Chamberlain v. Messer (In re Messer)

• Decision Date: 18 October 2013
• Docket Number: Bankruptcy No. 10–70444.,Adversary No. 10–7612.
• Parties: In re Bill Joseph MESSER, Debtor. Virginia H. Chamberlain, et al., Plaintiffs, v. Bill Joseph Messer, Defendant.
• Court: United States Bankruptcy Courts. Tenth Circuit. U.S. Bankruptcy Court — Eastern District of Michigan

500 B.R. 875

In re Bill Joseph MESSER, Debtor.Virginia H. Chamberlain, et al., Plaintiffs,

v.Bill Joseph Messer, Defendant.

Bankruptcy No. 10–70444.

Adversary No. 10–7612.

United States Bankruptcy Court,

E.D. Michigan,

Southern Division.

Oct. 18, 2013.

Dan E. Bylenga, Jr., Joseph Alexander Lucas, Grand Rapids, MI, for Plaintiffs.

Fred Sackllah, Canton, MI, for Defendant.

OPINION REGARDING MOTIONS FOR SUMMARY JUDGMENT

THOMAS J. TUCKER, Bankruptcy Judge.

In this adversary proceeding, Plaintiffs seek a determination that a debt in the amount of $134,074.95 is nondischargeable under 11 U.S.C. §§ 523(a)(2)(A) and (B), 523(a)(4), and 523(a)(6).¹ The debt is based on a prior state court default judgment, entered pre-petition in favor of Plaintiffs and against Defendant/Debtor (“Defendant”), on a multiple-count amended complaint (the “Default Judgment”). This adversary proceeding is before the Court on cross-motions for summary judgment (collectively, the “Motions”).²

Plaintiffs' motion for summary judgment (“Plaintiffs' Motion”) ³ seeks summary judgment on all counts of the adversary complaint, based entirely on collateral estoppel. Plaintiffs argue that under the doctrine of collateral estoppel, the Default Judgment precludes Defendant from disputing the non-dischargeability of the debt.⁴

Defendant's Motion seeks summary judgment on all counts of Plaintiffs' adversary complaint.

The Court held a hearing on the Motions. During the hearing, the parties requested the opportunity to file briefs to address the relevance of, and impact on the Motions of, Mich. Comp. Laws § 450.4404(5), and the Court granted this request. Also during the hearing, the Court required Defendant's counsel to file a transcript of the oral argument in the state court on a motion by Defendant to set aside the Default Judgment.⁵ Defendant then filed transcripts of two state court hearings, which in part, concerned the motion by Defendant to set aside the Default Judgment.⁶

The Court concludes that, based on the undisputed facts in the record, Plaintiffs' Motion must be denied, for the reasons stated in this opinion below. The Court also concludes that Defendant's Motion must be denied, because there are genuine issues of material fact precluding summary judgment for Defendant.

I. FactsA. The state court action

On August 13, 2009, Plaintiffs filed an amended complaint against Defendant and various corporate defendants in the Kent County, Michigan, Circuit Court ( Chamberlain v. Messer, Case No. 09–07287–CK).⁷ The amended complaint contained the following eight counts: “Count I—Breach of Promissory Notes (All Defendants)”; “Count II—Fraud in the Inducement (Defendant Mr. Messer)”; “Count III—Breach of the November 2005 Agreement and Rockford Operating Agreement & Violation of the Michigan Limited Liability Company Act (Defendant Mr. Messer)”; “Count IV—Breach of Fiduciary Duties (Defendant Mr. Messer)”; “Count V—Unjust Enrichment/Conversion (All Defendants)”; “Count VI—Tortious Interference/Usurpation of Corporate Opportunity (Defendants Mr. Messer and Messer Mobility)”; “Count VII—Accounting”; and “Count [VIII] ⁸—Temporary Restraining Order & Appointment of Receiver.” When Defendant and the corporate defendants failed to timely file answers to the amended complaint, defaults were entered against each of the corporate defendants, but not against the Defendant. Apparently, a default was not entered at that time against Defendant, because the state court erroneously believed that Defendant was a debtor in a pending bankruptcy case.

“On September 16, 2009, the [P]laintiffs formally filed a notice of entry of judgment, including a proposed judgment against all of the defendants for $134,074.95, and wrote in that notice that the defendants had to file written objections within seven days to prevent entry of the proposed judgment.” ⁹ On September 24, 2009, an objection to entry of the proposed default judgment “was filed on behalf of ‘the [d]efendants ... except [Defendant] Bill Messer.’ ” ¹⁰ The objection stated that “[Defendant] Bill Messer has filed personal bankruptcy and no Judgment can or should be entered against him.” ¹¹ In their objection, the corporate defendants “moved to set aside all of the defaults” against them and objected to entry of default judgments against them.¹²

B. The state court Default Judgment

On September 25, 2009, upon discovering that there was no pending bankruptcy case in which Defendant was a debtor, the state court, without first holding a hearing, entered a default and the Default Judgment against Defendant, individually, and in favor of Plaintiffs, in the amount $134,074.95.¹³ The Default Judgment provided, in relevant part: “IT IS ORDERED this judgment is granted in favor of the plaintiff(s) as follows. Damages: $132,966.40 Costs: $1,033.55 Attorney fee/Other $75.00 Total Judgment: $134,074.95 ” ¹⁴ The Default Judgment was a pre-printed form on which there were blank lines to fill in the total amount of Default Judgment, and the various amounts on which the total Default Judgment amount was computed. There is no indication whatsoever in the Default Judgment that the judgment was being entered on all counts of the Plaintiffs' amended complaint, or on which counts the judgment was being entered.

