Opinion
7:00-CV-219-R
January 17, 2001
MEMORANDUM OPINION
Now before this Court is the appeal of the Final Judgement rendered by the United States Bankruptcy Court for the Northern District of Texas, Wichita Falls Division, in an adversary proceeding. Appellant, Go Partners, LTD)., successor in interest to Gary S. Holder, appeals the September 1, 2000 Final Judgement, in which the Bankruptcy Court denied Mr. Holder all relief. For the reasons stated below, this judgement is AFFIRMED in part, and VACATED and REMANDED for further proceedings in part.
This Court will refer to Appellant as Gary Holder, consistent with the Bankruptcy Court's Second Memorandum Opinion and the Briefs of the Appellant and the Appellee.
BACKGROUND
In the early 1990s, Appellant, Gary Holder, entered into a partnership agreement with Appellee, Stacie Lynn Poynor. Some time after entering into the agreement, the parties had a falling out and on March 4, 1994, Poyner initiated a state court action against Holder in the 271st District Court of Jack County, Texas. On April 4, 1994, Holder filed his Original Answer and Counterclaim, alleging breach of contract, fraud, violation of the Texas Deceptive Trade Practices Act, and conspiracy to commit fraud. On June 23, 1997, the State Court action was called to trial. Although Poynor did not appear, Holder was permitted to present evidence and testimony on the issue of damages and the State Court entered a final default judgement in favor of Holder, ordering Poynor to pay Holder damages in the amount of $493,250, attorney fees of $175,000, and court costs. The trial transcript reveals that $50,000 of the damages award was for punitive damages.
Poyner subsequently filed Bankruptcy in May of 1999, and Holder timely filed a Complaint to Determine Dischargeability of Debt Pursuant to 11 U.S.C. § 523(A)(2) and § 523(A)(4) with the Bankruptcy Court. Holder's Complaint asserted that the State Court judgement is conclusive as a matter of law on the issues of liability and damages in the dischargeability proceeding. Holder's argument was initially rejected by the Bankruptcy Court in its Memorandum Opinion on Plaintiff's Motion for Summary Judgement ("First Memorandum Opinion"), issued on April 6, 2000. On August 23, 2000, at a trial on the merits, Holder again argued issue preclusion as to the entire case, and added the alternative theory that at the very least, he was entitled to collateral estoppel on the issue of punitive damages and nominal actual damages. Holder presented no evidence, other than the transcript of the State Court proceeding.
Holder theorized in his Bankruptcy Court case and in this Appeal that because fraud was essential to the punitive damages award, the Court must also assume that it was essential to some amount of actual damages and thus, he was at least entitled to nominal damages in the amount of $1. Brief of Appellant at 12-16.
In a Final Judgement, accompanied by the Bankruptcy Court's Second Memorandum Opinion, the court again rejected Holder's issue preclusion argument. Additionally, the court (found that, "It was clear from the August 23, 2000 record that Plaintiff's State Court trial transcript was only offered into evidence in connection with Plaintiff's collateral estoppel contention, and not otherwise." Second Memorandum Opinion n. 7. Thus, the court did not decide whether Holder had independently proven the necessary grounds for dischargeability.
DISCUSSION
I. Did the Bankruptcy Court Commit Reversible Error By Its Determination That the State Court Judgement Was Not Conclusive of the issues of Liability and Damages
Holder first argues that the Bankruptcy Court committed reversible error when it determined that the State Court judgement was not conclusive of the issues of liability and damages. A bankruptcy court's decision to give preclusive effect to a state court judgement is a question of law and thus this Court will review it de novo. See Schwager v. Fallas et. al, 121 F.3d 177, 181 (5th Cir. 1997) (citing. In re Gober, 100 F.3d 1195, 1201 (5th Cir. 1996); In re Garner, 56 F.3d 677, 679 (5th Cir. 1995)). Applying the de novo standard of review, this Court upholds the Bankruptcy Court's judgement as to preclusive effect of the State Court judgement.
In both the first and second memorandum opinions issued by the court below, the central issue was whether holder could use the previous State Court judgement offensively to prevail in the adversary Bankruptcy action against Poyner. Specifically, holder claimed that the existence of fraud, essential to his success in the Bankruptcy claim, had been established by the State Court and thus precluded re-litigation of the issue.
In both opinions, the Bankruptcy Court correctly set forth the required elements for issue preclusion, as required by Texas law. See In re Pancake, 106 F.3d 1242, 1244 (5th Cir. 1997) ("Because the judgement against the Defendant was entered in Texas state court we apply the Texas law of issue preclusion.") (citing, In re Gober, 100 F.3d 1195). And, in both opinions, the court found that the issue of fraud had been "fully and fairly litigated," between parties "cast as adversaries in the first action." In re Pancake, 106 F.3d at 1244 (citations omitted). However, in both opinions, Holder lost on the second element of issue preclusion when the court held that a finding of fraud was not essential to the prior judgement. Moreover, the Second Memorandum Opinion rejected Holder's additional theory that fraud was at least essential to the finding of punitive damages, and thus the court held that Holder should not prevail on the issue of punitive damages and nominal actual damages.
