Lovell v. Mixon

• Decision Date: 31 October 1983
• Docket Number: No. 82-1844,82-1844
• Citation: 719 F.2d 1373
• Parties: 9 Collier Bankr.Cas.2d 1065, 11 Bankr.Ct.Dec. 327, Bankr. L. Rep. P 69,434 Thomas F. LOVELL, Appellant, v. James G. MIXON, Trustee, Appellee.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 1373

719 F.2d 1373

9 Collier Bankr.Cas.2d 1065, 11 Bankr.Ct.Dec. 327,

Bankr. L. Rep. P 69,434

Thomas F. LOVELL, Appellant, v. James G. MIXON, Trustee, Appellee.

No. 82-1844.

United States Court of Appeals,

Eighth Circuit.

Submitted June 13, 1983.

Decided Oct. 31, 1983.

James G. Mixon, Little, McCollum & Mixon, Bentonville, Ark., for appellee.

Truman H. Smith, Smith & Smith, Fayetteville, Ark., for appellant.

Before ROSS and McMILLIAN, Circuit Judges, and COLLINSON, Senior District Judge. ^*

COLLINSON, Senior District Judge.

This is an appeal from a judgment of the United States District Court for the Western District of Arkansas ¹ which affirmed an order of the bankruptcy court ² denying a discharge in bankruptcy to the appellant-debtor (hereinafter the "Debtor") under the provisions of 11 U.S.C. Sec. 727(a)(2). The case concerns several adversary proceedings brought against the Debtor by the appellee-trustee (hereinafter the "Trustee") of the Debtor's estate. The appeal brings into question the res judicata or collateral estoppel effects of a bankruptcy court proceeding to set aside fraudulent transfers on a later bankruptcy court proceeding concerning the Debtor's discharge.

The Debtor filed a voluntary petition in bankruptcy on March 6, 1980. Within a few months the Trustee appointed to represent the Debtor's estate discovered that the Debtor had made several questionable property transfers in the preceding year. On May 12, 1980, the Trustee filed a complaint to cancel a deed as a fraudulent conveyance under the provisions of 11 U.S.C. Sec. 548, alleging that the Debtor had transferred forty acres of real estate to his mother. Both the Debtor and his mother were named as defendants.

On or about June 1, 1980, the Trustee filed another complaint for an order to turn over property and to set aside fraudulent conveyances, also pursuant to 11 U.S.C. Sec. 548. Count I of this complaint involved the Debtor's transfer of a boat, motor and trailer to his girlfriend; Count II involved transfers of money to the Debtor's aunt and uncle; Count III involved money transfers to the Debtor's father; Count IV involved a transfer of money to the Debtor's mother; Count V involved a transfer of money to the Debtor's brother; and Count VI involved forty-one withdrawals from the bank account of the Debtor's business. The Debtor and the alleged transferees were named as defendants.

In June 1980, the bankruptcy court held a hearing on the complaint concerning the forty-acre transfer to the Debtor's mother. The Trustee, the Debtor and an attorney representing both the Debtor and his mother appeared at the hearing and presented evidence. In its order of September 15, 1980, the bankruptcy court made findings of fact that the Debtor had transferred the real property to his mother, that at the time of the transfer he received less than a reasonably equivalent value in exchange, and that he intended to incur and believed that he would incur debts that would be beyond his ability to pay as they matured. On the basis of these facts, the court concluded that the conveyance was a constructively fraudulent transfer as defined by 11 U.S.C. Sec. 548(a)(2)(A), (B)(iii), and the Debtor's mother was ordered to convey the property to the Trustee.

A settlement was reached among the Trustee, the Debtor and the transferees with regard to the claims involved in the six-count complaint. In orders dated October 27, 1980, and November 19, 1980, the bankruptcy court approved the compromise settlements; Counts I, II and IV were dismissed without prejudice and Counts III, V and VI were dismissed with prejudice.

On January 9, 1981, the Trustee initiated a proceeding under 11 U.S.C. Sec. 727 objecting to the Debtor's discharge in bankruptcy on the grounds that the Debtor transferred and concealed property with the intent to hinder, delay and defraud his creditors and that the Debtor failed to explain satisfactorily a substantial loss and deficiency of assets to meet his liabilities. The Trustee later amended his complaint to include as proof of the Debtor's actual intent to defraud his creditors the specific allegations that the Debtor transferred money to his aunt and uncle and to his mother, that he wrongfully withdrew assets of the bankrupt estate and that he conveyed forty acres of real estate to his mother. The above conveyances refer to the same transactions involved in the Trustee's first complaint to set aside fraudulent conveyances and Counts II, IV and VI of the second complaint.

