Filed: Feb. 12, 2021
Latest Update: Feb. 13, 2021
FILED
FEB 12 2021
SUSAN M. SPRAUL, CLERK
U.S. BKCY. APP. PANEL
OF THE NINTH CIRCUIT
ORDERED PUBLISHED
UNITED STATES BANKRUPTCY APPELLATE PANEL
OF THE NINTH CIRCUIT
In re: BAP No. ID-20-1182-FLB
LANCE B. HAYNIE,
Debtor. Bk. No. 2:17-bk-20587
LANCE B. HAYNIE, Adv. No. 2:17-ap-07010
Appellant,
v. OPINION
JACK KRYSTAL,
Appellee.
Appeal from the United States Bankruptcy Court
for the District of Idaho
Terry L. Myers, Bankruptcy Judge, Presiding
APPEARANCES:
Safa Michael Riadh of Valiant Law argued for appellant;
Michael G. Schmidt of Lukins & Annis, P.S. argued for appellee.
Before: FARIS, LAFFERTY, and BRAND, Bankruptcy Judges.
FARIS, Bankruptcy Judge:
INTRODUCTION
The question presented is whether the bankruptcy court correctly
gave issue preclusive effect to a state court judgment, even though the
same state court had previously entered an inconsistent judgment between
the same parties in the same lawsuit. There is no Washington authority on
this question. We predict that the Washington Supreme Court would
follow the general rule that the judgment last in time should be afforded
issue preclusive effect notwithstanding the prior inconsistent judgment.
We also hold that the bankruptcy court did not err in applying issue
preclusion and holding that the judgment debt was nondischargeable
under §§ 523(a)(2) and (a)(6). 1 Accordingly, we AFFIRM.
We publish to address this unanswered question of Washington law.
FACTS 2
A. Prepetition events
Appellant Lance B. Haynie worked for an internet company,
Tsunami Communications, Inc., that owned Sanswire of Spokane, Inc.
(“Sanswire”). Sanswire was struggling financially. In or around May 2003,
Mr. Haynie and appellee Jack Krystal discussed the possibility of forming a
new company to purchase Sanswire. They memorialized their plans and
ideas for the new company in a handwritten memorandum that they
Unless specified otherwise, all chapter and section references are to the
1
Bankruptcy Code, 11 U.S.C. §§ 101-1532.
2 We exercise our discretion to review the bankruptcy court’s docket, as
appropriate. See Woods & Erickson, LLP v. Leonard (In re AVI, Inc.), 389 B.R. 721, 725 n.2
(9th Cir. BAP 2008). Because this appeal presents a question of law and the basic facts
and procedural history are not in dispute, we rely largely on the bankruptcy court’s
recitation of the facts in its memorandum decision.
2
referred to as the “Deal Points.” Among other things, the Deal Points
provided that Mr. Krystal would lend the new company up to $100,000 and
would hold a thirty-percent interest in the new company. Mr. Haynie’s
existing company, LBH Communications, would form the new company,
and he would have a seventy-percent interest, forty percent of which could
be sold to future investors. Mr. Krystal was to be the CEO and Mr. Haynie
would be the president. The Deal Points also specified a formula for
monthly disbursements to Mr. Haynie and Mr. Krystal. The parties initially
did not sign the Deal Points.
A month later, Mr. Haynie, apparently without Mr. Krystal’s
knowledge, formed Stat Network Solutions, LLC (“Stat”). Stat’s corporate
documents identified Mr. Haynie as the sole member and omitted
Mr. Krystal. Around the same time, Mr. Haynie and LBH Communications
executed a promissory note for a $20,000 loan from Mr. Krystal’s company,
Diversified Realty Services (“Diversified”).
In August 2003, Stat purchased Sanswire from Tsunami
Communications for $100,000. The owners of Tsunami Communications
each received a five-percent membership interest in Stat. Mr. Haynie and
LBH Communications executed another promissory note for a $100,000
loan from Diversified.
