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In Re: Randy Elbert Gray and v. Walter Wenzel; Cheryl L. Wenzel

July 7, 2011

IN RE: RANDY ELBERT GRAY AND KIMBERLY LORRAINE GRAY, DEBTORS. RANDY ELBERT GRAY; KIMBERLY LORRAINE GRAY, APPELLANTS,
v.
WALTER WENZEL; CHERYL L. WENZEL, APPELLEES.



Bk. No. 08-11894 Adv. No. 08-00931 Appeal From The United States Bankruptcy Court for the District of Arizona Honorable Charles G. Case, II, Bankruptcy Judge, Presiding

FILED JUL 07 2011

SUSAN M SPRAUL, CLERK

U.S. BKCY. APP. PANEL OF THE NINTH CIRCUIT

MEMORANDUM*fn1

Submitted Without Oral Argument on May 13, 2011

Before: MARKELL, MANN*fn2 and DUNN, Bankruptcy Judges.

INTRODUCTION

Randy Gray and Kimberly Gray (the "Grays") appeal from the bankruptcy court's summary judgment declaring that all amounts awarded in a state court judgment in favor of Walter Wenzel and Cheryl Wenzel (the "Wenzels") are non-dischargeable in the Grays' chapter 7*fn3 bankruptcy. We AFFIRM IN PART, REVERSE IN PART, AND REMAND this matter for further proceedings.

FACTS

In 2006, the Wenzels filed a lawsuit against the Grays and their company, Gray Mobile Tire Service, Inc. ("GMTS"), in the Arizona Superior Court for Maricopa County (Case No. CV2006- 015259) (the "State Court Litigation"). The Wenzels have never introduced into the record the complaint from the State Court Litigation, or any other document describing the interactions between the Wenzels and the Grays that eventually led the Wenzels to sue the Grays. The Wenzels only introduced: (1) the instructions given to the state court jury (the "Jury Instructions"), (2) the jury's verdict (the "Jury Verdict"), and (3) the state court's judgment based on the Jury Verdict (the "State Court Judgment"). In addition, no party has given us any useful general description of their pre-lawsuit relations.

Consequently, our understanding of pre-lawsuit events is quite limited.

But from what has been provided, we have pieced together that the Wenzels' invested money in GMTS, and some or all of the Wenzels' investment was lost. After trial, the jury considered the Wenzels' legal theories after receiving instructions on various legal theories including breach of contract, breach of fiduciary duty, "common law fraud," negligent misrepresentation, innocent misrepresentation, securities fraud, and unjust enrichment.

In June 2008, the jury returned a verdict in favor of the Wenzels on some, but not all, of their claims. The jury awarded the Wenzels, among other things: $18,000 against the Grays for breach of contract; $171,731.73 against GMTS for breach of contract; $276,731.73 against the Grays for breach of fiduciary duty; $190,000 against the Grays for fraud; and, $207,477.60 against the Grays for securities fraud.*fn4 The jury also awarded $23,768 against the Grays for punitive damages.*fn5

In September 2008, before the state court entered judgment on the Jury Verdict, the Grays filed a chapter 11 bankruptcy, but they later stipulated to conversion of their case to chapter 7, and the bankruptcy court entered an order converting the case in December 2009. Meanwhile, in March 2009, the bankruptcy court granted the Wenzels relief from stay, thereby enabling the parties to complete the State Court Litigation.

Apparently, there were lengthy post-trial proceedings in the State Court Litigation, but the bankruptcy court record does not reveal their nature. The State Court Judgment, entered in March 2010, awarded the Wenzels compensatory damages of $207,477.60 for securities fraud and an additional $105,000.00 for breach of fiduciary duty. The State Court Judgment also awarded $23,768.00 in punitive damages, $125,000 in attorneys' fees and $3,942.17 in costs. The State Court Judgment referenced ARS § 44-2001,*fn6 ARS § 12-341*fn7 and ARS § 12-341.01*fn8 as grounds for awarding fees and costs. However, the record does not specify what amount of fees and costs was attributable to each particular ground.

