100 F.3d 1195 (5th Cir. 1996), 96-10063, Matter of Gober

Docket Nº:96-10063.
Citation:100 F.3d 1195
Party Name:IN THE MATTER OF TERRY M. GOBER, DEBTOR. TERRY M. GOBER, APPELLANT, v. TERRA + CORPORATION, DOING BUSINESS AS LSMG, DOING BUSINESS AS SMG ARCHITECT-PLANNERS, APPELLEE.
Case Date:December 10, 1996
Court:United States Courts of Appeals, Court of Appeals for the Fifth Circuit
 
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100 F.3d 1195 (5th Cir. 1996)

IN THE MATTER OF TERRY M. GOBER, DEBTOR.

TERRY M. GOBER, APPELLANT,

v.

TERRA + CORPORATION, DOING BUSINESS AS LSMG, DOING BUSINESS AS SMG ARCHITECT-PLANNERS, APPELLEE.

No. 96-10063.

United States Court of Appeals, Fifth Circuit

December 10, 1996

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Kent Frank Brooks, Dallas, TX, for appellant.

Mark Xavier Mullin, Haynes & Boone, Dallas, TX, for appellee.

Appeal from the United States District Court for the Northern District of Texas.

Before Politz, Chief Judge, and Emilio M. Garza and Stewart, Circuit Judges.

EMILIO M. GARZA, Circuit Judge:

This case presents the question of whether a state court default judgment entered as a sanction for discovery abuse is entitled to issue preclusive effect in a subsequent bankruptcy proceeding to determine the dischargeability of the judgment debt. In 1992, Appellee Terra + Corporation ("Terra") filed a complaint in bankruptcy court against Debtor-Appellant, Terry M. Gober, objecting to discharge of a judgment it had obtained against Gober in Texas state court in 1983. The bankruptcy court collaterally estopped Gober from relitigating issues determined in the state court judgment and granted summary judgment in favor of Terra. The district court affirmed on appeal. Gober now appeals to this court, arguing, inter alia, that the state court judgment should not have preclusive effect on the dischargeability of the judgment debt. We disagree and affirm the decision of the district court.

I

Gober was a director, officer, and shareholder of Terra, an architectural firm, from the time of its incorporation until his termination in 1981. At that time, Gober was indicted by a Texas grand jury for misappropriation of client funds and loan proceeds that he received on behalf and for the benefit of Terra. He eventually entered a plea of nolo contendre and paid restitution of $75,000, consisting of $25,000 in cash and $50,000 in debt cancellation.

Terra filed a civil suit in Texas state court based on the same set of transactions in the indictment. In its complaint, Terra alleged that Gober negotiated unauthorized loans and deposited loan proceeds and client funds into an unauthorized account for his own use. Gober filed a general denial to Terra's complaint and filed counterclaims against Terra seeking offsets and credits for salary, business

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expenses, and his ownership interest in Terra.

The parties actively litigated the action for two years. In October 1983, the state court imposed a $1,000 sanction on Gober for discovery abuses and ordered Gober to deposit $1,500 as security for costs for his counterclaims pursuant to Rule 143 of the Texas Rules of Civil Procedure. The court further ordered Gober to respond to Terra's discovery requests. When Gober failed to post security for costs or to respond to discovery, Terra filed motions to dismiss Gober's counterclaims and to strike his answer. The court set a hearing on the motions for December 30, 1983. Gober did not attend the hearing and specifically directed his attorney not to appear on his behalf.

In his absence, the state court struck Gober's answer, entered a default judgment against him, and dismissed his counterclaims for failure to pay security for costs. The court, "after hearing the evidence and arguments of counsel," found that Gober "embezzled, converted, appropriated and ... stole[ ] ... $307,284.96" from Terra and that he "acted with fraudulent intent" and "acted maliciously and willfully." The court thereafter entered judgment in Terra's favor and awarded $307,284.96 in actual damages, $250,000 in exemplary damages, $75,000 in attorney's fees, and post-judgment interest. Gober did not appeal the judgment.

In 1992, Gober filed a voluntary petition for bankruptcy relief under Chapter 7 of the Bankruptcy Code. Terra then filed a complaint with the bankruptcy court objecting to discharge of the judgment debt under 11 U.S.C. § 523(a)(2), (4), and (6).1 In his answer, Gober denied the essential allegations of Terra's complaint and reasserted his right to credits and offsets in determining the amount of any debt owed. Terra filed a motion for summary judgment, asserting that issue preclusion2 barred Gober from relitigating the factual and legal issues necessary for holding the judgment debt nondischargeable. In response; Gober filed a cross-motion for summary judgment asserting that collateral estoppel does not apply to the state judgment and that Terra could not otherwise prove the elements necessary for a finding of nondischargeability of the debt.

