In re Vickery

          OPINION AND ORDER ON APPEAL

          CHRISTINE M. ARGUELLO, JUDGE

         This matter is before the Court on Debtor Terry Kenneth Vickery's (“Debtor”) appeal of the Bankruptcy Court's November 2, 2017 Opinion and Order on Remand Granting in Part Judgment on Nondischargeability Claim Under 11 U.S.C. § 523(a)(2)(A) for Actual Fraud in Adversary Proceeding No. 11-1164-TBM, Bankruptcy Case No. 10-41118-TBM. Chapter 7 Trustee Danning, Gill, Diamond & Kollitz, LLP (“Trustee”) opposes Debtor's appeal. In determining this matter, the Court has considered the designated record (Doc. ## 9-1-9-4), and the written arguments of parties, including Debtor's Opening Brief (Doc. # 13), Trustee's Answer Brief (Doc. # 14), and Debtor's Reply Brief (Doc. # 18), as well as relevant authorities. Exercising jurisdiction pursuant to 28 U.S.C. § 158, the Court affirms the Bankruptcy Court's November 2, 2017 Opinion and Order.

         I. PROCEDURAL BACKGROUND

         Over the past 24 years, Trustee has been on a quest rivaling Odysseus's formidable journey to Ithaca to recover assets of the estate of IVDS Interactive Acquisition Partners (“IIAP”). The Court has little interest in writing its own Homeric epic and thus looks to previous orders related to Debtor's instant appeal, from which the Court now quotes at length. The following facts are undisputed:

In the early 1990s, investment in interactive television systems became a potentially lucrative source of income, and by the mid-1990s certain bandwidths became eligible for licensing by the Federal Communications Commission for Interactive Video and Data Services (“IVDS”). IIAP was created in 1994 by [Debtor] Mr. Vickery and others for the purported purpose of purchasing IVDS licenses in large geographic areas, setting up IVDS systems, and profiting from the endeavor. Mr. Vickery did not have an ownership interest in IIAP, but was one of its promoters. Mr. Vickery was, however, the president and sole stockholder of Digital Interactive Associates, Inc. (“DIA”), which was set up at approximately the same time. The purported purpose of DIA was to raise $6 million from potential IIAP investors to be used by IIAP to obtain IVDS licenses.

In re Vickery, 488 B.R. 680, 682 (10th Cir. BAP (Colo.) 2013).

In 1995, [IIAP], a Florida general partnership, filed for bankruptcy protection in the Central District of California under Chapter 11. The case was converted to Chapter 7 and . . . Mr. Richard K. Diamond, was appointed Chapter 7 trustee.[1] In that case, [Trustee] initiated an adversary proceeding (hereinafter, the “IIAP Adversary Proceeding”) against the Debtor, Mr. Terry Vickery, and others [in a California federal district court].

In re Vickery, 526 B.R. 872, 875 (D. Colo. 2015).

         A. THE IIAP ADVERSARY PROCEEDING IN CALIFORNIA FEDERAL DISTRICT COURT

In the IIAP Adversary Proceeding, [Trustee] sought to avoid and recover $3.6 million in transfers to the Debtor and other defendants under 11 U.S.C. § 544. He argued that the transfers were fraudulent and therefore voidable under Florida law. . . . [Trustee] asserted three claims that the transfers were fraudulent under the Florida Uniform Fraudulent Transfer Act (FUFTA): (1) under FUFTA § 726.105(1)(a), based on evidence that the transfers were made with the actual intent to hinder, delay, or defraud IIAP; (2) under FUFTA § 726.105(1)(b)(i), based on evidence that IIAP's assets were unreasonably small in relation to what was required to satisfy its obligations; and (3) under FUFTA § 726.105(1)(b)(ii) based on evidence that at the time of the transfers, IIAP intended to incur, or should have believed that it would incur, debts beyond its ability to pay.

. . . Further, [Trustee] claimed that [it] was entitled to punitive damages because the Debtor and other defendants had allegedly conspired to cause IIAP to transfer the funds and that they acted willfully and with actual malice or wanton disregard of IIAP's creditors.

Id. at 878-79. Relevant to the instant appeal is Trustee's first claim for relief:

In the First Claim for Relief, [Trustee] sought recovery of the Subject Transfers under section 726.105 of the Florida Uniform Fraudulent Transfer Act (“FUFTA”). This claim required him to prove that the Subject Transfers were made to the Defendants by [IIAP], with actual intent to hinder, delay, or defraud creditors of [IIAP]. In the Pretrial Order, the Trustee asserted that actual intent to defraud would be shown through a number of badges of fraud; he made no mention of how actual intent to hinder or delay would be shown.

