Higgs v. Colliau

588 B.R. 460

Roy A. HIGGS, individually and on behalf of Inspection Management Systems, Inc., Appellant,

v.Russell Wade COLLIAU, Appellee.

CAUSE NO. 1:17-CV-572-LY

United States District Court, W.D. Texas, Austin Division.

Signed April 27, 2018

Roy A. Higgs, Roseville, CA, pro se.

Michael V. Baumer, Law Office of Michael Baumer, Austin, TX, for Appellee.

MEMORANDUM OPINION AND ORDER

LEE YEAKEL, UNITED STATES DISTRICT JUDGE

This cause is an appeal of an order entered on May 24, 2017, by the United States Bankruptcy Court for the Western District of Texas, Austin Division. Before the court are Appellant's Opening Brief filed September 21, 2017 (Dkt. No. 10), Appellee's Responsive Brief filed October 20, 2017 (Dkt. No. 11), and Appellant's Reply Brief filed November 12, 2017 (Dkt. No. 12). Having carefully considered the briefs, applicable law, and record on appeal, the court concludes that the bankruptcy court's orders should be affirmed in part and modified in part for the reasons to follow.

I. BACKGROUND

For brevity's sake, the court adopts the facts as set out by the bankruptcy court, except where factual findings have been challenged by Higgs.

Higgs raises eight issues in his opening brief: (1) the bankruptcy court erred when it did not apply the doctrine of collateral estoppel and res judicata; (2) the bankruptcy court erred in allowing Colliau to present evidence that was not admitted in his state court proceeding; (3) the bankruptcy court erred in its determination about the California discovery referee; (4) the bankruptcy court erred in its determination that Higgs was not damaged from Colliau's representation about Higgs's shares; (5 & 6) the bankruptcy court erred in finding that Higgs was not damaged when Colliau allegedly diluted Higgs's interest and thus erred in the amount of damages awarded to Higgs; (7) the bankruptcy court erred in finding that Colliau made a loan instead of a capital contribution; (8) the bankruptcy court erred in finding that Higgs received his fair share of dividends.¹

II. STANDARD OF REVIEW

The district court reviews the bankruptcy court's findings of fact under a clearly erroneous standard and conclusions of law de novo. Matter of Berryman Products, Inc. , 159 F.3d 941, 943 (5th Cir. 1998). Mixed questions of fact and law are subject to de novo review. In re CPDC, Inc. , 337 F.3d 436, 441 (5th Cir. 2003). The bankruptcy court's evidentiary rulings are subject to review for abuse of discretion. In re SGSM Acquisition Co., LLC , 439 F.3d 233, 239 (5th Cir. 2006).

III. ANALYSIS

1.

Whether the bankruptcy court should have applied the doctrines of collateral estoppel and res judicata is a question of law reviewed de novo. Bradberry v. Jefferson Cty., Tex. , 732 F.3d 540, 549 (5th Cir. 2013).

"Collateral estoppel, like the related doctrine of res judicata, has the dual purpose of protecting litigants from the burden of relitigating an identical issue with the same party or his privy and of promoting judicial economy by preventing needless litigation." Parklane Hosiery Co., Inc. v. Shore , 439 U.S. 322, 326, 99 S.Ct. 645, 58 L.Ed.2d 552 (1979). Though the bankruptcy court and Higgs considered the two doctrines together,² the doctrines are conceptually distinct:

Under the doctrine of res judicata, a judgment on the merits in a prior suit bars a second suit involving the same parties or their privies based on the same cause of action. Under the doctrine of collateral estoppel, on the other hand, the second action is upon a different cause of action and the judgment in the prior suit precludes relitigation of issues actually litigated and necessary to the outcome of the first action.

Id. at 327 n.5. Thus, res judicata is focused on relitigating the same cause of action; collateral estoppel is focused on relitigating issues previously adjudicated in a different action.

The bankruptcy court rightly focused its analysis on collateral estoppel. This is a second action in bankruptcy, in which Higgs seeks to invoke a previously entered default judgment in California state court to determine dischargeability in bankruptcy. The court will thus proceed in analyzing the issue under the doctrine of collateral estoppel.

