In re Gregg Fiene, No. 2:2010cv09586 - Document 26 (C.D. Cal. 2012)
Court Description: MEMORANDUM OPINION AND ORDER AFFIRMING THE JUDGMENT OF THE BANKRUPTCY COURT by Judge Virginia A. Phillips: (see document image for further details). The bankruptcy court did not err in determining that issue preclusion was available under the arbitra tion award Chic and the Forouzeshes secured against Fiene, nordid it abuse its discretion by then giving the award precisely that preclusive effect in these proceedings. Having done so, the bankruptcy court then granted Chic and the Forouzeshes summary judgment properly. The Court therefore AFFIRMS the judgment of the bankruptcy court. (Made JS-6. Case Terminated.) (ad)
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1 2 3 4 JS-6 5 6 7 8 UNITED STATES DISTRICT COURT 9 CENTRAL DISTRICT OF CALIFORNIA 10 11 IN RE: 12 13 14 15 16 17 18 19 ) ) GREGG FIENE, ) DEBTOR ) ) ) Selection Chic Look, ) Inc., et al., ) ) Plaintiffs-Appellees, ) ) v. ) ) Gregg Fiene, ) ) Defendant-Appellant. ) ________________________ ) Case No. CV 10-09586-VAP USBC Case No. LA09-12423 BR ADVERSARY Case No. LA0901486 BR MEMORANDUM OPINION AND ORDER AFFIRMING THE JUDGMENT OF THE BANKRUPTCY COURT [Motion filed on April 29, 2011] 20 21 Appellant Gregg Fiene and Appellees Danny Forouzesh, 22 Cyrus Forouzesh (collectively, "the Forouzeshes"), and 23 Selection Chic Look, Inc. (hereafter, "Chic" a company 24 over which Cyrus Forouzesh presided) participated in an 25 arbitration over a dispute involving a collapsed business 26 venture, in which the Forouzeshes and Chic were investors 27 and of which Fiene was the president. 28 The arbitrator 1 held that Fiene defrauded the Forouzeshes and Chic of 2 their investment, and awarded them damages. 3 4 During the pendency of the arbitration, however, 5 Fiene filed for bankruptcy protection. After prevailing 6 in the arbitration, Chic and the Forouzeshes initiated an 7 adversary proceeding against Fiene in the bankruptcy 8 court, seeking to prevent Fiene from discharging the 9 arbitration award in bankruptcy. The bankruptcy court 10 granted summary judgment in Chic's and the Forouzeshes' 11 favor, finding that Fiene was estopped from arguing 12 against the arbitrator's conclusion that he defrauded the 13 Forouzeshes and Chic; the bankruptcy court therefore held 14 that Fiene's debt to Chic and the Forouzeshes could not 15 be discharged. 16 judgment. Fiene now appeals the bankruptcy court's For the following reasons, the judgment of the 17 bankruptcy court is AFFIRMED. 18 19 I. BACKGROUND 20 In 2003, the Forouzeshes approached Fiene with a 21 proposal to develop a line of women's clothing called 22 "Yank" for Cyrus Forouzesh's clothing company, Selection 23 Chic. The Forouzeshes did so with the intention that 24 Danny Forouzesh would one day take over running the Yank 25 line. In April 2004, the Forouzeshes hired Fiene to 26 develop the line for Chic; in September, they brought 27 Gregg Walker in as an investor in the line. 28 2 As a 1 condition of his investment, however, Walker insisted 2 that a new company be formed as a vehicle for developing 3 the Yank brand. Fiene and Walker together formed G- 4 Squared Fashions, Inc. ("G2"), a company into which the 5 Forouzeshes and Chic made a capital investment valued at 6 $600,000. The Forouzeshes' and Chic's investment was 7 memorialized in an "Agreement between Capital Investor 8 and New Company" ("Agreement"), drafted by Walker and 9 signed by the Forouzeshes, Fiene, and Walker. 10 11 The Agreement set forth seven provisions benefitting 12 G2, to which the Forouzeshes and Chic (together, as the 13 "Capital Investor") agreed, and in exchange for which G2 14 was to: 15 Issue stocks in the name of Danny Foruzesh in 16 [G2] based on the formula below. 17 represents examples so if amount sold to 18 investor's [sic] changes, this formula will be 19 used to finalize the final percentage to Danny 20 Foruzesh). (This formula 21 22 20% OF THE COMPANY SOLD TO INVESTORS 23 24 Amount raised $2,000,000 plus $600,000(Capital 25 Investor)= 4.62% + 4% = 8.62% 26 27 28 3 1 Amount raised $3,500,000 plus $600,000(Capital 2 Investor) = 2.93% + 4% = 6.93% 3 4 (R. at 88) (errors in original). 5 6 The Agreement contained a choice of law clause 7 (California) and an arbitration clause, and the parties 8 executed it on October 7, 2004. (R. at 89.) 