In re Keene
| Decision Date | 20 December 1991 |
| Docket Number | Adv. No. 90-0073-BKC-RAM-A.,Bankruptcy No. 89-35706-BKC-RAM |
| Citation | 135 BR 162 |
| Parties | In re Ronald E. KEENE and Barbara J. Keene, Debtors. Erica JOHNSON and Tammy Wynn, Plaintiffs, v. Ronald E. KEENE and Barbara J. Keene, Defendants. |
| Court | U.S. Bankruptcy Court — Southern District of Florida |
Lawrence U. Taube, West Palm Beach, Fla., for plaintiffs.
Steven R. Jacob, Boynton Beach, Fla., for defendants.
SECOND SUPPLEMENTAL MEMORANDUM OPINION
Plaintiffs seek a determination that a state court judgment debt owed by defendant, Ronald E. Keene, is nondischargeable pursuant to 11 U.S.C. §§ 523(a)(2)(A), (a)(4) and (a)(6). The proceeding was tried on March 15, 1990, but for the procedural reasons discussed below, final judgment has not been entered despite the entry of two earlier memorandum opinions. In conjunction with this second supplemental memorandum opinion, the Court will enter a final judgment for the plaintiffs against Ronald E. Keene and a final judgment in favor of defendant, Barbara Keene.
This proceeding was tried on March 15, 1990, before the Honorable William Houston Brown, sitting in this district as a visiting judge. In a Memorandum Opinion issued on March 29, 1990, Judge Brown found that the plaintiffs failed to establish any obligation to them by Barbara Keene, and that therefore, she should receive a discharge as to the claims made by these plaintiffs. That determination is unaffected by subsequent proceedings and final judgment will be entered in her favor.
As to the defendant, Ronald E. Keene, the Court analyzed the preclusive effect of a pre-bankruptcy state court judgment against him. Although the judgment was introduced at the bankruptcy trial, Judge Brown concluded that he could not rely on the judgment alone to preclude relitigation of the dischargeability issues. His order granted plaintiffs twenty (20) days to submit to the Court the record from the state court proceeding including, if available, a transcript of the trial and jury instructions.
The twenty (20) day period expired with no apparent filing of the state court record. As a result, on May 7, 1990, Judge Brown entered a Supplemental Memorandum Opinion and Order on Complaint Objecting to Discharge (CP-10). Without the supplemental record, the Court could not conclusively determine from the record previously presented whether the state court judgment resulted from actual litigation in the state court or whether it was in the nature of a default judgment. Moreover, the Court could not determine whether the standard of proof applied in the state court jury trial was equivalent to the clear and convincing standard then required for bankruptcy dischargeability determinations. See Chrysler Credit Corp. v. Rebhan, 842 F.2d 1257, 1262 (11th Cir. 1988).
For these reasons the Court refused to give preclusive effect to the state court judgment against Ronald E. Keene. The Court found that plaintiffs had otherwise failed to meet their burden of proof under §§ 523(a)(2)(A), (a)(4), or (a)(6), and ordered that Keene's debt to the Plaintiffs was dischargeable.
On May 17, 1990, Plaintiffs filed a Motion to Alter or Amend a Judgment, or in the Alternative Motion for Reconsideration. The motion claimed that the state court record had been filed and should have been considered. The Court heard the motion for reconsideration on May 29, 1990, and determined that the state court record had been filed in the main case file (Case No. 89-35706-BKC-RAM), rather than in the adversary file (Case No. 90-0073) as it should have been, and therefore, the Court was not aware of the filing. Finding the filing mistake excusable, the Court granted the motion for reconsideration and agreed to issue a Second Supplemental Memorandum Opinion after a complete review of the state court record.
The Court has now reviewed the entire record, including the available portions of the state court record and has reviewed the standards for applying collateral estoppel in dischargeability actions. The Court concludes that the judgment debt owed by the defendant to the plaintiffs is nondischargeable pursuant to 11 U.S.C. § 523(a)(6).
Plaintiffs allege that in January 1985 they gave the defendants $25,000.00 to purchase an interest in a business known as Pelican Unlimited, Inc., a business brokerage franchise. The plaintiffs claim that the defendants improperly, and without the plaintiffs' consent, withdrew the funds from escrow and purchased another similar business, Business Investors Group, Inc. As framed in the complaint, these facts allegedly establish false pretenses, false representations or actual fraud under 11 U.S.C. § 523(a)(2)(A). In the alternative, the plaintiffs allege that the defendants acted fraudulently and in defalcation of their fiduciary capacity, or that the defendants were guilty of embezzlement or larceny, within the scope of 11 U.S.C. § 523(a)(4). Finally, the plaintiffs allege that the defendants' actions constituted a willful and malicious injury to the plaintiffs' property, thus establishing a basis to except the debt from discharge under 11 U.S.C. § 523(a)(6).
