Matter of Touchstone, Bankruptcy No. 92-30100-BKC-RAM
| Decision Date | 29 January 1993 |
| Docket Number | Bankruptcy No. 92-30100-BKC-RAM,Adv. No. 92-0276-BKC-RAM. |
| Citation | 149 BR 721 |
| Parties | In the Matter of Gale H. TOUCHSTONE, Debtor. TRICENTROL OVERSEAS, LTD., and Tricentrol Oil Trading, Inc., Plaintiffs, v. Gale H. TOUCHSTONE, Defendant. |
| Court | U.S. Bankruptcy Court — Southern District of Florida |
COPYRIGHT MATERIAL OMITTED
Joel M. Aresty, Kelly, Drye & Warren, Miami, FL, William H. Kiekhoffer, III and Kenneth J. Karl, Kelly, Drye & Warren, Los Angeles, CA, for plaintiffs.
Edward A. Marod, West Palm Beach, FL, for defendant.
This adversary proceeding came to be heard on plaintiffs' motion for summary judgment. On December 10, 1992, the Court announced its ruling partially granting the motion and advising that the oral ruling would be supplemented by a written opinion. This opinion supplements and expands upon the Court's ruling at the December 10, 1992 hearing.
Plaintiffs, Tricentrol Overseas, Ltd., (TOSL) and Tricentrol Oil Trading, Inc., (TOTI), seek a determination that the remaining monies owed by defendant Gale Touchstone (referred to as "Touchstone" or the "debtor"), under a state court judgment in the total amount of $1,170,790 are nondischargeable alternatively under Sections 523(a)(2)(A), (a)(4) or (a)(6) of the Bankruptcy Code. The plaintiffs argue that the state court record in Tricentrol Oil Trading Inc. v. Gale H. Touchstone, Case No. 87-30008, in the District Court of Harris County, 113th Judicial District (the "Texas Action"), and the appeal taken therefrom conclusively establish the elements of its dischargeability claims and therefore seeks summary judgment.
After reviewing applicable portions of the record in the Texas Action, including the specific findings of the jury incorporated in the judgment in the Texas Action, analyzing the decision of the Texas Supreme Court in Tricentrol Oil Trading Inc. v. Annesley, 809 S.W.2d 218 (Tex. 1991) and the opinion on remand by the Fourteenth Court of Appeals dated November 5, 1992, 841 S.W.2d 908 (Tex.1992) (the "Appellate Opinion on Remand"), considering the arguments of counsel and the extensive memoranda filed in this proceeding, the Court concludes that summary judgment will be granted in favor of the plaintiffs on the § 523(a)(4) and (a)(6) claims. The nondischargeable debt includes the punitive and compensatory damages awarded in the Texas Action on the conversion and breach of fiduciary duty claims plus post-judgment interest through the filing date of this Chapter 7 case.
Summary judgment will be entered in favor of the defendant on the § 523(a)(2) claim. The elements of fraud under § 523(a)(2) were not conclusively established in the state court trial. Finally, the Court denies summary judgment to the plaintiffs and will enter summary judgment in favor of the defendant on the attorneys' fees awarded in the Texas Action.
As explained below, the doctrine of collateral estoppel precludes the debtor from relitigating whether the conversion damages awarded in the Texas Action constitute a debt for willful and malicious injury and from relitigating whether his breach of fiduciary duty constituted defalcation while acting in a fiduciary capacity.
The factual and procedural background is extensive.
TOTI and its parent company, TOSL, were engaged in oil trading in the United States and the United Kingdom. TOTI purchased two seats (the "Seats") on the New York Mercantile Exchange (NYMEX). NYMEX rules apparently bar corporations from owning Seats in their own names, but officers can take Seats in their individual names and confer trading privileges on their corporations.
At the time the Seats were acquired, Touchstone was vice-president of TOTI. TOTI paid for the Seats and they were put in Touchstone's name. Sometime later, after Touchstone had become president, TOTI suffered significant losses. TOSL sold TOTI and the new owner terminated Touchstone. However, TOSL retained the responsibility to settle any claims that Touchstone may have had against the two plaintiffs here, TOTI or TOSL. TOSL, TOTI and Touchstone entered into an employment termination agreement (the "Agreement"). Touchstone received $75,000 and the parties executed mutual releases. At that point Touchstone did not assert any right to the Seats on the Exchange. The Seats were not mentioned during the negotiations of the Agreement or referred to in the written Agreement.
When Touchstone refused to turn over the Seats, the plaintiffs filed an action in the state court in Texas against Touchstone and a co-defendant, Margaret Annesley, to recover the Seats. The jury returned a verdict and awarded compensatory and punitive damages to the plaintiffs for conversion, breach of fiduciary duty and breach of contract. In conformance with the jury verdict, the trial court decreed that TOTI was the legal owner and holder of all right, title and interest in the Seats.
