In re Reader
| Decision Date | 16 June 1995 |
| Docket Number | Bankruptcy No. 90-01972. Adv. No. 90-6037. |
| Citation | 183 BR 630 |
| Parties | In re George L. READER and Marsha F. Reader, Debtors. Robert SACKS and Clive Pusey, Plaintiffs, v. George L. READER and Marsha F. Reader, Defendants. |
| Court | U.S. Bankruptcy Court — District of Idaho |
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Robert Felton, Salt Lake City, UT, and Douglas Merkley, Pocatello, ID, for plaintiffs.
William H. Mulberry, Ririe, ID, for defendants.
Craig W. Christensen, Pocatello, ID, for Trustee L.D. Fitzgerald.
Background.
This is a dischargeability action. The matter is before the Court for disposition of Plaintiff Sacks' Motion for Summary Judgment. From the pleadings and record, the following appears.
Years ago, Plaintiffs Robert Sacks and Clive Pusey loaned Defendants money. In November, 1985, Defendants filed for Chapter 11 relief in Utah. The bankruptcy case was converted to a Chapter 7 case in July, 1986 with no plan having been confirmed. The case was thereafter dismissed in August, 1986. Shortly thereafter, Defendants formed a corporation called Luke's Island, Inc., issuing the stock to themselves and their children. Defendants then transferred various assets to the corporation, and the corporation also made transfers for Defendants' benefit. In particular, it appears that Defendants transferred their real estate to the corporation, although they apparently remained in possession of the property. Thereafter, in 1988, Sacks and Pusey recovered a judgment against Defendants.
Defendants filed for Chapter 7 relief in this Court in June, 1990. Sacks and Pusey as Plaintiffs filed the present adversary against Defendants seeking to except their judgment claim from discharge under Section 523(a) and to deny Defendants a discharge under Section 727(a). Sacks and Pusey had persuaded this Court to grant them stay relief to pursue a fraudulent conveyance action against Defendants and others in state court to set aside the Defendants' transfers of property.1 This adversary proceeding has been on hold pending the outcome of the state action.
A jury trial was held in state court, finally, in September, 1994. The jury found in their verdict that Luke's Island, Inc. was the alter ego of the Defendants, and that a variety of asset transfers to the corporation by Defendants, and by the corporation for Defendants' benefit, were fraudulently made and recoverable. A judgment has been entered in the state court, which Defendants have appealed. The judgment has not been stayed by the state court, however.
Plaintiff Sacks2 now seeks a summary judgment arguing that the state court judgment collaterally estops Defendants as to the issues in this adversary proceeding. Defendants disagree. For the reasons explained below, since the Court finds there remain genuine issues of material fact, summary judgment is not appropriate and Plaintiffs motion must be denied.
Summary judgment is appropriate only if, viewing the evidence in light most favorably to the non-moving party, no genuine issues of material fact remain and the moving party is entitled to judgment as a matter of law. F.R.B.P. 7056; F.R.C.P. 56(c); State Farm Mutual Auto. Ins. Co. v. Davis, 7 F.3d 180, 182 (9th Cir.1993); In re Permann, 94 I.B.C.R. 208, 209, 174 B.R. 129 (Bkrtcy.D.Idaho 1994).
A valid state court judgment must be afforded collateral estoppel effect in dischargeability actions in bankruptcy. Grogan v. Garner, 498 U.S. 279, 284, 111 S.Ct. 654, 658-659, 112 L.Ed.2d 755 (1991). Federal courts should give a state court judgment the same preclusive effect as it would be given by the courts of the state rendering the judgment. 28 U.S.C. § 1738; Kremer v. Chemical Construction Corp., 456 U.S. 461, 466, 102 S.Ct. 1883, 1889, 72 L.Ed.2d 262 (1982); In re Koski, 92 I.B.C.R. 157, 157, 144 B.R. 486 (Bkrtcy.D.Idaho 1992). In Idaho, five elements are required to collaterally estop a party by virtue of a prior judgment:
(1) Did the party "against whom the earlier decision is asserted . . . have a `full and fair opportunity to litigate that issue in the earlier case?\'" . . . (2) Was the issue decided in the prior litigation "identical with the one presented in the action in question?" (3) Was the issue actually decided in the prior litigation? (4) "Was there a final judgment on the merits?" (5) "Was the party against whom the plea is asserted a party or in privity with a party to the prior adjudication?"
Anderson v. City of Pocatello, 112 Idaho 176, 183, 731 P.2d 171, 178-79 (1986).
