Vitol Inc. v. Brass (In re Brass)
| Decision Date | 24 June 2022 |
| Docket Number | CASE NO: 21-60025,ADVERSARY NO. 21-06006 |
| Citation | 641 B.R. 139 |
| Parties | IN RE: Arthur Jacob BRASS, Debtor. Vitol Inc., Plaintiff, v. Arthur Jacob Brass, Defendant. |
| Court | U.S. Bankruptcy Court — Southern District of Texas |
Keith Miles Aurzada, Bradley James Purcell, Lindsey Lee Robin, Reed Smith LLP, Dallas, TX, Michael Halley Bernick, Reed Smith LLP, Houston, TX, for Plaintiff.
Miriam Goott, Johnie J. Patterson, Walker & Patterson, PC, Houston, TX, for Defendant.
Arthur Brass seeks summary judgment on Vitol Inc.’s complaint to determine the dischargeability of debt under Sections 523(a)(2)(A), (a)(4), and (a)(6) of the Bankruptcy Code. Brass argues that Vitol released fraud and other related tort claims supporting its complaint under a prepetition settlement agreement approved by a Texas state court. Brass also argues that summary judgment on Vitol's Section 523(a)(4) claim is appropriate because he did not act in a "fiduciary capacity." Finally, Brass argues that summary judgment is warranted because the Texas statute of frauds prohibits Vitol from introducing evidence about an alleged loan supporting Vitol's debt claim. After careful consideration, the Court denies summary judgment as to Count 1 ( Section 523(a)(2)(A) ), Count 2 ( Section 523(a)(4) (embezzlement) ), and Count 3 ( Section 523(a)(6) ). But summary judgment is granted as to Count 2 ( Section 523(a)(4) ()).
Vitol, Brass, and Gulf Coast Asphalt Company ("GCAC "), an entity affiliated with Brass, litigated in a Texas state court before this bankruptcy case started. Vitol alleged, among other things, that Brass fraudulently siphoned $15 million that Vitol financed to GCAC. The parties settled before trial. The Settlement Agreement stated that Brass would pay Vitol $10 million and Vitol released "any claim or causes of action" ... "including but not limited to claims ... for fraud, defamation, and intentional or negligent misrepresentation," related to the transactions and acts alleged in the litigation—except obligations related to the Settlement Agreement.1 The Settlement Agreement included an Agreed Final Judgment for $10 million, which the state court approved in November 2020.2
Brass never paid Vitol and later filed a voluntary chapter 7 bankruptcy case in March 2021. In July 2021, Vitol filed a complaint to determine the dischargeability of debt and a first amended complaint in October 2021.3 Vitol reiterated its state court allegations.4 Vitol also alleged that Brass never paid the settlement amount—and never intended to do so—and requested an order stating that the $10 million is nondischargeable under Sections 523(a)(2)(A), (a)(4), and (a)(6) of the Bankruptcy Code.5 In April 2022, Brass moved for summary judgment.6
This is a core proceeding under 28 U.S.C. § 157(b)(2)(I). The Court has jurisdiction under 28 U.S.C. § 1334. The parties’ express and implied consent also provides this Court constitutional authority to enter a final judgment under Wellness Int'l Network, Ltd. v. Sharif , 575 U.S. 665, 678–83, 135 S.Ct. 1932, 191 L.Ed.2d 911 (2015) and Kingdom Fresh Produce, Inc. v. Stokes Law Off., L.L.P. (In re Delta Produce, L.P.) , 845 F.3d 609, 617 (5th Cir. 2016).
Federal Rule of Civil Procedure 56 permits a party to move for summary judgment, "identifying each claim or defense—or the part of each claim or defense—on which summary judgment is sought." FED. R. CIV. P. 56(a). Federal Rule of Bankruptcy Procedure 7056 incorporates Rule 56 in adversary proceedings. FED. R. BANKR. P. 7056. Brass is entitled to summary judgment if he shows "that there is no genuine dispute as to any material fact" and he is entitled to judgment as a matter of law. FED. R. CIV. P. 56(a). "A ‘material’ fact is one ‘that might affect the outcome of the suit under governing law.’ " Renwick v. PNK Lake Charles, L.L.C. , 901 F.3d 605, 611 (5th Cir. 2018) (citing Anderson v. Liberty Lobby, Inc. , 477 U.S. 242, 249–50, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986) ). A factual dispute is genuine if the evidence shows that a reasonable factfinder could return a verdict for the non-movant. Harville v. City of Houston , 945 F.3d 870, 874 (5th Cir. 2019). In determining whether summary judgment is appropriate, all inferences are drawn in Vitol's favor. Id. If, however, the record could not lead a rational trier of fact to find for the non-movant, summary judgment is appropriate. See Matsushita Elec. Indus. Co. v. Zenith Radio Corp. , 475 U.S. 574, 587, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986).
