In re Allen

• Decision Date: 10 February 1997
• Docket Number: Adv. No. 96-276.,Bankruptcy No. 96-0565-BKC-3P7
• Citation: 206 BR 602
• Parties: In re Dudley D. ALLEN, Debtor. Hanley C. CLARK, Commissioner of Insurance for the State of West Virginia, in his official capacity as Receiver of George Washington Life Insurance Company, Plaintiff, v. Dudley D. ALLEN, Defendant.
• Court: U.S. Bankruptcy Court — Middle District of Florida

206 B.R. 602 (1997)

In re Dudley D. ALLEN, Debtor Hanley C. CLARK, Commissioner of Insurance for the State of West Virginia, in his official capacity as Receiver of George Washington Life Insurance Company, Plaintiff, v. Dudley D. ALLEN, Defendant.

Bankruptcy No. 96-0565-BKC-3P7, Adv. No. 96-276.

United States Bankruptcy Court, M.D. Florida, Jacksonville Division.

February 10, 1997.

Raymond R. Magley, Jacksonville, FL, for Plaintiff.

Richard R. Thames, Jacksonville, FL, for Defendant.

FINDINGS OF FACT AND CONCLUSIONS OF LAW ON PLAINTIFF'S AND DEFENDANT'S MOTIONS FOR SUMMARY JUDGMENT ON COUNT II OF THE COMPLAINT

GEORGE L. PROCTOR, Bankruptcy Judge.

This proceeding came before the Court upon Plaintiff's and Defendant's Motions for Summary Judgment on Count II of the complaint pursuant to 11 U.S.C. § 523(a)(4). A hearing was held on November 13, 1996. Upon the pleading, affidavits and memoranda of law submitted by the parties, the Court enters the following Findings of Fact and Conclusions of Law:

FINDINGS OF FACT

1. Defendant was a member of the Board of Directors of George Washington Life Insurance Company (GW), from 1982 to 1991. (Adv.Rec. 17). Defendant performed attorney services for GW on its individual health and life insurance claims. (Id.).

2. On June 3, 1991, the Circuit Court of Kanawha County of West Virginia entered an Order appointing the Insurance Commissioner of the State of West Virginia, Hanley C. Clark (Plaintiff), Receiver and Liquidator of GW. (Adv.Rec 17, Ex. 1).

3. On September 3, 1992, Plaintiff sued Defendant and other former directors of GW. (Adv.Rec. 17). On July 29, 1993, Plaintiff filed an amended complaint, alleging, inter alia, that Defendant breached his fiduciary duties to GW (Count III), and committed professional negligence (Count IV). (Adv. Rec. 17, Ex. 2). A two-week trial was held in March and April 1995. (Adv.Rec. 17). The Verdict Form framed the issues under Counts III and IV in the following format for the jury to decide:

Count III: Do you find by a preponderance of the evidence that any of the Defendants breached their fiduciary duty to George Washington Life Insurance Company ("GW Life") by failing to exercise utmost good faith and loyalty in their dealings with GW Life?

Count IV: Do you find by a preponderance of the evidence that any of the Defendants deviated from the appropriate standard of care or were negligent in the performance of their professional services as attorneys for GW Life?

(Adv.Rec. 25, Ex. A).

4. On Count III, the West Virginia District Court instructed the jurors as follows: "If you find that the defendants, as officers and directors, did not act in good faith and loyalty in their dealings with G.W. Life, then you may find that they breached their fiduciary duty." (Adv.Rec. 17, Ex. 3, at 1984). The jurors were also told that: "The director's duty of good faith forbids placing himself in the position where his individual interest clashes with his duty to the corporation." (Id.).

5. On Count IV, the jurors were instructed to find that Defendant committed professional malpractice or negligence if: (i) Defendant did not perform services as an attorney for GW at the level required by the standard of care; (ii) Defendant violated any ethical rules that define the minimum level of professional conduct required by attorneys to their clients; or (iii) Defendant's law partner was negligent in his performance of his duties to the corporation. (Id. at 1989-91).

6. The jury found Defendant liable on Counts III and IV and apportioned his fault at ten (10) percent. (Adv.Rec. 25, Ex. A). On April 10, 1995, the jury entered a verdict and awarded $4,629,188 in damages on Count III, and $8,986,070 in damages on Count IV, totalling $13,615,258. (Id.). On July 7, 1995, the West Virginia District Court reduced the total award of damages to $6,198,591.34, and entered a Final Judgment Order accordingly. (Adv.Rec. 17, Ex. 6). Although Defendant was found ten percent at fault on both the breach of fiduciary duty and professional negligence counts, he was held jointly and severally liable for the full amount of the judgment. (Id. at 6).

7. On September 26, 1995, the West Virginia District Court's judgment was registered in the United States District Court of the Middle District of Florida. (Main Case Doc. 38).

