IN RE DARVISHIAN, (Bankr.E.D.Va. 1995)

STEPHEN MITCHELL, Bankruptcy Judge

This matter is before the court on the plaintiffs motion for summary judgment. A hearing was held on November 21, 1995, at which time the court heard the contentions of the parties and took the motion under advisement. For the reasons set forth in this memorandum opinion, the court concludes that summary judgment should be entered declaring that the plaintiffs claim against the debtor is nondischargeable under §§ 523(a)(2)(a) and (a)(4), Bankruptcy Code.

Facts

This is an action to have a $172,400 judgment that was entered in plaintiffs favor by the United States District Court for the Eastern District of Virginia declared nondischargeable under

§ 523(a)(2)(A) and (a)(4), Bankruptcy Code. The complaint in that case was filed on December 23, 1985 and named as defendants the debtor, the debtor's wife, and a Portsmouth, Virginia, attorney. The complaint alleged causes of action grounded in tortious conversion, fraud, breach of contract, breach of fiduciary duty and (with respect to the attorney only) legal malpractice. Specifically, Count I, grounded in tortious conversion and fraud, alleged that the plaintiff, Hassan Abrishemian, a citizen of Iran, had entrusted the debtor (his nephew) and the debtor's wife with the management of certain bank accounts and a certificates of deposit while he was out of the United States and gave the debtor a power of attorney for that purpose. Count I further alleged that, using the power of attorney, the debtor had fraudulently withdrawn and converted $165,720 from Abrishemian's bank account; had kept and converted to his own use $21,000 that Abrishemian had sent to him to deposit in the bank account; and had converted $2,750 worth of Iranian rugs that Abrishemian had left with the debtor for safekeeping. Count II of the complaint, grounded in breach of contract and breach of fiduciary duty, alleged essentially the same facts. Count III, although formally praying for judgment against all three defendants, contained specific allegations only against the attorney.

The case was tried to a jury. During the trial, the attorney and the debtor's wife were dismissed as defendants, and Count III was dismissed. The jury returned a general verdict in favor of Abrishemian against the debtor in the amount of $172,400.00. Following the verdict, the debtor filed three post-trial motions. One (a renewal of a motion that had been made at trial) requested "that the fraud count contained in the Complaint be dismissed on the basis of the statute of limitations." The District Judge, in a written memorandum opinion, characterized the action as involving "the conversion of funds in a certificate of deposit and two persian rugs." In denying the motion to dismiss based on statute of limitations grounds, the District Judge held that the Virginia 5 year statute of limitations for injuries to property rather than the 1 year statute of limitations for personal actions applied, noting,

Mr. Darvishian's behavior directly impacted the property, certificate of deposit and rugs, which plaintiff entrusted to his care. Defendant's fraud was aimed at the money to be held under trust and the result was its complete loss.

(emphasis added). Judgment was thereupon entered on December 23, 1986 as follows:

IT IS ORDERED AND ADJUDGED that the plaintiff, Hassan Abrishemian, recover of the defendant, AM R. Darvishian, the sum of $172,400.00 with interest thereon at the rate of 5.77 per cent as provided by law, and his costs of action.

The debtor took an appeal to the United States Court of Appeals for the Fourth Circuit, asserting as error the trial court's ruling on the issue of diversity jurisdiction. His brief filed with the Fourth Circuit described the action as follows: "The suit alleged fraud and conversion against each Defendant, and additionally alleged malpractice against [the attorney]." On November 13, 1987, the Fourth Circuit by unpublished opinion rejected the assignment of error and affirmed the judgment. The opinion of the court described the suit as "a fraud and conversion action. . . ." On May 26, 1995, the debtor filed a voluntary petition under chapter 7 of the Bankruptcy Code in this court, and Abrishemian then filed a timely complaint under § 523(c) and F.R.Bankr.P. 4007(c) to have the U.S. District Court judgment determined to be nondischargeable.

Conclusions of Law and Discussion

This court has jurisdiction of this action under 28 U.S.C. § 1334 and 157(a) and the general order of reference entered by the United States District Court for the Eastern District of Virginia on August 15, 1984. This is a core proceeding under 28 U.S.C. § 157(b)(2)(1).

Under § 523, Bankruptcy Code,

(a) A discharge under section 727 . . . of this title does not discharge an individual debtor from any debt — * * * (2) for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by —

(A) false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor's or an insider's financial condition. * * * (4) for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny.

The defendant has filed an answer denying the allegations of the nondischargeability complaint and asserting that Abrishemian "was at all times aware of the activities of the Defendant and participated in investment decisions concerning the referenced funds, including use of the funds for an investment in a restaurant." The answer, although admitting the entry of the U.S. District Court judgment, asserted that the judgment "did not specify which of the . . . counts . . . formed the basis of the award" and denied that the judgment "was based on a violation of 11 U.S.C. § 523(a)(2)(A) and 523(a)(4)."

