Whitaker v. Moroney Farms Homeowners' Assoc.

Filing 11

MEMORANDUM OPINION ON APPEAL FROM BANKRUPTCY COURT. Appellant Whitaker is collaterally estopped from relitigating the matters in the State Court Action. Appellant Whitakers appeal is DENIED and the decision of the Bankruptcy Court in the Adversary Proceeding is affirmed. Signed by Judge Ron Clark on 6/5/15. (cm, )

** NOT FOR PRINTED PUBLICATION **
IN THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF TEXAS
SHERMAN DIVISION
JAMES ROBERT WHITAKER,
Appellant,
v.
MORONEY FARMS HOMEOWNERS’
ASSOCIATION,
Appellee.

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CIVIL ACTION No. 4-14-cv-700
JUDGE RON CLARK

SJF

MEMORANDUM OPINION ON APPEAL FROM BANKRUPTCY COURT
Appellant James Robert Whitaker has appealed the August 29, 2014 Judgment of the
United States Bankruptcy Court for the Eastern District of Texas.1 Adversary Proceeding
Doc. # 95. Appellant Whitaker argues that the determination of the Bankruptcy Court that his
debt to Appellee Moroney Farms was not dischargeable due to defalcation under 11 U.S.C.
§ 523(a)(4) is incorrect. On the record before it, the court finds no error in the Bankruptcy
Court’s rulings. The Judgment of the Bankruptcy Court is affirmed.
I.

Background

Appellee Moroney Farms, a homeowners’ association, is a Texas non-profit corporation.
Appellant Whitaker served as an officer and director from January 2006 to July 2007. Following
his service as an officer and director, Appellee Moroney Farms sued Appellant Whitaker in the
296th Judicial District Court of Collin County, Texas (“State Court Action”). Appellee Moroney
Farms alleged, among other things, that Appellant Whitaker improperly caused Appellee