Issue preclusion is appropriate 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 judgement; and 3) the parties were cast as adversaries in the first action. See In re Pancake. 106 F.3d 1242, 1244 (5th Cir. 1997) (citing, In re Garner, 56 F.3d 677; Bonniwell v. Beech Aircraft Corp., 663 S.W.2d 816 (Tex. 1984); In re Schwager, 121 F.3d at 181.)
The Bankruptcy Court explicitly incorporated its original decision on this issue into its Sceond Memorandum Opinion. Second Memorandum Opinion at 6.
The Bankruptcy Court's decision was appropriately grounded in the Texas law regarding "alternative determinations by court of first instance." Schwager, 121 F.3d at 183 (recognizing that Texas courts have adopted Comment i of the Restatement (Sceond) of Judgements § 27) (citing, Eagle Properties, Inc. v. Schurbauer, 807 S.W.2d 714, 722 (Tex. 1991)), "If a judgement of a court of first instance is based on determinations of two issues, either of which standing independently would be sufficient to support the result, the judgement is not conclusive with respect to either issue standing alone." Restatement of Judgements § 27, Comment i. The Texas Supreme Court has explained the justification for this rule; "The rationale for this rule is that a determination in the alternative may not have been as rigorously considered as it would have been if necessary to the result, and the losing party may be dissuaded from appealing one determination because of the likelihood that the other will be upheld." Schwager, 121 F.3d at 183 (quoting,Eagle Properties, 807 S.W.2d at 722).
Here, the State Court judgement in favor of Holder included four different grounds for recovery: breach of contract, fraud, Texas Deceptive Trade Practices Act, and conspiracy to defraud. On its face then, the alternative determinations rule would prevent this judgement from having a preclusive effect in future proceedings. However, "the mere fact that the state court judgement includes alternative determinations does not necessarily establish that the [given issue] was not essential to the judgment." Spillers v. Webb, 979 F. Supp. 494, 500 (S.D.Tex. 1997). I this aspect, the Bankruptcy Court erred in stating: "The four conjunctive theories of the signed judgement amended and superceded any single transcript findings by the state trial court, thereby creating a judgement (ambiguous as to theory of recovery relied upon) not entitled to collateral estoppel." First Memorandum Opinion at 13.
While this statement may be correct in the scenario posited by the Bankruptcy Court in footnote 4 of its Opinion — a situation where there was an express conflict between a state court's finding on the record and its final judgement — is inapposite to the situation in this case, where no such conflict exists, and instead the transcript serves to infirm the final judgement.
Despite this incorrect statement, the court still went on to consider the transcript of the State Court proceeding and it used this transcript to Support the conclusion that the State Court judgement could have rested on a theory other than fraud. This Court agrees with this ultimate determination. First, it is important to note that Holder only produced evidence on the issue of damages and therefore we are asked to infer liability from evidence produced only to prove damages. While it might be possible to infer a finding of liability for fraud from a punitive damage award where the only other cause of action was breach of contract, for which punitive damages are not available, such an inference does not follow where other causes of action, for which punitive damages can be also awarded, have been plead.See Shelton Insurance Agency v. St. Paul Mercury Ins. Co., 848 S.W.2d 739, 747 (Tex.App. 1993); see also In re Gober, 100 F.3d n. 8. In this case, punitive damages are available for violations of the Texas Deceptive Trade Practices Act. "Tex. Bus. Com. Code § 17.50(b) Such damages are available for violations committed knowingly or intentionally — fraud is not required. Id.
In addition, the transcript reveals that the court relied, at least in part, on Poyner's behavior during the lawsuit in determining the amount of punitive damages. Such behavior was completely unrelated to any fraud that may have given rise to holder's counterclaims. In particular, Holder asked the court to consider the following facts: Poyner was the party that initiated the suit in the first place; Poyner failed to come to court on five different occasions; and Poyner refused to settle pursuant to an agreed settlement. Transcript of State Court Proceeding at
This Court's decision to uphold the Bankruptcy Court's judgement is also informed by two important principles regarding the application of issue preclusion in Bankruptcy proceedings. First, the Fifth Circuit has expressed the opinion that courts should hesitate in applying collateral estoppel to a judgement containing alternative determinations when estoppel is used offensively. See Hicks v. Quaker Oats Company, 662 F.2d 1158, 1170 (5th Cir. 1981) (Explaining that when collateral estoppel is used offensively the problems with relying on an alternative determination are heightened and the rule against such reliance is more persuasive). Second, regardless of whether the state court judgement rested on alternative theories, "in only limited circumstances may bankruptcy courts defer to the doctrine of collateral estoppel and thereby ignore Congress' mandate to provide plenary review of dischargeability issues." Schwager, 121 F.3d at 181 (Explaining that Congress granted bankruptcy courts exclusive jurisdiction to determine whether a debt is dischargeable based on the bankruptcy court's expertise) (quoting,Dennis v. Dennis, 25 F.3d 274, 278 (5th Cir. 1994)).
