Opinion
Case No. 11-98-10968 MA, Adv. No. 98-1191 M.
May 18, 2005
Steven Tal Young, Albuquerque, NM, Attorney for Plaintiff.
Shay E. Meagle, Albuquerque, NM, Attorney for Defendant.
James Franklin, Metro Manila, Philippines, Defendant/Counterclaimant.
MEMORANDUM OPINION
THIS MATTER is before the Court on Plaintiff's Motion for Summary Judgment ("Motion for Summary Judgment") filed on March 5, 2005, by and through her counsel Lamb, Metzgar, Lines Dahl, P.A. (Steven Tal Young). Defendant filed an Opposition to Plaintiff's Motion for Summary Judgment by and through his counsel, Pucinni Meagle, P.A. (Shay E. Meagle).
Undisputed Facts
Defendant filed a voluntary Chapter 11 bankruptcy petition on February 18, 1998. The case was converted to Chapter 7 on January 14, 2004.
Plaintiff and Defendant were married in 1984. In October of 1996 Plaintiff filed a dissolution of marriage proceeding, Coralie S. Franklin v. James W. Franklin, DM-96-3696, in the Second Judicial District Court, Bernalillo County, New Mexico. On or about March 10, 1997, Plaintiff and Defendant executed a settlement agreement in their dissolution of marriage proceeding (the "Settlement Agreement") and a final decree of dissolution of marriage incorporating the Settlement Agreement was entered on March 12, 1997. Exhibit 1.
On September 17, 1997, Plaintiff filed a Motion to Reopen Judgment alleging that Defendant fraudulently concealed property belonging to the marital community consisting of a contract between Defendant and Sunway PMI-Pile Construction SDN-BHD ("Sunway"), a Malaysian company (the "Sunway Contract").
On December 23, 1997, the Second Judicial District Court ("State Court") issued an Order of Enforcement Judgment (the "December 1997 Order") finding that Defendant did not disclose the existence of the Sunway Contract to Plaintiff in violation of the Settlement Agreement. The State Court made the following additional findings:
The Settlement Agreement provides in paragraph 12(g), ". . . Each party covenants a complete disclosure of all assets and liabilities herein has been made by that party. Each party warrants no other property is possessed by that party other than as specifically provided herein. . . . If at the date of this Agreement, either party was possessed of any property which is not set forth herein or had made any transfer of property with the intent to hinder, delay or defraud the other party, that party shall pay to the other one-half the fair market value of such property." Ex. 2 p. 11.
1. Defendant had received $800,000.00 from Sunway under the Sunway Contract;
2. The Sunway Contract was not disclosed by Defendant to Plaintiff justifying judgment interest at 15% rather than 8.75%;
3. The total payments required under the Sunway Contract to Defendant were $3,000,000.00;
4. The fair market value of the Sunway Contract was unknown; and
5. The Court needed an expert to determine the fair market value of the contract under Rule 706, N.M.R.Civ. Proc.
The State Court ordered Defendant to deposit into the court registry all funds received from Sunway pending a hearing to determine the fair market value of the Sunway Contract. A valuation report required by the State Court was completed on February 16, 1998, two days before the bankruptcy filing.
On July 21, 1998 the State Court issued Findings of Fact and Conclusions of Law and Order (the "July 1998 Order"). In the July 1998 Order, the State Court concluded that Defendant committed fraud against Plaintiff by "affirmatively and knowingly [providing] false information to her about material facts (by his own letter and through his lawyer's unwitting representations) upon which he intended her to rely, and upon which she did rely, to her detriment." Findings of Fact and Conclusions of Law and Order at p. 5 (Exhibit A).
In the July 1998 Order, the State Court described the contents of a letter from Defendant to Plaintiff. In the letter, which was cited as Plaintiff's Exhibit 11, the Defendant claimed that his own construction business was doing poorly, agreed not to lay claim to half of Plaintiff's monetary gain accrued during the marriage, and urged a quick uncontested divorce. July 1998 Order at p. 3.
