Blake v. Custom Recycling Services, Inc.
Filing
42
MEMORANDUM OPINION re 3 Order, 41 Order, 2 Memorandum Opinion. Signed by Senior Judge Glen H. Davidson on 11/3/2015. (dlh)
IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF MISSISSIPPI
ABERDEEN DIVISION
APPELLANT
CHARLES NATHAN BLAKE
v.
CIVIL ACTION NO.1: 15-cv-00055-GHD
APPELLEE
CUSTOM RECYCLING SERVICES, INC.
MEMORANDUM OPINION
Presently before the Court is Appellant Charles Nathan Blake's appeal to reverse the
United States Bankruptcy Court for the Northern District of Mississippi's memorandum opinion
[2] and final judgment [3] issued on August 25, 2014. Appellee Custom Recycling Services, Inc.
responded with its brief [30] to affirm the opinion and final judgment, and Appellant Charles
Nathan Blake submitted a reply brief [34]. The Court held oral argument on October 9, 2015.
Upon due consideration of this well briefed and argued appeal, this Court finds that the
memorandum opinion and final judgment of the United States Bankruptcy Court for the
Northern District of Mississippi should be affirmed in all respects.
A. Procedural Background
On November 29,2007, Plaintiff-Appellee Custom Recycling Services, Inc. ("Appellee")
filed a diversity action against Defendant-Appellant Charles Nathan Blake ("Appellant") and
Defendant Blake Equipment Sales, LLC (collectively, "Blake") in the United States District
Court for the Northern District of Mississippi (the "District Court") in a case styled Custom
Recycling Services, Inc. v. Charles Nathan Blake et aI., No. 1:07-cv-00306-MPH-JAD, wherein
Appellee alleged that Blake had converted certain equipment and funds from its business. See
Dist. Ct. CompI. [31] at 34-41. Blake moved for extra time to file an answer to the complaint,
but never filed an answer.
While the District Court case was pending, Appellant filed a
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voluntary petition for relief pursuant to Chapter 7 of Title 11 of the United States Code in the
United States Bankruptcy Court for the Northern District of Mississippi (the "Bankruptcy
Court") in case No. 08-13 780-JDW. Shortly thereafter, Blake filed a motion to stay further
proceedings in the District Court case pending the outcome of the Bankruptcy Court case which
was granted by the District Court. Appellee then filed a motion for relief from the stay in
Bankruptcy Court; the motion stated Appellee's desire to proceed in the District Court case and
allow that court to resolve the issue of whether the debt was dischargeable. The Bankruptcy
Court entered an order lifting the stay, allowing the District Court case to resume, and stating
that the District Court complaint alleged actions in the nature of theft, conversion, larceny, or
willful and malicious injury-any of which if proven could constitute an exception to discharge
pursuant to 11 U.S.C. § 523(a)(2)(A), (4), and (6). Appellee subsequently filed a motion for
default judgment in the District Court case. On September 24, 2010, the District Court entered
default judgment against Blake.
Thereafter, Appellee filed a complaint in Bankruptcy Court, asserting that the debt owed
by Blake was nondischargeable pursuant to 11 U.S.C. § 523(A)(4) (fraud, defalcation,
embezzlement, or larceny) and (6) (willful and malicious injury). Appellee additionally asserted
that the doctrine of collateral estoppel precluded the religitation in Bankruptcy Court of these
issues. On August 7, 2014, the Bankruptcy Court conducted phase one of a bifurcated trial to
determine whether collateral estoppel applied to the case. The Bankruptcy Court found that
collateral estoppel applied and precluded further litigation on the issue due to the willful and
malicious discharge exception found in 11 U.S.C. § 523(a)(6).
On September 8, 2014, Appellant filed his notice of appeal [1] to this Court from the
Bankruptcy Court's memorandum opinion [2] and final judgment [3] dated August 25, 2014.
