UNITED STATES DISTRICT COURT EASTERN DISTRICT OF CALIFORNIA
September 28, 2009
DONALD BRADFORD STARK, APPELLANT,
BARBARA STARK, ET AL., APPELLEES.
The opinion of the court was delivered by: Oliver W. Wanger United States District Judge
ORDER ON BANKRUPTCY APPEAL (DOC. 1)
This is an appeal from a final judgment of the United States Bankruptcy Court for the Eastern District of California on August 31, 2007 granting summary judgment in favor of Plaintiffs and Appellees Barbara Stark, Elizabeth Stark, and Susan Tsapanos on their nondischargeability claim. The bankruptcy court ruled that a default judgment entered by a California probate court on May 3, 2006 is a non-dischargeable debt under 11 U.S.C. § 523(a)(4) based on the doctrine of collateral estoppel. In so ruling, the court gave preclusive effect to the probate court's findings that Defendant and Appellant Donald Bradford Stark had fraudulently misappropriated trust funds while acting as Trustee of the Richard E. Stark, Jr. Testamentary Trust (the "Stark Trust").
Appellant contends that the bankruptcy court erred in applying collateral estoppel to the probate court's findings of fact and conclusions of law because the probate court judgment is void under California law. Appellant argues the probate court judgment is void because the damages awarded by default judgment exceed the amount of damages originally pled in the probate petition in violation of California Code of Civil Procedure § 580. He further argues the bankruptcy court improperly gave preclusive effect to the probate court's findings and conclusions without determining the validity of the probate court judgment.
Appellees respond that Appellant's arguments amount to an improper collateral attack and that this court lacks jurisdiction to review the validity of the probate court judgment under the Rooker-Feldman doctrine. In the alternative, Appellees argue the probate court judgment is valid pursuant to the California Probate Code and California Code of Civil Procedure § 580 does not apply. Appellees also contend that the bankruptcy court properly applied the doctrine of collateral estoppel to the probate court judgment.
II. ISSUES PRESENTED
Did the bankruptcy court err in applying collateral estoppel to the probate court judgment and determining that the probate court's findings that Donald Stark committed breaches of trust and financial abuse as Trustee of the Stark Trust entitled Appellees to judgment as a matter of law on their nondischargeability claim brought under 11 U.S.C. § 523(a)(4)?
Appellant Donald Bradford Stark served as Trustee of the Stark Trust from January 1984 to March 2006. On January 27, 1996, Appellee Barbara Stark filed a petition to compel an accounting, to remove the Appellant as Trustee, to surcharge the Appellant, and for elder financial abuse. (Doc. 8, Appellant's Excerpts of the Record ("ER") at 10-17.) The petition, which was served on the Appellant, requested removal of the Appellant as Trustee and various forms of financial relief. The petition did not state a specific amount for any of the damages requested. The Appellant did not respond to the petition.
After a hearing where the Appellant did not appear, the Tulare County Superior Court issued an order removing the Appellant as Trustee, ordering him to either prepare and file an account of his trust administration or appear and show cause why he had not done so, and setting an evidentiary hearing for April 5, 2006 on Petitioner's request that Donald Stark "be surcharged and for punitive and exemplary damages and costs of suit." (ER at 18-19.) The order, which was served on the Appellant, did not state a specific amount for any of the monetary damages which would be at stake at the hearing.
The Appellant did not file an accounting nor did he appear at the April 5 hearing. On May 3, 2006, the Tulare County Superior Court found by clear and convincing evidence that Appellant had committed: 1) breaches of trust within the meaning of Probate Code Section 16400, 2) financial abuse within the meaning of Welfare & Institutions Code Section 15610.30, and 3) was guilty of recklessness, oppression, fraud or malice in the commission of the abuse within the meaning of Welfare & Institutions Code Section 15657(a). (ER at 32-37.) The probate court entered judgment in favor of the Appellees and against the Appellant on May 3, 2006, awarding the Appellees: $1,516,000.00 to redress breaches of trust the court found to have occurred, $137,376.00 for lost income, and punitive damages of $412,128. (ER at 32-39.)
