In re Gilson, Bankruptcy No. 97-11256-RGM. Adversary No. 97-1163.
| Decision Date | 27 June 2000 |
| Docket Number | Bankruptcy No. 97-11256-RGM. Adversary No. 97-1163. |
| Parties | In re Traci Lynn GILSON, Debtor. Federal Insurance Company, Plaintiff, v. Traci Lynn Gilson, Defendant. |
| Court | Bankr. V.I. |
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Sammy S. Knight, Fairfax, Virginia, for debtor.
Bernard Fensterwald, III, Fensterwald & Alcorn PC, Arlington, Virginia, for plaintiff.
The question presented in this case is whether the debtor is precluded from further litigating the dischargeability of the plaintiffs claim in the bankruptcy court after entry of a post-petition sanction judgment in a United States District Court after the bankruptcy court granted relief from the automatic stay to litigate the matter in the district court. Neither the underlying factual issues nor damages were actually litigated in the district court.
Traci Lynn Gilson was employed by NYMEX as the secretary to Mark Seetin, a senior vice president. She made all of his travel arrangements and was authorized to use the corporate American Express card for this purpose. During the course of her two-and-a-half-year employment, she also used the credit card for her personal benefit. Paolo Verrone, who owned the travel agency used by Ms. Gilson to make travel arrangements, cooperated with Ms. Gilson. Upon discovery of the unauthorized use in 1996, Ms. Gilson was terminated and suit was filed in the United States District Court for the Southern District of New York against both Ms. Gilson and Mr. Verrone. The complaint contained four counts: fraud, conversion, breach of fiduciary duty, and violation of the Racketeer Influenced and Corrupt Organizations Act ("RICO") under 18 U.S.C. § 1961 et seq. Mr. Verrone did not respond to the complaint. Ms. Gilson filed an answer denying the critical allegations. On February 21, 1997, before any substantial effort was expended in the district court, Ms. Gilson filed a voluntary petition in bankruptcy under chapter 7 of the Bankruptcy Code in this court.
Federal Insurance Company ("FIC"), successor to NYMEX, filed a complaint in this court on May 27, 1997, alleging that its claim was not dischargeable. Ms. Gilson filed an answer. Discovery was propounded by FIC, but Ms. Gilson did not respond to it. FIC filed a motion to compel discovery on October 1, 1997. The matter came on for a hearing on October 31, 1997. The discovery motion was resolved by terminating the automatic stay so that the district court case could be fully litigated against both defendants and staying any further proceedings in this court. The order was entered on December 12, 1997.
Upon returning to the district court, FIC propounded discovery to Ms. Gilson to which she did not respond. On February 26, 1998, the district court entered a sanction default against Ms. Gilson for failure to respond to the discovery and referred the matter to a magistrate judge to determine damages.1 The magistrate judge gave both Mr. Verrone and Ms. Gilson an opportunity to submit evidence and to respond to the evidence submitted by FIC as to damages. Mr. Verrone did not respond. Ms. Gilson, through her attorney, replied. She stated she was the subject of a criminal investigation in the District of Columbia as a result of the transactions in issue in the case and asserted her Fifth Amendment privilege against self-incrimination. She did not submit any evidence or respond to the evidence submitted by FIC. The inevitable occurred. The magistrate judge issued his Report and Recommendation in which he found liability under the four counts and actual damages in the amount of $474,713.76 on each count. On the conversion and breach of fiduciary duty counts, he recommended punitive damages in the amount of $100,000.00 for each count. On the RICO count, he recommended treble damages based on the actual damages only, a total of $1,124,141.28. Mr. Verrone, while not having previously participated in the case, objected to the Report and Recommendation. Ms. Gilson did not. The district court heard Mr. Verrone's objections and overruled them. In light of the fact that the multiple counts arose from the same transaction, the district court held that FIC was entitled to only one satisfaction and entered judgement in the amount of $1,124,141.28 against Mr. Verrone and Ms. Gilson, jointly and severally.
FIC has now returned to this bankruptcy court. It requested and received leave to file an amended complaint in this adversary proceeding to conform to the district court complaint. The amended complaint was filed and served. Ms. Gilson did not respond to the amended complaint. FIC filed a motion seeking a default judgment or, in the alternative, summary judgment based on the district court judgment. Ms. Gilson has not responded to the motion.
