Nguyen v. Nguyen (In re Nguyen)

In re: Tony L Phan Jenny Nguyen Debtor(s).

Thu Nguyen, Truc Phan Plaintiff(s), v. Jenny Nguyen, Tony Lee Phan Defendant(s).

Case No.: 8:12-bk-16820-MW

Adv. No.: 8:12-ap-01334-MW

UNITED STATES BANKRUPTCY COURT CENTRAL DISTRICT OF CALIFORNIA SANTA ANA DIVISION

July 10, 2015

CHAPTER 7

MEMORANDUM DECISION AND ORDER

Date of Trial: June 30, 2015

Time: 9:00 a.m.

Courtroom: 6C

Justin Sterling, Esq. for Plaintiffs and David Tang, Esq. for Defendants

WALLACE, J.

This adversary proceeding came on for a bifurcated trial on June 30, 2015 to determine whether a debt owed to plaintiffs Truc Phan and Thu Nguyen ("Plaintiffs") by defendant-debtors Tony Lee Phan and Jenny Nguyen ("Defendants") is excepted from discharge pursuant to 11 U.S.C. § 523(a)(2)(A). The sole issue before the Court at this first phase of the bifurcated trial is whether the doctrine of issue preclusion applies and bars the Defendants from re-litigating a default judgment entered against them by the Orange County Superior Court.

The Court has subject matter jurisdiction over this proceeding pursuant to 28 U.S.C. § 1334 and General Order 13-05, filed July 1, 2013, of the United States District Court for the Central District of California. This is a core proceeding under 28 U.S.C. § 157(b)(2)(I).

On the record, in response to the Court's inquiry, each of the parties expressly consented to this Court's final determination of this case under the rule of Stern v. Marshall, 564 U.S. ___, 131 S.Ct. 2594 (2011) and Wellness International Network, Ltd. v. Sharif, ___ U.S. ___, 135 S.Ct. 1932 (2015).

FINDINGS OF FACT

A. Acquisition of the Property and the First State Court Action.

Plaintiffs joined with Defendants in or about July 2000 to acquire real property located at 11693 Garden Grove Boulevard, Garden Grove, California 92843 (the "Property") on a 50/50 basis. Title to the Property was held solely in Defendants' names. A dispute erupted when Plaintiffs demanded that their names be added to the title. Plaintiffs filed a complaint against Defendants in Orange County Superior Court on July 26, 2007 (the "First State Court Action") and recorded a lis pendens with respect to the Property on August 3, 2007.

The First State Court Action was settled in open court on January 28, 2009. Under the terms of the settlement, the Defendants agreed that the Plaintiffs had a 50 percent interest in the Property and agreed to pay Plaintiffs 50 percent of the Property's net value (appraised value less costs of sale, prorated property taxes and the existing first mortgage). Defendants were to fund the buyout out of their own financial resources or from the proceeds of a refinancing of the Property.

B. The Second State Court Action: Allegations and Causes of Action.

The settlement did not finally end the matter because terms of the settlement were not performed by Defendants. Approximately one year and four months after the settlement was concluded, on or about May 14, 2010, Plaintiffs filed a First Amended Complaint against Defendants in Orange County Superior Court, Case Number 30-2009-00323196 (the "Second State Court Action").¹ Plaintiffs alleged in the Second State Court Action that Defendants had intentionally concealed from them during the settlement negotiations their placement of a second mortgage in the amount of $150,000 on the Property in December 2007 (the lender was Wells Fargo Bank). Plaintiffs further alleged that they did not discover the second mortgage's existence until almost three months after the settlement, on April 20, 2009.

The First Amended Complaint in the Second State Court Action, Doc 11-3, filed September 25, 2012 (the "First Amended Complaint") states seven causes of action against Defendants: (1) intentional misrepresentation, (2) negligent misrepresentation, (3) conversion, (4) declaratory judgment, (5) equitable lien, (6) constructive trust, and (7) quiet title. Significantly, Plaintiffs chose not to seek relief in the First Amended Complaint with respect to Defendants' breach of the settlement agreement. No portion of the First Amended Complaint states a cause of action for breach of contract.

