In re: Clayton B. Smith v. ( 2008 )

By order of the Bankruptcy Appellate Panel, the precedential effect of this decision is limited to the
case and parties pursuant to 6th Cir. BAP LBR 8013-1(b). See also 6th Cir. BAP LBR 8010-1(c).
File Name: 08b0017n.06
BANKRUPTCY APPELLATE PANEL OF THE SIXTH CIRCUIT
In re: CLAYTON B. SMITH, )
)
Debtor. )
_____________________________________ )
) No. 08-8021
)
CRAIG T. CONLEY, )
)
Plaintiff - Appellee, )
)
v. )
)
CLAYTON B. SMITH, )
)
Defendant - Appellant. )
)
Appeal from the United States Bankruptcy Court
for the Northern District of Ohio, Eastern Division.
Case No. 06-60396; Adv. No. 07-6022.
Submitted: November 19, 2008
Decided and Filed: December 30, 2008
Before: McIVOR, PARSONS, and STOSBERG, Bankruptcy Appellate Panel Judges.
____________________
COUNSEL
ON BRIEF: Craig T. Conley, Canton, Ohio, for Appellee. Clayton B. Smith, Morgantown, West
Virginia, pro se.
____________________
OPINION
____________________
MARCIA PHILLIPS PARSONS, Chief Bankruptcy Appellate Panel Judge. The pro se
debtor Clayton B. Smith (“Debtor”) appeals an order of the bankruptcy court granting summary
judgment to creditor Craig T. Conley (“Conley”) in a nondischargeability action under 11 U.S.C.
§ 523(a)(2)(A). The bankruptcy court determined that a prior state court judgment for compensatory
and punitive damages based on the Debtor’s fraudulent transfer of assets collaterally estopped the
Debtor from relitigating whether the judgment debt owed to Conley resulted from fraud. For the
following reasons, we affirm the order of the bankruptcy court.
I. ISSUE ON APPEAL
The issue presented to us by this appeal is whether the bankruptcy court erred when it
granted Conley’s motion for summary judgment on his nondischargeability claim.
II. JURISDICTION AND STANDARD OF REVIEW
We have jurisdiction to decide this appeal. The United States District Court for the Northern
District of Ohio has authorized appeals to the Panel, and neither party timely elected to have this
appeal heard by the district court. 28 U.S.C. §§ 158(b)(6), (c)(1). A final order of the bankruptcy
court may be appealed as of right pursuant to 28 U.S.C. § 158(a)(1). An order granting summary
judgment is a final order. Menninger v. Accredited Home Lenders (In re Morgeson), 371 B.R. 798,
800 (B.A.P. 6th Cir. 2007).
We review the bankruptcy court’s final order granting Conley’s motion for summary
judgment de novo. Gold v. FedEx Freight East, Inc. (In re Rodriguez), 487 F.3d 1001, 1007 (6th
Cir. 2007); Lyon v. Contech Contr. Prods., Inc. (In re Computrex, Inc.), 403 F.3d 807 (6th Cir.
2005). “Under a de novo standard of review, the reviewing court decides an issue independently of,
and without deference to, the trial court’s determination.” In re Morgeson, 371 B.R. at 800.
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III. FACTS AND PROCEDURAL HISTORY
In 2002, the Debtor hired Conley, a licensed attorney, to defend him in a state court criminal
proceeding for passing bad checks. During the course of that criminal action, Conley’s
representation of the Debtor ended, and the Debtor was ultimately convicted. The Debtor then filed
a state court legal malpractice action against Conley in 2003. In turn, Conley commenced a separate
action against the Debtor in state court to collect unpaid attorney fees for services rendered in the
criminal action, and on March 11, 2004, obtained a judgment against the Debtor in the amount of
$2,890.