Prior to the bankruptcy filing, the plaintiffs sued Pelican Unlimited, Inc. and Ronald E. Keene in the Circuit Court for Palm Beach County, Florida. On April 26, 1988, judgment was entered after a jury verdict against Pelican Unlimited, Inc. and Ronald E. Keene. (Trial Ex. 1) The judgment provides that the jury "found the Defendants liable for civil theft under Florida Statutes § 812.035 and § 812.014, and thereby found the Defendants liable for theft, larceny and having obtained money through false pretenses." The $88,605.67 judgment consists of $25,000.00 in actual damages, which were then trebled, plus costs, prejudgment interest and attorney's fees.
Plaintiffs contend that the elements of their dischargeability claims in the bankruptcy court have already been litigated and determined in their favor in the state court. They urge this Court to apply the doctrine of collateral estoppel to preclude relitigating the issues here.
Collateral estoppel or issue preclusion forecloses a relitigation of an issue of fact or law that has been litigated and decided in a prior suit. In re Stowell, 113 B.R. 322 (Bankr.W.D.Tex.1990). The principles of collateral estoppel may be applied to foreclose a relitigation of facts in a dischargeability proceeding. In re Latch, 820 F.2d 1163 (11th Cir.1987); In re Halpern, 810 F.2d 1061 (11th Cir.1987); In re Held, 734 F.2d 628 (11th Cir.1984).
In considering the preclusive effect of the prior Florida judgment, the Court must first decide whether to apply the collateral estoppel law of Florida or the federal law of collateral estoppel. Despite some difference of opinion in prior federal decisions, this Court believes the issue is no longer subject to doubt—if the prior judgment was a state court judgment, the collateral estoppel law of that state must be applied. In re Feldstein, 93 B.R. 272 (Bankr. M.D.Fla.1988); Chang v. Daniels (In re Daniels), 91 B.R. 981 (Bankr.M.D.Fla. 1988); Sciarrone v. Brownlee (Matter of Brownlee), 83 B.R. 836 (Bankr.N.D.Ga. 1988).
In addition to agreeing with the excellent analysis of Bankruptcy Judges Baines and Bihary in the cited decisions, this Court finds that the Supreme Court's recent decision in Grogan v. Garner, ___ U.S. ___, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991) further clarified the issue and removed any remaining doubt concerning the law to apply in these circumstances. A review of the Supreme Court's relevant decisions is useful in understanding this Court's conclusion.
The analysis begins with the distinction between the validity of a claim and the dischargeability of that claim. The validity of a creditor's claim is determined by rules of state law. Grogan v. Garner, supra, citing Vanston Bondholders Protective Committee v. Green, 329 U.S. 156, 161, 67 S.Ct. 237, 239, 91 L.Ed. 162 (1946). The issue of nondischargeability is a matter of federal law governed by the Bankruptcy Code. As to certain exceptions to discharge, including the §§ 523(a)(2), (a)(4) and (a)(6) claims here, determining dischargeability is within the exclusive jurisdiction of the federal courts. Id., citing Brown v. Felsen, 442 U.S. 127, 129-130, 136, 99 S.Ct. 2205, 2208, 2211, 60 L.Ed.2d 767 (1979).
Exclusive federal jurisdiction over the dischargeability determination does not mean federal collateral estoppel law applies in analyzing the preclusive effect of a prior state judgment. That is so because 28 U.S.C. § 1738 normally requires federal courts to give full faith and credit to state court judgments. Does this full faith and credit statute control in considering whether to apply collateral estoppel to issues exclusively within the federal jurisdiction? That question was specifically addressed by the Supreme Court in Marrese v. American Academy of Orthopedic Surgeons, 470 U.S. 373, 105 S.Ct. 1327, 84 L.Ed.2d 274 (1985).
In Marrese the Supreme Court held that under 28 U.S.C. § 1738, a federal court is required to first consider the law of the state in which the judgment was rendered to determine its preclusive effect. 470 U.S. at 375, 105 S.Ct. at 1329. Absent an exception to § 1738, "state law determines at least the issue preclusive effect of a prior state judgment in a subsequent action involving a claim within the exclusive jurisdiction of the federal courts." 470 U.S. at 381, 105 S.Ct. at 1332.
The last step in the analysis is whether an exception to § 1738 would apply. "An exception to § 1738 will not be recognized unless a later statute contains an express or implied repeal." Marrese, 470 U.S. at 381, 105 S.Ct. at 1332, quoting from Kremer v. Chemical Construction Corp., 456 U.S. 461, 468, 102 S.Ct. 1883, 1890, 72 L.Ed.2d 262 (1982). Thus, the question is— does the Bankruptcy Code impliedly repeal § 1738 and...
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