The debtor is in default for having failed to respond to the amended complaint. F.R.BANKR.P. 7055, which incorporates F.R.CIV.P. 55(a). Consequently, the case is ripe for entry of the debtor's default by the clerk. However, the amount of damages is not a sum certain or a sum which can by computation be made certain. Therefore, the clerk cannot enter a judgment by default and a further hearing is required before the court. F.R.CIV.P. 55(b). Frame v. S-H, Inc., 967 F.2d 194, 204 (5th Cir., 1992); United States v. DiMucci, 879 F.2d 1488, 1497-98 (7th Cir., 1989).
This is not the relief FIC would like. It would like to avoid a second damages hearing, and the possibility of losing the benefit of the treble damages. To this end, FIC also moved for summary judgment based on the judgment rendered by the district court. FIC focuses on collateral estoppel2 to avoid repeating the proof hearing, assuming that res judicata3 is not available. Brown v. Felsen, 442 U.S. 127, 99 S.Ct. 2205, 60 L.Ed.2d 767 (1979).
It is necessary to be sensitive to whose law of collateral estoppel is being applied and the particular elements in that jurisdiction when reviewing reported opinions. The law of collateral estoppel, although similar throughout the United States, is not identical. A judgment that may give rise to collateral estoppel in one state may not give rise to collateral estoppel in another. For example, a default judgment is not generally entitled to collateral estoppel effect. RESTATEMENT (SECOND) OF JUDGMENTS § 27 cmt. e. This rule is not universal. In Bend v. Eadie (In re Eadie), 51 B.R. 890, 894 (Bankr.E.D.Mich., 1985), the prior judgment arose in a Michigan state court. The bankruptcy court applied Michigan's doctrine of collateral estoppel and found that a default judgment entered by the Michigan state court would be granted collateral estoppel in Michigan state courts as to all issues that were necessary to support the default judgment. But see Wood v. Dealers Fin. Services, Inc., 199 B.R. 25 (E.D.Mich., 1996); Montgomery v. Kurtz (In re Kurtz), 170 B.R. 596 (Bankr.E.D.Mich., 1994). See also TransDulles Ctr., Inc. v. Sharma, 252 Va. 20, 472 S.E.2d 274 (1996).
It is also necessary to be sensitive to the basis of the obligation to apply the law of another judicial system. Collateral estoppel is given effect between states by virtue of the Full Faith and Credit Clause of the United States Constitution. U.S. CONST. ART. IV, § 1. Federal courts are not bound by the Full Faith and Credit Clause. Federal courts are bound by 28 U.S.C. § 1738, which provides a statutory full faith and credit for federal courts to follow when presented with a state court judgment.4 In re Genesys Data Technologies, Inc., 204 F.3d 124 (4th Cir., 2000). As among the federal courts, however, neither the Constitution nor 28 U.S.C. § 1738 provide a basis for decision. Federal decisions provide the elements of collateral estoppel to be given by one federal court to the judgment of another federal court. Cf. Marrese v. American Academy of Orthopaedic Surgeons, 470 U.S. 373, 388, 105 S.Ct. 1327, 1336, 84 L.Ed.2d 274 (1985); Kremer v. Chemical Constr. Corp., 456 U.S. 461, 467, 102 S.Ct. 1883, 1890, 72 L.Ed.2d 262 (1982).
In the present case, the judgment presented to the court is a judgment of the United States District Court for the Southern District of New York. Consequently, the elements of federal collateral estoppel are applicable. Those elements are: (1) the issue sought to be precluded was the same as that involved in the prior action; (2) that issue was actually litigated; (3) it was determined by a valid and final judgment; and (4) the determination was essential to the prior judgment. Montana v. United States, 440 U.S. 147, 153, 99 S.Ct. 970, 973, 59 L.Ed.2d 210 (1979); Combs v. Richardson, 838 F.2d 112 (4th Cir., 1988).
In this case, there is no question that all but one element has been satisfied. The issues are identical. The creditor amended its complaint in the bankruptcy court to conform to the complaint filed in the district court.5 However, the issues were not actually litigated in the district court. The debtor, although having initially filed an answer, declined to participate in the case after the automatic stay was terminated by the bankruptcy court. Her stated reason for not participating was the protection of her Fifth Amendment rights. As a result of her default in responding to discovery, a sanction was imposed. A default was entered against her. The magistrate judge thereafter determined the damages, again without her participation. The missing element of actual litigation precludes the use of collateral estoppel. Cromwell v. County of Sac, 94 U.S. 351, 356-57, 24 L.Ed. 195 (1876).
FIC argues that the debtor had a full and fair opportunity to litigate the matters in the district court and that this full and fair opportunity meets the "actually...
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