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The Adversary Proceeding is styled Moroney Farms Homeowners’ Ass’n, Inc. v. James
Robert Whitaker, Case No. 10-4057, the Honorable Bill Parker presiding.
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Moroney Farms to incur attorney’s fees in an improper attempt to deny a homeowner access to
certain documents. It also argues that Appellant Whitaker gained improper benefits as a result of
his position. Appellee Moroney Farms also asserted that Appellant Whitaker owed it a fiduciary
duty and that he breached that duty.
The State Court Action resulted in a trial, which began on June 22, 2009, and concluded
on June 24, 2009. On September 4, 2009, the 296th District Court entered a judgment in the
State Court Action against Appellant Whitaker, in the amount of $30,177.00, with post-judgment
interest thereon at a rate of 5% per annum, as well as all costs taxed to Appellant Whitaker. In
addition to the Judgment in the State Court Action, on October 27, 2009, the 296th District Court
entered formal findings of fact and conclusions of law, which specifically found that:
(a) Appellant Whitaker was the president and director of Appellee Moroney Farms from
January 2006 through July 2007;
(b) As president and director of Appellee Moroney Farms, Appellant Whitaker knowingly
and intentionally incurred attorney’s fees, and litigation and settlement expenses, on
behalf of Appellee Moroney Farms to oppose a homeowner’s request for association
documents;
(c) The homeowner’s request for association documents was proper;
(d) The amount of attorney’s fees and litigation expenses approved and incurred by
Appellant Whitaker on behalf of Appellee Moroney Farms to oppose the homeowner’s
request for association documents was $27,873.83;
(e) Appellant Whitaker knowingly sought and received personal benefits as a president and
director of Appellee Moroney Farms;
(f) Appellant Whitaker knowingly sought and received money as a personal benefit from a
third-party contractor that was performing work paid for by Appellee Moroney Farms;
(g) The value of the money received by Appellant Whitaker as a personal benefit from a
third party contractor that was performing work paid for by Appellee Moroney Farms
was $470.00;
(h) Appellant Whitaker knowingly sought and received money from Appellee Moroney
Farms for reimbursement of personal expenses incurred solely by Appellant Whitaker;
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(i) The value of the money received by Appellant Whitaker from Appellee Moroney Farms
for the reimbursement of personal expenses of Appellant Whitaker was $272.21;
(j) The total value of the personal benefit received by Appellant Whitaker as president and
director of Appellee Moroney Farms was $742.21;
(k) Appellant Whitaker gave no notice of and made no claim for any settlement offset or
credit before or during the trial and offered no evidence prior to the close of evidence of
any payment of settlement funds to Appellee Moroney Farms;
(l) As president and director of Appellee Moroney Farms, Appellant Whitaker owed
Appellee Moroney Farms the duties of a fiduciary;
(m) Appellant Whitaker breached his fiduciary duty owed to Appellee Moroney Farms;
(n) Appellant Whitaker’s action in knowingly incurring attorney’s fees, and litigation and
settlement expenses, on behalf of Appellee Moroney Farms to oppose a homeowner’s
proper request for association documents was a breach of his fiduciary duty;
(o) Appellant Whitaker breached his fiduciary duty owed to Appellee Moroney Farms by
knowingly taking improper personal benefits arising out of his position as president and a
fiduciary;
(p) Appellant Whitaker’s personal receipt of money from a third-party contractor for work
performed for and paid for by the association was a breach of Appellant Whitaker’s
fiduciary duty to Appellee Moroney Farms;
(q) Appellant Whitaker’s personal receipt of money from the association as reimbursement
of Appellant Whitaker’s personal expenses was a breach of Appellant Whitaker’s
fiduciary duty to Appellee Moroney Farms;
(r) Appellant Whitaker was not entitled to any settlement credit or offset; and
(s) Appellant Whitaker’s indebtedness to Appellee Moroney Farms included pre-judgment
interest in the amount of $1,560.96 calculated at the rate of 5% per annum.
No appeal was ever taken of the findings or Judgment in the State Court Action.
Appellant Whitaker filed for Chapter 7 bankruptcy on January 12, 2010. On March 8,
2010, Appellee Moroney Farms timely filed its Complaint Objecting to the Discharge of Debt,
which instituted the Adversary Proceeding. On August 23, 2012, the Bankruptcy Court
conducted a trial and took the issue of dischargeablity of the State Court Action Judgment under
advisement. On September 11, 2012, the Bankruptcy Court declared that the debt to Appellee
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Moroney Farms was not dischargeable as a defalcation committed by Appellant Whitaker while
acting as a fiduciary, pursuant to 11 U.S.C. § 523(a)(4).
Appellant Whitaker timely appealed this matter to the United States District Court for the
Eastern District of Texas. James Robert Whitaker v. Moroney Farms Homeowners’ Ass’n, Case.
No. 4:23-cv-695-RAS. While the matter was pending on appeal, the Supreme Court clarified the
level of culpability required to find defalcation under 11 U.S.C. § 523(a)(4). Bullock v.
BankChampaign, N.A., 133 S. Ct. 1754 (2013). As a result of that decision, the District Court
remanded this matter “to the bankruptcy court to determine whether further proceedings are
needed and to apply the heightened standard as set forth in Bullock.” Adversary Proceeding
Doc. # 85.
Upon remand, the Bankruptcy Court solicited additional briefings from the parties. In
Appellant Whitaker’s briefing, he attempted to reargue issues that were beyond the scope of
remand relating to the legitimacy of Appellee Moroney Farm’s claims in the State Court Action.
In the Adversary Proceeding, the Bankruptcy Court found that the Appellant Whitaker, as well as
the Bankruptcy Court itself, were collaterally estopped from examining the findings in the State
Court Action. The Bankruptcy Court then proceeded to apply the defalcation standard from
Bullock. It found that Appellant Whitaker’s actions, as determined in the State Court Action,
constituted defalcation under the clarified standard put forth in Bullock. Those actions included
knowingly incurring attorney’s fees and litigation and settlement expenses owed by Appellee
Moroney Farms to oppose the homeowner’s proper request for association documents;
knowingly seeking and receiving improper personal benefits in the form of reimbursement of
personal expenses; and knowingly seeking and receiving money as a personal benefit from a
third-party contractor that was compensated by Appellee Moroney Farms.
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Appellant Whitaker timely appealed to this court, and the parties have submitted briefing.
II.

