Docteroff, In re

• Decision Date: 02 December 1997
• Docket Number: No. 97-5095,97-5095
• Citation: 133 F.3d 210
• Parties: 32 Collier Bankr.Cas.2d 248, 40 Fed.R.Serv.3d 214, Bankr. L. Rep. P 77,597 In re Norman DOCTEROFF, Debtor, Bert L. WOLSTEIN; Lady Iris Corporation v. Norman DOCTEROFF, Appellant. . Submitted Under Third Circuit LAR 34.1(a)
• Court: U.S. Court of Appeals — Third Circuit

Page 210

133 F.3d 210

32 Collier Bankr.Cas.2d 248, 40 Fed.R.Serv.3d 214,

Bankr. L. Rep. P 77,597

In re Norman DOCTEROFF, Debtor Bert L. WOLSTEIN; Lady Iris Corporation v. Norman DOCTEROFF, Appellant.

No. 97-5095.

United States Court of Appeals, Third Circuit.

Submitted Under Third Circuit

LAR 34.1(a) Dec. 2, 1997.

Decided Dec. 30, 1997.

Bruce Buechler, Ravin, Sarasohn, Cook, Baumgarten, Fisch & Baime, Roseland, NJ, for Appellant.

Bruce S. Etterman, Hellring, Lindeman, Golstein & Siegal, Newark, NJ, for Appellees.

Before: COWEN, McKEE, and ROSENN, Circuit Judges.

OPINION OF THE COURT

ROSENN, Circuit Judge.

In this case, we must decide whether a default judgment entered against a defendant in a fraud action as a sanction for the defendant's repeated and bad-faith refusals to comply with discovery requests collaterally estops the defendant from claiming that the debt underlying the judgment is dischargeable in bankruptcy. The United States District Court for the District of New Jersey and the bankruptcy court held that collateral estoppel applied. We affirm.

I.

On May 25, 1989, the Burger Boat Company, Inc. ("Burger") agreed to custom build a 105-foot luxury yacht for Bert L. Wolstein to be delivered to Wolstein in August 1990 for a purchase price of approximately $4.5 million. The yacht was to be called the Lady Iris. Pursuant to the terms of the agreement, Wolstein received a security interest in the yacht while it was under construction. Burger required Wolstein to make payments billed by Burger as the construction of the yacht proceeded. These progress payments were to be used to construct the yacht. Construction of the yacht commenced.

In March 1989, Tacoma Boatbuilding Company ("Tacoma"), in a leveraged buy out, purchased Burger for $3 million in cash to be paid prior to the sale's closing and a $1 million promissory note. The debtor in this case, Norman Docteroff, is a director and officer of Tacoma. Tacoma established United Shipbuilding of America, Inc. ("USA"), a holding company which would own the Burger capital stock following the purchase. Thus, there was a direct corporate link between Tacoma, USA, and Burger. USA had no revenues or operations and merely owned the Burger capital stock. In order to complete the purchase, Docteroff and an associate, Manuel Charach, loaned $3 million to USA which USA used to pay the cash portion of the Burger sale price. USA agreed to repay the $3 million to Docteroff and Charach in monthly payments over the next five years. Between July 1989 and January 1990, Docteroff and Charach loaned USA an additional $2.8 million. To secure the loan of this money to USA, Docteroff obtained a security interest in all of Burger's assets, a pledge of USA's Burger stock, and a mortgage on some of Burger's real property. USA's payments to Docteroff and Charach amounted to approximately $70,000 per month.

Eventually, USA became unable to pay the monthly debt payments to Docteroff and Charach. To keep the money flowing to him, Docteroff and others diverted Wolstein's progress payments from Burger to USA. USA then used those moneys to make the monthly debt payments to Docteroff. Docteroff did not disclose to Wolstein that the progress payments were not being used to pay for expenses associated with the construction of the Lady Iris, that the payments were being used to repay USA's debt to Docteroff, and that the diversion of the payments caused Burger to be unable to meet its obligation to build the Lady Iris.

In November 1990, Burger ceased operations, including its work on the Lady Iris. Wolstein and a corporation he formed, Lady Iris Corp., foreclosed on his security interest in the partially completed yacht, and formed another corporation, Manitowoc Boat Works, Inc., for the purpose of completing the Lady Iris construction. Ultimately, Wolstein built the yacht, but at a much greater expense than the one on which he and Burger agreed. On May 20, 1993, Wolstein and Lady Iris Corp. filed suit in the United States District Court for the Western District of Washington, alleging that Docteroff and several others defrauded him by, among other things, failing to disclose that his progress payments were being improperly diverted to pay the debt owing to Docteroff, the ultimate effect of which was to shut down Burger's operations. Docteroff filed an answer denying that he defrauded Wolstein. He also noticed Wolstein's deposition.

