ROBERT A. GORDON, Bankruptcy Judge.
This dispute raises the question of the extent to which a fact issue can be deemed "actually litigated" and thus binding in subsequent litigation when a party's investment in the former litigation drifts from participatory to unresponsive. Before this bankruptcy case was filed, the Plaintiff, Deborah A. Reed, the Debtor's former wife, sought to enforce her rights arising from the agreement between she and Mr. Reed that outlined how their marriage would be wound up. Her enforcement came in the form of a cross-claim for indemnification prosecuted in the Circuit Court for Anne Arundel County that ultimately prevailed through a summary judgment motion that Mr. Reed was served with but did not contest. Now Ms. Reed seeks to have the resulting debt excepted from Mr. Reed's discharge through a second summary judgment motion made pursuant to 11 U.S.C. §523(a)(15).
The undisputed facts are gleaned from (a) the Declaration of Plaintiff-Creditor Deborah A. Reed (Declaration), (b) the certified true copies of the papers filed in the case entitled Binner, et al. vs. Reed, et al., Case No. 02-C-10-152174, Circuit Court for Anne Arundel County (State Court Case) submitted in support of the Plaintiff's Motion for Summary Judgment (Summary Judgment Motion) (Dkt. No. 6), and (c) the certified true copies of additional papers filed in the State Court case and provided by Plaintiff as exhibits to the Plaintiff-Creditor's Supplement to Motion for Summary Judgment (Dkt. No. 33) filed in response to the Court's Sua Sponte Order for Supplementation of Plaintiff's Motion for Summary Judgment (Dkt No. 32).
Pl.'s Mot. Summ. J., Ex. A.
The Marital Settlement Agreement (Agreement) is attached to the Summary Judgment Motion as Exhibit "C". In relevant part, the Agreement states as follows with respect to 8280 Patapsco Avenue, Pasadena, Maryland, 21122 (Property):
Agreement, ¶8.
Ms. Reed commenced the parties' divorce proceeding on September 7, 2006 and almost a year later, on September 6, 2007, the Agreement was incorporated (but not merged) into the Order granting a Judgment of Absolute Divorce by the Circuit Court for Anne Arundel County. Pl. Mot. Summ. J., Ex. D. Soon after the Agreement's execution, the Property was sold to the Binners. However, on May 14, 2010, the Binners commenced the State Court Case. Their complaint (Binner Complaint) alleged a variety of claims for damages against Ms. Reed, the Debtor and several other defendants, all arising out of the pre-settlement condition of the Property and the obligations of each Defendant as either sellers or facilitators. Pl. Mot. Summ. J., Ex. E. Ms. Reed and the Debtor were each served with the Binner Complaint and they filed separate responses. Hence the Debtor was not in default and was joined as a party to the State Court Case. On August 16, 2010, Ms. Reed moved to formally enforce her rights under the Agreement by filing Defendant, Deborah A. Reed's, Cross-Claim Against Defendant, Steven K. Reed (Cross-Claim). The Cross-Claim provided in relevant part that:
Pl.'s Mot. Summ. J., Ex. G.
Debtor did not file a timely answer to the Cross-Claim and an Order of Default was entered on September 9, 2010. Newly motivated, he then filed a Request to Vacate Default (Request) on September 28, 2010. While the Request was pending, a settlement conference (Conference) was held in Baltimore on December 9, 2010 and both Ms. Reed and the Debtor were in attendance.
After the Conference, on December 16, 2010, the Request was granted and the Order of Default was vacated. Supplement to Pl.'s Mot. Summ. J., Ex. 2. On December 28, 2010, the unrepresented Debtor filed his Answer to the Cross-Claim (Answer). Supplement to Pl.'s Mot. Summ. J., Ex. 3. In pertinent part, he wrote:
Id.
On Feb. 15, 2011 the Binners filed Stipulations for Dismissal with Prejudice.
