In re Bennitt

• Decision Date: 28 August 2006
• Docket Number: Bankruptcy No. 05-03935-BGC-7.,Adversary No. 05-00164.
• Citation: 348 B.R. 820
• Parties: In re Robyn B. BENNITT, Debtor. Rhonda Steadman Hood, Plaintiff, v. Robyn B. Bennitt, Defendant.
• Court: U.S. Bankruptcy Court — Northern District of Alabama

348 B.R. 820

In re Robyn B. BENNITT, Debtor. Rhonda Steadman Hood, Plaintiff, v.Robyn B. Bennitt, Defendant.

Bankruptcy No. 05-03935-BGC-7.

Adversary No. 05-00164.

United States Bankruptcy Court, N.D. Alabama, Southern Division.

August 28, 2006.

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Henry E. Lagman, Lagman and Associates PC, Birmingham, AL, for Debtor.

James McFerrin, Virginia P. Meigs, for plaintiff.

Memorandum Opinion Regarding Cross Motions for Summary Judgment

BENJAMIN COHEN, Bankruptcy Judge.

The matters before the Court are:

1.The Motion for Summary Judgment for the Debtor, Robyn Bennitt filed on January 9, 2006(ProceedingNo. 31); and

2.The Creditor Hood's Motion for Summary Judgment filed on January 9, 2006(ProceedingNo. 33), as revised by Creditor Hood's Revised Motion for Summary Judgment filed on January 16, 2006(ProceedingNo. 35).

After notice, a hearing was held on February 23, 2006.Appearing were Mr. Henry Lagman, the attorney for the defendant; the plaintiffRhonda Steadman Hood; and one of her attorneys Mr. James McFerrin.The matters were submitted on the record in this proceeding, briefs, stipulations and arguments of counsel, and a complete record of the proceedings from the stateCircuit Civil Court of Jefferson County, Alabama, Civil ActionNo. CV 99-7128.

I.Facts

The plaintiff and the defendant are both lawyers.The plaintiff referred several cases to the defendant.In return, the defendant promised to pay the plaintiff referral fees equal to one-third of the entire attorney fees collected in those cases.The defendant settled or otherwise obtained a recovery in all of the cases referred to her by the plaintiff, and, in the process, collected $59,000 in attorney's fees.But, the defendant paid the plaintiff only $7,500 of the promised referral fees.In response, the plaintiff filed suit against the defendant in state court claiming breach of contract and fraud.At trial, the state court provided instructions to the jury regarding the elements and requirements of both of those types of actions under Alabama law.They were also specifically instructed that they could award punitive damages against the defendant on the plaintiff's fraud count only if they were to find by clear and convincing evidence that the defendant intentionally deceived the plaintiff.

The jury delivered a general verdict awarding the plaintiff undesignated damages in the amount of $90,000.The judgment entered by the trial court on the jury's verdict was affirmed by the Alabama Court of Civil Appeals without opinion.

The plaintiff contends that the debt represented by the state court judgment is nondischargeable pursuant to section 523(a)(2)(A) of the Bankruptcy Code.That section exempts debts resulting from, "false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor's or an insider's financial condition ..." from discharge.11 U.S.C. § 523(a)(2)(A).

The parties filed cross motions for summary judgment.Each contends that all of the issues required for resolution of this adversary proceeding have already been considered and resolved by the state court.Consequently, each argues that application of the doctrine of collateral estoppel precludes relitigation of those same issues by this Court, and each believes she is therefore entitled to a judgment in her favor.¹

II.Legal Framework

A.Summary Judgment Standards

Rule 56(c) of the Federal Rules of Civil Procedure, applicable to the pending matters by Rule 7056 of the Federal Rules of Bankruptcy Procedure, provides that a moving party is entitled to summary judgment if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law.Fed.R.Civ.P. 56(c).The framework for determining whether there is a genuine issue of material fact that would preclude summary judgment is outlined in the Eleventh Circuit Court of Appeals decision in Fitzpatrick v. City of Atlanta,2 F.3d 1112(11th Cir.1993).The Court has followed that framework here.

B.Collateral Estoppel

Collateral estoppel prevents the relitigation of issues already litigated and determined by a valid and final judgment in another court.HSSM # 7 Limited Partnership v. Bilzerian(In re Bilzerian),100 F.3d 886, 892(11th Cir.1996), cert. denied,523 U.S. 1093, 118 S.Ct. 1559, 140 L.Ed.2d 791(1998).And it is well-established that the doctrine of collateral estoppel applies in a proceeding to determine the dischargeability of a debt in bankruptcy.Id.

