Opinion
NOT FOR PUBLICATION
Argued and Submitted at Las Vegas, Nevada: May 17, 2007
Appeal from the United States Bankruptcy Court for the District of Nevada. Bk. No. 01-30153, Adv. No. 04-05241, Ref. No. 06-17. Honorable Gregg W. Zive, Chief Bankruptcy Judge, Presiding.
Before: DUNN, EFREMSKY[ and SMITH, Bankruptcy Judges.
Hon. Roger Efremsky, U.S. Bankruptcy Judge for the Northern District of California, sitting by designation.
This disposition is not appropriate for publication. Although it may be cited for whatever persuasive value it may have (see Fed. R. App. P. 32.1), it has no precedential value. See 9th Cir. BAP Rule 8013-1.
The debtors, John and Theresa Wardrobe, appeal the bankruptcy court's ruling that a state court judgment had issue preclusive effect in a nondischargeability action against them under § 523(a)(2)(A). For the reasons set forth below, we REVERSE and REMAND.
Unless otherwise indicated, all chapter, section and rule references are to the Bankruptcy Code, 11 U.S.C. § § 101-1330, and to the Federal Rules of Bankruptcy Procedure, Rules 1001-9036, as enacted and promulgated prior to October 17, 2005, the effective date of most of the provisions of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub. L. 109-8, April 20, 2005, 119 Stat. 23 (" BAPCPA"), as the debtors' bankruptcy petition was filed in advance of the BAPCPA effective date.
I. FACTS
John Wardrobe (" Wardrobe") was a licensed general contractor, doing business as LJ Construction. On June 12, 1998, Wardrobe entered into a contract with Susan Griffin (" Griffin") whereby Griffin paid Wardrobe $30,775 to repair damage to her residence.
Approximately one year later, Griffin filed a complaint against Wardrobe, alleging breach of contract and seeking rescission of the contract and damages, in Nevada state court (the " state court action"). Griffin also named National Guaranty Insurance Co. and Intercargo Insurance Co., the two surety bond insurers (collectively, " the bond insurers") for LJ Construction, as defendants in her complaint. Wardrobe filed an answer in the state court action. Trial in the state court action was scheduled to commence on January 22, 2001.
It appears from the State Court Findings that, in his answer to Griffin's state court complaint, Wardrobe filed a counterclaim.
On January 19, 2001, John and Theresa Wardrobe (collectively, the " debtors") filed a voluntary chapter 13 petition, which case was later converted to chapter 7. The debtors listed the state court action in both their original and amended statements of financial affairs.
Griffin subsequently filed a motion for relief from stay (" Relief from Stay Motion"). In the Relief from Stay Motion, Griffin requested relief from the automatic stay so that she could " proceed with her lawsuit against John Wardrobe in state court. This [was] necessary so she [could] recover against . . . [the bond insurers]." Relief from Stay Motion at 1:15-20, April 12, 2001. She explained that the state court action involved a breach of contract claim against Wardrobe and attached a copy of the state court complaint as an exhibit. Griffin further explained that she needed to compel Wardrobe to participate in the state court trial as a witness and, in order for her to collect from the bond insurers, she needed to establish that a valid and enforceable contract existed between herself and Wardrobe and that Wardrobe breached that contract. She did not allege any other claim against Wardrobe in either the Relief from Stay Motion or in the state court complaint. Griffin also stated that the " stay relief [would] only allow her to go to state court and proceed against [the bond insurers]. . . ." Id . at 3:4-9 (emphasis added). Griffin served the debtors and their bankruptcy counsel with notice of the hearing on the Relief from Stay Motion at their respective addresses listed on the bankruptcy court docket. The debtors did not file a response.
Although the debtors did not provide a copy of the notice of the hearing on the Relief from Stay Motion in the record on appeal, the notice was docketed and imaged by the bankruptcy court. We reviewed the notice on the bankruptcy court's electronic docket and take judicial notice of it. See Atwood v. Chase Manhattan Mortgage Co. (In re Atwood), 293 B.R. 227, 233 n.9 (9th Cir. BAP 2003)(obtaining relevant documents not included in the record on appeal from the bankruptcy court clerk and taking judicial notice of them).
At oral argument, counsel for debtors explained that he did not file a response because, based on the representations made in the Relief from Stay Motion, he believed that Griffin sought relief from stay to proceed against the bond insurers only, not the debtors.
