Opinion
Case No. 95-10255, Adversary No. 96-1001
January 17, 1997
DECISION ON MOTIONS FOR SUMMARY JUDGEMENT
The motion for summary judgment filed by the plaintiff, Hidy Honda, Inc., and the second motion for summary judgment filed by the debtor/defendant, Donald Edgar Richardson, are before the court. The court held a hearing on the motions on December 17, 1996, and having considered the responses in opposition, the arguments of the parties, the pleadings and affidavits of record and the applicable law, enters this decision.
In its complaint, Hidy Honda alleges that Mr. Richardson owes it a debt which is nondischargeable pursuant to 11 U.S.C. § 523(a)(4).
ISSUES
The cross-motions for summary judgment raise four determinative issues:
1. Whether the plaintiff is the real party in interest;
2. Whether the action is untimely under the Arizona statute of limitations applicable to fraud claims; if not,
3. Whether the defendant's conviction under 18 U.S.C. § 2314 is entitled to be given collateral estoppel effect in this case; and if so,
4. Whether the elements of the conviction are sufficient to establish Hidy Honda's § 523(a)(4) claim.
UNDISPUTED FACTS
In 1989, Mr. Richardson was an independent automobile broker. He orally contracted with an entity called Buckeye Acura to purchase automobiles for Buckeye Acura. He received a check of $200,000 from Buckeye Acura, but did not use the funds to purchase the automobiles.
On September 17, 1990, Mr. Richardson entered a guilty plea in the United States District Court for the District of Arizona to the interstate transportation of stolen monies, a violation of 18 U.S.C. § 2314. The criminal judgment ordered Mr. Richardson to pay restitution. The restitution was also included in a promissory note dated November 14, 1994, payable to the Financial Litigation Unit of the United States District Court. After he completed his probation, the amount remaining on the restitution obligation owed to the Financial Litigation Unit was written into a promissory note in favor of the victim, Buckeye Acura, c/o Hidy Honda. Mr. Richardson promised to pay the sum of $194,687.50 in monthly installments of $300, commencing in October 1995.
On November 13, 1995, Mr. Richardson filed his voluntary petition for relief under chapter 7 of the bankruptcy code. This action followed.
JURISDICTION
The court has jurisdiction over this adversary proceeding pursuant to 28 U.S.C. § 157 and 1334. This is a core proceeding within the meaning of 28 U.S.C. § 157(b)(2)(I). The motions are brought under Fed.R.Civ.P. 56, made applicable in adversary proceedings by F.R.Bankr.P. 7056.
DISCUSSION
Summary judgment is appropriate when there are no disputed issues of material fact, and the moving party is entitled to judgment as a matter of law. In re Baum, 22 F.3d 1014, 1016 (10th Cir. 1994). A material fact is one that could affect the outcome of the suit, and a genuine issue is one where the evidence is such that a reasonable jury could return a verdict for the nonmoving party. Farthing v. City of Shawnee, Kan., 39 F.3d 1131, 1134 (10th Cir. 1994). In this case, the parties agree that for purposes of the legal arguments now before the court, there is no factual dispute.
Preliminarily, Mr. Richardson seeks a dismissal of any alleged claims other than the § 523(a)(4) claim. In its prayer, in the motion for summary judgment, and at oral argument, the plaintiff raised argument and issues relating to the defendant's chapter 7 discharge and to the
dischargeability of the debt under several other provisions of § 523. However, Mr. Richardson points out that the complaint did not plead these with any specificity or accuracy, and they are therefore time-barred.
The court agrees, but for the purposes of this ruling does not need to address any claim except the § 523(a)(4) claim. Hidy Honda has the burden of proving its claim by a preponderance of the evidence. Grogan v. Garner, 498 U.S. 279, 291 (1991).
Standing
Several issues are presented by both motions and the responses thereto. First, Mr. Richardson argues that Hidy Honda does not have standing to pursue this nondischargeability claim. This alleged lack of standing is premised on his conclusion that because Hidy Honda is not the obligee on the promissory note and there is no evidence of an assignment, Hidy Honda has not proved that it is the "real party in interest."
In reply, Hidy Honda presented the affidavit of David Hidy stating that Hidy Motors, Inc., is the successor in interest to Buckeye Acura, and that the promissory note is an asset of Hidy Motors, Inc. Mr. Richardson does not argue that the allegation of ownership is untrue or disputed, but that the statement is insufficient evidence to establish ownership.
When considering a motion for summary judgment, the court views the facts and reasonable inferences therefrom in the light most favorable to the nonmoving party. Wright v. Southwestern Bell Tel. Co., 925 F.2d 1288, 1292 (10th Cir. 1991). Once the moving party meets its burden, the burden shifts to the nonmoving party to demonstrate a genuine issue. In re Baum, 22 F.3d at 1016. However, the nonmoving party may not rest on its pleadings, but must set forth specific facts showing a genuine issue for trial. Id.