Defendants argue that the judgment obtained by Plaintiff in state court in this case is not a "final judgment" because there is an appeal from the judgment pending, and therefore the judgment is not entitled to preclusive effect here. This contention is incorrect.
This issue has been presented, but apparently never decided by the Idaho appellate courts. However, the Idaho Supreme Court in Diamond v. Farmers Group, Inc., 119 Idaho 146, 804 P.2d 319 (1990), noted that it is appropriate to consider relevant sections of RESTATEMENT OF JUDGMENTS (SECOND) (1982) for guidance in deciding questions concerning the binding effect of judgments in other actions. The Restatement, at § 13, comment f, takes the position that the pendency of an appeal should not deprive a judgment of res judicata effect.
Thereafter, the Idaho Court of Appeals in Gilbert v. State, 119 Idaho 684, 686, 809 P.2d 1163, 1165 (Ct.App.1991), was presented with this issue of whether a judgment on appeal could be given collateral estoppel effect. Citing Diamond, the Court discussed Section 13 of the Restatement. However, it did not ultimately determine if the Restatement rule should be adopted in Idaho because the appeal from the judgment in the other action was dismissed before the Court of Appeals rendered its opinion. After reviewing the case law, though, it appears to this Court that the Idaho courts would rely on the Restatement in this context, and that a judgment on appeal would be entitled to res judicata effect.
The Ninth Circuit case law is consistent with this conclusion: "the established rule in the federal courts is that a final judgment retains all of its res judicata consequences pending decision of the appeal." Tripati v. Henman, 857 F.2d 1366, 1367 (9th Cir.1988) citing 18 C. Wright, A. Miller & E. Cooper, Federal Practice and Procedure § 4433, at 308 (1981); Robi v. Five Platters, Inc., 838 F.2d 318, 327 (9th Cir.1988). At least one bankruptcy court agrees: "The fact that a challenge to a judgment was pending on appeal prepetition does not deprive the judgment of finality for purposes of claim preclusion." In re Highway Truck Drivers and Helpers, Local 107, 100 B.R. 209, 213 (Bankr. E.D.Pa.1989).
This Court is therefore confident the rule should be applicable under these facts. Assuming the other elements required for application of the doctrine are present, the state court judgment here would be entitled to collateral estoppel effect in this case as a "final judgment" even though an appeal is pending in the Idaho courts.
Plaintiff asserts that the state court judgment provides a basis for objecting to Defendants' right to a discharge under Section 727(a)(2)(A). That statute provides that:
11 U.S.C. § 727(a)(2)(A). This section is to be construed liberally in favor of the debtor. In re Devers, 759 F.2d 751, 754 (9th Cir. 1985).
Defendants point out that the alleged transfers all took place well outside the one year prior to the filing of Defendants' Chapter 7 petition in Idaho. They did not attempt to conceal these transfers. There is no evidence in the record to suggest otherwise. However, Plaintiff argues that the statute also prohibits the wrongful concealment of property, and that Defendants concealed their retention of the beneficial interest in the properties transferred to the corporation. Plaintiff asserts the judicially-created doctrine of continuing concealment is applicable in this case to deny discharge to Defendants as to those transfers that occurred prior to one year before filing.
While "under § 727(a), a relevant concealment can occur only if property of the debtor is concealed . . .", Rosen v. Bezner, 996 F.2d 1527, 1531 (3rd Cir.1993), "concealing property for purposes of section 727(a)(2)(A) can be accomplished by a transfer of title coupled with the retention of the benefits of ownership." In re Olivier, 819 F.2d 550, 553 (5th Cir.1987). It is the continued concealment of this beneficial interest in the asset transferred with the requisite fraudulent intent within a year of the bankruptcy filing which constitutes an act within the reach of Section 727(a)(2)(A). Id. at 555. "What is critical under the concealment provision of § 727(a) is whether there is concealment of property, not whether there is concealment of a transfer." Rosen, 996 F.2d at 1532. The party objecting to discharge must also prove an improper subjective intent to hinder or defraud creditors during the year before bankruptcy in order to prevail. Id. at 1533. Therefore, regardless of when the transfers of property occurred, because Plaintiffs contend the Defendants fraudulently concealed the fact that they retained a beneficial interest in the transferred property, and because such concealment allegedly continued through the bankruptcy filing, Section 727(a)(2)(A) may prevent discharge.
Having recognized these rules of law, though, Plaintiff has not proven...
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