In re Brawn
| Decision Date | 16 March 1992 |
| Docket Number | Adv. No. 90-1051.,Bankruptcy No. 90-10471 |
| Citation | 138 BR 327 |
| Parties | In re Hayward BRAWN and Brenda M. Brawn, Debtors. Gail P. APPLEBEE, et al., Plaintiffs, v. Hayward BRAWN, Defendant. |
| Court | U.S. Bankruptcy Court — District of Maine |
John F. Logan, II, Logan, Kurr & Hamilton, Bangor, Me., Joseph L. Ferris, Ferris, Dearborn & Willey, Brewer, Me., for plaintiffs Gail P. Applebee, et al.
Norman S. Heitmann, III, Bangor, Me., for debtors—Hayward Brawn and Brenda M. Brawn.
Consolidated for consideration on a stipulated record are: plaintiffs' adversary complaint seeking to establish their claim's non-dischargeability under § 523(a)(4) of the Bankruptcy Code1; plaintiffs' objection to Hayward Brawn's claim of exemption in residential real estate; and Hayward Brawn's § 522(f)(1) motion seeking to avoid the plaintiffs' judicial lien on his residence.
For the reasons set forth below, the plaintiffs' claim of nondischargeability cannot prevail; the objection to the exemption claim must be overruled; and the motion to avoid plaintiffs' judicial lien must be granted.
Alvin S. Brawn ("Alvin") died testate on March 19, 1987, leaving six children. Gail P. Applebee, Freeman Brawn, Marlene Archer, Marvin Lee Brawn and Eve Harriett Danforth (collectively the "plaintiffs") are five. Hayward Brawn ("Hayward") is the sixth.2
At his death, Alvin's assets included $20,644.65 on deposit in a joint bank account in the names of "Alvin S. Brawn or Hayward Brawn."3 On the day Alvin died, Hayward withdrew the funds in the account.4 Alvin's will designated Hayward as personal representative and directed that the estate's assets be distributed equally among Alvin's six children.5 On April 13, 1987, Hayward accepted appointment as personal representative, knowing at the time that the plaintiffs, as Alvin's devisees or, alternatively, his heirs, claimed an interest in the funds previously held in the joint account.6 Hayward did not restore the funds to the account, nor did he distribute them according to the will's directives.7
On November 13, 1987, plaintiffs filed suit in Probate Court for Penobscot County to establish their right to share in the $20,644.65 fund.8 On July 16, 1990, that action, which Hayward had removed to the Superior Court, culminated in a final judgment, requiring Hayward to replace the funds and to distribute them in accordance with Alvin's testamentary disposition.9 The state court judge adopted comprehensive factual findings made by a court-appointed referee, including findings that the funds in the joint account had been wrongfully withdrawn; that the funds were estate assets; and that Hayward was obligated to restore them.10 Hayward did not appeal, nor did he satisfy the judgment obligation.11 On August 14, 1990, Hayward and his wife filed a joint petition for relief under Chapter 7.
Plaintiffs contend that the state court judgment, and the factual findings on which it is pinned, establish that their claim is excepted from discharge by § 523(a)(4). Hayward argues that, because the dischargeability complaint asserts a different cause of action than that previously litigated, the state adjudication is not determinative and that, in any event, the state court addressed different factual issues than those that figure here.
Plaintiffs do not urge that res judicata's principles carry the day. They asserted an entirely different cause of action in state court. The state court did not, and could not, consider dischargeability issues.12 Rather, plaintiffs posit that the facts determined by the state court establish a § 523(a)(4) discharge exception. Thus, this is a case for issue preclusion, or collateral estoppel, rather than one for claim preclusion, or res judicata. See In re Picard, 133 B.R. 1, 2 n. 3 (Bankr.D.Me.1991).
Federal courts must give effect to state court judgments.13 Until recently, however, unresolved questions concerning unique characteristics of dischargeability actions left doubt as to what effect state court factual determinations would have in the context of § 523(a) disputes. It is clear now that collateral estoppel may be invoked under appropriate circumstances in dischargeability actions. Grogan v. Garner, ___ U.S. ___, 111 S.Ct. 654, 658 n. 11, 112 L.Ed.2d 755 (1991).