The bankruptcy court denied Gober's motion for summary judgment and granted judgment in favor of Terra, holding that the state court's findings satisfy the elements of § 523(a)(4) and (6) and that issue preclusion barred relitigation of those issues. The court explicitly abstained from considering Gober's state law claims for offsets and credits. Gober appealed the judgment to the district court, which affirmed the bankruptcy court's judgment.

On appeal to this court, Gober argues that the district court erred in affirming the bankruptcy court's determination because (1) the state court's findings should not have been given issue preclusive effect under Texas collateral estoppel rules; (2) the bankruptcy and district courts should not have abstained from deciding Gober's state law counterclaims; and (3) the courts erred in declaring the entire amount of the state court judgment nondischargeable. We reject all of Gober's contentions.

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II

Parties may invoke collateral estoppel in certain circumstances to bar relitigation of issues relevant to dischargeability, although the bankruptcy court retains exclusive jurisdiction to ultimately determine the dischargeability of the debt. Grogan v. Garner, 498 U.S. 279, 284 n. 11, 111 S.Ct. 654, 658 n. 11, 112 L.Ed. 2d 755 (1991); Garner v. Lehrer (In re Garner), 56 F.3d 677, 681 (5th Cir.1995); Harold V. Simpson and Co. v. Shuler (In re Shuler), 722 F.2d 1253, 1255 (5th Cir.), cert. denied, 469 U.S. 817, 105 S.Ct. 85, 83 L.Ed. 2d 32 (1984). In deciding the preclusive effect of a state court judgment in federal court, we are guided by the full faith and credit statute, which provides that "judicial proceedings of any court of any ... State ... shall have the same full faith and credit in every court within the United States ... as they have by law or usage in the courts of such State ... from which they are taken." 28 U.S.C. § 1738. Accordingly, we must look to the state that rendered the judgment to determine whether the courts of that state would afford the judgment preclusive effect. Marrese v. American Academy of Orthopaedic Surgeons, 470 U.S. 373, 380, 105 S.Ct. 1327, 1331-32, 84 L.Ed. 2d 274 (1985). The judgment against Gober was rendered in Texas state court; accordingly, Texas rules of issue preclusion apply. Id. A bankruptcy court's decision to give preclusive effect to a state court judgment is a question of law that we review de novo. Boyce v. Greenway (In re Greenway), 71 F.3d 1177, 1180-81 (5th Cir.), cert. denied, U.S. , 116 S.Ct. 2499, 135 L.Ed. 2d 191 (1996); Sanders v. City of Brady (In re Brady, Texas Mun. Gas Corp.), 936 F.2d 212, 217 (5th Cir.), cert. denied, 502 U.S. 1013, 112 S.Ct. 657, 116 L.Ed. 2d 748 (1991).

Under Texas law, collateral estoppel "bars relitigation of any ultimate issue of fact actually litigated and essential to the judgment in a prior suit, regardless of whether the second suit is based upon the same cause of action." Bonniwell v. Beech Aircraft Corp., 663 S.W.2d 816, 818 (Tex.1984). Before applying collateral estoppel, the court must determine that the facts asserted in the second proceeding were fully and fairly litigated in the first, that the facts were essential to the judgment, and that the parties were cast as adversaries in the first action. Id. (citing Restatement (Second) of Judgments § 27 (1982)); In re Garner, 56 F.3d at 679-80; Amica Mut. Ins. Co. v. Moak, 55 F.3d 1093, 1097 (5th Cir.1995). Gober contends that the bankruptcy and district courts erred in barring relitigation of issues relevant to dischargeability because (1) the state court judgment is not a final judgment entitled to collateral estoppel effect, (2) the judgment is void and cannot provide the basis for a plea of estoppel, and (3) the issues relevant to dischargeability were not fully and fairly litigated in state court. We address each of these contentions in turn.

A

Gober first contends that the state judgment is not a final judgment. Application of collateral estoppel requires that there be a final judgment on the merits; interlocutory orders are not entitled to preclusive effect. Starnes v. Holloway, 779 S.W.2d 86, 93 (Tex.App.--Dallas 1989, writ denied); Texas v. Wellington Resources Corp., 706 F.2d 533, 536-37 (5th Cir.1983). A judgment on liability entered by default after striking an answer is interlocutory, and the plaintiff must still present sufficient evidence to support unliquidated damages. Bass v. Duffey, 620 S.W.2d 847, 849 (Tex.App.--Houston [14th Dist.] 1981, no writ). A default judgment entered as a sanction is merely interlocutory where the defendant receives no notice of the hearing on unliquidated damages. Pearson Corp. v. Wichita Falls Boys Club Alumni Assn., 633 S.W.2d 684, 687 (Tex.App.--Fort Worth 1982, no writ).

Gober contends that he received no notice of the damages hearing. Neither Terra's motion for imposition of sanctions, nor the state court's order setting the December 30, 1983 hearing, mention that the court might conduct a damages hearing on that date. Therefore, he asserts, the state...

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