In October 2003, Mr. Haynie and Mr. Krystal discussed another loan
of $25,000 to purchase equipment for Stat. By this time, Mr. Krystal had
apparently learned of Stat’s existence. Mr. Krystal requested, as an
3
“owner” of Stat, information regarding Stat’s finances and operations,
including revenues and expenses, accounts receivable and payable, and
future work plans. Mr. Haynie agreed to discuss the matter with his
attorney and to send the financial information. Mr. Haynie and LBH
Communications executed the promissory note for the third loan, but
Mr. Haynie never sent the requested financial information to Mr. Krystal.
In November 2003, the members of Stat considered admitting
Mr. Krystal as a member with thirty-percent ownership, backdated to
sometime after the Sanswire purchase. Mr. Krystal balked at the effective
date: he insisted that the company documents be amended to reflect that he
was involved with Stat from the beginning and had reached agreements
with Mr. Haynie as reflected in the Deal Points.
In December 2003, Mr. Krystal and Mr. Haynie signed the original
Deal Points, as well as a typed version with certain material changes. The
typed Deal Points identified Mr. Krystal as “Chairman” and Mr. Haynie as
“CEO/President.”
In July 2004, Mr. Haynie sold fifty percent of Stat to Tom Davis for
$650,000. Mr. Haynie used part of that sum to repay part of the Diversified
loans but did not share any of the sale proceeds with Mr. Krystal.
In 2007, Mr. Krystal sued Mr. Haynie, Mr. Davis, and Stat in
Washington state court. Among other things, he asserted breach of contract
and conversion and sought a declaratory judgment that he was a thirty-
percent member of Stat. Mr. Haynie answered the complaint and filed a
4
counterclaim.
The record on appeal includes only a few documents from the state
court record, so what transpired there is somewhat murky. The parties
agreed that the state court should hold a separate bench trial to decide the
existence and percentage of Mr. Krystal’s ownership interest in Stat.
Mr. Haynie testified as a witness at trial but, according to the state court,
“affirmatively waived his right to participate [as] a party.” The state court
issued a judgment (“First State Judgment”) determining that the Deal
Points agreement was not an enforceable contract. It held that Mr. Krystal
“is not now, nor has he ever been the owner of any membership interest in
Stat.” The court of appeals affirmed the First State Judgment.
In June 2012, the remaining issues were set for trial in the state
superior court, by a different judge. Although Mr. Haynie had answered
the complaint, filed a counterclaim, and participated in the litigation, he
did not appear on the date set for trial, so the court held that he was in
default as to the remaining claims and dismissed his counterclaim with
prejudice. The court mailed the notice of default to Mr. Haynie’s addresses
in Spokane, Washington and Coeur d’ Alene, Idaho.
Thereafter, the court held a second trial, and Mr. Haynie again did
not appear. Instead, Mr. Krystal introduced Mr. Haynie’s testimony from
the first trial. The state court issued findings of fact and conclusions of law
(“Second State Judgment”). For reasons that the record does not explain,
the Second State Judgment is markedly different from the First State
5
Judgment. In the Second State Judgment, the court held that the two
versions of the Deal Points were binding agreements. The court went on to
determine that Mr. Haynie breached the Deal Points by forming Stat
without Mr. Krystal and refusing to pay Mr. Krystal his share of the Stat
proceeds and profits. The court awarded Mr. Krystal $798,141.94 in
damages, plus interest and costs.
B. The chapter 7 case and adversary proceeding
Five years later, Mr. Haynie filed a chapter 7 petition. Mr. Krystal
filed an adversary complaint to declare the Second State Judgment
nondischargeable under §§ 523(a)(2), (a)(4), and (a)(6). He alleged that the
Deal Points constituted a valid and binding agreement effective May 23,
2003. He stated that Mr. Haynie breached the Deal Points when he formed
Stat without him and refused to share profits or sale proceeds with him. He
asserted that Mr. Haynie intentionally converted the business opportunity
and the business itself.
C. Trial and decision
The bankruptcy court held a five-day trial on the adversary
complaint in May 2020.3 It issued its memorandum decision and held that
the debt was nondischargeable under §§ 523(a)(2) and (a)(6).
3 Mr. Haynie opted not to provide us with a copy of the trial transcript, probably
because he does not challenge any of the bankruptcy court’s factual findings. Although
this is not fatal to his entire appeal, we may presume that nothing in the transcript
would help his position. See Gionis v. Wayne (In re Gionis), 170 B.R. 675, 680-81 (9th Cir.
