Kriescher v. Gibson (In re Gibson)
| Decision Date | 06 November 2014 |
| Docket Number | Bankruptcy No. 13–15635–7.,Adversary No. 14–34. |
| Citation | 521 B.R. 645 |
| Parties | In re Majorie Ellen GIBSON, Debtor. Thomas Kriescher, Vicky Kriescher, and Marjac, Inc., Plaintiffs, v. Majorie Ellen Gibson, Defendant. |
| Court | U.S. Bankruptcy Court — Western District of Wisconsin |
Erik F. Hansen, Burns & Hansen, P.A., Minneapolis, MN, for Plaintiffs.
Howard D. White, White & Schilling, LLP, Eau Claire, WI, for Defendant.
DECISION
This matter is before the Court on the Motion of Vicky M. Kriescher, Thomas A. Kriescher, and Marjac, Inc. (the “Plaintiffs”) for Summary Judgment (the “Motion”). The Motion seeks determination of nondischargeability of various claims under 11 U.S.C. §§ 523(a)(2)(A), 523(a)(4), and/or 523(a)(6)1 .
For the reasons set forth below, summary judgment is granted with respect to the claim under section 523(a)(4) for the acts resulting in damages in the amount of $200,487.00. This claim satisfies both the embezzlement and defalcation in a fiduciary capacity exceptions to discharge contained within section 523(a)(4). Summary judgment on the remaining claims is denied.
The Court has jurisdiction to resolve this matter under 28 U.S.C. § 1334. It is a core proceeding under 28 U.S.C. § 157(b)(2)(1).
Marjorie Ellen Gibson (the “Debtor” or “Defendant”) filed a voluntary Chapter 7 bankruptcy on November 20, 2013. The Plaintiffs had filed a complaint against the Defendant and two entities owned by her—J & M and Marjohn—in Minnesota state court in 2012. In the state court action, the Plaintiffs alleged that Marjac, J & M, and Marjohn were alter egos of the Defendant and that the Defendant tortiously interfered with a Buy/Sell Agreement, committed fraud and misrepresentation, breached fiduciary duties and duties of loyalty, and committed fraud in a fiduciary capacity. The Defendant appeared at trial on September 30 and October 1, 2013, but failed to appear on October 2, 2013. The state court then entered a default judgment in favor of the Plaintiffs on October 3, 2013 (the “Judgment”). The Plaintiffs are creditors as a result of the Judgment.
The Judgment included findings of fact that the Plaintiffs owned two FedEx routes, and to continue as FedEx contractors they were required to have at least three routes. The Plaintiffs entered into discussions with the Defendant about combining their respective FedEx routes in a new company to satisfy the new requirements for number of routes. The Defendant represented she owned three routes and that all three had been paid for in full. In fact, the Defendant was still paying the purchase price of one of the three routes.
Based on the representations of the Defendant, the Plaintiffs entered into an agreement to form a company, Marjac, Inc. (“Marjac” or “Company”), in which the Plaintiffs would each own a twenty percent interest and the Defendant would own a fifty-seven percent interest.2 The revenue from two routes was to be paid to the Plaintiffs and from the remaining three routes to the Defendant. The Defendant was selected to act as the CEO and Secretary/Treasurer of Marjac. The Plaintiffs were each Vice Presidents of Marjac.
In approximately March 2011, Marjac ceased distributions to the Plaintiffs. The Defendant commingled Marjac funds with the funds of her other companies. She began retaining earnings, taking a salary, and used Company funds to make payments on the third route and for expenses of her other companies. Such payments were not contemplated or agreed when Marjac was formed.
The parties had also entered into a Buy/Sell Agreement which provided that upon the termination of Thomas Kriescher's employment by the Company, the Company would repurchase his shares. Despite the cessation of his employment in May 2011, the Company did not repurchase his shares. He continued to be a shareholder and officer.
The Judgment contained the following awards:
Claim
Damages
Tortious interference with Buy/Sell Agreement
$80,000.00
Fraud and misrepresentation regarding assets Gibson was contributing
$20,000.00
Conversion and breach of fiduciary duties and loyalty (retention of Company revenue)
$200,487.00
Statutory attorney fees
$55,702.00
Appraiser to have been paid from Company funds
$2,400.00
Sanction attorney fees
$4,201.25
Failure to timely provide information to appraiser
$1,750.00
The Judgment also concluded the refusal to purchase Plaintiffs' shares pursuant to the Buy/Sell Agreement and the retention of the earnings and value were the result of fraud while acting in a fiduciary capacity.
