In re: Kenneth Anderson v. ( 2014 )

ELECTRONIC CITATION: 14 FED App.0007P (6th Cir.)
File Name: 14b0007p.06
BANKRUPTCY APPELLATE PANEL OF THE SIXTH CIRCUIT
In re: KENNETH RAY ANDERSON; )
LINDA CAROL ANDERSON, )
)
Debtor(s). )
______________________________________ )
)
KENNETH RAY ANDERSON; )
LINDA CAROL ANDERSON, ) No. 14-8007
)
Plaintiffs - Appellees, )
)
v. )
)
JAMES FISHER; RUBY FISHER, )
)
Defendants - Appellants. )
______________________________________ )
Appeal from the United States Bankruptcy Court
for the Eastern District of Kentucky, at London.
No. 13-60469; Adv. No. 13-06021.
Decided and Filed: September 15, 2014
Before: EMERSON, OPPERMAN, and PRESTON, Bankruptcy Appellate Panel Judges.
____________________
COUNSEL
ON BRIEF: Travis A. Rossman, ROSSMAN LAW, PLLC, Barbourville, Kentucky, for Appellants.
Marcia A. Smith, Corbin, Kentucky, for Appellees.
____________________
OPINION
____________________
GEORGE W. EMERSON, JR., Bankruptcy Appellate Panel Judge. Debtors Kenneth Ray
Anderson and Linda Carol Anderson (“Debtors”) appeal the bankruptcy court’s memorandum
opinion and orders granting partial summary judgment, dismissing remaining claims, and granting
final judgment to James and Ruby Fisher (“Fishers”) and concluding that the unliquidated state court
penalty default judgment1 owed to the Fishers is nondischargeable pursuant to 11 U.S.C.
§ 523(a)(2)(A).
I. ISSUES ON APPEAL
The issue presented in this appeal is whether the bankruptcy court erred when it found that
the Tennessee penalty default judgment entered against the Debtors was entitled to preclusive effect
based on the Full Faith and Credit Statute, 28 U.S.C. § 1738, and the doctrine of collateral estoppel.
The Fishers also maintain that summary judgment was proper because Debtors filed no
affidavits with the bankruptcy court and failed to establish that there was a genuine issue of material
fact before the bankruptcy court. Because the bankruptcy court did not err on the first issue, the
Panel does not need to reach the second issue.
1
See Sterling Factors, Inc. v. Whelan (In re Whelan), 236 B.R. 495, 507-08 (Bankr. N.D. Ga.
1999) modified sub nom. Sterling Factors, Inc. v. Whelan, 245 B.R. 698 (N.D. Ga. 2000) . Penalty default
judgments are default judgments entered as a sanction “[w]here a party has substantially participated in
an action in which he had a full and fair opportunity to defend on the merits, but subsequently chooses not
to do so, and even attempts to frustrate the effort to bring the action to judgment[.]” Bush v. Balfour Beatty
Bahamas, Ltd. (In re Bush) 62 F.3d 1319, 1325 (11th Cir. 1995). Several “[c]ourts in other circuits have
also given collateral estoppel effect in bankruptcy dischargeability proceedings to prior penalty default
judgments[.]” Whelan, 236 B.R. at507; Angus v. Wald (In re Wald), 208 B.R. 516, 552 (Bankr. N.D. Ala.
1997) ("[P]enalty default judgments . . . [are] rendered for purposeful evasion of service, refusal to
participate in discovery, and willful failure to appear for trial."); see generally Wolstein v. Docteroff (In
re Docteroff), 133 F.3d 210 (3d Cir.1997) (referencing deliberately preventing the resolution of the
lawsuit); Gober v. Terra + Corp. (In re Gober), 100 F.3d 1195 (5th Cir.1996) (holding discovery
violations can act as collateral estoppel in bankruptcy dischargeability cases); FDIC v. Daily (In re Daily),
47 F.3d 365 (9th Cir.1995) (holding that default resulted from the debtor's deliberate, dilatory, and
obstreperous conduct).
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II. JURISDICTION AND STANDARD OF REVIEW
The Bankruptcy Appellate Panel of the Sixth Circuit has jurisdiction to decide this appeal.