In response to this complaint under Sec. 727, the Debtor raised the affirmative defenses of res judicata and collateral estoppel, arguing that the decision and dismissals in the previous Sec. 548 proceedings concerning fraudulent transfers precluded a later suit by the Trustee objecting to the Debtor's discharge based on those same transfers.

The bankruptcy court held that the principles of res judicata and collateral estoppel did not apply in this situation. The court also concluded, after the presentation of evidence including the testimony of the Debtor, that within one year prior to the filing of his bankruptcy petition, the Debtor had transferred property to himself and others with the intent to hinder, delay or defraud his creditors in violation of 11 U.S.C. Sec. 727(a)(2). The Debtor's discharge was therefore denied.

Although the district court did not agree with the bankruptcy court's determination that the doctrines of res judicata and collateral estoppel were inapplicable under these facts, the district court affirmed the denial of the Debtor's discharge on other grounds. In the district court's view, because the Sec. 548 proceeding to set aside the real estate transfer to the Debtor's mother had been decided adversely to the Debtor, the Trustee could rely on this determination as collateral estoppel in the later proceeding objecting to the Debtor's discharge under Sec. 727. The Debtor appeals.

Although the parties did not distinguish between the concepts of collateral estoppel and res judicata in their briefs, we cannot properly analyze the issues involved in this appeal without recognizing the critical differences between them.

Under the doctrine of collateral estoppel, four criteria must be met before a determination is conclusive in a subsequent proceeding: (1) the issue sought to be precluded must be the same as that involved in the prior litigation; (2) that issue must have been actually litigated; (3) it must have been determined by a valid and final judgment; and (4) the determination must have been essential to the judgment. In re Piper Aircraft Distribution System Antitrust Litigation, 551 F.2d 213 (8th Cir.1977). The doctrine of res judicata bars a later suit when (1) the first suit resulted in a final judgment on the merits; (2) the first suit was based on proper jurisdiction; (3) both suits involved the same cause of action; and (4) both suits involved the same parties or their privies. Ward v. Arkansas State Police, 653 F.2d 346 (8th Cir.1981). Thus, the application of collateral estoppel or issue preclusion is limited to those matters previously at issue which were directly and necessarily adjudicated. Montana v. United States, 440 U.S. 147, 99 S.Ct. 970, 59 L.Ed.2d 210 (1979). In contrast, res judicata or claim preclusion bars the relitigation of issues which were actually litigated or which could have been litigated in the first suit. Federated Department Stores v. Moitie, 452 U.S. 394, 101 S.Ct. 2424, 69 L.Ed.2d 103 (1981); Allen v. McCurry, 449 U.S. 90, 101 S.Ct. 411, 66 L.Ed.2d 308 (1980). However, both doctrines are applied only when the party against whom the earlier decision is being asserted had a "full and fair opportunity" to litigate the issue in question. Kremer v. Chemical Construction Corp., 456 U.S. 461, 481 n. 22, 102 S.Ct. 1883, 1897 n. 22, 72 L.Ed.2d 262 (1982).

Applying these general principles to the facts before us, it is clear that the concept of collateral estoppel is no bar to the Trustee's suit to block the Debtor's discharge.

Under 11 U.S.C. Sec. 548(a), the Trustee is given authority to avoid transfers made by the Debtor within one year before the date of the filing of the bankruptcy petition on the ground of actual fraud or on the ground of constructive fraud. Subsection (a)(1) of Sec. 548 sets out the ground of actual fraud and subsection (a)(2) sets out the ground of constructive fraud. ³

On the other hand, in order to deny a bankrupt's discharge under 11 U.S.C. Sec. 727(a)(2), the Trustee must establish that the property was transferred with actual intent to hinder, delay or defraud creditors. Constructive intent cannot be the basis for the denial of a discharge in bankruptcy. ⁴

The intentional fraud issue, central to the proceeding to prevent the Debtor's discharge, was never decided by the bankruptcy court in the suit to set aside property transfers. Most of the claims were settled and dismissed. A hearing was held on the question of the forty-acre transfer after which the bankruptcy court determined that the transfer was a constructively fraudulent conveyance and therefore voidable. The court made no determination that the Debtor intended or did not intend to defraud his creditors. The doctrine of collateral estoppel at most could prevent the Trustee from relitigating in the discharge hearing those matters decided in the earlier hearing. The court was not precluded, under principles of collateral estoppel, from considering and deciding an issue never before resolved. Therefore, the Debtor's attempt to invoke collateral estoppel is inappropriate under these facts.

The Debtor also contends that the doctrine of res judicata, which precludes the relitigation of issues that could have been litigated, precluded the bankruptcy court from considering the nature of the transactions previously involved in the Sec. 548 proceeding as a basis for the denial of the Debtor's discharge. In...