), who was the first Chief Judge of the United
States Bankruptcy Court for the District of New Jersey. (Id.) (I take
judicial notice that Judge Commisa died in 1990.) The presiding
bankruptcy judge in this case, Rosemary Gambardella, clerked for Judge
Commisa. (Id.) (According to online sources, her clerkship occurred in
1979—80.) Judge Gambardella was also the President of the Bankruptcy
Inn of Court, an organization “formed to honor [Judge Commisa] and
some other jurists.” (Id.) Finally, “[i]t would be reasonable to assume
therefore that Judge Gambardella and [Attorney Commisal know each
other very well,” because Attorney Commisa “has practiced in
bankruptcy court for over two decades.” (Id. 6—7.)
Even assuming all of the above is true, it comes nowhere near a
showing of judicial bias requiring disqualification. It is unreasonable to
infer bias based on Attorney Commisa’s regular practice of bankruptcy
law in this district. Indeed, if an attorney could not litigate more than a
certain number of cases in a particular court without creating an
inference of bias, the judicial system might grind to a halt. And any
connection Judge Gambardella had with Judge Commisa, who died 25
years ago, is similarly innocuous absent any further proof of bias. The
Walterses’ attribution of bias based on the judge’s familiarity with, or
connection to, either of the Commisas is wholly unpersuasive.
The Walterses also cite the “irregularit[yJ” of Judge Gambardella’s
having allegedly decided seventeen separate “pleadings and motions” in
favor of Tehrani. (Id. 7; 20—21.) A losing streak, without more, is not
suggestive of bias; it ordinarily reflects nothing more or less than the
judge’s view of the merits. At any rate, to give rise to recusal, a source of
bias must generally be extrajudicial. See Selkridge, 360 F.3d at 167.
“Bias” does not encompass an opinion about the merits of a case formed
on the basis of the record of that case.
Finally, the Walterses detect a nefarious “pattern from the series of
pleadings by plaintiff and the corresponding rulings by the court.” They
refer to the bankruptcy court’s limited lifting of the stay in favor of the
state proceedings, followed by its adoption, via collateral estoppel, of the
state court’s findings of fraud. All of this, the Walterses argue, was a
complex scheme orchestrated by the bankruptcy court so that “[aill of
the ducks would then be in line for the bankruptcy court to enter a
nondischargeable judgment against the defendant by reason of fraud.”
(Walterses Br. 8.)
There is nothing erroneous, let alone improper, about the
bankruptcy court’s application of settled legal principles of abstention
and its limited lifting of the automatic stay. Those doctrines are designed
to avoid simultaneous proceedings in two courts on the same facts and
issues. Those concerns are particularly acute where, as here, a party
runs to bankruptcy court following adverse rulings in a state court case
that has been pending for some time. Restarting the case in a second,
parallel forum would risk inconsistent judgments, waste valuable
resources, and unfairly burden the parties.’
The Walterses do not raise any substantial arguments of bias, let
alone extrajudicial bias. I proceed to the merits of their appeal.
B. Collateral Estoppel Effect of the State Court Findings of
The Walterses argue that Judge Gambardella, in the course of
granting summary judgment for Tehrani, should not have given collateral
estoppel effect to the state court findings of fraud. I conclude that Judge
Gambardella properly applied the law of collateral estoppel.
“The preclusive effect of a state court judgment in a subsequent
This theory is also improbably complex. If Judge Gambardella wished to
rule against the Walterses, she had the power to do so; it did not require a to
and-fro shuttle maneuver with the state court.
federal lawsuit generally is determined by the full faith and credit
commands a federal court to accept the rules chosen
by the State from which the judgment is taken.” Marrese v. Am. Acad. of
Orthopaedic Surgeons, 470 U.S. 373, 380 (1985); see also Greenleafv.
Garlock, Inc., 174 F.3d 352, 357 (3d Cir. 1999). Therefore, the New
Jersey doctrine of collateral estoppel applies in this case.
In New Jersey, collateral estoppel “represents the ‘branch of the
broader law of res judicata which bars relitigation of any issue which was
actually determined in a prior action, generally between the same
parties, involving a different claim or cause of action.” Tarus v. Borough
of Pine Hill, 916 A.2d 1036, 1050 (N.J. 2007) (quoting Sacharow v.
Sacharow, 826 A.2d 710, 719 (N.J. 2003)).
