Tag Archives: Issue Preclusion

Is Elder Abuse Dischargeable Under The Bankruptcy Code?

By Ryan C. Wood

Howdy humans.  Elder abuse?  Yes, elder abuse.  I tell humans repeatedly bankruptcy touches all of life one way or another.  Even elder abuse can become a bankruptcy issue.  Bankruptcy touches all of life given when life goes bad bankruptcy may ultimately be the only way to get relief from what is taking place in the real world, outside of the Bankruptcy Code.  The question is what human or entity is benefiting from the bankruptcy filing and is the human or entity allowed this benefit under the Bankruptcy Code? 

Can you determine who is the good guy or bad guy is?    Is it possible that the human or entity that is owed the money is the bad guy collecting from someone that should have to pay?  Or did the debtor filing bankruptcy and their bankruptcy attorney seek to get over on creditors and obtain results not allowed under the Bankruptcy Code?  Both can be true at the same time in the same case.

In a recent Ninth Circuit Bankruptcy Appellate Panel case elder abuse was the issue and why the human bankruptcy filers filed for relief under Chapter 7 of the Bankruptcy Code.  The bankruptcy filers were sued for elder abuse, did not defend the lawsuit, default judgment was entered against the bankruptcy filers in state court, and then the present Chapter 7 bankruptcy case was filed to discharge the default judgment entered against the bankruptcy filers for elder abuse.

Background Leading to 9th Circuit Bankruptcy Appellate Panel Appeal

To not name the precise humans involved we will call the court appointed fiduciary, appointed to take care of the older human, the Fiduciary, and the person being taken care of the Client.  Then we have the people alleged taking advantage of the Client and committing elder abuse.  Since a default judgment was entered against them, we will call them the Elder Abusers.

A court appointed the Fiduciary to take care of the Client and for some unknown reason.

The Elder Abuses are the victim’s daughter, daughter’s husband and daughters sister.  Three Elder Abusers.  The Elder Abusers are accused of misusing a durable power of attorney and taking money they should not have.

The Oregon State Court complaint filed against the Elder Abusers included three claims for relief:

(1) elder abuse under Oregon Revised Statutes (“ORS”) 124.110 against all defendants

(2) unjust enrichment against all defendants

(3) breach of fiduciary duty against the one daughter of the victim.

Pursuant to ORS 124.100, it awarded Van Loo treble damages totaling $1,069,606.86 against Kristine and Bryce and an additional judgment against Kristine for treble damages of $887,276.16 – exactly what Van Loo requested. It also issued a second limited judgment awarding Van Loo attorneys’ fees and costs and conservator fees

The Fiduciary was awarded a default judgment against the Elder Abusers totaling $1,069,606.86 and an additional judgment against the specific daughter totaling $887,276.16.  There was also another judgment awarding the Fiduciary attorneys’ fees and costs with conservator fees.

Will the default judgments be discharged or not in Chapter 7 Bankruptcy?

A Little Commentary First

So, you get sued for elder abuse and you ignore the lawsuit.  Please read your mail each day no matter what.  Will the bankruptcy filing be strike three given strikes one and two happened before any state court lawsuit was ever filed.  No doubt the issue of whether elder abuse took place in this case was hashed out prior to any state court lawsuit being filed and the bankruptcy filers/Elder Abusers and most likely had some opportunity to improve the circumstances or at least defend the allegations against them.  To allow a default judgment to be entered against yourself for elder abuse is highly questionable and concerning.  The bankruptcy filers/Elder Abusers allowed a default judgment be entered against for elder abuse against their own family member.  Begs the question why?  I will attempt to fill in that blank and then review the bankruptcy filers filed petition to know their circumstances. 

At first blush it is difficult to know why the state court lawsuit was not defended.  Did they have no money to pay attorneys to fight for them?  Was service of the state court lawsuit was defective or fraudulent so they never knew they were getting sued?  Hmm no.  Did they believe even if a default judgment was entered it would be dischargeable when filing Chapter 7 Bankruptcy so why spend the money defending the Oregon State Court lawsuit for elder abuse?   Did a bankruptcy attorney advise the Elder Abusers to not defend the lawsuit and if a default judgment is entered you can just file for bankruptcy protection? 

Generally a bankruptcy should be filed prior to a default judgment being entered so at least what happened in this recent Ninth Circuit Bankruptcy Appellate Panel case illustrates.

Oh, and there has to be money involved because no one cares if their loved one was abused unless money was lost in the process as well.  Just say’in.

Chapter 7 Bankruptcy and Discharge of Elder Abuse Default Judgment

The Elder Abusers filed for Chapter 7 bankruptcy to obtain a discharge of the elder abuse default judgment.  Pursuant to Section 523(a) of the Bankruptcy Code certain types of debts, or how the debt was incurred, make the debt or claims not dischargeable.  Section 523(a)(2) is generally fraud; Section 523(a)(4) breach of fiduciary duty, embezzlement, defalcation, larceny; Section 523(a)(6) willful and malicious injury.  An adversary lawsuit must be filed to prove the debt/claim should not be discharged.

