BILL PARKER, Chief Bankruptcy Judge.
This matter came before the Court upon a Motion for Summary Judgment filed by the Plaintiff, Michael R. Healey, as the substituted Plaintiff in this proceeding through his official capacity as the Executor of the Estate of Edwin N. "Bud" Healey, deceased.
The Plaintiff's predecessor-in-interest filed his "Plaintiff's Original Complaint to Determine Dischargeability of Debt Under 11 U.S.C. § 523" on October 19, 2015, seeking to have the judgment debt owed by the Defendant declared nondischargeable under various subsections of 11 U.S.C. § 523(a), including a determination that the judgment debt owed by the Defendant is a debt for fraud or defalcation while acting in a fiduciary capacity under 11 U.S.C. § 523(a)(4) and a debt for a willful and malicious injury under 11 U.S.C. § 523(a)(6). Upon due consideration of the pleadings, the proper summary judgment evidence which has been submitted, and the relevant legal authorities, the Court concludes that the Plaintiff has demonstrated that there is no genuine issue as to any material fact and that he is entitled to judgment as a matter of law that the debt owed now to the decedent's estate of Edwin N. Healey by the Defendant arising from the final judgment issued by the 3rd Judicial District Court in and for Henderson County, Texas, is nondischargeable under § 523(a)(4).
On December 5, 2012, the Plaintiff, Edwin N. "Bud" Healey, appointed one of his sons, the Defendant, Edwin P. "Pete" Healey, as his attorney-in-fact through the execution of a Statutory Durable Power of Attorney.
Over the next couple of years, the Plaintiff became convinced that the Defendant had engaged in a number of unauthorized financial transactions through the use of the Power of Attorney. In an action initially filed in Tarrant County, the Plaintiff alleged that large amounts of his money had been misappropriated by the Defendant in order to pay personal debts and to make improvements on his own properties, all to the damage and detriment of his father. In the pursuit of various state law claims, including breach of fiduciary duty and theft, arising from the alleged misappropriations, the action was subsequently transferred to the 3rd Judicial District Court of Henderson County, Texas (the "State Court Litigation"), under Cause No. 2014C-0638.
The State Court Litigation was tried to a jury in June 2015 and the jury issued factual findings pursuant to the charge in favor of the Plaintiff.
Do you find by a preponderance of the evidence that Pete Healey, in his role as Power of Attorney (sic), breached his fiduciary duty owed to Bud Healey by: (i) borrowing money without interest and not paying it back; (ii) transferring Bud Healey's funds to his own accounts; and/or (iii) negotiating checks payable to himself from Bud Healey's accounts?
What sum of money would fairly and reasonably compensate Bud Healey, for his damages, if any, that resulted from Pete Healey's breach of fiduciary duty?
Do you find from a preponderance of the evidence that Pete Healey unlawfully appropriated Bud Healey's property with the intent to deprive him of the property by: (i) transferring Bud Healey's funds to his own accounts without repaying said funds; and/or (ii) negotiating checks payable to himself from Bud Healey's accounts without repaying said funds?
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You are further instructed that a person acts with intent with respect to the nature of his conduct or to a result of his conduct when it is the conscious objective or desire to engage in the conduct or cause the result.
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What do you find, by a preponderance of the evidence, was the fair market value, if any, of the property, which was unlawfully appropriated by Pete Healey?
Do you find by clear and convincing evidence that the conduct found in response to Question No. 10 was committed intentionally and knowingly?
You are instructed that a person acts "intentionally," or with "intent," with respect to the nature of his conduct or to a result of his conduct when it is the conscious objective or desire to engage in the conduct or cause the result.
You are further instructed that a person acts "knowingly," or with "knowledge," with respect to the nature of his conduct or to circumstances surrounding his conduct when he is aware of the nature of his conduct or that the circumstances exist. A person acts "knowingly," or with "knowledge," with respect to a result of his conduct when he is aware that his conduct is reasonably certain to cause the result.