A party asserting collateral estoppel in New Jersey must show that:
(1) the issue to be precluded is identical to the issue decided
in the prior proceeding; (2) the issue was actually litigated in
the prior proceeding; (3) the court in the prior proceeding
issued a final judgment on the merits; (4) the determination
of the issue was essential to the prior judgment; and (5) the
party against whom the doctrine is asserted was a party to
or in privity with a party to the earlier proceeding.
In re Mullarkey, 536 F.3d 215, 225 (3d Cir. 2008) (quoting Twp. of
Middletown v. Simon, 937 A.2d 949, 954 (N.J. 2008)); see also In re
Docteroff 133 F.3d 210, 2 14—15 (3d Cir. 1997) (federal collateral estoppel
allows a court to accept facts found by a previous court).
Thus a bankruptcy court deciding whether a debt is dischargeable
may “through the doctrine of collateral estoppel.
established by the prior state court record as evidence of non
50:13—15. The doctrine of collateral
estoppel, however, does not subsume the bankruptcy court’s authority to
decide whether a debt is non-dischargeable. That is, the bankruptcy
court is not limited to “a review of the judgment and record in the prior
state-court proceeding when considering the dischargeability of.
debt.” Brown u. Felsen, 442 U.S. 127, 138—39 (1979). Thus Judge
Gambardella permissibly reserved “the ultimate determination regarding
the debt’s dischargeability” to herself. Bankr. Op. 50:11—12.
Judge Gambardella properly analyzed the elements of collateral
estoppel, and she did not exceed her proper authority in accepting facts
established by Judge Miller as evidence of non-dischargeability on the
basis of fraud.
i. Identical issue (Element 1)
Addressing the first element of collateral estoppel, Judge
Gambardella correctly found that the state court and the bankruptcy
court proceedings had in common a critical issue: whether the Walterses
committed fraud. That issue, obviously relevant to a state action for
fraud, is also central to the debt’s dischargeability in bankruptcy. Bankr.
Op. 51:3—7. The Bankruptcy Code provides that discharge is unavailable
“from any debt.
obtained by false pretenses, a false representation, or
actual fraud.” 11 U.S.C. § 523(a)(2)(A). To establish such fraud, a party
must show by a preponderance of the evidence that:
(1) the Debtor obtained money, property or services through
a material misrepresentation; (2) the Debtor, at the time of
the transaction, had knowledge of the falsity of the
misrepresentation or reckless disregard or gross
recklessness as to its truth; (3) the Debtor made the
misrepresentation with intent to deceive; and (4) the
Plaintiffs reasonably relied on the representation; and (5) the
Plaintiffs suffered loss, which was proximately caused by the
In re Cohen, 185 B.R. 180, 186 (Bankr. D.N.J. 1995) affd, 191 B.R. 599
(D.N.J. 1996), affd, 106 F.3d 52 (3d Cir. 1997) aff’d sub nom. Cohen v.
de la Cruz, 523 U.S. 213 (1998).
The state court made a finding of actual fraud by the Walterses.
Judge Miller held a hearing, heard testimony, and thoroughly analyzed
the evidence under each element of fraud. He found that the Walterses’
fraud was “amply demonstrated.” Bankr.
56:24—25 (citing Proof
Hearing Tr. 160). Indeed, Judge Miller found fraud “by clear and
convincing evidence, not just a preponderance of the evidence.” Bankr.
Op. 52:1—4. Judge Gambardella was authorized to, and did, adopt Judge
Miller’s findings as to each element of fraud. She properly accepted
Judge Miller’s findings as to the issue of fraud, an issue central to the
issue of dischargeability in the bankruptcy court.
ii. Actually litigated (Element 2)
Addressing the second element of collateral estoppel, Judge
Gambardella found that the issue of fraud was “actually litigated” in
state court. Bankr. Op. 57:12—21.
The Walterses maintain that, because Judge Miller suppressed
their defenses, the state court proceeding was not actually litigated on
the merits. Id. 57:16—21. The Walterses did participate in the state court
action, however: they filed an answer to the complaint, filed moving
papers, communicated with opposing counsel, and “purportedly, in their
view, attempted to comply with discovery orders.” Id. 58:24—59:4. Judge
Gambardella therefore found that the state court action was actually
litigated and decided on the merits.