It is important to note that at the time that Hicks was decided, courts were just beginning to use what this Court refers to as the alternative determination rule. Hicks references, and rejects art "alternative ground rule," which specifically permitted, collateral estoppel based on a judgement that contained alternative determinations. Hicks, 662 F.2d at. 1170.
Applying these principles to the facts of this case, this Court holds that the Bankruptcy Court did no commit reversible error when it determined that the State Court judgement was not conclusive of the issues of liability and damages.
II. Did the Bankruptcy Court Commit Reversible Error By its Determination That the State Court Judgement Was Not Conclusive of the Issues of Liability and Damages, At Least To The Extent of The $50,000 of Exemplary Damages Awarded By the State Court
At trial, Holder argued in the alternative that if the Bankruptcy Court refused to apply collateral estoppel to the issue of liability, the court should still apply it to the issue of punitive damages. The above discussion of the first issue presented applies equally to this issue. Therefore, this Court holds that the Bankruptcy Court did not commit reversible error in refusing to find issue preclusion under this alternative theory.
III. Did the Bankruptcy Court Commit Reversible Error In Failing to Consider the State Court Transcript As Evidence in The Substantive Claim of Dischargeability
Holder's final argument on appeal is that the Bankruptcy Court erred by not considering the State Court transcript as evidence of his substantive claims under 11 U.S.C. § 523(A)(2) kind § 523(A)(4). Although findings of fact are subject to review under a clearly erroneous standard, See Anderson v. City of Bessemer City, N.C., 470 U.S. 564, 573-74 (1985), the Bankruptcy Court's decision not to consider the State Court transcript. for its substantive value was a legal decision, subject to de novo review. See Schwager, 121 F.3d at 181 (citations omitted).
A review of the proceedings in the Bankruptcy Court reveals that the court erred by not considering the State Court transcript as evidence in support of Holder's dischargeability claim. Primarily, this Court disagrees with the conclusions drawn by the Bankruptcy Court from the following colloquy between the court and Mr. Holder's counsel:
THE COURT: Now let me back up just so I'm understanding the complete record that you made. Now, as I understand it, the record that you're making is you're when you offered the appendix, you're offering that record for the standpoint of what was offered to the Trial Court as opposed to offering that as fresh testimony on that. Is that accurate?
MR. PETROCCHI: I am offering it to support my position that — it's Mr. Holder's testimony, but it supports my position on collateral estoppel.
THE COURT: My question is, though, is the transcript of the testimony is the transcript of what happened at the state court, it's not an attempt to offer, in effect, Holder's testimony today by offering that deposition. You're just saying that you're entitled to collateral estoppel, so that's what you're relying on as opposed to freshly offering it, if I understand correctly.
MR PETROCCHI: I am not — my argument comes from the latter, I am not seeking to restrict it. But, yeah, the primary — my purpose of the evidence is to demonstrate the collateral estoppel issues.
Transcript of Proceedings in the U.S. Bankruptcy Ct at 60-61.
In its Second Memorandum Opinion, the Bankruptcy Court stated: "It was clear from the August 23, 2000 record that Plaintiff's State Court trial transcript was only offered into evidence in connection with Plaintiff's collateral estoppel contention, and not otherwise." Second Memorandum Opinion n. 7. This Court disagrees with this conclusion. Although the colloquy was somewhat convoluted, it contains statements demonstrating Mr. Petrocchi's intent to admit the State Court transcript as evidence on the merits. Primarily, Mr. Petrocchi stated, "I am not seeking to restrict it." In addition, he stated that "it's (the transcript is) Mr Holder's testimony." Finally, in response to the statement, "You're just saying that you're entitled to collateral estoppel, so that's what you're relying on as opposed to freshly offering it, " Mr. Petrocchi stated, "my argument comes from the latter."
The Bankruptcy Court's refusal to consider the State Court transcript resulted in the dismissal of Mr. Holder's claim. The evidence in the record does not support such a harsh result. Therefore, Mr. Holder's appeal as to this issue is GRANTED. The Bankruptcy Court's judgement is VACATED and REMANDED for further proceedings on the issue of dischargeability.
CONCLUSION
For the reasons stated above, the Bankruptcy Court's judgement on the issue of collateral estoppel is AFFIRMED and the judgement as to the merits of Mr. Holder's claim is VACATED) and the case is REMANDED for further proceedings.
For the reasons stated in the Memorandum Opinion issued today by this Court, the Appeal of the Final Judgement rendered by the United States Bankruptcy Court, filed on November 21, 2000, is GRANTED in part and DENIED in part. The Bankruptcy Court's judgement on the issue of collateral estoppel is AFFIRMED and the judgement as to the merits of Mr. Holder's claim is VACATED and the case is REMANDED for further proceedings.
It is so ORDERED.