In re Sullivan, Bankruptcy No. 96-43015-HJB
| Decision Date | 05 February 1998 |
| Docket Number | Adversary No. 96-4366.,Bankruptcy No. 96-43015-HJB |
| Parties | In re Michael R. SULLIVAN and Kathleen J. Sullivan, Debtors. M-R SULLIVAN MANUFACTURING COMPANY, INC., Plaintiff, v. Michael R. and Kathleen J. SULLIVAN, Defendants. |
| Court | United States Bankruptcy Courts. First Circuit. U.S. Bankruptcy Court — District of Massachusetts |
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David A. Talman, Worcester, MA, for Plaintiff.
Stephen K. Midgley, Mansfield, MA, for Debtors.
Before this Court for determination are cross motions for summary judgment. In this action, the Plaintiff, M-R Sullivan Manufacturing Company (the "Company" or the "Plaintiff"), seeks to establish that a debt owed to the Company by the debtors, Michael and Kathleen Sullivan (individually "Mr." or "Mrs. Sullivan" or jointly the "Debtors" or the "Defendants"), is nondischargeable pursuant to 11 U.S.C. § 523(a)(4) and/or (6). Allowance or denial of the motions turns on the collateral estoppel effect of a judgment of an Arizona state court.
While the record before the Court is sparse and the parties disagree on many facts relative to events which occurred prior to the filing of this case, the following facts are free from material dispute.
Mr. and Mrs. Sullivan formerly served as President and employee, respectively, of the Company.1 Incorporated in Arizona in 1990, the Company's business was the manufacture and sale of items used by dentists and dental laboratories to make investment castings for dental implants. In connection with its business, the Company manufactured and sold a casting ring system known as "Clearese." The Clearese system was patented in March 1993.
Later in 1993, the Debtors, individually, entered into an agreement with Leach & Dillon Company ("L & D"). The agreement gave L & D the right to manufacture dental implants using the Clearese system. Subsequently, three minority shareholders of the Company commenced a shareholders' derivative suit against the Debtors in the Superior Court of Arizona, Maricopa County, alleging that the Debtors had converted corporate assets. Specifically, it was claimed that the Clearese patent was corporate property and that the Debtors had converted the patent and certain corporate funds for their personal use. The Debtors countered that they were the sole owners of the patent and as such had authority to lease the rights of Clearese to L & D. On August 10, 1995, a jury found for the Plaintiff and held the Debtors liable for conversion, with damages in the amount of $518,500.00 ("$500,000 for conversion of the Clearese patent and $18,500 for conversion of corporate funds"). That judgment, arising from the jury's general verdict, is final.
On June 5, 1996, the Debtors filed a voluntary petition in this court under Chapter 7 of the Bankruptcy Code. On or about August 27, 1996, the Company filed its complaint in this adversary proceeding seeking to have the aforesaid debt determined nondischargeable pursuant to 11 U.S.C. § 523(a)(4) and/or (6). The Debtors filed an answer to the complaint, denying its substantive allegations. The Plaintiff then filed the instant motion seeking summary judgment primarily on the grounds that, pursuant to the doctrine of collateral estoppel, the state court judgment established for the purpose of this action that the Debtors' acts of conversion constituted their "defalcation while acting in a fiduciary capacity" as set forth in § 523(a)(4), and caused a "willful and malicious" injury to the Plaintiff as set forth in § 523(a)(6). Attached to the Plaintiff's motion is the affidavit of William Venditti (the "Venditti Affidavit"), one of the minority shareholders who brought the derivative suit against the Debtors in Arizona. The Debtors responded with an opposition to Plaintiff's motion and their own motion for summary judgment arguing that all of the elements necessary to determine the debt nondischargeable under § 523(a)(4) or (6) had not been "actually litigated" in the Arizona case. The Debtors filed no affidavit in conjunction with their opposition or motion. After hearing the cross motions for summary judgment, the Court took the matters under advisement.
