Stoebner v. Parry, Murray, Ward & Moxley

• Decision Date: 31 July 1996
• Docket Number: No. 95-2662,95-2662
• Citation: 91 F.3d 1091
• Parties: John R. STOEBNER, Trustee of the Bankruptcy Estate of T.G. Morgan, Inc., Plaintiff-Appellant, v. PARRY, MURRAY, WARD & MOXLEY, formerly known as Parry, Murray, Ward & Cannon, Defendant-Appellee.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 1091

91 F.3d 1091

John R. STOEBNER, Trustee of the Bankruptcy Estate of T.G Morgan, Inc., Plaintiff-Appellant, v. PARRY, MURRAY, WARD & MOXLEY, formerly known as Parry Murray, Ward & Cannon, Defendant-Appellee.

No. 95-2662.

United States Court of Appeals Eighth Circuit.

Submitted Feb. 15, 1996.

Decided July 31, 1996.

Gordon Conn, Jr., Minneapolis, MN, argued, (Charles F. Webber, on the brief), for appellant.

David Olsen, Minneapolis, MN, argued (Brent D. Ward and David M. McGrath, Salt Lake City, UT, on the brief), for appellee.

Before HANSEN, LAY and JOHN R. GIBSON, Circuit Judges.

PER CURIAM.

T.G. Morgan, Inc. (TGM) is a Minnesota corporation formerly engaged in the business of selling rare coins for investment. Michael W. Blodgett was the founder, president, and majority owner of TGM. Diane Blodgett is his wife. In August, 1991, the Federal Trade Commission sued TGM and Michael Blodgett (the "FTC Action") for deceptive trade practices, seeking permanent injunctive relief and consumer redress. ¹

In January, 1992, while the FTC Action was pending, TGM creditors filed an involuntary bankruptcy petition against TGM. Thereafter, TGM, Blodgett, and the FTC reached a settlement (the "Settlement Agreement") and the district court entered final judgment on a consent order dated March 4, 1992. Federal Trade Commission v. T.G. Morgan, Inc., No. 4-91-638, 1992 WL 88162 (D.Minn. Mar. 5, 1992). The Settlement Agreement provided for the creation of a "Settlement Estate," to pay for claims of defrauded coin purchasers, and a "Litigation Estate," ² to fund legal fees for anticipated criminal defense costs of Michael and Diane Blodgett. ³ The Settlement Agreement stipulated that any excess funds advanced from the Litigation Estate were to be returned to that estate to be subsequently distributed, if necessary, by the FTC receiver at the direction of Michael Blodgett.

Upon Stoebner's appointment as Trustee of the Bankruptcy Estate, ⁴ he immediately obtained a district court order directing the FTC receiver to turn over any assets remaining in the Settlement Estate on the ground that they were property of the TGM bankruptcy estate. ⁵ Federal Trade Commission v. T.G. Morgan, Inc., No. 4-91-638 (D.Minn. Aug. 21, 1992) (the "Turnover Order").

After the Turnover Order, Diane Blodgett changed attorneys, hiring the law firm of Parry, Murray, Ward & Moxley (Parry, Murray) to replace Philip Resnick. At the time Blodgett severed the relationship, Resnick possessed $25,649.71 of the retainer he received from Blodgett's previous attorney, which had in turn had come from the TGM Litigation Estate. Unsure of the proper disposition of the retainer, Resnick petitioned the district court for direction. The district court ordered Resnick to remit the funds to the FTC receiver for disbursement in accordance with the FTC settlement. Federal Trade Commission v. T.G. Morgan, Inc., No 4-91-638 (D.Minn. Apr. 20, 1993) (order directing return of excess funds to the Litigation Estate)

Concerned that return of the legal funds to the FTC receiver would be tantamount to their transfer to the Bankruptcy Trustee pursuant to the Turnover Order, Parry, Murray, on behalf of Diane Blodgett, filed a motion for reconsideration. The district court denied the motion for reconsideration in June, 1993, Federal Trade Commission v. T.G. Morgan, Inc., No. 4-91-638 (D. Minn. June 15, 1993) (order denying Blodgett's motion for reconsideration), noting that its earlier order of April 20, 1993 merely required Resnick and the FTC receiver to comply with the terms of the Settlement Agreement, which provided that excess funds in the possession of an attorney should be returned to the Litigation Estate and transferred at the direction of Michael Blodgett. ⁶ Michael Blodgett then directed the receiver to transfer the funds to Parry, Murray for its criminal defense of his wife.

In the adversarial bankruptcy proceeding below, Stoebner sought to recover the money transferred to Parry, Murray under 11 U.S.C. § 549, which allows a bankruptcy trustee to recover post-petition transfers by a debtor that are not authorized by the bankruptcy court. ⁷ Parry, Murray moved for summary judgment, asserting that Stoebner was collaterally estopped from pursuing the section 549(a) claim based on the district court's June 15, 1993 order denying Blodgett's motion for reconsideration. Although Parry, Murray failed to plead the affirmative defense of collateral estoppel in its answer, the bankruptcy court construed Parry, Murray's summary judgment motion as one to amend its answer to add the estoppel defense and expressly allowed the amended answer. The court then denied Stoebner's motion for summary judgment, granted Parry, Murray's motion for summary judgment, and entered judgment in favor of Parry, Murray on Stoebner's claim. The district court affirmed the bankruptcy court's judgment in an order entered on June 21, 1995. We reverse and vacate the judgment of the district court with directions to remand to the bankruptcy court for further proceedings.

Discussion

We reject Stoebner's argument that the bankruptcy court improperly allowed Parry, Murray to raise collateral estoppel in its summary judgment motion because Stoebner has failed to show that he lacked notice of the defense, or that Parry, Murray's delay prejudiced his ability to respond. See Sanders v. Department of the Army, 981 F.2d 990, 991 (8th Cir.1992) (per curiam) (district court did not have to require formality of amended answer, and properly exercised discretion to allow government to raise affirmative defense for first time in motion to dismiss which was sufficient notice to plaintiff); see also Camarillo v. McCarthy, 998 F.2d 638, 639 (9th Cir.1993) (in absence of prejudice, affirmative defense may be raised for first time in summary judgment motion); but cf. Sayre v. Musicland Group, Inc., 850 F.2d 350, 355 (8th Cir.1988) (holding no error in denying motion to amend answer to include affirmative defense when plaintiff's estate would suffer substantial prejudice if forced to rebut defendant's allegations because plaintiff was deceased). Stoebner has not claimed prejudice, nor is any suggested by the record. The defense of collateral estoppel was not waived.

Nonetheless, we conclude the Bankruptcy Court incorrectly determined that collateral estoppel barred Stoebner's section 549 claim. Collateral estoppel "means simply that when an issue of ultimate fact has once been determined by a valid and final judgment, that issue cannot again be litigated between the same parties in any future lawsuit." Schiro v. Farley, 510 U.S. 222, 232, 114 S.Ct. 783, 790, 127 L.Ed.2d 47 (1994) (citation omitted). Four elements must exist in order to bar relitigation of a factual issue in a subsequent proceeding: (1) the issue sought to be precluded must be the same as that involved in the prior action; (2) the issue must have been litigated in the prior action; (3) the issue must have been determined by a valid and final judgment; and (4) the determination must have been essential to the prior judgment. In re Miera, 926 F.2d 741, 743 (8th Cir.1991).

The Bankruptcy Court based...