In support of that conclusion, Judge Gambardella persuasively
cited In re Docteroff 133 F.3d 210 (3d Cir. 1997), a case applying federal
collateral estoppel principles. There, the United States Court of Appeals
for the Third Circuit decided an issue very close to the one presented
here: “whether a default judgment entered against a defendant in a fraud
action as a sanction for the defendant’s repeated and bad-faith refusals
to comply with discovery requests collaterally estops the defendant from
claiming that the debt underlying the judgment is dischargeable in
bankruptcy.” Id. at 2 12—13. That defendant, Docteroff, had been sued for
fraud in connection with a debt in federal court in the Western District of
Washington. Because of Docteroff’s willful and bad faith “non-compliance
with discovery rules and Court orders,” the district court entered default
judgment against Docteroff on the issue of liability. Id. at 213—14
(internal quotation and citation omitted). Before the district court could
proceed with a trial to determine damages, Docteroff filed for bankruptcy
in the U.S. Bankruptcy Court for this district, seeking to have the debt
declared dischargeable. Id. at 214. The plaintiffs then filed an adversary
action against Docteroff, asking the bankruptcy court to give collateral
estoppel effect to the Western District of Washington’s determination of
fraud and find the debt non-dischargeable. Id. The bankruptcy court
granted summary judgment to the plaintiffs, giving the Western District
of Washington’s decision collateral estoppel effect. Id. This district court
and the Third Circuit affirmed the bankruptcy court’s decision.
The Third Circuit held that “Docteroff had every opportunity to
fully and fairly litigate any relevant issue in the district court in
Washington,” and that he had “simply elected not to comply with court
orders.” Id. at 215. That selective participation distinguished Docteroff
from “a typical default judgment where a defendant neglects or elects not
to participate in any manner because of the inconvenience of the forum
selected by the plaintiffs, the expense associated with defendant the
lawsuit, or some other reason.” Id. Rather, Docteroff had “participated
extensively in the lawsuit,” in which “[h]e filed an answer, noticed
deposition, engaged several lawyers, including local counsel, filed papers
with the court, and corresponded with opposing counsel.” Id. Therefore,
the Third Circuit “[did] not hesitate in holding that a party such as
Docteroff, who deliberately prevents resolution of a lawsuit, should be
deemed to have actually litigated an issue for purposes of collateral
estoppel application.” Id.
(citing In re Daily,
InreBush,62F.3d 1319 (11th Cir. 1995)).
47 F.3d 365 (9th Cir. 1995);
This case is identical to Docteroff in every way that matters. In
state court, the Walterses were given ample warning and multiple
opportunities to comply with discovery procedures, but chose not to do
so. As a result, they were eventually precluded from presenting their
defenses. The Walterses, like the defendant in Docteroff actively
participated in the state court proceeding. They filed an answer, filed
moving papers, communicated with opposing counsel, and engaged in
discovery disputes. Bankr.
58:24—59:4. Under those circumstances,
it was proper for Judge Gambardella to find that the Walterses had
actually litigated the case in state court for purposes of collateral
estoppel. “To hold otherwise would encourage behavior similar to [the
Walterses’] and give litigants who abuse the processes and dignity of the
court an undeserved second bite at the apple.” In re Docteroff 133 F.3d
New Jersey collateral estoppel principles are entirely consonant
with the Docteroff holding. A New Jersey court will apply collateral
estoppel “only when the defendant in the initial action had the
opportunity to fully and actively participate in the actual trial, and the
manner in which the trial was conducted merited a bar to relitigation of
the issues determined.” In re Azeglio, 422 B.R. 490, 495 (Bankr. D.N.J.
2010) (surveying New Jersey cases). This requires that “a party has had
his day in court on an issue” and that “a judgment on the merits is
entered in an adversarial context.” Id. (internal quotations omitted)
(quoting Zirger v. General Accident Ins. Co., 676 A.2d 1065, 1071 (N.J.
1996); Slowinski v. Valley National Bank, 624 A.2d 85, 90—91 (N.J.
Super. Ct. App. Div. 1993). True, New Jersey courts have denied
This is as good a place as any to address the general contentions,
scattered throughout the Walterses’ papers, that the state proceedings were
generally unfair or improper. I find, as did Judge Gambardella, that the
Walterses have made no showing whatever of any impropriety in the state court
proceedings. Bankr. Op. 68:7—14.
collateral estoppel where the defaulting defendant did not have a full and
fair opportunity to participate in the earlier proceedings. See, e.g.,
Slowinski, 624 A.2d at 88—91 (finding collateral estoppel inapplicable
where the named defendant in the previous action had not appeared at a
proof hearing and where another defendant had not been a party to or in
privity with a party to the previous action); Olivieri v. Y.M.F. Carpet, Inc.,
897 A.2d 1003, 1011—12, 1015 (N.J. 2006) (finding that an issue was not
fully litigated before an administrative tribunal where “there was nothing
in [the] record assuring that the
proceedings were recorded
the witnesses were sworn or that the witnesses were subjected to cross
that only competent evidence was received..