On June 25, 2012, the Debtor filed his Voluntary Petition. On September 21, 2012, Ms. Reed filed a Complaint for Determination of Dischargeability Pursuant to Section 523 of the Bankruptcy Code (Dischargeability Complaint) and this Adversary Proceeding began. The Dischargeability Complaint seeks to except the Recorded Judgment from the Debtor's discharge on the basis of Section 523(a)(15). On October 9, 2012, Plaintiff filed the Summary Judgment Motion. On October 22, 2012, the Debtor filed a Motion for (sic) to Dismiss with Prejudice (Motion to Dismiss) (Dkt. No. 7). Responses, oppositions and supplemental papers followed. A hearing was held on June 4, 2006 at which time the Court indicated that an oral ruling would be given on June 21, 2013. Upon reflection, the Oversigned decided to prepare this Opinion.
The Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334, 157, and Local Rule 402 of the United States District Court for the District of Maryland. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(I). Venue is proper pursuant to 28 U.S.C. §1409(a).
Fed. R. Civ. P. 56(c), made applicable by Fed. R Bankr. P. 7056, sets forth the procedure to be followed when a party files a motion for summary judgment. Summary judgment is proper where "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 the moving party is entitled to judgment as a matter of law." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 250 (1986). A material fact is one that might affect the outcome of the suit. Id. at 248. A genuine issue of material fact exists where "the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Id. at 248. In determining the facts for summary judgment purposes, the court may rely on affidavits made with personal knowledge that set forth specific facts otherwise admissible in evidence and sworn or certified copies of papers attached to such affidavits. Fed. R. Civ. P. 56(e). Permissible inferences to be drawn from the underlying facts are viewed in the light most favorable to the nonmoving party, but if "the record taken as a whole could not lead a rational trier of fact to find for the non-moving party," summary judgment may be granted. Miller v. FDIC, 906 F.2d 972, 974 (4th Cir. 1990).
The material facts, from the parties execution of the Agreement to the entry of the Recorded Judgment, are not in dispute and Section 523(a)(15) provides the governing law. Nevertheless the Defendant contends, as he did in his Answer filed in the State Court Case, that the Agreement cannot be enforced against him because the damages sought by the Binner Complaint arose after the Property had been "sold and settled" and fall outside the scope of his duty to indemnify. Were it not for the resolution of the State Court Case, the mixed question of fact and law proffered by the Defendant might well have been a fit candidate for adjudication. But because his defense is barred by the doctrine of issue preclusion, the question is insulated from review.
Section 523(a)(15) excepts from the discharge of any individual debtor debts owed, "to a ... former spouse ... of the debtor and not of the kind described in paragraph (5) ... incurred by the debtor ... in connection with a separation agreement ... (or) divorce decree...". In order for the debt in this case to be declared nondischargeable under Section 523(a)(15), three elements must therefore be satisfied by Ms. Reed: 1) Ms. Reed must prove she is the Debtor's former spouse, 2) the debt memorialized by the Recorded Judgment must not fall within the ambit of Section 523(a)(5) (a domestic support obligation) and 3) the debt must have been incurred in connection with the Agreement or the divorce decree. Ms. Reed has the burden of proving Section 523(a)(15)'s applicability by a preponderance of the evidence. Grogan v. Garner, 498 U.S. 279, 292 (1991); In re Dexter, 250 B.R. 222, 224 (Bankr. D. Md. 2000) (citing Matter of Gamble, 143 F.3d 223, 226 (5th Cir. 1998)).