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The parties subsequently filed briefs and presented their arguments before the Court in an oral
argument held on October 9,2015.
B. Standard ofReview
A party who is dissatisfied with a bankruptcy court's final decision can appeal to the
district court for the judicial district in which the bankruptcy judge is serving under 28 U.S.C. §
158(a)(1), which grants district courts jurisdiction to hear appeals from final judgments of
adjunct bankruptcy courts. In an appeal of a core proceeding in Bankruptcy Court, such as this
one, this Court reviews the Bankruptcy Court's factual findings for clear error and conclusions of
law de novo. See In re Croft, 737 F.3d 372, 374 (5th CiT. 2013).
C. Analysis and Discussion
On appeal, Appellant argues that the Bankruptcy Court erred in finding that collateral
estoppel applied, precluded further hearing on the merits in the discharge proceedings, and
determined that the debt was nondischargeable pursuant to 11 U.S.C. § 523(a)(6), which
provides that H[a] discharge [in bankruptcy] ... does not discharge an individual debtor from any
debt . . . for willful and malicious injury by the debtor to another entity or to the property of
another entity." See 11 U.S.C. § 523(a)(6). Appellant specifically argues to this Court as
follows: (1) the Bankruptcy Court failed to correctly apply the federal preclusion standard to the
District Court judgment, because the discharge issue was not actually litigated or fully and fairly
litigated in that court; (2) the issues in both cases were not identical, because intent to injure was
never pleaded, litigated, or necessary to the District Court action; and (3) the Bankruptcy Court
abdicated its duty by allowing the District Court to effectively decide the dischargeability issue.
The Court examines Appellant's arguments in the context of the doctrine of collateral estoppel.
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Appellant first contends that the Bankruptcy Court inappropriately relied on Pancake v.
Reliance Insurance Co. (In re Pancake), 106 F.3d 1242 (5th Cir. 1997), a bankruptcy case that
found collateral estoppel applied to a state court default judgment, when the Bankruptcy Court
should have instead applied the federal standard of collateral estoppel.
Appellant further
maintains that he did not have a full and fair opportunity to litigate the issue in the District Court
action, specifically, that, using the language of an Eleventh Circuit Court of Appeals case,
Appellant did not "have ... a fair opportunity procedurally, substantively[,] and evidentially to
contest the issue." See In re Bush, 62 F.3d 1319, 1323 (l1th Cir. 1995). Appellant argues that
he consistently maintained in Bankruptcy Court that he could not afford counsel in the District
Court proceeding and had no idea how to defend the District Court suit. Finally, Appellant
maintains that the Bankruptcy Court improperly gave preclusive effect to the default judgment
based the Appellee's evidentiary submission.
Appellee's position is that Appellant had the opportunity to participate in the District
Court proceeding, but did not do so, specifically, that Appellant did not show a colorable
defense, file an answer, or attempt to have the default judgment set aside. Appellee further
maintains that Appellant was served a summons, as well as notices of all hearings and filings,
leading up to the judgment. Thus, Appellee maintains that the issue was actually litigated in the
District Court, and consequently, that the Bankruptcy Court's finding is not clearly erroneous.
A bankruptcy court's decision to give preclusive effect to a district court judgment is a
question of law that this Court reviews de novo. See Caton v. Trudeau (In re Caton), 157 F.3d
1026,1029 (5th Cir. 1998), as amended on reh'g (Nov. 3,1998). Collateral estoppel, otherwise
known as issue preclusion, "bars 'successive litigation of an issue of fact or law actually litigated
and resolved in a valid court determination essential to the prior judgment,' even if the issue
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recurs in the context of a different claim." Taylor v. Sturgell, 553 U.S. 880, 892, 128 S. Ct.