On May 16, 2001, the bankruptcy court entered an order granting relief from stay (" Relief from Stay Order"), which provided that Griffin " may proceed with her lawsuit against Debtor, John Wardrobe, National Insurance Guaranty Association and Intercargo Insurance Company in State Court." Relief from Stay Order at 1:19-22, May 16, 2001. The Relief from Stay Order also provided that " the stay was lifted so that [Griffin] may seek to compel Debtor, John Wardrobe, to participate in this trial as a witness and obtain judgment." Id . at 1:23-24 (emphasis added). The Relief from Stay Order further provided that Griffin " may not proceed to enforce that judgment against the Debtor or property of the estate without further order of this court" and permitted Griffin to enforce the state court judgment against the bond insurers. Id . at 1:23-26 (emphasis added).
On May 24, 2001, Griffin filed a motion to extend the bar date to file a nondischargeability complaint against the debtors under § § 523(a)(2), (a)(4) and (a)(6), requesting a period of 30 days following the date of notice of entry of judgment in the state court action within which to file the nondischargeability complaint (" Motion to Extend"). Griffin served a copy of the notice of the hearing on the Motion to Extend, along with a copy of the Motion to Extend, on the debtors and their bankruptcy counsel at their respective addresses listed on the bankruptcy court docket. No opposition was filed by the debtors. On June 21, 2001, the bankruptcy court entered an order granting the motion and extending the bar date as to Griffin only as requested (" Extension Order").
On October 2, 2001, the debtors received their discharge. Three days later, their bankruptcy case closed.
Griffin and the bond insurers entered into a stipulation on or about September 17, 2003, whereby the state court complaint as to the bond insurers was dismissed. Thereafter, Wardrobe was the only remaining defendant in Griffin's state court action.
Prior to the trial in the state court action, counsel for Wardrobe moved to withdraw (" Motion to Withdraw"). In the Motion to Withdraw, counsel asserted that he had had no direct contact with Wardrobe since September 2001, and had lost contact with Wardrobe for approximately two years. Counsel also believed that Wardrobe had left Nevada. The certificate of service attached to the Motion to Withdraw did not list the debtors as parties served with the Motion to Withdraw. Nonetheless, the state court entered an order allowing counsel to withdraw on February 18, 2004 (" Withdrawal Order").
Per the certificate of service attached to the Motion to Withdraw, only counsel for Griffin in the state court action was served with the Motion to Withdraw.
The debtors did not provide a copy of the Withdrawal Order in the record before us. Although we may take judicial notice of the papers filed in the bankruptcy court docket, see supra note 5, we are unable to look at the papers filed in the state court action, as neither the state court record nor the state court docket is available to us.
The state court held the trial on the state court action on July 21, 2004. Wardrobe did not appear.
During the state court trial, Griffin moved to amend her complaint to include a claim for intentional fraudulent misrepresentation and damages against Wardrobe. The state court granted the motion.
After admitting exhibits and hearing testimony, the state court ruled in Griffin's favor. Four months later, the state court entered its findings of fact, conclusions of law and judgment (" State Court Findings").
In the State Court Findings, the state court found that the Withdrawal Order was properly served on Wardrobe at his last known address. It also found that Wardrobe was properly served with notice of the trial date (" Notice of Trial").
Specifically, the state court found that Griffin served notice of the trial on June 24, 2004, at the same address listed by the debtors on their bankruptcy petition. Neither the debtors nor Griffin provided a copy of the notice of the state court trial in the record before us. Further, neither the state court docket nor the state court record are available to us. See supra note 8.
The state court further found that Wardrobe knowingly and intentionally had made fraudulent misrepresentations as to his willingness and ability to perform the proposed work in order to induce Griffin to enter into the contract and to pay him. It also found that Griffin relied on these fraudulent misrepresentations and, as a result, sustained compensatory damages of $24,377, having had to employ another contractor to perform the work, and consequential damages of $192,314.54. In addition, the state court found that Wardrobe's representations were extreme, outrageous and malicious, and awarded $50,000 in punitive damages, as well as attorney's fees and costs. The debtors did not appeal the State Court Findings.
There is nothing in the record in the appeal before us indicating that the debtors appealed the State Court Findings. Further, the bankruptcy court found that the debtors did not appeal the State Court Findings.
On November 2, 2004, Griffin filed the Dischargeability Complaint against the debtors under § § 523(a)(2)(A) and 524(a)(3), to which the debtors filed an answer. The matter proceeded to trial.
At trial, the bankruptcy court listened to testimony, admitted evidence and made factual findings on the record. Among its factual findings, the bankruptcy court determined the following: (1) through the Motion to Extend, the debtors were aware, at least as of June 2001, of a potential fraud claim against them under § 523(a)(2)(A); (2) the state court made specific findings as to the issue of fraud; and (3) the state court judgment constituted community debt under § 524(a)(3). The bankruptcy court found these facts to be undisputed.