9 10 As it turned out, G2 never issued any shares to Danny 11 Forouzesh. In late 2005, the Forouzeshes and Chic sued 12 G2, Walker, and Fiene in the California Superior Court 13 for the County of Los Angeles, alleging among other 14 things that G2, Walker, and Fiene never intended to 15 issue shares in G2 to Danny Forouzesh, and thereby 16 defrauded the Forouzeshes and Chic by gulling them into 17 entering an agreement to purchase the shares in exchange 18 for their capital contribution. (See R. at 79-80.) 19 Pursuant to the Agreement's arbitration clause, G2, 20 Fiene, and Walker compelled Chic and the Forouzeshes to 21 arbitrate all of their claims. 22 23 The arbitration proceeded in two sessions, the first 24 taking place between April 27 and April 30, 2008 and May 25 1 and 2, 2008, and the second taking place between July 26 27 and 29, 2009. Between the two sessions, Fiene filed 27 for bankruptcy protection, and after the bankruptcy court 28 4 1 granted Chic and the Forouzeshes relief from the 2 automatic stay (see R. at 92), the arbitration proceeded 3 with Fiene now unable to pay for counsel representing 4 himself. 5 6 The arbitrator issued a decision on October 15, 2009, 7 concluding that G2, Fiene, and Walker violated California 8 securities law by offering to issue shares to Danny 9 Forouzesh, entitling Chic and the Forouzeshes to "return 10 of the value of consideration given for the shares," 11 i.e., $600,000. (R. at 139.) The arbitrator also found 12 G2, Fiene, and Walker breached an oral agreement with the 13 Forouzeshes as to an obligation to employ Danny 14 Forouzesh, and to repay the Forouzeshes and Chic for 15 certain advances. (See R. at 140-41.) Most importantly, 16 after noting that "[w]ith the bankruptcy of the 17 Respondent/Debtors [i.e., Fiene, Walker, and G2], this 18 case is all about fraud," the arbitrator set forth 19 evidence supporting his conclusion that Fiene, Walker, 20 and G2 defrauded the Forouzeshes and Chic by taking their 21 capital without any intention of ever providing the 22 promised equity in G2. (See R. at 141-44.) The 23 arbitrator then awarded Chic and the Forouzeshes $810,000 24 for the rescission of the stock agreement ($600,000 in 25 capital contributions, plus interest at 7% from October 26 7, 2004, to the time of the judgment) and an additional 27 $143,418.14 for other damages related to G2's, Fiene's, 28 5 1 and Walker's breach of contract. Finally, the arbitrator 2 awarded $3,533.75 in arbitration fees and expenses, for a 3 total of $956,951.89 in damages, for which Fiene, Walker, 4 and G2 were responsible jointly and severally. (R. at 5 149-50.) 6 7 On June 11, 2010, the superior court reduced the 8 arbitrator's award to a judgment of $956,951.89, plus 9 $36,169.76 in costs, pre-judgment interest of $16,339.94, 10 and post-judgment interest accruing at 10% per year. 11 at 168-69.) (R. The Forouzeshes and Chic then filed an 12 adversary action in Fiene's bankruptcy proceedings; in 13 it, they claimed alternately that the judgment debt Fiene 14 owed them was non-dischargeable because of his fraud, see 15 11 U.S.C. § 523(a)(2)(A), his causation of a willful and 16 malicious injury, see 11 U.S.C. § 523(a)(6), and his 17 securities law violation, see 11 U.S.C. § 523(a)(19). 18 (See R. at 5-19.) They aimed to prevent Fiene from 19 discharging at least $615,000 of the debt, plus pre20 judgment interest, punitive damages, attorneys' fees, and 21 costs. (See R. at 18-19.) 22 23 The Forouzeshes and Chic then moved for summary 24 judgment on their claims, arguing the arbitration award, 25 reduced to judgment, was outcome determinative: the 26 arbitrator's determination that Fiene defrauded the 27 Forouzeshes and Chic, and violated California securities 28 6 1 law, would preclude Fiene from arguing otherwise in 2 defending the adversary proceeding. (See R. 33-46.) The 3 bankruptcy court agreed, and ordered that the Forouzeshes 4 and Chic recover from Fiene a non-dischargeable money 5 judgment of $838,652.05, representing "the principal 6 amount of $600,000, plus interest of $238,652.05." (See 7 R. at 595-96.) 8 9 Fiene appealed the bankruptcy court's decision to 10 this Court, arguing that the bankruptcy court erred in 11 giving preclusive effect to the arbitration award entered 12 against him. Chic and the Forouzeshes filed no cross- 13 appeal (as to, e.g., the amount of the award), though 14 they did contest Fiene's appeal, arguing that the 15 bankruptcy court granted summary judgment correctly the 16 issue to which this Court now turns. 