BAP 1994) (“We are entitled to presume that [an appellant who does not provide a
6
The bankruptcy court first considered whether either of the
conflicting Washington state court judgments had preclusive effect.
Finding Washington law silent on this issue, it relied on a Ninth Circuit
case, Robi v. Five Platters, Inc., 838 F.2d 318, 322 (9th Cir. 1988), which holds
that when there are two conflicting judgments, preclusive effect is given to
the judgment that is last in time. As such, the Second State Judgment was
the operative judgment.
The court then considered whether the Second State Judgment
satisfied the four-prong test for issue preclusion. It stated that only the first
prong was at issue: whether Mr. Haynie had a full and fair opportunity to
litigate the second state court trial and whether the issues were actually
litigated. Mr. Haynie argued that he did not have notice of the second state
court trial because he had moved from Washington to Idaho and did not
receive the notice of default. But the bankruptcy court found that the state
court sent the notice of default to his correct address in Idaho, so he had
notice of the second state trial.
The court also held that the state court actually litigated the issues. It
noted that, under Washington law, a “true” default (such as where the
defendant does not appear at all) cannot satisfy the “actually litigated”
requirement. However, it predicted that the Washington Supreme Court
would apply issue preclusion where the party participated in litigation up
transcript] does not think the trial transcript helpful in that regard.”).
7
until the default judgment. Because Mr. Haynie answered the complaint
and participated in the first trial, the court concluded that the “actually
litigated” requirement was satisfied.
Accordingly, the bankruptcy court relied on the preclusive effect of
the Second State Judgment as to four issues: (1) that the Deal Points
agreement was an enforceable and binding contract; (2) that Mr. Haynie
breached the contract; (3) that his breach was intentional and wrongful;
and (4) that Mr. Krystal was entitled to damages totaling $798,141.94 plus
post-judgment interest and costs.
The court then turned to the remaining issues, which determined
whether Mr. Haynie’s debt was dischargeable. As to § 523(a)(2)(A),
concerning a debt obtained by false representations, the bankruptcy court
held, based on the evidence presented at trial, that Mr. Haynie knowingly
and intentionally misrepresented his intentions to (1) form Stat with
Mr. Krystal as a member and (2) rectify his failure to name Mr. Krystal as a
member of Stat. It held that Mr. Krystal relied on Mr. Haynie’s promises
and was damaged by not receiving his share of the proceeds from the sale
to Mr. Davis.
As to § 523(a)(6), pertaining to a debt for willful and malicious injury,
the bankruptcy court held that Mr. Haynie’s breach of contract was
accompanied by willful and malicious tortious conduct. It held that the
conduct was willful because it was intentional and Mr. Haynie knew that
Mr. Krystal was substantially certain to suffer injury. It also determined
8
that Mr. Haynie’s actions were malicious because they were wrongful,
intentional, and injurious. 4
The court issued its judgment in Mr. Krystal’s favor. Mr. Haynie
timely appealed.
JURISDICTION
The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334 and
157(b)(1) and (2)(I). We have jurisdiction under 28 U.S.C. § 158.
ISSUE
Whether the bankruptcy court erred in affording the Second State
Judgment issue preclusive effect and declaring the judgment debt
nondischargeable under §§ 523(a)(2) and (a)(6).
STANDARDS OF REVIEW
We review de novo the bankruptcy court’s determination that issue
preclusion was available. Black v. Bonnie Springs Family Ltd. P’ship (In re
Black), 487 B.R. 202, 210 (9th Cir. BAP 2013). We also review de novo the
bankruptcy court’s legal conclusions, including its construction of § 523(a).
Hamilton v. Elite of L.A., Inc. (In re Hamilton),
584 B.R. 310, 318 (9th Cir. BAP
2018), aff’d, 785 F. App’x 438 (9th Cir. 2019) (citing Carrillo v. Su (In re Su),
290 F.3d 1140, 1142 (9th Cir. 2002)).
“De novo review requires that we consider a matter anew, as if no
decision had been made previously.” Francis v. Wallace (In re Francis), 505
4 The bankruptcy court rejected the § 523(a)(4) claim, which concerns fraud or
defalcation, because the Deal Points did not expressly establish the requisite kind of
9
B.R. 914, 917 (9th Cir. BAP 2014).