The United States District Court for the Eastern District of Kentucky has authorized appeals to the
Panel, and none of the parties has timely elected to have this appeal heard by the district court. 28
U.S.C. § 158(b)(6), (c)(1).
For purposes of appeal, an order is final if it “‘ends the litigation on the merits and leaves
nothing for the court to do but execute the judgment.’” Midland Asphalt Corp. v. United States,
489 U.S. 794, 798, 109 S. Ct. 1494, 1497 (1989) (quoting Van Cauwenberghe v. Biard, 486 U.S.
517, 521, 108 S. Ct. 1945, 1949 (1988)). A partial summary judgment order “that does not dispose
of all parties and all claims is generally not immediately appealable[.]” Bonner v. Perry, 564 F.3d
424, 427 (6th Cir. 2009). The bankruptcy court’s ruling on the summary judgment motion did not
dispose of all the claims before the court. The Fishers later dismissed all of their remaining claims.
Once the remaining parts of a case are dismissed or otherwise resolved, a grant of partial summary
judgment becomes a final judgment. Id., (citing J.D. Pharm. Distribs., Inc. v. Save-On Drugs &
Cosmetics Corp., 893 F.2d 1201, 1208 (11th Cir. 1990)).
A grant of summary judgment is a conclusion of law, reviewed de novo. Medical Mutual of
Ohio v. K. Amalia Enters., Inc., 548 F.3d 383, 389 (6th Cir. 2008). “Summary judgment is proper
if the evidence, taken in the light most favorable to the nonmoving party, shows that there are no
genuine issues of material fact and that the moving party is entitled to a judgment as a matter of
law.” Id. (citing Mazur v. Young, 507 F.3d 1103, 1106 (6th Cir 2007)). “Under a de novo standard
of review, the reviewing court decides the issue independently of, and without deference to, the trial
court’s determination.” Menninger v. Accredited Home Lenders (In re Morgeson), 371 B.R. 798,
800 (B.A.P. 6th Cir. 2007) (citingTreinish v. Norwest Bank Minn., N.A. (In re Periandri), 266 B.R.
651, 653 (6th Cir. B.A.P. 2001)).
“The determination of the applicability of collateral estoppel is also reviewed de novo.
Spring Works, Inc. v. Sarff (In re Sarff), 242 B.R. 620, 623 (B.A.P. 6th Cir. 2000) (citing Markowitz
v. Campbell (In re Markowitz), 190 F.3d 455, 461 (6th Cir.1999).
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III. FACTS
The underlying facts of this case are not in dispute. Debtors were defendants in a civil
lawsuit filed in Tennessee Circuit Court (the “State Court Lawsuit”) that arose from a series of real
estate sales in a residential community developed by the Debtors (the “State Court Complaint”). The
development was called “The Village of Arcadian Springs,” in Anderson, Tennessee. The Fishers,
along with several other plaintiffs, allege that they were fraudulently induced to purchase waterfront
lots by the Debtors’ misrepresentations concerning the construction of a lake and other amenities
which were never completed. In the State Court Complaint, the plaintiffs alleged that the Debtors
committed fraud, misrepresentation, deceit, negligence, conversion, negligent and intentional
infliction of emotional distress, outrageous conduct, breach of contract, breach of warranty, and
statutory claims under the Tennessee Consumer Protection Act and the Fair Debt Collection
Practices Act. The Debtors filed their answer to the State Court Complaint eight months later and
were repeatedly compelled by order of the circuit court to respond to discovery requests. Ultimately,
the Plaintiffs filed a motion to compel, motion for sanctions, motion for entry of a default judgment,
and motion to dismiss against the Debtors. After a hearing, the circuit court granted the Plaintiffs’
motion for default judgment.
The circuit court’s judgment (the “State Court Judgment”) recognized the Debtors’ repeated
refusals to comply with court orders regarding discovery and then struck the Debtors’ answer from
the record. The State Court Judgment stated, in pertinent part,
The Plaintiffs are entitled to a Judgment pursuant to the allegations set forth in their
Complaint including . . . violation of the Tennessee Consumer Protection Act...and
that the [Debtors] have committed the following torts: negligence; misrepresentation;
fraud; conversion; negligent and intentional infliction of emotional distress;
outrageous conduct; and deceit . . . . This court specifically holds that the Plaintiffs
are entitled to a Default Judgment on the above-stated grounds, and that a hearing
will be set to determine the exact amount of compensatory damages and punitive
damages which the Plaintiffs are entitled to receive . . . .
