Opinion
Case No. 01-31206, AP No. 01-3087
June 10, 2002
MEMORANDUM OPINION
Plaintiff Rita Bennett's complaint to determine the dischargeability of a debt was filed on May 25, 2001, and defendant Dana Wilcox filed an answer on June 15, 2001. The parties chose to submit the issue of collateral estoppel to the court by brief. For reasons stated below, the court finds that collateral estoppel does not apply to the issue of fraud.
Findings of Fact and Procedural History .
Rita Bennett and Dana Wilcox are former business partners and social acquaintances. They entered into a business venture in 1989, incorporated in Delaware as Wilcox-Bennett International, Inc. The debts at issue in this adversary proceeding relate to transactions preceding and following the formation of the corporation.
On May 10, 1991, Bennett filed a complaint against Wilcox in the United States District Court for the Eastern District of Virginia alleging four counts of liability based on fraud and breach of contract totaling $168,162.21 and seeking punitive and exemplary damages. Wilcox filed an answer on June 12, 1991, contesting the allegation of fraud, but he did not deny liability to Bennett. Discovery was initiated, and Wilcox failed to respond to Bennett's first set of interrogatories.
On August 2, 1991, the court entered an order requiring Wilcox to answer Bennett's interrogatories within 10 days. Bennett moved for summary judgment after Wilcox failed to respond. Hearing was held September 13, 1991, on plaintiff's motion for summary judgment. Counsel for plaintiff appeared, but defendant did not. The court granted plaintiff's motion for summary judgment against defendant Wilcox on all counts listed in plaintiff's complaint and continued the hearing on damages to September 20, 1991. At hearing on damages, plaintiff submitted evidence regarding interest owed by defendant; again, Wilcox did not appear. The court entered final judgment against Wilcox in the amount of $212,428.63.
In the instant case, Wilcox filed a voluntary petition under chapter 7 of the Bankruptcy Code on February 28, 2001. On May 25, 2001, Bennett filed an adversary proceeding to determine the dischargeability of debts resulting from the 1991 judgment. Trial was set for February 14, 2001. Prior to trial, the parties agreed that only an issue of law remained in contention, and submitted their arguments to the court on brief. The parties have reserved their right to request trial after the court's ruling.
Position of the Parties .
Plaintiff Rita Bennett contends that defendant Dana Wilcox is collaterally estopped from denying that his debt to Bennett arose from fraudulent conduct. Relying heavily on the Fourth Circuit's decision inAnsari v. Ansari, 113 F.3d 17 (4th Cir. 1997), Bennett asserts that Wilcox actually participated in litigating the 1991 case. Bennett further argues that each party had a full and fair opportunity to litigate the issue of fraud in the 1991 case.
Defendant Wilcox responds that there has never been an evidentiary hearing or trial on the central issues in the case. In addition, Wilcox's participation in the case was limited by his heart problems, which prevented him from providing timely responses to Bennett's requests. Wilcox disputes Bennett's contention that an uncontested finding of summary judgment on the issue of fraud constitutes actual litigation of the issue.
Conclusions of Law .
The parties have agreed that the issue of collateral estoppel should be decided before the case can move forward.
Collateral Estoppel
Collateral estoppel precludes "the relitigation of issues of fact or law that are identical to issues which have been actually determined and necessarily decided in prior litigation in which the party against whom [issue preclusion] is asserted had a full and fair opportunity to litigate." Ramsay v. INS, 14 F.3d 206, 210 (4th Cir. 1994) (quoting Virginia Hosp. Ass'n. v. Baliles, 830 F.2d 1308, 1311 (4th Cir. 1987); see. e.g. Nestorio v. Associates Commercial Corp. (In re Nestorio), 250 B.R. 50 (D. Md. 2000). The principles of collateral estoppel apply in dischargeability proceedings in bankruptcy court. Grogan v. Garner, 498 U.S. 279, 284-285 (1991).
The five-part test used by the Fourth Circuit to establish collateral estoppel requires that:
1) the issue precluded must be identical to one previously litigated;
2) the issue must have been actually determined in the prior proceeding;
3) determination of the issue must have been a critical and necessary part of the decision in the prior proceeding;
4) the prior judgment must be final and valid; and
5) the party against whom estoppel is asserted must have had a full and fair opportunity to litigate the issue in the previous forum.
Ramsay, 14 F.3d at 210. Generally, when resolving the issue courts must balance the need to foreclose relitigation of an issue the parties have had the chance to litigate, with the need to prevent a party from intentionally ignoring a trial court case in order "to escape the collateral estoppel effects of an adverse judgment. . . ."
The basic policy underlying collateral estoppel is that "`one fair opportunity to litigate an issue is enough.'" Gilldorn Sav. Ass'n. v. Commerce Sav. Ass'n, 804 F.2d 390, 392-393 (7th Cir. 1986) (quoting Bowen v. U.S. 570 F.2d 1311, 1322 (7th Cir. 1978)).
