Matter of Life Science Church of River Park, Bankruptcy No. 82-30782

• Decision Date: 02 November 1983
• Docket Number: Bankruptcy No. 82-30782,Adv. No. 82-3181.
• Citation: 34 BR 529
• Parties: In the Matter of LIFE SCIENCE CHURCH OF RIVER PARK, Debtor. LIFE SCIENCE CHURCH OF RIVER PARK, Plaintiff, v. James E. PERSONETTE, Karen L. Personette, Defendants.
• Court: U.S. Bankruptcy Court — Northern District of Indiana

34 B.R. 529 (1983)

In the Matter of LIFE SCIENCE CHURCH OF RIVER PARK, Debtor LIFE SCIENCE CHURCH OF RIVER PARK, Plaintiff, v. James E. PERSONETTE, Karen L. Personette, Defendants.

Bankruptcy No. 82-30782, Adv. No. 82-3181.

United States Bankruptcy Court, N.D. Indiana, South Bend Division.

November 2, 1983.

Gerald Y. Sakaguchi, South Bend, Ind., for debtor.

Jere L. Humphrey, Plymouth, Ind., for defendants.

ORDER

ROBERT K. RODIBAUGH, Bankruptcy Judge.

On November 3, 1982, debtor Life Science Church of River Park, also known as Troyer's Pool 'N Patio Place, Division of Life Science Church of River Park, an unincorporated religious organization, initiated an adversary proceeding against James E. and Karen L. Personette, creditors, by filing a complaint to seek determination of the validity of creditors' claim against the debtor Church. Defendant/creditors filed a motion to dismiss the complaint.¹ The parties agreeing that no further oral testimony was required and that this matter could be decided upon the pleadings, record of state court case, exhibits, and briefs to be filed by each of the parties, the court took the matter under advisement on September 27, 1983.

The debtor's adversary complaint refers to a judgment rendered in state court against the Church's minister, Emmett Troyer, individually.² The Church asserts that the creditors have no claim against it, since the Church was not a defendant or proper party respondent in the original state proceeding.

The creditors claim that their right to enforce the state court judgment by execution upon the property of the debtor church is based upon the state court's determination that Emmett Troyer's transfer of all his personal and business assets to the Church was a fraudulent conveyance.

The debtor Church acknowledged the state court judgment against Emmett Troyer d/b/a Troyer's Pool 'N Patio, but alleged that the Church itself had never been sued, served with a petition to set aside fraudulent conveyances, or found by a court to have been in breach of contract.

The issue in this case is the effect on this Court of a non-bankruptcy court judgment rendered against the Church minister personally before the debtor Church's bankruptcy case commenced.

This issue has usually arisen when a creditor seeks a court's consideration of the dischargeability of a debtor's debt to creditor. In the present case, however, the debtor itself is in the offensive position, questioning the creditors' right to claim a debt against it.

The ruling of the United States Supreme Court on this issue as it relates to dischargeability of a debt is equally appropriate to the case at bar. In its decision Brown v. Felsen, 442 U.S. 127, 99 S.Ct. 2205, 60 L.Ed.2d 767 (1979), the Court held that a bankruptcy court may review the judgment, record, and even extrinsic evidence in prior state court proceedings. Id. at 138-139, 99 S.Ct. at 2213. Furthermore, when the allegation is fraud, deceit, or malicious conversion, if the state court determined factual issues using the standards presented under section 17 of the Bankruptcy Act section 523(a) of the Bankruptcy Code, ". . . then collateral estoppel, in the absence of countervailing statutory policy, would bar relitigation of those issues in the bankruptcy court." Id. at 139 n. 10, 99 S.Ct. at 2213 n. 10.

This Court has examined the state court proceedings and, in considering application of the doctrine of collateral estoppel, has compared that court's determination of fraudulent conveyance with the criteria established under the Bankruptcy Code. We then addressed the effect of the automatic stay upon the prior circuit court judgment, and have concluded that the creditors' claim is valid, and that the doctrine of collateral estoppel will bar relitigation of the state court's determinations.

1. State Court Proceedings

The non-bankruptcy case in question was begun on January 29, 1980, in Starke Circuit Court. Plaintiffs James E. and Karen L. Personette filed a complaint for breach of contract against Emmett Troyer d/b/a Troyer's Pool 'N Patio. On April 22, 1981, the court awarded plaintiffs damages of $5,120.00 from Troyer for the repair of their pool.

Several proceedings supplemental followed. On November 13, 1981, the Starke Circuit court found

that the defendant continues to operate said business as Troyer\'s Pool \'N Patio and that he has attempted to transfer all his personal and business assets to the Life Science Church. The Court further finds that he has total complete access to any of said funds and assets and that he uses said funds and assets for all his own personal family and business expenses. The Court further finds that said transferring and using of said funds and assets operates as fraud on the defendant\'s creditors.

