Schwager, Matter of
| Decision Date | 22 August 1997 |
| Docket Number | No. 96-20242,96-20242 |
| Citation | 121 F.3d 177 |
| Parties | , 11 Tex.Bankr.Ct.Rep. 332 In The Matter Of: Bruce Barton SCHWAGER, Debtor. Bruce Barton Schwager, Appellant, v. Meyer Fallas; Fred Fallas; William Cramer; Malcolm Marcoe, Appellees. |
| Court | U.S. Court of Appeals — Fifth Circuit |
Bruce Barton Schwager, Houston, TX, pro se.
James Hayden Kepner, Houston, TX, for Appellees.
Appeal from the United States District Court for the Southern District of Texas.
Before KING, GARWOOD and PARKER, Circuit Judges.
Bruce Barton Schwager appeals the district court's affirming of the bankruptcy court's ruling that his debt from a state court judgment against him is nondischargeable under 11 U.S.C. § 523(a)(4). He argues, inter alia, that the bankruptcy court improperly applied the doctrine of collateral estoppel to the jury's findings in the underlying state court judgment to determine that his debt was nondischargeable. We agree that the use of collateral estoppel was improper in this case, and thus, we reverse and remand.
The full details of this case are set forth in the state appellate court opinion, Schwager v. Texas Commerce Bank, N.A., 827 S.W.2d 504 (Tex.App.--Houston [1st Dist.] 1992). We will provide only a brief description of the facts that are pertinent to this decision.
In January 1984, Schwager, Fred Fallas, Meyer Fallas, Malcolm Marcoe, William Cramer, and Harvey Resnick formed a Texas limited partnership. Schwager served as managing partner, and the others were limited partners. The partnership purchased land in downtown Houston for the purpose of operating a restaurant. The partnership financed its purchase of the Houston property with a loan from Interfirst Bank. The restaurant operated at a loss, necessitating capital contributions from the limited partners.
In September 1984, Texas Commerce Bank (TCB) loaned the partnership $825,000. The partnership applied $700,000 of the TCB loan to retire the Interfirst Bank loan and retained $125,000 as working capital. By March 1985, the working capital was exhausted, and the limited partners were forced to make payments on the TCB note. Eventually the limited partners stopped making these payments.
In 1986, litigation ensued in Texas state court among Schwager, the partnership, and the limited partners. Ultimately, the trial court appointed a receiver. In January 1987, after payments on the note again stopped, TCB accelerated the note. TCB then sued Schwager and the limited partners in Texas state court. Schwager filed various counterclaims. The jury awarded compensatory damages against Schwager, finding, inter alia, that Schwager breached both the partnership agreement and his fiduciary duty to the limited partners. Finding that Schwager's breach of fiduciary duty was "committed intentionally, maliciously or with heedless and reckless disregard of the rights of the limited partners," the jury also awarded exemplary damages in favor of the limited partners. Finally, the jury found that Schwager fraudulently induced the limited partners to enter into the partnership agreement. The trial court entered the judgment on December 8, 1989 ("the 1989 judgment").
Schwager appealed to the Court of Appeals for the First District of Texas, which, after allowing two rebriefings, struck forty-two of Schwager's forty-four points of error for failure to comply with the state appellate procedure rules. Finding the remaining two claims to be without merit, the court of appeals affirmed the Texas trial court. The Texas Supreme Court denied discretionary review, and the United States Supreme Court denied certiorari. Schwager v. Texas Commerce Bank, N.A., 827 S.W.2d 504 (Tex.App.--Houston [1st Dist.] 1992, writ denied), cert. denied, 507 U.S. 1030, 113 S.Ct. 1844, 123 L.Ed.2d 469 (1993).
Schwager filed a petition for bankruptcy under chapter 7 in the U.S. Bankruptcy Court for the Southern District of Texas. Four of the limited partners 1 brought an adversary proceeding to establish that the damages awarded in the 1989 judgment were nondischargeable debts under 11 U.S.C. § 523(a)(2)(A), § 523(a)(4), or § 523(a)(6). 2 On February 15, 1995, the bankruptcy court granted summary judgment in favor of the limited partners. 3 The bankruptcy court concluded that Schwager was collaterally estopped from relitigating any of the issues determined in the 1989 judgment and, based on those facts, concluded that the entire judgment (both compensatory and exemplary damages) was nondischargeable under 11 U.S.C. § 523(a)(4). Fallas v. Schwager (In re Schwager), 178 B.R. 106 (Bankr.S.D.Tex.1995).