The Judgment entered by the Court on May 3, 1989 incorporated compensatory damages in the amount of $546,000 for conversion and the same amount for breach of fiduciary duty, $200,000 in punitive damages on the conversion claim, a separate award of $146,000 in punitive damages on the breach of fiduciary duty claim, $310,000 in attorneys' fees and prejudgment interest.
After the judgment, Touchstone transferred the seats to TOTI and, as provided in the judgment, the compensatory damage award of $546,000 was reduced to $16,000. Thus, the primary claims at issue here are the two separate punitive damage awards totalling $346,000 and the $310,000 attorneys fee award.
Defendant Touchstone appealed the Texas court judgment to the Fourteenth Court of Appeals of Texas, Appeal No. A14-89-00811-CV, 1990 WL 113747 (the "Texas Appellate Court"). The Texas Appellate Court reversed and remanded the case to the trial court. The plaintiffs appealed that decision to the Texas Supreme Court which, in turn, reversed the judgment of the Texas Appellate Court and remanded the case to the Texas Appellate Court for reconsideration of defendant's appeal. 809 S.W.2d at 221.
While the Texas Action was pending once again in the Texas Appellate Court for review of all issues in the trial, on January 15, 1992, the defendant Touchstone filed his petition for Chapter 7 relief in this Court. The plaintiffs timely filed the instant complaint and alleged that based upon the judgment and jury verdict in the Texas Action, the entirety of the unsatisfied portion of the judgment in the Texas Action should be deemed nondischargeable under Bankruptcy Code Sections 523(a)(2), (a)(4) and (a)(6). Absent this adversary proceeding, Touchstone's discharge in this Chapter 7 case would discharge the entire Texas judgment.
The original memoranda and oral argument focused on whether collateral estoppel could be applied to the judgment in the Texas Action following the remand by the Texas Supreme Court to the Texas Appellate Court for further appellate review. The procedural uncertainty was clarified by the Texas Appellate Court's November 5, 1992 opinion on remand, and its judgment entered in conjunction with that opinion. The Texas Appellate Court found no error in the trial court judgment and affirmed in all respects the original trial court judgment and jury verdict.
In addressing the breach of fiduciary duty claim, the Texas Appellate Court concluded that "Touchstone breached his fiduciary duty as a corporate officer by attempting to appropriate corporate property for his own financial benefit and breached his duty as a trustee of corporate property by refusing to carry out TOTI's demands as beneficiary of the trust property." Appellate Opinion on Remand, 841 S.W.2d at 910. In short, the Texas Appellate Court found that Touchstone breached his fiduciary duty both as a corporate officer and as a trustee of corporate property.
With respect to the conversion claim, the Texas Appellate Court stated that "Touchstone's failure to return the trust property at TOTI's direction supports the jury's findings of conversion." Appellate Opinion on Remand, 841 S.W.2d at 910. It noted further that "the jury specifically found Touchstone's conversion of the assets was intentional, as was his breach of fiduciary duty." Id. In approving the punitive damage award the court concluded that "malice may be implied" from the jury's findings. Finally, the opinion on remand found no abuse of discretion in the trial court's award of attorneys' fees to TOTI and TOSL in the declaratory judgment action.
Collateral estoppel or issue preclusion forecloses relitigation of an issue of fact or law that has been litigated and decided in a prior suit. In re Keene, 135 B.R. 162 (Bankr.S.D.Fla.1991). The principles of collateral estoppel may be applied to foreclose a relitigation of facts in a dischargeability proceeding. Grogan v. Garner, 498 U.S. 279, ___, 111 S.Ct. 654, 658, 112 L.Ed.2d 755, 763 (1991); In re Latch, 820 F.2d 1163 (11th Cir.1987), In re Halpern, 810 F.2d 1061 (11th Cir.1987), and In re Held, 734 F.2d 628 (11th Cir.1984).
To determine the preclusive effect of the prior Texas judgment, the Court must first decide whether to apply the Texas or federal law of collateral estoppel. Despite some difference of opinion in the federal case law, this Court has concluded in two prior decisions that the issue is no longer subject to doubt — if the prior judgment was in a state court, then the collateral estoppel law of that state must be applied. Johnson v. Keene, 135 B.R. 162 (Bankr.S.D.Fla.1991) and the cases cited therein, including In re Feldstein, 93 B.R. 272 (Bankr.M.D.Fla.1988), Chang v. Daniels, 91 B.R. 981 (Bankr.M.D.Fla.1988) and Sciarrone v. Brownlee (Matter of Brownlee), 83...
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