17 18 19 II. LEGAL STANDARD The standard of review that applies here is a 20 familiar one: the decision of the bankruptcy court to 21 grant summary judgment is reviewed de novo. In re 22 Bakersfield Westar Ambulance, Inc., 123 F.3d 1243, 1245 23 (9th Cir. 1997); see In Re Adv. Packaging & Prods. Co., 24 426 B.R. 806, 816 (C.D. Cal. 2010) ("When reviewing a 25 decision of the bankruptcy court, a district court 26 functions as an appellate court and applies the standards 27 of review generally applied in federal courts of 28 7 1 appeal."). In conducting its review, the Court views the 2 evidence in the light most favorable to the non-moving 3 party (here, Fiene), granting him the benefit of 4 reasonable inferences that can be drawn from the facts. 5 In re SNTL Corp., 571 F.3d 826, 834 (9th Cir. 2009). 6 7 Likewise, the Court conducts a de novo review of the 8 bankruptcy court's determination that issue preclusion is 9 available; that is, that findings in one proceeding may 10 preclude litigation of the same issues in another. Dias 11 v. Elique, 436 F.3d 1125, 1128 (9th Cir. 2006); In re 12 Lopez, 367 B.R. 99, 103 (B.A.P. 9th Cir. 2007). Once it 13 is determined that issue preclusion is available, 14 however, the bankruptcy court's decision to apply it is 15 discretionary, and will be reversed only if the 16 bankruptcy court somehow abused its discretion. Dias, 17 436 F.3d at 1128 (citing Miller v. Cnty. of Santa Cruz, 18 39 F.3d 1030, 1032 (9th Cir. 1994)). 19 20 21 III. DISCUSSION Whether the bankruptcy court granted summary judgment 22 correctly in favor of the Forouzeshes and Chic turns on 23 two questions: (A) whether the arbitration award (as 24 confirmed by the superior court) can be considered 25 preclusive as to its findings i.e., that Fiene 26 defrauded Chic and the Forouzeshes and; (B) assuming 27 the award is preclusive as to its findings, whether those 28 8 1 findings satisfy the non-dischargeability requirements 2 set forth in 11 U.S.C. § 523. 3 4 In this case, Fiene's principal arguments are first, 5 that the arbitration was unsound procedurally its 6 results were therefore undeserving of the preclusive 7 effect the bankruptcy court gave them and second, that 8 even if the bankruptcy court gave the arbitration award 9 preclusive effect, the elements necessary to prove non10 dischargeability under 11 U.S.C. § 523 are absent from 11 the arbitrator's findings. 12 13 A. Arbitration and Preclusion 14 Having been adjudicated under California law, the 15 arbitration award in this case, confirmed by the superior 16 court, has the same preclusive effect in this Court (and 17 in the bankruptcy court) as it would in a California 18 state court. See In re Bybee, 945 F.2d 309, 316 (9th 19 Cir. 1991) ("the res judicata effect of a previous state 20 court judgment is determined by the law of the rendering 21 court."); see, e.g., In re Khaligh, 338 B.R. 817, 824 22 (B.A.P. 9th Cir. 2006) (noting that a federal court must 23 give the same preclusive effect to a state court judgment 24 as would the courts of that state); see generally 28 25 U.S.C. § 1738 (requiring federal courts to accord "the 26 same full faith and credit" to state judicial proceedings 27 as those proceedings would have under the law of the 28 9 1 state in which they occurred). In California, the 2 determination of an issue in one forum precludes its 3 litigation in another if: (1) the issue sought to be 4 precluded from litigation is identical to the issue 5 decided previously; (2) the issue was actually litigated 6 in the earlier proceeding (i.e., the issue cannot have 7 been decided en passant); (3) resolution of the issue 8 must have been necessary to deciding the earlier 9 proceeding; (4) the decision in the earlier proceeding 10 must have been a final one, on the merits; and (5) "the 11 party against whom preclusion is sought must be the same 12 as, or in privity with, the party to the former 13 proceeding." Hernandez v. City of Pomona, 46 Cal. 4th 14 501, 513 (2009). Fiene posits a sixth criterion, 15 requiring courts to apply preclusion "only where such 16 application comports with fairness and sound public 17 policy." Vandenberg v. Super. Ct., 21 Cal. 4th 815, 835 18 (1999). 19 20 Fiene then argues, unconvincingly, that the 21 bankruptcy court erred in giving preclusive effect to the 22 arbitration award because the arbitration was unfair to 23 Fiene, who lacked counsel and, being unable to continue 24 paying his share of the arbitration fees, could not 25 assert a compulsory cross-claim. In other words, Fiene 26 argues that the arbitration violated the sixth criterion 27 for determining whether issue preclusion is available. 