Court: United States Bankruptcy Appellate Panel for the Ninth Circuit; February 1, 2013; Us Bankruptcy; United States Bankruptcy Court
Adam W. Child appealed a bankruptcy court's summary judgment that deemed a debt to Foxboro Ranch Estates, LLC, nondischargeable. Child argued that the bankruptcy court incorrectly applied issue preclusion based on an Arizona judgment favoring Foxboro, asserting that his minimal involvement in the related superior court action did not meet Arizona's requirements for such preclusion. The appellate court concurred with Child's argument, reversing the summary judgment and remanding the case for further proceedings.
The facts indicate that in summer 2006, Foxboro entered agreements with High Country Investors, LLC, managed by Child, for purchasing two lots in a development. Subsequently, Foxboro sued Child and his wife in Arizona for fraud related to those agreements. The litigation timeline reveals that Foxboro filed its original complaint on August 10, 2007, amended it to include Child's father on February 13, 2009, and sought summary judgment against Child shortly thereafter. The Superior Court granted summary judgment on June 8, 2009, against Child for breach of contract, fraud, and racketeering, awarding approximately $3 million in damages.
Child's participation in the superior court proceedings was limited to four case management conferences over fourteen months, during which he rarely engaged substantively. He appeared through counsel at the first conference and later represented himself. At the conferences, he expressed intentions to mediate and mentioned plans to file for bankruptcy. Additionally, he submitted a letter disputing Foxboro's claims but reiterated his intention to file for bankruptcy.
Child's involvement in the Superior Court Action was limited, as he did not file an answer or any responsive pleadings, oppose motions, or engage in discovery. Although he indicated intentions to file for bankruptcy, he ultimately filed a Chapter 7 petition in the U.S. Bankruptcy Court for Arizona, listing Foxboro’s litigation claim for $1,000,000. Foxboro subsequently filed an adversary complaint to prevent the Arizona Judgment from being discharged under bankruptcy law. During proceedings, the bankruptcy court noted challenges in granting issue preclusive effect to the Arizona Judgment due to Child's limited participation in the earlier action. However, it later decided that the judgment should indeed be given preclusive effect, citing Child's opportunity to litigate, which he chose to forgo. The court ruled to except the Arizona Judgment from discharge, leading Child to file a notice of appeal. The jurisdiction for the bankruptcy court was established under relevant U.S. codes, and the appeal will examine whether the court correctly applied issue preclusion under Arizona law. The standard of review for summary judgment motions is de novo, requiring the evaluation of evidence favorably to the nonmoving party and a determination of any genuine issues of material fact. The appealing party must demonstrate all elements of issue preclusion and provide a sufficient record of the prior litigation.
Issue preclusion is applicable in dischargeability proceedings, as established in Grogan v. Garner. Federal courts must afford prior state judgments the same preclusive effect as that recognized by the rendering state’s courts, in accordance with 28 U.S.C. 1738. The preclusive effect of a state court judgment is determined by applying the state’s issue preclusion law, as seen in Migra v. Warren City Sch. Dist. Bd. of Educ.
Under Arizona law, as outlined in Chaney Building Co. v. City of Tucson, issue preclusion requires: (1) the issue was actually litigated in a previous suit; (2) a final judgment was entered; (3) the party against whom preclusion is invoked had a full opportunity to litigate; (4) the party actually litigated the issue; and (5) the issue was essential to the prior judgment. Element (1) specifies that an issue is considered actually litigated if it was properly raised and determined, regardless of the basis for the determination. Situations involving judgments by confession, consent, or default do not satisfy this element, as those issues are not actually litigated.
Element (4) focuses on whether the party had the opportunity to litigate and did so to a substantial degree. Current analysis indicates that Child’s participation in the Superior Court Action does not meet this requirement, thus leaving unresolved whether the bankruptcy court’s summary judgment issues were actually litigated under element (1). Post-Chaney, there is some inconsistency in the application of elements (1) and (4) in state and federal cases, leading to confusion. Some cases explicitly incorporate element (4) into the Chaney framework, while others may not, reflecting evolving interpretations of Arizona's issue preclusion law.