Ramsey v. Bernstein (In re Bernstein). 197 B.R. 475, 481 (Bankr. D. Md. 1996). The court stated the importance of emphasizing that a defendant should not be able to assume "it is permissible to quit at any time prior to trial and not be subject to the constraints of collateral estoppel." Id. This concern was also addressed inKulsea v. Stankovich (In re Stankovich), where the debtor intentionally failed to respond in anticipation of his filing for bankruptcy. 171 B.R. 27, 29 (Bankr. E.D. Va. 1994).
Such detailed analysis of the applicability of collateral estoppel would not be appropriate in this case. In each of the cases noted above, where collateral estoppel was applied, the trial court proceedings included a much higher degree of involvement by the defendant than is shown here. In Ramsay, the plaintiff received hearings on the issue of the adjustment of his immigration status by both the INS and the district court. Plaintiff filed pleadings and memoranda and appeared at both hearings. 14 F.3d at 210-211. In Nestorio, the defendant appeared and moved to vacate the entry of default by the trial court. His motion was denied, and at hearing on damages, the magistrate judge heard testimony from several witnesses. 250 B.R. at 56-57. The state court action in Bernstein actually went to trial, and plaintiff presented his case to a jury, although defendant did not appear. 197 B.R. at 481.
Even the Fourth Circuit case on which plaintiff Bennett bases her motion, Ansari v. Ansari, predicated a finding of collateral estoppel on the fact that the state court case involved extensive discovery and numerous hearings, including a 2-day evidentiary hearing with several witnesses testifying. 113 F.3d 17, 21 (4th Cir. 1997).
In the 1991 district court case, final judgment followed a failure to respond to discovery by Wilcox and an uncontested motion for summary judgment in favor of Bennett. Hearings were held on plaintiff's motion to compel response to discovery, on plaintiff's motion for summary judgment, and to determine damages. Defendant did not appear at any of the hearings. The only evidence submitted was an affidavit by Bennett regarding the amount of damages and interest owed by defendant.
Finding of Collateral Estoppel Unwarranted
Based on the information before the court regarding the 1991 judgment, consideration of the issue of collateral estoppel is unwarranted. The only element of the test that is clear from the 1991 ruling is that the prior judgment was final and valid. The record does not indicate that the issue of fraud was ever brought before the district court. In its ruling, the district court found liability against Wilcox but made no specific findings of fraud. This court has no basis to find that Wilcox's alleged fraudulent conduct was ever considered by the district court. Collateral estoppel precludes the relitigation of an issue previously decided. In this case, the issue of fraud does not appear to have been decided, and it was not a necessary part of the judgment rendered by the district court.
The court is persuaded by the ruling in Kulsea v. Stankovich (In re Stankovich). 171 B.R. 27 (Bankr. E.D. Va. 1994), which involved facts almost identical to the instant case. In Stankovich, debtors failed to respond to plaintiff's request for admissions in their state court case. The conclusions stated in the request for admissions were "deemed admitted because of debtor's failure to respond, and those facts and conclusions thus established — by default and not by the presentation of evidence — supported the summary judgment entered in favor of plaintiffs" by the trial court. 171 B.R. at 30. The court noted that the issue of fraud, central to the case, was never "actually litigated and carefully considered" by the state court. Id. The court concluded that debtor was not estopped from denying dischargeability of debts arising from the state court judgment and that a trial to determine the dischargeability would not violate collateral estoppel. Id. at 31.
Further, this court has ruled in the past that "collateral estoppel should apply only to issues actually litigated and determined by a court and that collateral estoppel should not be applied to issues not `in issue' and not determined in a judicial proceeding." Rountrey v. Lee (In re Lee), 90 B.R. 202, 206 (Bankr. E.D. Va. 1988) (ruling that the issues were fully heard and actually litigated and that collateral estoppel may be applied to the state court judgment).
In this case Wilcox filed an answer in response to Bennett's complaint but took almost no other action in the case. Wilcox received and ignored Bennett's first set of interrogatories. He received and ignored a court order compelling him to respond to the interrogatories. Finally, he failed to respond to a motion for summary judgment filed by Bennett.
Bennett cannot show more than an uncontested summary judgment against an uninvolved debtor. None of the critical issues were submitted to the finder of fact. The only evidence submitted outside the pleadings was on the issue of damages. The facts regarding defendant's liability were deemed admitted after defendant's failure to respond to plaintiff's interrogatories. These facts were never established through a presentation of evidence in the district court. Because no evidence was presented to the finder of fact on the critical issue of fraud, and no appearance was made by the defendant to contest the matter, aside from filing an answer, the court finds that collateral estoppel effect may not be given to the district court judgment.
For the reasons stated above, the court finds that defendant Dana Wilcox is not collaterally estopped from denying dischargeability of his judgment debt to plaintiff Rita Bennett.
A separate order will be entered.