The Fiduciary filed the adversary lawsuit against the Elder Abusers in the Elder Abusers Chapter 7 bankruptcy case to have the Bankruptcy Court determine the default judgment against the Elder Abusers cannot be discharged.

The Elder Abusers defended the adversary proceeding of course and generally denied all of the allegations alleged in the Complaint to Determine Dischargeabillity of Oregon State Default Judgment for Elder Abuse against the Elder Abusers/bankruptcy filers.

Can The Oregon State Court Default Judgment Be Used to Prove Elder Abuse Claim is Not Dischargeable?

So, some states allow the preclusive effect of default judgments and other states do not.  The argument is if the lawsuit was not defended then nothing was actually litigated and should not and cannot be used in another legal matter to preclude the use of the default judgment.  Oregon happens to be a state that does allow default judgments to be used against the defendants in other matters; like a Chapter 7 bankruptcy case.  This is very controversial given the Oregon State Court lawsuit was not defended and the Fiduciary was awarded everything requested only because the Elder Abusers’ did not fight.  No actual litigation took place to make sure the allegations were true and damages are reasonable under the circumstances. 

Nevertheless, Oregon law says no problem.  So the Bankruptcy Court entered a judgment against the daughter Elder Abuser under Section 523(a)(4) ruling the $1,069,606.86 from the Oregon State Court default judgment is not dischargeable. 

The Elder Abuse daughter appealed the Bankruptcy Court’s entry of a judgment against her and here we are.  So do no defend the original Oregon State Court lawsuit, file for Chapter 7 bankruptcy, then defend adversary lawsuit objecting to the discharge of the default judgment and spend the money to appeal when the Bankruptcy Court entered judgment against Elder Abuse/bankruptcy filer.  Would it have been better to spend money and defend the original Oregon State Court lawsuit?  Or was there no hope and the only hope was to seek a discharge of the claim/elder abuse?  Hard to know.

Ninth Circuit Bankruptcy Appellate Panel Affirmed the Bankruptcy Courts Judgment

A little housekeeping regarding law.  Issue preclusion does apply in nondischargeability adversary proceedings pursuant to § 523(a) and See Grogan v. Garner, 498 U.S. 279, 284 n.11 (1991). Federal Bankruptcy Courts must also afford full faith and credit to state court judgments. 28 U.S.C. § 1738.  So the Bankruptcy Court in this adversary proceeding required to give the Oregon State Court’s default judgment against the Elder Abusers the same preclusive effect it would be given by other Oregon courts. See Far Out Prods., Inc. v. Oskar, 247 F.3d 986, 993 (9th Cir. 2001).

Generally the elements of issue preclusion are well settled.  If the Oregon State Court default judgments provides the following 5 elements, then the Bankruptcy Court in the dischargeability adversary proceeding is bound by the findings of fact and law in the Oregon State default judgment against the Elder Abusers.

1. The issue in the two proceedings is identical. 2. The issue was actually litigated and was essential to a final decision on the merits in the prior proceeding. 3. The party sought to be precluded has had a full and fair opportunity to be heard on that issue. 4. The party sought to be precluded was a party or was in privity with a party to the prior proceeding and, 5. The prior proceeding was the type of proceeding to which this court will give preclusive effect.

The Elder Abusers were part of both lawsuits whether the Elder Abusers participated in the Oregon State Court lawsuit or not. 

In this appeal the Elder Abusers disclose or argue why they did not defend the Oregon State Court lawsuit.  The inability to retain or hire an attorney, so the Elder Abusers were not given a full and fair opportunity to litigate the Oregon State Court lawsuit.  The problem is the Elder Abusers were in fact served and aware of the Oregon State Court lawsuit and their choice to not defend or have the ability to retain a bankruptcy attorney is not denial of a full and fair opportunity to be heard.  If the Elder Abusers could establish they were procedurally denied evidence or be heard then maybe no full or fair opportunity to be heard could be found in their favor.

Two of the issue preclusion elements need a more detailed analysis: (1) whether the issues in the two proceedings were identical; and (2) whether the issues were essential to the state court’s judgment.

The lower Bankruptcy Court said yes, and the Ninth Circuit Bankruptcy Appellate Panel agreed.

Oregon state courts have four elements regarding financial abuse of elders: (1) a taking or appropriation (2) of money or property (3) that belongs to an elderly or incapacitated person, and (4) the taking must be wrongful.

The Ninth Circuit Court of Appeals disagreed with the lower bankruptcy court’s decision but still affirmed the entry of the dischargeability judgment against the Elder Abusers for separate findings.