that the decision of the appeals examiner was fairly based on the proofs
adduced before him”); see also Gallo v. Tooley, No. 06-02523 DHS, 2007
WL 1071945, at *1_2 (Bankr. D.N.J. Apr. 3, 2007) (applying New Jersey
law and declining to give collateral estoppel effect to default judgment
where a pro se defendant had filed an answer and participated in
discovery, depositions, motion practièe, and mediation, but had failed to
appear at trial); In re Azeglio, 422 B.R. at 494—9 5 (finding that a New
Jersey court would not grant collateral estoppel effect to a default
judgment where there was “substantial participation in pretrial activity,
including filing responsive pleadings and participating in depositions,”
but the defendant’s attorney withdrew prior to trial, the defendant did
not receive notice of the trial, and the defendant did not appear at the
Here, by contrast, the Walterses had ample opportunity to fully
and actively participate in the state court case. The default judgment
against them was not a result of an attorney failure, of a lack of notice to
them about any of the proceedings, or of their failure to attend a proof
hearing. Rather, it was a result of their abuse of the state court process.
That the Walterses squandered their opportunity to fully and actively
litigate their case does not warrant this Court’s giving them another
opportunity to do so.
The Walterses object further that they were denied the opportunity
to seek relief from a state court order or judgment pursuant to N.J. Ct. R.
4:50-1. (That state rule is analogous to Fed. R. Civ. P. 60.) When the
Walterses presented that motion to the state court, Judge Miller noted
that Judge Gambardella had remanded the case to his court for the sole
purpose of conducting a proof hearing, and he confined the proceedings
to that. The state court case remained stayed for all other purposes. See
Proof Hearing Tr. 17:3—15; see also Bankr. Pet. 10-22037 ECF No. 46-6
at 5. The Walterses then asked Judge Gambardella to grant permission
for Judge Miller to hear their R. 4:50-1 motion. See id., ECF No. 44.
Judge Gambardella denied that motion on December 1, 2010. See id.,
ECF No. 49. The Walterses object, but do not offer any substantial basis
to conclude that the bankruptcy court committed legal error.
I do not think that Judge Gambardella’s December 1, 2010 ruling
rendered the state findings unworthy of deference. Recall that Judge
Miller suppressed the Walterses’ defenses only after affording them
multiple opportunities to cure their discovery defaults, in accordance
with State procedure. See N.J. Ct. R. 4:23-5; see also p.1- n.5, supra. He
then heard their motion for reconsideration, and denied that. See Super.
Ct. Mar. 5, 2010 Order. The Rule 4:50-1 motion, then, was to be the
Walterses’ third bite at the same apple. The Walterses protest supposed
procedural irregularities, but they never timely submitted proof of
compliance with their discovery obligations.
Collateral estoppel requires only that the prior proceeding have
possessed “significant procedural and substantive safeguards.” Winters v.
N. Hudson Reg’l Fire & Rescue, 50 A.3d 649, 661 (N.J. 2012) (internal
quotation and citation omitted). Such prior proceedings need not have
afforded the option of a motion to reopen judgment at all. Administrative
proceedings, for example, or a state Supreme Court order of disbarment,
New Jersey courts “accord administrative rulings that
otherwise satisfy collateral estoppel standards preclusive
effect if the proceedings provide ‘significant procedural and
substantive safeguards,’ similar to those that are provided to
litigants in courts of law.”
Feng Li v. Peng, 516 B.R. 26, 45 n.2 (D.N.J. 2014) (disbarment by
Disciplinary Review Board, affirmed by state Supreme Court) (quoting
Winters, 50 A.3d at 661 (administrative disciplinary proceedings)). Denial
of the opportunity to make an extraordinary motion to vacate judgment
does not so undermine the prior proceeding as to compel the conclusion
that the issue was not “actually litigated.”
As Olivieri noted, the collateral estoppel doctrine “has its roots in
equity.” 897 A.2d at 1009 (internal quotation and citation omitted). It
would be far from equitable to reward the Walterses’ bad faith conduct in
state court with another opportunity to litigate the issue of fraud in
federal bankruptcy court. Therefore, Judge Gambardella properly found
that for purposes of collateral estoppel, the Walterses had fully litigated
the issue of fraud in state court.
iii. Final judgment on the merits (Element 3)
Addressing the third element of collateral estoppel, Judge
Gambardella also properly found that the state court decision
constituted a “final judgment” on the merits.
