United States District Court, D. Colorado
In re LINO MIRANDA MUNOZ, Debtor.
v.
LINO MIRANDA MUNOZ, Appellee. SUPERIOR CLEANING SERVICE, LLC, Appellant, Appeal from Bankruptcy Adversary Proceeding No. 17-01066-KHT
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 ...