The State Court found that Defendant did not disclose the existence of the Sunway Contract to his divorce lawyer resulting in the lawyer's unintentional false representations to Plaintiff's lawyer that there were no community assets and that Defendant's financial circumstances were meager. July 1998 Order at p. 3.
To support this legal conclusion the State Court found the following:
1. Defendant intentionally concealed from Plaintiff both the negotiations with Sunway and the resulting Sunway Contract;
2. In the Sunway Contract, Defendant agreed to sell a patented construction method he had developed during the marriage to Plaintiff;
3. The Sunway Contract was finalized prior to the entry of the Settlement Agreement in the marriage dissolution proceeding; and
4. Defendant allocated $2,000,000.00 of the purchase price to the sale of used construction equipment that Defendant claimed was his separate property.
The State Court declined to allocate any of the sale proceeds to the sale of this equipment because the Sunway Contract made no mention of equipment, Defendant's testimony regarding this allocation was unbelievable, and Defendant would reap significant tax advantages if the sale proceeds were from the sale of equipment rather than the patented processes. The State Court granted judgment in favor of Plaintiff for $1,425,000.00 which it found was one-half of the fair market value of the Sunway Contract, plus $46,600.00 for Plaintiff's fees and costs.
Defendant appealed this judgment. On June 3, 1999 the New Mexico Court of Appeals partially affirmed the decision but reversed and remanded to the State Court instructing the State Court to either value the equipment portion of the Sunway Contract, and if necessary, recalculate Plaintiff's share of the proceeds, or make findings supported by substantial evidence indicating why valuation is not required.
On November 17, 1999 the State Court entered the Court's Findings of Fact and Conclusions of Law On Remand and Order of the Court (the "November 1999 Order"). In the November 1999 Order the State Court found that the equipment was Defendant's separate property, but there was no sale of the equipment in the Sunway Contract. The State Court reasoned that the sale transaction did not include the equipment because in the Memorandum of Understanding, executed before the parties entered into the Sunway Contract., Defendant "agreed to sell only his patented construction method for three million dollars." Exhibit E at p. 1. As a result, the State Court disregarded the language in the Sunway Contract allocating $2,000,000.00 of the sales price to the equipment. Alternatively, the State Court found that even if the equipment was included in the sale to Sunway, it was not possible to determine the value of the equipment. Finally, the State Court determined that the equipment was property of Defendant's corporation for which the corporation could be compensated in a civil suit. The State Court granted an additional judgment against Defendant in favor of Plaintiff for $37,530.00 representing fees and costs incurred in enforcing her judgment and defending the appeal. The State Court also ordered Defendant to reimburse Plaintiff $1,292.00 for his portion of the cost of the valuation expert.
The Complaint in this proceeding asserts that the State Court judgment memorialized in the December 1997 Order, July 1998 Order and the November 1999 Order is non-dischargeable pursuant to one of the following sections the Bankruptcy Code: 1) § 523(a)(2)(A) as a debt incurred through fraud; 2) § 523(a)(4) as a debt resulting from larceny; 3) § 523(a)(6) as a debt arising from willful and malicious injury; or 4) § 523(a)(15) as a debt incurred in the course of a divorce that is not otherwise excepted from discharge by § 523(a)(5).
In Defendant's Answer he argues that the July 1998 Order is void because it was entered in violation of the bankruptcy stay. This argument fails because an Order Modifying Stay, entered in Defendant's bankruptcy case, allowed the marriage dissolution proceeding and enforcement proceedings to proceed to judgment. Alternatively, Defendant asserts the following: 1) the debt represented by these judgments is not a debt for money obtained by fraud within the meaning of § 523(a)(2)(A); 2) the debt does not result from larceny as defined under New Mexico law for it to be non-dischargeable under § 523(a)(4); 3) he did not fraudulently conceal the Sunway Contract because he believed it was his separate property; and 4) he did not act maliciously to injure Plaintiff as required by § 523(a)(6). In addition, Defendant asserts that because the State Court judgment was void, it could not be an order from a divorce proceeding within the meaning of § 523(a)(15). If the State Court judgment is enforceable, Defendant argues that the debt is dischargeable because he is eligible for one of the exceptions set forth in § 523(a)(15)(A) or (B).
