IN RE GALVAN

• Decision Date: 19 May 2009
• Docket Number: Adversary No. 07-1167 M.,Bankruptcy No. 7-07-12000 ML
• Citation: 430 B.R. 685
• Parties: In re Ray A. GALVAN, fdba Speedy Towing and Recovery, Debtor. Mark and Corey Armendariz, Plaintiffs, v. Ray A. Galvan, fdba Speedy Towing and Recovery, Defendant.
• Court: U.S. Bankruptcy Court — District of New Mexico

430 B.R. 685

In re Ray A. GALVAN, fdba Speedy Towing and Recovery, Debtor.

Mark and Corey Armendariz, Plaintiffs, v. Ray A. Galvan, fdba Speedy Towing and Recovery, Defendant.

Bankruptcy No. 7-07-12000 ML, Adversary No. 07-1167 M.

United States Bankruptcy Court, D. New Mexico.

May 19, 2009.

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Daniel D. James, Las Cruces, NM, Kelly Albers, Law Office of Kelly P. Albers, P.C., Las Cruces, NM, for Plaintiffs.

R. Trey Arvizu, III, Las Cruces, NM, for Defendant.

ORDER DENYING PLAINTIFFS' MOTION FOR SUMMARY JUDGMENT

MARK B. McFEELEY, Bankruptcy Judge.

THIS MATTER is before the Court on Plaintiffs' Complaint for Determination of Dischargeability. Plaintiffs seek to have their debt of $ 92,573.72 plus interest declared nondischargeable under either 11 U.S.C. § 523(a)(4) or § 523(a)(6) as a debt for fraud or defalcation while acting in a fiduciary capacity or for willful and malicious injury by the debtor to plaintiffs or their property. Plaintiffs filed a Motion for Summary Judgment and Affidavits in support of the Motion on August 29, 2008 and a Reply in Support of the Motion on October 13, 2008. Defendant filed a Response to the Motion for Summary Judgment on September 29, 2008.

Plaintiffs' claim arises as a result of Defendant's towing, storage and eventual sale of four freight trailers owned by Plaintiffs. Plaintiffs assert that Defendant wrongfully converted their property and money resulting in Plaintiffs' inability to satisfy a debt to the IRS including the accrual of interest and penalties. Plaintiffs seek recovery of treble damages plus interest awarded by a state court judgment entered against Defendant for conversion. Defendant claims that Plaintiffs have failed to meet their burden under either non-dischargeability provision by failing to set forth sufficient evidence to support their claim. Defendant further asserts that the state court judgment is not binding in the instant proceeding. The Court after consideration of the pleadings and briefs, the uncontroverted facts, and applicable law finds the Plaintiffs' motion for summary judgment should be denied.

A. Summary Judgment Standard

Summary judgment is appropriate when there are no genuine issues of material fact, and the moving party is entitled to judgment as a matter of law. Rule 56(c), Fed.R.Civ.P., made applicable to bankruptcy proceedings by Rule 7056, Fed.R.Bankr.P. The party requesting summary judgment must demonstrate to the Court that the undisputed facts entitle the movant to judgment as matter of law.¹ The party opposing summary judgment may not rest upon allegations or denials contained in its own pleading, but must "set out specific facts showing a genuine issue for trial." Rule 56(e)(2), Fed.R.Civ.P. To successfully defend against a motion for summary judgment, the affidavits and/or other documentation offered by the party opposing summary judgment must contain probative evidence that would allow a trier of fact to find in Defendant's favor.² In determining whether summary judgment should be granted, the Court must view the facts in the light most favorable to the party opposing summary judgment.³

B. Undisputed Facts

It is undisputed that on April 19, 2005 Defendant towed four freight trailers from Travel Centers of America in Las Cruces, New Mexico. See Memorandum in Support of Armendarizes' Motion for Summary Judgment ("Plaintiff MSJ"), ¶ 1; Response to Motion for Summary Judgment ("Response"), ¶ 1. Defendant was contacted by the owner of the Travel Centers of America to remove the trailers from his property. See Complaint by Mark and Corey Armendariz for Determination of Dischargeability ("Complaint"), ¶ 6; Answer to Complaint ("Answer"), ¶ 1. At the time Defendant took possession of the trailers they were owned by Mark Enterprise, Inc. ("MEI"). Complaint, ¶ 9; Answer, ¶ 1. Defendant gave notice to MEI on or about May 11, 2005, asserting a debt and lien under NMSA 1978, § 48-3-13. Plaintiff MSJ, ¶ 4; Response, ¶ 1. Plaintiffs contacted Defendant in early June regarding their intention to redeem their property. Plaintiff MSJ, ¶ 5; Response, ¶ 3. Defendant sold the trailers on June 29, 2005 through a private sale. Complaint, ¶ 14, 16; Answer, ¶ 1. Defendant did not refund to the Plaintiffs the difference between the amount received from the sale of the trailers and the amount of the debt claimed in the notice given to MEI on May 11, 2005. See Complaint, ¶ 19; Answer, ¶ 1.