Where, as here, summary judgment turns, in part, on contractual interpretation, an unambiguous contract does not present a genuine dispute of material fact. See Vanguard Operating, LLC v. Klein (In re Vanguard Nat. Res., LLC) , 624 B.R. 400, 415 (Bankr. S.D. Tex. 2020) (citing Cooper Indus., LLC v. Precision Castparts Corp. , No. H-15-0576, 2016 WL 4939565, at *6 (S.D. Tex. Sept. 14, 2016) ); see also Amoco Prod. Co. v. Tex. Meridian Res. Expl. Inc. , 180 F.3d 664, 669 (5th Cir. 1999) ().
Brass argues that summary judgment is appropriate because the Settlement Agreement operated as a novation substituting Vitol's prepetition litigation claims with a new $10 million contract claim.7 And Vitol released its fraud and related tort claims under the Settlement Agreement.8 Thus, Vitol only holds a dischargeable contract claim related to nonpayment under the Settlement Agreement.9 Brass also argues that he never acted in a "fiduciary capacity" with Vitol, therefore, Vitol can't prove the debt is nondischargeable under Section 523(a)(4).10 Finally, Brass argues that Vitol's claims are based on an alleged loan.11 But, according to Brass, GCAC and Brass never signed a loan agreement and the statute of frauds under Texas Business & Commerce Code Section 26.02(b) prohibits Vitol from introducing evidence of any alleged loan.12 Vitol counters that the Settlement Agreement does not preclude the Court from considering the conduct alleged in the prepetition litigation and Brass's statute of frauds argument has no merit.13
The Court must first decide (i) whether the Agreed Final Judgment established the dischargeability of Vitol's debt in bankruptcy and (ii) whether the Settlement Agreement operated as a novation that deprived Vitol of a nondischargeable debt determination against Brass. For the reasons stated below, the answer to each of these issues is no.
Summary judgment is not warranted based on the Agreed Final Judgment. The Agreed Final Judgment stated that the Texas state court was informed that all matters between GCAC, Vitol, Brass, and another party were resolved and ordered entry of a $10 million judgment for Vitol against Brass and related parties.14
A party may invoke collateral estoppel in a bankruptcy adversary proceeding to establish that a debt is dischargeable or nondischargeable. See Grogan v. Garner, 498 U.S. 279, 285 n.11, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991) (). A party "may invoke collateral estoppel in certain circumstances to bar relitigating issues relevant to dischargeability, although the bankruptcy court retains jurisdiction to ultimately determine the dischargeability of the debt." Gober v. Terra + Corp. (In re Gober ), 100 F.3d 1195, 1201 (5th Cir. 1996).
A Texas state court entered the Agreed Final Judgment, so the Court applies Texas rules of issue preclusion. See Guerra & Moore Ltd., LLP v. Cantu (In re Cantu) , 389 F. App'x 342, 345 (5th Cir. 2010). Under Texas law, collateral estoppel bars a party from relitigating issues when "(1) the facts sought to be litigated in the second action were fully and fairly litigated in the first action; (2) those facts were essential to the judgment in the first action; and (3) the parties were cast as adversaries in the first action." John G. & Marie Stella Kenedy Mem'l Found. v. Dewhurst , 90 S.W.3d 268, 288 (Tex. 2002). The Agreed Final Judgment doesn't evidence what facts were essential to the judgment and the facts were never fully and fairly litigated. So collateral estoppel does not apply here.
The Agreed Final Judgment itself also doesn't preclude Vitol from arguing fraud or any other issue related to nondischargeability of debt in this case. See Brown v. Felsen , 442 U.S. 127, 133–35, 99 S.Ct. 2205, 60 L.Ed.2d 767 (1979). In Brown , the Supreme Court held that a consent judgment settling state court claims didn't prevent a creditor from seeking a nondischargeability determination based on fraud. Id. If the consent judgment doesn't identify the causes of action or provide specific factual findings about settling fraud claims, the creditor may still seek a nondischargeability determination based on fraud. Id. And although claim preclusion would bar a creditor from further pursuing state court litigation, it doesn't prevent the bankruptcy court from looking beyond the state-court record and the documents terminating the state-court proceeding to decide whether the debt was for money obtained by fraud. Id. at 138, 99 S.Ct. 2205 -39. "[T]he mere fact that a conscientious creditor has previously reduced his claim to judgment should not bar further inquiry into the true nature of the debt." Brown , 442 U.S. at 138, 99 S.Ct. 2205. Thus, summary judgment is not warranted based on the Agreed Final Judgment.
The next question is whether the releases in the Settlement Agreement preclude Vitol from seeking a determination about the...
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