If issue preclusion was available, we then review the bankruptcy
court’s application of issue preclusion for an abuse of discretion. In re Black,
487 B.R. at 210. To determine whether the bankruptcy court has abused its
discretion, we conduct a two-step inquiry: (1) we review de novo whether
the bankruptcy court “identified the correct legal rule to apply to the relief
requested” and (2) if it did, we consider whether the bankruptcy court’s
application of the legal standard was illogical, implausible, or without
support in inferences that may be drawn from the facts in the record.
United States v. Hinkson,
585 F.3d 1247, 1262-63 & n.21 (9th Cir. 2009) (en
banc).
DISCUSSION
Mr. Haynie argues on appeal that the bankruptcy court erred in
giving issue preclusive effect to the Second State Judgment. He contends
that the bankruptcy court should have relied on the First State Judgment in
his favor or should not have afforded issue preclusive effect to either
judgment. We discern no error.
A. The bankruptcy court correctly predicted that Washington courts
would adopt the last-in-time rule for conflicting judgments.
When applying issue preclusion, the bankruptcy court is required to
“give to a state-court judgment the same preclusive effect as would be
given that judgment under the law of the State in which the judgment was
fiduciary relationship between the parties.
10
rendered.” Migra v. Warren City Sch. Dist. Bd. of Educ., 465 U.S. 75, 81 (1984).
Mr. Haynie argues that the bankruptcy court erred in accepting the last-in-
time rule because Washington courts would not adopt such a rule. We
conclude that the bankruptcy court did not err.
The parties agree that the Washington state courts have not weighed
in on this issue, and we have not found any case on point. As such, we
must best predict how the Washington Supreme Court would rule. See
Ticknor v. Choice Hotels Int’l, Inc., 265 F.3d 931, 939 (9th Cir. 2001). We may
rely on “intermediate appellate court decisions, decisions from other
jurisdictions, statutes, treatises, and restatements as guidance.” Assurance
Co. of Am. v. Wall & Assocs. LLC of Olympia,
379 F.3d 557, 560 (9th Cir. 2004)
(quoting Nelson v. City of Irvine,
143 F.3d 1196, 1206 (9th Cir. 1998)).
The bankruptcy court relied on the Ninth Circuit’s decision in Robi,
838 F.2d 318. In that case, the Ninth Circuit was faced with multiple
conflicting judgments in different courts. It stated the general law:
Courts are not required to apply res judicata sua sponte.
Thus, if a second court to face a claim or issue is not presented
with res judicata arguments, or rejects these arguments, an
inconsistent judgment may arise. If two or more courts render
inconsistent judgments on the same claim or issue, a
subsequent court is normally bound to follow the most recent
determination that satisfies the requirements of res judicata. . . .
This is referred to as the “last in time” rule.
Id. at 322 (citing Americana Fabrics, Inc. v. L & L Textiles, Inc.,
754 F.2d 1524,
1529 (9th Cir. 1985)). The Ninth Circuit explained its reasoning:
11
When two inconsistent judgments exist, it is tempting for
a court to reexamine the merits of the litigants’ dispute and
choose the result it likes best. There are important reasons to
avoid this temptation. First, if one party could have raised res
judicata, but did not, that litigant must bear the cost of its tactic
or inadvertence. Second, the most recent court to decide the
matter may have considered and rejected the operation of the
prior judgment as res judicata, and its decision should be treated
as res judicata on the preclusive effect of the prior judgment.
Finally, the last in time rule is supported by the rationale that it
end[s] the chain of relitigation . . . by stopping it where it
[stands] after entry of the [most recent] court’s judgment, and
thereby discourages relitigation in [yet another] court.
Therefore, even when we think that the most recent judgment
might be wrong, we still give it res judicata effect so that finality
is achieved and the parties are encouraged to appeal an
inconsistent judgment directly rather than attack it collaterally
before another court.
Id. at 322-23 (citations and internal quotation marks omitted) (alteration in
original).