Generally, federal courts give a state court judgment "the same preclusive effect as would be given that judgment under the law of the State in which that judgment was rendered." Migra v. Warren City School Dist. Bd. of Educ., 465 U.S. at 81, 104 S.Ct. at 896. See Roy v. Augusta, 712 F.2d 1517, 1520-21 (1st Cir.1983); General Foods Corp. v. Massachusetts Dept. of Public Health, 648 F.2d 784 (1st Cir.1981). This case presents plaintiffs' attempt to wield collateral estoppel as a sword, cutting away Hayward's factual defenses to their § 523(a)(4) claim. Federal bankruptcy principles contemplate the doctrine's offensive use in § 523(a) actions. Grogan v. Garner, ___ U.S. at ___, 111 S.Ct. at 658. Nevertheless, the question remains whether such use here is consistent with the "preclusive effect" that the Maine courts would give a Maine judgment.
Maine's Supreme Judicial Court has explained that collateral estoppel operates so that "when an essential fact or question is actually litigated on the merits and determined by a valid final judgment, the determination is conclusive between the same parties and their privies on a different cause of action." Hossler v. Barry, 403 A.2d 762, 767 (Me.1979). See also Chandler v. Dubey, 378 A.2d 1096 (Me.1977); Sevigny v. City of Biddeford, 344 A.2d 34 (Me.1975).14 The purposes of collateral estoppel include preventing repetitious litigation, avoiding inconsistent results and giving sanctity and finality to judgments. Hossler v. Barry, 403 A.2d at 767 (citing Cianchette v. Verrier, 155 Me. 74, 151 A.2d 502 (1959).
Plaintiffs, having successfully litigated in state court, seek that to which the principle of finality of judgments entitles them. Exhaustive inquiry is unnecessary to conclude that, to the extent factual issues pertinent to their § 523(a)(4) claim were determined in state court, the plaintiffs may assert those determinations in aid of their claims here. If the issues to be precluded are the same as those involved in the prior action; if those issues were actually litigated; if they were determined by a valid and final judgment; and if the determinations were essential to the prior judgment; then collateral estoppel will operate. In re Picard, 133 B.R. at 2. See Chandler v. Dubey, 378 A.2d at 1098.
Section 523(a)(4)'s discharge exception provides that a debtor may not be discharged from any debt "for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny. . . ." The exception's requisites, which must be proved by a preponderance of the evidence15, consist of a "defalcation" while the debtor was acting in a fiduciary capacity, as that capacity is narrowly defined under § 523(a)(4). See In re Brown, 131 B.R. 900, 904 (Bankr.D.Me.1991); In re Reeves, 124 B.R. 5, 6 (Bankr.D.N.H.1990). Although the state court necessarily and finally determined Hayward's default,16 the record does not establish that Hayward's default occurred while he acted in a fiduciary capacity vis-a-vis the plaintiffs.
Hayward undeniably misappropriated estate funds in the joint account, but he was not at the time operating in a capacity "imbued with attributes giving rise to, in substance, a trust." In re Brown, 131 B.R. at 905. Hayward appropriated the joint account funds on the very day his father died, well before his appointment as personal representative.
To sustain a § 523(a)(4) claim, a creditor must establish that the required fiduciary relationship existed at the time the debtor engaged in the conduct giving rise to the debt at issue. In re Waning, 120 B.R. 607, 614 (Bankr.D.Me.1990). See In re Reeves, 124 B.R. at 9 (citing Davis v. Aetna Acceptance Co., 293 U.S. 328, 55 S.Ct. 151, 79 L.Ed. 393 (1934)). The plaintiffs proved in state court that Hayward's actions were contrary to Alvin's wishes and that the funds should have been included in Alvin's estate.17 The state court did not find that the funds in the joint account constituted a trust res at the time Hayward withdrew them.18 Although the state court ordered Hayward to restore the funds after he commenced service as personal representative, the acts giving rise to plaintiffs' claim preceded his appointment as the estate's fiduciary. The distinction is critical. See In re Hodges, 115 B.R. 152, 155 (Bankr.S.D.Ill.1990) (). Cf. In re Valdes, 98 B.R. 78, 80 (Bankr.M.D.Fla.1989) (); In re Gramza, 13 B.R. 733, 735 (Bankr.E.D.Wis. 1981) (). As cynical, selfish and insensitive as Hayward's conduct may have been, plaintiffs' § 523(a)(4) claim cannot carry the day.19
Invoking Maine's state exemption statute, as he must,20 Hayward has asserted a $60,000.00 exemption in his residence under 14 M.R.S.A. § 4422(1).21 Maine increases the generally available $7,500.00 "homestead" exemption to $60,000.00 if the debtor or his dependent is over 60 years of age or physically or mentally disabled from gainful employment.22 The parties agree that Hayward "is disabled within the meaning of 14 Me.Rev.Stat.Anno. § 4422(1)(B)."23 Nevertheless, citing disqualifying language within the exemption provision, plaintiffs...
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