Schwager appealed to the district court arguing, inter alia, that use of collateral estoppel was improper and that exemplary damages are dischargeable. The district court affirmed the bankruptcy court. On appeal, Schwager argues that the use of collateral estoppel is inappropriate, asserts that the court erred in determining that he was a fiduciary to the limited partners, and raises several other procedural arguments. We will discuss each in turn.
The Supreme Court has explicitly stated that collateral estoppel, or issue preclusion, principles apply in bankruptcy dischargeability proceedings. Grogan v. Garner, 498 U.S. 279, 285 n. 11, 111 S.Ct. 654, 658 n. 11, 112 L.Ed.2d 755 (1991). In such proceedings, "[p]arties may invoke collateral estoppel in certain circumstances to bar relitigation of issues relevant to dischargeability, although the bankruptcy court retains jurisdiction to ultimately determine the dischargeability of the debt." Gober v. Terra + Corp. (In re Gober ), 100 F.3d 1195, 1201 (5th Cir.1996). The preclusive effect given to state court judgments under collateral estoppel is a function of the full faith and credit statute. Garner v. Lehrer (In re Garner ), 56 F.3d 677, 679 (5th Cir.1995) (). A bankruptcy court's decision to give preclusive effect to a state court judgment is a question of law that this court reviews de novo. Gober, 100 F.3d at 1201; Garner, 56 F.3d at 679. Because Congress granted bankruptcy courts exclusive jurisdiction to determine whether a debt is dischargeable based on the bankruptcy courts' expertise, Brown v. Felsen, 442 U.S. 127, 135-36, 99 S.Ct. 2205, 2211-12, 60 L.Ed.2d 767 (1979), "in only limited circumstances may bankruptcy courts defer to the doctrine of collateral estoppel and thereby ignore Congress' mandate to provide plenary review of dischargeability issues." Dennis v. Dennis (In re Dennis ), 25 F.3d 274, 278 (5th Cir.1994).
Because the 1989 judgment was entered by a Texas state court, Texas rules of preclusion apply. See Garner, 56 F.3d at 679 & n. 2. "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.' " Id. at 679 (quoting Bonniwell v. Beech Aircraft Corp., 663 S.W.2d 816, 818 (Tex.1984)); accord Gober, 100 F.3d at 1201. The elements of collateral estoppel under Texas law are:
(1) the facts sought to be litigated in the second action were fully and fairly litigated in the prior action; (2) those facts were essential to the judgment in the first action; and (3) the parties were cast as adversaries in the first action.
Bonniwell v. Beech Aircraft Corp., 663 S.W.2d 816, 818 (Tex.1984).
The bankruptcy court found, and the district court agreed, that collateral estoppel applied, based on the jury's findings in the 1989 judgment. The jury found several facts that pertain to this case. In response to Question No. 16, the jury found that "Schwager breach[ed] his fiduciary duty to [the limited partners] in the performance of his responsibilities, ... which proximately caused damages [to the limited partners]." In response to Question No. 17, the jury determined that "Schwager materially breach[ed] the limited partnership agreement, ... proximately causing damages to the [limited partners]." The jurors were instructed to answer Question No. 18 only if they answered "yes" to either Question No. 16 or Question No. 17. The jury then awarded damages pursuant to Question No. 18, which is as follows:
What sum of money ... would fairly and reasonably compensate [the limited partners] for damages sustained, if any, as a result of breach of fiduciary duty or the material breach of the partnership agreement (which you previously found)?
(emphasis added). The jury also answered "yes" to Question No. 19, which is as follows:
Was Bruce Schwager's breach of fiduciary duty, if any, committed intentionally, maliciously or with heedless and reckless disregard of the rights of any of the limited partners? 4
After barring relitigation of these issues under the doctrine of collateral estoppel, the bankruptcy court concluded that Schwager's debt based on the 1989 judgment was nondischargeable under § 523(a)(4). 5 Section 523(a)(4) provides that a chapter 7 bankruptcy does not discharge any debt "for ... defalcation while acting in a fiduciary capacity," with defalcation being defined as "a willful neglect of duty, even if not accompanied by fraud or embezzlement." LSP Inv. Partnership v. Bennett (In re Bennett ), 989 F.2d 779, 790 (5th Cir.1993). 6 Thus, the jury must have found a breach of fiduciary duty and awarded damages on that basis in order for collateral estoppel to establish defalcation in a fiduciary capacity under § 523(a)(4). 7
Schwager asserts that the bankruptcy court's conclusion is erroneous, inter alia, because collateral estoppel does not apply in this circumstance. 8 He argues that the jury findings incorporated into the 19...
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