A line of case law has emerged in Arizona regarding issue preclusion that omits the fourth element, which is the requirement of substantial participation in previous litigation. This inconsistency is highlighted by the Gilbert decision from 1987, which referenced the elements from Chaney but excluded element (4) without explanation. Despite this, the Chaney ruling remains authoritative on the issue preclusion elements. Thus, satisfying element (4) is still essential for invoking issue preclusion under Arizona law.
To evaluate substantial participation, courts consider various factors, including whether the party answered the complaint, filed motions, participated in hearings, engaged in discovery, and was represented by counsel. In the Kirkland case, the court determined that the debtor had a full and fair opportunity to litigate, noting extensive participation including answering the complaint, filing motions, and engaging in discovery. Similarly, in In re Bell, the court found issue preclusion applicable based on the debtors' active participation in the state court, which included filing an answer, attending hearings, and being represented by counsel. Both cases affirm that active involvement in prior litigation is crucial for the application of issue preclusion.
The state court order is characterized as a detailed summary judgment in a contested proceeding, distinguishing it from a default judgment. Appellants were actively involved and represented by counsel, allowing for collateral estoppel. In this case, Debtor's involvement did not meet the participation threshold required under Arizona law, particularly element (4). Debtor's sole contribution was a disorganized letter disputing claims and indicating a bankruptcy filing, while Child did not file an answer, engage in discovery, or oppose the summary judgment motion. Child's participation included attending four case management conferences, where he expressed intent to file for bankruptcy but failed to provide any substantive defense. His actions were more about monitoring the litigation than engaging meaningfully, failing to hinder Foxboro's efforts. The interpretation of element (4) suggests that if a party opts not to participate, issue preclusion is not applicable. Additionally, the bankruptcy court's reliance on federal cases for determining Child's participation was incorrect, as those cases did not consider Arizona's specific requirement for actual participation in litigation, which differs from federal issue preclusion law.
The court declined to apply federal collateral estoppel law in a manner inconsistent with Arizona's collateral estoppel requirements. In Younie, it was established that California law allows a default judgment to meet the 'actually litigated' element, a principle not applicable under Arizona law. The cases of Bell and Kirkland, while informative regarding participation in litigation, are based on misconduct by defendants that is not recognized under Arizona law. Sanctions imposed in those cases for behaviors like evasiveness and failure to comply with court orders were deemed irrelevant to Arizona's standards. The judicial exception in federal law, which allows issue preclusion from default judgments when misconduct is present, does not align with Arizona law, where a party's substantial participation is necessary for issue preclusion to apply. The bankruptcy court incorrectly interpreted Arizona law by allowing issue preclusion based on minimal participation. No findings of sanctionable conduct by the debtor were present in the record, and the debtor's level of participation did not meet Arizona's threshold for issue preclusion.
Application of Arizona issue preclusion law requires that a party's involvement in a previous legal action be significant for it to be applied against them. In this case, the bankruptcy court incorrectly applied preclusive effect to the Arizona Judgment against Child, leading to the reversal of summary judgment and a remand for further proceedings. Child attended four case management conferences post-judgment and bankruptcy filing, though the reasons for his attendance are not clear from the record. The excerpt highlights the distinction between "issue preclusion" and "collateral estoppel," referencing recent Supreme Court terminology. Key elements for issue preclusion under federal law include having a full opportunity to litigate the issue, actual litigation of the issue, a final judgment that resulted in the loss of the issue, and the party against whom it is asserted being a party or in privity with a party in the prior action. Notably, there is no controlling Arizona precedent on whether a default judgment as a discovery sanction satisfies the "actually litigated" requirement. Additionally, the bankruptcy judge's reliance on Child's statements regarding filing for bankruptcy as a basis for applying issue preclusion is not supported by Arizona law.