The Ninth Circuit’s decision in Robi is consistent with the generally
accepted rule. The Restatement (Second) of Judgments § 15 (1982)
(“Restatement § 15”) provides: “When in two actions inconsistent final
judgments are rendered, it is the later, not the earlier, judgment that is
accorded conclusive effect in a third action under the rules of res judicata.”
An illustrious scholar, who later became a justice of the United States
Supreme Court, agreed. “Under traditional res judicata doctrine, where
there are conflicting judgments and each would be entitled to preclusive
12
effect if it stood alone, the last in time controls in subsequent litigation.”
Ruth B. Ginsburg, Judgments in Search of Full Faith and Credit: The Last-in-
Time Rule for Conflicting Judgments, 82 Harv. L. Rev. 798, 798 (1969); see also
18 Charles Alan Wright, Arthur R. Miller & Edward Cooper, Federal
Practice & Procedure § 4404 (3d ed. 2016) (“If a second action is pursued to
entry of a final judgment inconsistent with a prior judgment, the second
judgment ordinarily prevails whether the res judicata effects of the first
judgment were ignored by the parties or expressly rejected by the court in
the second action.”).
In fact, an illustration in Restatement § 15 appears to contemplate this
very situation:
A sues B on a promissory note. B denies that he executed the
note. There is a trial resulting in a verdict for B, and judgment is
rendered in B’s favor. A brings a second action against B on the
note, and B defaults, and judgment is given for A for the
amount of the note and interest thereon. Thereafter A brings an
action against B on the second judgment. The judgment for B in
the first action is no defense.
Restatement (Second) of Judgments § 15 illus. 1.
We see no reason why Washington courts would depart from this
general rule giving preclusive effect to the last-in-time judgment.
Mr. Haynie acknowledges that illustration 1 of Restatement § 15
would appear to apply the last-in-time rule to the facts of the present case.
However, he argues that Washington has not adopted Restatement § 15.
While Washington appellate courts have not adopted this particular
13
section, the Washington Supreme Court has repeatedly relied on other
sections of the Restatement (Second) of Judgments. See, e.g., Reninger v.
State Dep’t of Corr., 951 P.2d 782, 790-91 (Wash. 1998) (Restatement (Second)
of Judgments § 28); Southcenter Joint Venture v. Nat’l Democratic Policy
Comm.,
780 P.2d 1282, 1285 (Wash. 1989) (Restatement (Second) of
Judgments § 43); Schoeman v. N.Y. Life Ins. Co.,
726 P.2d 1, 3 (Wash. 1986)
(Restatement (Second) of Judgments §§ 13, 22). He gives no reason why the
Washington Supreme Court would not also adopt this section, given its
reliance on other sections of this Restatement.
Additionally, he contends that the last-in-time rule is not applicable
to two judgments within the same case. But he offers no authority for his
argument and no reason why the rule would apply only to multiple final
judgments entered in separate cases and not to multiple final judgments
entered in a single case.
Mr. Haynie cites Peterson v. Department of Ecology, 596 P.2d 285, 289
(Wash. 1979), for the proposition that “[a]n ambiguous and inconsistent
judgment should not be the basis for an estoppel by judgment.” But
Peterson was concerned with a single judgment that was ambiguous and
internally inconsistent, making it difficult to determine what the court
decided. In this case, the Second State Judgment is unambiguous and
internally consistent. There is no reason to reject the last-in-time rule in this
situation. See Cummins v. Mullins,
210 S.W. 170, 172 (Ky. 1919) (“Where
there are two conflicting judgments rendered by the same court upon the
14
same rights of the same parties, growing out of the same contract, that
which is later in time will prevail. Hence this court will treat the first
judgment to all intents and purposes as of no binding effect.”).
Mr. Haynie argues that the Washington state court of appeals
affirmed the First State Judgment, so the bankruptcy court should have
preferred that judgment. He states that the state court was bound to follow
the appellate decision, not the erroneous Second State Judgment. But it is
not our place to decide whether the Second State Judgment was “correct.”
