Connecticut District Court Affirms Ruling that Collateral Estoppel Effect of California Judgments for Fraud Established Them as Non-Dischargeable Fraud Debts in Bankruptcy

by Pullman & Comley, LLC

Debts based on fraud are not dischargeable in bankruptcy, but to achieve that result the aggrieved creditor must ordinarily commence a non-dischargeability action and prove the fraud.  However, when an action for fraud is litigated to judgment before the defendant files for bankruptcy, the fraud judgment will typically preclude the debtor from relitigating the fraud in bankruptcy court based on the doctrine of collateral estoppel.  

Occasionally, however, the debtor will argue that one element or another of the fraud claim that was used to procure the pre-bankruptcy judgment does not comport with what is required under the Bankruptcy Code to prevent the debtor from discharging the fraud debt.  Such was the case in In re Vincent Andrews Management Corp., Civ. No. 3:08 MC 132 (AWT) (D. Conn. Mar. 26, 2014).

In Andrews, the debtors argued that one of the required elements to discharge a debt for fraud – justifiable reliance – was not properly found in an action for fraud that was litigated to judgment against them in California because the standard used there was more lenient than what would be required to except the debt from discharge under the Bankruptcy Code.  The Bankruptcy Court rejected that argument and its decision was recently affirmed by the District Court on appeal.

In Andrews, horseracing legends Laffit Pincay and Christopher McCarron sued their former business managers and investment advisors. Vincent and Robert Andrews for fraud and the Andrews later filed for bankruptcy. In the suit, the jockeys claimed that the Andrews represented they would take as a fee no more than a certain percentage of the earnings derived from partnership investments they made for the jockeys, but that they actually received much more by investing in those partnerships themselves without disclosing it.  The evidence at trial was that plaintiffs received written disclosures which advised of the Andrews’ personal investments in the partnerships, but were told they did not have to read them.  Evidence was also presented that the plaintiffs were not well-educated, in contrast to the highly educated and sophisticated background of the debtors.

The plaintiffs sued the Andrews for fraud and RICO in California District Court in 1989, got judgments in 1992 and went through a series of appeals to the Ninth Circuit which culminated in final judgments for fraud in 2005.  In the Andrews’ individual bankruptcy proceedings, the plaintiffs claimed that the fraud judgments were entitled to collateral estoppel effect on the claim of non-dischargeability, which was challenged by the Andrews on the basis that the element of justifiable reliance was not actually found in the California action.   

The challenge was on the basis that the underlying jury verdicts in California made findings that the plaintiffs were justified in relying on fraudulent representations even though the statements claimed to be fraudulent were disclosed in documents provided to plaintiffs but never read.  More particularly, the debtors claimed that such a finding could not have been based on the standard of justifiable reliance for actions to except a debt from discharge for fraud because that standard requires a plaintiff to use his senses and make a cursory examination or investigation in processing an allegedly fraudulent statement.

In affirming the bankruptcy court’s ruling, the district court emphasized that under the U.S. Supreme Court’s decision in Field v. Mans and pertinent Ninth Circuit authority, there is not a single, “reasonable man” standard for justifiable reliance that in all cases requires investigation or use of one’s senses in evaluating a statement, but it is a more subjective standard that takes into account the knowledge and relationship of the parties and will not necessarily be negated by a failure to investigate or read written disclosures when the circumstances would not require doing so.

The district court, as did the bankruptcy court, reviewed the jury instructions and jury verdict to determine whether collateral estoppel should apply to the element of justifiable reliance (which was the only element in issue).  The district court, like the bankruptcy court, also found that the jury was properly instructed on the element of justifiable reliance under California law, which was the same standard required to except fraud debts from discharge under section 523(a)(2)(A), and answered affirmatively to the specific jury interrogatory asking if the plaintiffs were justified in relying on the fraudulent representations.

The district court specifically rejected the Andrews’ argument that the jury was misled into applying a more lenient standard for justifiable reliance by other jury instructions on a related intentional concealment claim and the Andrews’ statute of limitations defense.  These other instructions were to the effect that the plaintiffs were under no duty of inquiry concerning the fraudulent representations and concealment if there was a fiduciary relationship between the parties, leading the Andrews to argue that the jury was misled into believing that if they found a fiduciary relationship between the parties, they could find justifiable reliance without any duty of inquiry by the plaintiffs. 

The district court held that this argument was untimely and inappropriate because it should have been raised with the trial court in California and on appeal to the Ninth Circuit, but was not.  In effect, the district ruled that the Andrews could not raise that argument in the context of non-dischargeability proceedings if it was not raised in the non-bankruptcy action in which a final judgment was rendered.  The district court added that there is a presumption that a jury will properly apply the instructions they are given and that nothing in the record provided a basis for disturbing that presumption.

[View source.]

Written by:

Pullman & Comley, LLC

Pullman & Comley, LLC on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at:

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.