Opinion
Case No. 04-41195-R, Adv. No. 04-4294.
November 12, 2004
Opinion Granting Plaintiff's Motion for Summary Judgment
Crosswinds West Corporation is a judgment creditor of Ronald Eakin. Crosswinds sued Eakin in the Oakland County Circuit Court for breach of contract and fraud related to Eakin's subcontract cement work. On October 2, 2003 the state court granted Crosswinds' motion for summary judgment and entered a judgment against Eakin in the amount of $87,750.70. The judgment specifies that $27,571 is attributable to the fraud counts of the complaint. Eakin filed bankruptcy prior to paying any amount toward the judgment. Crosswinds filed an adversary proceeding complaint asserting that $27,571 plus costs are nondischargeable pursuant to 11 U.S.C. § 523(a)(2)(A), (a)(4), (a)(11) and (a)(17). Crosswinds has filed the present motion for summary judgment pursuant to § 523(a)(2)(A) based upon collateral estoppel.
I.
Under Rule 56(c) of the Federal Rules of Civil Procedure, summary judgement may be granted "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." "A fact is `material' and precludes grant of summary judgment if proof of that fact would have [the] effect of establishing or refuting one of the essential elements of the cause of action or defense asserted by the parties, and would necessarily affect [the] application of appropriate principle[s] of law to the rights and obligations of the parties." The court must view the evidence in a light most favorable to the nonmovant as well as draw all reasonable inferences in the nonmovant's favor.
United States v. Certain Real Prop. 800 F. Supp. 547, 549-50 (E.D. Mich. 1992).
II.
The doctrine of collateral estoppel "precludes relitigation of issues of fact or law actually litigated and decided in a prior action between the same parties and necessary to the judgment, even if decided as part of a different claim or cause of action." Sanders Confectionery Products, Inc. v. Heller Financial, Inc., 973 F.2d 474, 480 (6th Cir. 1992); accord Parklane Hosiery Co. v. Shore, 439 U.S. 322, 336 n. 23, 99 S. Ct. 645, 58 L. Ed. 2d 552 (1979) ("[T]he whole premise of collateral estoppel is that once an issue has been resolved in a prior proceeding, there is no further factfinding function to be performed."); Montana v. United States, 440 U.S. 147, 153, 99 S. Ct. 970, 59 L. Ed. 2d 210 (1979).
Collateral estoppel will apply where (1) the law of collateral estoppel in the state in which the issue was litigated would preclude relitigation of such issue, and (2) the issue was fully and fairly litigated in state court. 28 U.S.C.A §§ 1738 (West 1994); see also Marrese v. American Academy of Orthopaedic Surgeons, 470 U.S. 373, 380, 105 S. Ct. 1327, 84 L. Ed.2d 274 (1985) (noting that §§ 1738 "directs a federal court to refer to the preclusion law of the State in which the judgment was rendered"); Haring v. Prosise, 462 U.S. 306, 312-14, 103 S. Ct. 2368, 76 L. Ed. 2d 595 (1983).
Under Michigan law, collateral estoppel precludes the relitigation of an issue in a subsequent, different cause of action between the same parties where the prior proceeding culminated in a valid, final judgment and the issue was actually litigated and necessarily determined. See People v. Gates, 434 Mich. 146, 452 N.W. 2d 627, 630 (Mich. 1990); see also United States v. Three Tracts of Property Located on Beaver Creek, 994 F.2d 287, 290 (6th Cir. 1993). An issue is actually litigated if it is put into issue by the pleadings, submitted to the trier of fact, and determined by the trier of fact. See Latimer v. Mueller Son, Inc., 149 Mich. App. 620, 386 N.W. 2d 618, 627 (Mich.Ct.App. 1986). An issue is necessarily determined if it is essential to the judgment. Gates, 452 N.W.2d at 631.
Markowitz v. Campbell ( In re Markowitz), 190 F.3d 455, 461-62 (6th Cir. 1999) (footnote omitted).
III.
Eakin argues that the motion for summary judgment should be denied for two reasons. First, Eakin asserts that the elements necessary for finding nondischargeability pursuant to § 523(a)(2)(A) were not "actually litigated" because the judgment resulted from a motion for summary judgment. Eakin's argument fails. Michigan courts have held that a judgment which results from a motion for summary judgment may be given preclusive effect. See Unviersal Underwriters Group v. Allen ( In re Allen), 243 B.R. 683 (Bankr. E.D. Mich. 1999).
Eakin's second challenge is that not all of the elements required for § 523(a)(2)(A) were necessarily determined by the state court judgment. An issue is "necessarily determined" if it is essential to the judgment. Gates, 452 N.W.2d at 631. Thus, the Court must determine whether a judgment for fraud under Michigan law necessarily entails a finding on each of the elements required to prove fraud under § 523(a)(2)(A).
A claim under § 523(a)(2)(A) requires proof of the following elements:
(1) the debtor obtained money through a material misrepresentation that, at the time, the debtor knew was false or made with gross recklessness as to its truth; (2) the debtor intended to deceive the creditor; (3) the creditor justifiably relied on the false representation; and (4) its reliance was the proximate cause of loss.
