[00:00:00] Speaker 02:
Propellant.

[00:00:03] Speaker 01:
Okay, let me make a note here.

[00:00:04] Speaker 01:
I don't think we have anybody here for the app.

[00:00:06] Speaker 01:
Howie and counsel for the appellant may be aware that there was a filing day or two ago having to do with that person's participation.

[00:00:18] Speaker 01:
I'll just say this had that person been here, I would have noted

[00:00:22] Speaker 01:
that as far as the BAP's concerned, if they are admitted in any district, they are eligible to argue at a BAP hearing.

[00:00:28] Speaker 01:
They're not here.

[00:00:30] Speaker 01:
What we suggest is we simply will take their position on the papers.

[00:00:34] Speaker 01:
If you would like to do the same, you're welcome to, if you'd like to argue, we're happy to hear your arguments.

[00:00:40] Speaker 00:
I would like to argue.

[00:00:41] Speaker 00:
Okay.

[00:00:42] Speaker 00:
Thank you.

[00:00:42] Speaker 01:
Can I ask you a trick question?

[00:00:44] Speaker 01:
Are you reserving time?

[00:00:49] Speaker 01:
Okay.

[00:00:49] Speaker 01:
You may proceed.

[00:00:50] Speaker 00:
Thank you, Your Honor.

[00:00:52] Speaker 00:
May it please the court, Kyle Mandeville of the Duke Ebbett law firm here in Boise, Idaho.

[00:00:56] Speaker 00:
Welcome to you all.

[00:00:58] Speaker 00:
Thank you, Judge, Your Honor Brand, joining us from California.

[00:01:01] Speaker 00:
We appreciate you being here.

[00:01:04] Speaker 00:
I do want to begin with a kind of housekeeping matter.

[00:01:07] Speaker 00:
I know the court likes to know if things have become moot.

[00:01:12] Speaker 00:
This is not a case where something has become moot, but there was a filing two days ago in the bankruptcy case by the trustee to vacate the debtor's discharge.

[00:01:22] Speaker 00:
And so that is set for hearing March 23rd.

[00:01:25] Speaker 00:
I wanted to bring that to the court's attention.

[00:01:27] Speaker 01:
Well, can I ask to vacate the discharge?

[00:01:31] Speaker 01:
It's not an action to revoke the discharge.

[00:01:33] Speaker 00:
It was styled as a motion to vacate the discharge.

[00:01:38] Speaker 00:
I take that to mean the same thing, but that's how it was styled.

[00:01:41] Speaker 01:
All right.

[00:01:41] Speaker 01:
So that in your mind, that will be motion practice and that will be argued at some point down the road.

[00:01:48] Speaker 00:
March 23rd is when that motion is set for hearing.

[00:01:51] Speaker 01:
Okay.

[00:01:52] Speaker 00:
Thank you.

[00:01:57] Speaker 00:
Sure enough, my first time getting to argue before the United Circuit Bankruptcy Appellate Penal, and I'm here on a question of Idaho law.

[00:02:07] Speaker 00:
How ironic things can be sometimes.

[00:02:10] Speaker 00:
This appeal presents two issues.

[00:02:12] Speaker 00:
The first issue is whether a default judgment issued by the Idaho State Court actually decided a claim for fraud.

[00:02:22] Speaker 00:
And if it did,

[00:02:23] Speaker 00:
That judgment is entitled to full faith and credit in the bankruptcy court and the bankruptcy court erred by not applying issue preclusion in this dischargeability proceeding.

[00:02:37] Speaker 00:
The second question is whether the bankruptcy court erred in allocating the burden of proof and the burden of persuasion onto man mortgage, the plaintiff in this case, even though the entire state court record

[00:02:50] Speaker 00:
was filed and admitted in the trial.

[00:02:53] Speaker 00:
And even though the challenge to the issue of preclusion issue did not arise, was not raised by the defendant, but was raised to a sponsor by the court after the trial.

[00:03:04] Speaker 00:
We submit that the standard for both of those issues is de novo and the relief that we're asking the court to grant is reversed and rendered and enforce issue preclusion and enforce the discharge ability of the default judgment.

[00:03:19] Speaker 01:
Just to make sure I'm with you on the, maybe this has to do with both points.

[00:03:24] Speaker 01:
The, as I understood what the trial court did was it assigned you the burden of proof with respect to whether collateral estoppel was applicable, right?

[00:03:34] Speaker 01:
Yes.

[00:03:35] Speaker 01:
Okay.