Applicable Law

A. Standard of Review
A bankruptcy court’s findings of fact shall not be set aside unless clearly erroneous, and
due regard shall be given to the opportunity of the bankruptcy court to judge the credibility of
witnesses. See Fed. R. Bankr. P. 8013; see also In re Herby’s Foods, Inc., 2 F.3d 128, 130-31
(5th Cir. 1992). “A finding of fact is clearly erroneous ‘when although there is evidence to
support it, the reviewing court on the entire evidence is left with a firm and definite conviction
that a mistake has been committed.’” In re Missionary Baptist Found. of Am. Inc., 712 F.2d 206,
209 (5th Cir. 1983) (quoting United States v. U.S. Gypsum Co., 333 U.S. 364, 395 (1948)).
Issues of law are reviewed de novo. In re SGSM Acquisition Co., LLC, 439 F.3d 233,
238-39 (5th Cir. 2006). Mixed questions of fact and law are also reviewed de novo. In re
CPDC, Inc., 337 F.3d 436, 441 (5th Cir. 2003). A finding of fact that is premised on an
improper legal standard or on a proper standard improperly applied will also be reviewed de
novo. Missionary Baptist Found., 712 F.2d at 209.
B. Collateral Estoppel
Collateral estoppel, or issue preclusion, “means simply that when an issue of 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, 510 U.S. 222, 232 (1994)
(internal quotations omitted). “Under collateral estoppel, once an issue is actually and
necessarily determined by a court of competent jurisdiction, that determination is conclusive in
subsequent suits based on a different cause of action involving a party to the prior litigation.”
Montana v. United States., 440 U.S. 147, 153 (1979) (citing Parklane Hosiery Co. v. Shore, 439
U.S. 322, 326 n. 5 (1979)). Where the factual issues for the creditor’s theory of
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nondischargeability have been actually litigated in a prior proceeding, neither the creditor nor the
debtor may relitigate those grounds. RecoverEdge L.P. v. Pentecost, 44 F.3d 1284, 1294 (5th
Cir. 1995).
When a party is asserting collateral estoppel regarding a state court judgment, the court
applies the collateral estoppel law of that state. In re Pancake, 106 F.3d 1242, 1244 (5th Cir.
1997). Under Texas law, collateral estoppel occurs when: “(1) the facts sought to be litigated in
the second case were fully and fairly litigated in the first; (2) those facts were essential to the
prior judgment; and (3) the parties were cast as adversaries in the first case.” Id. (citing in re
Garner, 56 F.3d 667 (5th Cir. 1995); Bonniwell v. Beech Aircraft Corp., 663 S.W.2d 806 (Tex.
1984)).
C. Defalcation
“The party promoting the exception to discharge must prove by a preponderance of the
evidence that the debt is nondischargeable.” Grogan v. Garner, 498 U.S. 279, 286 (1991). Any
exception to discharge should be construed liberally in favor of the debtor. In re Hudson, 107
F.3d 355, 356 (5th Cir. 1997).
A debtor seeking relief in bankruptcy will not receive a discharge of any debt “for fraud
or defalcation while acting in a fiduciary capacity, embezzlement, or larceny.” 11 U.S.C.
§ 523(a)(4). The Supreme Court has stated that defalcation “includes a culpable state of mind
requirement akin to that which accompanies application of the other terms in the same statutory
phrase.” Bullock, 133 S. Ct. at 1757. The state of mind required is “one involving knowledge
of, or gross recklessness in respect to, the improper nature of the relevant fiduciary behavior.”
Id. The conduct at issue must involve bad faith, moral turpitude, intentional wrong, or other
immoral conduct. Id. at 1759.

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III.

