In re Harris
| Decision Date | 19 September 1980 |
| Docket Number | No. 80-10-BKC-TCB-A,80-1128-Civ-SMA.,80-10-BKC-TCB-A |
| Parties | In re Lester J. HARRIS, Debtor. Lester J. HARRIS, Appellant, v. FIDELITY AND DEPOSIT COMPANY OF MARYLAND, Appellee. |
| Court | U.S. District Court — Southern District of Florida |
Warren D. Hamann, Miami, Fla., for appellant.
Blackwell, Walker, Gray, Powers, Flick & Hoehl, Stephen Judson, Miami, Fla., for appellee.
THIS CAUSE came before the Court upon the Debtor Lester J. Harris's Appeal from the Final Judgment of the Bankruptcy Court. The facts are not in dispute, and can be summarized as follows.
In 1975, the Florida Home Insurance Company, an insurance agency, was formed with Harris as its vice president. During the time it did business, the fidelity and honesty of its employees, including Harris, were guaranteed by a standard employees' fidelity bond, issued by the Appellee Fidelity and Deposit Company of Maryland F & D. The amount of the fidelity bond was $500,000. Florida Home was in business until late 1978 or early 1979, when it ran into financial difficulties. As a result of its inability to continue doing business, Florida Home went into receivership, and the Florida Department of Insurance took over as receiver.
In its capacity as receiver, the Department of Insurance sued F & D on the fidelity bond in state court; F & D subsequently removed the action to the United States District Court for the Northern District of Florida, where it is currently pending. The Department of Insurance's Complaint alleges that the President and Secretary of Florida Home, Daniel W. McCormack, Jr. and David K. Harris, respectively, and the Appellant herein, Lester J. Harris, converted and diverted premium payments to their own use. It is this course of conduct which allegedly rendered Florida Home incapable of continuing business. The Complaint further alleges that F & D has a contractual duty under the fidelity bond to reimburse the Department of Insurance, and that it has refused to do. The Department of Insurance therefore seeks damages against F & D for the full amount of the $500,000 fidelity bond. The Department of Insurance, however, has not named either the Debtor, Lester J. Harris, or the other former Florida Home officers, Daniel W. McCormack, Jr. and David K. Harris, as defendants in the action currently pending in the Northern District of Florida.
Prior to the filing of that action, Lester J. Harris filed his Petition in Bankruptcy in the Southern District of Florida. The Department of Insurance has appeared in this action by filing a Complaint to Determine Dischargeability of Debt, and a Proof of Claim. The allegations in these documents pertain to the same activities alleged to have occurred in the Northern District of Florida action. The Department of Insurance has voluntarily dismissed the Complaint to Determine Dischargeability; it has not, however, withdrawn its Proof of Claim, which is still before the Bankruptcy Court below.
F & D's response to the Petition in Bankruptcy was two-fold. First, it filed a Complaint to Determine Dischargeability of Debt in the bankruptcy action. It is this Complaint which is the subject of the instant appeal. Unlike the Department of Insurance, however, F & D has not filed a Proof of Claim in the Bankruptcy Court. Second, F & D filed a Third Party Complaint against Lester J. Harris in the Northern District of Florida action. That Third Party Complaint is for indemnification: it alleges that if the Department of Insurance recovers against F & D on the fidelity bond, then Lester J. Harris will be liable over to F & D for whatever amount the Department of Insurance recovers.
In its Complaint to Determine Dischargeability of Debt filed below, F & D sought two forms of relief. The first was a modification of the automatic stay which prevented the Northern District of Florida action from going forward. By seeking this relief, F & D argues that the issue of Harris' fraud is more appropriately determined in the Northern District of Florida. The second form of relief sought by F & D was a declaratory judgment, stating that if F & D prevails on its Third Party Complaint against Harris in the Northern District of Florida action (which would mean that the Department of Insurance had prevailed over F & D in that action), then that judgment would be a fortiori non-dischargeable under 11 U.S.C. § 523(a)(2) and (4).