In an effort to collect on his judgment, Conley filed a fraudulent transfer action in state court
against the Debtor. After a trial in that action on June 28, 2005, the state court found that: (1) the
Debtor had only two personal assets, a Jeep and a Coney Cart; (2) the Debtor transferred title and
ownership of the Jeep to his mother for no consideration while continuing to possess and use it;
(3) when served with an Order/Writ of Execution for his Coney Cart, the Debtor refused to turn it
over and falsely told the sheriff’s deputy that he did not have the property in his possession; and
(4) the Debtor’s testimony that he did not fraudulently transfer the Jeep and did not fraudulently
conceal the Coney Cart was not credible. The state court concluded that the Debtor “intended to and
did defraud Conley by transferring the Jeep . . . (R.C. 1336.04)” and “by concealing the Coney Cart
. . . (R.C. 1336.04).” The court awarded Conley compensatory damages against the Debtor in the
amount of the unpaid judgment, $2,067.40, and punitive damages in the amount of $1,500 for the
Debtor’s “egregious fraud” (the “Fraudulent Transfer Judgment”). The Debtor unsuccessfully
appealed the Fraudulent Transfer Judgment, and it became final after the Ohio Supreme Court
ultimately dismissed the appeal by order entered April 18, 2007.
On March 28, 2006, the Debtor filed a voluntary petition for relief under chapter 13 of the
Bankruptcy Code. Conley was listed on Schedule F as a creditor. After the Debtor converted his
case to one under chapter 7 of the Bankruptcy Code on October 16, 2006, the clerk of the court
issued a notice setting a February 9, 2007 deadline for filing complaints to determine dischargeability
of debts. The Debtor subsequently received a discharge on February 22, 2007.
While his bankruptcy case was pending, the debtor removed his state court legal malpractice
action to bankruptcy court, but the bankruptcy court subsequently remanded the action by order
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entered January 31, 2007. The Debtor did not appeal that order. Although the Debtor voluntarily
dismissed the state court malpractice action on October 15, 2007, the state court determined that the
Debtor’s pursuit of the legal malpractice case was frivolous and awarded Conley a judgment against
the Debtor on December 14, 2007, for $90,458.48 in attorney’s fees.
In the meantime, Conley initiated on February 9, 2007, the instant adversary proceeding,
seeking a determination that the Fraudulent Transfer Judgment was nondischargeable pursuant to
§ 523(a)(2)(A) of the Bankruptcy Code. The Debtor answered the complaint and asserted a
counterclaim against Conley and another individual for legal malpractice, apparently the same claim
he was making in his pending state court action. Conley then moved for summary judgment as to
his nondischargeability claim, asserting that the Fraudulent Transfer Judgment was res judicata on
the § 523(a)(2)(A) dischargeability claim. Conley also sought dismissal of the Debtor’s
counterclaim on the grounds that the statute of limitations had run.
In response, the Debtor asserted that Conley’s adversary complaint was not timely filed, and
that the Fraudulent Transfer Judgment was invalid and did not “meet the standard of [the]
Bankruptcy Court, in so determining a fraudulent transfer of an asset.” (Docket 38 at 1.)1
Additionally, the Debtor argued that his counterclaim asserted a cause of action for breach of
contract, rather than legal malpractice and, consequently, was not subject to the same statute of
limitations raised by Conley.
On January 22, 2008, the Debtor filed a motion in his underlying chapter 7 case titled
“Motion under § 362 ” in which he asserted that because he was granted a discharge on February 22,
2007, the state court’s December 14, 2007 judgment for $90,458.48 in attorney fees violated the
discharge injunction set forth in 11 U.S.C. § 524(a). On June 2, 2008, the bankruptcy court entered
an order denying the Debtor’s motion, having concluded that the Debtor waived this argument
because he did not previously assert that the continuation of that proceeding was a violation of the
automatic stay. The Debtor did not appeal this order.
1
Citations to the docket are to those entries made in the bankruptcy court adversary
proceeding involving these parties or in the Debtor’s bankruptcy case. The Debtor’s designation of
record filed on June 17, 2008, included all records in both the adversary proceeding and the
bankruptcy case.
