In re Austin, Bankruptcy No. 86-B-07628-J

• Decision Date: 23 November 1988
• Docket Number: Bankruptcy No. 86-B-07628-J,Adv. No. 88-A-0172.
• Citation: 93 BR 723
• Parties: In re Ward Hunting AUSTIN, Jr., aka Ward H. Austin, aka Ward Austin, Debtor. PACIFIC ENERGY AND MINERALS, LTD., Plaintiff, v. Ward Hunting AUSTIN, Jr., Defendant.
• Court: U.S. Bankruptcy Court — District of Colorado

93 B.R. 723 (1988)

In re Ward Hunting AUSTIN, Jr., aka Ward H. Austin, aka Ward Austin, Debtor PACIFIC ENERGY AND MINERALS, LTD., Plaintiff, v. Ward Hunting AUSTIN, Jr., Defendant.

Bankruptcy No. 86-B-07628-J, Adv. No. 88-A-0172.

United States Bankruptcy Court, D. Colorado.

November 23, 1988.

Peter M. Susemihl, Susemihl, Lohman, Kent, Carlson & McDermott, P.C., Colorado Springs, Colo., for plaintiff.

Dean P. Grossenbach, Colorado Springs, Colo., for defendant.

MEMORANDUM OPINION AND ORDER

SIDNEY B. BROOKS, Bankruptcy Judge.

THIS MATTER comes before the Court upon the Plaintiff's Motion for Summary Judgment to except its claim from discharge in bankruptcy pursuant to 11 U.S.C. § 523(a)(2), (4) and (6), and the Debtor's Response thereto. For the reasons set forth below, the Court grants the Plaintiff's Motion, and orders that its principal claim be excepted from Debtor's discharge in bankruptcy.

BACKGROUND AND FACTS

The facts pertinent to this decision are as follows:

1. Plaintiff corporation ("Plaintiff" or "Creditor") and the Defendant ("Debtor") had a business relationship commencing in 1978 wherein the Debtor became a stockholder, director and vice president of the Plaintiff. Debtor was the principal officer responsible for the Plaintiff's oil, gas and mineral exploration and lived in and carried out his responsibilities in the city of Suva, the country of Fiji. This relationship resulted in subsequent disputes and litigation which is the subject of this adversary proceeding.

2. Plaintiff commenced a civil action against the Debtor on or about December 1984, in District Court, County of El Paso, State of Colorado. Generally, Plaintiff alleged that the Debtor (a) breached his fiduciary duty as a director and officer of the corporation, (b) misappropriated, misused, and converted for his own use and benefit, corporate funds and assets, and (c) intentionally interfered with corporate business and relationships, and intentionally damaged the rights and property of the business. A pretrial conference was held in the matter in December, 1985 and a trial was first scheduled for August 19, 1986.

3. On August 19, 1986, the Judge in state court did not, as requested by the Debtor, grant a continuance of the scheduled trial date and immediately thereafter the Debtor filed for protection under Chapter 11 of the Bankruptcy Code.

4. On June 22, 1987, the Bankruptcy Court granted to the Plaintiff relief from the automatic stay and permitted the Plaintiff to proceed against the Debtor and allow litigation of Plaintiff's claims and Debtor's counterclaims in state court. A new, second trial date was set in state court for October 13, 1987.

5. On the second scheduled trial date, the Bankruptcy Court granted the Debtor's motion to convert the case to a Chapter 7. This, again, stayed the Plaintiff from proceeding in state court with a trial on the merits.

6. The Plaintiff filed a motion for the Bankruptcy Court to abstain from hearing the matters still pending in the state court which the Bankruptcy Court granted on December 2, 1987. Trial to the state court was, again, rescheduled for February 16, 1988.

7. At commencement of the trial on February 16, 1988, counsel for the Debtor appeared and advised, on the record, that the Debtor did not desire to proceed to litigate the matter and/or was not able to proceed to litigate the matter and consented to default judgment being entered against the Debtor.

8. Plaintiff's counsel, on instruction from the state court Judge, prepared and submitted to the Court Findings of Fact, Order and Judgment which was signed by the Judge and entered as a default judgment on May 29, 1988 ("Judgment").¹

9. The Judgment entered in state court recited, in pertinent part, the following:

(a) "The Defendant did not appear at trial except through his counsel . . . who indicated that his client would not appear and that his client Ward H. Austin did not want to litigate this matter. Defendant . . . has not appeared for trial after protracted court proceedings and was not prepared either to defend the claims of Plaintiff or to present evidence as to his counterclaim."

(b) Defendant "was a fiduciary with regard to the corporation."

(c) "Actions of the Defendant resulted in the loss of personal property . . ." that he "appropriated unauthorized funds from the company . . ." and he "removed funds from the Suva bank account in the unauthorized amount of $100,838.00."

