Bass v. Romano (In re Romano)

In re: JOSHUA B. ROMANO, Debtor.

MELISSA K. BASS, Plaintiff, v. JOSHUA B. ROMANO, Defendant.

Case No. 18-35464-KRH

Adv. Pro. No. 19-03017-KRH

UNITED STATES BANKRUPTCY COURT FOR THE EASTERN DISTRICT OF VIRGINIA Richmond Division

October 15, 2019

Chapter 7

MEMORANDUM OPINION

On September 19, 2019 (the "Trial Date"), the Court conducted a trial (the "Trial") on the complaint (the "Complaint") of Melissa K. Bass (the "Plaintiff") for a determination whether the debt owed to her by the debtor, Joshua B. Romano (the "Debtor"), is not dischargeable under section 523(a)(2)(A) of title 11 of the United States Code (the "Bankruptcy Code"). At the conclusion of the trial, the Court took the matter under advisement.

This Memorandum Opinion sets forth the Court's findings of fact and conclusions of law in accordance with Rule 7052 of the Federal Rules of Bankruptcy Procedure.¹ The Court has subject matter jurisdiction over this adversary proceeding pursuant to 28 U.S.C. §§ 157(a) and 1334 and the General Order of Reference from the United States District Court for the EasternDistrict of Virginia dated August 15, 1984. This is a core proceeding under 28 U.S.C. §§ 157(b)(2)(A), (I), and (O), in which final orders or judgments may be entered by a bankruptcy judge. Venue is appropriate in this Court pursuant to 28 U.S.C. § 1409(a).

On October 8, 2016, the Plaintiff entered into a contract (the "Purchase Agreement") to acquire a residence located at 3122 Edgewood Avenue, Richmond, Virginia 23222 (the "Property") from CNJ Ventures LLC ("CNJ"), an entity solely owned by the Debtor. Pl.'s Ex. 4. The Purchase Agreement contemplated that CNJ would perform various renovations and repairs to the Property prior to an anticipated closing date in January 2017. Id. Closing was delayed as work on the Property ensued. In the meantime, Plaintiff sold her existing home and obtained temporary housing until the renovations and repairs could be finished. In April 2017, Plaintiff had a home inspection performed on the Property. Pl.'s Ex. 5. The inspection revealed a number of deficiencies that still needed to be addressed by CNJ. But Plaintiff was anxious to occupy her new home. Although not all of the repairs and renovations had been completed to Plaintiff's satisfaction, she nevertheless agreed to close on the purchase of the Property, based upon the Debtor's assurances that he would correct the outstanding issues after closing. Compl. ¶¶ 7-9. Plaintiff did not request that any portion of the purchase price be escrowed to pay for the promised repairs.

Following closing on May 5, 2017, Plaintiff provided the Debtor with a list of the items that needed to be completed or repaired. Pl.'s Ex. 5. The Debtor attended to certain of the issues on the list over the course of the next few months, but he did not correct all of the noted deficiencies to Plaintiff's satisfaction. Work on the Property ceased entirely near year end when the Debtor ran out of funds. Plaintiff thereupon obtained estimates of the cost to complete the outstanding items. See, e.g., Pl.'s Ex. 12, 13A, 13D, 14, 15 B-E, 16, 17, 18, 19, 20. As of theTrial Date, Plaintiff had commenced work to finish the repairs and renovations on the Property utilizing her own funds, but not all of the issues had been resolved.

Almost a year following closing, on April 20, 2018, Plaintiff sued the Debtor and three entities solely owned and operated by him, including CNJ, in the Circuit Court for the City of Richmond, Virginia (the "State Court"). The State Court complaint included four counts alleging breach of contract, misrepresentation and fraud, breach of implied warranty, and unjust enrichment. Another count sought to void certain transfers and assert liens against the defendants under sections 55-80 through 55-82.1 of the Virginia Code.² Pl.'s Ex. 1. The State Court entered judgement by default as to liability against all four defendants on July 31, 2018 (the "Default Judgment"). Pl.'s Ex. 2. On October 31, 2018, the Debtor filed a voluntary petition under chapter 7 of the Bankruptcy Code, thereby staying the State Court proceeding as to the Debtor. That same day, the State Court fixed damages against the remaining three corporate defendants in the amount of $239,539.86.

Plaintiff timely filed the Complaint in the case at bar on February 7, 2019, seeking a determination of the dischargeability of the Default Judgment. The Complaint alleges that the Debtor induced Plaintiff to close on the purchase of the Property by false pretenses, false representations, or actual fraud. Due to Plaintiff's reliance on the Debtor's false pretenses, false representations, or actual fraud, Plaintiff claims that she sustained damages of not less than $239,539.86. Thus, Plaintiff requests that her claim against the Debtor be declared non-dischargeable under section 523(a)(2)(A) of the Bankruptcy Code.