[00:03:35] Speaker 01:
And that was that a mistake or do you think that the interpretation of it was a mistake?

[00:03:39] Speaker 00:
I think the interpretation of it is a mistake.

[00:03:41] Speaker 00:
I don't think there's any question that the burden of proof is on the plaintiff, but in this case, you know, put yourself in a plaintiff proving

[00:03:49] Speaker 00:
issue preclusion, other than putting the entire state court record, including the docket in the record, you know, short of subpoenaing the district court judge to come testify what he or she may have met in their decision.

[00:04:03] Speaker 00:
There's really no more evidence that plaintiff respectfully submits it could have presented on the issue of issue preclusion.

[00:04:11] Speaker 01:
So the issue was the issue, whether a matter was necessarily decided or was it something else?

[00:04:18] Speaker 00:
The issue that gave rise to the bankruptcy court declining to enforce issue preclusion was that the bankruptcy judge concluded that fraud was not actually decided by the default judgment.

[00:04:31] Speaker 00:
Okay, thanks.

[00:04:33] Speaker 00:
And in order to address that question, which I think is the important threshold question here, we start with the Idaho rules of civil procedure, and it's rules 55 and 54 that we filed as part of our addendum, and I think

[00:04:48] Speaker 00:
answer the question, was the fraud claim actually decided in the Idaho State Court?

[00:04:54] Speaker 00:
And Rule 55 and 54 of the Idaho Rules of Civil Procedure are similar, but a little bit different than the federal rules.

[00:05:01] Speaker 00:
The important points that I want your honors to note is that Rule 55 governs the default procedure.

[00:05:09] Speaker 00:
Rule 55A talks about how the first step in getting a default judgment is you ask the court for an order of default.

[00:05:17] Speaker 00:
And the legal effect of that is twofold.

[00:05:19] Speaker 00:
And it's important.

[00:05:20] Speaker 00:
The first legal effect is that all of the allegations in the complaint are admitted.

[00:05:27] Speaker 00:
The second component, which is equally as important, is it cuts off the defendant's right to challenge the stated claims of relief.

[00:05:37] Speaker 00:
Two important key components of that 55A order of default.

[00:05:43] Speaker 00:
Next, we come to 55B, which is you have your order of default.

[00:05:46] Speaker 00:
Now you're getting a default judgment.

[00:05:48] Speaker 00:
55B does not speak specifically about claims for relief.

[00:05:52] Speaker 00:
It talks about damages.

[00:05:54] Speaker 00:
And so you have two scenarios under 55B.

[00:05:58] Speaker 00:
If your claim is for a sum certain, you can file an affidavit with your evidence and the court can enter a default judgment for that sum certain.

[00:06:08] Speaker 00:
If it's unliquidated, if it's more complicated than that, like a tort claim,

[00:06:12] Speaker 00:
emotional distress, something that is not able to be calculated based upon a writing, then the judge may require a hearing or something along those lines to hear evidence and determine the amount of damages so that default judgment can be rendered.

[00:06:31] Speaker 00:
In this case, man mortgage obtained a default judgment for the amount that it was stated, the amount it requested, it was supported by evidence, it was for

[00:06:41] Speaker 00:
a little north of $210,000.

[00:06:42] Speaker 00:
And really it was just trying to get back the money that it loaned for a home that was never built.

[00:06:54] Speaker 00:
So that's 55, that's the process that is followed for obtaining a default judgment in Idaho State Court.

[00:07:03] Speaker 00:
Then we looked to 54, rule 54 of the Idaho Rules of Civil Procedure and

[00:07:09] Speaker 00:
the text and history of this rule, I think are really important for this case.

[00:07:13] Speaker 00:
Okay.

[00:07:14] Speaker 00:
And we filed with our brief, um, some case law and also a Supreme court rule that was kind of a red line showing changes that have been made to this rule over time.

[00:07:23] Speaker 00:
And the reason we wanted the court to understand the historical changes to the rule is because back in 2010, the Supreme court of Idaho noticed that there was some confusion about what constituted a final judgment.

[00:07:38] Speaker 00:
And also the court noted that it was also a little bit unclear when a claim was dismissed and the court wanted to avoid the implicit dismissal of claims.

[00:07:49] Speaker 00:
And so what the court did in 2010 is it amended rule 54.

[00:07:53] Speaker 00:
And now when an Idaho state court enters judgment, it has to style it as a judgment.

[00:08:00] Speaker 00:
It has to state the relief, not the claims.

[00:08:03] Speaker 00:
It has to state the relief that it is awarding on one or more claims.

