Bicknell v. Stanley, No. TH90-13-C

CourtUnited States District Courts. 7th Circuit. United States District Court (Southern District of Indiana)
Writing for the CourtMcKINNEY
Citation118 BR 652
PartiesJames F. BICKNELL, and Debra S. Bicknell, Appellants, v. Joseph H. STANLEY, and Billie Stanley, Appellees. In re James F. BICKNELL and Debra S. Bicknell, Debtors. Joseph H. STANLEY, and Billie Stanley, Plaintiffs, v. James F. BICKNELL, and Debra S. Bicknell, Defendants.
Decision Date28 August 1990
Docket NumberNo. TH90-13-C,Adv. No. 88-0149.,Bankruptcy No. 88-01306TH

118 B.R. 652 (1990)

James F. BICKNELL, and Debra S. Bicknell, Appellants,
Joseph H. STANLEY, and Billie Stanley, Appellees.

In re James F. BICKNELL and Debra S. Bicknell, Debtors.

Joseph H. STANLEY, and Billie Stanley, Plaintiffs,
James F. BICKNELL, and Debra S. Bicknell, Defendants.

No. TH90-13-C, Bankruptcy No. 88-01306TH, Adv. No. 88-0149.

United States District Court, S.D. Indiana, Indianapolis Division.

August 28, 1990.

118 BR 653
118 BR 654
Gary Lynn Hostetler, Jeffrey E. Ramsey, Hostetler & Kowalik, P.C., Indianapolis, Ind., for Bicknells

W.F. Conour, Rex E. Baker, Conour & Doehrman, Indianapolis, Ind., for Stanleys.


McKINNEY, District Judge.

I. Introduction:

On its surface, this bankruptcy appeal presents an easy case to resolve. As will be seen, though, first impressions are often deceiving. The central issue is whether an agreed judgment entered into in state court by the debtors and the creditors in a pre-bankruptcy action should be given collateral estoppel effect in a bankruptcy dischargeability proceeding.

If the Court follows the standard announced by the Seventh Circuit in Klingman v. Levinson, 831 F.2d 1292, 1297 (7th Cir.1987), the prior action will not preclude relitigation of issues relating to the dischargeability of certain debts. This is so because Klingman requires an agreed judgment to clearly indicate that the parties intended issues to be foreclosed in future litigation, and the Agreed Judgment entered into in the prior state-court action in this instance does not meet this standard, at least not at summary judgment.

On the other hand, if this Court applies the standard set forth by the Indiana Court of Appeals in Hanover Logansport v. Robert C. Anderson, Inc., 512 N.E.2d 465 (Ind. App.1987), the prior action will preclude relitigation of such issues. This is so because Hanover Logansport arguably supplies a presumption of preclusion unless an issue is expressly reserved for future litigation in an agreed judgment, and the Agreed Judgment in this case would not meet such a standard.

118 BR 655

The difficulty in this case is not only in choosing between these competing standards, but also determining, in light of other persuasive authority, whether either standard is correct. As will be seen, this task requires a somewhat lengthy analysis in order to reach the proper conclusions. The first step, though, is to set forth the background for this appeal.

II. Factual and Procedural Background:1

The Bicknells operated a mobile home park in Greencastle, Indiana. They decided to incorporate the enterprise and sold shares of stock in the corporation to the Stanleys. The next year, however, the Stanleys were discontented with their investment and brought an action in state court against the Bicknells for violations of state securities laws and for common-law fraud. The Stanleys sought $65,100 plus punitive damages and pre-judgment interest under state securities laws in one count of the complaint, as well as $195,300 (inclusive of treble damages) and prejudgment interest and attorneys fees for common law fraud under another count.

In the securities law count, the Stanleys alleged that the Bicknells failed to register the sale of stock pursuant to Ind.Code § 23-2-1-3. No other specific allegations were included in this count. In the common law fraud count, the Stanleys alleged that the Bicknells solicited the purchase of stock from the Stanleys through misrepresentations and omissions of material facts, including:

1 failure to inform the Stanleys that Bicknell was the owner of 2,000 shares of stock at a certain price per share;
2 failure to inform Stanleys of how many lots were to be purchased by the corporation;
3 and the failure to disclose to the Stanleys the total amount of financing to be raised by the sale of securities in the corporation.

(Complaint at ¶ 18). No other specific allegations of fraud were made in the state-court Complaint.

The state-court action was resolved in August of 1988 by way of an "Agreed Judgment" between the parties. Without delineating any underlying facts, the parties agreed that "judgment should be entered on the Complaint," and the Bicknells agreed to pay the sum of $88,250 in periodic installments. The Agreed Judgment neither discussed nor reserved any particular claims or issues.