28 10 1 Further, Fiene argues, the arbitration lacked 2 evidentiary rules sufficient for the bankruptcy court to 3 be able to determine, with certainty, that the same 4 issues were litigated in the arbitration. In other 5 words, Fiene argues the bankruptcy court could not 6 conclude at summary judgment that the arbitration award 7 met the first criterion for issue preclusion set forth 8 above. 9 10 1. Was the Arbitration Fair? 11 In assessing whether an underlying arbitration was 12 fair enough to be given preclusive effect in later 13 litigation, courts look to whether the arbitration 14 "followed basic elements of adjudicatory procedure." In 15 re Khaligh, 338 B.R. at 828 (citing Kelly v. Vons Cos., 16 67 Cal. App. 4th 1329, 1336-37 (1998)); see, e.g., People 17 v. Sims, 32 Cal. 3d 468, 479-82 (1982) (setting forth 18 facts indicating that an underlying administrative 19 proceeding was judicial in nature for the purpose of 20 preclusion) superseded in irrelevant part by statute, 21 1984 Cal. Stat. c. 1448 § 6 as recognized in People v. 22 Preston, 43 Cal. App. 4th 450 (1996); cf. United States 23 v. Utah Constr. & Mining Co., 384 U.S. 394, 421-22 (1966) 24 ("When an administrative agency is acting in a judicial 25 capacity and resolves disputed issues of fact properly 26 before it which the parties have had an adequate 27 28 11 1 opportunity to litigate, the courts have not hesitated to 2 apply res judicata to enforce repose."). 3 4 Fiene contends first that "the arbitration 5 proceedings in this case do not possess the requisite 6 indicia that they were sufficiently adjudicatory" 7 (Appellant's Opening Br. (Doc. No. 19) at 13), because he 8 "was not represented by counsel and presented no 9 witnesses" (id.). This argument fails; a judicial 10 proceeding such as the one in which Fiene would have 11 remained had he not compelled Chic and the Forouzeshes to 12 arbitrate remains adjudicative regardless whether the 13 participants (1) are represented, or (2) put on 14 witnesses. If instead Fiene means to argue that an 15 adjudicatory proceeding is unfair as a matter of public 16 policy when a party lacks counsel or declines to put on 17 witnesses, his argument is still implausible. There is 18 no general guarantee of counsel (as opposed to a right to 19 hire one's own counsel) in civil cases in either the 20 federal or California state courts; civil proceedings in 21 either forum are not thereby rendered unfair as a matter 22 of public policy. See Lassiter v. Dep't of Soc. Servs., 23 452 U.S. 18, 25-27 (1981) (holding that there is 24 generally no constitutional right to appointment of 25 counsel in civil cases); Cnty. of Santa Clara v. Super. 26 Ct., 2 Cal. App. 4th 1686, 1691 n.3 (1992) (declining to 27 find civil litigants have a general right to appointed 28 12 1 counsel). Likewise, when a party is entitled to call 2 witnesses but declines to do so he can hardly fault 3 the forum in which he is litigating for his own failure 4 to make use of its procedures. "It is the opportunity to 5 litigate that is important in these cases, not whether 6 the litigant availed him or herself of the opportunity." 7 Rymer v. Hagler, 211 Cal. App. 3d 1171, 1179 (1989). 8 9 Fiene then argues that the arbitrator's analysis was 10 truncated due to Fiene's inability to pay the fees for 11 arbitration, and that "is reason alone to find that the 12 arbitration was not sufficiently adjudicatory." 13 (Appellant's Opening Br. at 14.) Moreover, Fiene adds, 14 he was unable to present a cross-claim because he could 15 not pay the arbitrator to decide it. (Id.) 16 17 As to the argument that the arbitrator's truncated 18 analysis is a sufficient reason to disregard the 19 arbitration award's preclusive value, the Court notes 20 that the arbitrator nowhere stated that he performed a 21 truncated analysis. Instead, he wrote that he read 22 opening and closing briefs, took testimony from "numerous 23 witnesses," and received declarations, affidavits, and 24 "almost 300" other documents in evidence. (R. at 133.) 