Morgan v. Morgan (In re Morgan)
| Decision Date | 25 October 2021 |
| Docket Number | 2:20-cv-00291-DBB |
| Parties | In re TROY R. MORGAN, Debtor. BRENT MORGAN and SUMMIT DEVELOPMENT AND LENDING GROUP, INC., Appellants, v. TROY R. MORGAN, Appellee. |
| Court | U.S. District Court — District of Utah |
In re TROY R. MORGAN, Debtor.
BRENT MORGAN and SUMMIT DEVELOPMENT AND LENDING GROUP, INC., Appellants,
v.
TROY R. MORGAN, Appellee.
No. 2:20-cv-00291-DBB
United States District Court, D. Utah
October 25, 2021
MEMORANDUM DECISION AND ORDER
David Barlow United States District Judge
At the conclusion of a chapter 7 bankruptcy proceeding, bankruptcy courts typically enter an order that discharges most, if not all, of the debtor's pre-bankruptcy debts.[1] To protect the fresh start a discharge in bankruptcy provides, the discharge “operates as an injunction against the commencement or continuation of an action, the employment of process, or an act, to collect, recover or offset any” debt that has been discharged and “voids any judgment at any time obtained” that determines that the debtor is personally liable for a discharged debt.[2] A creditor who violates a debtor's discharge can be held in civil contempt and subjected to sanctions.[3]
At issue here are a bankruptcy court's orders finding that Appellants Brent Morgan (Brent) and Summit Development and Lending Group, Inc. (Summit) willfully violated Appellee
Troy Morgan's (Troy) bankruptcy discharge and awarding Troy $68, 180.27 in damages.[4]Appellants argue on appeal that the bankruptcy court's orders should be reversed or, in the alternative, that the damages awarded to Troy should be reduced.[5] The appeal is fully briefed[6]and the court has reviewed the record.[7] For the following reasons, the bankruptcy court's orders are affirmed.
BACKGROUND
The history of this case involves over a decade of bitter relations between two family members. Brent and Troy are brothers-in-law who owned and operated similar, but separate, lending businesses.[8] In 2009, a rift in their relationship began to develop over business troubles and because Troy allegedly failed to pay back loans Brent and his wife (Troy's sister) had given him.[9]
On May 18, 2010, Troy filed for bankruptcy under Chapter 7 of the Bankruptcy Code.[10]Brent was not listed as a creditor.[11] After the bankruptcy trustee determined that Troy had no
assets to distribute to creditors, the court granted a discharge under 11 U.S.C. § 727 on September 1, 2010.[12]
The rift between Brent and Troy began to intensify in 2014 when the Securities Division of the Utah Department of Commerce instigated an administrative action against Appellants.[13]The Securities Division alleged that Brent had defrauded certain investors in 2007.[14] Troy was not a party in the administrative action, but Brent claims that the alleged violations were based in large part on Troy's interactions with an investor.[15] Brent contested the allegations but was eventually ordered to pay a fine of approximately $140, 000.[16] He appealed the fine, but it was upheld by the Utah Court of Appeals in 2018.[17]
On July 31, 2018, Appellants commenced an action against Troy in Utah state court related to the fine imposed by the Securities Division.[18] They claimed that Troy should indemnify them for the fine because it was incurred due to his actions and he would be unjustly enriched if he was not required to do so.[19] Troy twice requested additional time to respond to Appellants' complaint, but he never filed an answer.[20] The state court subsequently entered default judgment against him for the full amount of the fine.[21]
A few days after the default judgment was entered, Troy sent an email to Brent asserting that because the transactions Appellants' state court action was based on occurred in 2007 or 2008, he was released from any liability for those transactions by his bankruptcy discharge in 2010.[22] Troy further asserted that Brent's state court action violated his bankruptcy discharge, and if Brent did not dismiss the action and judgment against him, Troy would instigate a contempt action in bankruptcy court.[23] Troy filed a notice regarding his bankruptcy with the state court a few weeks later to inform the court of his position that Brent's case should be dismissed because it violated his bankruptcy discharge.[24] However, the court appears to have taken no action with regard to the bankruptcy notice.[25]
Despite notice of the bankruptcy, Appellants filed an application for a writ of garnishment on the default judgment in January 2019.[26] The court issued the writ on February 14, 2019, after holding a hearing at which Troy did not appear.[27] Instead of beginning to garnish Troy's wages immediately, Brent began negotiating a settlement with Troy.[28] However, the negotiations fell through, and Brent began receiving Troy's garnished wages on May 2, 2019.[29]
A few days later, Troy filed a “Reply and Request for Hearing” on Brent's writ of garnishment, arguing that it had been issued improperly because it violated the discharge order from his bankruptcy.[30] Brent filed an opposition to Troy's reply in which he argued that the court
