Garoutte v. Damax, Inc.

• Decision Date: 03 March 2009
• Docket Number: No. 3:08-cv-0083-DFH-WGH.,3:08-cv-0083-DFH-WGH.
• Citation: 400 B.R. 208
• Parties: Terry Lee GAROUTTE, Appellant, v. DAMAX, INC., Appellee.
• Court: U.S. District Court — Southern District of Indiana

400 B.R. 208

Terry Lee GAROUTTE, Appellant, v. DAMAX, INC., Appellee.

No. 3:08-cv-0083-DFH-WGH.

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

March 3, 2009.

COPYRIGHT MATERIAL OMITTED

Jeffrey Kevin Eicher, Greenfield, IN, for Appellant.

Nick J. Cirignano, Robert L. Burkart, Ziemer Stayman Weitzel & Shoulders, Evansville, IN, for Appellee.

ENTRY ON BANKRUPTCY APPEAL

DAVID F. HAMILTON, Chief Judge.

A final judgment of an Indiana state court found that debtor Terry Lee Garoutte had engaged in criminal conversion against creditor Damax, Inc. When Garoutte sought bankruptcy protection, Chief Bankruptcy Judge Lorch granted summary judgment in favor of Damax, holding that the debt for criminal conversion is not dischargeable in bankruptcy because the state court's judgment amounted to a conclusive finding that Garoutte had inflicted "willful and malicious injury ... to another entity or to the property of another entity." In re Garoutte, 2008 WL 2246908 (Bankr.S.D.Ind. May 28, 2008), applying 11 U.S.C. § 523(a)(6). Garoutte has appealed, arguing that collateral estoppel should not preclude him from challenging the non-dischargeability of the debt. For the reasons discussed below, the bankruptcy court's grant of summary judgment is vacated.

Facts

The history behind the state court judgment is laid out in detail in the Indiana Court of Appeals' opinion in the case. See Hawkeye Charter Serv., Inc., v. Damax, Inc., 2008 WL 2080947 (Ind.App. May 19, 2008). For purposes of this appeal, the following facts from the bankruptcy court's entry will suffice. Debtor Garoutte was the president of Hawkeye Charter Service. Marc Shea was one of Hawkeye's customers, and Shea told Garoutte that he wanted to purchase an aircraft. Garoutte tried to find an aircraft for Shea to purchase, and he eventually discovered that Damax wanted to sell an aircraft. Garoutte signed a sales agreement with Damax. At the time the parties signed the sales agreement, Hawkeye actually had possession of the aircraft for purposes of inspection. The agreement provided that Hawkeye would return the aircraft to Damax in pre-purchase condition if the transaction was not completed. Shea later told Garoutte that he had secured financing for substantial repairs that the aircraft required. Shea (who did not yet own the aircraft) instructed Garoutte to begin the repairs. Garoutte arranged for the repairs to begin, which resulted in the aircraft being disassembled. But Shea's financing for the purchase later fell through, and Damax then demanded the return of its aircraft in airworthy condition. Neither Garoutte nor Hawkeye returned the aircraft to the owner, Damax.

Damax then filed a civil suit against Garoutte, Hawkeye, and others in Elkhart Superior Court. The state court entered a judgment in favor of Damax and against Garoutte, finding that Garoutte committed criminal conversion in violation of Indiana Code § 35-43-4-3. Relying on the Indiana statute authorizing treble damages for victims of many crimes, see Ind.Code § 34-24-3-1, the court entered judgment against Garoutte and in favor of Damax for treble damages, $2,802,734.80. The Indiana Court of Appeals affirmed that judgment, which is now final. The Court of Appeals affirmed the trial court because it found that the evidence showed that Garoutte was "aware that [he was] possessing Damax's Aircraft without Damax's consent." Hawkeye, 2008 WL 2080947, at * 15. But the court found the case "troubling": "This seems to have been a situation in which one party set certain events into motion based upon representations that eventually proved untrustworthy, and by the time the realization(s) hit, it was too late." Id. The court said that although the facts establish that Garoutte committed criminal conversion, "they read much more like a complex contractual dispute or tortious conversion (which lacks both the mens rea element and the accompanying treble damages)." Id. at *16. Nevertheless, the state court judgment for criminal conversion and treble damages stands as final.

Garoutte filed for Chapter 7 bankruptcy protection. Damax sought a declaration that the debt under the state court judgment against Garoutte is non-dischargeable pursuant to 11 U.S.C. § 523(a)(6), which provides that an individual may not obtain a discharge for a debt "for willful and malicious injury by the debtor to another entity or to the property of another entity."¹ The bankruptcy court held that Damax could use the state court judgment to preclude Garoutte from challenging the non-dischargeability of the debt. The bankruptcy court relied on the doctrine of collateral estoppel. Garoutte appeals to this court.