Starke Circuit Court Docket, Cause No. 80-38, entry 11/13/81.

Later hearings were held on motions by defendant Emmett Troyer and by his wife Carol Troyer as President of Life Science Church of River Park, intervening to represent the interests of the Church. On June 25, 1982, the state court granted the plaintiffs' petition to set aside Emmett Troyer's transfer of all his personal, family, and business assets to the Life Science Church on grounds of fraud.

The defendant Emmett Troyer and intervenor Carol Troyer/Life Science Church then filed additional motions. On July 22, 1982, the court stayed all proceedings against the Church until disposition of the motion to correct errors. However, a proviso was attached to that stay:

provided the Life Science Church at River Park file herein its bond with surety to be approved by the Court on or before July 26, 1982, at 4:00 p.m. in the amount of $7,000.00, condition for the satisfaction of the judgment in full, with costs, interest, and damages for delay, or for satisfaction of the judgment as it may be modified upon determination of the Motion.

Starke Circuit Court Docket, Cause No. 80-38, entry 7/22/82.

The Life Science Church did not file bond. At 3:34 p.m., on July 26, 1982, Life Science Church of River Park, by Carol L. Troyer, President, filed its petition under Chapter 13 of the Bankruptcy Code.

2. Collateral Estoppel

The common law doctrine of collateral estoppel prevents duplicative litigation and encourages the finality of justice.

It holds, essentially, that once issues of fact and law between opposing parties have been fully and fairly litigated and substantially adjudicated, those parties should be estopped from relitigating those issues before another court.

In re Davis, 23 B.R. 639, 640 (Bkrtcy.W.D. Ky.1982).

In bankruptcy cases collateral estoppel has been used primarily to determine dischargeability of a debt under section 523 of the Bankruptcy Code. The Brown v. Felsen decision of the Supreme Court (Brown v. Felsen, 442 U.S. 127, 99 S.Ct. 2205, 60 L.Ed.2d 767 (1979)) considered the doctrine of res judicata directly and of collateral estoppel tangentially. It did not determine what collateral effect would be given pre-bankruptcy decisions. No Seventh Circuit case has resolved the issue, but the U.S. District Court for the Northern District of Illinois fully discussed the appropriate use of collateral estoppel in determining nondischargeability of a state court judgment. United States Life Title Insurance Company v. Dohm, 19 B.R. 134 (D.C.Ill.1982).

The circumstances in U.S. Life are similar to those herein. An Illinois circuit court granted summary judgment to U.S. Life for Dohm's willful and malicious embezzlement of company funds. Matter of Dohm, 19 B.R. 132 (Bkrtcy.N.D.Ill.1981). The company attempted to collect on the judgment until Dohm filed a petition in bankruptcy. At that point U.S. Life filed a complaint in the bankruptcy court to determine whether Dohm's debt to U.S. Life was dischargeable, and then filed a motion for summary judgment based on the collateral estoppel effect of the circuit court judgment. The bankruptcy court granted the motion for summary judgment. U.S. Life Title Ins. Co., supra, at 135-6.

The District Court affirmed, following the criteria established by the Third Circuit in testing the proper application of the doctrine of collateral estoppel:

1. The issues sought to be precluded must be the same as that involved in the prior action;

2. The issue must have been actually litigated;

3. It must have been determined by valid and final judgment;

4. The determination must have been essential to the prior judgment.

In re McMillan, 579 F.2d 289, 291-92 (3d Cir.1978); Matter of Ross, 602 F.2d 604, 608 (3d Cir.1979).

Id. at 137. These criteria were applied to the facts of the case presently at bar; the four conditions have been met.

First, the issue sought to be precluded is creditors' "claim through a state court action . . . of a lien and right to enforce a judgment against this debtor which was rendered . . . against Emmett Troyer personally . . . by execution upon this debtor." Adversary Complaint, filed in this court November 3, 1982. This was the issue involved in the prior state action. The Proceedings Supplemental to the original judgment against Emmett Troyer concerned creditors' right to execution of the judgment upon the Church as a result of the fraudulent transfer of Troyer's assets into the possession of the Church. Count two of Plaintiff's Petition to Set Aside Fraudulent Transfers (filed in Starke Circuit Court February 17, 1982) alleged that the defendant Emmett Troyer

made fraudulent conveyances to the Life Science Church, which transfers were made without consideration and which works the fundamental purpose of defrauding plaintiffs of the collection of damages.

The Starke Circuit Court granted the petition and found that the nonexempt assets of Life Science Church could be used to satisfy the judgment. Starke Circuit Court Docket, Cause No. 80-38, entry 7/2/82.

Second, the issue was actively litigated. Trial on the original complaint was held for two days. At its conclusion the court...