The Grays appealed the State Court Judgment, and that appeal is still pending (Arizona Court of Appeals, Division One, Case No. CV 10-0338).

The Wenzels, representing themselves in the bankruptcy court, filed a complaint against the Grays in December 2008. It is not entirely clear from the single page of allegations in their complaint whether the Wenzels sought to object to the Grays' discharge under § 727, to obtain a determination under § 523 that the Grays' indebtedness to them was non-dischargeable, or both. In fact, the complaint does not reference any specific exception to discharge under § 523(a).

In any event, the Grays answered the complaint with a general denial in January 2009. The bankruptcy court from time to time held scheduling and status conferences, but essentially suspended prosecution of the adversary proceeding pending the completion of the post-trial proceedings in the State Court Litigation.

In April 2010, shortly after entry of the State Court Judgment, the Wenzels filed their motion for summary judgment.
Reading their moving papers liberally, it appears that the Wenzels asserted that they were entitled to summary judgment based on issue preclusion, because the State Court Judgment established the requisite elements for nondichargeability under §§ 523(a)(2)(A), 523(a)(2)(B), 523(a)(4), 523(a)(6) and 523(a)(19). As previously indicated, the only materials from the State Court Litigation that the Wenzels presented in support of their summary judgment motion were the Jury Instructions, the Jury Verdict and the State Court Judgment.
In response, the Grays (who were represented by counsel before the bankruptcy court) objected to the summary judgment motion solely on two grounds. First, they argued that the bankruptcy court could not properly apply issue preclusion because of their pending appeal of the State Court Judgment.
According to the Grays, in light of the pending state court appeal, there was no final judgment on the merits. And second, the Grays argued that the State Court Judgment's award of punitive damages, attorneys' fees and costs should be deemed dischargeable because no particular exception to discharge under § 523(a) specifically covered these items.
On July 7, 2010, the bankruptcy court held a hearing on the summary judgment motion at which it considered and rejected both of the Grays' objections. The court entered summary judgment on July 27, 2010, deeming non-dischargeable the entire debt represented by the State Court Judgment. Neither the court's comments at the July 7 hearing nor its July 27 judgment specified the grounds for granting summary judgment.

The Grays timely appealed on August 10, 2010.

JURISDICTION

The bankruptcy court had jurisdiction pursuant to 28 U.S.C. §§ 1334 and 157(b)(2)(I). We have jurisdiction under 28 U.S.C. § 158.

ISSUE

Did the bankruptcy court err when it granted the Wenzels' motion for summary judgment?

STANDARDS OF REVIEW

The bankruptcy court's order granting summary judgment is reviewed de novo. Centre Ins. Co. v. SNTL Corp. (In re SNTL Corp.), 380 B.R. 204, 211 (9th Cir. BAP 2007). "Viewing the evidence in the light most favorable to the non-moving party, we must determine 'whether there are any genuine issues of material fact and whether the trial court correctly applied relevant substantive law.'" New Falls Corp. v. Boyajian (In re Boyajian), 367 B.R. 138, 141 (9th Cir. BAP 2007) (quoting Tobin v. San Souci Ltd. P'ship (In re Tobin), 258 B.R. 199, 202 (9th Cir. BAP 2001)).

We also review de novo the preclusive effect of a judgment; whether issue preclusion is available is a mixed question of law and fact in which the legal questions predominate. The Alary Corp. v. Sims (In re Associated Vintage Group, Inc.), 283 B.R. 549, 554 (9th Cir. BAP 2002); Stephens v. Bigelow (In re Bigelow), 271 B.R. 178, 183 (9th Cir. BAP 2001). If issue preclusion is available, the bankruptcy court's decision to apply it is reviewed for abuse of discretion. Lopez v. Emergency Serv. Restoration, ...

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