Memorandum of Decision Re: Issue Preclusion

DO NOT PUBLISH This case disposition has no value as precedent and is not intended for publication. Any publication, either in print or electronically, is contrary to the intent and wishes of the court.
Judge's Decisions
In re BRIAN and DONNA PORTERFIELD,                                         No. 97-12737      Debtor(s). ______________________________________/ CYRUS I. GOLDIN, et al.,      Plaintiff(s),    v.                                                                                                   A.P. No. 99-1013 BRIAN and DONNA PORTERFIELD,      Defendant(s). _______________________________________/
Memorandum of Decision
     Chapter 7 debtors and defendants Brian and Donna Porterfield are extremely unsuccessful litigants. In 1992, they purchased a residence from plaintiffs Cyrus Goldin, Geraldine Goldin, Ronald Goldin, and Kurt Stevens for $257,000, paying $55,000 cash down and giving the Goldins a note for the balance. Eighteen months later, the Porterfields sued for rescission, alleging undisclosed defects in the property. The Goldins countersued, alleging that the Porterfields never intended to pay on the note and lied about their ability to pay off the note. The Goldins foreclosed, taking the house back. A jury found in their favor, giving the Porterfields nothing on their complaint and awarding the Goldins fraud damages of $21,225. The state court then added $31,404 in costs and $250,000 in attorneys' fees. The issue before the court is whether any or all of this debt is nondischargeable. Both sides have moved for summary judgment.      The court notes that the state court judgment is not final. The times for post-trial motions and appeals has been tolled by the automatic stay.(1)      State court judgments must be given collateral estoppel effect in subsequent dischargeability actions (In re Bugna, 33 F.2d 1054 (9th Cir.1994)), but only if the state court findings are identical to those required to establish nondischargeability under the Bankruptcy Code and only if the judgment is entitled to collateral estoppel effect under state law. In re Nourbakhsh, 67 F.3d 798, 800 (9th Cir.1995); In re Turner, 204 B.R. 988, 992 (9th Cir.BAP 1997). In this case, neither factor is present. First, the judgment is not final, so it is not entitled to collateral estoppel effect under California law. In re Turner, 204 B.R. at 992-93. Second, it appears that the fraud found by the state court jury related to the Porterfields' financial condition. Under the Bankruptcy Code, such fraud is nondischargeable only if made in writing. 11 U.S.C. § 523(a)(2)(A).      If a debt is incurred by fraud, then all damages arising from the fraud, including attorneys' fees, is nondischargeable. Cohen v. de la Cruz, -- U.S. -- , 118 S.Ct. 1212, 1217 (1998). However, in this case the state court judge made it clear that award of attorneys' fees was based on contract, as fees incurred by the Goldins in defense to the Porterfields' claim for breach of contract. Since the attorneys' fees are based on contract and did not arise from fraud, they are dischargeable.(2)      Even in cases where a state court judgment is not entitled to collateral estoppel effect, it is still properly considered by a bankruptcy court. In such cases, the state court judgment establishes a prima facie case, but one which the debtor is entitled to rebut. In re Houtman, 568 F.2d 651, 655 (9th Cir.1978).      For the foregoing reasons, the Goldin motion for summary judgment will be denied. The Porterfield motion will be granted in part, in that it will be deemed without substantial controversy pursuant to FRCP 56(d) that the attorneys' fees are dischargeable. Counsel for the Porterfields shall submit an appropriate form of order.
Dated: July 1, 1999                                                                             ____________________________                                                                                                             Alan Jaroslovsky                                                                                                             United States Bankruptcy Judge

1. This court allowed the state court proceedings to go forward in order to liquidate the amount of attorneys' fees. The bankruptcy was originally filed under Chapter 13, and the amount of the attorneys' fees created an eligibility issue under § 109(e) of the Bankruptcy Code.

2. The court finds unconvincing the Goldins' argument that new § 523(a)(17) excepts from discharge any civil fees and costs. That section is only applicable to fees and costs imposed or assessed by a court for the filing of a case. In this case fees were not assessed because an action was filed, but only because it was lost. In the absence of a finding that the fees are being assessed as the result of a frivolous or unlawful filing, the section is not appli