Stoebner v. Parry, Murray, Ward & Moxley , 91 F.3d 1091 ( 1996 )

___________
No. 95-2662
___________
John R. Stoebner, Trustee of *
the Bankruptcy Estate of *
T.G. Morgan, Inc., *
*
Plaintiff-Appellant, *
* Appeal from the United States
v. * District Court for the
* District of Minnesota.
Parry, Murray, Ward & Moxley, *
formerly known as Parry, * [PUBLISHED]
Murray, Ward & Cannon, *
*
Defendant-Appellee. *
___________
Submitted: February 15, 1996
Filed: July 31, 1996
___________
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
1
Between 1985 and 1992, TGM made sales of rare coins in
amounts in excess of approximately $50 million. TGM achieved this
success, however, by operating as a Ponzi scheme in which investors
were lured into purchasing rare coins by the expectation of future
profits upon the resale of those coins through TGM. TGM sold its
coins at inflated prices; investors who made a profit on resale did
so only because their coins were resold to other investors at even
more inflated prices.
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 (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
2
The Settlement and Litigation Estates consisted of certain
assets to be transferred to the FTC by T.G. Morgan, Michael
Blodgett, and his wife, Diane Blodgett. The FTC settlement
provided that a receiver would liquidate the assets in the two
estates and disburse the money in each of the estates according to
a specified procedure. Assets in the Litigation Estate were sold
to fund the legal fund with $300,000. All remaining assets in the
Litigation Estate were then transferred to the Settlement Estate.
The law firm of Meshbesher & Spence represented Michael
Blodgett for $250,000. Diane Blodgett originally retained Douglas
Kelly to represent her. She then terminated her relationship with
him, and hired Philip Resnick. Blodgett then terminated her
relationship with Resnick and hired Parry, Murray to represent her.
It appears that the initial transfer of $50,000 to Kelly took place
on March 9, 1992.
3
Michael Blodgett was criminally prosecuted for mail and wire
fraud in connection with his actions as president of TGM. He was
convicted of mail fraud; this Court affirmed his conviction on
appeal. See United States v. Blodgett, 32 F.3d 571 (8th Cir.
1994), cert. denied, 115 S. Ct. 1414 (1995). Diane Blodgett was
not charged.
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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,
4
Subsequent to the filing of the FTC complaint, but prior to
the entry of judgment, creditors of T.G. Morgan filed a Chapter 7
involuntary bankruptcy petition against it pursuant to 11 U.S.C.
§ 303. T.G. Morgan then converted the bankruptcy case to one under
Chapter 11, but on May 28, 1992, the bankruptcy court converted the
case to Chapter 7 and appointed John Stoebner the Chapter 7
trustee.
5
The Turnover Order dealt exclusively with assets in the
Settlement Estate and was silent with respect to the Litigation
Estate. By the time the district court issued the turnover order,
the Litigation Estate had no assets, exhausted by payments to
criminal defense counsel.
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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,
6
In a memorandum to the district court, Stoebner argued that
legal funds in the possession of the FTC receiver should be turned
over to him in compliance with the Turnover Order. The district
court rejected this argument, noting that turning over the legal
funds may not be consistent with the Settlement Agreement.
Although Stoebner alerted the district court and the parties
to possible grounds for setting aside the Settlement Agreement,
Stoebner noted that that issue was not properly before the district
court on the 1992 turnover motion, and was not presented in the
motions preceding the district court's June 15, 1993 order denying
Diane Blodgett's motion for reconsideration.
7
Stoebner filed a similar claim against the law firm retained
to defend Michael Blodgett. In an unpublished decision, this Court
affirmed the district court's order granting summary judgment on
the ground that Stoebner was judicially estopped from challenging
the Settlement Agreement. Stoebner v. Meshbesher & Spence, 72 F.3d
134 (8th Cir. 1995) (table). Neither Stoebner nor Parry, Murray
raise any claim of judicial estoppel in this action, and, at oral
argument, both parties agreed the doctrine is not implicated in
this case.
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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
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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, 114 S. Ct. 783, 790 (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 its collateral estoppel decision on the
district court's June 15, 1993 order denying Diane Blodgett's motion for
reconsideration of its earlier order regarding the disposition of funds
retained by Resnick. That order, however, meets none of the four
requirements for collateral estoppel because neither the district court nor
the parties in the FTC Action addressed the crucial factual issue in this
case: whether the money in the Litigation Estate came from the debtor.
The district court simply determined that the FTC Settlement Agreement,
rather than the Turnover Order, governed the disposition of the legal funds
and required Resnick to return the money to the Litigation Estate.
The June 15 Order denying Blodgett's motion for reconsideration did
not determine Stoebner's rights under section 549 because neither the legal
issue of section 549 nor the factual issue of the origination of the money
received by Parry, Murray was before the district court. The question of
whether money in the Litigation Estate originally came from the TGM was not
"actually litigated" in the FTC action, was not "determined by" the
district court, and was not "necessary" to the district court's
determination not to reconsider its prior order. Because the requirements
for application of collateral estoppel are not
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present, we reverse the district court's judgment granting summary judgment
to Parry, Murray.
Judgment reversed with directions to remand to the bankruptcy court
for further proceedings.
A true copy.
Attest:
CLERK, U. S. COURT OF APPEALS, EIGHTH CIRCUIT.
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