25 He then stated not that his analysis was curtailed due to 26 a lack of funding, but instead that his "decision [would] 27 be somewhat abbreviated." The length of a decision, 28 13 1 however, is no basis by which to measure the value of its 2 content or the analysis involved in authoring it. See, 3 e.g., Denny v. Radar Indus., Inc., 184 N.W.2d 289, 290 4 (Mich. Ct. App. 1970).1 5 6 Nor does the Court find unfair the arbitrator's 7 refusal to hear Fiene's cross-claim. True, the 8 California Code of Civil Procedure § 426.30 requires a 9 defendant to file a cross-complaint against a plaintiff 10 with its answer, or else forgo evermore any related 11 claims the defendant may have against that plaintiff. 12 Perhaps the arbitrator's refusal to hear Fiene's cross13 claim would thus prohibit him, unfortunately, from being 14 able to later file suit against Chic or the Forouzeshes 15 in state court on a related claim. It was Fiene, Walker, 16 and G2, however, who demanded arbitration in a forum 17 where they would be forced to pay to play and 18 threatened Chic, the Forouzeshes, and their counsel with 19 sanctions unless they acquiesced. (See R. at 252-60.) 20 21 1 As evidence of the arbitrator's alleged analysis22 on-the-cheap, Fiene points to the fact the arbitrator awarded Chic and the Forouzeshes $600,000 "based on the 23 value of the shares" G2, Fiene, and Walker agreed to, but did not, issue. This is absurd, Fiene argues, because 24 the arbitrator later said the shares were worthless. (Appellant's Opening Br. at 14.) Fiene's argument 25 strains credulity. At the time Chic and the Forouzeshes paid $600,000 for the shares, the shares were worth 26 $600,000; at the time of the arbitration, when G2 was bankrupt, the shares were worth nothing. Those two 27 concepts are not difficult to reconcile, and certainly not indicative of slipshod analysis on the arbitrator's 28 part. 14 1 Fiene cannot now argue that his litigation strategy 2 turned out to be cost-prohibitive in the forum he chose. 3 See EZ Loader Boat Trailers, Inc. v. Cox Trailers, Inc., 4 746 F.2d 375, 377 (7th Cir. 1984) ("The fact that [the 5 appellant] chose the forum in which to proceed weighs in 6 favor of collateral application of that forum's findings, 7 and of discounting [the appellant's] complaints of 8 procedural inadequacies."); Zazueta v. Cnty of San 9 Benito, 38 Cal. App. 4th 106, 111 (1995) (expressing the 10 same sentiment). 11 12 Moreover, assuming Fiene had been able to arbitrate 13 his cross-claim, and prevailed, that outcome might have 14 effected the allocation of a money judgment among the 15 parties but it would not have affected the arbitrator's 16 finding that Fiene was liable for, among other things, 17 defrauding Chic and the Forouzeshes. Thus Fiene's 18 inability to bring a cross-claim is irrelevant to the 19 paramount question here, i.e., whether the arbitration 20 award could have precluded the litigation before the 21 bankruptcy court of issues the arbitrator already 22 decided. 23 24 In sum, the Court finds nothing unfair about the 25 arbitration that Fiene elected to pursue though he 26 ultimately did so without counsel, and suffered a 27 significant adverse judgment. 28 15 The Court thus turns to 1 Fiene's argument that "a judgment stemming from an 2 arbitration proceeding not governed by the rules of 3 evidence cannot be afforded collateral estoppel effect," 4 because "absent adherence to evidentiary rules, no 5 identity of issues exists between those heard by the 6 other tribunal and those before the bankruptcy court." 7 (Appellant's Opening Br. at 14-15.) 8 9 2. 10 11 Were the Issues Arbitrated Identical to Those Before the Bankruptcy Court? Citing a decades-old decision of the bankruptcy 12 court, Fiene argues that if the arbitrator's findings 13 "were not based upon evidence introduced pursuant to 14 rules of evidence substantially identical to the Federal 15 Rules of Evidence, the doctrine of collateral estoppel 16 will not apply to such findings." In re Barigian, 72 17 B.R. 407, 410 (Bankr. C.D. Cal. 1987). Fiene points out 18 that the same bankruptcy judge who authored the opinion 19 in Barigian appears to have departed from that holding in 20 giving preclusive effect to the arbitration award in this 21 case. 22 23 The bankruptcy court is, of course, not bound by its 24 own previous judgments. Cf. Camreta v. Greene, 131 S. 25 Ct. 2020, 2033 n.7 (2011) ("'A decision of a federal 26 district court judge is not binding precedent . . . upon 27 the same judge in a different case.'" (quoting 18 J. 28 16 1 Moore, et al., Moore's Federal Practice § 134.02[1][d] 2 (3d ed. 2011)). This Court thus does not attribute the 3 bankruptcy court's departure from its holding in Barigian 4 to any inconsistency, but instead to its considered 5 response some time in the 25 years that elapsed since 6 it issued its opinion in that case of the measured 7 criticisms of its prior approach. See, e.g., In re 8 Clayton, 168 B.R. 700, 705 (Bankr. N.D. Cal. 1994) 9 (noting that the Barigian rule would also deny preclusive 10 effect to the judgments of many state courts). 