Analysis

Having reviewed the findings of fact from the Bankruptcy Court in the Adversary
Proceeding, this court has determined that none of these findings are clearly erroneous. See In re
Missionary Baptist Found., 712 F.2d at 209. This court will apply those facts to the issues of
law, which it will review de novo. In re SGSM, 439 F.3d at 238-39.
A. The Judgment in the State Court Action Collaterally Estops Relitigation of Facts
Surrounding the Amount of Appellant Whitaker’s Debt to Appellee Moroney Farms
Throughout the litigation in the Bankruptcy Court, Appellee Moroney Farms has argued
the Appellant Whitaker is collaterally estopped from relitigating the findings and conclusions in
the State Court Action. In applying Texas law to this case, this court must determine whether the
facts sought to be litigated at the Bankruptcy Court were fully and fairly litigated in the State
Court Action, whether those facts were essential to the State Court Action Judgment, and
whether the parties were cast as adversaries in the State Court Action. See In re Pancake, 406
F.3d at 1244 (citations omitted).
The questions of fact addressed in the State Court Action are the same as the factual
disputes in the Bankruptcy Court’s Adversary Proceeding. The issues in the State Court Action
are whether, and to what extent, Appellant Whitaker breached his fiduciary duties to Appellee
Moroney Farms, and if a breach occurred, what was the measure of damages. The question
before the Bankruptcy Court was whether that breach of fiduciary duty rose to the level of
defalcation. The evidentiary issues that Appellant Whitaker brought forth in the Adversary
Proceeding were fully and fairly litigated in the multi-day trial in the State Court Action. Those
facts were essential to the judgment of liability in the State Court Action. There is no dispute
that the parties were adversary in all the relevant proceedings. Collateral estoppel applies in this
matter to the factual findings listed in the Background Section of this Order. The factual issues
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for Appellee Moroney Farms’ theory of nondischargeability have been actually litigated in the
State Court Action; therefore, neither party may relitigate those grounds. See RecoverEdge L.P.,
44 F.3d at 1294.
B. The Debt to Appellee Moroney Farms Arose from Defalcation in a Fiduciary
Capacity
Appellee Moroney has argued, and the Bankruptcy court found, that Appellant
Whitaker’s debt resulted from defalcation in a fiduciary capacity and was therefore
nondischargable under 11 U.S.C. § 523(a)(4). The burden is on Appellee Moroney Farms to
show, by a preponderance of the evidence, that Appellant Whitaker is not entitled to a discharge
of his debt. See Grogan, 498 U.S. at 286. Appellee Moroney Farms has met that burden.
Regarding fiduciaries under 11 U.S.C. § 523(a)(4), the scope of their obligations is
determined by federal law, but state law is important to the determination of whether or not a
trust obligation exists. In re Harwood, 637 F.3d 615, 619-20 (5th Cir. 2011) (citations omitted).
“Under Texas law, corporate officers and directors owe fiduciary duties to the corporations they
serve and must not allow their personal interests to prevail over the interests of the corporation.”
Id. at 620 (citing Pinnacle Data Servs., Inc. v. Gillen, 104 S.W.3d 188, 198 (Tex.App.—
Texarkana 2003, no pet.)). This constitutes a fiduciary duty under federal law regarding 11
U.S.C. § 523(a)(4). In re Shcolnik, 670 F.3d 624, 628 (5th Cir. 2012). Appellant Whitaker was
an officer on the board for Appellee Moroney Farms during the relevant period and owned
Appellee Moroney Farms a fiduciary duty under federal law. The question now shifts to whether
Appellant Whitaker breached that duty in such a way that he committed defalcation.
Under the heightened standard of Bullock, defalcation requires knowledge or gross
recklessness. Bullock, 133 S. Ct. at 1757. Appellant Whitaker knowingly incurred attorney’s
fees on behalf of Appellee Moroney Farms in an improper attempt to prevent the homeowner
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who sought association documents. Appellant Whitaker also knowingly sought and received
improper reimbursement of personal expenses. Appellant Whitaker knowingly received
improper benefits from third-party contractors. Each of these actions constituted defalcation.
Appellant Whitaker’s debt to Appelle Moroney Farms is nondischargable.
IV.

Conclusion

Appellant Whitaker is collaterally estopped from relitigating the matters in the State
Court Action. Appellant Whitaker owed a fiduciary duty to Appellee Moroney Farms, which he
breached. He breached it knowingly, resulting in defalcation. Pursuant to 11 U.S.C. § 523(a)(4),
debts from defalcation are nondischargeable. Appellant Whitaker’s appeal is DENIED and the
decision of the Bankruptcy Court in the Adversary Proceeding is affirmed.
So ORDERED and SIGNED this 5 day of June, 2015.

___________________________________
Ron Clark, United States District Judge

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