Ex. B to Mot. For Summ. J., Adv. Proc. No. 13-06021, ECF No. 6-2 at 6-7.
The Debtors filed their Chapter 7 bankruptcy petition just prior to the scheduled hearing on
damages in circuit court. The Fishers filed an adversary proceeding alleging that the judgment debts
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were nondischargeable under 11 U.S.C. § 523(a)(2)(A) and (a)(6). After the Debtors filed their
answer, the Fishers moved for summary judgment on the § 523(a)(2)(A) claims based on the
collateral estoppel effect of the State Court Judgment finding that Debtors had committed fraud,
misrepresentation and deceit.
The bankruptcy court’s memorandum opinion relied primarily upon Rally Hill Productions,
Inc. v. Bursack (In re Bursack), 65 F.3d 51 (6th Cir. 1995) to determine whether or not the
Tennessee state court judgment should be afforded collateral estoppel effect on a subsequent
dischargeability action. In Bursack, the Sixth Circuit Court of Appeals stated, “Under Tennessee
law, collateral estoppel bars relitigation of an issue if it was raised in an earlier case between the
same parties, actually litigated, and necessary to the judgment of the earlier case.” Id. at 54 (citation
omitted).
The bankruptcy court thoroughly analyzed its obligation to give full faith and credit to the
State Court Judgment. The bankruptcy court also carefully compared the elements of 11 U.S.C.
§ 523(a)(2)(A) to the requirements necessary to sustain a cause of action for fraud in Tennessee, as
alleged in the Fishers’ complaint, and concluded that they were the same. The bankruptcy court then
found that the fraud claims were actually litigated in the circuit court, especially in light of the
Debtors’ participation in the State Court Lawsuit. Finally, the bankruptcy court found that the
finding of fraud was necessary in order to support the State Court Judgment. The bankruptcy court
concluded that collateral estoppel applied to the state court fraud claims brought by the Fishers,
rendering them non-dischargeable pursuant to 11 U.S.C. § 523(a)(2)(A). In its final judgment and
order dismissing the Fishers’ remaining claims, the bankruptcy court ordered that damages for the
state court fraud claims would be determined by the appropriate state court.
IV. DISCUSSION
The Debtors are urging the Panel to reverse and remand this case to the bankruptcy court
because the bankruptcy court’s decision relied, in part, on Bay Area Factors v. Calvert (In re
Calvert), 105 F.3d 315 (6th Cir. 1997), which the Debtors argue was “wrongly decided.” In Calvert,
the Sixth Circuit Court of Appeals held that collateral estoppel applies to true default judgments in
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bankruptcy dischargeability proceedings in those states that would give such judgments that effect.
As later noted by the Sixth Circuit Bankruptcy Appellate Panel:
The [Calvert] court concluded that state court judgments, including default
judgments, that would have been given preclusive effect in their state of origin,
regardless of whether or not “the important issues were actually litigated in the prior
proceeding,” would be given preclusive effect in bankruptcy discharge exception
proceedings. Id. In so doing, the Circuit broke from its previous expression in
Spilman v. Harley, 656 F.2d 224, 228 (6th Cir. 1981), which referred to issues which
“were actually litigated.”
Nat’l City Bank v. Plechaty (In re Plechaty), 213 B.R. 119, 129 (B.A.P. 6th Cir. 1997).
Because Calvert was wrongly decided, the Debtors reason, the bankruptcy court should
instead have relied on Spilman and found that the judgment did not preclude relitigating the
dischargeability issue in the Debtors’ bankruptcy case. “If the important issues were not actually
litigated in the prior proceeding, as is the case with a default judgment, then collateral estoppel does
not bar relitigation in the bankruptcy court.” Spilman, 656 F.2d at 228.
