In re: FRED M. LEONARD, JR., Debtor. FRED M. LEONARD, JR., Appellant, v. RDLG, LLC, Appellee.
Case No. 15-5452
UNITED STATES COURT OF APPEALS FOR THE SIXTH CIRCUIT
Mar 28, 2016
NOT RECOMMENDED FOR FULL-TEXT PUBLICATION File Name: 16a0176n.06 FILED DEBORAH S. HUNT, Clerk ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF TENNESSEE
BOGGS, Circuit Judge. After Appellant Fred M. Leonard, Jr. filed for bankruptcy, Appellee RDLG, LLC initiated an adversary proceeding to have one of his debts—the result of a subsequent fraud judgment based on a default sanction—ruled nondischargeable under a statutory exception. Leonard argued that an automatic bankruptcy stay precluded the sanction, that he was not collaterally estopped from relitigating the issue of his fraud, and thаt, in any event, RDLG did not make out the elements of the statutory exception. Like the bankruptcy and district courts before us, we disagree. We therefore affirm.
I
When Fred Leonard declared bankruptcy, he was delinquent on a monetary sanction owed to the Western District of North Carolina based on an underlying lawsuit and faced the
The lawsuit before the federal court in North Carolina arose from a soured business deal. In 2010, RDLG was formed as an ownership vehicle for a real-estate development made up of residential lots bordering a golf course. RDLG contracted with RPM Group, a marketing and sales firm owned and operated by Leonard, to market the property and manage a onе-day event to sell the lots. By the contract‘s terms, RDLG and RPM would split the cost of marketing equally and Leonard would earn a commission on each lot sale after the expenses of both parties were recouped. The sale was unsuccessful, and RDLG filed suit against Leonard, RPM, and several others. The complaint alleged common-law claims including fraudulent misrepresentation on the theory that Leonard knowingly inflated his estimation of the prices that the lots would generate at the sаle in order to coax RDLG into entering the agreement.
Over the next two years, the parties proceeded through the normal processes of federal civil litigation. After conducting discovery and participating in a failed mediation session, they
Then the litigation process unraveled. Latе on September 30, Leonard‘s attorneys (Terri Lankford and local counsel Seth Neyhart) filed motions to withdraw and to postpone the pretrial conference. They revealed that they had not communicated with Leonard in a month and that Lankford was out of the country. The court denied the motions and, threatening to hold counsel in contempt, instructed them to appear at the conference. The next day, Lankford swore by declaration that four weeks earlier, Leonard disclosed his plan to file for bankruptcy and asked her keep the information from the court.
At the pretrial conference, Leonard appeared with Neyhart and RDLG moved for sanctions. See
October 9 came and went without Leonard paying the sanction and, the next day, he filed for Chapter 7 bankruptcy in the Eastern District of Tennessee. At the Rule 11 hearing on October 11, the court issued no additional sanctions. A week later, it entered a default-judgment order on the issue of Leonard‘s and RPM‘s liability. Finally, the court stayed the issue of
II
The thrust of Leonard‘s appeal contests the district court‘s order affirming the bankruptcy court‘s grant of summary judgment to RDLG on the issue of whether debt that he owes in connection with the fraud judgment is nondischargeable in bankruptcy. In particular, he challenges its findings that (a) the sanctions entered against him were excepted from an automatic bankruptcy stay, (b) he was precluded from relitigating the issue of his fraud, and (c) the debt fits within the
In a bankruptcy appеal, we review the bankruptcy court‘s factual findings for clear error “without being bound by the district court‘s determinations.” In re Charfoos, 979 F.2d 390, 392 (6th Cir. 1992). We review the district court‘s legal conclusions de novo. In re Baker & Getty Fin. Servs., Inc., 106 F.3d 1255, 1259 (6th Cir. 1997).
A
The bankruptcy court where a debtor files “shall have exclusive jurisdiction of all the property, wherever located, of the debtor as of the commencement of such case, and of property of the estate.”
Section 362(b)(4) also excepts the sanctions from the stay‘s effects. The automatic stay does not impede the “continuation of an action or proceeding by a governmental unit . . . to enforce [its] police and regulatory power, including the enforcement of a judgment other than a money judgment, obtained in an action or proceeding by the governmental unit.”