The decision rendered by the Supreme Court in Marrese v. American Academy of Orthopaedic Surgeons,470 U.S. 373, 105 S.Ct. 1327, 84 L.Ed.2d 274(1985) requires bankruptcy courts, in dischargeability proceedings, to utilize a state's principles of collateral estoppel to determine the issue preclusive effect of a judgment rendered by a court of that state."If the prior judgment was rendered by a state court, then the collateral estoppel law of that state must be applied to determine the judgment's preclusive effect."St. Laurent v. Ambrose(In re St. Laurent),991 F.2d 672, 676(11th Cir.1993).

Under Alabama law, a prior judgment may be accorded collateral estoppel effect if: (1) the issue involved in the prior proceeding was identical to the issue involved in the present proceeding; (2) the issue was "actually litigated" in the prior proceeding; (3) the resolution of the issue was necessary to the prior judgment; and (4)the parties in the present proceeding are the same as those involved in the prior proceeding.Lott v. Toomey,477 So.2d 316, 319(Ala.1985).

C.Section 523(a)(2)(A)

Section 523(a)(2)(A) of the Bankruptcy Code makes nondischargeable debts for money, property, services or credit obtained by a debtor by "false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor's or an insider's financial condition."11 U.S.C. § 523(a)(2)(A).To have a debt declared nondischargeable pursuant to 523(a)(2)(A), a creditor must prove:

1.The debtor made a false statement;

2.With the purpose and intention of deceiving the creditor;

3.The creditor relied on such false statement;

4.The creditor's reliance on the false statement was justifiably founded; The creditor sustained damage as a result of the false statement.

Fuller v. Johannessen(In re Johannessen),76 F.3d 347, 350(11th Cir.1996).²

The discussion below of "fraud" under Alabama law will demonstrate that the above standard for proving nondischargeable fraud in a bankruptcy context is far stricter than proof of certain types of fraud under state law.Hence, it may be necessary, where fraud is alleged in a state court proceeding, for a bankruptcy court to determine whether that "fraud" rises to the level of nondischargeable fraud in the bankruptcy context.

D.Alabama "fraud" law

What constitutes "fraud" in Alabama is the extensive subject of many statutes and judicial opinions.As the discussion below demonstrates, there are different types of fraud in Alabama law with varying degrees of intent.

Section 6-5-101 of the Code of Alabama provides, "Misrepresentations of a material fact made willfully to deceive, or recklessly without knowledge, and acted on by the opposite party, or if made by mistake and innocently and acted on by the opposite party, constitute legal fraud."Code of Ala.1975, § 6-5-101.Under section 6-5-101, a false representation, even if made by mistake or innocently, is actionable and entitles a plaintiff to compensatory damages.Hall Motor Co. v. Furman,285 Ala. 499, 504, 234 So.2d 37, 41(1970).Fraudulent intent, or an intent to deceive, is not essential to a recovery under that section.Standard Oil Co. v. Johnson,276 Ala. 578, 581, 165 So.2d 361, 364(1964).Neither is knowledge by the defendant of the falsity of his or her representations.First Nat'l Bank of Auburn v. Dowdell,275 Ala. 622, 626, 157 So.2d 221, 225(1963);Barrett v. Hanks,275 Ala. 383, 385, 155 So.2d 339, 342(1963).

The good faith of a party in making what proves to be a misrepresentation is immaterial as to the question of whether there was an actionable fraud if the other party acted on the misrepresentation to his detriment.Smith v. Reynolds Metals Co.,497 So.2d 93, 95(Ala.1986).Consequently, the mere assertion of that to be true which is not true, although believed to be true, when made to be relied on and which is relied on to the injury of a party misled thereby, may result in the imposition of liability for compensatory damages.Hudson v. Moore,239 Ala. 130, 133, 194 So. 147, 149(1940);Hartselle Real Estate & Ins. Co. v. Atkins,426 So.2d 451, 453(Ala.Civ.App.1983).³

Intentional fraud, unlike innocent or mistaken fraud, may entitle the party deceived to receive punitive damages.That is the subject of sections 6-5-103and6-5-104 of the Code of Alabama.

Section 6-5-103 provides:

Willful misrepresentation of a material fact made to induce another to act, and upon which he does act to his injury, will give a right of action.Mere concealment of such a fact, unless done in such a manner as to deceive and mislead, will not support art action.In all cases of deceit, knowledge of a falsehood constitutes an essential element.A fraudulent or reckless representation of facts as true, which the party may not know to be false, if intended to deceive, is equivalent to a knowledge of the falsehood.

Code of Ala.1975, § 6-5-103.

And section 6-5-104 provides:

(a) One who willfully deceives another with intent to induce him to alter his position to his injury or risk is liable for any damage which he thereby suffers.

(b) A deceit within the meaning of this section is either:

(1) The suggestion as a fact of that which is not true by one who does not believe it to be true;

(2) The assertion...