A motion for summary judgment should be granted "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed.R.Bankr.P. 7056; Fed.R.Civ.P. 56(c); DeNovellis v. Shalala, 124 F.3d 298, 305 (1st Cir.1997). The moving party bears the burden of showing the "absence of evidence to support the non-moving party's position." Weiss v. Blue Cross Blue Shield of Delaware, 206 B.R. 622, 624 (1st Cir. BAP 1997); see also Celotex Corp. v. Catrett, 477 U.S. 317, 325, 106 S.Ct. 2548, 2554, 91 L.Ed.2d 265 (1986). "Once the moving party has properly supported its motion for summary judgment, the burden shifts to the non-moving party, who `may not rest on mere allegations or denials of his pleading, but must set forth specific facts showing there is a genuine issue for trial.'" Barbour v. Dynamics Research Corp., 63 F.3d 32, 36 (1st Cir.1995) (quoting Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 256, 106 S.Ct. 2505, 2514, 91 L.Ed.2d 202 (1986)), cert. denied, 516 U.S. 1113, 116 S.Ct. 914, 133 L.Ed.2d 845 (1996). The court must then resolve any disputed facts and inferences in favor of the party opposing summary judgment. Fleet Nat'l Bank v. H & D Entertainment, Inc., 96 F.3d 532, 537 (1st Cir.1996).
Each of the cross motions is grounded on the applicability of the doctrine of collateral estoppel.2 If, as the Plaintiff contends in its motion, all of the elements necessary to a finding of nondischargeability under § 523(a)(4) and/or (6) can be resolved by applying the doctrine of collateral estoppel, summary judgment should be granted in its favor. On the other hand, if, as Debtors contend, collateral estoppel cannot be invoked to resolve all of the elements required to be proven under § 523(a)(4) and/or (6), partial summary judgment should be granted with respect to those elements, if any, to which collateral estoppel can be invoked or can otherwise be established as a matter of law; and denied as to the balance. See Fed.R.Civ.P. 56(d).
The Supreme Court has held that collateral estoppel principles apply in bankruptcy cases to determine the nondischargeability of a debt. Grogan v. Garner, 498 U.S. 279, 284 n. 11, 111 S.Ct. 654, 658 n. 11, 112 L.Ed.2d 755 (1991). In the case of Grella v. Salem Five Cent Savings Bank, the United States Court of Appeals for the First Circuit restated the doctrine of collateral estoppel, or issue preclusion, as follows:
When there is an identity of the parties in subsequent actions, a party must establish four essential elements for a successful application of issue preclusion to the later action: (1) the issue sought to be precluded must be the same as that involved in the prior action; (2) the issue must have been actually litigated; (3) the issue must have been determined by a valid and binding final judgment; and (4) the determination of the issue must have been essential to the judgment.
42 F.3d 26, 30 (1st Cir.1994) (citing NLRB v. Donna-Lee Sportswear Co., Inc., 836 F.2d 31, 34 (1st Cir.1987)); see also Friedman v. Internal Revenue Serv. (In re Friedman), 200 B.R. 1, 4 (Bankr.D.Mass.1996).
"In determining the collateral estoppel effect of a state court judgment, federal courts must, as a matter of full faith and credit, apply that state's law of collateral estoppel."3 Bugna v. McArthur (In re Bugna), 33 F.3d 1054, 1056 (9th Cir.1994); United States v. One Parcel of Real Property, 900 F.2d 470, 473 (1st Cir.1990). It is well established, therefore, that the collateral estoppel law of the state in which a judgment is rendered applies in determining the dischargeability of a debt. Hagan v. McNallen (In re McNallen), 62 F.3d 619, 624 (4th Cir.1995); see Rally Hill Prod., Inc. v. Bursack (In re Bursack), 65 F.3d 51 (6th Cir. 1995) (); Bugna, 33 F.3d at 1057 (); In re Bulic, 997 F.2d 299, 304 n. 6 (7th Cir.1993) (); St. Laurent, II v. Ambrose (In re St. Laurent, II), 991 F.2d 672, 675-76 (11th Cir.1993) (); Stowe v. Bologna (In re Bologna), 206 B.R. 628, 631 (Bankr. D.Mass.1997) ().
Under Arizona law, the doctrine of collateral estoppel is applied whenever: (I) the issue was "actually litigated in a previous suit," (ii) a final judgment was entered, (iii) the party against whom the doctrine is to be invoked had a "full and fair opportunity to litigate the matter and actually did litigate it," and (iv) the issue was "essential to the prior judgment." In re First Actuarial Corp. of Illinois, 182 B.R. 178, 183 (Bankr. W.D.Mich.1995) (citing Chaney Bldg. Co. v. City of Tucson, 148 Ariz. 571, 716 P.2d 28, 30 (1986)). Having concluded that Arizona law is applicable in this case, this Court must determine whether the doctrine of collateral estoppel as applied in Arizona precludes the dischargeability of the Arizona state court judgment pursuant to § 523(a)(4) and/or (6). Alternatively, the Court may find an element of proof established if no genuine issue of material fact exists and it can be established as a matter of law.
Bankruptcy Code section 523(a)(4) provides that a debtor may not discharge "any debt . . . for fraud or...
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