In re Bergman, Bankruptcy No. 88-101235
| Decision Date | 28 August 1989 |
| Docket Number | 88-101705,Adv. No. 88-04265,Bankruptcy No. 88-101235,88-04275. |
| Citation | 103 BR 660 |
| Parties | In re Esther BERGMAN, Debtor. NORFOLK AND WESTERN RAILROAD CO., Southern Railroad Co., Union Pacific Railroad Co., Missouri Pacific Railroad Co., Western Pacific Railroad Co., Spokane International Railroad Co., Missouri-Kansas-Texas Railroad Co., Burlington Northern Railroad Co., Consolidated Rail Corporation, Plaintiffs, v. Esther BERGMAN, Defendant. In re David E. WASSERSTROM, Debtor. NORFOLK AND WESTERN RAILROAD CO., Southern Railroad Co., Union Pacific Railroad Co., Missouri Pacific Railroad Co., Western Pacific Railroad Co., Spokane International Railroad Co., Missouri-Kansas-Texas Railroad Co., Burlington Northern Railroad Co., Consolidated Rail Corporation, Plaintiffs, v. David WASSERSTROM, Defendant. |
| Court | U.S. Bankruptcy Court — Eastern District of Pennsylvania |
Paul D. Keenan, Susan L. Parsons, Katherine McAlice, Philadelphia, Pa., for plaintiffs.
Jonathan H. Ganz, W.J. Winterstein, Jr., Philadelphia, Pa., for debtors/defendants in Adversary proceedings.
Edwin E. Thompson, Ambler, Pa., for debtors in main bankruptcy cases.
Anthony Barone, Aris J. Karalis, Philadelphia, Pa., for Trustee.
The Plaintiffs in these consolidated adversarial proceedings, nine (9) interline railroads (hereinafter "the Plaintiffs"), seek a determination that the individual Chapter 7 Debtor-Defendants' debts owed to them for failure of the Debtors' railroad to remit collections due to the Plaintiffs are non-dischargeable. An unusual aspect of this matter is that the Debtors' liabilities on these debts were established in a judgment entered by the district court in deciding another count of this very proceeding. We conclude that application of the related doctrines of stare decisis and collateral estoppel requires that the Plaintiffs must succeed under 11 U.S.C. § 523(a)(4) on the ground that the Debtors are chargeable with defalcations while acting in the fiduciary capacity of trustees as to the funds collected by operation of law.
On May 5, 1986, the Plaintiffs filed suit against the Debtors and two corporations controlled by them, CENTRAL INDUSTRIES, INC. (hereinafter "CI") and CENTRAIL MANAGEMENT, INC. (hereinafter "CM"), in the local district court, at C.A. No. 86-2613 (E.D.Pa.). This matter was assigned to the Honorable Norma L. Shapiro. On January 14, 1988, and January 19, 1988, respectively, Debtor DAVID E. WASSERSTROM (hereinafter "Wasserstrom") and Debtor ESTHER S. BERGMAN (hereinafter "Bergman") (Wasserstrom and Bergman are collectively referred to herein as "the Debtors") filed an individual Chapter 7 and an individual Chapter 13 bankruptcy petition, respectively, in this court. Bergman's case was converted to Chapter 7 upon her request on March 28, 1988.
On March 17, 1988, the Plaintiffs filed the above-captioned two adversary proceedings in this court against each of the Debtors. The Complaints in these proceedings recited seven Counts, Count I of which alleged that the obligations of the Debtors to the Plaintiffs were nondischargeable under 11 U.S.C. §§ 523(a)(2) and (a)(4), and Count II of which alleged that the Debtors converted railroad freight revenue trusts funds to their own personal use.1
On May 18, 1988, we issued a pre-trial Order indicating that we would hear only Count I of the Complaint at a trial commencing on June 13, 1988, because we believed that, insofar as the other Counts sought recoveries from the Debtors' estates (the only issue related to the Debtors' bankruptcies), the matters raised therein should be resolved via the claims process. See In re Stelweck, 86 B.R. 833, 844-45 (Bankr.E.D.Pa.1988). However, before the established trial date, the district court, per the Honorable Robert J. Kelly, withdrew the reference of the entire adversary Complaints on May 26, 1988, and ultimately transferred them to Judge Shapiro, who consolidated them with C.A. No. 86-2613.