Under F.R.Bankr.P. 7056, incorporating Fed.R.Civ.P. 56, "A party seeking to recover upon a claim . . . or to obtain a declaratory judgment may, at any time after the expiration of 20 days from the commencement of the action, move with or without supporting affidavits for a summary judgment in the party's favor." The rule further provides,

The judgment sought shall be rendered forthwith if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.

The evidence before the court on the summary judgment motion consists of a certified copy of the complaint commencing the action in the U.S. District Court, that court's memorandum opinion and judgment, the opinion of the U.S. Court of Appeals for the Fourth Circuit, and a portion of the debtor's brief filed with the Fourth Circuit. The debtor has filed an affidavit asserting that Count III of the U.S. District Court complaint was dismissed "against all parties;" that the jury verdict did not specify which counts it was based upon; that at no time did he "use, appropriate or convert" any funds belonging to Abrishemian; and that Abrishemian was "fully informed and aware of the amount, location and use to which his funds were put, and actively participated in the management of his assets."

Since the debtor's affidavit actively contradicts the underlying factual assertions of fraud and fiduciary defalcation, summary judgment would be inappropriate unless, as argued by the plaintiff, the judgment in the U.S. District Court action is entitled to preclusive effect under the doctrine of collateral estoppel. Although the Supreme Court held in Brown v. Felsen, 442 U.S. 127, 99 S.Ct. 2205, 60 L.Ed.2d 767 (1979) that res judicata, or claim preclusion, did not apply to bankruptcy dischargeability litigation, the Court has also held that collateral estoppel, or issue preclusion, may apply to prevent relitigation of issues actually litigated in an earlier action. See, Grogan v. Garner, 498 U.S. 279, 284-85 n. 11, 111 S.Ct. 654, 112 L.Ed.2d 308 (1991). The requirements for application of collateral estoppel are as follows:

Because of the requirement that the issues sought to be precluded from relitigation must have been "actually litigated" in the prior case, a default judgment is not entitled to collateral estoppel effect. M M Transmissions, Inc. v. Raynor (In re: Raynor), 922 F.2d 1146 (4th Cir. 1991).

(1) the parties to the prior and subsequent proceedings, or their privies, must be the same,

(2) the factual issue sought to be litigated actually must have been litigated in the prior action,

(3) the factual issue must have been essential to the judgment in the prior proceeding, and

(4) the prior action must have resulted in a judgment that is valid, final, and against the party against whom the doctrine is sought to be applied.

Catercorp, Inc. v. Henicheck (In re Henicheck), 186 B.R. 211, 214 (E.D.Va. 1995) (Tice, J.). Here there is no question that the parties in the U.S. District Court action and this dischargeability action are the same, that the factual issues raised in the dischargeability complaint were actually litigated in the U.S. District Court action, and that the prior action resulted in a valid, final judgment against the debtor. The question is whether the factual issues litigated were "essential to the judgment" in the prior proceedings.

As noted above, after the dismissal of Count III in the U.S. District Court action, there remained two counts. Count I was grounded in fraud and conversion; Count II was grounded in breach of contract and fiduciary duty. However, both counts, and all four theories of liability, were predicated on the same facts, namely the debtor's misuse of the power of attorney, which Abrishemian had given him to manage his bank accounts, to take money out of his accounts and convert it to the debtor's own use; the debtor's keeping for his own use of funds that Abrishemian had sent him to be deposited in the accounts; and keeping the rugs that Abrishemian had left with the debtor to be sold. The jury verdict, and the judgment entered thereon, did not specify on which count or counts judgment was being entered. It is apparent, however, simply from a reading of the factual allegations of Counts I and II, that any judgment would have necessarily required a factual finding that the debtor took money that Abrishemian had entrusted to him. Certainly, there does not appear to have been any misunderstanding at the time by the debtor or the U.S. District Court as to what the jury had determined. Otherwise, there would have been no reason, post-verdict, for the debtor to have renewed his motion to dismiss the fraud count on statute of limitations grounds. The trial judge, in denying that motion, specifically referred to the debtor's "fraud" involving "certificates of deposit and rugs entrusted to [the debtor's] care." The debtor himself, when appealing to the Fourth Circuit, recognized the action as having been one for "fraud and conversion," and the Fourth Circuit in its opinion characterized it the same way. For the debtor now to assert that, because the judgment did not specifically state whether it was being entered on Count I or Count II or both, we cannot now be sure the jury found fraud, is disingenuous at best.

Based on the facts and causes of action alleged in the U.S. District Court action and the judgment entered thereon, and taking into account the trial court's memorandum opinion on the post-trial motions, this court concludes that a finding of fraud and breach of fiduciary duty by taking, using the power of attorney that Abrishemian had given him, the funds Abrishemian had entrusted to his care, was necessary to the judgment entered in that case. Accordingly, the court concludes that collateral estoppel bars the debtor from relitigating that issue in this case, and that the debtor's conduct, as necessarily found by the jury in the prior case, is such as to except the debt from discharge under §§ 523(a)(2)(A) and (a)(4), Bankruptcy Code.

A separate order will be entered granting the motion for summary judgment.