In the Matter of Steven Pixley v. Pixley

• Citation: 456 B.R. 770
• Decision Date: 18 October 2011
• Docket Number: Adversary No. 10–6665.,Bankruptcy No. 10–62556.
• Parties: In the matter of Steven PIXLEY, Debtor.Joyce McCallum, Plaintiff,v.Steven Pixley, Defendant.
• Court: United States Bankruptcy Courts. Tenth Circuit. U.S. Bankruptcy Court — Eastern District of Michigan

456 B.R. 770

In the matter of Steven PIXLEY, Debtor.Joyce McCallum, Plaintiff,

v.Steven Pixley, Defendant.

Bankruptcy No. 10–62556.

Adversary No. 10–6665.

United States Bankruptcy Court, E.D. Michigan, Southern Division.

Oct. 18, 2011.

William J. Brown, Midland, MI, for Plaintiff.John C. Lange, Michelle H. Bass, Gold, Lange & Majoros, PC, Southfield, MI, for Defendant.

OPINION REGARDING PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT

THOMAS J. TUCKER, Bankruptcy Judge.

This adversary proceeding raises collateral estoppel issues. These include the question whether, under Michigan law, a “true default” judgment ( i.e., one entered without the defendant having participated in defending the case,) is entitled to any preclusive effect in a later lawsuit between the same parties. The Court answers this question “yes.” The remaining issues arise in the Court's application of collateral estoppel to the default judgment in this case.

The case is before the Court on Plaintiff's motion for summary judgment. The motion seeks a determination of nondischargeability of a debt under 11 U.S.C. §§ 523(a)(2) and 523(a)(6), based on the collateral estoppel effect of a state court default judgment. For the reasons stated in this opinion, the Court cannot grant such relief, based on collateral estoppel, and must deny Plaintiff's motion.

I. Background

In this case, Plaintiff Joyce McCallum seeks a determination that Defendant Debtor Steven Pixley's judgment debt to McCallum is non-dischargeable under 11 U.S.C. § 523(a)(2) for fraud, and under 11 U.S.C. § 523(a)(6) for “willful and malicious injury.” The facts relevant to McCallum's summary judgment motion are undisputed.

Eighteen months before Pixley filed his Chapter 7 bankruptcy petition, McCallum obtained a default judgment against Pixley in the Tuscola County, Michigan Circuit Court, in the amount of $157,028.03, plus costs and interest. The default judgment was entered after Pixley failed to answer McCallum's complaint. Pixley did not defend or participate in any way in the state court action, and never appealed or sought relief in the state court from the default judgment.

The default judgment granted judgment for McCallum on all counts of McCallum's state court complaint, including counts for fraud and conversion. In her summary judgment motion, McCallum argues that under the Michigan law of collateral estoppel, which applies here under the federal Full Faith and Credit Statute, 28 U.S.C. § 1738, and related case law,¹ Pixley is precluded from contesting that the debt is nondischargeable under §§ 523(a)(2) and 523(a)(6). Pixley disagrees.

II. Jurisdiction

This Court has subject matter jurisdiction over this adversary proceeding under 28 U.S.C. §§ 1334(b), 157(a) and 157(b)(1), and Local Rule 83.50(a) (E.D.Mich.). This is a core proceeding under 28 U.S.C. § 157(b)(2)(I).

III. Summary judgment standard

Fed.R.Civ.P. 56(a), applicable to bankruptcy adversary proceedings under Fed.R.Bankr.P. 7056, provides that a motion for summary judgment “shall” be granted “if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” In Cox v. Kentucky Dep't of Transp., 53 F.3d 146, 149–50 (6th Cir.1995), the court elaborated:

The moving party has the initial burden of proving that no genuine issue of material fact exists and that the moving party is entitled to judgment as a matter of law. To meet this burden, the moving party may rely on any of the evidentiary sources listed in Rule 56(c) or may merely rely upon the failure of the nonmoving party to produce any evidence which would create a genuine dispute for the [trier of fact]. Essentially, a motion for summary judgment is a means by which to challenge the opposing party to ‘put up or shut up’ on a critical issue.

If the moving party satisfies its burden, then the burden of going forward shifts to the nonmoving party to produce evidence that results in a conflict of material fact to be resolved by [the trier of fact]. In arriving at a resolution, the court must afford all reasonable inferences, and construe the evidence in the light most favorable to the nonmoving party. However, if the evidence is insufficient to reasonably support a ... verdict in favor of the nonmoving party, the motion for summary judgment will be granted. Thus, the mere existence of a scintilla of evidence in support of the plaintiff's position will be insufficient; there must be evidence on which the [trier of fact] could reasonably find for the plaintiff.

