In re Munoz

          ORDER AFFIRMING IN PART AND VACATING IN PART THE JUDGMENT OF THE BANKRUPTCY COURT

          William J. Martinez, United States District Judge

         Lino Miranda Munoz (“Munoz”) filed a Chapter 13 bankruptcy petition, and listed as one of his debts a judgment of approximately $91, 000 owed to Superior Cleaning Service, LLC (“Superior”). Superior filed an adversary proceeding to establish that Munoz's debt is nondischargeable for “actual fraud, ” per 11 U.S.C. § 523(a)(2)(A). The Bankruptcy Court found that only $2 of the debt was tainted by actual fraud, and so entered judgment in favor of Munoz, less $2. Superior now appeals the Bankruptcy Court's judgment to this Court under Federal Rules of Bankruptcy Procedure 8001-02.

         After the close of merits briefing, the Court referred the matter to U.S. Magistrate Judge Scott T. Varholak for a recommended disposition. (ECF No. 19.) The Magistrate Judge entered his recommendation on June 3, 2018 (“Recommendation”). (ECF No. 20.) The Recommendation rejects certain of Superior's arguments but nonetheless recommends vacating and remanding this matter to the Bankruptcy Court for additional analysis. Munoz filed a timely objection (ECF No. 27), and Superior filed a response to that objection (ECF No. 28). Superior did not file its own objection to the portions of the Recommendation disfavoring its position.

         For the reasons explained below, the Court adopts the Recommendation in part and rejects it in part. As to the portion the Court rejects, the Court finds that the recommended relief would excuse Superior's explicit waiver of a certain theory of recovery. Accordingly, the Court will affirm the judgment of the Bankruptcy Court in all respects save for the question of whether Superior is entitled to attorneys' fees incurred in the adversary proceeding-a matter raised in the adversary proceeding, but which the Bankruptcy Court apparently overlooked.

         I. RULE 72(b) STANDARD OF REVIEW

         When a magistrate judge issues a recommendation on a dispositive matter, Federal Rule of Civil Procedure 72(b)(3) requires that the district court judge “determine de novo any part of the magistrate judge's [recommendation] that has been properly objected to.” Fed.R.Civ.P. 72(b)(3). In conducting its review, “[t]he district court judge may accept, reject, or modify the recommendation; receive further evidence; or return the matter to the magistrate judge with instructions.” Id. An objection is proper if it is filed within fourteen days of the magistrate judge's recommendations and is specific enough to enable the “district judge to focus attention on those issues-factual and legal-that are at the heart of the parties' dispute.” United States v. 2121 East 30th Street, 73 F.3d 1057, 1059 (10th Cir. 1996) (internal quotation marks omitted).

         Munoz timely objected to the Recommendation with sufficient specificity. (See ECF No. 27.) Accordingly, the Court reviews de novo the portions of the Recommendation to which Munoz has objected.

         The Recommendation rejects what the Magistrate Judge accurately characterized as “Superior's primary argument-both before the bankruptcy court and on appeal.” (ECF No. 20 at 8.) The Court will discuss the specifics of this primary argument below. For present purposes, the Court notes that Superior did not file an objection to the Recommendation. Thus, as to those portions of the Recommendation disfavoring Superior (and any portions disfavoring Munoz but not encompassed within his objection), the Court may review them “under any standard it deems appropriate.” Summers v. Utah, 927 F.2d 1165, 1167 (10th Cir. 1991) (citing Thomas v. Arn, 474 U.S. 140, 150 (1985)). The Court will review these portions for clear error only. See Fed. R. Civ. P. 72(b), Advisory Committee Notes to 1983 Addition (“When no timely objection is filed, the court need only satisfy itself that there is no clear error on the face of the record in order to accept the recommendation.”).

         II. BANKRUPTCY APPEAL STANDARD OF REVIEW

         In reviewing a bankruptcy court's decision, the district court normally functions as an appellate court, reviewing the bankruptcy court's legal conclusions de novo and its factual findings for clear error. 28 U.S.C. § 158(a); In re Warren, 512 F.3d 1241, 1248 (10th Cir. 2008).

         III. BACKGROUND

         A. The Parties' Commercial Relationship

         Superior provides residential and new construction cleaning services. (Record on Appeal (ECF No. 7-1) (“R.”) at 7.) Sometime in 2003 or 2004, Superior subcontracted window cleaning operations to Munoz. (R. at 163.) The parties memorialized the subcontracting relationship in an “Independent Contractor Agreement” (“Agreement”). (Id.)