Oregon State’s elder abuse law does not specifically require a finding of a fiduciary relationship while Section 523(a)(4) of the Bankruptcy Code does.  This is a problem.  But the 9th Cir. BAP found the default judgment did include enough information to assume, or read into the default judgment, the elements for larceny and embezzlement pursuant to Section 523(a)(4).  What did the default judgment in Oregon State Court specifically find though? 

The 9th Cir. BAP found that the elements of the Oregon State elder abuse law are exact as to larceny and embezzlement when compared to Section 523(a)(4) even if the Oregon State court default judgment did not go into detail as to findings of fact.  It must be assumed the entry of the default judgment incorporates the elements of Oregon State law regarding elder abuse or the default judgment would not be entered period. 

The 9th Circuit Bankruptcy Appellate Panel therefore conducted the analysis for the Oregon State court providing the Oregon Court had to make finding that the Elder Abusers:  (1) took or appropriated (2) money or property (3) that belongs to the victim, who was incapacitated, and (4) the taking was wrongful.  They held there was no need to find the Elder Abusers were acting in fiduciary capacity given the elements for larceny and embezzlement pursuant to Section 523(a)(4) were satisfied.

Do Not Let A Default Judgment Be Entered Against You At All Costs

This is a cautionary tale of allowing a default judgment entered against you.  Even if the default judgment does not include detailed findings of fact and law a court may look to the elements of the law in support of the default judgment to determine if the elements for dischargeability of a debt are satisfied.  The entry of the default judgment itself is probative in jurisdictions that allow the preclusive effect of default judgments in Bankruptcy Court cases.

Can A California State Court Judgment or Arbitration Award Be Used In Bankruptcy Court?

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A sequence of events that takes place is a person lends money or credit is extended and then the borrower for whatever reason cannot continue to make payments and breaches the repayment agreement. The creditor then sues them in California Superior Court. There are numbers of ways to obtain a judgment, but a judgment is entered against the borrower in state court. Or an arbitration award is entered against the borrower. Can the judgment or arbitration award be used against the borrower if the borrower chooses to file for bankruptcy protection? Can the judgment be used to make the debt owed not discharged? This is an issue of issue preclusion. Can a judgment or arbitration award be entered against the borrower in Bankruptcy Court? Will the Bankruptcy Court require litigation of the same issue already decided by the judgment or arbitration award?

Like the answer to many legal questions bankruptcy attorneys must answer, the correct answer is it depends upon the judgment or language of the arbitration award. The Bankruptcy Appellate Panel for the Ninth Circuit recently discussed this issue in Richard Scott Urban vs. BCS West, LLC; BAP No. SC-13-1047. According to California state law California courts may apply issue preclusion only if certain requirements are met and if the application of issue preclusion furthers the public policies underlying the doctrine. The doctrine of issue preclusion is the theory that issues already decided in state court should or must be recognized by federal courts pursuant the Full Faith and Credit Clause of the United States Constitution. Under California law requires that (1) whether the issue sought to be precluded from relitigation is identical to that decided in the former proceeding; (2) whether the issue was actually litigated in the former proceeding; (3) whether the issue was necessarily decided in the former proceeding is final and on the merits; and (5) whether the party against whom preclusion is sought was the same as, or in privity with, that party to the state court proceeding. If these requirements are met California courts must further consider whether any overriding concerns about the fairness of the former proceeding are present or consistent with sound public policy.

Regarding an arbitrary award Federal Bankruptcy Courts can give California arbitration awards preclusive effect if the arbitration proceeding was held in an adjudicatory manner. Arbitration awards that have been confirmed by California courts have been given preclusive effect in Bankruptcy Court too. California judgments are more likely to be given preclusive effect given that they are more likely to satisfy the actually litigated factor listed above. Many arbitrations are not held in an adjudicatory manner.

One of the most important factors is the wording of the judgment or arbitration award and the facts that came to light in the California State Court matter. One of the main areas of Bankruptcy cases that California State Court judgment are used for issue preclusion purposes area in adversary proceedings to determine whether a debt or claim is discharged or if the debtor should receive a discharge of their debts at all. A bankruptcy attorney may not have been retained to represent the creditor or debtor in the California State Court litigation. The wording of the judgment or arbitration award will be extremely important for the Bankruptcy Court’s analysis if issue preclusion can be used. In Urban case the Bankruptcy Appellate Panel held that the arbitration award was ambiguous. In Federal Bankruptcy Court the question of whether all of the requirements for a debt to be deemed not discharged is an uphill battle and any ambiguity in the California State Court case will be decided in favor of the debtor or bankruptcy filer. What is proven in the California State Court will most likely not be exactly the same as a fraud charge, breach of fiduciary duty or willful or malicious injury. If you believe a person you are suing is going to file for bankruptcy protection in the future you must carefully craft your allegations and the wording of any judgment or arbitration award so that it can be used in bankruptcy court.