In re Vickery, No. 10-04118 ABC, Adv. No. 11-01164, 2011 WL 4963136, *2 (Bankr. D. Colo. Oct. 17, 2011) (emphasis added).

         After a nearly two-week jury trial in the California federal district court, the jury returned a verdict in favor of Trustee on all three claims for relief. It “found that $3.6 million was fraudulently transferred by IIAP and that the defendants conspired to cause IIAP to make the transfers to them or for their benefit.” In re Vickery, 526 B.R. at 878- 79. As to Trustee's first claim:

For the first claim for relief, that “[IIAP] made a transfer or incurred an obligation with the actual intent to hinder, delay, or defraud any creditor of [IIAP], ” in response to the question, “Do you the jury ... unanimously find in favor of the [Trustee] as Chapter 7 trustee for the bankruptcy estate of [IIAP] and against defendants?, ” the jurors answered, “Yes” as to [Debtor] Terry Vickery. Further, the jury answered, “Yes” as to Terry Vickery in response to “We the jury unanimously find that the defendants' action in this case were part of a conspiracy to have [IIAP] make fraudulent transfers to them or for their benefit.” The jury assessed actual and compensatory damages on this claim against Vickery and in favor of Diamond in the amount of $400, 000. The jury also assessed a total of $1, 040, 000 in actual and compensatory damages against other defendants. (Pl.'s Mem. Ex. E, Apr. 13, 2007 Tr. at 5:16-24.)

In re Vickery, 2011 WL 4963136 at *4 (emphasis added). After finding for Trustee and assessing actual and compensatory damages against Debtor also on the second and third claims,

The jury also answered “yes” in response to three interrogatories as to whether the Debtor had acted maliciously, oppressively, and in reckless disregard of IIAP creditors' rights. As a result, the jury awarded $1 million in punitive damages against the Debtor individually and additional amounts against the other defendants.

In re Vickery, 526 B.R. at 878-79.

         At its end, the IIAP Adversary Proceeding culminated in 2007 with a judgment in favor of Trustee and against Debtor and other defendants in the amount of $4.6 million plus interest. Id. at 875. Trustee subsequently domesticated in Colorado the judgment from in the IIAP Adversary Proceeding.

         B. THIS ADVERSARY PROCEEDING IN THE COLORADO BANKRUPTCY COURT

         In December 2010, Debtor filed for bankruptcy protection under Chapter 7 in the District of Colorado (the “Colorado Bankruptcy Court”). In re Vickery, Bankruptcy No. 10-41118 (Bankr. D. Colo.).

         In 2011, Trustee commenced this adversary proceeding against Debtor by filing a Complaint to Determine Dischargeability of Debt in the Colorado Bankruptcy Court. Trustee seeks a determination that the judgment against Debtor entered in the IIAP Adversary Proceeding in California (the “judgment debt”) is nondischargeable debt Debtor owes IIAP's bankruptcy estate pursuant to 11 U.S.C. §§ 523(a)(2), (4), and/or (6). See In re Vickery, No. 10-04118 ABC, Adv. No. 11-01164, 2012 WL 2022502 (Bankr. D. Colo. June 5, 2012), aff'd in part, rev'd in part, 488 B.R. 680 (10th Cir. BAP (Colo.) 2013), and aff'd, 526 B.R. 872 (D. Colo. 2015). Specifically,

[Trustee] argued that the judgment debt is nondischargeable because it was (1) a debt for funds obtained “under false pretenses, false representations or actual fraud” under § 523(a)(2); (2) a debt for “fraud and defalcation, while acting in a fiduciary capacity to [IIAP]” under § 523(a)(4); and/or (3) a debt for “willful and malicious injury to [IIAP] and its property” under § 523(6).

In re Vickery, 526 B.R. at 875 (emphasis added).

         The appeal presently before this Court concerns Debtor's first argument, alleging actual fraud under Section 523(a)(2)(A). Section 523(a)(2)(A) of the Bankruptcy Code provides:

(a) A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) 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; . . .

11 U.S.C. § 523(a)(2)(A) (emphasis added).

         Trustee moved for summary judgment “entirely on the law of preclusion, in that [Trustee] assert[ed] that the facts established in the [IIAP] Adversary Proceeding . . . establish the nondischargeability of the judgment debt.” In re Vickery, 2011 WL 4963136 at *1.

