McHeffey et al v. Pereira

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UNITES STATES BANKRUPTCY COURT
DISTRICT OF MASSACHUSETTS
EASTERN DIVISION
__________________________________________
IN RE:
JANET S. PEREIRA and
JOSMAR D. PEREIRA 	Chapter 7
DEBTORS. 	Case No. 08-19341-WCH
_________________________________________
JENNIFER MCHEFFEY and
ROCHELLE MCFARLAND,
PLAINTIFFS, 	Adversary Proceeding
No. 09-1082
v.
JOSMAR D. PEREIRA,
DEFENDANT.
_________________________________________
MEMORANDUM OF DECISION
I. INTRODUCTION
The matter before the Court is Rochelle McFarland and Jennifer McHeffey’s (the
“Plaintiffs”) Motion for Summary Judgment (the “Motion for Summary Judgment”),
Josamar D. Pereira’s (the “Debtor’s”) response in opposition thereto (the “Response”),
and the Plaintiffs’ reply (the “Reply”). Through the Motion for Summary Judgment, the
Plaintiffs seek a determination that the debt owed to them by the Debtor is non-
dischargeable under 11 U.S.C. § 523(a)(2)(A) as having been for money obtained by
false pretenses, false representation, and/or actual fraud. For the reasons set forth below,
I will enter an order denying the Motion for Summary Judgment.
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II. BACKGROUND
The underlying dispute between the parties arises out of the Debtor’s alleged
failure to conduct home renovations for the Plaintiffs.1 The parties submitted the dispute
to arbitration and on July 24, 2006, after the Debtor failed to appear at the arbitration
hearing, the Plaintiffs obtained a default arbitration award (the “Arbitration Award”)
against the Debtor for, among other things, “unfair and deceptive acts as defined in MGL
Chapter 	93A” 	(“Chapter 	93A”).2 Additionally, 	the 	arbitrator 	(the 	“Arbitrator”)
determined that due to the nature of the Debtor’s wrongdoing, the Plaintiffs were entitled
to, among other things, double their actual damages, a total sum of $41,908.00.3
Thereafter, on July 24, 2007, after the Debtor failed to plead or otherwise defend
against the Plaintiffs’ attempt to confirm the Arbitration Award in the Massachusetts
Superior Court, the Plaintiffs obtained a default judgment confirming the Arbitration
Award (the “Superior Court Judgment”).4
On December 5, 2008, the Debtor filed a bankruptcy petition which properly
included the Plaintiffs on his Schedule F – Creditors Holding Unsecured Nonpriority
Claims. 5 On March 10, 2009, the Debtor received his discharge.6
Prior to the Debtor receiving his discharge, on March 6, 2009, the Plaintiffs filed
a complaint alleging that the debt owed to them, namely, the Arbitration Award, was for
1 See Adversary Proceeding Number 09-1082 (the “Adversary Proceeding”), Docket No. 21, Exhibit A at
“Findings of Fact” ¶ 1.
2 Id.; See Mass. Gen. Laws ch. 93A, § 1 et seq.
3 Adversary Proceeding, Docket No. 21, Exhibit A
4 Id. Exhibit B.
5 See Case Number 08-19341 (the “Bankruptcy Proceeding”), Docket No. 1.
6 Id. at Docket No. 20.
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money obtained by false pretenses, false representation, and/or actual fraud, making it
non-dischargeable under 11 U.S.C. § 523(a)(2)(A) (the “Complaint”).7 On April 6, 2009,
the Debtor filed his answer to the Complaint (the “Answer”) in which he denied the
allegations.8
On March 3, 2010, the Plaintiffs filed the Motion for Summary Judgment. 9 In the
accompanying memorandum they argue that the Arbitrator must have found that the
Debtor willfully and/or knowingly committed acts that violated Chapter 93A, as that
conduct is necessary for an award of double damages.10 Based on principles of collateral
estoppel, they assert that summary judgment is appropriate because a finding of willful
and knowing violations of sections 2 and 11 of Chapter 93A necessitates a finding of
false pretenses, false representation, and/or fraud, as required to find a debt non-
dischargeable under 11 U.S.C. § 523(a)(2)(A).11 The Debtor filed the Response three
weeks later in which he argued that genuine issues of material fact remained and that as a
member of the Army at the time the Superior Court Judgment was entered, he is entitled
under the Servicemembers Civil Relief Act (the “Servicemembers Act”) to reopen any
default judgment entered against him during his military tenure.12 On April 6, 2010, the
Plaintiffs filed the Reply asserting that the Debtor notified them of the potential
applicability of the Servicemembers Act for the first time in the Response and that only
