In re Edwards

• Decision Date: 04 October 2001
• Docket Number: Adversary No. 01-4025.,Bankruptcy No. 00-43650-S.
• Citation: 277 B.R. 311
• Parties: In re Mark A. EDWARDS, Debtor. The Hardesty Company, Inc. d/b/a Mid-Continent Concrete Co., Plaintiff, v. Mark A. Edwards, Defendant.
• Court: U.S. Bankruptcy Court — Eastern District of Texas

277 B.R. 311

In re Mark A. EDWARDS, Debtor The Hardesty Company, Inc. d/b/a Mid-Continent Concrete Co., Plaintiff, v. Mark A. Edwards, Defendant.

Bankruptcy No. 00-43650-S.

Adversary No. 01-4025.

United States Bankruptcy Court, E.D. Texas, Sherman Division.

October 4, 2001.

Frank L. Broyles, Goines, Underkofler, Crawford & Langdon, James P. Moon, Dallas, TX, for debtor.

S. Todd Barton, Carrington, Coleman, Sloman & Blumenthal, Dallas, TX, for plaintiff.

MEMORANDUM OPINION

DONALD R. SHARP, Chief Judge.

NOW before the Court is the Plaintiff's Motion For Summary Judgment filed by The Hardesty Company, Inc. d/b/a Mid-Continent Concrete Co. ("Plaintiff"). The Court considered the pleadings filed and the evidence adduced. This opinion constitutes the Court's findings of fact and conclusions of law to the extent required by Fed.R.Bankr.Proc. 7052 and disposes of all issues before the Court.

FACTUAL AND PROCEDURAL BACKGROUND

The dispute originated when Mark A. Edwards, the Defendant ("Debtor" or "Edwards"), the Debtor in the main case, was president of Edwards Construction Co., a construction company("ECC"), working in Oklahoma. The Hardesty Company ("THC") d/b/a Mid-Continent Concrete Company ("Mid-Continent") supplied concrete to ECC in Oklahoma on the Palazzo Apartments project. The Debtor was a managing officer while the Palazzo work was being performed.¹ ECC owed THC money for materials supplied to the Palazzo project. Defendant's Motion for Judgment filed on August 9, 2001, p. 2.²

On or about January 21, 2000, Williams Industries, Inc., the general contractor for the Palazzo Apartments project, issued Check No. 43490, payable to Edwards Construction and Mid-Continent in the amount of $153,985.98. The Williams Industries, Inc., check was presented to Mid-Continent for endorsement and Mid-Continent was given ECC's check # 17512, payable to Mid-Continent in the same amount, drawn on ECC's account at Legacy Bank, Texas. Ex. D2 to the Defendant's Motion for Judgment, Affidavit of Mark Edwards. Mid-Continent's credit manager, F.T. Milroy, endorsed the check. Ex. D. to the Defendant's Motion for Judgment, Plaintiff's Responses to Defendant's Motion for Judgment. Mr. Milroy executed a release of lien. Ex. A to Defendant's Motion for Judgment. Thereafter, on January 27, 2000, ECC's check was returned to Mid-Continent for insufficient funds on January 27, 2000.

THC filed suit against Edwards, as an individual, Williams Industries and Hartford Fire Insurance Company in the District Court In And For Tulsa County, State of Oklahoma (C/J. No.2000-02726). Although Edwards was served, he neither answered nor appeared. Ex. C to the Defendant's Motion for Judgment. On August 7, 2000, THC obtained a Default Judgment against the Debtor for $153,985.98 in actual damages, prejudgment interest at the rate of 18% per annum from January 21, 2000 to August 7, 2000, in the amount of $14,883.91, attorneys' fees in the amount of $7,335.05, costs in the amount of $199.00 and post-judgment interest at the prevailing rate. Defendant's Motion for Judgment, p. 3. At the hearing, the issue on the amount of punitive damages on Counts Two and Three (i.e. fraud and violation of 42 Okla.St. § 152³) was reserved. Ex.C. to the Defendant's Motion for Judgment. On September 14, 2000, the Court entered a Judgment Awarding Exemplary Damages in favor of THC against Mark Edwards.

The Debtor filed a voluntary petition under Ch. 7 on December 1, 2000. Thereafter, THC filed its Complaint To Determine Dischargeability of Debts objecting to the discharge of Edwards' debt to THC (the "Complaint"). Thereafter, Plaintiff filed the Motion for Summary Judgment now before the Court for consideration. Defendant responded and the matter was set for hearing on a regular setting.⁴

DISCUSSION

Summary Judgment is appropriate in bankruptcy proceedings when there is no genuine issue of material fact and moving party is entitled to judgment as a matter of law. In re McCafferty, 96 F.3d 192 (6th Cir.1996). The burden of establishing the nonexistence of a "genuine issue" is on the party moving for Summary Judgment. Celotex Corp. v. Catrett, 477 U.S. 317, 330, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). One cannot rest on the mere allegations of the pleadings. In Anderson v. Liberty Lobby, 477 U.S. 242, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986), the Court held that (1) only disputes over facts that might legitimately effect the outcome are material under Rule 56; (2) the test for determining whether a genuine issue of material fact exists is the same as the test for granting a directed verdict (i.e. whether the evidence is sufficient to sustain a verdict for the non-moving party); and (3) in applying the test the court must view the evidence in the light most favorable to the non-movant and assess its sufficiency according to the evidentiary burden imposed by the controlling substantive law. Under Rule 56(e), the burden shifts. Rule 56(e) requires the opposing party to "set forth specific facts" that demonstrate the existence of a genuine issue for trial.