“‘[Fjor purposes of issue preclusion.
‘final judgment’ includes
any prior adjudication of an issue in another action that is determined to
be sufficiently firm to be accorded conclusive effect.” In re Docteroff 133
F.3d at 217 (quoting Restatement (Second) of Judgments § 13 (1982)). A
judgment is sufficiently final where there is nothing to indicate that the
“court has any intention of revisiting the issue
that its findings are
unreliable, that [the losing party] did not have sufficient opportunity to
be heard before the court entered judgment, or that the
insufficient consideration to the issue.” Id. (citing In re Brown, 951 F.2d
564, 569 (3d Cir. 1991)).
As in Docteroff there is nothing here to suggest that Judge Miller’s
judgment was anything but final. The default was entered with due
deliberation, after the Walterses were given multiple opportunities to
comply with discovery obligations. Judge Miller held a proof hearing and
delivered a thorough and well-reasoned opinion regarding his findings as
to fraud and damages. He then denied a motion for reconsideration of
that order. There is nothing to indicate that Judge Miller intended to
revisit the issue. Therefore, Judge Gambardella properly found that
Judge Miller’s order was sufficiently firm to be given preclusive effect.
In short, Judge Miller’s order was final.
iv. Determination of issue was essential to prior judgment
Addressing the fourth element of collateral estoppel, Judge
Gambardella properly found that Judge Miller’s determination of fraud
was essential to his judgment.
Judge Gambardella lifted the stay on state court proceedings
specifically to allow the state court case to proceed to judgment. Bankr.
60:24—61:5. The state case did go forward, and Judge Miller found
that the Walterses had “clearly” committed fraud. Id. 61:14—15; see Proof
Hearing Tr. at 172. That determination was essential to the final
judgment, which was a finding in Tehrani’s favor on a claim of fraud.
v. Parties identical (Element 5)
The fifth element of collateral estoppel is that the party against
whom the doctrine is asserted was a party to or in privity with a party to
the earlier proceeding. Tehrani and the Walterses were themselves
parties to the state court proceeding. This element is satisfied.
I therefore affirm Judge Gambardella’s finding that the five
elements of collateral estoppel were satisfied. In connection with finding
the debt non-dischargeable, Judge Gambardella properly gave collateral
estoppel effect to the state court’s finding of fraud.
C. The Walterses’ cross-motions
The Walterses challenge Judge Gambardella’s denial of their crossmotions “to compel discovery or dismiss the case and for contempt of
court, sanctions and damages.” See Adv. 10-1945 ECF No. 11.
Specifically, the Walterses moved: (1) “to compel discovery or dismiss the
case for failure to provide discovery or for entry of default and default
judgment, and for contempt of court, sanctions and damages for failure
to provide discovery”; (2) “for relief from judgment or order”; and (3) “for
contempt of court, sanctions and damages, against Nahid Tehrani and
Joseph V. Meyers Esq., for violation of the automatic stay and for
violation of Judge Gambardella’s bankruptcy court order dated
As for the first motion, Judge Gambardella observed without
contradiction that the Walterses’ counsel “conceded that the debtors
were no longer pursuing contempt or sanctions [for discovery violations]
because [Tehrani], after the filing of the motion, provided answers in
discovery as to the current adversary proceeding.” Bankr.
(noting that this cross-motion had been rendered moot). Because the
Walterses do not state any specific reasons for their appeal of Judge
Gambardella’s denial of this first cross-motion, I do not address it any
As for the second motion, Judge Gambardella noted that the
Walterses’ counsel “clarified that they were seeking denial of summary
judgment so that the debtors could go forward with a full hearing and
acknowledged that [this] cross-motion was more in the vein of [their]
opposition to summary judgment.
state court order.” Bankr.
and not a request to set aside the
4 1:22—42:4. This, then, was not a version
of the Rule 4:50-1 motion for relief from judgment that the Walterses had
sought to assert in state court. Because the Walterses do not argue that
Judge Garnbardella misunderstood their counsel, I will likewise consider
this cross-motion to be integral to their opposition to summary
judgment, already discussed above.
As for the Walterses’ third motion, which sought damages and
sanctions against Tehrani and her counsel for violating the automatic
stay, I affirm Judge Gambardella’s denial. The Bankruptcy Code, 11
§ 362(a)(1), provides that the filing of a bankruptcy petition
automatically stays any other
judicial, administrative, or other action or proceeding against
the debtor that was or could have been commenced before
the commencement of the case under this title, or to recover
a claim against the debtor that arose before the
commencement of the case under this title.