An overriding policy goal of the Bankruptcy Code is to afford debtors with a fresh start. Dominion Va. Power v. Robinson (In re Robinson), 340 B.R. 316, 328 (Bankr. E.D. Va. 2006) (citing KMK Factoring, L.L.C. v. McKnew (In re McKnew), 270 B.R. 593, 617 (Bankr. E.D. Va. 2001)). To promote that goal, section 727 of the Bankruptcy Code allows Chapter 7 debtors to receive a general discharge of their debts except as provided in section 523 of the Bankruptcy Code. 11 U.S.C. § 727(b). Section 523 of the Bankruptcy Code provides certain statutory exceptions to the general discharge. Id. § 523(a). In keeping with the policy of promoting a debtor's fresh start, courts are to construe the exceptions to discharge narrowly against the objecting creditor and in favor of the debtor. TKC Aerospace Inc. v. Muhs, (In re Muhs), 923 F.3d 377, 384 (4th Cir. 2019); In re Robinson, 340 B.R. at 329 (citing Foley & Lardner v. Biondo (In re Biondo), 180 F.3d 126, 130 (4th Cir. 1999)). The burden of proof is on the creditor seeking to except the debt from discharge. In re Muhs, 923 F.3d at 384 (citing Grogan v. Garner, 498 U.S. 279, 287 (1991)). One of the statutory exceptions applicable to a chapter 7 discharge is on account of debts owed for "money, property, [or] services . . . to the extend obtained by false pretenses, a false representation, or actual fraud . . . ." 11 U.S.C. § 523(a)(2)(A).

At Trial, Plaintiff first argued that the doctrine of collateral estoppel precluded the Debtor from relitigating the dischargeability of the Default Judgment under section 523(a)(2)(A) of the Bankruptcy Code. "State court judgments can collaterally estop the litigation of issues in adversary proceedings in federal bankruptcy court." Duncan v. Duncan (In re Duncan), 448 F.3d 725, 728 (4th Cir. 2006) (citing Pahlavi v. Ansari (In re Ansari), 113 F.3d 17, 19 (4th Cir. 1997)). "In determining the preclusive effect of a state-court judgment, the federal courts must, as a matter of full faith and credit, apply the forum state's law of collateral estoppel." Hagan v.McNallen (In re McNallen), 62 F.3d 619, 624 (4th Cir. 1995). In this case, Virginia's law of collateral estoppel applies. Virginia state collateral estoppel law requires five elements:

First, the issue litigated must have been essential to the prior judgment. Second, the prior action must have resulted in a valid and final judgment against the party sought to be precluded in the present action. Third, the parties or privies in both proceedings must be the same. Fourth, there must be mutuality between the parties. Finally, the factual issue litigated actually must have been litigated in the prior action.

Reed v. Owens (In re Owens), 449 B.R. 239, 250 (Bankr. E.D. Va. 2011) (quoting E.L. Hamm & Assocs., Inc. v. Sparrow (In re Sparrow), 306 B.R. 812, 825 (Bankr. E.D. Va. 2003)). Collateral estoppel may apply where the first judgment is a default judgment. TransDulles Ctr., Inc. v. Sharma, 472 S.E.2d 274, 276 (Va. 1996) ("Virginia law does not support a blanket exemption from the application of collateral estoppel in the case of a default judgment.").

Collateral estoppel is inapplicable to the case at bar because the first element of Virginia's collateral estoppel doctrine is missing. The issue litigated - false pretenses, false representations, or actual fraud - was not essential to the entry of Default Judgment by the State Court. "The liability in the state court must be specifically based on the identical issue in the adversary proceeding for collateral estoppel to apply." MT Tech. Enters., LLC v. Nolte (In re Nolte), 542 B.R. 185, 193 (Bankr. E.D. Va. 2015) (citing Duncan, 448 F.3d at 729-30); accord In re Muhs, 923 F.3d at 387-88 (applying similar Alaskan collateral estoppel law). "[T]he legal standards must be identical and the finder of fact must expressly indicate that liability was found under the identical legal standard and not a lesser standard. . . . Even if the two issues are identical, the state court's finding of liability must be clear. There must be no possibility of a non-identical finding of liability." In re Nolte, 542 B.R. at 193 (citing Duncan, 448 F.3d at 730). "A corollary to the general rule of collateral estoppel is that, where the court in the prior suit hasdetermined two issues, either of which could independently support the result, then neither determination is considered essential to the judgment. Thus, collateral estoppel will not obtain as to either determination." Ritter v. Mount St. Mary's Coll., 814 F.2d 986, 993 (4th Cir. 1987); see also Kloth v. Microsoft Corp. (In re Microsoft Corp. Antitrust Litig.), 355 F.3d 322, 328 (4th Cir. 2004).

In this case, in order for the Debtor to be collaterally estopped from relitigating non-dischargeability of the debt, the State Court must have specifically found that the Debtor obtained money, property, or services through false pretenses, a false representation or actual fraud. The Default Judgment did not include specific findings; instead, it granted judgment against the defendants as to liability as requested in Plaintiff's...