2161, 171 L. Ed. 2d 155 (2008) (quoting New Hampshire v. Maine, 532 U.S. 742, 748-49, 121
S. Ct. 1808, 149 L. Ed. 2d 968 (2001)). "By 'preclud[ing] parties from contesting matters that
they have had a full and fair opportunity to litigate,' [collateral estoppel] protects against 'the
expense and vexation attending multiple lawsuits, conserv[es] judicial resources, and foste[rs]
reliance on judicial action by minimizing the possibility of inconsistent decisions.' " Id., 128 S.
Ct. 2161 (quoting Montana v. United States, 440 U.S. 147, 153-54, 99 S. Ct. 970, 59 L. Ed. 2d
210 (1979)).
Because the default judgment against Appellant arose from a federal court, federal
principles of collateral estoppel control. See Taylor, 553 U.S. at 891, 128 S. Ct. 2161 ("The
preclusive effect of a federal-court judgment is determined by federal common law."). See
generally R. Fallon, D. Meltzer, & D. Shapiro, Hart and Wechsler's The Federal Courts and the
Federal System 1473 (4th ed. 1996); Degnan, Federalized Res Judicata, 85 Yale LJ. 741 (1976).
The United States Supreme Court has explained the complicated nature of federal collateral
estoppel:
Neither the Full Faith and Credit Clause, U.S. Const., Art. IV, §
1, nor the full faith and credit statute, 28 U.S.C. § 1738, addresses
the question. By their terms they govern the effects to be given
only to state-court judgments (and, in the case of the statute, to
judgments by courts of territories and possessions). And no other
federal textual provision, neither of the Constitution nor of any
statute, addresses the claim-preclusive effect of a judgment in a
federal diversity action.
Nationwide uniformity in the substance of the matter is better
served by having the same claim-preclusive rule (the state rule)
apply whether the dismissal has been ordered by a state or a federal
court. This is, it seems to us, a classic case for adopting, as the
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federally prescribed rule of decision, the law that would be applied
by state courts in the State in which the federal diversity court sits.
Semtek Int'l Inc. v. Lockheed Martin Corp., 531 U.S. 497, 506-07, 508, 121 S. Ct. 1021, 149 L.
Ed. 2d 32 (2001) (quotation marks omitted).
However, whether this Court applies Mississippi law or federal law on collateral
estoppel, the legal standard, analysis, and result are the same. Under federal law, collateral
estoppel is appropriate if" '(1) the issue at stake is identical to the one involved in the earlier
action; (2) the issue was actually litigated in the prior action; and (3) the determination of the
issue in the prior action was a necessary part of the judgment in that action.'" Crook v. Galaviz,
No. 15-50244, 2015 WL 5534162, at *5 (5th Cir. Sept. 21, 2015) (per curiam) (quoting Test
Masters Educ. Servs., Inc. v. Robin Singh Educ. Servs., Inc., 428 F.3d 559, 572 (5th Cir. 2005)).
Under Mississippi law, "the parties to an action will be precluded from relitigating a specific
issue, which was: (1) actually litigated in the former action; (2) determined by the former action;
and (3) essential to the judgment in the former action." In re Estate o/Stutts v. Stutts, 529 So. 2d
177,179 (Miss. 1988) (citing Dunaway v. WH Hopper & Assocs., 422 So. 2d 749,751 (Miss.
1982)). Thus, there is no substantive difference between Mississippi law on collateral estoppel
and federal law on collateral estoppel.
Collateral estoppel principles apply in bankruptcy discharge exception proceedings
pursuant to 11 U.S.C. § 523(a). In re Montgomery, 200 F. App'x 320, 322 (5th Cir. 2006) (citing
Grogan v. Garner, 498 U.S. 279, 285, 111 S. Ct. 654, 112 L. Ed. 2d 755 (1991)). The United
States Supreme Court has stated: "If, in the course of adjudicating a state law question, a ...
court should determine factual issues using standards identical to those of [11 U.S.C. § 523],
then collateral estoppel, in the absence of countervailing statutory policy, would bar relitigation
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of those issues in the bankruptcy court." Brown v. Felsen, 442 U.S. 127, 139 n.lO, 99 S. Ct.