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On March 3, 2008, the bankruptcy court issued a memorandum of opinion and order,
granting Conley’s motion for summary judgment and dismissing the Debtor’s counterclaim. The
court concluded that all of the necessary conditions for the application of collateral estoppel had been
met and that, therefore, the Fraudulent Transfer Judgment was nondischargeable under the actual
fraud provision of § 523(a)(2)(A). The bankruptcy court also concluded that the Debtor’s
counterclaim was a non-core proceeding over which it did not have jurisdiction.
Subsequently, on March 10, 2008, Conley filed a motion in the adversary proceeding seeking
a finding that the Debtor is a vexatious litigator. Conley based this request upon the numerous court
filings by the Debtor in the nearly six years of litigation in both the state court and the bankruptcy
court. The motion also sought an order requiring the Debtor to obtain approval from the bankruptcy
court before filing anything further in the bankruptcy court. On June 2, 2008, the bankruptcy court
granted Conley’s motion and imposed a “prefiling bar” on the Debtor. The Debtor did not appeal
that order.
On March 12, 2008, the Debtor filed a timely notice of appeal from the March 3, 2008 order.
That order, in addition to granting Conley’s motion for summary judgment and dismissing the
Debtor’s counterclaim, also denied the Debtor’s motions for summary judgment, for a protective
order, for relief from a state court judgment, and to compel discovery. The Debtor did not list any
of these additional matters in his statement of issues or address them in his brief. Similarly, the
Debtor failed to list or address the dismissal of his counterclaim. Accordingly, we consider all of
these matters, other than consideration of Conley’s summary judgment motion, to be waived. See
Brindley v. McCullen, 61 F.3d 507, 509 (6th Cir. 1995) (“We consider issues not fully developed
and argued to be waived.”).
On the other hand, while the Debtor does argue in his brief that the bankruptcy court erred
by remanding the legal malpractice action to state court, by denying his motion for violation of the
discharge injunction, and by determining that he is a vexatious litigator, the Debtor did not appeal
these orders. Accordingly, we are without jurisdiction to address them. See Suhar v. Burns (In re
Burns), 322 F.3d 421, 429-430 (6th Cir. 2003) (affirming BAP finding of no jurisdiction to consider
appeal from additional order not timely included in notice of appeal); In re Boyd, No. 08-8010, 2008
WL 4372948, *2 (B.A.P. 6th Cir. Sept. 23, 2008) (no jurisdiction to consider appeal from additional
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orders listed in notice of appeal that were not timely appealed). As a result, the only issues
remaining for the Panel’s consideration are whether Conley timely filed his nondischargeability
complaint and, if timely, whether the bankruptcy court correctly held that collateral estoppel
precluded relitigation of the Debtor’s fraud.
IV. DISCUSSION
A. Timeliness of Complaint
Although the Debtor argues in this appeal that summary judgment should not have been
granted in Conley’s favor because the adversary complaint was not timely filed, he does not indicate
how the filing was untimely. Under Federal Rule of Bankruptcy Procedure 4007(c), a complaint to
determine the dischargeability of this type of debt must be filed no later than 60 days after the first
date set for the meeting of creditors. In this case, the clerk of court set the first date for the meeting
of creditors on December 11, 2006, and the last day to file complaints objecting to the
dischargeability of debts on February 9, 2007. Conley timely filed his complaint on February 9,
2007.
It is irrelevant that the Debtor’s bankruptcy case was originally filed as a chapter 13 and that
a meeting of creditors was held under that chapter. Under Federal Rule of Bankruptcy Procedure
1019(2), a new time period for filing complaints to determine dischargeability under Rule 4007(c)
commenced after the conversion of the case from chapter 13 to chapter 7. See Classic Auto
Refinishing, Inc. v. Marino (In re Marino), 181 F.3d 1142, 1145 (9th Cir. 1999) (when case is
converted to chapter 7 proceeding, new time limitation comes into being).
