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In re Hernandez

United States Court of Appeals, Eighth Circuit

June 14, 2017

In re: Michael John Hernandez Debtor
v.
General Mills Federal Credit Union Appellee Michael John Hernandez Appellant

          Submitted: March 7, 2017

         Appeal from United States District Court for the District of Minnesota - Minneapolis

          Before BENTON, BEAM, and MURPHY, Circuit Judges.

          BEAM, Circuit Judge.

         General Mills Federal Credit Union[1] filed an adversary proceeding to determine the dischargeability of a debt in Michael Hernandez's Chapter 7 bankruptcy. The bankruptcy court[2] found the debt excepted from discharge, the district court[3] affirmed, and we now affirm as well.

         I. BACKGROUND

         Hernandez's grandparents, Joseph and Stella Hernandez (whom we will refer to as Joseph and Stella), owned a home in St. Paul, Minnesota. In June 2003, Joseph and Stella executed a quitclaim deed transferring title to Hernandez with a reserved life estate. At that time the home was encumbered with a $144, 000 mortgage. In October 2003, Hernandez, Joseph, and Stella executed a mortgage for $185, 000, obtained from General Mills, which was used to pay off the earlier mortgage and some of Hernandez's personal debt. In April 2004, Hernandez obtained a home equity loan in his own name from General Mills for $30, 000, which he used to consolidate his debt. In May 2004, the three took out another mortgage on the home for $222, 300, again for consolidating debt. At closing, Hernandez signed the mortgage agreement both in his own name and as the attorney-in-fact for Joseph and Stella under powers of attorney (the 2004 POAs). The 2004 POAs were notarized by an Edward J. Thompson.

         In March 2005, the three took out a home equity line of credit (the Loan), secured by a second mortgage subordinate to the May 2004 loan. The bank provided Hernandez new POA forms for Joseph and Stella which were completed and included in the loan documents (the 2005 POAs). The 2005 POAs provided a space for a "specimen" signature of the attorney-in-fact, and these were left blank. The 2005 POAs were notarized by a Cheryl L. Engh. At closing, Hernandez, as he did with the 2004loan, signed for himself and for his grandparents as their attorney. He also signed an affidavit stating he "is the Attorney-in-Fact (or agent) named in that certain Power of Attorney dated March 8, 2005." "March 8, 2005" was typed into a blank space. Within a short time and over several transactions, Hernandez drew on the line of credit nearly to its limit of $100, 000.

         In 2007, Joseph and Stella sought the assistance of their niece, Vicki Giller, in dealing with foreclosure notices they received due to defaulted payments on the $30, 000 loan. In the course of researching loan documents Giller discovered what she believed to be forged signatures. She testified that the principal signatures on the 2005POAs were not those of Joseph and Stella, which signatures she was familiar with from having helped her aunt and uncle with bills and other matters. Giller also gave hearsay testimony that Joseph and Stella told her in 2007 that they had not signed either the 2004 or 2005 POAs. Further, she testified that her aunt and uncle no longer drive and that their practice was to walk across the street from their home in Ramsay County to the Cathedral of St. Paul when they needed a notary. The 2004 and 2005 POAs, however, were notarized in Anoka and Hennepin Counties, respectively. Suspecting Hernandez had taken advantage of Joseph and Stella by committing fraud, Giller filed a police report and sought the assistance of Adult Protective Services. In August 2008, Stella signed an affidavit revoking "any and all Power(s) of Attorney Never given to Michael Hernadez, specifically the documents on 5/24/2004 & 3/8/2005."

         In March 2009, Joseph and Stella filed a complaint in Ramsay County District Court against Hernandez, General Mills, and another party alleging various acts of fraud. The complaint alleged in part that neither Joseph nor Stella had signed the 2004 or 2005 POAs, that the signatures appearing on those forms are not those of Joseph and Stella, and that Hernandez falsely represented that he had the authority to sign the loan documents for his grandparents. General Mills in its answer stated that it was "without sufficient knowledge or information to form a belief as to the truth or falsity" of those allegations and denied them on that basis. Further, General Mills made a cross-claim against Hernandez for indemnity or contribution should General Mills be ordered to release or rescind the mortgages or to pay damages. In June 2010, the court dismissed the case due to Joseph and Stella's failure to engage in mediation, attend the pretrial conference, and to otherwise comply with the Minnesota Rules of Civil Procedure. The order dismissed Joseph and Stella's claims with prejudice, but it also stated, "Nothing herein shall be construed to affect, modify or prevent any of the Defendants from enforcement of any rights or remedies they may possess with respect to any liens, interest, mortgage, promissory note or otherwise with respect to the relationships between them and/or any interest in the property at issue in this case." An August 2010 stipulation dismissed all claims between the codefendants without prejudice.