7 Adversary Proceeding, Docket No. 1.
8 Id. Docket No. 5.
9 Id. Docket No. 21.
10 Id.
11 Id.
12 Id. Docket No. 24. See also 50 App. U.S.C. § 521(g).
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the Superior Court could afford the Debtor any relief as it entered the Superior Court
Judgment. 13
I held a hearing on all matters on April 14, 2010, and at its conclusion, I took the
matter under advisement.14
III. POSITION OF THE PARTIES
The Plaintiffs
In seeking a determination that the debt owed to them is non-dischargeable, the
Plaintiffs argue that the Arbitrator determined that the Debtor willfully and knowingly
deceived them, in violation of Chapter 93A, as evidenced by the award of double
damages. 	The Plaintiffs assert that the Arbitrator’s determination is equivalent to a
finding that the debt was obtained by actual fraud or false pretenses and hence non-
dischargeable under 11 U.S.C. § 523(a)(2)(A). 	Accordingly, due to the Arbitration
Award and the subsequent Superior Court Judgment, the Plaintiffs assert that the Debtor
should be collaterally estopped from re-litigating the issue of whether the debt owed to
them was obtained by fraud and/or false pretenses. Furthermore, the Plaintiffs argue that
this Court should not consider the Servicemembers Act as the Debtor did not raise the
defense in the Answer, this Court does not have competent jurisdiction to hear the
defense, and the Debtor has not shown that his military serves affected his ability to
defend against the Superior Court Judgment.
13 Adversary Proceeding, Docket No. 25.
14 Id., Docket No. 26.
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The Debtor
The Debtor argues that he has been a member of the Army since January 2007
and that he is entitled to the benefits of the Servicemembers Act, including his right to
apply to reopen the Superior Court Judgment.
IV. DISCUSSION
A. 	The Summary Judgment Standard
Summary judgment should be granted “if the pleadings, the discovery and
disclosure materials on file, and any affidavits show that there is no genuine issue as to
any material fact and that the movant is entitled to judgment as a matter of law.” 15 The
burden of proof is on the moving party in the first instance.16 To defeat the motion, the
opposing party must produce substantial evidence of a genuine dispute as to a material
fact.17 A material fact is one that has the “potential to affect the outcome of the suit
under applicable law.”18
In responding to a motion for summary judgment, the opposing party “may not
rely merely on allegations or denials in its own pleading; rather, its response must–by
affidavits or as otherwise provided in this rule–set out specific facts showing a genuine
issue for trial.”19 Further, “if the opposing party does not so respond, summary judgment
15 Fed. R. Civ. P. 56(c), made applicable to adversary proceedings by Fed. R. Bankr. P. 7056.
16 Steel Hector & Davis v. Wang Labs., Inc. (In re Wang Labs., Inc.), 155 B.R. 289, 290 (Bankr. D. Mass.
1993).
17 Desmond v. Varrasso (In re Varrasso), 37 F.3d 760, 763 n. 1 (1st Cir. 1994).
18 Nereida-Gonzalez v. Tirado-Delgado, 990 F.2d 701, 703 (1st Cir. 1993).
19 Fed. R. Civ. P. 56(e)(2).
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should, if appropriate, be entered against that party.”20 The United States Court of
Appeals for the First Circuit has explained this provision to mean that the absence of a
material factual dispute is a “condition necessary,” but not a “condition sufficient” to
summary judgment.21 The moving party, therefore, must show that it is entitled to
judgment as a matter of law.22
B. Collateral Estoppel
“The principle of collateral estoppel, or issue preclusion, bars relitigation of any
factual or legal issue that was actually decided in previous litigation ‘between the parties,
whether on the same or a different claim.’”23 In determining whether a party should be
estopped from re-litigating an issue decided in a prior state court action, the bankruptcy
court must look at that state’s law of collateral estoppel.24 Under Massachusetts law, in
order for collateral estoppel to apply, a court must determine that: (1) there was a valid
and final judgment on the merits; (2) the party against whom estoppel is asserted was a
party (or in privity with a party) to the prior litigation; (3) the issue in the prior
adjudication is identical to the issue in the current litigation; and (4) the issue in the prior
litigation was essential to the earlier judgment.25 The doctrine of collateral estoppel
20 Id. (emphasis added).
21 In re Varrasso, 37 F.3d 760, 764.
22 Id.
23 Grella v. Salem Five Cents Sav. Bank, 42 F.3d 26, 30 (1st Cir. 1994) (quoting Restatement (Second) of
Judgments, § 27 (1982)).