A determination of whether debt is nondischargeable is a "matter of federal bankruptcy law, not state law." Matter of Dennis , 25 F.3d 274, 277 (5th Cir. 1994) (citing Grogan v. Garner , 498 U.S. 279, 284, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991) ). But principles of collateral estoppel apply equally to dischargeability proceedings. Grogan , 498 U.S. at 284 n.11, 111 S.Ct. 654 ; Matter of Schwager , 121 F.3d 177, 181 (5th Cir. 1997). The preclusive effect of a California state court default judgment is determined by California law. Marrese v. Am. Acad. of Orthopaedic Surgeons , 470 U.S. 373, 380, 105 S.Ct. 1327, 84 L.Ed.2d 274 (1985) ; Matter of Schwager , 121 F.3d at 181. In California, a court may apply the doctrine collateral estoppel if the following five factors are met:

[T]he issue sought to be precluded from relitigation must be identical to that decided in a former proceeding. Second, this issue must have been actually litigated in the former proceeding. Third, it must have been necessarily decided in the former proceeding. Fourth, the decision in the former proceeding must be final and on the merits. Finally, the party against whom preclusion is sought must be the same as, or in privity with, the party to the former proceeding.

In re Harmon , 250 F.3d 1240, 1245 (9th Cir. 2001). The party asserting collateral estoppel bears the burden of establishing each of these requirements. Id. In addition, the court must find that the "application of preclusion furthers the public policies underlying the doctrine." Id.

A. Privity

In California, privity exists where there is "a mutual or successive relationship to the same rights of property, or to such an identification in interest of one person with another as to represent the same legal rights." Gottlieb v. Kest , 141 Cal. App. 4th 110, 149, 46 Cal.Rptr.3d 7 (2006) (internal punctuation and emphasis omitted). Courts look to whether a non-party is sufficiently close to an unsuccessful party in a prior action to justify the application of collateral estoppel against the non-party. Id. Finally, "the determination of privity depends upon the fairness of binding [a party to the present proceeding] with the result obtained in earlier proceedings in which it did not participate," which "requires close examination of the circumstances of each case." Id. at 149–50, 46 Cal.Rptr.3d 7. The requirement of privity arises out of a due process concern and serves to ensure that a non-party has "an identity or community of interest with, and adequate and zealous representation by, the party in the first action." Id. at 150, 46 Cal.Rptr.3d 7.

i. State Court Default Judgment and Bankruptcy Proceedings

Higgs brought a shareholder derivative action in California state court against Inspection Management Systems, Russell Colliau, Marci Colliau, United Professional Real Estate Inspectors, Inc., Mold Detectives, Inc., and Husbands for Rent, Inc.

In California, a court may enter default judgment for conduct that misuses the discovery process. See CAL. CIV. CODE § 2023.030. A discovery referee recommended entering default judgment against United Professional Real Estate Inspectors, Mold Detectives, and Husbands for Rent³ because these defendants "intentionally and in bad faith refused to produce documents." The referee recommended an entry of default judgment because "the only effective sanction as to these corporate defendants is entry of default judgment.... [t]he documents that defendants refused to produce were crucial to proving both liability and damages" against the corporate defendants. The referee did not recommend entering default judgment against Inspection Management Systems because it produced responsive documents. The discovery referee also declined to recommend entering default judgment against Colliau under an alter ego theory, despite his conclusion that Colliau "played a central role" in the corporate defendants' refusal to produce documents.

Higgs objected to the discovery referee's conclusion not to enter default against Colliau and requested that the state court also enter judgment against Colliau and his wife, Marci. The state court declined to do so, stating that:

[The discovery referee] noted in the Recommendations that as the court has refused to allow plaintiff to pursue an alter ego theory against the individual defendants, it would not be appropriate to order an entry of default judgment against Russell Colliau. This finding is supported. The operative complaint in this action contains no allegations of alter ego liability, and the court declined to permit plaintiff to amend his complaint to add such allegations. It is not appropriate to enter terminating sanctions against Russell Colliau in his individual capacity.

The state court did, however, adopt the recommendation of the discovery referee and entered default against the corporate defendants for fraud, misappropriation, and conspiracy to commit fraud and misappropriation. After default was entered, Higgs filed a motion to amend the default judgment to add Colliau as a judgment debtor. This motion was denied because granting it would not resolve all causes of action against Colliau. Higgs then dismissed several causes of action and filed another motion to amend the default judgment to add Colliau. The state court again denied Higgs's motion on due process grounds, stating that:

[D]efault judgments have been entered against the Corporate Defendants. However, Colliau answered the complaint, remains a party in the action, and has been actively litigating his defenses and cross-claims against Higgs. Terminating sanctions were requested, and denied, as against Colliau. Higgs also provides very little evidence regarding Colliau's control of the litigation with respect to the Corporate Defendants....

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