McCallum v. Pixley (In re Pixley)

• Decision Date: 24 January 2014
• Docket Number: Bankruptcy No. 10–62556.,Adversary No. 10–6665.
• Citation: 504 B.R. 852
• Parties: In re Steven PIXLEY, Debtor. Joyce McCallum, Plaintiff, v. Steven Pixley, Defendant.
• Court: U.S. Bankruptcy Court — Eastern District of Michigan

504 B.R. 852

In re 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.

Jan. 24, 2014.

William J. Brown, Midland, MI, for Plaintiff.

John C. Lange, Michelle H. Bass, Jason Patrick Smalarz, Southfield, MI, for Defendant.

TRIAL OPINION

THOMAS J. TUCKER, Bankruptcy Judge.

I. Introduction

In this adversary proceeding, 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)(A) for fraud, and under 11 U.S.C. § 523(a)(6) for “willful and malicious injury.” 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 state court 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.

Before trial in this adversary proceeding, McCallum moved for summary judgment, arguing that collateral estoppel precluded Pixley from contesting that his debt to McCallum was nondischargeable under §§ 523(a)(2)(A) and 523(a)(6). The Court denied McCallum's motion for summary judgment, for reasons explained at length in a published opinion. McCallum v. Pixley ( In re Pixley ), 456 B.R. 770 (Bankr.E.D.Mich.2011).

The Court then held a bench trial, after which the parties filed post-trial briefs regarding certain issues. The Court has considered all of the arguments and evidence presented by the parties at trial, as well as the post-trial briefs. This opinion states the Court's findings of fact and conclusions of law.

For the reasons stated in this opinion, the Court finds for Plaintiff McCallum, and will enter a judgment in her favor, determining that Pixley's entire judgment debt to McCallum is nondischargeable under 11 U.S.C. § 523(a)(6).

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. Background and factsA. Stipulated facts

Initially, the Court finds the following facts, which the parties have stipulated to: ¹

A. In 2007, Plaintiff entered into an agreement with debtor whereby debtor's company would convert a Chrysler 300 automobile to a limousine for the Plaintiff;

B. In 2008, Plaintiff sued debtor in the 54th Circuit Court for Tuscola County Michigan;

C. Defendant did not answer the State Court Complaint;

D. A default was entered against defendant on June 25, 2008;

E. A motion for a default judgment was filed on December 12, 2008 by Plaintiff against debtor;

F. On January 21, 2009, a default judgment was entered against debtor in the amount of $157,028.03 which included treble damages due to debtor's liability for statutory conversion;

G. Debtor has not paid the state court judgment[.]

B. Collateral estoppel and the Court's summary judgment decision

There are collateral estoppel issues that remain to be decided now, after the trial of this case. Because collateral estoppel was discussed extensively in the Court's summary judgment opinion, the Court will describe some of its rulings made in the summary judgment opinion.

To begin with, the Court reiterates, and incorporates by reference into this opinion, the Court's opinion denying McCallum's motion for summary judgment. Next, some of the key points from the Court's summary judgment opinion are described here, because they are relevant to the Court's decision now.

First, the Court stated the following general principles in its summary judgment opinion, regarding the doctrine of 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, 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).

McCallum, 456 B.R. at 775–76 (footnote omitted).

Second, after discussing the federal and Michigan case law on the issue, this Court held in its summary judgment opinion that under Michigan law, a “true default” judgment is given preclusive effect under the doctrine of collateral estoppel:

The Court holds that under Michigan law a “true default” judgment, like the one in this case, meets Michigan's “actually litigated” requirement, and must be given preclusive effect under the doctrine of collateral estoppel. “Substantial participation” by the defendant in the state court case is not necessary in order for collateral estoppel to apply. No participation is necessary.

Id. at 777.

Third, this Court discussed the “actually litigated” and “necessarily determined” requirements for collateral estoppel to apply under Michigan law, and what those requirements mean:

Under Michigan law, an issue is “actually litigated” if it is “put into issue by the pleadings, submitted to the trier of fact for determination, and is thereafter determined.” Phillips, 434 B.R. at 486 (majority opinion) ( quoting Latimer v. William Mueller & Son, Inc., 149 Mich.App. 620, 386 N.W.2d 618, 627 (1986)); Phillips, 434 B.R. at 490 (Rhodes, J., concurring) (same). This Court agrees with the concurring opinion in Phillips that “[a]n issue may be actually litigated without a trial;” id., and that:

Under Michigan law, “the entry of a default judgment is equivalent to an admission by the defaulting party as to all of the matters well pleaded.” Sahn v. Brisson's Estate, 43 Mich.App. 666, 204 N.W.2d 692, 694 (1972); Lesisko v. Stafford, 293 Mich. 479, 292 N.W. 376, 377 (1940). The only matters that are not considered actually litigated are those not pled.

Id. at 492 (Rhodes, J., concurring) (emphasis added).

An issue that is “actually litigated” is also considered to be “necessarily determined” if “it is necessary to the judgment.” See id. at 493;see also Rohe Scientific Corp. v. Nat'l Bank of Detroit, 133 Mich.App. 462, 350 N.W.2d 280, 282 (1984) (citation omitted) (“Collateral estoppel applies to default judgments; however the default judgment is conclusive only as to those matters essential to support the judgment.”); Detroit Automobile Inter–Insurance Exchange v. Higginbotham, 95 Mich.App. 213, 290 N.W.2d 414, 418 (1980) (same). Whether an “actually litigated” issue is also “necessary to the judgment,” or “essential to the judgment,” in turn, depends on the elements of the claim or defense involved.

Id. at 778–79.

Fourth, the Court noted that “[i]t is clear, and undisputed, that the existence and amount of Pixley's debt to McCallum were both ‘actually litigated and necessarily determined’ by the default judgment.” Id. at 778. But, the Court noted, “as to both § 523(a)(2)(A) and § 523(a)(6), the parties dispute whether all of the elements of non-dischargeability were both ‘actually litigated and necessarily determined’ by the default judgment.” Id.

Fifth, the Court ruled that two of the necessary elements of McCallum's § 523(a)(2)(A) nondischargeability claim were not “actually litigated” in the state court default judgment, because they...