24 McCrory v. Spigel (In re Spigel), 260 F.3d 27, 33 (1st Cir. 2001).
25 Alba v. Raytheon Co., 441 Mass. 836, 843, 809 N.E.2d 516, 521 (2004); see also Smith Barney, Inc. v.
Strangie (In re Strangie), 192 F.3d 192, 194 (1st Cir. 1999).
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applies in dischargeability proceedings in bankruptcy.26 The “‘guiding principle’ in
determining whether to allow a party the use of collateral estoppel is whether the party
against whom it is asserted had a ‘full and fair opportunity to litigate the issue in the first
action or whether other circumstances justify affording him an opportunity to relitigate
the issue.’”27
As the parties in the Arbitration Award, Default Judgment, and the current
litigation are identical, I find that the second element of collateral estoppel is met.
It is within a court’s discretion to apply collateral estoppel to a default judgment. 28
In Massachusetts, however, default judgments are generally not given collateral estoppel
effect on an issue in a subsequent action because the issues have not been actually
litigated.29 Other federal courts have found it appropriate to make exceptions to the
general rule when the defendant actively or substantially participated in the proceedings
prior to the entry of a default judgment or avoided participating in the proceeding as part
of a litigation tactic.30 These courts reason “that if a party was afforded a reasonable
opportunity to defend in the prior action but chose not to do so, the party could have
26 Grogan v. Garner, 498 U.S. 279, 285 n. 11 (1991).
27 Treglia v. MacDonald, 430 Mass. 237, 241, 717 N.E.2d 249, 253 (1999) (citation omitted).
28 Int’l Strategies Group, Ltd. v. Pomeroy (In re Pomeroy), 353 B.R. 371, 376 (Bankr.D.Mass. 2006) (citing
Parklane Hosiery Co., Inc. v. Shore, 439 U.S. 322, 331 (1979)).
29 Treglia, 430 Mass. at 241.
30 See e.g. Gober v. Terra + Corporation (Matter of Gober), 100 F.3d 1195 (5th Cir. 1996)(default issued
against defendant after two years of litigation in which the defendant had answered and denied all
allegations of the complaint); Bush v. Balfour Beatty Bahamas, Ltd. (In re Bush), 62 F.3d 1319, 1324 (11th
Cir. 1995)(applying collateral estoppel effect to prior default judgment against debtor based on fraud,
where debtor “actively participated” in adversary process for almost one year through filing an answer,
counterclaim, and discovery requests); FDIC v. Daily (In re Daily, 47 F.3d 365, 368 (9th Cir.
1995)(applying collateral estoppel where “denying preclusive effect to the [prior] judgment…would permit
[debtor] to delay substantially and perhaps ultimately avoid payment of the debt by deliberate abuse of the
judicial process").
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reasonably foreseen the consequences of not defending the action and it would be
‘undeserved’ to give a ‘second bite at the apple when he knowingly chose not to defend
himself in the first instance.’”31
In the current case, both the Arbitration Award and the subsequent Superior Court
Judgment were defaults based on the Debtor’s failure to participate in the respective
proceedings. 	From the outset, I note that because I did not enter the default judgment
against the Debtor, I lack jurisdiction to reopen the proceeding to vacate the default.32
Nonetheless, though the Arbitrator reviewed “documents submitted by the [Plaintiffs],”33
the record does not reflect that that the Debtor participated in the arbitration in any
meaningful way or that his default was part of a grand scheme to delay substantially or
avoid the payment of the debt owed to Plaintiffs. 	Similarly, the record displays a
complete lack of the Debtor’s involvement in the proceeding that lead to the Superior
Court Judgment. Thus, the present case is not one in which the exception to the general
rule barring collateral estoppel effect of default judgments is applicable. 	Accordingly, I
find that there has not previously been a judgment on the merits of the Plaintiffs’
complaint.