Discussion

The court has jurisdiction over Garoutte's appeal from the final decision of the United States Bankruptcy Court of this district pursuant to 28 U.S.C. § 158(a).² The bankruptcy court's grant of summary judgment is reviewed de novo. In re Midway Airlines, Inc., 383 F.3d 663, 668 (7th Cir.2004). In reviewing Garoutte's appeal from the bankruptcy court's entry of summary judgment, the court must construe all facts and draw all reasonable inferences in favor of Garoutte. Hoseman v. Weinschneider, 322 F.3d 468, 473 (7th Cir.2003).

I. Collateral Estoppel in Bankruptcy Discharge Proceedings

"[T]he doctrine of collateral estoppel applies in bankruptcy discharge exception proceedings." Meyer v. Rigdon, 36 F.3d 1375, 1378-79 (7th Cir.1994); see Grogan v. Garner, 498 U.S. 279, 285 n. 11, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991). The effect of a state court judgment in the bankruptcy proceedings is "determined by the law of the jurisdiction that rendered the judgment." In re Catt, 368 F.3d 789, 790-91 (7th Cir.2004), applying 28 U.S.C. § 1738.

Under Indiana law, the doctrine of collateral estoppel or issue preclusion applies to bar later litigation of a fact or issue if that fact or issue was necessarily decided in an earlier lawsuit. Indianapolis Downs, LLC v. Herr, 834 N.E.2d 699, 704 (Ind.App.2005). For an Indiana judgment to preclude further litigation of an issue, there are three requirements: "(1) a final judgment on the merits in a court of competent jurisdiction, (2) identity of issues, and (3) the party to be estopped was a party or the privity of a party in the prior action." Sims v. Scopelitis, 797 N.E.2d 348, 351 (Ind.App.2003). Indiana courts also consider "whether the party against whom the prior judgment is asserted had a full and fair opportunity to litigate the issue and whether it would be otherwise unfair under the circumstances to permit the use of issue preclusion." Id.

II. Criminal Conversion Judgment and the Non-dischargeability Standard

The dispute in this case is over the "identity of issues" prong of the Indiana collateral estoppel standard. The question is whether the state court determination that Garoutte committed criminal conversion in violation of Indiana Code § 35-43-4-3 is the same as a determination that Garoutte's debt arising from the judgment is non-dischargeable under 11 U.S.C. § 523(a)(6), which provides that an individual's debt "for willful and malicious injury by the debtor to another entity or to the property of another entity" is not dischargeable in bankruptcy. The relevant subsection of § 35-43-4-3 states: "A person who knowingly or intentionally exerts unauthorized control over property of another person commits criminal conversion. ..." Ind.Code § 35-43-4-3(a). Garoutte argues that the two determinations are different.

A. The Meaning of the Criminal Conversion Judgment

In the state court case, the Indiana Court of Appeals explained the meaning of "knowingly" and "intentionally" in the criminal conversion statute. The applicable standards are:

"A person engages in conduct `intentionally' if, when he engages in the conduct, it is his conscious objective to do so." Ind.Code § 35-41-2-2(a). "A person engages in conduct `knowingly' if, when he engages in the conduct, he is aware of a high probability that he is doing so." Ind.Code § 35-41-2-2(b).

Hawkeye Charter Serv., Inc. v. Damax, Inc., 2008 WL 2080947, at * 13 (Ind.App. May 19, 2008). The Court of Appeals said that Garoutte was "aware that [he was] possessing Damax's Aircraft without Damax's consent...." Id. at *15.

B. Requirements for Non-dischargeability under § 523(a)(6)

The Seventh Circuit and the Supreme Court have addressed the meaning of "willful and malicious injury" several times. The Seventh Circuit has said that "willful means deliberate or intentional ... and malicious means in conscious disregard of one's duties or without just cause or excuse; it does not require ill-will or specific intent to do harm." In re Thirtyacre, 36 F.3d 697, 700 (7th Cir.1994), quoting Wheeler v. Laudani, 783 F.2d 610, 615 (6th Cir.1986). The Supreme Court's most recent decision discussing the meaning of the phrase came after Thirtyacre. In that case, Kawaauhau v. Geiger, 523 U.S. 57, 118 S.Ct. 974, 140 L.Ed.2d 90 (1998), the Kawaauhaus obtained a medical malpractice judgment against Dr. Geiger. Dr. Geiger petitioned for bankruptcy, and the Kawaauhaus requested that the bankruptcy court determine the medical malpractice debt to be non-dischargeable under § 523(a)(6). The Court held that the debt was dischargeable because the Kawaauhaus had shown only negligent or reckless conduct. Id. at 64, 118 S.Ct. 974. The Court said that a debt is non-dischargeable only if the debtor intended the injury, not merely the act that caused the injury. Id. at 61, 118 S.Ct. 974.³ The Court said that § 523(a)(6) "triggers in the lawyer's mind the category `intentional torts,'" which "generally require that the actor intend `the consequences of an act,' not simply `the act itself.'" Id. at 61-62, 118 S.Ct. 974, quoting Restatement (Second) of Torts § 8A, cmt. a, p. 15 (1964); accord, In re Gulevsky, 362 F.3d 961, 964 (7th Cir.2004) (Section 523(a)(6) "does require proof that the injury was intended").

An earlier Supreme Court cas...