[00:08:09] Speaker 00:
It can, as part of the judgment, dismiss any claims that are going to be dismissed that are not going to be adjudicated.

[00:08:17] Speaker 00:
And then by feature, this is a feature, not a bug, of Idaho state law.

[00:08:22] Speaker 00:
It does not contain any recitals of pleadings, any record of proceedings.

[00:08:27] Speaker 00:
It does not contain findings.

[00:08:28] Speaker 00:
It does not contain conclusions.

[00:08:30] Speaker 00:
It does not contain legal reasoning.

[00:08:31] Speaker 00:
It is the amount.

[00:08:32] Speaker 00:
It is a judgment.

[00:08:34] Speaker 00:
It's the amount on one or more claims for relief.

[00:08:38] Speaker 00:
Now, when we apply rule 55 and rule 54, in this case, what we see is that man mortgage applied for and obtained an order of default.

[00:08:49] Speaker 00:
All of its allegations are admitted.

[00:08:52] Speaker 01:
All of its, well, okay, all of its, I'm sorry, you go ahead.

[00:08:56] Speaker 01:
No, go ahead.

[00:08:57] Speaker 01:
All of its well pleaded allegations are admitted, right?

[00:08:59] Speaker 01:
Let me give you a hypothetical.

[00:09:01] Speaker 01:
Let's say there was a complaint that said the Moons made a green cheese, so therefore I get a fraud judgment.

[00:09:06] Speaker 01:
Would any judge on their right mind enter that?

[00:09:08] Speaker 01:
No, what's missing here is what's the significance of the judicial act, not the judicial act.

[00:09:15] Speaker 01:
There's something that happens between you get a default because somebody doesn't answer your complaint and the judge adjudicates it, right?

[00:09:24] Speaker 01:
So that's what I'm missing so far, at least in my sense of this, go ahead.

[00:09:30] Speaker 00:
Yeah, and you're right.

[00:09:32] Speaker 00:
And I think the Idaho system entrusts the Idaho judges to

[00:09:37] Speaker 00:
If there's problems, significant problems with the pleading, or if the evidence of damages, the Idaho judges are interested to recognize and be kind of a gatekeeper, so to speak, on those issues before rendering a default judgment.

[00:09:55] Speaker 00:
However, and this is the important point that if you take away one thing from me today, this is the important point I want you to take away.

[00:10:02] Speaker 00:
An erroneous default judgment is still entitled to full faith and credit.

[00:10:08] Speaker 00:
if there are errors that are made between an application for a default judgment and the court issuing a default judgment.

[00:10:16] Speaker 00:
That's an erroneous judgment, but you know what?

[00:10:18] Speaker 00:
That's still entitled to full faith and credit from the federal court.

[00:10:26] Speaker 00:
And the two cases that I think speak to this principle to Idaho cases most clearly, and we recited them in our brief, are the Waller case and the Plate versus Pinkham case.

[00:10:36] Speaker 00:
Because in both of those cases, there was a default judgment that was entered that for different reasons were completely wrong.

[00:10:44] Speaker 00:
Completely wrong.

[00:10:45] Speaker 00:
They were erroneous.

[00:10:46] Speaker 00:
I don't think the Supreme Court really even went to great lengths to try to justify them.

[00:10:54] Speaker 00:
But they said, you know what, they're erroneous judgments, but they're judgments and they weren't timely challenged.

[00:10:59] Speaker 00:
And so now obviously this is not full faith and credit because this is all happening within the Idaho system.

[00:11:04] Speaker 00:
But the Supreme Court still said,

[00:11:07] Speaker 00:
And erroneous judgment is not a good reason to set aside a judgment.

[00:11:12] Speaker 02:
But we're not setting aside a judgment, right?

[00:11:14] Speaker 02:
This is issue preclusion.

[00:11:16] Speaker 02:
This is whether or not those claims were properly litigated such that you could use them to meet the elements of a 523-828 cause of action.

[00:11:30] Speaker 00:
Yes, Your Honor.

[00:11:32] Speaker 00:
I think those are overlapping.

[00:11:34] Speaker 00:
Because if you look at the Waller case, that was a separate proceeding.

[00:11:38] Speaker 00:
And so it was looking at both race judicata and rule 60B, which is how you would directly set aside a default judgment.

[00:11:49] Speaker 00:
And it analyzed them very similarly.

[00:11:51] Speaker 00:
And so I think the analysis between, okay, are we going to set it aside under rule 60B?

[00:11:58] Speaker 00:
versus are we going to set it aside under, you know, race judicata or issue preclusion?