8. On February 1, 1996, Defendant filed his petition for relief under Chapter 7 of the Bankruptcy Code. (Main Case Doc. 1). On May 7, 1996, Plaintiff filed this proceeding objecting to Defendant's discharge and to determine dischargeability of debt pursuant to 11 U.S.C. §§ 523(a)(4) and 727(a)(2)(A). (Adv.Rec. 1). On October 3, 1996, the Court allowed Plaintiff to amend his complaint, adding Counts III and IV pursuant to 11 U.S.C. §§ 727(a)(2)(B) and (a)(4) respectively. (Adv.Rec. 21).

9. Count II of the complaint alleges that the debt owed by Defendant pursuant to the West Virginia District Court Final Judgment in the amount of $6,189,591.34 is nondischargeable pursuant to 11 U.S.C. § 523(a)(4). (Adv.Rec. 12). On September 26, 1996, Plaintiff moved for summary judgment on Count II of the complaint. (Adv.Rec. 15). A hearing was held on November 13, 1996, and the Court gave Defendant an opportunity to file his Motion for Summary Judgment within seven days. (Adv.Rec. 20). Defendant served Plaintiff with his Summary Judgment Motion on December 13, 1996, but a copy was not filed with the Clerk's Office until January 23, 1997. (Adv.Rec. 32, at 17). Plaintiff made no objections to the timeliness of Defendant's Motion for Summary Judgment.

CONCLUSIONS OF LAW

The issue before the Court is whether either party is entitled to summary judgment pursuant to 11 U.S.C. § 523(a)(4). A motion for summary judgment is granted if "the pleading, depositions, answers to interrogatories, and admissions on file, together with affidavits, if any, show that there is no genuine issue of material fact and the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56; Fed.R.Bankr.P. 7056. The moving party has the burden of demonstrating that there is no genuine issue of material fact. Macks v. United States of America (In re Macks), 167 B.R. 254, 256 (Bankr.M.D.Fla.1994) (citing Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 2552, 91 L.Ed.2d 265 (1986)). After the moving party has met its burden, the party opposing a motion for summary judgment must make a sufficient showing establishing the existence of an essential element of that party's case on which the party bears the burden of proof at trial. Id.

In this proceeding, both Plaintiff and Defendant moved for summary judgment. Plaintiff contends that the Court should enter summary judgment in his favor pursuant to 11 U.S.C. § 523(a)(4), based on the doctrine of collateral estoppel. (Adv.Rec. 16). Defendant seeks summary judgment on the following bases: (i) There is no "fiduciary relationship" under 11 U.S.C. § 523(a)(4) because an express trust and a trust res are required, and there is no express trust or trust res involved in Defendant's relationship with GW; (ii) Defendant cannot be held liable for acts or occurrences which occurred prior to his acting in a fiduciary capacity for purposes of satisfying the requirements of 11 U.S.C. § 523(a)(4); and (iii) Defendant's mere negligence in the performance of his professional responsibilities as an attorney, absent a trust res and defalcation relating to the res, will not support an exception to discharge under 11 U.S.C. § 523(a)(4). The Court will address each party's Motion for Summary Judgment accordingly.

A. PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT

The Court is initially presented with the issue of whether to grant Plaintiff's Motion for Summary Judgment pursuant to 11 U.S.C. § 523(a)(4) on the basis of collateral estoppel. The doctrine of collateral estoppel applies to dischargeability proceedings, and "bars relitigation of an issue previously decided in judicial or administrative proceedings if the party against whom the prior decision is asserted has a `full and fair opportunity' to litigate the issue in an earlier case." See St. Laurent, II v. Ambrose (In re St. Laurent, II), 991 F.2d 672, 676 (11th Cir. 1993) (citations omitted). The Eleventh Circuit Court of Appeals sets out the following four elements that must be satisfied before collateral estoppel applies:

1. The issue at stake must be identical to the one involved in the prior litigation;

2. The issue must have been actually litigated in prior litigation;

3. The determination of the issue in the prior litigation must have been a critical and necessary part of the judgment in that earlier action; and

4. The burden of persuasion in the discharge proceeding must not be significantly heavier than the burden of persuasion in the initial action.

Id.¹ The Court will address each element accordingly.

1. The issue at stake must be identical to the one involved in the prior litigation.

Critical to this Court's determination of whether to grant Plaintiff's motion is whether the issue at stake in this proceeding is identical to the issues in the West Virginia District Court action. To determine whether the issues are identical, the Court examines whether the requirements of proving the issue at stake in this proceeding "closely mirror" the requirements of proving the issues presented to the jury in the prior action. See, e.g., St. Laurent, 991 F.2d at 676; Cardinal Serv. Corp. of Richmond v. Jolly (In re Jolly), 124 B.R. 365, 367 (Bankr.M.D.Fla. 1991). In so doing, the Court examines the instructions and questions that were presented to the jury, and case law outlining the requirements of proving each issue. Id.

In this proceeding, the issue at stake is whether Defendant committed "defalcation while acting in a fiduciary capacity" pursuant to 11 U.S.C. § 523(a)(4).² In a proceeding under Section 523(a)(4), the plaintiff must prove that: (1) the defendant was acting in a fiduciary...