The bankruptcy court assumed, based on the Debtor’s argument in his motion to dismiss the
complaint, that the Debtor contested the complaint’s timeliness because he apparently received his
discharge order before service of process in the nondischargeability complaint. The court noted that,
if that were the basis, the Debtor failed to read the reverse side of the discharge order that expressly
indicates that the discharge is subject to any debts the bankruptcy court specifically determines are
nondischargeable. It is well settled that “[t]he timely filing of a complaint under § 523(a)(2), (4),
(6) or (15) does not prevent the entry of a discharge. The court can grant the discharge and
subsequently declare that a particular debt was not discharged under one of those provisions.” Smith
v. Bandy (In re Bandy), 237 B.R. 661, 663 (Bankr. E.D. Tenn. 1999).
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B. Collateral Estoppel
The doctrine of collateral estoppel applies in dischargeability actions under § 523(a). See Bay
Area Factors v. Calvert (In re Calvert), 105 F.3d 315, 318 (6th Cir. 1997); Rally Hill Prods., Inc.
v. Bursack (In re Bursack), 65 F.3d 51, 53 (6th Cir. 1995) (citing Grogan v. Garner, 498 U.S. 279,
284 n.11, 111 S. Ct. 654, 658 (1991)). The fact that bankruptcy courts have “exclusive jurisdiction
over dischargeability issues does not alter this rule.” Id. While the bankruptcy court must make its
own determination regarding the dischargeability of the debt, that determination may be governed
by factual issues that were actually and necessarily decided by the state court. Vogel v. Kalita (In
re Kalita), 202 B.R. 889, 894 (Bankr. W.D. Mich. 1996) (citing Grogan, 498 U.S. at 284 n.11)).
State law dictates whether a state court judgment should be afforded collateral estoppel effect. In
re Calvert, 105 F.3d at 317. In Ohio, collateral estoppel applies where:
1) [There is a] final judgment on the merits in the previous case after a full and fair
opportunity to litigate the issue; 2) The issue [was] actually and directly litigated in
the prior suit and must have been necessary to the final judgment; 3) The issue in the
present suit [is] identical to the issue in the prior suit; [and] 4) The party against
whom estoppel is sought was a party or in privity with the party to the prior action.
Sill v. Sweeney (In re Sweeney), 276 B.R. 186, 189 (B.A.P. 6th Cir. 2002) (quoting Gonzalez v.
Moffitt (In re Moffitt), 252 B.R. 916, 921 (B.A.P. 6th Cir. 2000)).
The record in this case establishes that the Fraudulent Transfer Judgment is a final judgment
on the merits rendered after a full and fair opportunity to litigate the issues, including a trial at which
the Debtor fully participated. Additionally, the parties to the adversary proceeding are the same as
those in the state court litigation. Therefore, the first and fourth elements of collateral estoppel under
Ohio law have been met.
As to the second and third elements regarding actual and necessary litigation of identical
issues, it must be noted that pursuant to Ohio Revised Code § 1336.04(A)(1) and (A)(2), a fraudulent
conveyance can be established through proof of either actual fraud, (A)(1), or constructive fraud,
(A)(2). Upon its review of the state court record, the bankruptcy court held that the issue litigated
and determined in the state court was actual fraud rather than constructive fraud, thereby establishing
the second and third elements of collateral estoppel.
Although the state court does not specifically identify 1336.04(A)(1) in the
judgment, the Court finds the judgment is for actual fraud. Simply, the state court
made specific findings regarding [the Debtor’s] intent: “Smith intended to and did
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defraud Conley . . . .” (Pl.’s Am. Mot. Summ. J., Ex. B, Conclusions of Law, para.
1-2.) These findings of intent speak to actual fraud, not constructive. Consequently,
the Court finds that the issue of fraudulent intent was litigated in the prior suit and
was necessary for a finding of actual fraud. In concluding that the state court
litigated actual fraud, and actual fraud is the same issue involved in this proceeding,
the Court finds that both conditions two and three are satisfied.
(Docket 52 at 5.)
We find no error in the bankruptcy court’s ruling. Section 523(a)(2)(A) provides, in pertinent
part:
(a) A discharge under section 727 . . . of this title does not discharge an individual
debtor from any debt–
....
(2) for money, property, services or an extension, renewal, or refinancing of
credit, to the extent obtained by–
(A) false pretenses, a false representation, or actual fraud . . .[.]
