The following is a case update by Adam A. Lewis, Senior Counsel at Morrison & Foerster LLP analyzing a recent decision of interest:
In Haynie v. Krystal (In re Haynie), 624 B.R. 872 (Bankr. 9th Cir. 2021) (“Haynie”), the Bankruptcy Appellate Panel of the Ninth Circuit (the “BAP”) held that the Bankruptcy Court correctly ruled that the later of two competing inconsistent “judgments” in the same case between the same parties in state court on the same dispute was entitled to preclusive effect in a nondischargeabilty adversary proceeding.
Haynie can be found here.
Krystal sued Haynie in Washington State Court (the “State Court”) for cheating him out of an investment opportunity they had allegedly agreed to pursue together. The parties agreed to have a separate bench trial on the questions of whether Krystal had an ownership interest in the entity Haynie set up on the sly and, if so, what his percentage interest was before trying other issues. According to Haynie, although Haynie testified in the proceeding, he did not participate as a party (meaning, evidently, that the party was his entity). Haynie obtained a “judgment “(the “First Judgment”) holding that there was no agreement between Haynie and Krystal to form an entity. Later, the remaining issues were assigned to a different judge to try. Haynie answered the complaint (it is not clear why he had not already answered), filed a counterclaim and participated in the litigation up to the point of trial. However, after he did not appear on the trial date, the second State Court judge entered his default and caused notice to be sent to Haynie at his old Washington address and his new Idaho address. The State Court then tried the matter on the new date. Again, Haynie did not appear. The State Court entered a “judgment” for Krystal (the “Second Judgment”) finding that there was in fact an investment contract between him and Haynie, that Haynie breached that contract by not including Krystal in the new entity and that Haynie never had the intention of involving Krystal. The Second Judgment also included about $800,000 in damages for Krystal.
Eventually, Haynie filed a Chapter 7 case. Krystal filed an adversary proceeding against him asserting that the Second Judgment debt was nondischargeable under Bankruptcy Code sections 523(a)(2) (debt obtained by false representation), (a)(4) (fiduciary fraud or defalcation) and (a)(6) (willful and malicious injury). For part of his case, Krystal relied in part on the Second Judgment, asking the Bankruptcy Court to apply issue preclusion (collateral estoppel). The Bankruptcy Court granted that request over Haynie’s objection that the First Judgment should prevail and, relying partly on the facts determined in the Second Judgment, entered a judgment of nondischargeabilty under (a)(2) and (a)6) for Krystal. Haynie appealed to the BAP, which affirmed the Bankruptcy Court.
The principal issue the BAP addressed in Haynie was whether the First Judgment (as contended by Haynie) or the Second Judgment (as contended by Krystal and found by the Bankruptcy Court) was entitled to preclusive effect. Citing to Migra v. Warren City Sch. Dist. Bd. Of Educ., 465 U.S. 75, 81 (1984), the BAP observed that normally, in determining the preclusive effect of a state court judgment, federal courts are bound by the law of the state in which the judgment was obtained. However, the BAP found, and the parties agreed, that there was no precedent at either the supreme court or intermediate court level in Washington on which judgment should control. Thus, citing to Ticknor v. Choice Hotels Int’l, Inc., 265 F.3d 931, 939 (9th Cir. 2001), the BAP explained that under those circumstances a federal court must predict what the state’s highest court would do. It noted that in applying that rule, a court can rely on a wide range of sources, both judicial and other analyses. (Among the latter sources supporting the last judgment rule cited by the BAP is a 1969 law review article by the late Justice Ginsburg.)
The Bankruptcy Court followed this path, adopting the Ninth Circuit’s rule in Robi v. Five Platters, Inc., 838 F.2d 318 (9th Cir. 1988) that the latest of competing judgments governs. The BAP concurred in the Bankruptcy Court’s analysis. In doing so, it adverted to the rationales of Robi, 838 F.2d 322-23: it prevents the court from simply adopting the result it likes best, avoids rewarding the winning party in an earlier result for failing to raise the preclusion issue in the later proceeding, does not undo the later court’s consideration and rejection of the earlier result (if it did that) and ensures finality in lieu of endless re-litigation, encouraging parties instead to appeal. The BAP pointed out that the last judgment rule is generally accepted, as reflected in The Restatement (Second) of Judgments § 15 (1982).
Among Haynie’s arguments against use of the Second Judgment was that the requirement of a full opportunity for fair litigation for application of preclusion was not satisfied because he did not get notice of the second trial. But both the Bankruptcy Court and the BAP applied the rule that mail notice to the correct address is presumed effective unless the contesting party proves some mishap. Here, notice was sent to both his old Washington address and his new Idaho address, and his mere denial that he got either notice is insufficient to overcome that presumption. That he chose (so far as the record substantiates) not to participate in the second trial did not deprive him of a full and fair opportunity to attend it. The BAP also rejected some other, less significant arguments by Haynie.
The opinion also covers application of preclusion to the actual nondischargeabilty issues, but this report will not cover that subject.
As a preliminary matter, the record in the state court proceedings is confusing on various points (indeed, the BAP opinion notes this problem), but one lesson the opinion offers is the consequences of dropping out of the proceedings before they are over. For example, it is not clear why there was a second trial if the result of the first one was that there was no contract (e.g., no contract, no breach; no breach, no damages). But evidently Haynie chose not to oppose or participate in a second trial. In fact, Haynie missed several opportunities to shut the proceedings down on various grounds. It appears to be a case of bad lawyering by his counsel or bad strategic choices by him (e.g., not to appear for the second trial despite his evidently having had notice of the original trial date and gotten the post-default notice of the second, re-set date). Another unclear point is why the Haynie opinion characterizes each of the two State Court results as a “judgment”. There can be but one judgment between parties in a case. There may be multiple determinative rulings, but these are law of the case, not judgments. Only the ruling that finally incorporates all the rulings is the judgment.
On the merits of old vs. new judgment, the decision is right. Perhaps the most important reason is that it encourages attentive and efficient litigation, while also preserving the prohibition against federal courts second-guessing state courts (think Rooker-Feldman doctrine, which enshrines the same policy under different circumstances). After (perhaps) sensibly agreeing to bifurcate the case, Haynie missed a chance to protect himself in state court by failing to stay involved when he could have objected to the second trial altogether as being superfluous given that the first trial had found no breach, let alone presenting evidence on the First Judgment issues once the second court evidently decided to revisit them before moving on to damages Furthermore, had he done so unsuccessfully – that is, had he made a law of the case argument against a second trial on the contract/breach issues but the second court rejected it, yet reached the same result as it did without his participation – it would not be up to the Bankruptcy Court to second guess a final judgment in state court.
These materials were authored by Adam A. Lewis, Senior Counsel at Morrison & Foerster LLP (firstname.lastname@example.org), with editorial contributions from ILC member Summer Shaw of Shaw & Hanover, PC (email@example.com).
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