Just because you have an arbitration award, doesn’t mean you’re going to win in the end according to a recent ruling by the US Bankruptcy Court in Boston. The case involved a party (the plaintiff) who obtained an arbitration award in the state of California. The plaintiff then took their arbitration award to the California state court where a judgment in the amount awarded in the arbitration was then obtained. After that, the respondent in the arbitration (the debtor) filed for bankruptcy protection.
The plaintiff brought an Adversary Proceeding seeking a determination that the judgment was non-dischargeable on the basis that it was incurred through fraud as well as by a willful and malicious injury. Under the Bankruptcy Code, debts incurred through fraud as well as those caused by willful and malicious injuries are not dischargeable. The plaintiff relied on the doctrine of collateral estoppel: arguing that the judgment in the California court precluded the relitigation of the same factual issues in the Bankruptcy court.
For collateral estoppel to apply, the plaintiff had to prove that “(a) the issues sought to be precluded in [the Bankruptcy Court] are identical to those decided in the Arbitration Proceeding; (b) those issues were actually litigated there; (c) those issues were necessarily decided there; (d) the decision there was final and on the merits; and (e) the party against whom preclusion is sought was the same as or in privity with the party there.” The plaintiff’s complaint alleged fraud and deceit as well as conversion (an intentional tort). The complaint also alleged negligent misrepresentation and breach of contract. The plaintiff argued that it raised the issues in its complaint and the issues were determined by the arbitrator.
Relying solely on that argument, the plaintiff’s attended the trial but they did not really participate: no testimony was offered (hence, the "woulda"), there was no examination of the debtor ("shoulda"), and they did not seek to offer into evidence any documents ("coulda"). In other words, the plaintiff’s argument was basically “I won in California, and that’s all anyone needs to know.” The problem with the plaintiff’s argument was that the arbitration award did not identify what facts were found by the arbitrator, and what facts supported the basis of the award. In other words, the plaintiff won the California case, but there was something the Bankruptcy Court needed to know: why?
“While the issues necessary for a determination of fraud or conversion may have been properly raised in the Arbitration Proceeding” the court wrote, “it is not clear that they were determined and, if so, on what basis.” The Bankruptcy court also cited California case law holding that a decision in a California mandatory arbitration “should not have collateral estoppel effect in a later judicial proceeding.” So the plaintiff may have won in the California court, but they lost in the US Bankruptcy Court and ultimately, it comes down to the fact that the plaintiff thought he did not have to prove his case. Hindsight is always 20/20 and there are likely some regrets on the posture the plaintiff took at trial. But the outlook for the debtor is positive: the debtor’s $1 million obligation is discharged.