In Calvert, the Sixth Circuit stated that it was not bound by Spilman because the issue of the
collateral estoppel effect of a default judgment was not before the Spilman court and because
Spilman was decided before the Supreme Court issued its decision in Marrese v. American Academy
of Orthopaedic Surgeons, 470 U.S. 373, 105 S. Ct. 1327 (1985).
In Marrese, the Supreme Court, in accordance with the Full Faith and Credit
Statute, instructed lower federal courts faced with the question of whether to give full
faith and credit to a state court default judgment to “consider first the law of the State
in which the Judgment was rendered to determine its preclusive effect.” If the state
court would not give preclusive effect to a default judgment, the analysis is complete.
If, however, the state would accord the judgment preclusive effect, Marrese instructs
that the federal court give preclusive effect to the judgment unless Congress has
expressly or impliedly created an exception to § 1738 which ought to apply to the
facts before the federal court.
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Calvert, 105 F.3d at 317 (citations omitted).2 Because Marrese did not expressly overrule Spilman,
Debtors continue to press Spilman as if it were valid precedent.3
Debtors argue that an exception to the Full Faith and Credit Statute exists for dischargeability
determinations based on Brown v. Felsen, 442 U.S. 127, 138, 99 S. Ct. 2205, 2212 (1979).
However, the Brown Court stated that its holding was specifically limited to the principle of res
judicata. “This case concerns res judicata only, and not the narrower principle of collateral
estoppel.” Id. at 139, 99 S. Ct. at 2213, n.10. Brown was a pre-Bankruptcy Code case issued at a
time when State courts frequently decided issues of dischargeability. Brown is distinguishable on
its facts as well as its legal issues. In Brown, Debtor Mark Felsen sought to preclude a creditor from
bringing a dischargeability action against him in bankruptcy court because the same parties had
previously agreed to a judgment in state court. The state court judgment did not address either
dischargeability or fraud. Felsen sought to use claim preclusion, or res judicata, to prevent the
creditor from bringing a dischargeability action based on fraud in bankruptcy court.
The Supreme Court refused to preclude the creditor from asserting the non-dischargeability
action and did not foreclose the bankruptcy court’s review of evidence other than what was presented
in the state court action.4 Debtors assert that the Brown decision found that Congress intended to
except dischargeability actions from the Full Faith and Credit Statute. This misstates the holding
of Brown. The Brown Court was faced with deciding whether to foreclose a creditor from bringing
2
28 U.S.C. § 1738 provides, in pertinent part:
The records and judicial proceedings of any court of any such State, Territory or
Possession, or copies thereof, shall be proved or admitted in other courts within the
United States . . . . Such Acts, records and judicial proceedings or copies thereof, so
authenticated, shall have the same full faith and credit in every court within the United
States and its Territories and Possessions as they have by law or usage in the courts of
such State, Territory or Possession from which they are taken.
3
In their brief, the Debtors state that Brown, its progeny Spilman, and Marrese “are all consistent
and dovetail to provide that Congress intended the Federal law of preclusion to govern dischargeability
determinations, not state law . . . .” Appellants’ Brief, at 15. This is simply incorrect.
4
The Debtors appear to be confusing claim preclusion with collateral estoppel (also known as
issue preclusion), which the Brown Court did not need to address, instead stating: “If, in the course of
adjudicating a state-law question, a state court should determine factual issues using standards identical
to those of § 17 (dischargeability determinations), then collateral estoppel, in the absence of countervailing
statutory policy, would bar religitation of those issues in the bankruptcy court.” Brown, 442 U.S. at 139,
99 S. Ct. at 2213, n.10.
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a dischargeability action in bankruptcy court. Congress had previously passed legislation which
granted to the bankruptcy courts exclusive jurisdiction over such dischargeability proceedings. The
Brown Court stated that a state court judgment, which did not specifically find that the debt in
question was nondischargeable, would not foreclose a creditor from subsequently bringing a
dischargeability action in bankruptcy court--the specific venue in which Congress intended such
actions be brought.
Brown stated that Congressional intent is that dischargeability causes of action be within the
exclusive jurisdiction of the bankruptcy court. Id. at 135-136, 99 S. Ct. at 2211-2212. Brown’s
holding simply cannot be extended to say that Congress intended that dischargeability determinations
should be an exception to the Full Faith and Credit Statute.