Based upon the jury findings in the State Court Litigation, the 3rd Judicial District Court issued a Final Judgment on June 30, 2015 (the "State Court Judgment").
Less than a month later, on July 23, 2015, the Defendant filed a voluntary petition for relief under Chapter 7 of the Bankruptcy Code.
On July 12, 2017, the Texas Court of Appeals for the Twelfth District of Texas at Tyler issued an opinion which fully affirmed the State Court Judgment which had been assessed against the Defendant.
The Plaintiff brings his Motion for Summary Judgment in this adversary proceeding pursuant to Federal Rule of Bankruptcy Procedure 7056. That rule incorporates Federal Rule of Civil Procedure 56 which provides that summary judgment shall be rendered "if the movant shows that there is no genuine issue as to any material fact and the movant is entitled to judgment as a matter of law."
The party seeking summary judgment always bears the initial responsibility of informing the court of the basis for its motion.
The operation of the summary judgment standard depends upon which party will bear the burden of persuasion at trial. "If the moving party bears the burden of persuasion at trial, it must also support its motion with credible evidence . . . that would entitle it to a directed verdict if not controverted at trial."
If the motion is supported by a prima facie showing that the moving party is entitled to judgment as a matter of law, a party opposing the motion may not rest upon the mere allegations or denials in its pleadings, but rather must demonstrate in specific responsive pleadings the existence of specific facts constituting a genuine issue of material fact for which a trial is necessary.
The record presented is reviewed in the light most favorable to the non-moving party.
In this case, the Plaintiff bears the ultimate burden as to the nondischargeability of the debt. Thus, the Plaintiff is entitled to a summary judgment only if there exists no genuine issue of material fact as to each essential element under § 523(a)(4). The motion for summary judgment under consideration herein seeks judgment as a matter of law through the application of collateral estoppel. The Plaintiff claims that the facts as established during the state court litigation before the 3rd Judicial District Court in and for Henderson County, Texas, and as affirmed by the Texas Court of Appeals form the basis for a determination that the underlying judgment debt is nondischargeable in the Defendant's Chapter 7 bankruptcy case. Resolving this question requires that the Court first determine the applicability of the doctrine itself. If collateral estoppel applies, any relevant factual findings (i.e., related to the required elements for nondischargeability) regarding the actions of the Defendant in this common set of operative facts upon which the state court judgment is based should not be disturbed here. The Court applies those findings to the required elements for nondischargeability to ascertain which factual issues, if any, remain. If collateral estoppel does not apply, the Plaintiff's motion must be wholly denied.
"Collateral Estoppel or, in modern usage, issue preclusion, `means simply that when an issue of ultimate fact has once been determined by a valid and final judgment, that issue cannot again be litigated between the same parties in any future lawsuit.'"
In the bankruptcy dischargeability context, "parties may invoke collateral estoppel in certain circumstances to bar relitigation of issues relevant to dischargeability" and satisfy the elements thereof.
The inquiry into the preclusive effect of a state court judgment is guided by the full faith and credit statute, which states that "judicial proceedings . . . shall have the same full faith and credit in every court within the United States . . . as they have by law or usage in the courts of such State . . . from which they are taken." 28 U.S.C. § 1738 (1994). Thus, federal courts look to the principles of issue preclusion utilized by the forum state in which the prior judgment was entered.
Collateral estoppel under Texas law prevents the relitigation of identical issues of law or fact that were actually litigated and were essential to the final judgment in a prior suit.
In the context of issue preclusion, "issue" and "fact" are interchangeable. The purpose of the reviewing court is to determine the specific facts brought that were already established through full and fair litigation. In this circuit, issue preclusion will prevent a bankruptcy court from determining dischargeability issues for itself only if "the first court has made specific, subordinate, factual findings on the identical dischargeability issue in question. . . and the facts supporting the court's findings are discernible from that court's record."