Under Arizona law, which is applicable to this note, a transferee of a note may sue in his own name on the instrument. Fore v. Bles, 149 Ariz. 603, 721 P.2d 151 (Ariz.App. 1986). Other jurisdictions have held that one who can account for possession of a note and prove his right to the instrument, may maintain a suit on the note whether or not he is the owner. In re All Media Properties, Inc., 5 B.R. 126, 141 (Bankr.S.D.Tex. 1980), aff'd, 646 F.2d 193 (5th Cir. 1981). Even a noninjured assignee of a tort victim may pursue a nondischargeability action. In re Florida, 164 B.R. 636 (Bankr. 9th Cir. 1994).
Although this is not an action on a note, the court understands that the note itself is the claimed basis for the debt and supports the plaintiffs statute of limitations argument. Even so, Mr. Richardson has not raised any fact that contradicts Hidy Honda's alleged right to payment, or which shows a genuine dispute on the question of ownership. In the absence of any facts or evidence to the contrary, and in light of the Arizona law cited herein, the court holds that the affidavit is sufficient evidence to establish that Hidy Honda is the owner of the note, with the attendant rights under the note.
Statute of Limitations
Mr. Richardson argues that this action is precluded by Arizona's two-year limitation on claims brought for conversion or three-year limitation on claims for fraud. Ariz. Rev. Stat. §§ 12-542 12-543 (1996), respectively. The applicability of a state statute of limitations to a bankruptcy nondischargeability action was addressed by the Tenth Circuit in In re McKendry, 40 F.3d 331, 337 (10th Cir. 1994); reh'g denied (1994).
In that case, the creditor had obtained judgment on a contract claim without bringing its fraud claims in state court. The court held that the cause of action which establishes the debt is governed by the applicable state statute of limitations, and that the creditor's liquidated contract claim was sufficient to establish the debt for purposes of the nondischargeability fraud action in the bankruptcy.
The court did not reach the issue of whether the same result would attend if the state fraud action was time barred before the contract claim had been brought in state court. Even so, the McKendry case has been criticized for overly simplifying a more complicated question. In re Gergely 186 B.R. 951, 958 (Bankr. 9th Cir. 1995).
This court thinks the McKendry case is sufficiently clear to resolve the issue here. The cause of action for fraud under state law is a separate claim from the dischargeability of the debt under bankruptcy law.
But even assuming that Mr. Richardson is correct, i.e., that the state fraud claim is time-barred, he prefers to ignore the existence of the promissory note.
In so doing, Mr. Richardson misreads the McKendry case, seemingly concluding that either the underlying obligation which supports a nondischargeability action must be established by a judgment based on the specific wrongful conduct of the defendant, or that the claim brought in the nondischargeability case must mirror some state law cause of action. Neither assumption is supported by the language of § 523 or the McKendry analysis. See In re Thrall, 196 B.R. 959, 967 n. 7 (Bankr.D.Colo. 1996).
In support of his argument, he cites the case of In re Taylor, 137 B.R. 925, 928 (Bankr.S.D.Ind. 1991), where the court opined that if a creditor who only has a viable contract claim when the debt is liquidated (the statute having run on the fraud claim), may not later resurrect a time-barred tort claim to bring a nondischargeability claim.
In McKendry the Tenth Circuit disagreed with the conclusions of the Taylor court, and this court finds no distinction here which would compel a different result. Section 523 states that a debt for embezzlement is not discharged (emphasis provided). The statute does not say that the debt can only be established by a prior judgment of embezzlement.
Mr. Richardson's argument may, be persuasive when the contract claim and the nondischargeability claim have no relationship one to the other, and there is no other means to preserve the debt. However, in this case, the debt is established by the promissory note which Mr. Richardson signed and/or by the criminal judgment which orders restitution. The only purpose to be served by bringing a state law claim would be to provide a vehicle for collection, but collection could also be accomplished by a contract action on the note, a claim that is not time barred. Ariz. Rev. Stat. § 12-548 (1996). See In re Mahlman, 136 B.R. 723, 726 (Bankr.S.D.Ohio 1992).
Commingled with this argument, Mr. Richardson questions the validity of any underlying claim based on the order of restitution and its relationship to the notes. Because the court views the promissory note as sufficient to support the debt and the claim under § 523(a)(4), the arguments about extinguishment, satisfaction and novation are irrelevant. This is not a claim based on nondischargeability of criminal restitution, although the court does believe that such a claim is assignable. Nor is this a state law claim for conversion or fraud. The issue is whether the debt evidenced by the note was incurred as a result of Mr. Richardson's embezzlement.