The first element is indisputably satisfied, since Ms. Reed is the Debtor's ex-spouse. As for the second element, the Debtor does not assert that the debt is a domestic support obligation. Nevertheless, a brief inquiry would be prudent. Section 523(a)(5) excepts domestic support obligations — a defined term under the Code — from an individual discharge. The primary characteristic that distinguishes a domestic support obligation from an obligation arising from a separation agreement, is that a domestic support obligation must be founded upon an "alimony, maintenance or support obligation." Section 101(14A)(B). The intention of the parties determines the nature of the obligation. Matter of Long, 794 F.2d 928, 931 (4th Cir. 1986); Tilley v. Jessee, 789 F.2d 1074, 1077-1078 (4th Cir. 1986). Relying upon the Agreement to determine the parties' intent, Ms. Reed's Summary Judgment Motion puts it neatly:
The parties' intentions are also confirmed by how the Agreement operates, at least insofar as the treatment of the Property (and any lingering obligations) are concerned. The Agreement requires the sale of the Property and also states how the proceeds and liabilities are to be divided. Mr. Reed's indemnification responsibilities arise from those clauses and thus the debt owed to Ms. Reed is not a domestic support obligation subject to Section 523(a)(5).
The final question under Section 523(a)(15) — whether the debt was incurred in connection with the Agreement — is the one that the Debtor seeks to contest. However, the Reeds squared off on that precise issue in the state court: whether the Agreement required indemnification for any damages and attorney's fees paid by Ms. Reed as a result of the Binner Complaint and judgment was entered against Mr. Reed. Nevertheless, he contends that (a) the Dischargeability Complaint's allegations are insufficient to state a claim under his suggested interpretation of the Agreement's indemnification clause and (b) his failure to respond to the State Court SJ Motion should afford him a second opportunity to litigate the question he previously raised but failed to effectively pursue.
Mr. Reed's Motion to Dismiss is grounded upon the contention that because "all the events for which the plaintiff demands an indemnity happened after the property was `sold and settled'," they are, "beyond the scope of the parties underlying separation agreement" and therefore the Dischargeability Complaint is insufficient on its face. The Defendant's Opposition expands upon that argument. The Debtor's Opposition to the Plaintiff's Supplemental Summary Judgement (sic) Pleading Asserting Res Judicata (Supplemental Opposition) addresses the question of issue preclusion head on.
Issue preclusion, historically known as collateral estoppel, bars relitigation of issues previously tried and resolved. Hagan v McNallen (In re McNallen), 62 F.3d 619, 624 (4th Cir. 1995); Nestorio v. Associates Commercial Corporation, 250 B.R. 50, 55 (D. Md. 2000); In re Bernstein, 197 B.R. 475, 480 (Bankr. D. Md. 1996). "Collateral estoppel precludes relitigation of an issue decided previously in judicial or administrative proceedings provided the party against whom the prior decision was asserted enjoyed a full and fair opportunity to litigate that issue in an earlier proceeding." McNallen, 62 F.3d at 624. Issue preclusion can be applied in a dischargeability adversary proceeding. Grogan, 498 U.S. at 284. When a party attempts to assert that a state court judgment carries preclusive effect, "the federal courts must, as a matter of full faith and credit, apply the forum state's law of collateral estoppel." Jordan v. Moore (In re Jordan), Case No. WMN-09-CV-2882, 2010 WL 997065, slip op. (D. Md. March 16, 2010) (citing In re McNallen, 62 F.3d at 624). Thus, in order to prevail on summary judgment, Ms. Reed must establish that: (1) the issues presented by the Dischargeability Complaint are identical to those raised in the prior adjudication; (2) the issues actually litigated were essential to the judgment in the prior adjudication; (3) a final judgment on the merits was entered in the prior litigation; and (4) the party against whom collateral estoppel is asserted was a party or in privity with a party to the prior adjudication. Brown & Sturm v. Frederick Road Ltd. Partnership, 137 Md.App. 150, 192, 768 A.2d 62 (2001), see also In re McClendon, 415 B.R. 170, 180-184 (Bankr. D. Md. 2009).
The answers to points one, three and four are self-evident. The question presented by the Cross-Claim was whether under the Agreement, Mr. Reed had to indemnify Ms. Reed for the sums she paid the Binners and her attorney's fees. If the other elements of Section 523(a)(15) are satisfied, then the debt arising from the duty to indemnify must be excepted from Mr. Reed's discharge. Likewise, there is no question that the Recorded Judgment memorializes a final, fully enforceable judgment and, moreover, that Mr. Reed was a party to the State Court Case.
