USBC Case No. LA09-12423 BR ADVERSARY Case No. LA09-01486 BR
The opinion of the court was delivered by: VIRGINIA A. Phillips United States District Judge
MEMORANDUM OPINION AND ORDER AFFIRMING THE JUDGMENT OF THE BANKRUPTCY COURT [Motion filed on April 29, 2011]
Appellant Gregg Fiene and Appellees Danny Forouzesh, Cyrus Forouzesh (collectively, "the Forouzeshes"), and Selection Chic Look, Inc. (hereafter, "Chic" a company over which Cyrus Forouzesh presided) participated in an arbitration over a dispute involving a collapsed business venture, in which the Forouzeshes and Chic were investors and of which Fiene was the president. The arbitrator held that Fiene defrauded the Forouzeshes and Chic of their investment, and awarded them damages.
During the pendency of the arbitration, however, Fiene filed for bankruptcy protection. After prevailing in the arbitration, Chic and the Forouzeshes initiated an adversary proceeding against Fiene in the bankruptcy court, seeking to prevent Fiene from discharging the arbitration award in bankruptcy. The bankruptcy court granted summary judgment in Chic's and the Forouzeshes' favor, finding that Fiene was estopped from arguing against the arbitrator's conclusion that he defrauded the Forouzeshes and Chic; the bankruptcy court therefore held that Fiene's debt to Chic and the Forouzeshes could not be discharged. Fiene now appeals the bankruptcy court's judgment. For the following reasons, the judgment of the bankruptcy court is AFFIRMED.
In 2003, the Forouzeshes approached Fiene with a proposal to develop a line of women's clothing called "Yank" for Cyrus Forouzesh's clothing company, Selection Chic. The Forouzeshes did so with the intention that Danny Forouzesh would one day take over running the Yank line. In April 2004, the Forouzeshes hired Fiene to develop the line for Chic; in September, they brought Gregg Walker in as an investor in the line. As a condition of his investment, however, Walker insisted that a new company be formed as a vehicle for developing the Yank brand. Fiene and Walker together formed G-Squared Fashions, Inc. ("G2"), a company into which the Forouzeshes and Chic made a capital investment valued at $600,000. The Forouzeshes' and Chic's investment was memorialized in an "Agreement between Capital Investor and New Company" ("Agreement"), drafted by Walker and signed by the Forouzeshes, Fiene, and Walker.
The Agreement set forth seven provisions benefitting G2, to which the Forouzeshes and Chic (together, as the "Capital Investor") agreed, and in exchange for which G2 was to:
Issue stocks in the name of Danny Foruzesh in [G2] based on the formula below. (This formula represents examples so if amount sold to investor's [sic] changes, this formula will be used to finalize the final percentage to Danny Foruzesh).
20% OF THE COMPANY SOLD TO INVESTORS
Amount raised $2,000,000 plus $600,000(Capital Investor)= 4.62% 4% = 8.62% Amount raised $3,500,000 plus $600,000(Capital Investor) = 2.93% 4% = 6.93% (R. at 88) (errors in original).
The Agreement contained a choice of law clause (California) and an arbitration clause, and the parties executed it on October 7, 2004. (R. at 89.)
As it turned out, G2 never issued any shares to Danny Forouzesh. In late 2005, the Forouzeshes and Chic sued G2, Walker, and Fiene in the California Superior Court for the County of Los Angeles, alleging -- among other things -- that G2, Walker, and Fiene never intended to issue shares in G2 to Danny Forouzesh, and thereby defrauded the Forouzeshes and Chic by gulling them into entering an agreement to purchase the shares in exchange for their capital contribution. (See R. at 79-80.) Pursuant to the Agreement's arbitration clause, G2, Fiene, and Walker compelled Chic and the Forouzeshes to arbitrate all of their claims.
The arbitration proceeded in two sessions, the first taking place between April 27 and April 30, 2008 and May 1 and 2, 2008, and the second taking place between July 27 and 29, 2009. Between the two sessions, Fiene filed for bankruptcy protection, and after the bankruptcy court granted Chic and the Forouzeshes relief from the automatic stay (see R. at 92), the arbitration proceeded with Fiene -- now unable to pay for counsel -- representing himself.
The arbitrator issued a decision on October 15, 2009, concluding that G2, Fiene, and Walker violated California securities law by offering to issue shares to Danny Forouzesh, entitling Chic and the Forouzeshes to "return of the value of consideration given for the shares," i.e., $600,000. (R. at 139.) The arbitrator also found G2, Fiene, and Walker breached an oral agreement with the Forouzeshes as to an obligation to employ Danny Forouzesh, and to repay the Forouzeshes and Chic for certain advances. (See R. at 140-41.) Most importantly, after noting that "[w]ith the bankruptcy of the Respondent/Debtors [i.e., Fiene, Walker, and G2], this case is all about fraud," the arbitrator set forth evidence supporting his conclusion that Fiene, Walker, and G2 defrauded the Forouzeshes and Chic by taking their capital without any intention of ever providing the promised equity in G2. (See R. at 141-44.) The arbitrator then awarded Chic and the Forouzeshes $810,000 for the rescission of the stock agreement ($600,000 in capital contributions, plus interest at 7% from October 7, 2004, to the time of the judgment) and an additional $143,418.14 for other damages related to G2's, Fiene's, and Walker's breach of contract. Finally, the arbitrator awarded $3,533.75 in arbitration fees and expenses, for a total of $956,951.89 in damages, for which Fiene, Walker, and G2 were responsible jointly and severally. (R. at 149-50.)
On June 11, 2010, the superior court reduced the arbitrator's award to a judgment of $956,951.89, plus $36,169.76 in costs, pre-judgment interest of $16,339.94, and post-judgment interest accruing at 10% per year. (R. at 168-69.) The Forouzeshes and Chic then filed an adversary action in Fiene's bankruptcy proceedings; in it, they claimed alternately that the judgment debt Fiene owed them was non-dischargeable because of his fraud, see 11 U.S.C. § 523(a)(2)(A), his causation of a willful and malicious injury, see 11 U.S.C. § 523(a)(6), and his securities law violation, see 11 U.S.C. § 523(a)(19). (See R. at 5-19.) They aimed to prevent Fiene from discharging at least $615,000 of the debt, plus prejudgment interest, punitive damages, attorneys' fees, and costs. (See R. at 18-19.)
The Forouzeshes and Chic then moved for summary judgment on their claims, arguing the arbitration award, reduced to judgment, was outcome determinative: the arbitrator's determination that Fiene defrauded the Forouzeshes and Chic, and violated California securities law, would preclude Fiene from arguing otherwise in defending the adversary proceeding. (See R. 33-46.) The bankruptcy court agreed, and ordered that the Forouzeshes and Chic recover from Fiene a non-dischargeable money ...