         B. The State Court Lawsuit & Judgment

         In February 2014, Munoz sued Superior in Boulder County District Court (“State Court”) for breach of the Agreement and unjust enrichment. (Id.) Superior answered and counterclaimed for breach of contract, fraud, violation of the Colorado Organized Crime Control Act (“COCCA”), ^[1] and civil theft. (R. at 163-64.) In what must be one of the rarest circumstances in civil litigation, Munoz failed to answer the counterclaims and so the State Court entered a clerk's entry of default. (R. at 164.) Several months later, Munoz obtained a new attorney who moved for relief from default, but the State Court denied the motion. (Id.)

         In March 2015, the case went to a jury trial on liability and damages for Munoz's claims against Superior, and on damages only for Superior's counterclaims against Munoz. (Id.)^[2] The jury found Superior not liable to Munoz on either of Munoz's theories of relief. (Id.) As counterclaimed damages, the jury awarded Superior $1 in nominal damages for breach of contract, $1 in nominal damages for fraud, $12, 500 in punitive damages for fraud, and nothing for civil theft or violation of COCCA. (Id.) The State Court reduced the punitive damages award to $1 because Colorado prohibits punitive damages in excess of actual damages. (Id.)^[3] Thus, the total damages award against Munoz was $3.

         The Agreement contains a fee-shifting clause which awards fees to the prevailing party in “any dispute arising from or related to” the Agreement. (R. at 103.) Superior moved for its fees under this provision, and the State Court granted that motion. (R. at 102-05.) The State Court's order specifically noted that Superior was claiming all of its fees (regardless of whether they were incurred in defending against Munoz's claims or prosecuting Superior's counterclaims) but Munoz “did not raise specific challenges to line items charged by [Superior's] counsel.” (R. at 103.)

         Munoz then filed certain motions to reconsider and for relief from judgment on both liability and attorneys' fees, which the State Court denied. As relevant here, the State Court's order denying relief from judgment specified that Superior was the prevailing party under the fee-shifting clause because

[Munoz] did not prevail on [his] own claims for breach of contract and unjust enrichment. Thus, [Superior] was the prevailing party on the claims brought by [Munoz]. Further, in addition to the nominal damages, the jury awarded $12, 500 in punitive damages on [Superior's] counterclaims. Regardless of the Court's reduction of the punitive damages award consistent with the statutory limitation, [Superior] prevailed in obtaining punitive damages. Thus, [Superior] prevailed both on [Munoz's] claims and on its own counterclaims.

(R. at 128.)

         In May 2016, the State Court reduced the jury's $3 damages award and the attorneys' fees award to a single judgment of $90, 733.79 (“Judgment”). (See R. at 165; see also R. at 66, 147, 165.) In other words, the State Court lawsuit started out as Munoz's attempt to seek relief from Superior but ended up granting meaningful relief to no one except Superior's attorneys, at Munoz's expense.

         C. Bankruptcy Court Proceedings & Decision

         Munoz filed for Chapter 13 bankruptcy protection in November 2016. (ECF No. 7-2 at 5.) He listed his residential mortgage as his only secured debt and the Judgment as his only unsecured debt. (Id. at 30-31.) For unclear reasons, he listed the amount of the Judgment as $90, 933.79, not $90, 733.79. (Id.)

         In February 2017, Superior filed an adversary proceeding to establish that the Judgment may not be discharged in bankruptcy. (R. at 6.) Superior invoked 11 U.S.C. § 523(a)(2)(A), which provides:

A discharge under . . . this title does not discharge an individual debtor from any debt-

* * *

for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by- false pretenses, a false representation, or actual fraud . . . .

         Superior argued that the entire Judgment was “derivative from the jury verdict . . . awarding Superior damages on its fraud claim” so the entire Judgment “is non-dischargeable” due to “actual fraud.” (R. at 8.)

         Superior soon moved for summary judgment in the adversary proceeding. (R. at 45.) Superior argued that “the jury in the [State Court] Case determined that Munoz had committed ‘actual fraud' and entered damages in favor of Superior accordingly” and so “Munoz is collaterally estopped from re-litigating [the ‘actual fraud'] issue.” (R. at 53- 54.) Moreover, Superior argued that the attorneys' fees award is properly considered a debt connected to the actual fraud, and so is non-dischargeable. (R. at 50-53.) Thus, in Superior's view, it was entitled to a judgment of non-dischargeability for $90, 733.79, plus postjudgment interest and attorneys' fees and costs incurred in the adversary proceeding itself (per the Agreement's fee-shifting clause). (R. at 50, 54-55.)

         As relevant here, Munoz responded that the State Court had never apportioned “the amount of Attorneys' Fees granted in defending against Mr. Munoz's claims versus each of the Counterclaims.” (R. at 100.) Thus, Munoz argued that the Bankruptcy Court could deny summary judgment because Superior failed to prove ...