Under this section, fraud is not limited to a fraudulent misrepresentation and can encompass “any
deceit, artifice, trick, or design involving direct and active operation of the mind, used to circumvent
and cheat another.” Cash Am. Fin. Servs., Inc. v. Fox (In re Fox), 370 B.R. 104, 116 (B.A.P. 6th Cir.
2007) (quoting Mellon Bank, N.A. v. Vitanovich (In re Vitanovich), 259 B.R. 873, 877 (B.A.P. 6th
Cir. 2001)). “When a debtor intentionally engages in a scheme to deprive or cheat another of
property or a legal right, that debtor has engaged in actual fraud and is not entitled to the fresh start
provided by the Bankruptcy Code.” In re Vitanovich, 259 B.R. at 877. Because the state court
litigated the issue of the Debtor’s actual fraud in attempting to deprive Conley of his legal right to
execute his judgment against the Debtor’s assets, and the issue was necessary to Conley’s state court
fraudulent transfer action, the bankruptcy court correctly applied collateral estoppel in this instance.
Finally, the Debtor argues that in order to prevail under § 523(a)(2)(A), Conley must prove
that he obtained Conley’s legal services by fraud. According to the Debtor,“[b]ecause . . . he never
defrauded Conley into giving his services by any type of fraud[,] that debt is clearly dischargeable
under 11 U.S.C. § 523[.]” (Appellant’s Br. at 11-12.) Upon initial review, this argument has some
facial appeal since § 523(a)(2)(A), by its terms, excepts from discharge “any debt for money,
property, services . . . to the extent obtained by . . . fraud.” (Emphasis added.) However, courts
considering this provision have not read the word “obtain” so literally. The United States Supreme
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Court concluded in Cohen v. de la Cruz, 523 U.S. 213, 222, 118 S. Ct. 1212, 1218 (1998), that
“§ 523(a)(2)(A) bars the discharge of all liability arising from fraud.”
In the specific context of a fraudulent transfer within the meaning of § 523(a)(2)(A), one
court has observed:
While the facts of this case may not neatly fit a paradigmatic construction of
obtaining property by false pretenses, the reality of this case compels a finding of
nondischargeability.
It is too facile to say that the property “obtained by” the [debtors] was
property they already possessed. The focus of Section 523(a)(2)(A)’s
nondischargeability provisions must center on the harm caused to the creditor. [The
debtor] intentionally conveyed his major asset in order to make it unavailable to
creditors. By divesting himself of bare legal title while retaining all other indicia of
ownership (possession, use, control) [the debtor] did in fact “obtain” for himself and
[his codebtor wife] . . . property which would otherwise have been available for [the
debtors’] creditors. Stated differently, what the [debtors] “obtained” by the transfer
was property free from creditors’ claims. In so doing, they obtained something from
their creditors.
Gentry v. Kovler (In re Kovler), 249 B.R. 238, 260 (Bankr. S.D.N.Y. 2000) (emphasis in original).
See also McClellan v. Cantrell, 217 F.3d 890, 895 (7th Cir. 2000) (court of appeals noted that if the
debtor had rendered a debt uncollectible by making an actually fraudulent transfer of the property
that secured it, his actual fraud would give rise to a new debt, nondischargeable because created by
fraud); K-B Bldg. Co. v. Barber (In re Barber), 281 B.R. 617, 625 (Bankr. W.D. Pa. 2002) (debt
owed by debtor which arose from judgment entered in state court fraudulent transfer action is
excepted from discharge under § 523(a)(2)(A)). Moreover, pursuant to the Supreme Court’s
decision in de la Cruz, § 523(a)(2)(A) encompasses not only the compensatory damages portion of
the Fraudulent Transfer Judgment, but also its punitive damages component. See Cohen v. de la
Cruz, 523 U.S. at 223. Accordingly, we reject Debtor’s argument that the bankruptcy court erred
in awarding summary judgment in Conley’s favor on his nondischargeability claim.
V. CONCLUSION
For the foregoing reasons, the bankruptcy court’s order is AFFIRMED.
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