The Order Modifying Stay was entered on December 15, 1998, but was made effective nunc pro tunc as of July 20, 1998, one day before the July 1998 Order was entered by the State Court. Order Modifying Stay (Doc. 156) at p. 2.
In his Answer, Defendant also asserts counterclaims against Plaintiff for tortious interference with contractual relationship, nuisance, prima facie tort and willful violation of the bankruptcy automatic stay alleging that Plaintiff, by a letter from her lawyer, contacted Sunway after the bankruptcy was filed informing Sunway of Defendant's bankruptcy and her claims to the payments under the Sunway Contract causing Sunway to withhold payments to Defendant under the Sunway Contract. Plaintiff filed a response to the counter claims asserting, among other things, that her property interest in the proceeds of the Sunway Contract is not property of Defendant's bankruptcy estate and is therefore not protected by the automatic stay.
Discussion
Summary judgment is governed by Rule 56, Fed.R.Civ.P., made applicable to adversary proceedings by Rule 7056, Fed.R.Bankr.P. Summary judgment is proper when there are no genuine issues of material fact, and the moving party is entitled to judgment as a matter of law. Rule 56(c), Fed.R.Civ.P. In her Motion for Summary Judgment, Plaintiff argues that collateral estoppel precludes Defendant from relitigating the findings of fraud made by the State Court in the December 1997 Order, the July 1998 Order and the November 1999 Order. Plaintiff contends that the findings by the State Court establish all of the necessary elements of § 523(a)(2)(A); therefore, she is entitled to summary judgment excepting the debt represented by these orders from discharge.
Collateral estoppel, or issue preclusion, applies in bankruptcy proceedings to determine dischargeability of a debt. State v. Audley (In re Audley), 275 B.R. 383, 387 (10th Cir. BAP 2002). See also Grogan v. Garner, 498 U.S. 279, 284-85 N. 11, 111 S.Ct. 654, 112 L.Ed. 2d 755 (1991) (". . . collateral estoppel principles do indeed apply in discharge exception proceedings pursuant to § 523(a)."). The Court must apply New Mexico issue preclusion law. Audley, 275 B.R. at 387. Under New Mexico issue preclusion law, the moving party must show that: 1) the party to be estopped was a party, or privy to a party, in the prior adjudication; 2) the cause of action is different from the cause of action in the prior adjudication; 3) the issue was actually litigated in the prior adjudication; and 4) the issue was necessarily determined in the prior adjudication. Rex, Inc. v. Manufactured Housing Committee, 119 N.M. 500, 504, 892 P.2d 947, 951 (1995), citing, Shovelin v. Central New Mexico Electric Cooperative, Inc., 115 N.M. 293, 297, 850 P.2d 996, 1000 (1993).
Here, Defendant was a party to the marriage dissolution proceeding and this cause of action, non-dischargeability of a debt, is different from the adjudication involving a violation of the Settlement Agreement entered in connection with a dissolution of marriage decree. Thus, the first two elements required for issue preclusion are satisfied. Whether the issue of fraud within the meaning of § 523(a)(2)(A) was actually litigated and decided on its merits in the marriage dissolution proceeding is central to the application of collateral estoppel in this case.
To declare a debt non-dischargeable under § 523(a)(2)(A), a creditor must prove by a preponderance of evidence that the debtor knowingly committed actual fraud or false pretenses or made a false representation or a willful misrepresentation, the debtor had the intent to deceive the creditor, the creditor relied on the debtor's representation to his or her detriment and the reliance was justifiable. See Fowler Bros. v. Young (In re Young), 91 F.3d 1367, 1373 (10th Cir. 1996) (describing elements); Field v. Mans, 516 U.S. 59, 73-75, 116 S.Ct. 437, 133 L.Ed.2d 351 (1995) (recognizing justifiable reliance standard).
