Blake v. Custom Recycling Servs., Inc.

• Decision Date: 03 November 2015
• Docket Number: CIVIL ACTION NO. 1:15-ev-00055-GHD
• Court: U.S. District Court — Northern District of Mississippi
• Parties: CHARLES NATHAN BLAKE APPELLANT v. CUSTOM RECYCLING SERVICES, INC. APPELLEE

CHARLES NATHAN BLAKE APPELLANT v. CUSTOM RECYCLING SERVICES, INC. APPELLEE

CIVIL ACTION NO. 1:15-ev-00055-GHD

UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF MISSISSIPPI ABERDEEN DIVISION

November 3, 2015

MEMORANDUM OPINION

Presently before the Court is Appellant Charles Nathan Blake's appeal to reverse the United States Bankruptcy Court for the Northern District of Mississippi's memorandum opinion [2] and final judgment [3] issued on August 25, 2014. Appellee Custom Recycling Services, Inc. responded with its brief [30] to affirm the opinion and final judgment, and Appellant Charles Nathan Blake submitted a reply brief [34]. The Court held oral argument on October 9, 2015. Upon due consideration of this well briefed and argued appeal, this Court finds that the memorandum opinion and final judgment of the United States Bankruptcy Court for the Northern District of Mississippi should be affirmed in all respects.

A. Procedural Background

On November 29, 2007, Plaintiff-Appellee Custom Recycling Services, Inc. ("Appellee") filed a diversity action against Defendant-Appellant Charles Nathan Blake ("Appellant") and Defendant Blake Equipment Sales, LLC (collectively, "Blake") in the United States District Court for the Northern District of Mississippi (the "District Court") in a case styled Custom Recycling Services, Inc. v. Charles Nathan Blake et al., No. 1:07-cv-00306-MPH-JAD, wherein Appellee alleged that Blake had converted certain equipment and funds from its business. See Dist. Ct. Compl. [31] at 34-41. Blake moved for extra time to file an answer to the complaint, but never filed an answer. While the District Court case was pending, Appellant filed a voluntary petition for relief pursuant to Chapter 7 of Title 11 of the United States Code in the United States Bankruptcy Court for the Northern District of Mississippi (the "Bankruptcy Court") in case No. 08-1378G-JDW. Shortly thereafter, Blake filed a motion to stay further proceedings in the District Court case pending the outcome of the Bankruptcy Court case which was granted by the District Court. Appellee then filed a motion for relief from the stay in Bankruptcy Court; the motion stated Appellee's desire to proceed in the District Court case and allow that court to resolve the issue of whether the debt was dischargeable. The Bankruptcy Court entered an order lifting the stay, allowing the District Court case to resume, and stating that the District Court complaint alleged actions in the nature of theft, conversion, larceny, or willful and malicious injury—any of which if proven could constitute an exception to discharge pursuant to 11 U.S.C. § 523(a)(2)(A), (4), and (6). Appellee subsequently filed a motion for default judgment in the District Court case. On September 24, 2010, the District Court entered default judgment against Blake.

Thereafter, Appellee filed a complaint in Bankruptcy Court, asserting that the debt owed by Blake was nondischargeable pursuant to 11 U.S.C. § 523(A)(4) (fraud, defalcation, embezzlement, or larceny) and (6) (willful and malicious injury). Appellee additionally asserted that the doctrine of collateral estoppel precluded the religitation in Bankruptcy Court of these issues. On August 7, 2014, the Bankruptcy Court conducted phase one of a bifurcated trial to determine whether collateral estoppel applied to the case. The Bankruptcy Court found that collateral estoppel applied and precluded further litigation on the issue due to the willful and malicious discharge exception found in 11 U.S.C. § 523(a)(6).

On September 8, 2014, Appellant filed his notice of appeal [1] to this Court from the Bankruptcy Court's memorandum opinion [2] and final judgment [3] dated August 25, 2014.The parties subsequently filed briefs and presented their arguments before the Court in an oral argument held on October 9, 2015.

B. Standard of Review

A party who is dissatisfied with a bankruptcy court's final decision can appeal to the district court for the judicial district in which the bankruptcy judge is serving under 28 U.S.C. § 158(a)(1), which grants district courts jurisdiction to hear appeals from final judgments of adjunct bankruptcy courts. In an appeal of a core proceeding in Bankruptcy Court, such as this one, this Court reviews the Bankruptcy Court's factual findings for clear error and conclusions of law de novo. See In re Croft, 737 F.3d 372, 374 (5th Cir. 2013).

