In re White

• Decision Date: 27 December 2010
• Docket Number: Bankruptcy No. 09–10289–AJM–7.,Adversary No. 09–50511.
• Citation: 444 B.R. 887
• Parties: In re Christopher Paul WHITE, Debtor.The National Bank of Indianapolis, Plaintiffv.Christopher Paul White, Defendant.
• Court: U.S. Bankruptcy Court — Southern District of Indiana

444 B.R. 887

In re Christopher Paul WHITE, Debtor.The National Bank of Indianapolis, Plaintiff

v.Christopher Paul White, Defendant.

Bankruptcy No. 09–10289–AJM–7.

Adversary No. 09–50511.

United States Bankruptcy Court, S.D. Indiana, Indianapolis Division.

Dec. 27, 2010.

Edward R. Cardoza, Elliott D. Levin, R. Brock Jordan, Rubin & Levin, P.C., Indianapolis, IN, for Plaintiff.

Christine K. Jacobson, Michael W. Hile, Katz & Korin, PC, Indianapolis, IN, for Defendant.

FINDINGS OF FACT, CONCLUSIONS OF LAW AND ORDER ON PLAINTIFF'S MOTIONS FOR SUMMARY JUDGMENT

ANTHONY J. METZ, III, Bankruptcy Judge.

The Plaintiff, the National Bank of Indianapolis (“NBI”) filed a two-count nondischargeability complaint against debtor Christopher Paul White (“White”) under §§ 523(a)(2)(A) (Count I) and 523(a)(6) (Count II) for damages arising out of a check delivered by White which was returned for insufficient funds. White asserted various affirmative defenses in his answer and counterclaimed, alleging, among other things, that it was NBI's practice to cover overdrafts by transferring funds from certain accounts, some from which NBI took without authorization (“White's Counterclaim”). NBI has moved for summary judgment on both Count I and White's Counterclaim.

Findings of Fact

The facts material to NBI's motions, to which there is no material dispute, are as follows:

1. White was the sole shareholder, president and secretary of Reffco II, Inc., which, in turn was the general partner of Reffco II LP (“Reffco LP”).

2. Reffco LP maintained a checking account at NBI (the “Account”) for which White was the sole authorized signatory. Both White and Reffco LP were joint and severally liable for deficiencies in the Account resulting from overdrafts, as well as costs incurred by NBI to collect any deficiency.

3. On January 3, 2008, White deposited into the Account a check made payable to Premier Properties USA, Inc. (“Premier”) in the amount of $500,000 (the “Check”) which had been drawn on the account of HPT, LLC (“HPT”). NBI honored the Check and credited the Account for its amount. Unfortunately for both NBI and White, the Check was presented for payment and dishonored down the line for insufficient funds. By that point, NBI had honored other checks drawn on the Account, which resulted in an overdraft to the Account amounting to $382,486.17.

4. NBI's counsel made demand of White by letter of March 20, 2008 that he pay the overdraft of $382,486.17. NBI and White had communications about resolving the deficiency in the Account. When none resulted in payment of the overdraft, NBI sued White in the Marion Superior Court (the “State Court Action”). The State Court Action alleged ten (10) separate counts (the “State Court Complaint”), of which the following are relevant here: (1) Count I, Check Deception; (2) Count 2, Check Fraud; (3) Count III, Criminal Mischief; and (4) Count IV, Defrauding Financial Institutions (the “State Court Counts”).

5. Initially, White was represented by counsel in the State Court Action and answered the State Court Complaint, asserting affirmative defenses, including a claim for setoff.

6. NBI moved for summary judgment in the State Court Action. White's response to NBI's summary judgment motion was due on June 24, 2008 and the summary judgment motion was set for hearing to be held on August 11, 2008. The State Court granted White's counsel's request to withdraw its representation on June 23, 2008, the day before White's response was due.

7. White neither responded to the summary judgment motion nor moved for an extension of time in which to respond. On June 25, 2008, partial summary judgment in the amount of $2,000,000 (the amount of the NSF check—$500,000—plus treble damages of $1,500,000) was entered on behalf of NBI and against White on the State Court Counts (the “State Court Judgment”).

8. About the same time the State Court entered the State Court Judgment, a criminal action was filed against White. On August 18, 2009, a jury convicted White of fraud on a financial institution, check fraud and theft. The check fraud and theft counts were merged into the fraud on a financial institution count (the “Criminal Conviction”). As a result of the Criminal Conviction, White was ordered to pay restitution to NBI in the amount of $382,486. The Criminal Conviction currently is on appeal.