2205, 60 L. Ed. 2d 767 (1979).
Whether considered under federal law or Mississippi law, "the doctrine [of collateral
estoppel] applies to a default judgment." See In re Montgomery, 200 F. App'x at 322 (citing
Morris v. Jones, 329 U.S. 545, 550-51, 67 S. Ct. 451, 91 L. Ed. 488 (1947) ("A judgment ofa
court having jurisdiction of the parties and of the subject matter operates as res judicata, in the
absence of fraud or collusion, even if obtained upon a default."); Moyer v. Mathas, 458 F.2d 431,
434 (5th Cir. 1972»; Strain v. Gayden, 20 So. 2d 697, 700 (Miss. 1945) ("It is true that the
judgment here complained of was by default, but it is also true that a judgment by default, where
personal jurisdiction of a defendant has been obtained, is as conclusive either as an estoppel or
bar as a judgment in a contested case. A judgment by default is attended by the same legal
consequences as if there had been a verdict for the plaintiff.").
"For purposes of collateral
estoppel, ... the critical inquiry is not directed at the nature of the default judgment but, rather,
one must focus on whether an issue was fully and fairly litigated." Pancake, 106 F.3d at 1244
1255.
However, despite these principles, the Fifth Circuit has stated that a bankruptcy court is
not bound by the earlier determination of the trial court and retains exclusive jurisdiction to
determine the ultimate dischargeability of a debt. In re Shuler, 722 F.2d 1253, 1255 (5th Cir.
1984).
In the context of a default judgment, once the defendant has filed an answer, the plaintiff
cannot obtain a simple default judgment and must satisfy his burden of proof on the elements of
the action with evidence. In that situation, the Fifth Circuit has held that collateral estoppel gave
preclusive effect to a prior state court judgment even though the defendant did not actually
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appear at the trial. See Garner v. Lehrer (In re Garner), 56 F.3d 677 (5th Cir. 1995). Further,
in Pancake, the Fifth Circuit approved the use of collateral estoppel in a bankruptcy
dischargeability action arising from a case in which the state court struck the answer of the
defendant for discovery abuses and entered judgment for $455,703.31 at a trial at which the
defendant failed to appear.
Under those circumstances, the Fifth Circuit stated that,
notwithstanding the defendant's absence, "where the court enters a default judgment after
conducting a hearing or trial at which the plaintiff meets [its] evidentiary burden, the issues
raised therein are considered fully and fairly litigated for collateral estoppel purposes." 106 F.3d
at 1244. Although both Garner and Pancake involved the application of Texas law on collateral
estoppel as opposed to federal or Mississippi law, the point as to when an issue is "actually
litigated" is the same. See Cornwell v. Loesch (In re Cornwell), 109 F. App'x 682, 684 (5th Cir.
2004).
Although m this appeal Appellant maintains that he could not afford to continue
defending the District Court suit and asks this Court to consider that in the determination of
whether he participated in the proceeding, this Court finds that argument unavailing. Unlike a
default judgment wherein the defendant chooses not to litigate issues at all for reasons that have
nothing to do with the merits of the case, such as finding from the start that the expense of
contesting the lawsuit is not justified, see Gober v. Terra +Corp. (In re Gober), 100 F.3d 1195,
1205 (5th Cir. 1996), Blake participated in the District Court case. First, Blake was served with
the District Court summons and complaint. Subsequently, Blake filed a motion for extension of
time to file an answer to the complaint, which the District Court granted. Blake then filed a
motion to dismiss and accompanying memorandum brief, contending the complaint should be
dismissed on jurisdictional grounds. The District Court denied the motion. Next, Blake filed a
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motion for extension of time to file an answer to the complaint, which the District Court
granted.
