In re Waldorf
| Decision Date | 13 March 1997 |
| Docket Number | Bankruptcy No. 95-54088-R,Adv. No. 96-4356-R,96-4388-R.,96-40992-G |
| Citation | 206 BR 858 |
| Parties | In re Lindsey WALDORF, Debtor. Karen CRESAP, Personal Representative of the Estates of Joseph and Jean Cresap, Plaintiff, v. Lindsey WALDORF, Defendant. In re Reinhart A. OLSEN, Debtor. Karen CRESAP, Personal Representative of the Estates of Joseph and Jean Cresap, Plaintiff, v. Reinhart A. OLSEN, Defendant. |
| Court | U.S. Bankruptcy Court — Eastern District of Michigan |
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E. Michael Morris, Birmingham, MI, for plaintiff.
Stuart Gold, Southfield, MI, for defendants.
Karen Cresap filed each of these adversary proceedings to obtain a determination that the debt which the debtors Lindsey Waldorf and Reinhart Olsen jointly and severally owe to the estates of Joseph and Jean Cresap is nondischargeable.1 Cresap alleges that the debt is non-dischargeable because it is the result of one or more of the following: fraud and misrepresentation, under § 523(a)(2)(A); fraud while acting in a fiduciary capacity, under § 523(a)(4); or willful and malicious injury to the property of Cresap, under § 523(a)(6). Cresap now moves for summary judgment. Waldorf and Olsen respond with cross-motions for summary judgment. The Court consolidated the proceedings for the purpose of resolving these motions together. The Court concludes that Cresap is entitled to a judgment of non-dischargeability under § 523(a)(2)(A) on the basis of collateral estoppel, but that the balance of her claims should be dismissed.
The underlying facts of Cresap's claim have already been the subject of lengthy litigation in state court. On February 3, 1992, Jean and Joseph Cresap ("the Cresaps") brought suit in the Oakland County Circuit Court to recover money which they invested in a corporation, Technology Un-Limited. The Cresaps sued Technology Un-Limited, its successor corporation, Innovative Industries, and the individual debtors, Reinhart Olsen and Lindsey Waldorf. In response to the defendants' motion for summary disposition, the state court dismissed Counts I, II, and VI of the complaint. Count III remained and alleged:
Fraud and misrepresentation of defendants Technology Un-Limited, Inc., officers, Reinhart A. Olsen, Philip E. Chase, Lindsey Waldorf as officers of the corporation and individually, jointly and severally and its successor corporation, Innovative Industries, Inc. and its president, Elmer Sivacek as an officer of the corporation and individually, jointly and severally.
After protracted litigation, the Cresaps obtained summary disposition on this remaining count. In an order entered on December 7, 1994, the state court found all of the defendants liable. However, this order did not set the amount of damages. The trial judge convened a hearing on damages, but adjourned the hearing to allow the parties to brief the admissibility of certain evidence. The hearing was set to resume on December 27, 1995. When Waldorf and Olsen failed to appear, the trial judge issued final judgment against them in the amount of $279,023. Waldorf and Olsen did not appeal this ruling. On December 29, 1995, Waldorf filed a petition for bankruptcy relief under chapter 7. Olsen filed for chapter 7 relief on January 25, 1996.
After learning of the bankruptcies, Cresap brought these adversary proceedings against Waldorf and Olsen.
Waldorf and Olsen deny that they are indebted to Cresap for the state court judgment and deny that Cresap's claim is nondischargeable.
Cresap now moves for summary judgment, contending that the state court's judgment is binding in this case and collaterally estops Waldorf and Olsen from contesting the non-dischargeability of the debt. In response, Waldorf and Olsen contend that Cresap is not entitled to rely on collateral estoppel. Waldorf and Olsen cross-move for summary judgment, arguing that Cresap's complaint fails to sufficiently state a claim for fraud and for the existence of a fiduciary relationship between the parties.
II. This Court must give full faith and credit to the prior state judgment.
The federal courts employ a variety of doctrines to recognize the validity and effect of prior state judgments, including res judicata, collateral estoppel, judicial estoppel, and the Full Faith and Credit Act. The bankruptcy courts do not apply the doctrine of res judicata (or "claim preclusion") in dischargeability proceedings since the Supreme Court decided Brown v. Felsen, 442 U.S. 127, 99 S.Ct. 2205, 60 L.Ed.2d 767 (1979). However, the bankruptcy courts can apply the doctrine of collateral estoppel (or "issue preclusion") to avoid relitigating any grounds for non-dischargeability which were litigated in a prior proceeding. Grogan v. Garner, 498 U.S. 279, 285, n. 11, 111 S.Ct. 654, 658, n. 11, 112 L.Ed.2d 755 (1991); Spilman v. Harley, 656 F.2d 224, 227 (6th Cir. 1981); Rally Hill Prods. v. Bursack (In re Bursack), 65 F.3d 51 (6th Cir.1995); Bay Area Factors v. Calvert (In re Calvert), 105 F.3d 315 (6th Cir.1997); Bend v. Eadie (In re Eadie), 51 B.R. 890, 893 (Bankr.E.D.Mich. 1985).
