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.
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 ...