Animal Blood Bank, Inc. v. Hale (In re Hale), Case No. 11-33589-dof

Decision Date24 April 2014
Docket NumberCase No. 11-33589-dof,Adv. Pro. No. 11-03501-dof
PartiesIn re: ANNE S. HALE, Debtor. ANIMAL BLOOD BANK, INC, MICHAEL W. KAUFMAN, and PATRICIA M. KAUFMAN, Plaintiffs, v. ANNE S. HALE, Defendant.
CourtU.S. Bankruptcy Court — Eastern District of Michigan
Chapter 7 Proceeding

Hon. Daniel S. Opperman

OPINION GRANTING PLAINTIFFS' MOTION FOR SUMMARY JUDGMENT

The matter before the Court is the Plaintiffs' Motion for Summary Judgment, in which the Plaintiffs argue that they are entitled to summary judgment on their §§ 523(a)(2)(A), (a)(4), and (a)(6) counts based on the collateral estoppel effect of an Order issued by the United States District Court for the Eastern District of California granting the Plaintiffs' Motion for Default Judgment and determining that the Defendant committed fraud, breached her fiduciary duty, and misappropriated trade secrets.

JURISDICTION

This Court has jurisdiction over this matter pursuant to 28 U.S.C. § 157, 28 U.S.C. § 1334 and E.D. Mich. LR 83.50. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(I) (determinations as to the dischargeability of particular debts).

The issues before the Court arise from Title 11 of the United States Code and are therefore within this Court's jurisdiction pursuant to Stern v. Marshall, 131 S. Ct. 2594 (2011), and Waldman v. Stone, 698 F.3d 910 (6th Cir. 2012).

BACKGROUND FACTS AND PROCEDURAL HISTORY

Anne Hale ("Defendant") filed her Chapter 7 bankruptcy petition after ten months of litigation with Michael and Patricia Kaufman and their company, Animal Blood Bank ("ABB") (collectively referred to as "Plaintiffs"), in the United States District Court for the Eastern District of California ("California Court"), Animal Blood Bank, Inc. et al. v. Hale, Case No. 2:10-cv-02080-KJM-KJN.

Michael and Patricia Kaufman formed ABB as a California corporation in 2002. ABB is in the business of providing animal blood and blood products to the veterinary industry.

In general, the California Court case arose out of the merger of the Defendant's company, MidWest Animal Blood Services, Inc. ("MABS") with and into ABB. The merger closed on July 16, 2008. The Defendant was the president and chief executive officer of ABB from June 22, 2008, until her resignation in May of 2010. Over the course of her relationship with ABB, the Plaintiffs allege the Defendant breached her fiduciary duties to ABB, breached her contracts with the Plaintiffs, defrauded the Plaintiffs, and misappropriated ABB's trade secrets and proprietary information.

The Plaintiffs filed a complaint in the California Case on August 4, 2010. The Defendant filed an Answer and Counterclaims on October 8, 2010. On August 3, 2011, the Plaintiffs' counsel filed a Notice of Filing Bankruptcy as to the Defendant. On October 24, 2011, the district judge stayed the California Case due to the pendency of the Defendant's bankruptcy proceeding.

On October 24, 2011, the Plaintiffs filed the pending adversary proceeding seeking a judgment that the claims pending in the California Court were nondischargeable on October 24, 2011. On December 9, 2011, ABB filed a motion to lift the automatic stay in the Defendant's bankruptcy case to allow the underlying issues to be litigated in the California Court. Neither the Chapter 7 Trustee nor the Defendant filed a response to ABB's Motion to Lift the Stay. The Court entered an Order Lifting the Automatic Stay, allowing the California Case to proceed, and staying the adversary proceeding on December 29, 2011. On January 8, 2012, the Trustee filed a Motion for Reconsideration of the Court's December 29, 2011, Order. The Defendant joined the Trustee's Motion. The Court held a hearing on the Motion for Reconsideration and entered an Order denying it on February 1, 2012.

On February 10, 2012, the district judge lifted the stay in the California Case. After the stay was lifted, the Defendant ceased participating in the California case, despite multiple court orders directing her to do so. After a hearing on a motion to compel on May 3, 2012, and having determined that neither the Defendant or the Chapter 7 Bankruptcy trustee who "owns" the Defendant's counterclaims intended to participate in the litigation, the California Court entered an order to show cause directing the Defendant to show cause why: (1) her answer should not be stricken; (2) a default should not be entered; and (3) her counterclaims should not be dismissed with prejudice. The California Court ordered the Chapter 7 bankruptcy trustee, Michael A.Mason, to similarly show cause in regard to the dismissal of Defendant's counterclaims. Neither defendant nor Mr. Mason filed a response to the order to show cause. Accordingly, the California Court recommended that: (1) the Clerk of Court be directed to strike the Defendant's answer to the Plaintiffs' complaint and enter the Defendant's default; and (2) the Defendant's counterclaims be dismissed with prejudice. The order to show case warned that the Defendant's and the Trustee's failures to respond to the order to show cause would constitute consent to those recommendations. On July 2, 2012, the district judge issued an order dismissing Defendant's counterclaims, pursuant to the parties' stipulation.