In Calvert, the Sixth Circuit expressly concluded that Debtors’ arguments are without merit:
This Court’s review of the Bankruptcy Code and the extensive amount of legislative
history of the Code confirms the court’s conclusion in In re Byard that neither reveal
anything that would suggest that Congress intended to exclude default judgments
obtained in state court from the applicability of the Full Faith and Credit Statute in
dischargeability proceedings in bankruptcy court.
Calvert, 105 F.3d at 320-321(citing Harris v. Byard (In re Byard), 47 B.R. 700 (Bankr. M.D. Tenn.
1985)).
The Debtors fail to mention the Supreme Court’s decision in Grogan v. Garner, 498 U.S.
279, 285, 111 S. Ct. 654, 658 n.11 (1991), in which the Court stated, “[w]e now clarify that collateral
estoppel principles do indeed apply in discharge exception proceedings pursuant to § 523(a).”
While the Grogan case dealt mainly with the burden of proof that should be applied in
dischargeability proceedings, the Court stated that if the preponderance of the evidence standard was
adopted by the Court, bankruptcy courts could properly give collateral estoppel effect to those
elements of the claim that are identical to the elements required for a dischargeability action and
which were actually litigated and determined in the prior action. Id. at 284, 111 S. Ct. at 658. The
Court then concluded that the standard of proof in § 523 actions is the ordinary preponderance of the
evidence standard. Id. at 291, 111 S. Ct. at 661.
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Tennessee state courts have yet to decide whether, as here, a penalty default judgment should
also be afforded collateral estoppel effect in a subsequent proceeding. However, Tennessee state
courts would give preclusive effect to a “true” default judgment in which the Defendant failed to
answer. Lawhorn v. Wellford, 168 S.W.2d 790, 792 (Tenn. 1943). See also White v. Rogers (In
re Rogers), 57 F.3d 1070, 1995 WL 364154 (6th Cir. 1995); Brown v. Ausley (In re Ausley), 507
B.R. 234, 242 (Bankr. W.D. Tenn. 2014); Stephens v. Morrison (In re Morrison), 450 B.R. 734, 754
(Bankr. W.D. Tenn. 2011).
The facts of this case most closely resemble the facts of Rally Hill Productions, Inc. v.
Bursack (In re Bursack), 65 F.3d 51 (6th Cir. 1995). In that case, Bursack filed an answer to a
complaint in Tennessee state court that alleged he had made false representations and submitted false
financial statements to the plaintiff upon which the plaintiff relied in loaning money. Id. at 52.
Bursack answered, asserted cross-claims against the plaintiff, and attended two depositions. When
Bursack failed to appear at trial, the state court entered a default judgment against him.
In a subsequent dischargeability action, the bankruptcy court entered summary judgment in
favor of the judgment creditor. On appeal, the Sixth Circuit Court of Appeals concluded that the
default judgment in Bursack differed from a “true” default judgment of the type discussed in Spilman
because the issues were “actually litigated to the extent that Bursack retained an attorney, filed an
answer, asserted cross-claims, and participated in discovery, which included his submitting to two
depositions . . . . His strategic decision not to appear at the trial does not undo his earlier active
participation in the litigation.” Id. at 54.
Like Bursack, the Debtors retained an attorney, filed an answer, and participated in the
discovery process to the extent that their repeated failures to respond properly resulted in the penalty
default judgment. The fraud issues in this case, like those of Bursack, were necessary to the outcome
of the State Court Judgment and were, therefore, actually litigated.
Subsequent to Bursack, the Sixth Circuit’s Calvert decision applied the Full Faith and Credit
Statute and collateral estoppel to give preclusive effect to a California state court “true” default
judgment. Tennessee state courts also give preclusive effect to “true” default judgments. Following
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Bursack and Calvert, it appears that the Debtors’ participation in the Tennessee state court lawsuit
make it even more likely that a Tennessee state court would give preclusive effect to the penalty
default judgment in this case. Accordingly, the Panel finds that the default judgment is entitled to
preclusive effect.
V. CONCLUSION
For the foregoing reasons, the bankruptcy court’s decision is affirmed in its entirety.
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