Approximately one month later on September 15, 1988, the Bicknells filed a Chapter 7 petition in Bankruptcy Court. Listed on the Debtors' Schedule of unsecured claims was the $88,250 debt to the Stanleys stemming from the Agreed Judgment. Thereafter the Stanleys initiated the present adversary proceeding by filing a Complaint Objecting to Discharge. In their Complaint, the Stanleys alleged that the Debtors had previously admitted fraud and misrepresentation in the Agreed Judgment, and that the debt should be nondischargeable under 11 U.S.C. § 523(a)(2)(A). This Code Section states that a debtor is not discharged from any debt to the extent it was obtained by "false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor's or an insider's financial condition."

The Stanleys also filed a motion for summary judgment, arguing that the Debtors should be collaterally estopped from relitigating the dispositive fraud issue under the nondischargeability provision of § 523(a)(2)(A). In support of their motion, the Stanleys proffered only the Complaint and the Agreed Judgment filed in the state-court action. Although the Stanleys' motion for summary judgment contained numerous unsworn references to other purported evidence, no affidavits, discovery materials, or other evidence is found in the record.2 Although the Debtors argued

118 BR 656
that dischargeability issues are within the exclusive jurisdiction of the Bankruptcy Court, the Stanleys' motion was granted

III. The Decision Below:

In a seven-page written opinion, the Bankruptcy Court held that the state-court Agreed Judgment operated to bar further litigation of any fraud issues under the doctrine of collateral estoppel, which is also known as issue preclusion.3 After setting forth the Seventh Circuit's standard from Klingman, which allows issue preclusion from a consent judgment only if that judgment clearly shows that the parties intended issues to be foreclosed in future litigation, the Bankruptcy Court then suddenly shifted, without explanation, to the seemingly contrary standard used by the Indiana Court of Appeals in Hanover Logansport.

Under Hanover Logansport, an agreed judgment will have preclusive effect unless a claim is reserved by express incorporation in the judgment. Applying this standard, the Bankruptcy Court held that "no reservation was made in the Agreed Judgment between the plaintiff and the defendants in the matter at bar." The court added, "Because the parties negotiated the Agreed Judgment under Indiana law, and because no reservation was made, the Agreed Judgment shall collaterally estop the defendants from relitigating the questions decided in the state-court." The Bankruptcy Court thus held that the debt was nondischargeable under § 523(a)(2)(A).

The Debtors filed a timely appeal from the Bankruptcy Court's entry of judgment, and this Court has jurisdiction to hear the matter. Before reaching the issues raised, the appropriate standard of review must be outlined.

IV. Standards of Review:

In reviewing a decision of the bankruptcy court, this District Court acts as an appellate tribunal and is governed by traditional standards of appellate review. Where, as here, only legal issues are in question, the decision must be reviewed de novo. Excalibur Auto Corp., 859 F.2d 454, 457, n. 3 (7th Cir.1988); Longardner & Associates, Inc., 855 F.2d 455, 459 (7th Cir.1988).

Indeed, appellate courts are required to give de novo review to summary judgment decisions. Toys "R" Us, Inc. v. NBD Trust Co., 904 F.2d 1172, 1175-76 (7th Cir.1990); Central States, S.E. & S.W. Areas Regional Pension Fund v. Jordan, 873 F.2d 149, 152 (7th Cir.1989). This is equally true in this setting where the Bankruptcy Court ruled on a summary judgment motion. In re Tobman, 107 B.R. 20, 23 (S.D.N.Y.1989). This is so because in adversary proceedings, the bankruptcy courts are required to follow the same summary judgment standards used by the district courts in general civil litigation. See Bankruptcy Rule 7056 ("Rule 56 F.R.Civ.P. applies in adversary proceedings."); In re Brown, 79 B.R. 789, 792 (Bankr.N.D.Ill. 1987).

In this light, it should be noted that, although both appellate briefs are otherwise well written, the Stanleys' brief contains numerous references to purported "evidence" that is not in the record. Included among the brief's "Statement of Facts" are the following unsupported comments:

— The Stanleys paid for the stock by mortgaging their home. . . .
118 BR 657
— In August of 1987, the Stanleys . . . discovered that the corporation was fast approaching insolvency.
— The Bicknells were advised by their attorney that the Agreed Judgment admitting fraud and illegal conduct would not be dischargeable in bankruptcy proceedings.
— The Bicknells . . . are also the subject of a criminal investigation by the Putnam County Prosecutor\'s Office. . . .

Brief. at 2-4).

The reference to the Debtors' attorney purportedly advising the Debtors of the preclusive effect of the Agreed Judgment, which is repeated again at pages 6 and 12 of the brief, is particularly inappropriate for several reasons. First, as noted before there is no evidence in the record supporting this assertion. It is axiomatic that admissible evidence rather than unsworn commentary must be used to support and defend motions for summary judgment. See Fed.R.Civ.P. 56(e); Mid-State Fertilizer v. Exchange National Bank, 877 F.2d 1333, 1339-40 (7th Cir.1989).

Second, putting aside for the moment any issues of attorney-client...

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