Midway through trial, the bankruptcy court and counsel for the parties appear to have agreed to treat the matter as effectively a hearing on a motion for summary judgment. It is unclear from its findings of fact, conclusions of law and judgment (" Bankruptcy Court Findings"), however, whether the bankruptcy court ultimately made its decision under summary judgment standards.
At first, the bankruptcy court believed that the State Court Findings did not include findings on the issue of reliance. The bankruptcy court later determined, however, that all the elements under § 523(a)(2)(A) were satisfied.
Neither Griffin nor the debtors objected on the record to the factual findings made by the bankruptcy court. Before the bankruptcy court entered its Bankruptcy Court Findings on the adversary docket on December 4, 2006, the debtors filed an objection to entry of the Bankruptcy Court Findings on November 6, 2006, requesting more time to review the transcript of the trial and compare it with the Bankruptcy Court Findings, but neither a hearing nor an order followed. We reviewed the bankruptcy court's electronic docket and the documents entered thereon and take judicial notice thereof. See supra note 5.
The bankruptcy court determined that the state court made the findings necessary to establish all the elements of nondischargeable fraud under § 523(a)(2)(A), and to award compensatory damages. However, it found that the state court did not make sufficient findings to establish willful and malicious injury and to award punitive damages under § 523(a)(6). Finally, the bankruptcy court determined that the State Court Findings constituted a final judgment, which the debtors did not appeal. Based on these determinations, the bankruptcy court ruled that, pursuant to 28 U.S.C. § 1738, the full faith and credit statute, issue preclusion barred the bankruptcy court from revisiting the State Court Findings. The bankruptcy court later entered the Bankruptcy Court Findings, which incorporated its findings of fact, conclusions of law and judgment in favor of Griffin on her § § 523(a)(2)(A) and 524(a)(3) causes of action.
The debtors appealed.
II. JURISDICTION
The bankruptcy court had jurisdiction under 28 U.S.C. § § 1334 and 157(b)(2)(I). We have jurisdiction under 28 U.S.C. § 158.
III. ISSUE
Whether, in determining Wardrobe's debt to Griffin to be nondischargeable in part under § 523(a)(2)(A), the bankruptcy court erred in applying issue preclusion to the State Court Findings.
IV. STANDARDS OF REVIEW
The preclusive effect of a prior judgment is a question of law that we review de novo. Far Out Productions, Inc. v. Oskar, 247 F.3d 986, 993 (9th Cir. 2001).
V. DISCUSSION
The debtors contend that issue preclusion should not apply to the State Court Findings because the underlying state court judgment is invalid. They argue that, although the Relief from Stay Motion and Relief from Stay Order contemplated that Griffin only would proceed with her state court breach of contract action to obtain an enforceable judgment against the bond insurers, Griffin nonetheless proceeded with a fraud action against Wardrobe that was not contemplated or referenced in the Relief from Stay Motion and was not provided for in the Relief from Stay Order. Thus, the debtors contend, Griffin violated the stay and rendered the State Court Findings invalid for issue preclusion purposes in her adversary proceeding.
Reviewing the Relief from Stay Motion and the Relief from Stay Order together, we agree with the debtors that the State Court Findings lack preclusive effect to establish the elements of a § 523(a)(2)(A) cause of action, with the possible exception of damages, because the bankruptcy court only lifted the stay to allow the state court to make a determination on the breach of contract claim in order, if appropriate, to enter an enforceable judgment against the bond insurers. The bankruptcy court did not lift the stay to allow Griffin to proceed with her lawsuit against Wardrobe, except to the extent that obtaining a judgment against Wardrobe personally was a prerequisite to establishing an enforceable claim against the bond insurers.
The authority to annul, terminate or modify the automatic stay falls within the exclusive jurisdiction of the bankruptcy court. Gruntz v. County of Los Angeles (In re Gruntz), 202 F.3d 1074, 1081 (9th Cir. 2000)(en banc). " The automatic stay under 11 U.S.C. § 362(a) operates, until further order of the bankruptcy court, as an absolute bar to the commencement or continuation of a proceeding concerning the debtor before [any court]." Noli v. Comm'r of Internal Revenue, 860 F.2d 1521, 1525 (9th Cir. 1988)(emphasis added). As " [t]he automatic stay is an injunction issuing from the authority of the bankruptcy court, " persons or entities subject to the injunction of the stay, including state courts, are bound until the bankruptcy court modifies or terminates the stay. Gruntz, 202 F.3d at 1082 (quoting Celotex Corp. v. Edwards, 514 U.S. 300, 313, 115 S.Ct. 1493, 131 L.Ed.2d 403 (1995)); see also McGhan v. Rutz (In re McGhan), 288 F.3d 1172, 1178-79 (9th Cir. 2002). Given the broad sweep of the automatic stay and " 'because only an order of the bankruptcy court can authorize any further progress in the stayed proceedings, it follows that the continuation of the [stayed] proceeding can derive legitimacy only from the bankruptcy court order.'" Gruntz, 202 F.3d at 1082 (quoting Noli, 860 F.2d at 1525). The terms of an order granting relief from stay are strictly construed. Noli, 860 F.2d at 1525.
