                                                            FILED
                                                             AUG 21 2012
 1                                                       SUSAN M SPRAUL, CLERK
                                                           U.S. BKCY. APP. PANEL
                                                           OF THE NINTH CIRCUIT
 2
                    UNITED STATES BANKRUPTCY APPELLATE PANEL
 3                            OF THE NINTH CIRCUIT
 4
 5   In re:                        )      BAP No.     NC-10-1208-BaJuH
                                   )
 6   ANTHONY A. MALFATTI,          )      Bk. No.   09-43469
                                   )
 7                  Debtor.        )      Adv. Pro. No. 09-04318
     ______________________________)
 8                                 )
     ANTHONY A. MALFATTI,          )
 9                                 )
                    Appellant,     )
10                                 )
     v.                            )      M E M O R A N D U M1
11                                 )
     BANK OF AMERICA, N.A.;        )
12   MBNA AMERICAN BANK, N.A.,     )
                                   )
13                  Appellees.     )
     ______________________________)
14
                            Submitted on May 11, 2011
15                        at San Francisco, California
16                          Filed - August 21, 2012
17            Appeal from the United States Bankruptcy Court
                  for the Northern District of California
18
          Honorable Edward D. Jellen, Bankruptcy Judge, Presiding
19                       __________________________
20   Appearances:     William F. Abbott, Esq. argued for Appellant;
                      Douglas Boven, Esq. of Reed Smith LLP argued for
21                    Appellees.
                           __________________________
22
     Before: JURY, HOLLOWELL, and BARRECA2, Bankruptcy Judges.
23
24
     1
          This disposition is not appropriate for publication.
25   Although it may be cited for whatever persuasive value it may
26   have (see Fed. R. App. P. 32.1), it has no precedential value.
     See 9th Cir. BAP Rule 8013-1.
27
     2
          Hon. Marc L. Barreca, Bankruptcy Judge for the Western
28   District of Washington, sitting by designation.
 1        The bankruptcy court granted Plaintiffs’ motion for summary
 2   judgment, ruling that the judgment owed by Debtor-Defendant to
 3   Plaintiffs was non-dischargeable under Code § 523(a)(6) on the
 4   basis of issue preclusion.3   Debtor appealed.
 5        The underlying judgment was entered as a penalty default
 6   judgment as a discovery sanction in an Alabama state court
 7   proceeding.   The bankruptcy court applied issue preclusion on the
 8   premise that an Alabama state court would have treated the issues
 9   as “actually litigated.”4   As there was no controlling Alabama
10   case law on this question, the Panel certified it to the Supreme
11   Court of Alabama.   That court answered in the negative.
12        Accordingly, we REVERSE and REMAND.
13
14                                 I.   FACTS
15        Malfatti was one of three principals of TA Financial Group
16   ("TAF"), a Nevada corporation, purportedly designed to assist
17   credit card holders in arbitration of disputes with the card
18   issuers.   The arbitration providers were selected by the card
19   holders from a list provided by TAF.       Among the arbitration
20   providers was Arbitration Forum of America, Inc. ("AFOA"), an
21
     3
22         Absent contrary indication, all “Code,” chapter and section
     references herein are to the Bankruptcy Code, 11 U.S.C. §§ 101-
23   1532.
     4
24        The Supreme Court has applied the Restatement (Second) of
     Judgments’ substitution of the terms “claim preclusion” and
25   “issue preclusion” for the terms “res judicata” and “collateral
26   estoppel,” respectively. George v. City of Morro Bay, 318 B.R.
     729, 733 (9th Cir. BAP 2004), aff’d, 144 Fed. Appx. 636 (9th Cir.
27   2005). Thus, although the parties and Alabama jurisprudence
     commonly use the term “collateral estoppel,” the term “issue
28   preclusion” is used herein.