As the Ninth Circuit stated, “the most recent decision ‘is not binding
because it is correct; it is binding because it is last.’ This concept of finality
is central to the entire body of res judicata doctrine.” Robi, 838 F.2d at 328
(quoting Americana Fabrics,
Inc., 754 F.2d at 1530).
At oral argument, Mr. Haynie argued that, if there are two
inconsistent judgments, neither of them should have issue preclusive effect.
For the reasons given above, we think that the last-in-time rule is preferable
and that the Washington courts would follow it.
Mr. Haynie also argues that, even if Washington law would generally
recognize the last-in-time rule, it should not be applied in this case.
He argues that he could not have asserted that the First State
Judgment had issue preclusive effect at the second trial because the state
court entered the Second State Judgment against him by default. This
ignores the bankruptcy court’s factual finding that Mr. Haynie received
notice of the trial yet did not participate. In other words, he could have
15
raised this defense, but chose not to. Nothing required the state court to
ascertain the preclusive effect of the First State Judgment on its own
motion. “The considerations of policy which support the doctrine of res
judicata are not so strong as to require that the court apply them of its own
motion when the party himself has failed to claim such benefits as may
flow from them.” Restatement (Second) of Judgments § 15 cmt. b. If
Mr. Haynie disagreed with the Second State Judgment, he should have
appealed immediately. See Robi, 838 F.2d at 328 (“If an aggrieved party
believes that the second court . . . erred in not giving res judicata effect to the
first court’s . . . judgment, then the proper avenue of redress is appeal of
the second court’s judgment, not collateral attack in a third court.” (citation
omitted));
Ginsburg, supra, at 798-99 (“Under the last-in-time rule, if a
defense based on the first judgment is not raised in the second action, the
defense cannot be resurrected in a subsequent proceeding. . . . The decision
not to raise the prior adjudication, or to discontinue the contest concerning
its effect by failing to utilize an opportunity for direct review, settles the
matter.”). 5
He also contends that the second trial was limited to damages, so the
5 We also note that, under Washington law, a court always has discretion to
refuse to apply issue preclusion if its application would result in an injustice. See
Reninger, 951 P.2d at 789 (Court must not apply issue preclusion “so rigidly as to defeat
the ends of justice, or to work an injustice.” (quoting Henderson v. Bardahl Int'l Corp.,
431
P.2d 961, 967-68 (Wash. 1967))). Therefore, a court could decide not to give preclusive
effect to the last-in-time judgment in order to avoid injustice in a particular case. The
bankruptcy court did not exercise that discretion in this case, and we discern no abuse.
16
state court could not have properly considered whether any of the issues
decided in the First State Judgment were afforded issue preclusive effect.
As we explained above, preclusion does not depend on whether the
judgment was correct.
In sum, we agree with the bankruptcy court that the Washington
Supreme Court would follow the last-in-time rule, which potentially
affords preclusive effect to the Second State Judgment despite the
inconsistent First State Judgment.
B. The bankruptcy court did not err in applying issue preclusion to
the Second State Judgment.
The last-in-time rule applies only if the last judgment is itself entitled
to preclusive effect. Mr. Haynie argues that it was error to give the Second
State Judgment issue preclusive effect under Washington law. We disagree.
There is no dispute as to the standard for issue preclusion under
Washington law:
Collateral estoppel, also known as issue preclusion, bars
the relitigation of issues that were decided in a previous
proceeding involving the same parties. The court considers four
factors to determine whether collateral estoppel applies:
“(1) identical issues; (2) a final judgment on the merits;
(3) the party against whom the plea is asserted must have
been a party to or in privity with a party to the prior
adjudication; and (4) application of the doctrine must not
work an injustice on the party against whom the doctrine
is to be applied.”
17
In addition, the issues to be precluded must have been actually
litigated and necessarily decided in the first proceeding. The
party against whom collateral estoppel is asserted must have
had a full and fair opportunity to litigate the issues in the first
proceeding.
Sprague v. Spokane Valley Fire Dep’t, 409 P.3d 160, 183 (Wash. 2018) (citations
omitted).
First, Mr. Haynie argues that the Second State Judgment did not
necessarily and finally determine issues of his conduct and Mr. Krystal’s
reliance. As such, he contends that the bankruptcy court erred in finding
that his breach of the Deal Points was intentional and wrongful and that
Mr. Krystal relied on those misrepresentations.