On August 21, 2012, the district judge issued an order partially adopting the Findings and Recommendations of the magistrate judge. Therein, the district judge directed the Clerk of the Court to: (a) strike the Defendant's answer to the Plaintiffs' complaint; and (b) enter the Defendant's default with respect to the Plaintiffs affirmative claims. On October 3, 2012, the Clerk of the Court entered the Defendant's default pursuant to the district judge's Order.

On September 20, 2012, the Plaintiffs filed a Motion for Default Judgment against the Defendant and served a copy of the motion on the Defendant. The Defendant did not file a response to the Motion for Default Judgment.

On November 19, 2012, the magistrate judge overseeing the California Case issued Findings and Recommendations. On August 8, 2013, the California Court issued its Order, which adopted the Findings and Recommendations with the exception of the attorney fee award, which it reduced to $242,167.50. Specifically, the California Court (1) granted the Plaintiffs' Motion for Default Judgment, (2) entered a default judgment against the Defendant for the breach of contract, breach of fiduciary duty, misappropriation of trade secrets, and fraud claims; and (3) awarded damages.

APPLICABLE LAW
A. Summary Judgment Standard

Federal Rule of Civil Procedure 56 is made applicable in its entirety to bankruptcy adversary proceedings by Fed. R. Bankr. P. 7056. Federal Rule of Bankruptcy Procedure 7056(c) provides that summary judgment is proper "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." See Choate v. Landis Tool Co., 46 F. Supp. 774 (E.D. Mich. 1980). The moving party bears the burden of showing the absence of a genuine issue of material fact as to an essential element of the non-moving party's case. Street v. J.C. Bradford & Co., 886 F.2d 1472 (6th Cir. 1989) (citing Celotex Corp. v. Catrett, 477 U.S. 317, 106 S. Ct. 2548, 91 L.Ed.2d 265 (1986)). The burden then shifts to the nonmoving party once the moving party has met its burden, and the nonmoving party must then establish that a genuine issue of material fact does indeed exist. Janda v. Riley-Meggs Industries, Inc., 764 F. Supp. 1223, 1227 (E.D. Mich. 1991).

B. Collateral Estoppel
The Supreme Court has held that the doctrine of collateral estoppel is applicable in dischargeability proceedings. Grogan v. Garner, 498 U.S. 279, 284 n.11, 111 S.Ct. 654, 658, 112 L.Ed.2d 755 (1991). Federal common law governs the claim-preclusive effect of all federal court judgments. Semtek Int'l Inc. v. Lockheed Martin Corp., 531 U.S. 497, 507-8, 121 S.Ct. 1021, 1027-28, 149 L.Ed.2d 32 (2001). While the federal rule applied to federal judgments in diversity cases generally requires the application of the issue preclusion rules of the state in which the federal diversity court sits, federal issue preclusion law applies to federal judgments in federal question cases. See id.

In re Trantham, 304 B.R. 298, 305 (B.A.P. 6th Cir. 2004).

Here, the federal district court that decided the California case is in California and has diversity jurisdiction. Accordingly, this Court should apply the issue preclusion rules of the state of California in this case.

California courts will apply collateral estoppel only if certain threshold requirements are met, and then only when its application furthers the public policies underlying the doctrine. See Harmon v. Kobrin (In re Harmon), 250 F.3d 1240, 1245 (9th Cir. 2001). Pursuant to California law, courts may apply collateral estoppel if the following threshold requirements are met:
First, the issue sought to be precluded from relitigation must be identical to that decided in a former proceeding. Second, this issue must have been actually litigated in the former proceeding. Third, it must have been necessarily decided in the former proceeding. Fourth, the decision in the former proceeding must be final and on the merits. Finally, the party against whom preclusion is sought must be the same as, or in privity with, the party to the former proceeding.
Id. (internal quotation marks omitted).

In re Lopez, 378 Fed. Appx. 610, 611 (9th Cir. 2010).

ANALYSIS

In determining if the doctrine of collateral estoppel is applicable in this adversary proceeding, the Court must consider the following elements: (1) the issue to be precluded is identical to the issue in the former proceeding; (2) the issue was actually litigated in the former proceeding; (3) the issue was necessarily decided in the former proceeding; (4) the judgment in the former...

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