         A summary of these events, along with quotations from Stella and Giller, appeared in an October 2011 edition of the St. Paul Pioneer Press newspaper. Much of this account was disputed by testimony from Regina Griffith, Joseph and Stella's granddaughter and Hernandez's sister. At the time of the adversary proceeding in 2015, Joseph was deceased and Stella was living near Griffith in a nursing home in Ohio. Griffith's testimony painted Giller as the antagonist. Giller had been given power of attorney for Stella in 2013. Stella, apparently unhappy with Giller, revoked her power of attorney and gave it instead to Griffith. Griffith disputed much of the content of the St. Paul Pioneer Press article, and she stated that Giller had stolen jewelry from Stella. In addition, Griffith presented hearsay testimony that Stella told her Hernandez had not forged her and her husband's signatures.

         Hernandez lost his job in February 2009 and defaulted on the Loan that April. General Mills charged off the Loan in May 2014. In March 2014, Hernandez filed for Chapter 7 bankruptcy. General Mills filed an adversary proceeding in May to determine the dischargeability of the debt from the Loan, arguing it should be excepted from discharge for fraud under 11 U.S.C. § 523(a)(2)(A). The bankruptcy court rejected Hernandez's res judicata, statute of limitations, and other defenses. In determining whether Hernandez's debt was dischargeable for fraud, the bankruptcy court placed great weight on the testimony of Cheryl Engh, the purported notary on the 2005 POAs. She testified that she does not generally notarize documents, that the signature on the 2005 POAs were not hers, and that she did not know the Hernandezes or recall notarizing the 2005 POAs. The bankruptcy court admitted in evidence the conflicting hearsay testimony of Giller and Griffith under Federal Rule of Evidence 807's residual hearsay exception, and it admitted the newspaper article over Hernandez's counsel's hearsay objection. The bankruptcy court also admitted in evidence Exhibit 2, a copy of the Loan agreement, which had been substituted for Exhibit BB, an earlier, incomplete version of the Loan agreement. Exhibit 2 was a complete version of the agreement that contained Hernandez's signature on his own behalf, his signature on behalf of Joseph and Stella, and his initials. Exhibit BB contained only Hernandez's signature on his own behalf. When Hernandez attempted to introduce Exhibit BB at trial, the bankruptcy court sustained General Mills' objection for lack of foundation, disclosure, and relevance.

         The bankruptcy court found by a preponderance of the evidence that General Mills had met the elements necessary under § 523(a)(2)(A) to except the Loan from discharge. Its conclusion was bolstered by the negative inference it drew from Hernandez's invocation of his right not to incriminate himself under the Fifth Amendment. This occurred when Hernandez was questioned about the fact that Edward Thompson, who purportedly notarized the 2004 POAs, was also the name Hernandez provided as that of a tenant in one of his rental properties in the 2004 loan application. When asked whether he had provided false information on the 2004 loan application, Hernandez invoked the Fifth Amendment. Based on its findings and the negative inference, the bankruptcy court excepted from discharge the debt from the Loan, totaling $122, 115.25 plus an annual interest rate of four percent. The district court, with appellate jurisdiction under 28 U.S.C. § 158(a), affirmed, and Hernandez now appeals.

         II. DISCUSSION

         Hernandez argues the bankruptcy court erred in rejecting his res judicata and statute of limitations defenses, in making certain evidentiary rulings, and in finding his debt nondischargeable under 11 U.S.C. § 523(a)(2)(A). As a general matter, we review the decision of a bankruptcy court to deny discharge with the same standard of review applied by the district court below, reviewing the bankruptcy court's factual findings for clear error and its conclusions of law de novo. Waugh v. Eldridge (In re Waugh), 95 F.3d 706, 710 (8th Cir. 1996). Our review is independent of the district court's, although we may afford its decision persuasive weight. Id.

         A. Res Judicata

         Hernandez argues the Ramsay County District Court's dismissal of Joseph and Stella's fraud claims with prejudice, and the later stipulation dismissing claims between codefendants without prejudice, precluded relitigation of the fraud issue in the adversary proceeding. "[W]e review de novo the preclusive effects of a previous state-court judgment on this federal case." Knutson v. City of Fargo, 600 F.3d 992, 995 (8th Cir. 2010). The bankruptcy court found that the language in the state court's order reserving the parties' rights and remedies, and the dismissal of cross-claims without prejudice, prevented the state court judgment from having preclusive effect in the instant dispute. "The preclusive effect of a state court judgment in a subsequent federal lawsuit generally is determined by the full faith and credit statute, " which "directs a federal court to refer to the preclusion ...


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