11 12 Suffice it to say that this Court declines to apply a 13 rule that the bankruptcy court itself eschewed. Courts 14 give preclusive effect regularly to judgments issued by 15 bodies that do not adhere to strict evidentiary rules, as 16 long as whatever rules applied allowed the parties an 17 adequate opportunity to litigate their claims. Murray v. 18 Alaska Airlines, Inc., 50 Cal. 4th 860, 869-73 (2010); 19 see, e.g., Sims, 32 Cal. 3d at 480-81 ("Collateral 20 estoppel effect is given to final decisions of 21 constitutional agencies such as the Workers' Compensation 22 Appeals Board . . . and the Public Utilities Commission 23 even though proceedings before these agencies are not 24 conducted according to judicial rules of evidence."). 25 26 27 28 17 1 Here, the arbitrator conducted proceedings according 2 to the American Arbitration Association Commercial 3 Arbitration Rules, one of which governs the presentation 4 of evidence. That rule Rule 31 allows the parties to 5 offer evidence, the admissibility, relevance, and 6 materiality of which are determined by the arbitrator. 7 While Rule 31 is more basic than the Federal Rules of 8 Evidence, it is not so inadequate as to undermine all of 9 the many proceedings that parties agree, for efficiency's 10 sake, to arbitrate under the Commercial Arbitration 11 Rules. 12 13 Accordingly, the Court concludes the difference in 14 evidentiary rules between the arbitral forum and the 15 bankruptcy court is not, itself, sufficient to undermine 16 the preclusive effect of the arbitration award in these 17 bankruptcy proceedings. Nor, as the Court noted above, 18 was the arbitration otherwise unfair to Fiene. Further, 19 there is no dispute as to whether any of the other 20 criteria necessary to give the arbitration award 21 preclusive effect are satisfied. The Court finds that 22 they are, that issue preclusion is therefore available in 23 this case, and that the bankruptcy court did not abuse 24 its discretion in applying it. The Court thus turns to 25 the question whether the arbitration award, when given 26 27 28 18 1 preclusive effect, establishes the requisite facts to 2 satisfy 11 U.S.C. § 523's requirements for non3 dischargeability. 4 5 B. Non-Dischargeability 6 Fiene's arguments about why the arbitration award 7 fails to satisfy Section 523 are largely quarrels with 8 the arbitrator's conclusions. (See, e.g., Appellant's 9 Opening Br. at 20 ("An error also exists with respect to 10 the arbitrator's interpretation of the condition 11 precedent required to trigger the issuance of G2 12 shares.").) This Court is not the proper forum in which 13 to raise such disputes. See Coutee v. Barington Capital 14 Group, L.P., 336 F.3d 1128, 1132-33 & n.4 (9th Cir. 2003) 15 (setting forth the "limited and highly deferential" 16 standard of review of an arbitrator's decision, which 17 does not include review for simple legal or factual 18 error); Vandenberg, 21 Cal. 4th at 830-32. Instead of 19 indulging such arguments, the Court conducts its de novo 20 review by recounting precisely what it was the arbitrator 21 found, and then asking whether his findings satisfy 22 Section 523's criteria. 23 24 The arbitrator's final award, as reduced to judgment 25 by the superior court, was that G2, Fiene, and Walker 26 violated the California Corporations Code because they 27 sold (though never delivered) shares of G2 stock to Danny 28 19 1 Forouzesh without qualifying the offer of shares with the 2 California Commissioner of Corporations. 3 Code § 25110. See Cal. Corp. The judgment thus declared Chic and the 4 Forouzeshes "entitled to the value of consideration given 5 for the shares which were to have been issued," i.e., 6 $600,000. (R. at 164.) 