The Complaint, as amended, seeks this Court's entry of an order holding THC's claims against Edwards non-dischargeable under 11 U.S.C. §§ 523(a)(2)(A), (a)(4) and (a)(6).⁵ THC argues that Edwards' debt to THC is non-dischargeable under 11 U.S.C. § 523(a)(2)(A) because it is "a debt for money, property or services obtained by false pretenses, a false representation or actual fraud." The fraudulent scheme perceived by THC is the exchange of a check for which there was insufficient funds in consideration of the endorsement of the Williams' check and release of liens. THC further contends Edwards violated his fiduciary duty to Mid-Continent by failing to use the funds held in trust to pay Mid-Continent its "lienable" claims: "[b]ecause of this violation of a fiduciary duty, Mark Edwards' debt to Mid-Continent cannot be discharged under section 523(a)(4) of the Bankruptcy Code because [the] debt is `for fraud or defalcation while acting in a fiduciary capacity, embezzlement or larceny.' "⁶ THC avers the debt is non-dischargeable pursuant to § 523(a)(6) as it was for "willful and malicious injury by the debtor to another entity or to the property of another entity".⁷ The standard of proof for allegations under § 523 is by a preponderance of the evidence. Grogan v. Garner, 498 U.S. 279, 111 S.Ct. 654, 661 112 L.Ed.2d 755(1991); In re Townsley, 195 B.R. 54(Bkrtcy.E.D.Tex.1996). The burden is on the objecting party.

The Court has scrutinized the Plaintiff's Motion for Summary Judgment, the exhibits attached in support of same, the Debtor's response to same and the record in this case and concludes the motion should be granted. This Court is of the opinion that Edwards seeks to re-litigate in the bankruptcy forum the state court's determination as to whether, as president of the company, he had the requisite authority and involvement in the process to be found actually liable for and personally liable for the corporate debts. At this point, such arguments are immaterial because this Debtor is faced with a judgment against him by a court of competent jurisdiction — the issues have already been litigated. Thus, the issues this Court must examine are: whether issue preclusion, or collateral estoppel, applies to the findings of the Oklahoma state court and whether this Court must re-litigate the factual issues or may adopt the findings of the Oklahoma state court and determine whether the debt is non-dischargeable.

Generally, a default judgment will not be granted preclusive effect because none of the issues was actually litigated.⁸ The "actual litigation" requirement of collateral estoppel may be satisfied if the party was afforded a reasonable opportunity to defend himself on the merits but choose not to do so. See Bush v. Balfour Beatty Bahamas, Ltd. (In re Bush), 62 F.3d 1319, 1324 (11th Cir.1995). The history of this issue in the Fifth Circuit, which is controlling here, was discussed by a Mississippi Bankruptcy Court:

The failure of a defendant to attend the trial does not prevent issue preclusion in a subsequent action, so long as the prior action was actually litigated in the defendant's absence. In Garner v. Lehrer (In re Garner), 56 F.3d 677 (5th Cir.1995), the Fifth Circuit, applying Texas law on collateral estoppel, gave preclusive effect to a prior state court judgment even though the defendant failed to appear at the trial. In the opinion, the court made a distinction between a "simple default judgment" and a "post-answer default." Once an answer is filed, the plaintiff is unable to obtain a simple default judgment and must offer evidence to satisfy the burden of proof as to the elements of the action. Lehrer had sued Garner in state court. Garner answered the complaint, but did not appear at the trial, and a judgment was entered against him. Garner then filed bankruptcy which prompted the filing of a dischargeability complaint by Lehrer. Lehrer then moved for summary judgment based on the preclusive effect of the state court judgment. In response, Garner asserted that the "fully and fairly litigated" element of issue preclusion had not been met since the trial had been conducted in his absence. In affirming the bankruptcy court and the district court, the Fifth Circuit stated as follows:

In the state court proceedings, Garner answered Lehrer's complaint with a general denial, and then he failed to appear for trial. The district court conducted a trial in Garner's absence, and "based on the testimony presented to the Court, the Court f[ound] and conclude[d] that Plaintiff, Kenneth Eugene Lehrer [was] entitled to recover judgment against Defendants." This decision was reached after Garner answered Lehrer's complaint and after a trial in which Lehrer put on evidence sufficient to carry his burden of proof. According to Texas law, the issues were properly raised and actually litigated; accordingly, we find they were...