On July 11, 1988, the Debtors filed a motion for summary judgment in their favor as to all Counts in C.A. No. 86-2613 and these proceedings in the district court. On August 11, 1988, the Plaintiffs therein filed a cross-motion for summary judgment as to only Count II (conversion) of the three actions. The matters next re-surfaced in our court when CI and CM filed Chapter 7 cases, on July 1, 1988, at Bankr. Nos. 88-12307S and 88-12308S, respectively. By an Order of November 22, 1988, we granted the Plaintiffs relief from the automatic stay to pursue these parties, although we dismissed, without prejudice, separate proceedings against CI and CM in our court (Adv. Nos. 88-2023S and 88-02024S).2
On April 11, 1989, Judge Shapiro filed a Memorandum and Order in which she denied the Debtors' motion for summary judgment and granted the Plaintiffs' similar motion. By Order of May 15, 1989, Judge Shapiro entered judgments against Bergman in the amount of $37,500.00 and against Wasserstrom in the amount of $470,390.62, the latter on a motion to reconsider the amount set forth in the Order of April 11, 1989. See page 665 n. 4 infra.
In that same Order of May 15, 1989, Judge Shapiro referred Count I of these proceedings (dischargeability) back to this court. After Judge Shapiro denied Wasserstrom's further motion for reconsideration, the Debtors filed a notice of appeal of her final Orders to the Court of Appeals at No. 89-1629 (3d Cir.).
On May 18 and May 19, 1989, we entered Pre-trial Orders which, inter alia, scheduled the trial of these matters on July 25, 1987. On July 13, 1987, both parties agreed in a conference call with this court as to how they wished to present these matters to us, which we memorialized in an Order of July 14, 1989. The parties agreed that a Stipulation of Facts and attachments thereto which had been the entire record presented to Judge Shapiro, plus her Memorandum and Order of April 11, 1989, plus one additional factual paragraph added to the Stipulation would constitute the record in this court. They also agreed to file Briefs in support of their respective positions in addition to that already prepared by the Plaintiffs in support of a motion for summary judgment in this court as follows: the Debtors on or before July 28, 1989, and the Plaintiffs a reply on or before August 10, 1989. The latter date was subsequently extended by agreement until August 14, 1989.
On August 2, 1989, the Debtors filed an "Objection" to the Plaintiffs' plans, apparently articulated to the Debtors' counsel, to move to amend the Complaint in order to add a reference to 11 U.S.C. § 523(a)(6) and address dischargeability under this Code section in their reply brief. On August 16, 1989, the plaintiffs filed a motion to strike this Objection and for permission to amend their Complaint, which has been scheduled for a hearing on September 14, 1989. In our view, our disposition of this proceeding in favor of the Plaintiffs solely on the basis of their claim under § 523(a)(4) renders disposition of this motion moot.
This Opinion is prepared in narrative form because we are deciding this proceeding on a stipulated record and are therefore not obliged to make any findings of fact.
We begin our decision-making process by carefully analyzing the impact of the contents of District Court Judge Shapiro's Memorandum of April 11, 1989, upon the outcome of this proceeding. In Brown v. Felsen, 442 U.S. 127, 134-39, 99 S.Ct. 2205, 2211-13, 60 L.Ed.2d 767 (1979), the Court held that a state-court decision, irrespective of its contents, could not have res judicata effect on a bankruptcy court's determination of dischargeability. This is because of the Court's finding that dischargeability is "the type of question Congress intended that the bankruptcy court would resolve." Id. at 138, 99 S.Ct. at 2212. Thus, even "if a state court should expressly rule on dischargeability questions," id. at 135, 99 S.Ct. at 2211, the bankruptcy court was not bound by such rulings and was obliged to make its own independent determination as to them. However, the court did allow the application of "the narrower principle of collateral estoppel" from state-court cases to dischargeability proceedings. Id. at 139 n. 10, 99 S.Ct. at 2213 n. 10. Thus, "if in the course of adjudicating a state law question, a state court should determine factual issues identical to those relevant to dischargeability, then collateral estoppel, in the absence of countervailing statutory policy, would bar relitigation of those issues in the bankruptcy court." Id.
Although the April 11, 1989, Memorandum constitutes a decision of a federal court rather than a state court and was a determination on certain issues in the same litigation as the proceedings before us, we believe that the district court's decision must be accorded only as much weight in a dischargeability proceeding as would a separate state-court determination in an independent proceeding. The district court had (and in fact has exercised) power to withdraw the reference of this proceeding to itself. 28 U.S.C. § 157(d). However, had it chosen to decide Count I of this proceeding, the district court would have had to sit as a bankruptcy court. Having already ruled in favor of the Plaintiffs on the merits, the court was probably disinclined to also rule on dischargeability, a ruling in favor of the Debtors in which could have effectively nullified its prior ruling.3 The district court's reference of Count I of this proceeding back to this court, which is permissible for any purpose under 28 U.S.C. § 157(a), was perhaps perceived as a means of assuring objectivity by allowing the dischargeability issue to be litigated in a different forum. We therefore perceive no "signal" to this court ...
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