In Grogan, the Supreme Court held that the standard of proof on a claim of non-dischargeability under § 523(a) is the preponderance of the evidence standard. The Court based this conclusion, in part, on its determination that "application of that standard will permit exception from discharge of all fraud claims creditors have successfully reduced to judgment." Grogan, 498 U.S. at 290, 111 S.Ct. at 661 (emphasis added). The Court expressly stated that collateral estoppel principles apply in discharge proceedings, without discussing the matter further. Id. at 285, n. 11, 111 S.Ct. at 658, n. 11.
In recent years, the Supreme Court has issued a series of decisions expanding the analysis that the federal courts must use to determine whether to give a state judgment preclusive effect. Rather than relying solely on the judicial doctrine of collateral estoppel, a federal court must first consider whether the Full Faith and Credit Act requires it to accord the state judgment the same preclusive effect that the judgment would receive under state law. See Migra v. Warren City Sch. Dist. Bd. of Educ., 465 U.S. 75, 104 S.Ct. 892, 79 L.Ed.2d 56 (1984); Parsons Steel, Inc. v. First Alabama Bank, 474 U.S. 518, 106 S.Ct. 768, 88 L.Ed.2d 877 (1986); Marrese v. Am. Academy of Orthopaedic Surgeons, 470 U.S. 373, 105 S.Ct. 1327, 84 L.Ed.2d 274 (1985); Matsushita Elec. Indus. Co. v. Epstein, ___ U.S. ___, 116 S.Ct. 873, 134 L.Ed.2d 6 (1996).
The Full Faith and Credit Act states, in relevant part, that state court "judicial proceedings shall have the same full faith and credit in every court within the United States . . . as they have by law or usage in the courts of such State . . . from which they are taken." 28 U.S.C. § 1738.
The Sixth Circuit has held that the Full Faith and Credit Act applies in dischargeability proceedings. Bursack, 65 F.3d at 52-53. Under Bursack, the bankruptcy court must initially determine whether a state court judgment would receive preclusive effect in the state where it was rendered. Id. at 53. If so, the bankruptcy court must give the state judgment preclusive effect unless it determines that an exception to the Full Faith and Credit Act exists. Id.
Recently, the Sixth Circuit concluded that the Act would apply without exception even when the underlying state judgment is a default judgment. Calvert, 105 F.3d 315. Accordingly, this Court must apply the Full Faith and Credit Act and give Cresap's state judgment the same preclusive effect that is recognized by Michigan law.
III. Michigan law employs the doctrine of collateral estoppel to give preclusive effect to prior judgments.
Michigan courts apply collateral estoppel "to avoid relitigation of claims, and to prevent vexation, confusion, chaos and the inefficient use of judicial resources." Bd. of County Road Comm'rs v. Schultz, 205 Mich.App. 371, 377, 521 N.W.2d 847, 851 (1994). The Michigan Supreme Court has explained Michigan's rule of collateral estoppel, as follows:
Collateral estoppel precludes the relitigation of an issue in a subsequent, different cause of action between the same parties where the prior proceeding culminated in a valid, final judgment and the issue was 1) actually litigated and 2) necessarily determined.
People v. Gates, 434 Mich. 146, 154, 452 N.W.2d 627, 630, cert. den., 497 U.S. 1004, 110 S.Ct. 3238, 111 L.Ed.2d 749 (1990).
An issue is "actually litigated" if it "is put into issue by the pleadings, submitted to the trier of fact, and determined by the trier of fact." Latimer v. Mueller & Son, Inc., 149 Mich.App. 620, 640-41, 386 N.W.2d 618, 627 (1986); see also In re Eadie, 51 B.R. at 894. For collateral estoppel purposes, an issue may be "actually litigated" without a trial. Latimer, 149 Mich.App. at 640-41, 386 N.W.2d at 627 (); see also Detroit v. Qualls, 434 Mich. 340, 357, n. 27, 454 N.W.2d 374, 382, n. 27 (1990) ().
An issue is "necessarily determined" if it is essential to the judgment. Gates at 158, 452 N.W.2d at 631.
For collateral estoppel, Michigan also requires that the "same parties" are involved in both the initial and the subsequent case. This is requirement is known as the doctrine of mutuality of estoppel:
The doctrine of mutuality of estoppel requires that in order for a party to estop an adversary from relitigating an issue that party must also have been a party, or a privy to a party, in the previous action. In other words, "the estoppel is mutual if the one taking advantage of the earlier adjudication would have been bound by it, had it gone...
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