Conclusions of Law

Summary Judgment Standard

1. Summary judgment is appropriate “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 judgment as a matter of law”. Fed.R.Civ.P. 56; Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). The moving party bears the burden of showing that no genuine issue of material fact is disputed, but once the moving party has met this burden, the nonmoving party must set forth specific facts demonstrating a disputed material fact for trial and cannot merely rely on denials in its pleadings. If the nonmoving party “fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial”, summary judgment will be entered against it. Celotex, 477 U.S. at 322, 106 S.Ct. 2548.

2. NBI alleges nondischargeability under Section 523(a)(2)(A) which excepts from discharge a debt “for money .... to the extent obtained, by false pretenses, a false representation, or actual fraud ...”. NBI asserts that the State Court Judgment conclusively determined the issue of “actual fraud” for § 523(a)(2)(A) purposes and that White is estopped from relitigating that issue in this proceeding.

Collateral Estoppel

3. The State Court Judgment is entitled to full faith and credit in this proceeding because a federal court, including a federal bankruptcy court, “must give to a state court judgment the same preclusive effect as would have been given that judgment under the law of the state in which the judgment was rendered”. In re McHenry (McHenry v. McHenry), 131 B.R. 669, 673 (Bankr.N.D.Ind.1989) quoting Migra v. Warren City School District Board of Education, 465 U.S. 75, 81, 104 S.Ct. 892, 896, 79 L.Ed.2d 56, 63 (1984); In re Staggs (Forrester v. Staggs), 178 B.R. 767, 773 (Bankr.N.D.Ind.1994).

4. Indiana recognizes both claim preclusion (res judicata) and issue preclusion (collateral estoppel). “Res judicata” forecloses all that which might have been litigated previously, whereas “collateral estoppel” forecloses relitigation only of those facts or issues actually and necessarily decided in a prior suit. Brown v. Felsen, 442 U.S. 127, 99 S.Ct. 2205, 60 L.Ed.2d 767 (1979). Given the unique nature of nondischargeability proceedings whereby determination of nondischargeability is exclusively a question of federal bankruptcy law, Brown held that res judicata does not apply in dischargeability cases, but collateral estoppel does. Id. at 139, n. 10, 99 S.Ct. 2205. Grogan v. Garner, 498 U.S. 279, 285, n. 11, 111 S.Ct. 654, 658 n. 11, 112 L.Ed.2d 755 (1991).

5. In Indiana, a party wishing to use collateral estoppel must make a threshold showing that (1) the issue in the current action is identical to that in the prior action; (2) the issue was actually litigated; (3) the resolution of the issue in the first action was necessary to the judgment and (4) a final judgment determined the issue in the prior action. Staggs, 178 B.R. at 774; In re Busick, 264 B.R. 518, 522 (Bankr.N.D.Ind.2001); In re Luedtke, 429 B.R. 241, 250 (Bankr.N.D.Ind.2010).

Offensive Use of Collateral Estoppel

6. Once this threshold issue is resolved, the Court then considers whether the party arguing for estoppel wants it applied offensively or defensively, as Indiana recognizes the use of both. Tofany v. NBS Imaging Systems, Inc., 616 N.E.2d 1034, 1037 (Ind.1993). Offensive collateral estoppel is where the plaintiff “seeks to foreclose the defendant from litigating an issue the defendant had previously litigated unsuccessfully” and defensive collateral estoppel is where the defendant “seeks to prevent a plaintiff from asserting a claim which the plaintiff had previously litigated and lost”. Id.; Bartle v. Health Quest Realty VII, 768 N.E.2d 912, 917 (Ind.Ct.App.2002).

7. The use of offensive collateral estoppel, as NBI seeks here, is thought to be “more problematic” than the use of defensive collateral estoppel because “it does not promote judicial economy in the same manner as the defensive use of collateral estoppel”. Parklane Hosiery, v. Shore, 439 U.S. 322, 329, 99 S.Ct. 645, 650, 58 L.Ed.2d 552 (1979). In determining whether a plaintiff should be allowed to use collateral estoppel offensively, Indiana has adopted the Parklane Hosiery test which considers: (1) whether the party against whom the former adjudication is sought had a full and fair opportunity to litigate the issue and (2) whether it would be otherwise unfair under the circumstances to permit the use of issue preclusion in the subsequent suit. Tofany, 616 N.E.2d at 1038. Bartle, 768 N.E.2d at 917. Indeed, cases in this area are somewhat confusing because the “actually litigated” element of the test to apply collateral estoppel generally is often assimilated into the “full and fair opportunity to litigate” element considered in allowing the offensive use of collateral estoppel.

8. In considering whether the defendant against whom the use of offensive collateral estoppel is sought had a “full and fair opportunity to litigate”, a court may consider: privity, the defendant's incentive to litigate the prior action, the defendant's ability to defend the prior action, and the ability of the plaintiff to have joined the prior action. Tofany, 616 N.E.2d at 1038–39. With respect to the “incentive to litigate”, a court takes into account the interest at stake for the defendant in the prior action as well...