Subsequently, Appellant filed a petition for Chapter 7 bankruptcy in Bankruptcy Court
and requested a stay of the District Court proceedings; the District Court granted this
request. Blake's counsel then filed a motion to withdraw from representation in the District
Court case, which the District Court denied. At this point, Blake ceased participating in the
District Court case, but his counsel continued to receive notices of all documents filed in the
District Court case.
Next, Appellee filed a motion to lift stay which the District Court granted. Then,
Appellee sought a default judgment against Blake, who had never filed an answer to the District
Court complaint. See Dist. Ct. Mot. Def. 1. [31] at 43-47. The District Court granted the motion
and ordered Appellee to file affidavits and other supporting evidence in lieu of a hearing on
damages. The District Court indicated that it would hold a hearing if substantial issues remained
following its review of the evidentiary submission. As stated above, Blake's counsel received
notice of all documents filed in the case. However, Blake never filed a response to the motion
for default judgment.
On September 24, 2010, the District Court entered default judgment, ruling as follows:
"The evidence submitted shows that [Blake] had wrongfully come into possession of, or
wrongfully detained[,] five pieces of equipment belonging to [Appellee]," one piece of which
was ultimately recovered, but four pieces of which "were converted by [Blake] in a malicious
and willful manner, due to [Blake's] own financial condition. [Blake] also converted $26,000.00
of equipment sales proceeds belonging to [Appellee]." Dist. Ct.' s J. [31] at 48-49. The District
Court awarded judgment against Blake "jointly and severally, for this conversion," specifically,
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"compensatory damages in the sum of $133,200.00 and punitive damages in the amount of
[Blake's] attorney's fees of $16,246.35 for a total judgment in the amount of $149,446.35" with
"[i]nterest [to] accrue ... at the rate of 0.26 percent per annum from and after the date of entry."
Id. at 49.
In the opinion of this Court, pursuant to Fifth Circuit case law and the status of the law in
Mississippi, the Bankruptcy Court properly gave the default judgment entered by the District
Court against Appellant preclusive effect, because the issue of dischargeability was fully and
fairly litigated. As the Bankruptcy Court further noted, the default judgment was uncontested by
Blake in District Court and was never appealed by Blake to the Fifth Circuit. The validity of the
default judgment is not before this Court. Blake had the chance to attack the default judgment
properly to the Fifth Circuit Court of Appeals and did not do so. In addition, as shown below,
the issue was identical in both the Bankruptcy Court and District Court, and the District Court's
determination of the issue was necessary to the judgment.
Having determined that the Bankruptcy Court correctly applied collateral estoppel to the
District Court default judgment, this Court now turns to Appellant's remaining arguments.
Appellant argues that the Bankruptcy Court improperly delegated its exclusive jurisdiction over
dischargeability to the District Court when the ultimate dischargeability intent to injure was
never before the District Court. Interrlated to this argument is the Appellant's argument that the
issues in the Bankruptcy Court case and District Court case were not identical because intent to
injure was never pleaded, litigated, or necessary to the District Court action. Appellee responds
that the District Court found that the conversion was intentional and that this finding was based
on the District Court complaint, which asserted a theory of intentional conversion, as well as the
evidentiary submission of Appellee.
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The Court finds that Appellee's arguments are well taken.
The Bankruptcy Court
properly concluded that collateral estoppel barred relitigation of issues relevant to
dischargeability, specifically, that Appellant's conduct ranked as "willful and malicious" under
the statutory exception and rendered the debt to Appellee nondischargeable. "[P]arties may
invoke collateral estoppel in certain circumstances to bar relitigation of issues relevant to
dischargeability[, and] collateral estoppel can provide an alternate basis to satisfy the elements
of [11 U.S.C.] § 523(a)(6)." Raspanti v. Keaty (In re Keaty),397 F.3d 264, 270 (5th Cir.
2005) (quotation marks and alterations omitted).