(d) "The Court finds that all of the actions of Defendant Ward H. Austin were intentional and amounted to larceny, theft, and embezzlement, and that judgment should enter in favor of the Plaintiff and against the Defendant in the amount of $173,329.00."

(e) "The Court further finds that the Defendant has engaged in intentional and deceitful activities which were intended to economically injure the Plaintiff. . . . "

(f) "The Court further finds that the Defendant and his attorney have been given full and ample opportunity to present evidence of their counterclaim and to defend against the allegations made by the Plaintiff, and that the Defendant has failed to do so."

(g) "Defendant Debtor has filed a counterclaim in this matter . . . which was dismissed by the court for failure of the Defendant to supply documentation and discovery to support said claims. The counterclaims of Defendant . . . should be dismissed for lack of prosecution and the default of the Defendant Austin should enter on the Plaintiff\'s Complaint filed herein."

(h) "Judgment be entered for the Plaintiff and against the Defendant in the amount of $173,329.00 plus punitive damages in a like amount for a total judgment of $346,658.00. . . . Judgment is awarded based upon the intentional, deceitful, and fraudulent acts of the Defendant. . . . "

Significantly, the record does not reflect any objection or appeal by the Debtor to the Judgment prepared by Plaintiff's counsel and entered by the state court.

OPINION

Plaintiff maintains it is entitled to entry of a summary judgment, by the doctrine of collateral estoppel, on the issue of whether its claim is to be excepted from discharge pursuant to Section 523(a)(2), (4) or (6).²

Plaintiff argues that entry of findings of fact and a default judgment, by consent, in the state court proceedings precludes relitigation of the same issues in Bankruptcy Court. Debtor denies that entry of a default judgment has preclusive effect on relitigating issues raised, but not fully tried, in the state court action. Debtor asserts that the Bankruptcy Court has "exclusive jurisdiction to determine nondischargeability of debt which arises from a state court judgment," and maintains this Bankruptcy Court should proceed to try this adversary proceeding.

The principal issue before the Court is whether or not entry of a default judgment, by consent, in state court may have preclusive effect on, or collaterally estop, the Bankruptcy Court with regard to questions of discharge of debt in bankruptcy. Two Tenth Circuit cases are instructive, if not controlling, on this issue. In re Wallace, 840 F.2d 762 (10th Cir.1988); Matter of Lombard, 739 F.2d 499 (10th Cir.1984).

In In re Wallace, the creditor filed a complaint in state court alleging the defendant fraudulently obtained monies and "intentionally, willfully, and maliciously converted monies. . . ." Plaintiff obtained from the Court, after a non-jury trial on the merits, a money judgment which stated, in part, that "the defendant Wallace embezzled funds. . . ." Wallace subsequently filed bankruptcy. The judgment creditor filed an adversary proceeding to except from discharge his claim against Wallace on the grounds of "fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny." 11 U.S.C. § 523(a)(4).

The Court of Appeals upheld the Bankruptcy Court's decision granting the creditor's motion for summary judgment, stating that: "The doctrine of collateral estoppel may be invoked to bar relitigation of the factual issues underlying the determination of dischargeability. . . ."³ In re Wallace, supra at 764; Brown v. Felsen, 442 U.S. 127, 99 S.Ct. 2205, 60 L.Ed.2d 767 (1979).⁴ The court in Wallace ruled that:

Collateral estoppel is binding on the bankruptcy court and precludes relitigation of factual issues if (1) the issue to be precluded is the same as that involved in the prior state action, (2) the issue was actually litigated by the parties in the prior action, and (3) the state court\'s determination of the issue was necessary to the resulting final and valid judgment. In re Wallace, supra at 765.

The court examined each of these three necessary conditions for imposing collateral estoppel. For our purposes, the single key condition cited in Wallace which is not readily found in the instant case is the second condition, namely, that "the issue was actually litigated" in the prior action. This is crucial because clearly, the distinguishing feature between Wallace and the instant case is that a trial on the merits was held in Wallace; a default judgment was entered, by consent, in the instant case.

While a state court trial had been held in Wallace, the Wallace court ruling does not require that an actual trial be held to collaterally estop subsequent relitigation of dischargeability issues by a Bankruptcy Court; it just requires that the issues be "actually litigated." Significantly, the court notes that the state court judgment:

"Reflects that the issues necessarily addressed to establish liability . . . were actually litigated by the parties. Wallace cannot complain that he was denied a full and fair opportunity to present his case or litigate the relevant issues." (Emphasis added.) In re Wallace, supra at 765.

The focus, the reliance, and the emphasis is placed by the Wallace court on a debtor's "opportunity to present his case" or to "litigate the relevant issues." See also, In re Werth, 54 B.R. 619, 622 (Dist.Ct.Colo. 1985).

The issues pertaining to...