Addressing the relevant factors in reverse order, the summary judgment record clearly demonstrates that these two parties were adversaries in the state court litigation. The summary judgment record further evidences that the factual determinations tendered in the state court litigation were essential to the entry of the State Court Judgment against the Defendant in that state court proceeding and a certain number of those are germane to the determination of the nondischargeable nature of that judgment debt under 11 U.S.C. § 523. The State Court Judgment, and the jury findings upon which it is based, establish several facts which undergird the liability of the Defendant to the Plaintiff for breach of fiduciary duty and other grounds. Such facts arose from a full evidentiary trial. As a result, the facts established in the state court litigation were fully and fairly litigated by the parties in the state court system. Thus, all three requirements for the application of collateral estoppel under Texas law are established in this case and all of the parties are thereby estopped from relitigating those determinations that necessarily support the State Court Judgment. However, notwithstanding the application of collateral estoppel principles, the Court must ascertain whether those established factual findings are sufficient to fulfill the elements of the dischargeability claims brought by the Plaintiff under 11 U.S.C. § 523(a)(4).
11 U.S.C. § 523(a)(4) provides that "[a] discharge under 11 U.S.C.§ 727 does not discharge an individual from any debt — for fraud or defalcation while acting in a fiduciary capacity, embezzlement or larceny." The Fifth Circuit has noted "that this discharge exception was intended to reach those debts incurred through abuses of fiduciary positions and through active misconduct whereby a debtor has deprived others of their property by criminal acts; both classes of conduct involve debts arising from the debtor's acquisition or use of property that is not the debtor's."
The Fifth Circuit has discussed the concept of a fiduciary under § 523(a)(4) in the following terms:
However, the trust relationship must exist prior to the creation of, and without reference to, the indebtedness in question.
The Fifth Circuit has recognized that the "technical" or "express" trust requirement is not limited to trusts that arise by virtue of a formal trust agreement, but includes relationships in which trust-type obligations are imposed pursuant to statute or common law.
Under Texas law, "[A] power of attorney creates an agency relationship, which is a fiduciary relationship as a matter of law."
Although the recognition of a fiduciary relationship under Texas law does not, ipso facto, satisfy the fiduciary capacity requirement under § 523(a)(4), that requirement is fulfilled "where the duties and control exercised by the agent are tantamount to those of a trustee of an express trust."
In the context of this case, the jury determined that, instead of performing his fiduciary duties with integrity and fidelity, the Defendant had not only engaged in self-dealing under the prescribed instruction,
As to the remaining element of nondischargeability under § 523(a)(4), there is a sufficient factual basis in the state court record to support a conclusion that the Defendant committed a defalcation while acting in his fiduciary capacity. Under the recent decision of the United States Supreme Court in Bullock v. BankChampaign, N.A., ___ U.S. ___, 133 S.Ct. 1754 (2013), in which it rejected an objective recklessness standard in favor of a heightened culpability standard for defalcation under § 523(a)(4), the Supreme Court declared that such defalcation "includes a culpable state of mind requirement" involving "knowledge of, or gross recklessness in respect to, the improper nature of the relevant fiduciary behavior." Id. at 1757. According to Bullock, "where the conduct at issue does not involve bad faith, moral turpitude, or other immoral conduct, the term [defalcation] requires an intentional wrong." Id. at 1759. Such an intentional wrong encompasses not only conduct which the fiduciary knows is improper, but it also encompasses reckless conduct,
In this case, the jury found, on the basis of the evidence presented, that the Defendant had intentionally and knowingly appropriated the Plaintiff's property with an intention to deprive him of it. In fact, it found that the Defendant possessed that requisite mental state in pursuing his misdeeds by the heightened standard of clear and convincing evidence. When the Defendant engaged in his intentional failure to account and to deliver the funds received in trust to his principal and instead utilized them for his own purposes, he knew of the improper nature of his behavior and possessed a "culpable state of mind" with regard to his actions. Indeed, the assessment of exemplary damages against the Defendant by the state court buttresses that conclusion. Accordingly, as a result of the Defendant's actual knowledge of the improper nature of his conduct, the Plaintiff has established a prima facie case for the entry of a summary judgment that the actual damages evidenced by the State Court Judgment should be rendered nondischargeable under § 523(a)(4) as arising from a defalcation committed by the Defendant while acting in a fiduciary capacity.
