Tuesday, June 7, 2016

Having a Bankrupt Co-Fraudster Doesn't Get You Off the Hook

Patel v. Crown Diamonds, Inc., No. G051439 (D4d3 Apr. 29, 2016)
A bunch of guys and their company allegedly swindled a Widow out of her money. One of the guys went BK and had all his debts discharged, over Widow’s objection. But the others didn’t go BK. Nor did their company. The widow sued them for fraud. Defendants moved for sanctions, claiming that the case was frivolous because the rejection of Widow’s objection to the discharge of BK guy’s debts barred the claims under res judicata. For some crazy reason, the trial court agreed, struck plaintiff’s complaint, and awarded Defendants over $12k for their fees.

The Court of Appeal reverses. A discharge against one party to a multi-defendant tort does not discharge the others unless they are in privity. And as the Supreme Court recently explained in the DKN case, ordinary joint tortfeasors like co-fraudsters are not in privity for preclusion purposes. If three guys commit fraud and one of them gets out—whether by discharge in BK, settlement, release, or judgment—res judicata doesn’t bar claims against the others. Nor would collateral estoppel apply because there was no common issue decided adversely to Widow’s claim in that proceeding.


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