Mr. Haynie is wrong because the bankruptcy court did not rely on
issue preclusion to determine Mr. Haynie’s mental state or Mr. Krystal’s
reliance. Rather, the bankruptcy court made its own findings as to these
two issues based on the evidence presented at trial in the bankruptcy court.
It stated in its written decision that:
Based on the evidence presented at trial, including the
evaluation of weight and credibility of witness testimony, this
Court finds and concludes that Haynie knowingly and
intentionally misrepresented his intentions to form Stat with
Krystal as a member and, later, his intentions to remedy the
failure to include Krystal as a member of Stat. Krystal relied on
Haynie’s promises and continued his relationship with Haynie
and Stat. As a result, Krystal was damaged by not receiving his
share of the profits of Stat or the Davis sale.
(Emphases added).
18
Second, Mr. Haynie argues that the issues determined in the Second
State Judgment, including the validity and enforceability of the Deal
Points, were not “actually litigated” because the Second State Judgment
was effectively a default judgment.
The Ninth Circuit and many other courts have held that the “actually
litigated” requirement “may be satisfied by substantial participation in an
adversary contest in which the party is afforded a reasonable opportunity
to defend himself on the merits but chooses not to do so.” FDIC v. Daily (In
re Daily), 47 F.3d 365, 368 (9th Cir. 1995); see Backlund v. Stanley-Snow (In re
Stanley-Snow),
405 B.R. 11, 20 (1st Cir. BAP 2009) (Most federal courts “have
reasoned that if a party was afforded a reasonable opportunity to defend in
the prior action but chose not to do so, the party could have reasonably
foreseen the consequences of not defending the action and it would be
‘undeserved’ to give a ‘second bite at the apple when he knowingly chose
not to defend himself in the first instance.’ Although a few courts have
declined to adopt a ‘substantial participation’ exception, these courts are in
the minority.” (citations and footnote omitted)). Mr. Haynie correctly
points out that the Washington Supreme Court has not spoken on this
issue, but we see no reason why the Washington Supreme Court would not
follow the rule in Daily. The contrary rule would allow a party to
participate in a case until things start going badly, and then simply quit
participating in order to get a second bite at the apple.
The bankruptcy court heard testimony and received evidence
19
concerning Mr. Haynie’s ability to participate in the second state court trial.
It found that he had fair notice of the state court proceedings and could
have participated in the trial if he had wanted to. It thus found that he had
a full and fair opportunity to litigate the issues determined in the Second
State Judgment. We discern no error with these findings of fact.
Finally, Mr. Haynie argues that the bankruptcy court erred in
applying “offensive” issue preclusion against him because he did not have
an opportunity to defend himself against allegations of his “fraudulent and
malicious conduct.” He points to the Robi court’s statement that “[a]llowing
offensive collateral estoppel may also be unfair to a defendant if the
judgment relied upon as a basis for the estoppel is itself inconsistent with
one or more previous judgments in favor of the defendant.” 838 F.2d at 329
(quoting Parklane Hosiery Co. v. Shore,
439 U.S. 322, 330 (1979)).
The bankruptcy court did not allow “offensive” issue preclusion in
this case. In Robi, one of the plaintiffs (Williams) sought to use a judgment
rendered in favor of another plaintiff (Robi) against the common corporate
defendant. The court used the term “offensive” issue preclusion to describe
that situation, where one plaintiff attempts to get the benefit of preclusion
based on a judgment entered in favor of a different plaintiff. The Robi court
said that Williams could not use Robi’s judgment against the defendant
because Williams had litigated his own case and had lost. In such a
situation, the court held, it would be unfair to give preclusive effect to the
judgment not involving Williams in order to overturn a judgment against
20
Williams in a case in which he was a party. Id. at 330. In this case,
Mr. Haynie was a party to the litigation throughout. Giving the Second
State Judgment issue preclusive effect was not unfair.
CONCLUSION
The bankruptcy court did not err in affording the Second State
Judgment issue preclusive effect and concluding that the judgment debt
was excepted from discharge under §§ 523(a)(2) and (a)(6). We AFFIRM.
21