7 8 The next portion of the judgment is the most crucial: 9 the arbitrator found Fiene, Walker, and G2 defrauded Chic 10 and the Forouzeshes; that is Fiene, Walker, and G2 made 11 "a material misrepresentation of fact with the intent to 12 deceive so as to cause the other person to reasonably 13 rely on the representation with resulting damage because 14 of that reliance." (R. at 165.) The arbitrator also 15 noted specifically that "[t]here is also the concept of 16 promissory fraud: a promise made without the intent to 17 carry through on the promise." (Id.) 18 19 Noting the import of a fraud finding the arbitrator 20 was "acutely aware" of the effect of such a finding on 21 the dischargeability of the award the arbitrator found 22 Fiene, et al., denied the Forouzeshes and Chic "an equity 23 interest in [G2]," as well as Danny Forouzesh's "salary, 24 benefits, and credit advances . . . ." (Id.) He then 25 found that Fiene, Walker, and G2 "never intended to 26 compensate" Chic and the Forouzeshes as agreed. 27 166.) (R. at In other words, the arbitrator found that the 28 20 1 entirety of the agreement between Fiene, Walker, and G2 2 on one hand, and Chic and the Forouzeshes on the other, 3 was induced by a false promise. See generally Lazar v. 4 Super. Ct., 12 Cal. 4th 631, 638 (1996) (describing the 5 tort of promissory fraud). The arbitrator then made 6 findings to support his conclusion, including his finding 7 specifically that "Fiene never intended to compensate" 8 Chic and the Forouzeshes. (R. at 167.) He went on to 9 note that Chic and the Forouzeshes were justified in 10 relying on the promises of Fiene, Walker, and G2, and 11 attributed to Fiene a primary role in the fraud, writing 12 that he "enlisted the help of a financier [Walker] who 13 saw an opportunity to capitalize on a vulnerable 14 businessman [Cyrus Forouzesh]." (R. at 168.) In 15 conclusion, the arbitrator wrote, G2, Walker, and Fiene 16 committed fraud on each of the Forouzeshes and Chic. 17 (Id.) 18 19 The superior court, when it reduced the arbitrator's 20 decision to a judgment, set forth a lump sum of damages: 21 $956,951.89, plus costs and pre-judgment interest. (Id.) 22 The arbitrator, as noted above, spread the award among 23 various sources of the damage Chic and the Forouzeshes 24 suffered. 25 26 27 28 21 1 The arbitrator's breakdown of damages gives rise to 2 Fiene's argument that it is hopeless to attempt the task 3 of labeling any portion of the award as "for fraud" or 4 "for securities violations," and therefore impossible for 5 a court to conclude that the award is non-dischargeable 6 under either 11 U.S.C. § 523(a)(2)(A) or 11 U.S.C. § 7 523(a)(19). The Court turns to this argument before 8 addressing whether the arbitration award otherwise 9 contained the necessary facts to support the conclusion 10 that the judgment against Fiene is non-dischargeable. 11 12 Fiene contends that "[n]owhere does the [a]rbitration 13 [a]ward articulate that any portion of the damage award 14 of $600,000 is attributable to fraud." 15 Opening Br. at 18.) Not so. (Appellant's The arbitrator found that 16 the whole of the award beyond the $600,000 amount was 17 attributable to fraud, which is why the superior court 18 reduced the entire arbitration award to a single judgment 19 amount of $956,951.89, and wrote explicitly that "[t]he 20 damages awarded, as set forth above, are based upon a 21 finding of fraud, and violation of the California 22 Security Act." (R. at 163.)2 23 24 25 2 Given that the whole of the award can be attributed to fraud, if the bankruptcy court erred, it was in 26 allowing Fiene to discharge any portion of the award at 27 all. (See R. at 596, 615-18.) Chic and the Forouzeshes, however, did not appeal the size of the award the 28 bankruptcy court granted them. 22 1 Fiene's argument seems to be driven by the 2 misconception that a plaintiff cannot recover a single 3 damage award for both a tort and a concurrent breach of 4 contract. That is not so. See Lazar, 12 Cal. 4th at 638 5 (noting that in cases of promissory fraud where an 6 enforceable contract exists, a plaintiff has a cause of 7 action in tort, and possibly also in contract, subject to 8 the "rule against double recovery of tort and contract 9 compensatory damages"). Here, Fiene and company 10 simultaneously violated California securities law (by 11 making an unqualified offering), breached a contract (by 12 failing to give Danny Forouzesh the shares they owed 13 him), and committed promissory fraud (by never intending 14 to issue the shares in the first place). The damages for 15 all three claims, however, could be (though are not 16 necessarily) the same: the $600,000 in capital Chic and 17 the Forouzeshes gave G2, Fiene, and Walker in exchange 18 for the shares. 