In the months following the filing of the complaint in the Washington case, Docteroff repeatedly and in bad faith refused to submit to properly noticed depositions or respond to numerous legitimate requests for the production of documents despite court orders and warnings. The district court found that Docteroff's "non-compliance with discovery rules and Court orders was the product of willfulness and bad faith." Wolstein v. Bernardin, 159 F.R.D. 546, 552 (W.D.Wash.1994). As a sanction for Docteroff's improper conduct, pursuant to Federal Rule of Civil Procedure 37(d), the district court entered default judgment against him on the issue of liability and scheduled trial on damages. See 159 F.R.D. at 553. Docteroff concedes that the effect of the court's order was to make him "liable to [Wolstein and Lady Iris, Corp.] as pled in the complaint." On the day the trial was scheduled to begin, Docteroff filed a Chapter 11 bankruptcy petition in the United States Bankruptcy Court for the District of New Jersey, which, because of the automatic stay, see 11 U.S.C. § 362(a)(1), had the effect of preventing the trial on damages.

The plaintiffs then filed this adversary action against Docteroff in the New Jersey bankruptcy case. They alleged that the Washington court's order entering default judgment against Docteroff collaterally estopped Docteroff from denying that he had defrauded and embezzled money from them in connection with the yacht construction contract. The plaintiffs also contended in the adversary action complaint that because Docteroff incurred the debt by fraud, embezzlement, and willful injury, it was not dischargeable in bankruptcy pursuant to, among other provisions, 11 U.S.C. § 523(a)(2)(A), (a)(4), and (a)(6).

On cross-motions for summary judgment, the bankruptcy court entered judgment for the plaintiffs, holding that the debt was not dischargeable. The court found that the Washington court's order had collateral estoppel effect and that the allegations in the Washington complaint established that, by his actions in connection with the aborted construction of the Lady Iris, Docteroff engaged in fraud, embezzlement, and fraud while acting in a fiduciary capacity, and caused Wolstein willful and malicious injury. The district court affirmed. ¹ We exercise plenary review over the district court's order which affirmed the bankruptcy court's decision to enter summary judgment for Wolstein. In re Continental Airlines, 125 F.3d 120, 128 (3d Cir.1997); accord In re Engel, 124 F.3d 567, 571 (3d Cir.1997).

II.

Docteroff argues that the district and bankruptcy courts erred by giving the Washington court's order collateral estoppel effect. In the alternative, he contends that the plaintiffs' adversary complaint failed properly to allege a cause of action or did not comply with the pleading requirement that allegations of fraud be pled with particularity. See Fed.R.Civ.P. 9(b). His arguments are without merit.

A.

Collateral estoppel prohibits the relitigation of issues that have been adjudicated in a prior lawsuit. The principles of collateral estoppel apply in discharge proceedings in bankruptcy court. See Grogan v. Garner, 498 U.S. 279, 284-85 n. 11, 111 S.Ct. 654, 658 n. 11, 112 L.Ed.2d 755 (1991); In re McNallen, 62 F.3d 619, 624 (4th Cir.1995). Because the prior judgment was rendered by a federal court, we apply federal principles of collateral estoppel. See Heiser v. Woodruff, 327 U.S. 726, 732, 66 S.Ct. 853, 855-56, 90 L.Ed. 970 (1945); see also Grogan, 498 U.S. at 284, 111 S.Ct. at 658 (citing Restatement (Second) Judgments § 27 (1982) as establishing elements of federal collateral estoppel). For a party to be estopped from relitigating an issue, the following elements must be present: (1) the issue sought to be precluded must be the same as the one involved in the prior action; (2) the issue must have been actually litigated; (3) the issue must have been determined by a valid and final judgment; and (4) the determination must have been essential to the prior judgment. In re Ross, 602 F.2d 604, 608 (3d Cir.1979); accord Restatement (Second) Judgments § 27 (1982). Docteroff argues that none of these elements are met here.

His argument regarding the first and fourth elements of the test rests on his conclusion that the actual dischargeability of the debt was not at issue in the previous lawsuit. Docteroff for that reason argues that he is not estopped from claiming that the debt is dischargeable in bankruptcy because the dischargeability issue is not the same issue as the one previously litigated and, thus, could not have been essential to the earlier judgment. Docteroff's argument has no merit. Of course, dischargeability was not at issue in the previous lawsuit. That is not controlling, however, because the plaintiffs only seek to estop Docteroff from asserting certain facts, i.e., claiming that he did not obtain money from them by fraud, embezzlement or willful injury. Collateral estoppel is applicable if the facts established by the previous judgment in the Washington court that the progress payments were obtained by fraud, embezzlement, and willfully injurious conduct, meet the requirements of nondischargeability listed in 11 U.S.C. § 523(a)(2)(A), (a)(4), and (a)(6), namely that the money was obtained by fraud, embezzlement, or willful conduct. See In re Halpern, 810 F.2d 1061, 1064 (11th Cir.1987) (bankruptcy court makes ultimate determination regarding debt's dischargeability; collateral estoppel permits court to accept facts...