ILC E-Bulletin: Yang v. Fund Management International, LLC (In re Yang) (9th Cir.)

The following is a case update written by the Hon. Meredith Jury (Bankruptcy Judge, C.D. CA., ret.), analyzing a recent decision of interest:

The United States Court of Appeals for the Ninth Circuit in an unpublished disposition ruled that when a state court defendant has stipulated to facts which support a state court finding of fraud and a stipulated judgment, those same stipulated facts will support a judgment for nondischargeability under 11 U.S.C. section 523(a)(2)(A) based on the collateral estoppel effect of such stipulation. The Ninth Circuit’s final disposition culminated a winding judicial path which began in the state court proceeding, became an adversary proceeding in the bankruptcy court which issued a judgment for nondischargeability, appealed to the Ninth Circuit BAP (affirmed), appealed to the Ninth Circuit (reversed and remanded), then reheard in the bankruptcy court (judgment for nondischargeability), affirmed by the district court and finally affirmed in the Ninth Circuit. Yang v Fund Management International, LLC (In re Yang), 2021 WL 754571 (9th Cir. Feb. 26, 2021).

To view the opinion, click here:
https://cdn.ca9.uscourts.gov/datastore/memoranda/2021/02/26/20-55051.pdf

FACTS^[1]

Yun Ho Yang and his wife Ho Soon Hwang Yang operated a company which purportedly used investment funds to make auto title loans. By promising their funds would be used for such purposes, Yang induced Fund Management International (FMI) to loan it almost $4 million which would generate monthly payments and could be paid back upon demand. Yang did not use all the funds for the stated purpose, instead using it for personal investments and to support his lifestyle. When FMI learned of the misuse and could not work out a payment plan, it sued the Yangs in California state court for breach of contract, fraud and other claims. FMI obtained admissions from Yang that he had misused the funds and he agreed to settle the case for a $3 million Stipulated Judgment. In the settlement agreement, Yang stipulated to the facts pled in the complaint for the fraud claim. Specifically, Paragraph 12 of the Settlement Agreement provided:

Yang stipulates to the facts supporting the claims made against him and that said facts and claims allege liability for, that he is admitting liability for and that the facts and claims are within the meaning of 11 U.S.C.A. 523….Yang agrees that this stipulation can be used in favor of FMI…and against Yang in any action in which Yang…is a party to an action for protection under the Bankruptcy Code.

The Yangs filed bankruptcy in 2004, but FMI did not learn of the proceeding until 2013 due to a failure of notice, at which time it moved for the case to be reopened. It then filed an adversary proceeding for nondischargeability under section 523(a)(2)(A) and sought summary judgment based on the issue preclusive effect of the Stipulated Judgment. This motion was denied but the bankruptcy court invited a motion based on the stipulated facts, which was subsequently granted. The 9th Circuit BAP affirmed, but the Ninth Circuit reversed and remanded, Yang v. Fund Mgmt. Int’l, LLC (In re Yang), 698 Fed. Appx 374 (9th Cir. 2017), holding that under California law, stipulated facts in one case may be given preclusive effect in a different case only “when the parties manifest an intent to be collaterally bound by its terms.” [citation omitted]. The Circuit reasoned that the question of intent was a disputed fact which caused summary judgment to be improper and remanded for the bankruptcy court to determine that issue.

On remand, the bankruptcy court held an evidentiary hearing and found that the parties intended the agreed facts to be binding in future proceedings, partly because of Paragraph 12 which referenced bankruptcy proceedings and section 523(a)(2)(A). This time, however, the court granted judgment based on collateral estoppel, founded on the stipulated facts. The Yangs appealed that decision to the district court, which affirmed. The district court in a chambers order also addressed whether Paragraph 12 of the Settlement Agreement quoted above amounted to a waiver of the debtor’s right to obtain a discharge which was unenforceable as against public policy. The district court relied on a BAP decision in ruling the provision was not an improper waiver of discharge. In re Cole, 226 B.R. 647, 654 (9th Cir. BAP 1998) (For public policy reasons, a debtor may not contract away the right to a discharge in bankruptcy. However, a debtor may stipulate to the underlying facts that the bankruptcy court must examine to determine whether a debt is dischargeable.)

The Yangs appealed to the Ninth Circuit, which affirmed.

REASONING

As in most Ninth Circuit unpublished dispositions, the recitation of facts is skimpy (hence my reliance on the earlier BAP decision for facts) and the legal analysis short and to the point. First, the Circuit determined that the bankruptcy court had properly interpreted its mandate which was to decide whether the parties intended the stipulated facts to be binding in other proceedings. The mandate did not require the bankruptcy court to hold an evidentiary hearing regarding the other elements of collateral estoppel, which the Yangs asserted should have been done. The bankruptcy court had the discretion to limit its hearing to the one precise issue which caused the remand.

It then turned to whether the bankruptcy court properly determined that the requirements of issue preclusion had been met. Because California law held that a stipulated judgment may be given collateral estoppel effect when the parties manifest an intent to be collaterally bound by its terms—Cal. State Auto Ass’n Inter-Ins. Bureau v. Superior Court, 50 Cal.3d 658, 664 (1990)—and the court had made the necessary factual finding re intent, application of preclusion law was appropriate. Moreover, because the facts to support a fraud finding had been admitted, Paragraph12 of the Settlement Agreement did not amount to a prepetition waiver. Also relying on the BAP’s Cole case, the Circuit found the stipulation to the underlying facts, not just the judgment, made the application of collateral estoppel an exception to the rule against a prepetition waiver of discharge.

AUTHOR’S COMMENT

I rarely will review an unpublished disposition of the Ninth Circuit because, as noted above, they are short on facts and summary in analysis. However, the long judicial path of this case and the significance of its ruling made it worthy of review. It did not make law—hence, its unpublished status—but it did remind practitioners of some critical factors which affect the use of a state court judgment to support a finding of nondischargeability in a later bankruptcy proceeding. It is not sufficient to just enter a judgment in the state court with a provision that “this judgment shall be nondischargeable in a subsequent bankruptcy proceeding.” Such is the prepetition waiver of discharge which has been found to be unenforceable as in violation of public policy. The BAP’s Cole case cited by both the district court and the Ninth Circuit addressed that very issue in 1998. While upholding the public policy issue, it opined that if the defendant (eventual debtor) stipulated to or admitted facts which would support a fraud claim, then those agreed facts would have a preclusive affect in the bankruptcy case.

So the lesson for creditor’s counsel, when settling state court litigation which might have a nondischargeable basis, is to strive to obtain admissions of precise facts which will support a fraud claim for relief. The opposite applies to defendant/debtor’s counsel, who should be wary of ever admitting any facts when settling a case.

These materials were authored by the Hon. Meredith Jury (Bankruptcy Judge, C.D. CA., ret.), a member of the ad hoc group, with editorial assistance by Monique Jewett-Brewster, a shareholder with Hopkins & Carley, ALC, a member of the ad hoc group and past Chair of the CLA Business Law Section. Thomson Reuters holds the copyright to these materials and has permitted the Insolvency Law Committee to reprint them. This material may not be further transmitted without the consent of Thomson Reuters.

[1] The factual background is taken from the BAP disposition Yang v Fund Mgmt. Int’l (In re Yang), 2016 WL 639039 (9th Cir. BAP 2016).