[00:12:04] Speaker 00:
I think according to the Idaho Supreme Court, those are very similar analyses.

[00:12:10] Speaker 00:
And you're not looking at whether it was erroneous.

[00:12:12] Speaker 00:
You're looking at, okay, was there something about the proceeding that was just so unfair that we can't enforce even an erroneous judgment?

[00:12:21] Speaker 00:
For example, was there no jurisdiction?

[00:12:23] Speaker 00:
Was there no due process?

[00:12:25] Speaker 02:
Again, maybe I'm missing something, but we're not enforcing a judgment in the 523A2A context.

[00:12:33] Speaker 02:
What you're doing is you're saying the issues and fraud that were determined at the state court overlay on the elements that I have to show in my 523.

[00:12:44] Speaker 02:
There's no claim preclusion because there was no discharge

[00:12:49] Speaker 02:
previously before the bankruptcy case.

[00:12:52] Speaker 02:
So it's only whether or not the elements of fraud were shown such that I can overlay them on the elements I have to show that your client at man mortgage had to show in order to meet the preponderance of the evidence standard under a 523-828.

[00:13:11] Speaker 00:
I agree with you, your honor.

[00:13:15] Speaker 00:
And I would say that

[00:13:17] Speaker 00:
based on the case law that we've cited, at least the Idaho bankruptcy court case law, if you have, I don't think there's a question that if there is a valid state court default judgment for fraud, that that satisfies issue preclusion in a dischargeability proceeding.

[00:13:36] Speaker 00:
And so I guess that, and I hope I'm answering your question directly.

[00:13:40] Speaker 00:
I don't think there's a question that if this is a valid state court judgment that includes fraud, the elements of issue preclusion

[00:13:48] Speaker 00:
for purposes of 523 are met.

[00:13:51] Speaker 00:
And that's why I think this all boils down to was the fraud claim actually decided in the default judgment?

[00:13:59] Speaker 00:
And the other thing that I think is going to be important in the plate versus Pinkham case, in that case, the party is a little bit different

[00:14:15] Speaker 00:
posture, but it's a similar analysis, I think.

[00:14:18] Speaker 00:
And that is, in that case, the party did not request any damages, did not submit any evidence of damages.

[00:14:25] Speaker 00:
The damages that were entered in the judgment was the completely wrong measure of damages.

[00:14:31] Speaker 00:
But when it ended up in front of the Idaho Supreme Court, they said, we have serious concerns about this default judgment and we're going to remind the state court judges to, you need to do your job to make sure that

[00:14:45] Speaker 00:
based on the pleadings, based on the application that you're entering default judgments that conform to the rules.

[00:14:52] Speaker 00:
Be that as it may, this is a default judgment that was entered by the state court.

[00:14:57] Speaker 00:
There's no issues with due process.

[00:14:59] Speaker 00:
There's no issues with jurisdiction.

[00:15:01] Speaker 00:
None of the kind of equitable considerations that judges might look at outside of whether it was erroneous.

[00:15:09] Speaker 00:
Um, none of those, you know, fraud inclusion during the judicial process, none of those types of considerations were at play and required the court to set aside the default judgment.

[00:15:21] Speaker 00:
I think that same type of analysis would be at play here.

[00:15:24] Speaker 00:
And I actually think the Lopez case in Ray Lopez that Judge Hill incited in his order denying the motion to reconsider

[00:15:32] Speaker 00:
I think it actually speaks to this a little bit.

[00:15:34] Speaker 00:
Number one, it echoes the sentiment that even an erroneous judgment is entitled to full faith and credit.

[00:15:41] Speaker 00:
And then it also says that while there are some equitable considerations the courts can look at outside of whether it's erroneous to consider whether to apply issue preclusion,

[00:15:56] Speaker 00:
those have to be different than is the judgment correct.

[00:16:01] Speaker 00:
Those types of considerations are about jurisdiction and due process.

[00:16:04] Speaker 01:
Okay, I think I will note that I think you're a little over your time and I will ask my colleagues if they have any last questions.

[00:16:12] Speaker 01:
I don't.

[00:16:13] Speaker 01:
I have none.

[00:16:15] Speaker 01:
Okay, thank you for your very good arguments.

[00:16:17] Speaker 01:
Interesting issue.

[00:16:18] Speaker 01:
We will take the matter under submission and we'll get you a written decision as soon as we can.

[00:16:22] Speaker 01:
Thank you very much.

[00:16:24] Speaker 01:
Okay, let's call the next matter.