Only federal courts have the final authority to determine the scope and applicability of the stay. Gruntz, 202 F.3d at 1083; see also McGhan, 288 F.3d at 1179 (explaining that Gruntz holds that state courts lack jurisdiction to modify the stay). " Any state court modification of the automatic stay would constitute an unauthorized infringement upon the bankruptcy court's jurisdiction to enforce the stay." Gruntz, 202 F.3d at 1082. In modifying the stay, a state court interferes in the operation of the ongoing bankruptcy case, the management of which is delegated exclusively to the bankruptcy court. Id . at 1084.
Should the state court issue a judgment in violation of the stay, that judgment is void, id. at 1082, and the bankruptcy court need not extend full faith and credit to such judgment, id. at 1082 n.6.
Interpreting the Relief from Stay Order in light of the relief requested in the Relief from Stay Motion, we determine that the state court, in finding in favor of Griffin on her fraudulent misrepresentation claim against Wardrobe, first raised during the state court trial, acted beyond the limited scope of the relief from stay ordered by the bankruptcy court.
Although the Relief from Stay Order states that the automatic stay was lifted and that Griffin could proceed with her lawsuit against Wardrobe and the bond insurers, the Relief from Stay Motion requested that the stay be lifted in order to obtain an enforceable judgment against the bond insurers only. The bankruptcy court could not, in the Relief from Stay Order, grant relief greater than what Griffin requested in the Relief from Stay Motion. See, e.g., Thornburg v. Lynch (In re Thornburg), 277 B.R. 719, 726-27 (Bankr. E.D. Tex. 2002)(where the bankruptcy court determined that the narrow relief sought in a motion for relief from stay " cannot be broadened retroactively by the loosely drafted language of the order, " and that the order on the relief from stay motion granted the relief requested in the motion, " no more, no less").
In the Relief from Stay Motion, Griffin asserted to the bankruptcy court her need to obtain relief in order to pursue her breach of contract claim against the bond insurers as the sole ground to lift the stay. This was the only issue that Griffin presented to the bankruptcy court to determine the extent to which it should lift the stay. Because " [t]he automatic stay sweeps broadly, enjoining the commencement or continuation of any judicial, administrative, or other proceedings against the debtor . . . that arose before the commencement of the case, " Gruntz, 202 F.3d at 1081-82, the stay was still in effect as to the prosecution of a fraudulent misrepresentation claim against Wardrobe in state court. Griffin did not request that the bankruptcy court terminate the stay to allow such a claim against Wardrobe to proceed in state court. The lifting of the stay, as authorized by the bankruptcy court in the Relief from Stay Order, was narrow in its application; the stay only was lifted to pursue the breach of contract claim in Griffin's state court lawsuit in order to establish an enforceable claim against the bond insurers.
The state court allowed Griffin to proceed with her lawsuit against Wardrobe on a fraudulent misrepresentation claim, first raised at trial, and later made findings against Wardrobe in her favor. By doing so, the state court impermissibly modified the stay as to Wardrobe. Thus, the State Court Findings against Wardrobe were entered in violation of the stay. With the possible exception of damages, the State Court Findings are void and without preclusive effect. The bankruptcy court inappropriately accorded all of the State Court Findings full faith and credit in finding in favor of Griffin on her § 523(a)(2)(A) cause of action.
The bankruptcy court arguably could give preclusive effect to the amount of actual and consequential damages determined by the state court, as there is nothing in the record indicating that breach of contract damages would have been determined differently.
VI. CONCLUSION
As the State Court Findings with respect to the fraudulent misrepresentation claim against Wardrobe lack preclusive effect, having been based on an impermissible modification of the automatic stay, we REVERSE and REMAND to the bankruptcy court to hear evidence and to make its own findings, as appropriate, on Griffin's § 523(a)(2)(A) cause of action against the debtors.