Second, Leonard claims that the default-judgment sanction was improper because the North Carolina court never determined whether the stay applied to the proceeding before it. A non-bankruptcy court presiding over a proceeding that is exempted from the automatiс stay may enter orders that are not inconsistent with the stay. See Chao, 270 F.3d at 384. We instructed in Chao that when responding to a motion to continue or commence proceedings against a debtor, the non-bankruptcy court should determine the stay‘s effect. Ibid. Leonard erroneously reads Chao for the broader proposition that a non-bankruptcy court acting sua sponte also must declare on the record whether a bankruptcy stay applies. The animating concern in Chao—creditors attempting to circumvent bankruptcy stays—is not so pronounced when a court acts on its own motion. Regardless, the North Carolina court did consider the stay. The default-judgment order acknowledged the pending bankruptcy proceeding and stayed the remainder of the case—resolving the issue of damages—until after the termination of the bankruptcy proceedings. To be sure, this carried risk. An order based on an erroneous jurisdictional determination may later be declared void. Ibid. But that uncertainty does not diminish the power of a non-bankruptcy court to determine whether a pending matter is stayed by a debtor‘s bankruptcy filing. See In re Singleton, 230 B.R. 533, 538–39 (B.A.P. 6th Cir. 1999)
B
Under federal law, issue preclusion prevents a party from relitigаting a matter if: (1) the precise issue was raised and actually litigated in a prior proceeding; (2) the determination of the issue was necessary to the outcome of that proceeding; (3) the prior proceeding resulted in a final judgment on the merits; and (4) the party against whom estoppel is sought had a full and fair opportunity to litigate the issue in the prior proceeding. Ark. Coals, Inc. v. Lawson, 739 F.3d 309, 320–21 (6th Cir. 2014). Leonard argues that the first and fourth elements were not satisfied.
1
An issue is actually litigated when it “is properly raised, by the рleadings or otherwise, and is submitted for determination, and is determined.” Restatement (Second) of Judgments § 27 cmt. d (1982). That did not happen here, Leonard asserts, because the fraud claim was resolved through a default-judgment order instead of a hearing on the evidence. His argument is not
The “default” contemplated by the Court in Arizona (and the Restatement comment that it quotes in support), is that of the ordinary case—where a defendant “fail[s] to plead or otherwise defend” against the plaintiff‘s claim,
When default is the result of a failure to plead or defend, giving the judgmеnt collateral-estoppel effect might “discourage compromise, . . . decrease the likelihood that the issues . . . would be narrowed by stipulation, and thus . . . intensify litigation.” Restatement (Second) of Judgments § 27 cmt. e. In those cases, “[t]he interests of conserving judicial resources, of maintaining consistency, and of avoiding oppression or harassment of the adverse party are less
Before default was entered, Leonard actively litigated the lawsuit: He engaged several attorneys, filed an answer and amended answer, served аnd responded to discovery requests, and appeared personally at the pre-trial conference. On the eve of trial, he ignored the pretrial order and case-management plan, and moved to continue the proceeding (apparently to obscure his imminent bankruptcy filing). The dismayed court imposed monetary sanctions. Fully aware that noncompliance could result in a default-judgment order, Leonard took his chances. He chose poorly—and а default sanction was entered pursuant to Rule 16. Far from being denied his day in court, Leonard spent two years litigating before changing course. As the North Carolina district court said, his “bad faith throughout the[] proceedings . . . prejudice[d] [RDLG], the judicial process, and the administration of justice.” Applying issue preclusion here served its basic purposes—“protecting the prevailing party from the expense and vexation attending multiple lawsuits, conserving judicial resources, and fostering reliancе on judicial action by minimizing the possibility of inconsistent decisions.” Daily, 47 F.3d at 368 (quoting Montana v. United States, 440 U.S. 147, 153–54 (1979)) (alterations omitted).
2
No significant procedural limitation impeded the North Carolina trial, let alone procedures so inadequate that they deprived Leonard of the opportunity to litigate. Over two years, he participаted in extensive discovery, a mediated settlement conference, and successfully defended against a motion for pre-judgment attachment. When the court imposed a monetary sanction, it warned that his failure to comply could “result in the Court striking the answer of Defendants and entering default judgment against Defendants.” Just as due process is not violated by the entry of a default-judgment sanction for a defendant‘s bad-faith refusal to cooperate with discovery, see Societe Internationale Pour Participations Industrielles Et Commerciales, S.A. v. Rogers, 357 U.S. 197, 209–10 (1958), neither is it violated when a default order issues in response to willful noncompliance with pretrial orders and a sanction order.