...

Finally, the Sixth Circuit has concluded that, in the “new era” of summary judgments that has evolved from the teachings of the Supreme Court in Anderson [ v. Liberty Lobby, Inc., 477 U.S. 242, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986)], Celotex [ Corp. v. Catrett, 477 U.S. 317, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986)] and Matsushita [ Electric Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986)], trial courts have been afforded considerably more discretion in evaluating the weight of the nonmoving party's evidence. The nonmoving party must do more than simply show that there is some metaphysical doubt as to the material facts. If the record taken in its entirety could not convince a rational trier of fact to return a verdict in favor of the nonmoving party, the motion should be granted.

Id. (internal quotation marks and citations omitted). In determining whether the moving party has met its burden, a court must “believe the evidence of the nonmovant, and draw all justifiable inferences in favor of the nonmovant.” Ingram v. City of Columbus, 185 F.3d 579, 586 (6th Cir.1999) (relying on Russo v. City of Cincinnati, 953 F.2d 1036, 1041–42 (6th Cir.1992)).IV. DiscussionA. General framework of the parties' dispute over collateral estoppel

Collateral estoppel applies in nondischargeability proceedings under the Bankruptcy Code, such as this adversary proceeding. Grogan v. Garner, 498 U.S. 279, 284 n. 11, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991). “Collateral estoppel ... prevents a party from relitigating issues of fact or law which were necessarily decided by a previous final judgment.” Smith v. Sushka, 117 F.3d 965, 969 (6th Cir.1997). In determining whether a state court judgment precludes relitigation of issues under the doctrine of collateral estoppel, the Full Faith and Credit Statute, 28 U.S.C. § 1738, ² requires bankruptcy courts to “ ‘consider first the law of the State in which the judgment was rendered to determine its preclusive effect.’ ” Bay Area Factors v. Calvert ( In re Calvert ), 105 F.3d 315, 317 (6th Cir.1997) (quoting Marrese v. Am. Acad. of Orthopaedic Surgeons, 470 U.S. 373, 375, 105 S.Ct. 1327, 84 L.Ed.2d 274 (1985)). If the state courts would not deem the judgment binding under collateral estoppel principles, then the bankruptcy court cannot do so either. But if the state courts would give preclusive effect to the judgment, then the bankruptcy court must also give the judgment preclusive effect, “unless Congress has expressly or impliedly created an exception to § 1738 which ought to apply to the facts before the federal court.” Id. (citing Marrese, 470 U.S. at 386, 105 S.Ct. 1327).

In Calvert, the Sixth Circuit held that there is no such express or implied exception under § 1738 in dischargeability actions. The court found no indication of such an exception “in the Bankruptcy Code or legislative history.” And the court reasoned that there is “no principled distinction between cases where a defendant participates in part in defense of the state court suit and cases where the defendant does not respond at all.” 105 F.3d at 322. The court held that “collateral estoppel applies to true default judgments in bankruptcy dischargeability proceedings in those states which would give such judgments that effect.” Therefore, the Court must look to the law of Michigan to determine the collateral estoppel effect of the default judgment in this adversary proceeding.

Under Michigan law, the following requirements must be met in order for collateral estoppel to apply:

1) there is identity of parties across the proceedings,

2) there was a valid, final judgment in the first proceeding,

3) the same issue was actually litigated and necessarily determined in the first proceeding, and

4) the party against whom the doctrine is asserted had a full and fair opportunity to litigate the issue in the earlier proceeding.

Phillips v. Weissert ( In re Phillips ), 434 B.R. 475, 485 (6th Cir. BAP 2010) (citation omitted).

The parties do not dispute that the first, second, and fourth of these requirements are met in this case. Their dispute concerns both components of the third requirement. Pixley argues first that no issues were “actually litigated” in the state court case, because he did not participate in that case before the default judgment was entered. And even if the Court rejects this first argument, Pixley argues, not all of the necessary elements for non-dischargeability under §§ 523(a)(2) and 523(a)(6) were both “actually litigated and necessarily determined” by the state court default judgment.

B. The “true default” issue: was anything “actually litigated” in state court?

Courts considering the “actually litigated” element in this context often use the phrase “true default” judgment to refer to a judgment entered by default after “there was no appearance and absolutely no participation in the state court action” by the defendant debtor. See Vogel v. Kalita ( In re Kalita ), 202 B.R. 889, 891 (Bankr.W.D.Mich.1996). This is in contrast to a default judgment entered after the defendant has participated in the defense of the action. Examples of this latter type of default judgment would be where the default judgment was entered as a sanction for a discovery violation, or because the defendant failed to appear for trial, rather than because the defendant failed even to answer the complaint.

The Court...