The Walterses contend that Tehrani and her counsel violated the
automatic stay in bankruptcy when they filed a claim with the New
Jersey Lawyers’ Fund for Client Protection and a grievance with the
Office for Attorney Ethics regarding Karlene Rawle-Walters, who is an
attorney. Adv. 10-1945 ECF No. 11-1 at 29—33. Relatedly, the Walterses
argue that the actions of Tehrani and her counsel exceeded the scope of
Judge Gambardella’s order lifting the stay for the sole purpose of
allowing the state case to proceed to judgment. Adv. 10-1945 ECF No.
11-1 at 31; see In re Walters et al., Bankr. No. 10-22037 (RG) (“Bankr.
Pet. 10-22037 ECF”), ECF No. 25.
I agree with Judge Gambardella that Tehrani’s ethical complaints
did not violate the automatic stay. The stay provision of the Code
contains an exception for “the commencement or continuation of an
action or proceeding by a governmental unit.
to enforce such
police and regulatory power.” 11 U.S.C.
The term “governmental unit” means United States; State;
commonwealth; District; Territory; municipality; foreign
state; department, agency, or instrumentality of the United
States (but not a United States trustee while serving as a
trustee in a case under this title), a State, a Commonwealth,
a District, a Territory, a municipality, or a foreign state; or
other foreign or domestic government.
101. That exception for governmental units is to be
“construed broadly.” Penn Terra Ltd. v. Dep’t of Envtl. Res., Corn, of Pa.,
733 F.2d 267, 273 (3d Cir. 1984). The automatic stay is designed to give
bankrupts relief from the demands of creditors and permit an orderly
prioritization and disposition of claims against them, not to frustrate
The Office of Attorney Ethics and the New Jersey Lawyers’ Fund for
Client Protection are both entities of the Supreme Court of New Jersey.
See New Jersey Judiciary, Office of Attorney Ethics (Apr. 13, 2015, 11:38
AM), http: / / www.judiciary. state. nj .us/ oae 7; New Jersey Judiciary, New
Jersey Lawyers’ Fund for Client Protection (Apr. 13, 2015, 11:38 AM),
http:// www.judiciary. state. nj .us / cpf/. Judge Gambardella therefore
properly found that they are governmental units for purposes of the
exception to the automatic stay provision. Bankr. Op. 66:1—19.
An ethical complaint is, of course, just that; it is a regulation of
attorneys’ professional behavior, not a claim for damages in the ordinary
sense. A matter before the Lawyers’ Fund for Client Protection, too, is an
exercise of the state’s police power. At any rate it is technically a claim on
the Fund, not a claim for damages against the attorney. See In re Wade,
948 F.2d 1122, 1122—23 (9th Cir. 1991) (finding that disciplinary
proceedings are exempted from the automatic stay, as they fall under the
police or regulatory powers); See also In re Baillie, 368 B.R. 458, 467—68
(Bankr. W.D. Pa. 2007) aff’d in part sub nom. Pa. Lawyer’s Fund for
Client Sec. v. Baillie, No. 07CV1050, 2007 WL 2875501 (W.D. Pa. Oct. 3,
2007) (finding that proceedings before the Pennsylvania Lawyers Fund
for Client Security were not “against the debtor,” and thus did not violate
the automatic stay; and, even assuming that such actions were “against
the debtor,” the proceedings were an exercise of “police or regulatory
powers” that were exempt from the automatic stay); In re Universal Life
Church, Inc., 128 F.3d 1294, 1297 (9th Cir. 1997), as amended on denial
of reh’g (Dec. 30, 1997) (finding government actions to be exempt from
the automatic stay when they (1) are not primarily related “to the
protection of the government’s pecuniary interest in the debtor’s
property,” but rather “to matters of public safety and welfare and (2)
“effectuate public policy” rather than “adjudicate private rights”); In re
Minnich, 449 B.R. 679, 685—86 (Bankr. E.D. Pa. 2011) (using the In re
Universal Lfe Church, Inc. test to conclude that the IRS’s suspension of a
debtor’s participation in an electronic filing program was exempt from
the automatic stay).
I will therefore uphold Judge Gambardella’s order declining to
impose sanctions against Tehrani and her counsel for filing claims with
the Office of Attorney Ethics and the New Jersey Lawyers’ Fund for Client
For the foregoing reasons, the order of the bankruptcy court is
Dated: April 21, 2015
United States District Judge
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