Dischargeability
Under § 523(a)(4), the Bankruptcy Code excepts from the debtor's discharge certain debts for "fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny." Hidy Honda alleges that. its debt is the result of embezzlement by Mr. Richardson. Mr. Richardson argues that he was not a fiduciary, that under any of the four subparts of § 523(a)(4), Hidy Honda must prove that he was acting in a fiduciary capacity; and that, therefore, the claim. fails.
This court has previously rejected such an argument which is unsupported by the case law, including that cited by Mr. Richardson. The statute is clear that the fiduciary requirement applies only to fraud or defalcation. In re Stoelk, case no. 95-207-56 slip op. at 5 (Bankr.D.Wyo. April 17, 1996); In re Kressner, 155 B.R. 68, 74 (Bankr.S.D.N.Y. 1993).
The definition of embezzlement is a question of federal law. Id. For nondischargeability purposes, embezzlement is the fraudulent appropriation of property
by a person to whom such property has been entrusted. In re Shervin, 112 B.R. 724, 735 (Bankr.E.D.Pa. 1990). The term has a criminal connotation but does not necessarily require proof of a criminal act. The property in question must rightfully be in possession of the nonowner, In re Littleton, 942 F.2d 551, 555 (9th Cir. 1991), and the nonowner must appropriate the property to a use other than that to which it was entrusted. In re Montes, 177 B.R. 325, 331 (Bankr.C.D.Cal. 1994); In re Black, 787 F.2d 503, 507 (10th Cir. 1986).
Hidy Honda urges the court to apply collateral estoppel to Mr. Richardson's conviction for the illegal transportation of stolen property, thereby satisfying the elements of its embezzlement claim. Mr. Richardson replies that the elements of collateral estoppel are not satisfied, and even if they were, the issues litigated were not the same.
Although the doctrine of res judicata is not effective in a dischargeability action, Brown v. Felsen, 442 U.S. 127 (1979), the doctrine of collateral estoppel is applicable. Grogan v. Garner, 498 U.S. at 284 n. 11. Mr. Richardson was convicted of a federal crime by a federal court. Thus, the elements of collateral estoppel are determined by federal law. IB J. Moore, Moore's Federal Practice, 0.418[l], p III.-362 (1996).
In the Tenth Circuit the elements which must be established to bar the relitigation of issues are set forth in Murdock v. Ute Indian Tribe of Uintah and Ouray Reservation, 975 F.2d 683 (10th Cir. 1992); cert. denied, 507 U.S. 1042 (1993). The moving party must establish that the issues are identical; the prior action was fully adjudicated on the merits; the party against whom the doctrine is invoked was a party in the previous action; and the party against whom the doctrine is invoked had a full and fair opportunity to litigate the issues in the prior action. Id. at 687. Mutuality is no longer a requirement of collateral estoppel, particularly with regard to litigation related to criminal convictions. Klein v. Commissioner Internal Revenue, 880 F.2d 260 (10th Cir. 1989).
Mr. Richardson's conviction resulted from a plea of guilty. A criminal defendant who enters a guilty plea is considered to have had a full and fair opportunity to litigate the issues constituting the crime. In re Turner, 179 B.R. 273, 279 (Bankr.D.Colo. 1995); In re Lloyd, 142 B.R. 866, 871 (Bankr.E.D.Ark. 1992) (conviction after trial but court discusses application of collateral estoppel at length); 1BJ. Moore, Moore's Federal Practice, 0.444[3] (1996). No party disputes that Mr. Richardson's conviction is a final judgment, or that he was a party.
The real question is whether the facts previously litigated and of which Hidy Honda seeks to collaterally estop relitigation are identical in this case. The guilty plea was a confession of the elements of 18 U.S.C. § 2314, which states:
[w]hoever transports, transmits, or transfers in interstate or foreign commerce any goods, wares, merchandise, securities or money, of the value of $5,000 or more, knowing the same to have been stolen, converted. or taken by fraud . . . shall be fined . . . or imprisoned.
Under the Federal criminal code this is a crime of stolen property.
The guilty plea is a confession of the elements therein. The conviction establishes that Mr. Richardson transported or transmitted fraudulently obtained or stolen funds. This admission is sufficient to establish possession of and the fraudulent misuse of the funds.
In his affidavit, Mr. Richardson admits that the check from Buckeye Acura for $200,000 was for the purpose of purchasing automobiles, and that he used the funds for his own purposes (urgent financial needs) rather than for the purpose to which the money was intended.
Clearly, Mr. Richardson misappropriated to his own use, the funds entrusted to him to purchase automobiles. Only a tortured analysis of the defendant's own admissions could lead to a different conclusion. The court concludes that Hidy Honda has established the elements of embezzlement and is entitled to summary judgment on its complaint. The court will issue a separate order in accordance with this decision.