Leonard‘s argument to the contrary is unconvincing. He asserts that his absence from the Rule 11 hearing (where the court decided not to impose additional sanctions on his attorneys) robbed him of a full and fair opportunity to litigate. The court‘s default order did state that the default sanction was based on reasons given and an oral order issued at the Rule 11 hearing. Yet any alleged defect in that hearing did not undermine the fairness of the entire proceeding. Leonard had every opportunity to litigate vigorously. Instead, “he plotted and schemed to delay and undermine the trial,” and was made aware of the probable repercussions. His absence from the Rule 11 hearing (of which he had notice)—after he flouted a sanction order, disregarding the
C
The only question remaining is whether the resulting debt is excepted from discharge under
One such exception is for “any debt . . . for money, property, services, or . . . credit, to the extent obtained by . . . actual fraud.”
A North Carolina fraud judgment corresponds to “actual fraud” under
Leonard argues that the North Carolina judgment is insufficient alone to establish nondischargeability because the exception applies only to debtors who “obtained” “money, property, services, or . . . credit” through their fraud, which he did not.
The facts of this case allow us to leave the question for another day. Leonard clearly obtained a financial benefit from his fraud. Even the stricter reading of subsection (a)(2)(A) does not rigidly require plaintiffs to prove the direct transfer of money from a creditor to a debtor. It is sufficient to “show that the debtor . . . indirectly obtained some tangible or intangible financial benefit as a result of his misrepresentation.” In re Brady, 101 F.3d 1165, 1172 (6th Cir. 1996). Through the contract, RPM—and Leonard as its owner—stood to earn a cоmmission on each sale of RDLG land. As the complaint alleges (and the default judgment confirms), that contract
III
Leonard also argues that the bankruptcy court exceeded its authority by (a) deciding that his fraud was nondischargeable without determining the amount of the claim and (b) granting voluntary dismissal to RDLG on its remaining claims. We review for abuse of discretion. See Bridgeport Music, Inc. v. Universal-MCA Music Publ‘g, Inc., 583 F.3d 948, 953 (6th Cir. 2009).
A
Although we have held that a bankruptcy court may enter final judgment on thе amount of a nondischargeable claim, In re Hart, 564 F. App‘x 773, 776 (6th Cir. 2014), we have never held that it must do so. Bankruptcy courts sit in equity. See Norwest Bank Worthington v. Ahlers, 485 U.S. 197, 206 (1988). Courts of equity with jurisdiction over the parties to a controversy generally “decide all matters in dispute and decree complete relief,” Alexander v. Hillman, 296 U.S. 222, 242 (1935)—even matters that could also be decided by courts of law, Porter v. Warner Holding Co., 328 U.S. 395, 399 (1946). So long as it is exercising that power within the bounds of the Bankruptcy Code (and the Constitution, Stern v. Marshall, 131 S. Ct. 2594, 2620 (2011)), a bankruptcy court may answer the nondischargeability question without
We have acknowledged that it is oftentimes difficult, “impossible” even, “to separate the determination of dischargeability function from the function of fixing the amount of the nondischargeable debt.” In re McLaren, 3 F.3d 958, 966 (6th Cir. 1993) (quoting In re Devitt, 126 B.R. 212, 215 (Bankr. D. Md. 1991)). But this is not such a case. The North Carolina court where RDLG and Leonard spent two years litigating the fraud claim was well-equipped to oversee the jury trial that resolved the amount of damages that flowed from it. We are not swayed by Leonard‘s contention that returning the case to the North Carolina court frustrated the purpose of collateral estoppel and promoted a “multiplicity of appeals.” Appellant Br. 48. Reserving the task of determining damages to a court well-acquainted with a given case is not contrary to the interests of conserving judicial resources, maintaining consistency, and avoiding harassment of adverse parties. See Restatement (Second) of Judgments § 27 cmt. e. The bankruptcy court‘s decision to leave for the North Carolina court the issue of damages was not an abuse of discretion.
B
In an adversary proceeding, a plaintiff may request dismissal of an action against a debtor. See
The bankruptcy court here acted within its discretion when it granted voluntary dismissal of RDLG‘s
IV
For these reasons, we AFFIRM the grant of summary judgment to RDLG on the