1. Cause of Action for Intentional Misrepresentation.

In their first cause of action for intentional misrepresentation, Plaintiffs alleged each of the elements of fraud under California law: (1) Defendants deliberately failed to disclose the existence of the second mortgage in connection with the negotiation of the settlement agreement and continuously represented that there was only one mortgage on the Property; (2) the representation related to a material fact; (3) the Defendants knew their representation was false; (4) the Defendants made the representation with the intent to deceive and to induce reliance by the Plaintiffs; (5) the Plaintiffs were unaware that the representation was false and in fact justifiably relied upon it; (6) Plaintiffs suffered resulting damage from their reliance upon Defendants' false representation; and (7) Plaintiffs' reliance on Defendants' representation was a substantial factor in causing harm to Plaintiffs.²

Plaintiffs sought damages for "out-of-pocket expenses, actual damages, and other loss. . ." with respect to their first cause of action. First Amended Complaint at page 8 of 15, lines 20-22.

2. Cause of Action for Negligent Misrepresentation.

The second cause of action for negligent representation is an exact carbon copy of the first cause of action except for its title. Notwithstanding the title of negligent misrepresentation (underscoring added), the second cause of action has precisely the same allegations as the first cause of action, as if the typist had simply used the computer to supercopy all the allegations in the first cause of action and then inserted them under the heading "SECOND CAUSE OF ACTION (Negligent Misrepresentation)" without changing a single word. Thus, although the second cause of action is labeled "negligent misrepresentation," there is no negligence pleaded and the second cause of action is simply a repetition of the first cause of action for intentional misrepresentation with an incorrect label.

3. Cause of Action for Conversion.

The third cause of action is for conversion. It is this cause of action that Defendants rely upon most heavily for their contention that issue preclusion does not apply in this case. In the cause of action for conversion, Plaintiffs alleged that the second mortgage demonstrated a wrongful exercise of dominion and control by Defendants over Plaintiffs' interest in the Property because Defendants had effectively seized possession of Plaintiffs' interest in the Property since December 3, 2007. Plaintiffs also contended that the second mortgage continuously prevented them from having access to their Property interest, as they could not proceed with a sale under the settlement agreement due to a potential foreclosure action from the second mortgage and that upon completion of any foreclosure sale, the Plaintiffs' 50% Property interest would be significantly reduced in order to pay off the second mortgage. First Amended Complaint at 9 - 10 of 15.

Although using somewhat different language, Plaintiffs' cause of action for conversion sought damages very similar to those sought under the first cause of action. As will be seen later, the identity or near identity of damages under the first and third causes of action complicates the inquiry into the basis for the judgment issued by the Orange County Superior Court in the Second State Court Action.

4. Other Causes of Action.

In the additional causes of action stated in the First Amended Complaint, Plaintiffs sought a declaratory judgment that the Property be sold and Plaintiffs awarded a 50 percent interest therein exclusive of the second mortgage, that an equitable lien be impressed on the Property, that a constructive trust be placed upon the Property, and that title to the Property be quieted in Plaintiffs' favor with respect to their 50 percent undivided interest in the Property. First Amended Complaint at pages 9-14 of 15.

C. The Second State Court Action: Default and Default Judgment.

Defendants failed to timely answer the First Amended Complaint, and their default was entered. Plaintiffs filed a Request for Court Judgment (the "Request for Judgment") on or about June 14, 2011.³ Plaintiffs sought damages of $171,813 on the first page of the Request for Judgment, consisting of $122,238 in special damages, $6,120 in interest, $455 in costs, and $43,000 in attorney fees. On the third page of the Request for Judgment, the Plaintiffs itemized their damages as follows (and came up with a number differing from the number on the first page by $455.48 - roughly the amount of costs, with the 48 cent difference likely attributable to rounding): "Damages from Defendants' Fraud" of $76,500.00, $5,347.80 for "Homeowners Association Payments", $43,000.00 in "Attorney Fees", "Interest on Plaintiffs' Proceeds Share" of $6,120.00, and "Total Mortgage Payments" of $40,389.72. The fourth page of the Request for Judgment supplies added detail with respect to the "Total Mortgage Payments."

Also attached to the Request for Judgment are three declarations and one pseudo-declaration. The three declarations are: (1) Declaration of Truc Phan; (2) Declaration of Thu Nguyen; and (3) Declaration of Phu Do Nguyen Regarding Prejudgment Interest. The pseudo-declaration, entitled Declaration in Support of Plaintiffs Truc Phan and Thu Nguyen's Application for Default Judgment By Court, is not really a declaration at all but instead a document authored by Plaintiffs' attorney Justin Sterling that lays out the case for awarding $171,357.52 in damages for intentional and negligent misrepresentation, $171,357.52 for conversion based upon Defendants' interference with Plaintiffs' 50 percent interest in the Property (interference that occurred because a secret second mortgage had been placed on the Property by Defendants) and for quieting title with respect to the...