On November 11, 2009, Defendant filed a motion to set aside the Default Judgment.¹⁵ The state court held hearings on November 13, 2009 and December 11, 2009, which, in part, dealt with Defendant's motion to set aside the Default Judgment.¹⁶ At the conclusion of the December 11, 2009 hearing, the state court took the issue of whether to set aside the Default Judgment under advisement.

On January 7, 2010, the state court entered an opinion denying Defendant's motion to set aside the Default Judgment, because it had been filed after the 21–day time limit for bringing such a motion under Mich. Ct. R. 2.603(D)(2)(b).¹⁷ The opinion stated that the Default Judgment was “fully enforceable.” ¹⁸

II. Jurisdiction

This Court has subject matter jurisdiction over this adversary proceeding under 28 U.S.C. §§ 1334(b), 157(a) and 157(b)(1), and Local Rule 83.50(a) (E.D. Mich.). This is a core proceeding under 28 U.S.C. § 157(b)(2)(I).

III. Discussion of Plaintiffs' Motion

The issue before the Court on Plaintiffs' Motion is whether under the doctrine of collateral estoppel, the Default Judgment bars Defendant from contesting the dischargeability of the $134,074.95 judgment debt under 11 U.S.C. §§ 523(a)(2), 523(a)(4), and/or 523(a)(6).

A. The collateral estoppel doctrine

The Court reiterates the following discussion of collateral estoppel, which appears in this Court's opinion in McCallum v. Pixley (In re Pixley), 456 B.R. 770, 775–76 (Bankr.E.D.Mich.2011):

Collateral estoppel applies in nondischargeability proceedings under the Bankruptcy Code, such as this adversary proceeding. Grogan v. Garner, 498 U.S. 279, 284 n. 11, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991). “Collateral estoppel ... prevents a party from relitigating issues of fact or law which were necessarily decided by a previous final judgment.” Smith v. Sushka, 117 F.3d 965, 969 (6th Cir.1997). In determining whether a state court judgment precludes relitigation of § 523(a) issues under the doctrine of collateral estoppel, the Full Faith and Credit Statute, 28 U.S.C. § 1738, requires bankruptcy courts to “ ‘consider first the law of the State in which the judgment was rendered to determine its preclusive effect.’ ” Bay Area Factors v. Calvert (In re Calvert), 105 F.3d 315, 317 (6th Cir.1997) (quoting Marrese v. Am. Acad. of Orthopaedic Surgeons, 470 U.S. 373, 375, 105 S.Ct. 1327, 84 L.Ed.2d 274 (1985)). If the state courts would not deem the judgment binding under collateral estoppel principles, then the bankruptcy court cannot do so either. But if the state courts would accord a preclusive effect to the judgment, then the bankruptcy court must also give the judgment preclusive effect, “unless Congress has expressly or impliedly created an exception to § 1738 which ought to apply to the facts before the federal court.” Id. (citing Marrese, 470 U.S. at 386, 105 S.Ct. 1327).

In Calvert, the Sixth Circuit held that there is no such express or implied exception under § 1738 in dischargeability actions. The court found no indication of such an exception “in the Bankruptcy Code or legislative history.” And the court reasoned that there is “no principled distinction between cases where a defendant participates in part in defense of the state court suit and cases where the defendant does not respond at all.” 105 F.3d at 322. The court held that “collateral estoppel applies to true default judgments in bankruptcy dischargeability proceedings in those states which would give such judgments that effect.” Therefore, the Court must look to the law of Michigan to determine the collateral estoppel effect of the Default Judgment on the issues in this adversary proceeding.

Under Michigan law, the following requirements must be met in order for collateral estoppel to apply:

1) there is identity of parties across the proceedings,

2) there was a valid, final judgment in the first proceeding,

3) the same issue was actually litigated and necessarily determined in the first proceeding, and

4) the party against whom the doctrine is asserted had a full and fair opportunity to litigate the issue in the earlier proceeding.

Phillips v. Weissert (In re Phillips), 434 B.R. 475, 485 (6th Cir. BAP 2010) (citation omitted).

Id. (footnote omitted).

In determining whether a debt arising out of a judgment is within an exception to discharge, the language of the judgment itself is not controlling, but rather the Court must look to the “entire record in the original action” to determine the “exact nature of the debt on which such judgment was based.” See Tudryck v. Mutch, 320 Mich. 86, 30 N.W.2d 512, 514 (1948) (Bankruptcy Act case). “It is well settled that the court will look behind a note, a mortgage, or even a...