         In denying Trustee's Motion for Summary Judgment on October 17, 2011, the Colorado Bankruptcy Court began with a comprehensive review of the IIAP Adversary Proceeding, noting that Debtor did not dispute any of the underlying facts of the case, id. at *1-5, and with an explanation of the Court of Appeals for the Ninth Circuit's doctrine of issue preclusion, id. at *6-7.^[2] Because it was undisputed that the IIAP Adversary Proceeding ended with a final judgment on the merits and that Debtor was a party to that proceeding, the question for the Colorado Bankruptcy Court, in its view, was “whether the issues determined by in [sic] the [IIAP] Adversary Proceeding were (a) necessarily decided and (b) identical to the elements that [Trustee] must establish in order to prove his claims under §§ 523(a)(2), (4), and (6).” Id. at *7. With respect to Trustee's first nondischargeability claim pursuant to Section 523(a)(2)(A), the Colorado Bankruptcy Court explained:

With respect to a nondischargeability claim predicated on false representation or actual fraud, a plaintiff must establish the following elements: (1) the defendant made a false representation; (2) the defendant made the representation with the intent to deceive the plaintiff; (3) the plaintiff relied on that representation; (4) the plaintiff's reliance as reasonable; (5) the debtor's representation caused the creditor to sustain a loss. Fowler Bros. v. Young (In re Young), 91 F.3d 1367, 1373 (10th Cir.1996). The creditor bears the burden of proving all elements of a claim under § 523(a)(2)(A).

Id. at *8 (emphasis added). For reasons irrelevant to the instant appeal, the Colorado Bankruptcy Court denied Trustee's Motion for Summary Judgment as to Trustee's first nondischargeability claim pursuant to Section 523(a)(2)(A) and as to Trustee's two other nondischargeability claims pursuant to Sections 523(a)(4) (fraud or defalcation while acting in fiduciary capacity) and 523(a)(6) (willful and malicious injury). Id. at *12.

         The Colorado Bankruptcy Court conducted a three-day trial on this adversary proceeding in March 2012. In re Vickery, 2012 WL 2022502 at *1.

         On June 5, 2012, the Colorado Bankruptcy Court issued its Findings of Fact, Conclusions of Law, and Ruling. Id. As to Trustee's Section 523(a)(2)(A) claim that the judgment debt is a debt for false representations or actual fraud, the Colorado Bankruptcy Court held:

In its prior rulings in this case, the Court has rejected [Trustee]'s claim that the IIAP Judgment for funds transferred “with the intent to hinder, delay, or defraud” creditors of IIAP is a debt for “false representations, or actual fraud, ” under 11 U .S.C. § 523(a)(2)(A) without proof of the following elements: (1) the debtor made a false representation; (2) with the intent to deceive plaintiff; (3) plaintiff relied on that representation; (4) the reliance was reasonable; and (5) that the misrepresentation caused the creditor to sustain a loss. See, Fowler Bros v. Young (In re Young), 91 F.3d 1367, 1373 (10th Cir. 1996). . . .

[Trustee] endeavored to fit the evidence he presented at trial into the Young elements by arguing that Vickery misled IIAP by failing to disclose that only $2.4 million of the $6 million raised would be available to IIAP for the acquisition of FCC licenses and the build out of the technology necessary to operate an interactive television system. The evidence was to the contrary. The evidence showed that the principals involved in IIAP, including Dambro and Anneke, IIAP's initial general partner, were well aware of, in fact created, the fund-raising and expense parameters. There was nothing in this regard that was concealed from IIAP, and there were no misrepresentations on which IIAP reasonably relied. Accordingly, [Trustee]'s § 523(a)(2)(A) claim fails, and the Court will enter judgment in favor of Vickery on this claim.

Id. at *5 (emphasis added). In short, the Colorado Bankruptcy Court rejected Trustee's Section 523(a)(2)(A) argument because Trustee had not proven that Debtor made a false representation. See generally id. The Colorado Bankruptcy Court also rejected Trustee's second claim for nondischargeability, asserted under Section 523(a)(4). Id. at *6. However, the Colorado Bankruptcy Court ruled in favor of Trustee on its third claim for nondischargeability under Section 523(a)(6). Id. at *6. It therefore ordered:

[T]he IIAP Judgment is a debt for willful and malicious injury by [Debtor] Vickery to IIAP, and judgment will enter in favor of [Trustee] and against Vickery, declaring the IIAP Judgment, in the amount of $4.6 million in actual and punitive damages, plus pre-petition interest of $865, 272.48, for a total amount of $5, 465, 272.48, is non-dischargeable in Vickery's bankruptcy case, pursuant to 11 U.S.C. § 523(a)(6).

Id. at *7.

         C. DEBTOR'S APPEAL TO THIS COURT

         Debtor appealed the Colorado Bankruptcy Court's judgment concerning Section 523(a)(6), in which the Colorado Bankruptcy Court ruled against him, to this Court. See In re Vickery, 526 B.R. at 875. The substance of Debtor's appeal, and the rulings thereon, are irrelevant to the questions presently before this Court. It addresses Debtor's appeal only to provide a comprehensive procedural background of this action.