However, the Supplemental Opposition asserts that the question of indemnification liability was not actually litigated and that the second element cannot be satisfied, because (a) the only `finding' made was that the Debtor "failed to plead", (b) there was no indication that the claim was "heard and considered by a jury", (c) there was no indication that a "hearing was held and evidence introduced" and (d) the state court made no findings "to use" for an issue preclusion analysis. These points ignore the settled principle that full blown adversarial combat — a trial — is not always necessary to support a finding that an essential issue was `actually litigated'. What is important is whether the party against whom the findings are asserted was afforded fundamental due process — notice, an opportunity to be heard and motivation to protect one's rights — before the finding was made.
Nestorio presents a perfect example of the actual litigation of an issue notwithstanding the defendant's default and failure to participate in the prior litigation's last significant hearing. The plaintiff lienholder sued the defendant for the wrongful conversion of heavy construction equipment subject to its lien. The defendant first went into default but a motion to set aside the default, filed with his answer, was granted on the condition that a bond be posted. The defendant never posted the bond and the default was left in place. A hearing on damages before a magistrate judge was commenced with the defendant and counsel in attendance but it was continued to permit supplemental briefing. The defendant filed a voluntary petition in bankruptcy before the hearing could be resumed. The respite was short lived though, as the bankruptcy court lifted the automatic stay to allow the damages hearing to run its course. The defendant did not appear for the continued damages hearing. After the damages were determined, the bankruptcy court concluded that the debtor was precluded from re-litigating the plaintiff's exception to discharge claim under Section 523(a)(6) by the district court's decision and entered a partial summary judgment excepting the debt on that basis.
The debtor appealed and claimed that (1) because the prior district court judgment was premised upon his default and (2) he was unable to "cross-examine witnesses and offer evidence in [his] defense ..." at the final damages hearing, the bankruptcy court erred by entering summary judgment. Nestorio, 250 B.R. at 55. The District Court recognized that default judgments do not normally carry preclusive effect. However, the Court went on to state that
Id. at 55-56.
This Court's decision in Bernstein is to the same effect:
Bernstein, 197 B.R. at 480.
Both decisions provide imminently sound reasoning directly applicable to the case at hand. The Debtor filed a response to both the Binner Complaint and the Cross-Claim. As to the Cross-Claim, he even extricated himself from default to file his Answer and raise precisely the same issue he raises now — whether Ms. Reed's claim for indemnity is nullified by the opening phrase of the Agreement's relevant paragraph. Once his Answer was filed, and Ms. Reed's damages were quantified by the settlement, Ms. Reed proceeded diligently by seeking resolution of the question presented through the State Court SJ Motion. The Debtor does not contend that he was either unaware of the State Court SJ Motion or that he was deprived of an opportunity to respond to it. He certainly had enough incentive to do so and he had already explained the basis for his disagreement with Ms. Reed's position in the Answer. The Debtor had more than a vague expectation that the crucial issue would be raised; he raised it himself. To the extent the State Court Case became a one-sided contest, the fault for the imbalance falls squarely on the Debtor's shoulders. He could have continued to press his argument and seek to insulate his basic duty to indemnify from the facts raised in the Binner Complaint through the filing of a response to the State Court SJ Motion, but for whatever reason, he decided not to do so. When appropriate, as in this `second act' of a case, summary judgment is a valid substitute for trial and the fact issues necessarily adjudicated may be used for their preclusive effect. Accordingly, the Court concludes that the second element of the test for issue preclusion — whether the issues were actually litigated and were essential to the judgment — is resolved in Ms. Reed's favor. Hence, accepting the effect of the Judgment Order, the Court must find that the Debtor had a duty under the Agreement to indemnify Ms. Reed on the basis of her settlement of the Binner Complaint.
In conclusion, the entire debt memorialized in the Recorded Judgment shall be excepted from the Debtor' discharge. A separate Order shall be entered.