19 20 Having resolved that argument, the Court now may 21 turn, finally, to the question whether the arbitration 22 award adequately supports the bankruptcy court's judgment 23 that Fiene's judgment debt to Chic and the Forouzeshes is 24 at least partially non-dischargeable. 25 that it does. The Court finds While Chic and the Forouzeshes advanced 26 three theories under which the arbitration award against 27 Fiene is non-dischargeable, given the arbitrator's 28 23 1 finding of over-arching promissory fraud, fraud under 11 2 U.S.C. § 523(a)(2)(A) is enough of a reason to render the 3 debt non-dischargeable.3 4 5 To establish that a debt is non-dischargeable under 6 Section 523(a)(2)(A), a creditor must show: (1) that the 7 debtor made false representations; (2) and knew they were 8 false when he made them; (3) but nevertheless did so, 9 with the intention of deceiving the creditor; who (4) 10 relied on the debtor's representations; and (5) thereby 11 suffered damages. 12 Cir. 1992). In re Kirsh, 973 F.2d 1454, 1457 (9th Here, the arbitrator found that Fiene 13 entered an agreement with the Forouzeshes and Chic, but 14 never intended to compensate them for their capital 15 contributions (as evidenced by his failure to put the 16 contributions on G2's books); that Chic and the 17 Forouzeshes relied reasonably on Fiene's representations 18 regarding their capital contribution and employment of 19 Danny Forouzesh; and that Chic and the Forouzeshes were 20 thereby damaged. (See R. at 166-68.) Thus, once the 21 arbitration award is given preclusive effect, which it 22 should be, Chic and the Forouzeshes demonstrate 23 24 3 The arbitrator's finding that promissory fraud underlay the entirety of Fiene's dealings with Chic and 26 the Forouzeshes blunts Fiene's argument (based on nonbinding authority) that summary judgment is improper when 27 some facts satisfy the requirements for nondischargeability and others do not. See In re 28 Bogdanovich, 292 F.3d 104, 111-12 (2d Cir. 2002). 25 24 1 successfully that Fiene's judgment debt is non2 dischargeable under 11 U.S.C. § 523(a)(2)(A). 3 4 All that remains, then, is the parties' argument 5 regarding the proper rates of pre- and post-judgment 6 interest to be applied to the award the Forouzeshes and 7 Chic secured from the bankruptcy court. Fiene contends 8 the proper rates are those prescribed by statute for 9 judgments issued by federal courts (see Appellant's 10 Opening Br. at 27-28); the Forouzeshes and Chic argue 11 they are those set by the superior court and California 12 law, and applied by the bankruptcy court (see Appellee's 13 Opening Br. (Doc. No. 21) at 29-30). The Court is 14 puzzled as to why the parties are disputing the 15 applicable pre- and post-judgment interest rates, when 16 the bankruptcy court's judgment mentions neither. 17 R. at 596.) (See The bankruptcy court "awarded a non- 18 dischargeable money judgment" of "the total sum of 19 $838,652.05," "comprised of the principal amount of 20 $600,000, plus interest of $238,652.05 . . . from October 21 7, 2004 through and including June 11, 2010." (Id.) 22 June 11, 2010 was the date on which the superior court 23 entered its final judgment on the arbitration award in 24 this matter. (See R. at 169.) 25 26 27 28 25 1 Consequently, the interest of which the bankruptcy 2 court spoke ran before the superior court's judgment it 3 was not pre-judgment interest set by, or running before, 4 the bankruptcy court's judgment. 5 properly by the superior court. It was therefore set The bankruptcy court 6 prescribed no rate of post-judgment interest; however, 7 Chic and the Forouzeshes are entitled to receive post8 judgment interest at the rate prescribed by federal law. 9 See Fed R. Bankr. P. 7058 (applying Federal Rule of Civil 10 Procedure 58 on the issuance of judgments to 11 adversary proceedings in bankruptcy courts); 28 U.S.C. § 12 1961(a) (allowing post-judgment interest on civil money 13 judgments). 14 15 16 IV. CONCLUSION The bankruptcy court did not err in determining that 17 issue preclusion was available under the arbitration 18 award Chic and the Forouzeshes secured against Fiene, nor 19 did it abuse its discretion by then giving the award 20 precisely that preclusive effect in these proceedings. 21 Having done so, the bankruptcy court then granted Chic 22 and the Forouzeshes summary judgment properly. The Court 23 therefore AFFIRMS the judgment of the bankruptcy court. 24 25 26 Dated: September 5, 2012 27 VIRGINIA A. PHILLIPS United States District Judge 28 26
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