Franklin, In re, 82-1932

• Decision Date: 23 January 1984
• Docket Number: No. 82-1932,82-1932
• Citation: 726 F.2d 606
• Parties: , 11 Bankr.Ct.Dec. 1306, Bankr. L. Rep. P 69,599 In re James Everett FRANKLIN, Bankrupt, FIRST NATIONAL BANK OF ALBUQUERQUE, as guardian of the estate of Paul Anthony Sanchez, a minor and incompetent, and Reina Sanchez, individually, Appellees, v. James Everett FRANKLIN, Appellant.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 606

726 F.2d 606

77 A.L.R.Fed. 909, 11 Bankr.Ct.Dec. 1306,

Bankr. L. Rep. P 69,599

In re James Everett FRANKLIN, Bankrupt,

FIRST NATIONAL BANK OF ALBUQUERQUE, as guardian of the

estate of Paul Anthony Sanchez, a minor and

incompetent, and Reina Sanchez, individually, Appellees, v. James Everett FRANKLIN, Appellant.

No. 82-1932.

United States Court of Appeals, Tenth Circuit.

Jan. 23, 1984.

Denis J. Blanck, Denver, Colo., for appellees.

Paul D. Rubner, Denver, Colo., for appellant.

Before SETH, Chief Judge, McWILLIAMS, Circuit Judge, and KERR, District Judge ^*.

KERR, District Judge.

This case arises as an appeal from a decision rendered by the United States District Court for the District of Colorado affirming an order of the United States Bankruptcy Court for the District of Colorado. Appellant is the bankrupt in the bankruptcy court proceedings below. In those proceedings it was determined that a certain debt owed to the First National Bank of Albuquerque, New Mexico acting as guardian of the estate of Paul Anthony Sanchez, a minor, was a result of willful and malicious conduct, and thereby nondischargeable in bankruptcy.

There are three issues raised in this appeal. They are briefly stated as follows:

(1) Based upon the evidence presented during the bankruptcy proceedings, whether the findings of the bankruptcy court are clearly erroneous and unsupported by clear and convincing evidence;

(2) Whether the actions of appellant reflected in the findings of the bankruptcy court constitute "willful and malicious" conduct as defined in Sec. 17 of the Bankruptcy Act; and

(3) Whether appellant was denied an opportunity to effectively present an appeal to the district court.

The relevant facts of this case involve, for the most part, an extensive procedural and appellate history, and are related as follows:

In 1977 Paul Anthony Sanchez was admitted to the hospital for an appendectomy. The operation was performed by appellant, an osteopathic surgeon practicing in New Mexico. Cardiac arrest occurred during the surgery and Sanchez sustained extensive brain damage. Legal proceedings against appellant were initiated in the district court for the State of New Mexico, alleging negligent medical care and actions so reckless and willful that both compensatory and punitive damages were claimed.

An initial default judgment was entered awarding compensatory damages of $912,250.00 and punitive damages of $225,000.00 to Paul Anthony Sanchez and compensatory damages of $80,895.00 to Reina Sanchez, Paul's mother. The New Mexico Court of Appeals affirmed the award of compensatory damages, but reversed the award of punitive damages, holding that punitive damages could only be awarded after a trial.

A trial was held in September and October, 1977 on the issue of punitive damages, the transcript of which has been made a part of this record. Though no instruction defining "willful and wanton" under New Mexico law was given, the jury returned a general verdict awarding punitive damages to Paul Anthony Sanchez in the amount of $6,850.00. This verdict was affirmed by the New Mexico Court of Appeals and the New Mexico Supreme Court denied a petition for writ of certiorari.

In December 1977 appellant filed a petition for bankruptcy listing as one of the debts the judgment in favor of plaintiffs in the medical negligence case. The bank as guardian and Reina Sanchez entered an appearance in the bankruptcy proceeding to object to the discharge of the judgment.

Based solely upon the record and judgment in the state court, in accordance with In re Nicholas, 510 F.2d 160 (10th Cir.1975), cert. denied, 421 U.S. 1012, 95 S.Ct. 2417, 44 L.Ed.2d 680 (1975), the bankruptcy court held that the debt owed to the bank was nondischargeable. The court found that willful and malicious conduct on the part of appellant was clearly evident. The record regarding the debt to Reina Sanchez was found by the bankruptcy court to be ambiguous and an evidentiary hearing was ordered.

