Cherry v. Neuschafer (In re Neuschafer)

Cherry v. Neuschafer (In re Neuschafer), No. KS-13-1030 & KS-13-1035 (BAP 10th Cir. June 12, 2014)
BAP affirmed bankruptcy court judgment applying issue preclusion to except from discharge state court fraud in the inducement judgment. BAP also affirmed bankruptcy court's judgment not to except from discharge state court judgment on RICO, or attorney fees and costs.
Procedural context:
Plaintiffs obtained judgment in state court on fraud in inducement and RICO, including treble damages, attorney fees, and costs. Defendant appeared and contested claims until attorney withdrew prior to trial. Defendant failed to notify court of proper address for notice, and alleged he did not receive notice of trial. Plaintiffs obtained judgments following trial where Defendant did not appear. Defendant filed Chapter 7. Plaintiffs filed adversary to except state court judgment from discharge. Following trial, bankruptcy court entered judgment in favor of plaintiffs on fraud in the inducement claim, applying issue preclusion from state court proceeding. Bankruptcy court entered judgment in favor of defendant on plaintiffs' claims under RICO, including treble damages, attorney fees and costs. Bankruptcy court ruled that there were insufficient findings by the state court on the RICO claims to allow issue preclusion to compel a finding of nondischargeability, and inadequate evidence of damages to plaintiffs on the RICO claim. Bankruptcy court also ruled that state court award of attorney fees was dischargeable because there were no findings linking fees to fraud in the inducement claim. Parties cross appealed to BAP, with defendant contesting liability based on assertion that he had not received notice of state court trial, and plaintiffs seeking nondischargeability of RICO damages and attorney fee claim.
Debtor/defendant was principal of two entities that advertised credit repair services through buying houses of distressed debtors and selling them replacement homes. Plaintiffs entered into agreement with one of the entities to sell their home and to lease-purchase a replacement home. Upon seeking to purchase the replacement home, plaintiffs discovered that home was owned by a principal of affiliated company, who refused to sell. Plaintiffs sued entities, home owner, and debtor-defendant. Debtor-defendant appeared in defense of claims, and litigated through discovery. However, after debtor-defendant's attorney withdrew, debtor-defendant made no further appearances. Debtor-defendant failed to notify court of proper home address, even after moving out of state. Debtor-defendant failed to receive notice of trial, and did not appear. Following trial, court entered judgment in favor of plaintiff on claims for fraud in the inducement, RICO, attorneys' fees, and costs.
Romero, Jacobvitz, and Hall

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