C. Analysis and Discussion

On appeal, Appellant argues that the Bankruptcy Court erred in finding that collateral estoppel applied, precluded further hearing on the merits in the discharge proceedings, and determined that the debt was nondischargeable pursuant to 11 U.S.C. § 523(a)(6), which provides that "[a] discharge [in bankruptcy] . . . does not discharge an individual debtor from any debt . . . for willful and malicious injury by the debtor to another entity or to the property of another entity." See 11 U.S.C. § 523(a)(6). Appellant specifically argues to this Court as follows: (1) the Bankruptcy Court failed to correctly apply the federal preclusion standard to the District Court judgment, because the discharge issue was not actually litigated or fully and fairly litigated in that court; (2) the issues in both cases were not identical, because intent to injure was never pleaded, litigated, or necessary to the District Court action; and (3) the Bankruptcy Court abdicated its duty by allowing the District Court to effectively decide the dischargeability issue. The Court examines Appellant's arguments in the context of the doctrine of collateral estoppel.

Appellant first contends that the Bankruptcy Court inappropriately relied on Pancake v. Reliance Insurance Co. (In re Pancake), 106 F.3d 1242 (5th Cir. 1997), a bankruptcy case that found collateral estoppel applied to a state court default judgment, when the Bankruptcy Court should have instead applied the federal standard of collateral estoppel. Appellant further maintains that he did not have a full and fair opportunity to litigate the issue in the District Court action, specifically, that, using the language of an Eleventh Circuit Court of Appeals case, Appellant did not "have . . . a fair opportunity procedurally, substantively[,] and evidentially to contest the issue." See In re Bush, 62 F.3d 1319, 1323 (11th Cir. 1995). Appellant argues that he consistently maintained in Bankruptcy Court that he could not afford counsel in the District Court proceeding and had no idea how to defend the District Court suit. Finally, Appellant maintains that the Bankruptcy Court improperly gave preclusive effect to the default judgment based the Appellee's evidentiary submission.

Appellee's position is that Appellant had the opportunity to participate in the District Court proceeding, but did not do so, specifically, that Appellant did not show a colorable defense, file an answer, or attempt to have the default judgment set aside. Appellee further maintains that Appellant was served a summons, as well as notices of all hearings and filings, leading up to the judgment. Thus, Appellee maintains that the issue was actually litigated in the District Court, and consequently, that the Bankruptcy Court's finding is not clearly erroneous.

A bankruptcy court's decision to give preclusive effect to a district court judgment is a question of law that this Court reviews de novo. See Caton v. Trudeau (In re Caton), 157 F.3d 1026, 1029 (5th Cir. 1998), as amended on reh'g (Nov. 3, 1998). Collateral estoppel, otherwise known as issue preclusion, "bars 'successive litigation of an issue of fact or law actually litigated and resolved in a valid court determination essential to the prior judgment,' even if the issuerecurs in the context of a different claim." Taylor v. Sturgell, 553 U.S. 880, 892, 128 S. Ct. 2161, 171 L. Ed. 2d 155 (2008) (quoting New Hampshire v. Maine, 532 U.S. 742, 748-49, 121 S. Ct. 1808, 149 L. Ed. 2d 968 (2001)). "By 'preclud[ing] parties from contesting matters that they have had a full and fair opportunity to litigate,' [collateral estoppel] protects against 'the expense and vexation attending multiple lawsuits, conserv[es] judicial resources, and foste[rs] reliance on judicial action by minimizing the possibility of inconsistent decisions.' " Id., 128 S. Ct. 2161 (quoting Montana v. United States, 440 U.S. 147, 153-54, 99 S. Ct. 970, 59 L. Ed. 2d 210 (1979)).

Because the default judgment against Appellant arose from a federal court, federal principles of collateral estoppel control. See Taylor, 553 U.S. at 891, 128 S. Ct. 2161 ("The preclusive effect of a federal-court judgment is determined by federal common law."). See generally R. Fallon, D. Meltzer, & D. Shapiro, Hart and Wechsler's The Federal Courts and the Federal System 1473 (4th ed. 1996); Degnan, Federalized Res Judicata, 85 Yale L.J. 741 (1976). The United States Supreme Court has explained the complicated nature of federal collateral estoppel:

Neither the Full Faith and Credit Clause, U.S. Const., Art. IV, § 1, nor the full faith and credit statute, 28 U.S.C. § 1738, addresses the question. By their terms they govern the effects to be given only to state-court judgments (and, in the case of the statute, to judgments by courts of territories and possessions). And no other federal textual provision, neither of the Constitution nor of any statute, addresses the claim-preclusive effect of a judgment in a federal diversity action.

. . .

Nationwide uniformity in the substance of the matter is better served by having the same claim-preclusive rule (the state rule) apply whether the dismissal has been ordered by a state or a federal court. This is, it seems to us, a classic case for adopting, as thefederally prescribed rule of decision, the law that would be applied by state courts in the State in which the federal diversity court sits.

Semtek Int'l Inc. v. Lockheed Martin Corp., 531 U.S. 497, 506-07, 508, 121 S. Ct. 1021, 149 L. Ed. 2d 32 (2001) (quotation marks...