The findings of the bankruptcy court were affirmed in the district court and the decision appealed to this court. In an opinion dated February 20, 1980 this court reversed and remanded the entire matter. In Re Franklin, 615 F.2d 909 (10th Cir.1980). In the course of that appeal, the United States Supreme Court had disapproved of the In Re Nicholas ruling and had determined that a bankruptcy court, in making a discharge determination, was not limited to review of the state court judgment and record. In other words, the notion of res judicata should not be applied to control the decision of the bankruptcy court regarding Sec. 17 issues. Whether collateral estoppel effect need be given the prior state judgment was a question left unanswered by the court. Brown v. Felsen, 442 U.S. 127, 99 S.Ct. 2205, 60 L.Ed.2d 767 (1979).

On remand, the bankruptcy court found that collateral estoppel prevented relitigation of the issues previously tried in the state court, and once again determined the judgment debt to be nondischargeable.

This second determination made by the bankruptcy court was also appealed to the district court. The district court again remanded the case back to the bankruptcy court, holding that the bankruptcy court was not bound by the doctrine of collateral estoppel and that an independent determination of dischargeability should be made. The district court indicated that when the bankruptcy court made its independent determination it could and should use the state court proceedings, however, the determination must be more than a mere substitution of the jury verdict for the court's finding. In so many words the district court said:

We do not envision that a trial de novo must be held by the Bankruptcy Court. Nor do we intend to imply that the state court proceedings should play a small role in the Referee's Section 17 determination. Where the state court proceedings, including the transcript and other state records, are the only evidence offered to the Bankruptcy Referee, the Referee may very well be able to make a conclusive determination for purposes of Section 17. However, the Bankruptcy Court must then state its findings and conclusions on the issues. Memorandum Opinion, Proceeding No. 77 B 3762, p. 8 (U.S.D.C., Dist. of Colo. Aug. 26, 1981).

A hearing pursuant to the remand was held in the bankruptcy court on October 21, 1981. At that hearing, the First National Bank of Albuquerque presented only the state court record, including exhibits as evidence. Appellant moved for judgment in his favor, contending that the state court transcript was an insufficient basis upon which findings could be made. The motion was denied and appellant took the stand on his own behalf. Appellant was also given an opportunity to present those exhibits from the state court proceedings that he found necessary. Aside from oral argument, nothing more of substance took place at the bankruptcy hearing; no additional evidence was presented.

On November 18, 1981 the bankruptcy referee filed findings of fact and conclusions of law in appellant's case. The opinion is 12 pages in length and sets out in some detail the portions of the state court record upon which it relied for its determination. That determination is: "The bankrupt [Appellant] is liable for willful and malicious injury to the person of another" and consequently the debt is not discharged. Findings of Fact, Conclusions of Law and Order on Complaint to Determine Dischargeability of Debt, Bankruptcy No. 77 B 3762, p. 12 (U.S. Bankruptcy Court, Dist. of Colo. Nov. 18, 1981). It is from this determination that appellant appeals.

I. BANKRUPTCY COURT FINDINGS

In his first issue, appellant attacks the findings of the bankruptcy court which are based upon the record of the state court proceeding. Specifically appellant objects to use of the record which contains ambiguities and a general jury verdict made without certain instructions. In the first place, this court is not concerned with the general jury verdict and the absence of so called "critical" jury instructions. The bankruptcy court was ordered to make an independent determination regarding appellant's conduct. When previously, the bankruptcy court had considered the verdict in attempting to apply the doctrines of res judicata or collateral estoppel, the case was remanded back for further proceedings. In its last consideration, the bankruptcy court appears to have made the necessary independent determination. The Order entered by the bankruptcy court consists of findings of fact and conclusions of law; the factual findings are supported by evidence from the state trial transcript. The bankruptcy court did not rely on the general verdict of the jury, and therefore, that verdict and the instructions upon which it was based are not relevant to a review of the bankruptcy court findings.

As for the ambiguity of the record, there is certainly no doubt that the...