Rembert v. AT T Universal Card Services, Inc. ( In re Rembert), 141 F.3d 277, 280-281 (6th Cir. 1998), cert. denied 525 U.S. 978, 119 S. Ct. 438 (1998) (footnote omitted).
Michigan requires the plaintiff to prove the following elements to establish fraudulent misrepresentation:
1) the defendant made a material representation;
2) it was false;
3) the defendant knew it was false when made, or made it recklessly without knowledge of its truth, and as a positive assertion;
4) it was made with the intention to induce reliance by the plaintiff;
5) the plaintiff relied on it; and
6) the plaintiff thereby suffered a loss.
Hi-Way Motor Co. v. Intern. Harvester Co., 247 N.W.2d 813, 816 (Mich. 1976).
The only element of the § 523(a)(2)(A) claim that Eakin asserts was not necessarily determined by the state court is "that the debtor knew the representation was false or made the representation with gross recklessness as to the truth." The state court judgment found that Crosswinds submitted sufficient evidence of Eakin's breach of contract/breach of warranty, fraud and/or unjust enrichment. The judgment then awarded specific damages on the fraud counts. The judgment goes on to state: "Construing the evidence most favorably to [Eakin], [Eakin] testified that improper billings were a mistake/accidental; however, that testimony does not negate recklessness or the should have known portions of the intent element of fraud claims." (State Court Op. at footnote 4.) Eakin argues that this finding does not rise to the level required for nondischargeability pursuant to § 523(a)(2)(A).
Pursuant to the Rooker-Feldman doctrine, this Court is prohibited from reviewing a state court decision. See Sill v. Sweeney ( In re Sweeney), 276 B.R. 186 (B.A.P. 6th Cir. 2002) (explaining Rooker v. Fidelity Trust Co., 263 U.S. 413, 44 S. Ct. 149, 68 L. Ed. 362 (1923), and District of Columbia Court of Appeals v. Feldman, 460 U.S. 462, 103 S. Ct. 1303, 75 L. Ed. 2d 206 (1983)). In order to hold Eakin liable for fraud under Michigan law, the state court necessarily held that Eakin made representations either with the knowledge that they were false or recklessly without knowledge of the truth. Because the state court did not specifically find that Eakin made the representations with the knowledge that they were false, the Court must examine whether a finding that the representations were made "recklessly without knowledge of the truth" meets the requirement of § 523(a)(2)(A). Eakin argues that § 523(a)(2)(A) has a higher requirement of "gross recklessness" than Michigan's requirement of a statement made "recklessly, without knowledge of its truth."
During oral argument, Eakin's counsel was unable to articulate a distinction between "gross recklessness" and "recklessness." Rather, counsel merely stated that "gross recklessness" must be something more. The Court has also been unable to find case law which clearly articulates a distinction between the two. In First Nat'l Bank of Centerville v. Sansom ( In re Sansom), 224 B.R. 49, 57 (Bankr. M.D. Tenn. 1998), the bankruptcy court noted that "`Gross recklessness' appears to be a term of art with only minimal use outside the bankruptcy arena. Despite the term's use since the Sixth Circuit's opinion in Martin,[ 761 F.2d 1163 (6th Cir. 19985)] it has not been defined." Id. The bankruptcy court went on to say, "For purposes of this opinion, the court will assume that the recklessness standard includes the qualifier "gross" to mean flagrant, indicating mental attitude of the debtor that would be the evidentiary equivalent of intent to deceive." Id. This Court finds that this definition is substantially equivalent to the definition of recklessness used by Michigan courts.
The Michigan Non-Standard Jury Instructions explain:
It is not always necessary that the defendant knew that the representation was false for a fraud/misrepresentation to be proven. It is sufficient if the plaintiff proves that the defendant's lack of knowledge as to the false nature of the representation was due to the defendant's recklessness. Recklessness is more than an ordinary lack of due care. Recklessness is an intentional disregard for the truth or falsity of a representation.
Mich. Non-Standard Jury Instr. Civil § 20.09 (emphasis added).
The Court concludes that there is no principled way to distinguish gross recklessness from recklessness. The Court agrees with Judge Gregg's conclusion that the fraud elements pursuant to Michigan law meet the elements required for a finding on nondischargeability.
As is shown by comparing the two sets of fraud elements above, this court agrees, "[T]he elements of a dischargeability case under 11 U.S.C. §§ 523(a)(2)(A) for false misrepresentation and fraud are virtually identical to the elements that Michigan requires to establish fraudulent misrepresentation." Cresap v. Waldorf ( In re Waldorf), 206 B.R. 858, 863 (Bankr. E.D. Mich. 1997). Thus, a state court judgment based upon fraud necessarily encompasses a finding of all the elements of Section 523(a)(2)(A) and is entitled to collateral estoppel effect in a subsequent bankruptcy court action.
Robinson v. Callendar ( In re Callender), 212 B.R. 276, 281 (Bankr. W.D. Mich. 1997).
Accordingly, Crosswinds motion for summary judgment is granted. The state court judgment for $27,571 plus costs is nondischargeable pursuant to § 523(a)(2)(A). An appropriate order will be entered.