Friday, March 27, 2020
State Judgment Has Preclusive Effect in Bankruptcy Proceeding
Opinion Says $8 Million Los Angeles Superior Court Judgment Against Fraudster for Punitive Damages Can’t Be Contested in Bankruptcy Court Based on Debtor’s Loss of State Appeal Right
By a MetNews Staff Writer
A man who was socked in the Los Angeles Superior Court with an $8 million judgment for punitive damages based on fraud—with the Court of Appeal subsequently holding that he lost his standing to appeal upon declaring bankruptcy—was not entitled to contest the judgment in the Bankruptcy Court after the debt was held to be nondischargeable, the Ninth U.S. Circuit Court of Appeals has held.
In a memorandum opinion, filed Wednesday, a three-judge panel rejected the contention of Noam Bouzaglou that the Superior Court judgment cannot be given preclusive effect because he was denied his right of appeal.
Bouzaglou and his wholly owned construction company, Ness Adams, Inc., were sued in 2012 by the trustee of the McGinty Family Revocable Trust and by beneficiary Kathleen McGinty after Bouzaglou obtained the deed to the McGinty family home in Santa Monica, through fraud. A jury in 2014 awarded the trust compensatory damages of $803,280 against Bouzaglou and $1,331,608.77 against Ness; it set compensatory damages to Kathleen McGinty, against Bouzaglou, at $17,000; and it assessed punitive damages in favor of the trust in the amount of $8,032,800 against Bouzaglou and $13,316,087.70 against Ness.
Los Angeles Superior Court Judge J. Stephen Czuleger then tried the equitable issues and found an entitlement to rescission of an agreement and a quitclaim deed to the Santa Monica property. The plaintiffs elected the equitable remedy, with the trust regaining title to the property.
The trust thereby lost $803,280 in compensatory damages, but the plaintiffs retained their respective punitive-damage awards.
Rejecting a motion for a new trial, Czuleger found the awards of compensatory and punitive damages were supported by the evidence. Judgment was entered on Sept. 18, 2014.
Meanwhile, Bouzaglou had filed for bankruptcy in the Central District of California (with the Bankruptcy Court opting not to stay the Superior Court trial that was in progress). On October 8, 2014, the estate and McGinty sued in the Bankruptcy Court to establish nondischargeability of the debts to them.
Back in state court, Div. Two of the Court of Appeal for this district on Feb. 1, 2017, affirmed the judgment against Ness in an unpublished opinion by Justice Victoria Chavez. She said, with respect to Bouzaglou:
“We issued an order to show cause re dismissal to Bouzaglou as to why his appeal should not be dismissed for lack of standing. A chapter 7 debtor’s right to appeal an adverse judgment is property of the bankruptcy estate….Absent abandonment of that right by the bankruptcy trustee, by order of the bankruptcy court, or by operation of law, a chapter 7 debtor may not prosecute a claim belonging to the bankruptcy estate….Bouzaglou provided no evidence of such abandonment, and for that reason we dismissed his appeal.”
The judgment creditors then moved for summary judgment in the Bankruptcy Court as to nondischargeability. Having been barred from appealing the Superior Court judgment in state court, Bouzaglou proclaimed, he had a right to attack it in the Bankruptcy Court.
Bankruptcy Judge Deborah J. Saltzman rejected Bouzaglou’s contention, and on Aug. 16, 2017, judgment was entered for the estate and McGinty on their claims based on the punitive-damage awards.
The Bankruptcy Appellate Panel (“BAP”) on Aug. 13, 2018, affirmed. It said, in a memorandum opinion:
“Most jurisdictions, including California, recognize an exception to issue preclusion when the party against whom issue preclusion is sought had no opportunity, as a matter of law, to appeal or otherwise obtain judicial review of the adverse ruling….But this exception does not apply when the party against whom issue preclusion is sought voluntarily relinquishes the opportunity to appeal….
“Here, Bouzaglou chose to file a chapter 7 petition and thereby voluntarily relinquished to the chapter 7 trustee the right to pursue, or not pursue, the appeal from the state court judgment. Even then, had Bouzaglou persuaded the bankruptcy court to exercise its discretion to compel the chapter 7 trustee to abandon the appeal rights to Bouzaglou, he could have moved forward with the appeal. But the bankruptcy court was not so persuaded. Bouzaglou never appealed the order denying the abandonment motion and that denial is beyond the scope of this appeal.”
Ninth Circuit’s Ruling
Agreeing, the Ninth Circuit’s opinion declares:
“We affirm the BAP’s ruling that Bouzaglou is bound by the state court judgment of fraud. There are several reasons. First, Bouzaglou chose, post- judgment, to file for bankruptcy, thereby voluntarily relinquishing his personal right to appeal. The bankruptcy code provides that legal interests are considered property of a debtor’s estate…, and we have held that a bankruptcy trustee has the exclusive right to raise legal claims on behalf of the estate….The trustee here did not appeal. Second, while there remained the possibility that the bankruptcy court could order the trustee to abandon the appeal rights, the bankruptcy court denied Bouzaglou’s motion to compel abandonment, and he neither re-filed the motion nor challenged that ruling.
“Finally, Bouzaglou’s alter ego corporation did appeal the fraud judgment against it in state court and lost. The state appellate court explained that substantial evidence supported the fraud judgment and the damages award against the corporation. There is no indication that the result would have been any different if Bouzaglou personally had appealed the parallel judgment against him.”
The opinion continues:
“The bankruptcy court rested its conclusion on California principles of issue preclusion….All of the required elements are met here, including the identity of issues sought to be litigated with issues already litigated in the state court proceeding. Bouzaglou’s only remaining argument appears to be that of there being some unfairness in his inability to appeal the fraud judgment. Since his alter ego corporation did appeal the merits of the fraud judgment against it, which was based on the same evidence, there is no conceivable unfairness.”
The case is Bouzaglou v. Haworth, 18-60054.
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