C. Collateral Estoppel

As a threshold matter this Court will address Defendant's claim that the state court judgment should not be binding. "Collateral estoppel, or issue preclusion, is a doctrine that prohibits the relitigation between the same parties of issues of ultimate fact that have been determined by a valid and final judgment."⁴ The doctrine of collateral estoppel applies to dischargeability actions⁵. Thus when the elements of a prior claim are identical to the elements required to establish an exception to discharge, it is appropriate for the Court to give collateral estoppel effect to those elements that "were actually litigated and determined in the prior action."⁶ Summary judgment on a non-dischargeability claim may, therefore, be granted based on a prior judgment obtained outside of bankruptcy provided that the prior judgment establishes all elements necessary to the determination of non-dischargeability under the Bankruptcy Code.

In the state court litigation, Plaintiffs moved for partial summary judgment against the Defendant. Defendant failed to file any pleadings in opposition or appear at the hearing on the motion and the Court entered judgment in favor of Plaintiffs. Defendant asserts that he was unable to oppose the motion for summary judgment because of his inability to compensate counsel to represent him. In addition, Defendant asserts that he was not informed about the hearing on the summary judgment motion. Essentially, Plaintiffs received a default judgment against Defendant in the state court. "Not all default judgments will have, nor should they have, preclusive effect on dischargeability issues in Bankruptcy Court".⁷ "A default judgment merely disposes of the cause of action and is not a reliable adjudication of any issue for that case, and should not have a collateral estoppel effect in a bankruptcy dischargeability proceeding."⁸ In In re Hubbard, the Court reasoned that a party's opportunity to litigate should not be given the same effect as "actual litigation" unless application of the estoppel to a subsequent proceeding was foreseeable.⁹ This Court finds that Defendant did not participate fully in "actual litigation." Therefore, the state court judgment does not have a collateral estoppel effect in this adversary proceeding.

D. 11 U.S.C. § 523(a)(4)

The first theory under which Plaintiffs seek a determination as to non-dischargeability of their of the debt is 11 U.S.C. § 523(a)(4) which states that, "... a debt is -non-dischargeable if the debtor committed "fraud or defalcation while acting in a fiduciary capacity ..." 11 U.S.C. § 523(a)(4). To prevail under this subsection, Plaintiffs must establish that a fiduciary relationship between themselves and Defendant existed, that funds or property were entrusted to the Defendant, and that Defendant committed fraud or defalcation in the course of that fiduciary relationship.¹⁰ Once that proof is made, the burden shifts to the debtor-fiduciary to account for the entrusted funds.¹¹ Plaintiffs reliance on their assertion that Defendant was a fiduciary under 11 U.S.C. § 523(a)(4) is misplaced. Plaintiffs argue that the lien statutes imposed a bailment duty on Defendant with respect to the trailers and as such Defendant was a fiduciary. The meaning of the term "fiduciary" is an issue of federal law.¹²

Federal courts have found that the general definition of fiduciary, a relationship involving confidence, trust and good faith, is too broad in the dischargeability context.¹³ Consequently, federal courts have limited the fiduciary relationship contemplated in 11 U.S.C. § 523(a)(4) to one arising out of a pre-existing express or technical trust, not an implied, resulting, or constructive trust.¹⁴ The trust giving rise to the fiduciary relationship must be imposed prior to any wrongdoing; the debtor must have been a "trustee" before the wrong and without reference to it.¹⁵ Although the concept of fiduciary is to be narrowly defined as a matter of state law, state law is still a very important factor in determining when a technical or express trust exists.¹⁶ Section 523(a)(4), insofar as it relates to a debtor acting in a fiduciary capacity, does not apply to frauds of agents, bailees, brokers, factors, partners, and other persons similarly situated.¹⁷ Furthermore, a debtor is not a fiduciary, within the meaning of 11 U.S.C. § 523(a)(4), when the debtor is merely in the position of an agent, bailee, broker, factor, partner, or other similarly situated person, unless some additional fact is shown.¹⁸ Courts have found that absent additional facts or special considerations, 11 U.S.C. § 523(a)(4) does not extend to the more general class of fiduciaries such as agents, bailees, brokers, factors, and partners.¹⁹

Express or technical trusts may be created by statute.²⁰ "A state statute must meet three requirements to trigger section 523(a)(4)'s fiduciary status: (1) the trust res must be defined by the statute, (2) the statute must spell out the fiduciary duty, and (3) the statute must impose a trust on funds prior to the act creating the debt."²¹

Plaintiffs argue that NMSA § 48-3-15, which sets forth the procedures for disposing of sale proceeds by a lien claimant, imposes a fiduciary duty on Defendant. NMSA § 48-3-15 states:

After sale made as provided in the preceding section 48-3-14 NMSA 1978, the proceeds of such sale shall be applied to the payment of the costs of advertising and making the sale and the satisfaction of the

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