On October 28, 2006, six days short of the maximum of six months permitted by applicable state law for the filing of such a motion, the Appellant filed a motion for relief from the probate court judgment based on mistake, inadvertence or excusable neglect pursuant to California Code of Civil Procedure § 473. The Superior Court denied the Appellant's motion on the dual grounds that the motion was untimely because, although filed within six months, it was not filed within a reasonable time as required by applicable state law, and the Appellant had not shown mistake, inadvertence, surprise or excusable neglect. (ER at 40-41.) The Appellant filed an untimely appeal from the Probate Court order denying his motion for relief in the California Court of Appeal, Fifth Appellate District, which was dismissed on June 14, 2007 "as abandoned" after failure to respond to an order of the court. (ER at 42.)
After Appellant filed a voluntary Chapter 11 petition in the bankruptcy court, Appellees filed a complaint in the Chapter 11 proceeding seeking a determination that the probate judgment was a non-dischargeable debt under 11 U.S.C. § 523(a)(4). Appellees then moved for summary judgment on the ground that the probate court's findings and conclusions determined that the Appellant had committed breaches of trust sufficient to meet the requirements of § 523(a)(4) and to make the debt non-dischargeable. Appellees argued the bankruptcy court was bound by the probate court's factual determinations under the doctrine of collateral estoppel.
Appellant opposed summary judgment on the grounds that the probate court judgment was invalid. He did not contest the application of collateral estoppel or in any way challenge the probate court findings. He conceded the facts asserted in support of the motion. The bankruptcy court granted summary judgment that the debt was non-dischargeable after determining that the probate court judgment was entitled to issue preclusive effect and that the factual findings of the probate court met the requirements of 11 U.S.C. § 523(a)(4). (ER at 57-67.)
IV. STANDARD OF REVIEW
The bankruptcy court's decision granting summary judgment under Fed. R. Civ. P. 56, made applicable to the bankruptcy proceedings by Bankruptcy Rule 7056, is reviewed de novo. In viewing the facts in the light most favorable to the nonmoving party, the district court must determine whether there is a genuine issue of material fact and whether the moving party is entitled to judgment as a matter of law. In re R&T Roofing Structures & Commercial Framing, Inc., 887 F.2d 981 (9th Cir. 1989); In re Cal. Canners & Growers, 62 B.R. 18 (Bankr. Fed. App. 1986).
A. The Rooker-Feldman Doctrine
"The Rooker-Feldman doctrine is a well-established jurisdictional rule prohibiting federal courts from exercising appellate review over final state court judgments." Reusser v. Wachovia Bank, N.A., 525 F.3d 855, 858-59 (9th Cir. 2008) (citing Henrichs v. Valley View Dev., 474 F.3d 609, 613 (9th Cir. 2007)). Appellees argue that the Rooker-Feldman doctrine applies to bar Appellant's contention that the probate court judgment is void because this amounts to an improper collateral attack in a lower federal court on the validity of a final state court judgment.
In Rooker and Feldman, the losing party in state court filed suit in federal court after the state proceedings ended, complaining of an injury caused by the state-court judgment and seeking review and rejection of that judgment. Plaintiffs in both cases alleged federal-question jurisdiction and called upon the district court to overturn an injurious state-court judgment.
The district courts in Rooker and Feldman were found to lack subject-matter jurisdiction because 28 U.S.C. § 1257 vests authority to review a state court's judgment solely in the U.S. Supreme Court. See Verizon Md. Inc., 535 U.S. at 644 ("The Rooker-Feldman doctrine merely recognizes that 28 U.S.C. § 1331 is a grant of original jurisdiction, and does not authorize district courts to exercise appellate jurisdiction over state-court judgments, which Congress has reserved to this Court, see § 1257(a).").