The United States Supreme Court has
explained:
The word "willful" in (a)(6) modifies the word "injury," indicating
that nondischargeability takes a deliberate or intentional injury, not
merely a deliberate or intentional act that leads to injury. Had
Congress meant to exempt debts resulting from unintentionally
inflicted injuries, it might have described instead "willful acts that
cause injury." Or, Congress might have selected an additional
word or words, i.e., "reckless" or "negligent," to modify "injury."
Moreover, ... the (a)(6) formulation triggers in the lawyer's mind
the category "intentional torts," as distinguished from negligent or
reckless torts. Intentional torts generally require that the actor
intend "the consequences of an act," not simply "the act itself."
Restatement (Second) of Torts § 8A, Comment ~ p. 15 (1964)
(emphasis added).
Kawaauhau v. Geiger, 523 U.S. 57, 61-62, 118 S. Ct. 974, 140 L. Ed. 2d 90 (1998). Under
Mississippi law, "[c]onversion ... is an intentional tort that does not require proof of fraud,
malice, libel, slander, or defamation." See, e.g., Zumwalt v. Jones Cnty. Ed ofSupervisors, 19
So. 3d 672, 688-89 (Miss. 2009). However, according to the United States Supreme Court, "not
every tort judgment for conversion is exempt from discharge," because "[n]egligent or reckless
acts ... do not suffice to establish that a resulting injury is 'wil[l]ful and malicious.' "
Kawaauhau, 523 U.S. at 63-64, 118 S. Ct. 974 (citing Davis v. Aetna Acceptance Co., 293 U.S.
328,332,55 S. Ct. 151, 79 L. Ed. 393 (1934». In Davis, which is cited by Appellant in support
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of his argument of dischargeability, the United States Supreme Court explained: "There may be a
conversion which is innocent or technical, an unauthorized assumption of dominion without
willfulness or malice." 293 U.S. at 332, 55 S. Ct. 151. But "[tJhere is no doubt that an act of
conversion, if willful and malicious, is an injury to property within the scope of this exception."
Id., 55 S. Ct. 151; see McIntyre v. Kavanaugh, 242 U.S. 138,141,37 S. Ct. 38,61 L. Ed. 205
(1916) (holding that when broker committed conversion by "depriv[ing] another of his property
forever by deliberately disposing of it without semblance of authority" he committed intentional
injury to property of another, bringing it within the discharge exception). According to the Fifth
Circuit, recovery under 11 U.S.C. § 523(a)(6) for a "willful and malicious injury" now requires
proof that such injury arose from a deliberate and intentional act by a debtor that was inflicted
under circumstances evidencing either: (1) an objective substantial certainty of harm; or (2) a
subjective motive to cause harm. Miller v. JD. Abrams, Inc. (In re Miller), 156 F.3d 598, 606
(5th Cir.1998), cert. denied, Miller v. JD. Abrams, Inc., 526 U.S. 1016 (1999); see also Caton,
157 F.3d at 1029.
Thus, in the case sub judice, to demonstrate nondischargeability, Appellee was required
to prove by a preponderance of the evidence that Appellant (1) caused an injury (2) to Appellee
or his property, and (3) either (a) intended that his conduct harm Appellee, or (b) intended
conduct that was substantially certain to cause harm to Appellee. The ruling of the District Court
reveals that its determination to assess individual liability against Blake for the damages owed to
Appellee took into account these elements.
First, conversion, which is pled in the District Court complaint, is an intentional tort
under Mississippi law. See Zumwalt, 19 So. 3d at 688-89. The United States Supreme Court
has stated in the context of the "willful and malicious" exception in 11 U.S.C. § 523(a)(6) that
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the word "willful" encompasses "a deliberate or intentional injury, not merely a deliberate or
intentional act that leads to injury" and that "[i]ntentional torts generally require that the actor
intend 'the consequences of an act,' not simply 'the act itself.' " Kawaauhau, 523 U.S. at 61-
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