Plaintiff argues that the findings of fraud made by the State Court clearly fit within the elements of § 523(a)(2)(A) entitling her to a judgment of non-dischargeability as a matter of law. The State Court found that Defendant affirmatively and knowingly provided false information to Plaintiff about material facts concerning the existence of the Sunway Contract, and also intentionally concealed the existence of the Sunway Contract, which was property of the marital community. Further, the State Court found that Plaintiff relied on the false information to her detriment. The State Court determined that the entire value of the Sunway Contract was a community asset and awarded Plaintiff one-half of the value of the Sunway Contract plus costs and fees as provided in the Settlement Agreement.
Defendant argues that summary judgment on non-dischargeability is not appropriate here. Defendant argues that he did not conceal the Sunway Contract, Plaintiff was aware of the Sunway Contract before the divorce, the Sunway Contract was between Sunway and Defendant's separately owned corporation, the Sunway Contract does not have a fair market value of $2,850,000.00 and he has not received any additional payments under the Sunway Contract. These arguments fail because they are impermissible collateral attacks on the State Court judgment.
On the issue of collateral estoppel, Defendant argues that the elements of § 523(a)(2)(A) were not actually litigated in the dissolution proceeding. Defendant argues that the issues before the State Court were limited to whether he violated the Settlement Agreement by concealing community assets. However, the issues before the State Court were broader than Defendant's characterization. The State Court was adjudicating allegations of fraudulent misrepresentation and concealment in the context of a Motion to Reopen Judgment after the final decree of dissolution was entered. The State Court held a hearing on November 3, 1997 and issued its November 1997 Order finding that Defendant concealed the Sunway Contract in violation of the Settlement Agreement. The State Court expanded its findings in the July 1998 Order, which was entered after a hearing on valuation of the Sunway Contract. In the July 1998 Order the State Court made specific findings of fraud. Therefore, the State Court's determination of fraud can have a collateral estoppel effect on this non-dischargeability proceeding.
Defendant next argues that the State Court's finding that Plaintiff relied on the false information to her detriment does not meet the reasonable reliance standard under § 523(a)(2)(A); therefore, he is not precluded from defending this non-dischargeability proceeding. However, the standard for reliance in § 523(a)(2)(A) is justifiable reliance, which is a more subjective and less stringent standard than the reasonable reliance standard. See Field v. Mans, 516 U.S. at 74 (describing justifiable reliance as prevailing common law type of reliance in fraud cases and was the meaning intended by Congress in Bankruptcy Code). New Mexico applies the justifiable reliance standard in fraud cases. Jones v. Friedman, 57 N.M. 361, 367, 258 P.2d 1131, 1135 (1953). The State Court, applying New Mexico law, found that Plaintiff relied to her detriment on the false representation made by Defendant. In making this finding, the State Court necessarily determined that Plaintiff justifiably relied on the false representation; therefore, the reliance requirement under § 523(a)(2)(A) has been conclusively determined. All the other elements of § 523(a)(2)(A) fraud were determined by the State Court. Accordingly, the Court finds that the Defendant is collaterally estopped from relitigating the finding of fraud made by the State Court, and the debt resulting from the State Court Orders is non-dischargeable as a matter of law. See Nelson v. Tsamasfyros (In re Tsamasfyros), 940 F.2d 605, 607 (10th Cir. 1991) (affirming application of collateral estoppel in § 523(a)(2)(A) proceeding to debtor found by state court to have breached fiduciary duty with fraud and recklessness); Audley, 275 B.R. at 388 (affirming bankruptcy court's application of collateral estoppel to state court determination that debtor acted with specific intent to defraud in § 523(a)(2)(A) non-dischargeability proceeding); Hill v. Horst (In re Horst), 151 B.R. 563, 569 (Bankr. D. Kan. 1993) (same). Because the debt is non-dischargeable under § 523(a)(2)(A), the Court need not address Plaintiff's alternative arguments for non-dischargeability under § 523(a)(4), (a)(6) and (a)(15).
The Court recognizes that Defendant has made counter-claims against Plaintiff which were not the subject of the Motion for Summary Judgment. The summary judgment rendered here does not affect those counter-claims. This Memorandum Opinion shall constitute the Court's findings of fact and conclusions of law under Rule 7052, Fed.R.Bankr.P. An appropriate order and judgment will be entered.