In Rooker, the losing party in the state court case requested that the federal district court declare the state court judgment void. The Supreme Court explained that if the state court decision was wrong, "that did not make the judgment void, but merely left it open to reversal or modification in an appropriate and timely appellate proceeding." Id. at 415. Federal district courts, the Rooker Court recognized, lacked the requisite appellate authority, for their jurisdiction was "strictly original." Id. at 416. Among federal courts, the Rooker Court clarified, Congress had empowered only the Supreme Court to exercise appellate authority "to reverse or modify" a state-court judgment. Id. A federal action that is a de facto appeal from a state court judgment cannot be maintained. Kougasian v. TMSL, Inc., 359 F.3d 1136, 1139 (9th Cir. 2004) (citing Bianchi v. Rylaarsdam, 334 F.3d 895, 898 (9th Cir. 2003)). A federal action constitutes a de facto appeal where "claims raised in the federal court action are 'inextricably intertwined' with the state court's decision such that the adjudication of the federal claims would undercut the state ruling or require the district court to interpret the application of state laws or procedural rules." Bianchi, 334 F.3d at 898.
In Exxon Mobil Corp. v. Saudi Basic Industries Corp., 544 U.S. 280 (2005), the Supreme Court clarified that the Rooker-Feldman doctrine "is confined to cases of the kind from which the doctrine acquired its name: cases brought by state-court losers complaining of injuries caused by state-court judgments rendered before the district court proceedings commenced and inviting district court review and rejection of those judgments. Rooker-Feldman does not otherwise override or supplant preclusion doctrine or augment the circumscribed doctrines that allow federal courts to stay or dismiss proceedings in deference to state-court actions."
The Rooker-Feldman doctrine is specifically applicable to the instant case. Here the federal action was initiated by the state court loser seeking to avoid responsibility for the state court judgment. The state court winners filed a complaint in the bankruptcy court to have the debt of the state court judgment declared non-dischargeable. Appellant, who lost in the probate court, seeks to avoid nondischargeability by his defense in the bankruptcy adversary proceeding that the state court judgment is void. The Ninth Circuit has recognized that "[t]he clearest case for dismissal based on the Rooker-Feldman doctrine occurs when a federal plaintiff asserts as a legal wrong an allegedly erroneous decision by a state court, and seeks relief from a state court judgment based on that decision." Henrichs, 474 F.3d at 613.
The facts in Reusser are very close to this case. There, the appellant debtor was defaulted in Oregon state court and a motion to set aside the state court default judgment for insufficient notice of intent to seek default judgment and failure of the creditor to tell the state court judge the debtors contested the merits of a foreclosure was denied. The Reusser court further held that a jurisdictional challenge to the bankruptcy court's foreclosure judgment failed because the bankruptcy court had in rem jurisdiction based on the real property before it and was binding on the case. As a disguised de facto attack on the state court's judgment and decision, Appellant's jurisdictional claim under state law is barred. The bankruptcy court correctly applied the Rooker-Feldman doctrine in declining to consider the validity of the state court judgment.
B. Application of Collateral Estoppel
The Supreme Court has held that "collateral estoppel principles do specifically apply in bankruptcy discharge exception proceedings pursuant to § 523(a)." Grogan v. Garner, 498 U.S. 279, 284 (1991). In addition, 28 U.S.C. § 1738 requires federal courts, as a matter of full faith and credit, to apply the pertinent state's collateral estoppel principles. In re Nourbakhsh, 67 F.3d 798, 800 (9th Cir. 1995). Under California law, collateral estoppel only applies if certain threshold requirements are met:
relitigation must be identical to that decided in a First, the issue sought to be precluded from actually litigated in the former proceeding. Third, it former proceeding. Second, this issue must have been must have been necessarily decided in the former proceeding. Fourth, the decision in the former proceeding must be final and on the merits. Finally, same as, or in privity with, the party to the former the party against whom preclusion is sought must be the proceeding.
In re Harmon, 250 F.3d 1240, 1245 (9th Cir. 2001) (citation omitted).