The Plaintiffs commenced this adversary proceeding by filing a complaint on February 21, 2014 (the “Complaint”). In the Complaint, the Plaintiffs assert the damages for misrepresentation of assets, retention and use of profits, and tortious interference by exercising control over the Company are nondischargeable under 11 U.S.C. § 523(a)(2)(A).3 The Complaint asserts the claims for retention and use of corporate funds are also nondischargeable as embezzlement or as fraud in a fiduciary capacity under 11 U.S.C. § 523(a)(4).4 The Complaint asserts the retention and use of corporate property was a conversion that is nondischargeable under 11 U.S.C. § 523(a)(6).5 Finally, the Complaint asserts the attorneys' fees and certain costs awarded in the Judgment as sanctions are nondischargeable under 11 U.S.C. § 523(a)(6).
The Plaintiffs contend the Judgment supports the application of collateral estoppel and bars the Debtor from contesting dischargeability.
Summary judgment is proper “if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(a), applied through Fed. R. Bankr.P. 7056. When faced with a motion for summary judgment, the court's role is to determine whether there is a genuine issue for trial, not to weigh the evidence to determine the truth. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249, 106 S.Ct. 2505, 2510–11, 91 L.Ed.2d 202 (1986).
“[T]he burden is on the moving party to establish that there is no genuine issue about any material fact, or that there is an absence of evidence to support the nonmoving party's case, and that the moving party is entitled to judgment as a matter of law.” 20 Charles Alan Wright, Arthur R. Miller & Mary Kay Kane, Federal Practice and Procedure § 105 (3d ed. 1998) (citing Celotex Corp. v. Catrett, 477 U.S. 317, 325, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986) ). The party seeking to establish an exception to discharge also bears the burden of proof based on a preponderance of the evidence. Grogan v. Garner, 498 U.S. 279, 291, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991). Exceptions to discharge are to be construed strictly against the creditor and liberally in favor of the debtor. In re Morris, 223 F.3d 548, 552 (7th Cir.2000). Thus, the Court must view all facts and indulge all inferences in the light most favorable to the Debtor.
Federal courts are required to give state court judgments the same preclusive effect that the judgments otherwise have in state court. See Dollie's Playhouse, Inc. v. Nable Excavating, Inc. (In re Dollie's Playhouse, Inc.), 481 F.3d 998, 1000 (7th Cir.2007). If an issue was previously litigated under state law, the law on collateral estoppel of the state where the judgment was rendered applies. Kremer v. Chemical Constr. Corp., 456 U.S. 461, 481–82, 102 S.Ct. 1883, 72 L.Ed.2d 262 (1982) ; Adams v. Adams, 738 F.3d 861, 865 (7th Cir.2013). The prior litigation between the parties took place in Minnesota state court, and therefore Minnesota law on collateral estoppel applies.
Under Minnesota law, collateral estoppel is available when: (1) the issues are identical to those in a prior adjudication, (2) there was a final judgment on the merits, (3) the estopped party was a party or in privity with a party in the previous action, and (4) the estopped party was given a full and fair opportunity to be heard on the adjudicated issues. Ellis v. Minneapolis Comm'n on Civil Rights, 319 N.W.2d 702, 704 (Minn.1982). Collateral estoppel prevents a party from relitigating issues essential to a court's decision in a previous action. See Anderson v. Mikel Drilling Co., 257 Minn. 487, 491, 102 N.W.2d 293, 297 (1960). It does not, however, apply to issues incidentally decided. For example, it does not apply when the court makes findings of fact but the judgment does not depend on those facts. Id. at 297 and n. 8 ().
Consequently, the question on summary judgment in this adversary proceeding is whether the Plaintiffs can satisfy all four collateral estoppel elements with respect to any of the claims for nondischargeability. The facts on which the Judgment necessarily depended must demonstrate that the issues decided in the state court proceeding were identical to the elements of the section 523(a)(2)(A), 523(a)(4), or 523(a)(6) exception they seek to prove. Admissions from the Defendant's answer to the adversary complaint may be added to prove elements of one or more section 523 exceptions.
The parties in the two proceedings are the same, satisfying the third element for collateral estoppel. Additionally, the Judgment is a final judgment. It was not appealed. Thus, the second requirement for collateral estoppel is satisfied.
The fourth element is also satisfied in this case. Under Minnesota law, “a default judgment is not only res judicata to another action on the same claim but collateral estoppel as to those issues pleaded in the complaint.” Roberts v. Flanagan, 410 N.W.2d 884, 886–87 (Minn.Ct.App.1987). The default judgment stands “as a final determination of the facts essential to its existence.”Herreid v. Deaver, 193 Minn. 618, 622, 259 N.W. 189, 191 (1935). This is the case even if the Defendant did not interpose a defense in the action. North Tel, Inc. v. Brandl (In re Brandl), 179 B.R. 620, 626 (Bankr.D.Minn.1995)....
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