should reject Troy's objection to the writ of garnishment because his reply was untimely and challenged the judgment underlying the writ rather than the writ itself.[31] After a hearing, the state court overruled Troy's objection because, as Brent had argued in his opposition, the reply was untimely and Troy could not attack the validity of the judgment underlying the writ of garnishment during garnishment proceedings.[32] Thus, Appellants were permitted to proceed with garnishment and have, to date, garnished approximately $4, 700 of Troy's wages.[33]
On July 8, 2019, Troy filed a motion in the United States Bankruptcy Court for the District of Utah to reopen his bankruptcy case for the purpose of obtaining a civil contempt order against Appellants.[34] He argued that Appellants should be held in contempt and sanctioned because their state court action and garnishment proceedings violated his bankruptcy discharge.[35]Appellants objected to Troy's motion.[36] After conducting a preliminary hearing, the bankruptcy court reopened Troy's bankruptcy case and entered a scheduling order for addressing the merits of Troy's contempt claim.[37]
Appellants subsequently filed a motion to dismiss Troy's claim.[38] They argued that Troy's contempt claim should be dismissed, and his bankruptcy case closed, because the claim was barred by res judicata and on equitable grounds.[39] Even if Troy's contempt claim was not
barred, Appellants argued, Troy had failed to establish that Appellants should be held in contempt and sanctioned.[40]
The bankruptcy court addressed Appellants' res judicata argument independently in a bench ruling on December 5, 2019.[41] The bankruptcy court noted that res judicata under Utah law includes both claim preclusion and issue preclusion.[42] The court found, among other things, that the state court did not decide the dischargeability issue, that only the Bankruptcy Court could decide whether sanctions should be imposed for a violation of its discharge order, and that neither claim nor issue preclusion prevented Troy's sanctions claim from proceeding.[43]
After holding additional hearings, the bankruptcy court ruled on the merits of Troy's motion for contempt sanctions on April 16, 2020.[44] The bankruptcy court rejected Appellants' argument that Troy's motion was barred on equitable grounds.[45] It then found that Appellants had willfully violated Troy's discharge order and, after obtaining additional filings and conducting a hearing, awarded Troy a total of $68, 180.27 in damages.[46] Appellants filed a notice of appeal with this court on April 30, 2020.[47]
ANALYSIS
Appellants raise three issues on appeal. First, they argue that the bankruptcy court erred in concluding that res judicata did not bar it from determining whether their claims against Troy had been discharged, which was a prerequisite to finding that they violated his discharge.[48] Second, even if res judicata did not apply, the bankruptcy court erred in finding that Appellants violated Troy's discharge injunction willfully.[49] Finally, Appellants argue that even if sanctions for willful violations were appropriate, the damages awarded to Troy should be reduced because the fees awarded to some of his attorneys were improper, unreasonable, and excessive.[50]
I. Claim Preclusion Did Not Bar the Bankruptcy Court from Determining whether Appellants' Claims against Troy Were Discharged in Deciding Troy's Motion for Contempt Sanctions.
The court must analyze de novo the bankruptcy court's conclusions of law regarding the applicability of res judicata.[51] In determining whether a state court judgment has res judicata effect in subsequent federal litigation, a federal court must apply the law of the state in which the judgment was entered.[52] In this case, that is Utah.
Utah law recognizes “two distinct branches” of res judicata: “claim preclusion and issue preclusion.”[53] Claim preclusion bars relitigation of causes of action which have already been
resolved by a final judgment on the merits in a prior lawsuit.[54] Issue preclusion is more narrow and bars relitigation of “facts and issues underlying causes of action” that have already been litigated.[55] In this case, Appellants challenge the bankruptcy court's conclusions regarding the applicability of claim preclusion only.
In Utah, claim preclusion applies when (1) two actions involve the same parties; (2) a claim raised in the second action was raised, or could and should have been raised, in the first; and (3) the first action concluded with a final judgment on the merits.[56] Whether a claim is the same as one previously raised, or that could and should have been raised, is determined by whether it “arise[s] from the same operative facts, or in other words from the same transaction.”[57]
Appellants argue that there are two reasons the bankruptcy court should have denied Troy's motion for contempt sanctions due to claim preclusion.[58] First, Appellants argue...
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