                                        2
 1   Alabama corporation.   Once an arbitration award was entered, a
 2   separate company, TAG Services, an Alabama limited liability
 3   company, would file the awards in the Circuit Court of Jackson
 4   County, Alabama, and then reduce the awards to judgments.    In
 5   fact, AFOA was not conducting legitimate arbitrations, but
 6   instead was a sham.    Every arbitration resulted in an award in
 7   favor of the card holder, which was then reduced to judgment.
 8   Malfatti claims he was unaware that AFOA's practices and the
 9   judgments stemming therefrom were illegitimate.
10        At some time after the card-issuing banks involved learned
11   of the judgments, they filed cross-complaints against the card
12   holders in the Circuit Court of Jackson County, Alabama to set
13   aside the judgments as fraudulently obtained.   In September 2005,
14   the banks, including Bank of America, N.A. (USA) and MBNA America
15   Bank, N.A.(together, "Banks" or "Appellees"), filed Amended Third
16   Party Complaints against, among others, Malfatti and TAF,
17   alleging tortious interference with contract, abuse of process,
18   wantonness, and civil conspiracy, and seeking an injunction
19   against further arbitrations.   Malfatti and TAF were served with
20   the complaints in November 2005, and answered the complaints in
21   January 2006.
22        Malfatti and TAF actively participated in the state court
23   proceedings, vigorously contesting personal jurisdiction. They
24   consistently refused to cooperate with discovery, failing to
25   respond to interrogatories and requests for production and
26   failing to appear for noticed depositions. They also failed to
27   comply with various discovery orders issued by the court.
28

                                       3
 1        On March 6, 2007, the court granted the Banks’ motion for
 2   default judgment as a sanction for failure to cooperate with
 3   discovery.   On October 4, 2007, the court entered an order
 4   denying Malfatti and TAF's motion to set aside the defaults, and
 5   after a hearing on the Banks’ motion for damages and injunctive
 6   relief, judgment was entered against Malfatti and TAF on
 7   February 19, 2008.
 8        The court found Malfatti and TAF to be jointly and severally
 9   liable for compensatory damages, awarded punitive damages against
10   Malfatti, and found Malfatti to be liable for punitive damages
11   awarded against TAF under the alter ego doctrine.   Damages
12   against Malfatti totaled $513,270.35 (the "Judgment").    Malfatti
13   and TAF moved to "amend, alter, vacate or set aside" the Judgment
14   and filed for summary judgment on their claims against the Banks.
15   The court denied both motions.
16        Malfatti filed for chapter 7 bankruptcy on April 27, 2009.
17   On July 30, 2009, the Banks filed an adversary proceeding
18   alleging the debt owed to them by Malfatti was nondischargeable
19   pursuant to § 523(a)(6).   On March 3, 2010, the Banks moved for
20   summary judgment, alleging that the Alabama Judgment was
21   nondischargeable by virtue of issue preclusion.   Malfatti opposed
22   the summary judgment on the basis that the Judgment was a default
23   judgment, arguing that Alabama law does not grant issue
24   preclusive effect to default judgments.   The bankruptcy court
25   granted summary judgment, finding all amounts owed to the Banks
26   to be nondischargeable.
27        The bankruptcy court applied issue preclusion on the premise
28   that an Alabama state court would do so when the prior proceeding

                                      4
 1   was resolved by a penalty default judgment, as opposed to a
 2   simple default judgment.     As there was no controlling precedent
 3   under Alabama law, the Panel certified the following question to
 4   the Supreme Court of Alabama:
 5        In Alabama, is a "default" judgment premised upon
          discovery sanctions or other post-answer conduct of the
 6        defendant sufficient to support the application of
          issue preclusion in a later proceeding?
 7
 8        That court issued its opinion on June 29, 2012, answering
 9   this question in the negative.
10
11                               II.    JURISDICTION
12        The bankruptcy court had jurisdiction pursuant to 28 U.S.C.
13   § 1334 and § 157(b)(1) and (b)(2)(I).            The Panel has jurisdiction
14   pursuant to 28 U.S.C. § 158(c).
15
16                                     III.   ISSUE
17        Whether the bankruptcy court erred in granting summary
18   judgment on the basis of issue preclusion where the underlying
19   Alabama state court judgment was issued by “default” premised
20   upon discovery sanctions.
21
22                         IV.    STANDARD OF REVIEW
23        A bankruptcy court’s order granting summary judgment is
24   reviewed de novo.   Abdul-Jabbar v. General Motors Corp.,
25   85 F.3d 407, 410 (9th Cir. 1996); Jung Sup Lee v. TCAST Commc’n.,
26   Inc., 335 B.R. 130, 135 (9th Cir. BAP 2005).            Viewing the
27   evidence in the light most favorable to the non-moving party, the
28   Panel must determine whether there are genuine issues of material