         This Court, with Chief Judge Marcia S. Krieger presiding, affirmed on January 26, 2015, the Colorado Bankruptcy Court's determination that the $4.6 million judgment debt held by Trustee is nondischargeable under Section 523(a)(6). Id. at 881. Debtor appealed the Court's Opinion to the Court of Appeals for the Tenth Circuit, but after appellate briefing, the Tenth Circuit determined it lacked jurisdiction because the Court's Opinion “isn't a final, appealable order.” In re Vickery, 658 Fed.Appx. 398, 401 (10th Cir. 2016). The Tenth Circuit dismissed Debtor's appeal. Id.

         D. PANEL TRUSTEE'S APPEAL TO THE TENTH CIRCUIT BANKRUPTCY APPELLATE

         Trustee also appealed the Colorado Bankruptcy Court's June 5, 2012 Order, arguing that the Colorado Bankruptcy Court erred in determining that Trustee had not proven its claims against Debtor under Section 523(a)(2)(A) (false pretenses, false representation or actual fraud) and Section 523(a)(4) (fraud or defalcation while acting in a fiduciary capacity). See In re Vickery, 488 B.R. at 682. Trustee's appeal was heard by the Bankruptcy Appellate Panel of the Tenth Circuit (“Tenth Circuit BAP”). Id.

         With respect to Section 523(a)(2)(A), the Tenth Circuit BAP ruled on March 13, 2013, that the Colorado Bankruptcy Court erred in holding that false representations by the debtor was an element of “actual fraud” under Section 523(a)(2)(A). Id. at 687; see In re Vickery, 2012 WL 2025202 at *5 (stating that “the debtor made a false representation” is an element of a “false representations or actual fraud” claim under Section 523(a)(2)(A)). The Tenth Circuit BAP held:

In order to give full effect to the plain meaning of the disjunctive “or” in § 523(a)(2)(A), we conclude that “actual fraud” is an independent basis for nondischargeability under that subsection. As a result, we reverse the bankruptcy court's pretrial legal conclusion in this regard. The [McClellan v. Cantrell, 217 F.3d 890 (7th Cir. 2000)] court's reasoning is persuasive, and we adopt its position that “actual fraud” under § 523(a)(2)(A) is not limited to misrepresentations or misleading omissions. As in McClellan, we are careful to clarify that only “actual fraud” is covered by § 523(a)(2)(A), not constructive, or implied fraud. As this Court has previously stated, “[t]he term ‘fraud' as used in § 523(a)(2)(A) means actual or positive fraud rather than fraud implied by law.”

Accordingly, the Trustee may prevail under § 523(a)(2)(A) if he shows that the debt Mr. Vickery owes to IIAP is for money obtained by actual fraud. It is the creditor's (i.e., the Trustee's, standing in the shoes of IIAP) duty to show that those damages (i.e., the debt owed by Mr. Vickery to IIAP) were incurred by actual fraud. Because the bankruptcy court held before trial that proof of actual fraud was not a sufficient showing under § 523(a)(2)(A), and that a misrepresentation had to be shown, it did not have an opportunity to determine whether the Trustee could carry his burden. Thus, the bankruptcy court erred in denying the Trustee an opportunity to prove actual fraud through Mr. Vickery's transfer of assets from IIAP to DIA.

To give the Trustee an opportunity to prove actual fraud, we remand the § 523(a)(2)(A) claim to the bankruptcy court to apply the correct definition of actual fraud to the facts of this case. On remand, the Trustee must prove by a preponderance of the evidence that the debt Mr. Vickery owes IIAP was for money obtained by actual fraud. Moreover, because § 523(a)(2)(A) requires actual fraud, and not merely constructive fraud, the Trustee must prove the amount of his damages attributable to actual fraud. The bankruptcy court is tasked, therefore, with not only determining whether the debt is for money obtained by actual fraud, but if so, what is the correct measure of damages.

In re Vickery, 488 B.R. at 691-92 (emphasis added). The Tenth Circuit BAP rejected Trustee's other arguments on appeal, id. at 692-95, none of which are relevant to the appeal presently before this Court.

         Debtor appealed the Tenth Circuit BAP's ruling regarding the elements of actual fraud under Section 523(a)(2)(A) to the Court of Appeals for the Tenth Circuit, but the Tenth Circuit dismissed Debtor's appeal for lack of jurisdiction because the Tenth Circuit BAP had remanded the issue back to the Colorado Bankruptcy Court. See (Doc. # 9-1 at 104.)

         E. ON REMAND TO THE ...