With regard to the recovery of exemplary damages, attorney's fees, interest, and associated costs, the United States Supreme Court has stated that "[o]nce it is established that specific money or property has been obtained by fraud, . . . `any debt' arising therefrom is excepted from discharge." Cohen v. de la Cruz, 523 U.S. 213, 218 (1998); see also Snook v. Popiel (In re Snook), 168 Fed. App'x. 577, 578 (5th Cir. 2006); S&S Food Corp. v. Sherali (In re Sharali), 490 B.R. 104, 125 (Bankr. N.D. Tex. 2013). Though the facts in Cohen specifically addressed a liability rendered nondischargeable under the actual fraud prong of § 523(a)(2)(A), its rationale to prevent a discharge of all liability arising from circumstances that render a debt nondischargeable under § 523(a) has been extended to cases in which the primary debt is rendered nondischargeable due to fraud or defalcation while acting in a fiduciary capacity. Helvetia Asset Recovery, Inc. v. Kahn (In re Kahn), 533 B.R. 576, 587 (Bankr. W.D. Tex. 2015); Drexel Highlander Ltd. P'ship v. Edelman (In re Edelman), 2014 WL 1796217, at *43 (Bankr. N.D. Tex., May 6, 2014); Conte v. Woomer (In re Woomer), 2013 WL 5536072, at *18 (Bankr. E.D. Tex., Oct. 7, 2013). Further, "the status of ancillary obligations such as attorney's fees and interest depends on that of the primary debt. When the primary debt is nondischargeable. . ., the attorney's fees and interest accompanying compensatory damages, including post-judgment interest, are likewise nondischargeable." Gober v. Terra + Corp. (In re Gober), 100 F.3d 1195, 1208 (5th Cir. 1996). Thus, in light of the jurisprudence that § 523(a) should be properly construed to bar the discharge of all liability arising from the categories of misconduct that render a debt nondischargeable, thereby insuring "that the creditors' interest in recovering full payment of debts in these categories outweigh[s] the debtors' interest in a complete fresh start," Cohen, 523 U.S. at 222, the Court concludes that the Plaintiff has further established a prima facie case for the entry of a summary judgment that the damages awarded to the Plaintiff in the State Court Judgment for exemplary damages, interest, and attorneys' fees based upon the Defendant's misconduct must also be rendered nondischargeable under § 523(a)(4).
Accordingly, the Plaintiff has made a prima facie showing that it is entitled to a summary judgment against the Defendant that the debt evidenced by the State Court Judgment should be declared nondischargeable pursuant to § 523(a)(4) of the Bankruptcy Code. The burden therefore shifts to the Defendant under Fed. R. Civ. P. 7056(e) to set forth specific facts demonstrating that there is a genuine issue of material fact for trial or that judgment should not otherwise be entered as a matter of law.
Accordingly, upon due consideration of the pleadings, the proper summary judgment evidence submitted by the Plaintiff, the relevant legal authorities and for the reasons set forth herein, the Court concludes that there is no genuine issue as to any material fact germane to a determination of dischargeability and that the Plaintiff, Michael R. Healey, as the substituted Plaintiff in this proceeding through his official capacity as the Executor of the Estate of Edwin N. "Bud" Healey, deceased, is entitled to summary judgment that the debt now owed to the decedent's estate by the Debtor-Defendant, Edwin Peter "Pete" Healey, arising from the State Court Judgment is non-dischargeable under the provisions of 11 U.S.C. § 523(a)(4). The Court further concludes that the Plaintiff's recovery of $350.00 in court costs expended in the filing of the adversary complaint is also proper under 28 U.S.C. §1920.
An appropriate order and a judgment will be entered which is consistent with this opinion.