                                              5
 1   fact and whether the bankruptcy court correctly applied relevant
 2   substantive law.   See Bishop, Baldwin, Rewald, Dillingham, &
 3   Wong, Inc. v. Brooks, 819 F.2d 214, 215 (9th Cir. 1987).
 4
 5                               V.   DISCUSSION
 6        Issue preclusion may be applied in non-dischargeability
 7   proceedings under Bankruptcy Code § 523(a).      Grogan v. Garner,
 8   498 U.S. 279, 284-85, 111 S. Ct. 654, 658 n.11 (1991).      A state
 9   court judgment is entitled to issue preclusive effect in a
10   subsequent federal court proceeding to the same extent that it
11   would be entitled to issue preclusive effect in a court of the
12   state which entered the judgment.      Gayden v. Nourbakhsh, 67 F.3d
13   798, 800 (9th Cir. 1995).    Thus, the bankruptcy court, and this
14   Panel, must look to state law to determine whether application of
15   issue preclusion is appropriate.
16        In Alabama,
17        Collateral estoppel operates where the subsequent suit
          between the same parties is not on the same cause of
18        action. Requirements for collateral estoppel to
          operate are (1) issue identical to one involved in
19        previous suit; (2) issue actually litigated in prior
          action; and (3) resolution of the issue was necessary
20        to the prior judgment. . . . If these elements are
          present, the prior judgment is conclusive as to those
21        issues actually determined in the prior suit.
22   Wheeler v. First Alabama Bank of Birmingham, 364 So. 2d 1190,
23   1199 (Ala. 1978) (emphasis added).
24        Here, there is no dispute that the parties are the same, the
25   issues are the same, and the resolution of the issues was
26   necessary to the prior judgment.       Further, Malfatti does not
27   dispute that the factual elements needed to prove a willful and
28   malicious injury per § 523(a)(6) were at issue in the Alabama

                                        6
 1   litigation.   Indeed, punitive damages were awarded against
 2   Malfatti and TAF in a separate, contested evidentiary hearing.
 3   Malfatti argues on appeal that because a default was entered
 4   against him on the basis of procedural sanctions, the “actually
 5   litigated” requirement has not been satisfied, and therefore
 6   issue preclusion cannot be applied under Alabama law.
 7        The Supreme Court of Alabama agrees.     That court, while
 8   acknowledging other jurisdictions’ application of an exception to
 9   the general rule that default judgments are not entitled to
10   preclusive effect, concluded that its precedents leave no room
11   for such an exception:
12        For purposes of determining whether an issue is
          precluded by the doctrine of collateral estoppel,
13        Alabama law makes no distinction between a simple
          default and a penalty default. There are “clear
14        controlling precedents in the decisions,” Rule 18, Ala.
          R. App. P., of this Court adhering to the traditional
15        federal view denying preclusive effect to all default
          judgments on the ground that preclusive effect should
16        not be given to claims that were not actually litigated
          in a prior action. Accordingly, we answer the question
17        certified to us by the BAP in the negative.
18   Malfatti v. Bank of America, N.A., ___ So. 3d ___, 2012 WL
19   2477945, at *6 (Ala. June 29, 2012) (citations omitted).
20
21                             VI.   CONCLUSION
22        Because the bankruptcy court incorrectly applied the
23   relevant substantive law, it erred in granting summary judgment
24   on the basis of issue preclusion.     We REVERSE and REMAND for
25   further proceedings in accordance with this disposition.
26
27
28

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