Even assuming, arguendo, that the current proceeding could fall within an
exception to the general rule of not applying collateral estoppel to cases that were
determined by default judgment, collateral estoppel would still be inappropriate as the
31 Backlund v. Stanley-Snow (In re Stanley-Snow), 405 B.R. 11, 20 (1st Cir. BAP 2009) (citing Bush, 62
F.3d at 1324).
32 50 App. U.S.C. § 521(g)(1) (“If a default judgment is entered in an action covered by this section against
a servicemember during the servicemember’s period of military service (or within 60 days after termination
of or release from such military service), the court entering the judgment shall …”) (emphasis added).
33 Adversary Proceeding, Docket No. 21, Exhibit A, “Findings of the Arbitrator,” Introduction.
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issue determined in the Arbitration Award is not identical to the one currently before me.
Section 2(a) of Chapter 93A makes unlawful any “unfair or deceptive acts or practice in
the conduct of any trade or commerce.”34 Under section 11 of Chapter 93A, if the court
finds that the defendant has violated § 2(a), the plaintiff is entitled to actual damages and
costs and attorney’s fees.35 Furthermore, if the fact finder determines that the defendant’s
conduct in violating § 2(a) of Chapter 93A was willful or knowing, the plaintiff is entitled
to multiple damages: up to three times but no less than two times the amount of actual
damages. 36
On the other hand, pursuant to 11 U.S.C. § 523(a)(2)(A), a monetary debt is non-
dischargeable to the extent the debt is obtained by “false pretenses, a false representation,
or actual fraud.”37 The First Circuit Bankruptcy Appellate Panel has previously noted
that “many courts treat the phrases as ‘functionally equivalent.’” 38 Nonetheless,
[T]o establish that a debtor obtained a debt by false pretenses or false
representations, a creditor most show that: (1) the debtor made a knowingly
false representation or one made in reckless disregard of the truth; (2) the
debtor intended to deceive; (3) the debtor intended to induce the creditor to
rely upon the false statement; (4) the creditor actually relied upon the
misrepresentation; (5) the creditor’s reliance was justifiable; and (6) the
reliance upon the false statement caused damage.39
34 Mass. Gen. Laws ch. 93A, § 2(a).
35 Id.
36 Id.; See also Sack v. Friedlander (In re Friedlander), 170 B.R. 472, 479 (Bankr. D. Mass. 1994)
37 11 U.S.C. § 523(a)(2)(A).
38 In re Stanley-Snow, 405 B.R. at 21.
39 Id. (citations omitted).
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Ultimately, Chapter 93A violations and fraud are not synonymous 40 and a
violation of Chapter 93A can be founded on “behavior that lacks the characteristics of
misconduct necessary to support a finding of non-dischargeability” under 11 U.S.C. §
523(a)(2)(A).41 A Chapter 93A violation may be established without proof that the
defendant knew his or her false representations to be false, intended to deceive or induce
the 	plaintiffs 	to 	rely 	upon 	false 	statements, 	and 	that 	the 	plaintiff 	relied 	on 	the
representation.42
In the current proceeding, the underlying dispute involves the Debtor failing to
deliver contracted services to the Plaintiffs and the Plaintiffs’ reliance on the Debtor’s
promise to conduct said services.43 Though the Arbitrator found that the Debtor
knowingly and willfully violated Chapter 93A, the record does not reflect that the Debtor
entered into the agreement with the knowledge that he would be unable to perform his
obligations under the agreement or with the intent to deceive the Plaintiffs. 	Not does it
reflect that the Plaintiffs’ reliance was justified. 	Therefore, I find that the issue in the
Arbitration Award and Default Judgment was not identical to the issue in the current
proceeding.
Therefore, genuine issues of material fact remain as to whether the debt owed to
the Plaintiffs from the Debtor was obtained by false pretenses, false representations,
and/or fraud necessitating a trial on the merits.
40 Stoehr v. Mohamed, 244 F.3d 206, 209 (1st Cir. 2001).
41 Id.
42 In re Friedlander, 170 B.R. at 479 (citing Commonwealth v. Hale, 618 F.2d 143, 146-147 (1st Cir.
1980)).
43 Adversary Proceedings, Docket No. 21, Exhibit A.
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V. CONCLUSION
In light of the foregoing, I will enter an order denying the Plaintiffs’ Motion for
Summary Judgment.
______________________________
William C. Hillman
United States Bankruptcy Judge
Dated: May 5, 2010
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