The fact that "judgment was secured by default does not warrant the application of a special rule." Williams v. Williams, 36 Cal.2d 289, 293 (1950). California law does, however, place two limitations on this general principle. The first is that collateral estoppel applies only if the defendant "has been personally served with summons or has actual knowledge of the existence of the litigation." In re Harmon, 250 F.3d at 1247 (quoting Williams, 223 P.2d at 254). Collateral estoppel, therefore, only applies to a default judgment to the extent that the defendant had actual notice of the proceedings and a "full and fair opportunity to litigate." Id. at 1247 n. 6.
The second limitation, in the context of a default judgment, is that a decision has a preclusive effect in later proceedings "only where the record shows an express finding upon the allegation" for which preclusion is sought. Williams, 36 Cal.3d at 254. But "the express finding requirement can be waived if the court in the prior proceeding necessarily decided the issue." 250 F.3d at 1248. In such circumstances, an express finding is not required because "if an issue was necessarily decided in a prior proceeding, it was actually litigated." Id.
Appellant does not argue that collateral estoppel principles do not apply; in fact, he concedes that if the probate court judgment is not void, the bankruptcy court was required to give it issue preclusive effect. The five requirements of California collateral estoppel law must be analyzed. The first issue is whether the issues in the probate court proceeding and the bankruptcy proceeding are identical. If a state court "should determine factual issues using standards identical to those in [§ 523], then collateral estoppel.would bar relitigation of those issues in the bankruptcy court." Brown v. Felsen, 442 U.S. 127, 139 (1979).
There are two issues under § 523(a)(4): whether the debtor incurred the debt by committing fraud or defalcation and whether the fraud was in relation to the debtor's fiduciary responsibilities. Bugna v. McArthur, 33 F.3d 1054 (9th Cir. 1994). The probate court found Appellant committed breaches of trust within Probate Code section 16400 and financial abuse under Welfare & Institutions Code Section 15610.30 while acting as Trustee of the Stark Trust. This meets the two requirements under § 523(a)(4) that the debt arose out of the Trustee's breach of fiduciary duty, actual and constructive fraud and that the debts arose out of Apellant's fiduciary responsibility. The bankruptcy court correctly found these issues were identical.
Second, whether the judgment was actually litigated, the probate court entered a default judgment after notice Appellant failed to respond to the probate petition and failed to appear at two hearings, including an evidentiary hearing. Appellant was admittedly served with the probate petition and the notices and orders for each of the probate court hearings. It is evident he had notice of and opportunity to be heard because he filed, but later abandoned, a state court appeal from the probate court judgment. Appellant failed to pursue the appeal he filed from the probate court judgment in the California Court of Appeals for the Fifth Appellate District, which the state appeals court found was abandoned. Appellant had more than sufficient notice and numerous opportunities to be heard in the probate case. He now attempts to raise in federal court an argument about validity of the judgment based on state substantive and procedural law an argument which he had the opportunity to, should have raised, but abandoned in state appellate court.
Third, the issue of Appellant's fraud as Trustee was necessarily decided in the probate court judgment because his defalcations arose from his role as a trustee over which the probate court had subject matter jurisdiction. The court issued specific findings and conclusions after an evidentiary hearing that determined Appellant committed breaches of trust, financial abuse and "recklessness, oppression, fraud, or malice" under relevant state law.
Fourth, the decision in the probate court was final and on the merits. The probate court entered judgment the same day it issued its findings and conclusions and Appellant abandoned his appeal of the judgment to the state appellate court. The probate court judgment, though entered as a default judgment, was on the merits as outlined in Williams because the record shows express findings upon the allegation for which preclusion is sought. After expiration of time for appeal to the California Supreme Court and United States Supreme Court, the state probate court judgment became final.
Fifth, the parties in the probate proceeding - Donald Bradford Stark and Barbara Stark - are identical to those in the bankruptcy proceeding, where Barbara Stark and successor co-trustees Elizabeth Stark and Susan Tsapanos are plaintiffs and Donald Stark is the named defendant.
For all the foregoing reasons, the judgment of the bankruptcy court is AFFIRMED.
IT IS SO ORDERED.
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