The Bankruptcy Court granted both forms of relief. The Court rejected Harris' request to bring the Third Party Complaint in the Northern District of Florida into the Bankruptcy Court under 28 U.S.C. § 1471, stating that such an action "would have the tail wagging the dog." Accordingly, the automatic stay was modified to permit the Northern District of Florida action to proceed to judgment. The Bankruptcy Court also issued the requested declaratory judgment. In its view, "there is no way that F & D could obtain a judgment against Harris on its third party complaint without that judgment being res judicata as to all the issues necessary to make that claim non-dischargeable under 11 U.S.C. § 523(a)(4)."1 On that basis, the Bankruptcy Court issued a declaratory judgment stating that "any judgment F & D obtains will be, a fortiori, non-dischargeable under 11 U.S.C. § 523(a)(4)." Harris has appealed both rulings.
At the hearing before this Court, both parties agreed that under the 1978 Bankruptcy Code, the Bankruptcy Court retains the discretion it had under the former Bankruptcy Act to modify the stay and permit actions involving the Debtor in other forums to proceed. See, e.g., In re Lebow, 397 F.Supp. 487 (S.D.N.Y.1975). In this appeal, however, Harris contends that in view of the Code's policy of providing the Debtor with a "fresh start" and a rapid determination of his liabilities, the Bankruptcy Court abused its discretion in permitting the action in the Northern District of Florida to proceed.
An almost identical factual pattern confronted the Court in In re Olmstead, 608 F.2d 1365 (10th Cir. 1979). There, the Federal Deposit Insurance Company, as receiver of a bank, filed suit against Transamerica Insurance Company on two bankers' blanket bonds. The bonds had guaranteed the honesty of Olmstead, the Bankrupt. Transamerica therefore impleaded Olmstead. When Olmstead filed his petition for bankruptcy, Transamerica requested modification of the automatic stay to permit the FDIC's previously filed action, and Transamerica's third party complaint thereto, to proceed. The Bankruptcy Court granted the modification and permitted the prior action to proceed. In affirming, the Tenth Circuit held that the Bankruptcy Court's decision was within its discretion:
It is obvious . . . that the bankruptcy court will save considerable time, effort, and money by awaiting the outcome of the liability proceeding and reviewing facts there presented to liquidate and determine dischargeability of the debt. Consequently, we cannot say that the bankruptcy court abused its discretion by deferring its determination of dischargeability until the FDIC v. Transamerica v. Olmstead action is concluded. The judgment and order of the district court is therefore Affirmed.
As in Olmstead, this Court finds that the Bankruptcy Court in the instant case acted within its discretion in allowing the action in the Northern District of Florida to proceed to judgment. As the Bankruptcy Court noted in different terms, adjudication of a Third Party Complaint while the main action is still pending would be putting the cart before the horse. If F & D prevails against the Department of Insurance in the Northern District of Florida action, the Bankruptcy Court would have wasted its time and effort. Accordingly, this Court finds that the Bankruptcy Court had the discretion to modify the automatic stay, and it properly acted within that discretion in permitting the prosecution of the action in the Northern District of Florida.
While maintaining that the action should not be permitted to proceed in the Northern District of Florida, Harris argues that even if this position is rejected, the Bankruptcy Court erred in entering its declaratory judgment. Upon consideration of the procedural posture of the case, this Court concludes that Harris is correct in this respect, and finds that the declaratory judgment was improvidently entered.
The basis for the entry of the declaratory judgment was the Bankruptcy Court's conclusion that a decision in the Northern District of Florida action would necessarily be "res judicata as to all the issues necessary to make F & D's claim non-dischargeable under 11 U.S.C. 523(a)(4)." But the decision of whether a judgment has a res judicata or collateral estoppel impact on the dischargeability of a debt in bankruptcy requires a careful consideration into the nature of the judgment and the factual findings upon which it is based. See, e.g., Carey v. Lumber Co. v. Bell, 615 F.2d 370 (5th Cir. 1980). When a declaratory judgment is entered on the basis of the collateral impact of another judgment not yet rendered, as was done here, this kind of careful consideration is not possible.
This was implicitly recognized in Austin v. Wendell-West Co., 539 F.2d 71 (9th Cir. 1976). In that case, creditors had filed actions for fraud and misrepresentation against the debtor in California state court prior to its filing the petition in bankruptcy. The Court granted the creditors' motion to modify the stay and to permit the state court actions to continue. In so doing, the Court recognized that "these allegations in the state court actions, if proven, may be grounds for holding that the debts on the California judgments derived from these actions, if any, are non-dischargeable." Id. at 74. The Court then proceeded to explain the procedure that would be used after the state courts...
To continue reading
Request your trial