DANIEL S. OPPERMAN, Bankruptcy Judge.
Plaintiff Jeffrey K. Roettger filed a Motion for Summary Judgment arguing that this Court should give a state court order preclusive effect and make a determination that the debt owed to him by Defendant Trina Kay Rakay is excepted from discharge pursuant to 11 U.S.C. § 523(a)(2) due to fraud and under 11 U.S.C. § 523(a)(5) for a domestic support obligation. Defendant disagrees that the state court order should be given such an effect and argues that Plaintiff is not entitled to summary judgment. Because collateral estoppel applies to part of the judgment, the Court grants Plaintiff's Motion for Summary Judgment in part and denies it in part for the reasons discussed in this Opinion.
Plaintiff and Defendant Trina Kay Rakay were married on September 23, 2011. Defendant filed a complaint for divorce in the Oakland County Circuit Court on February 2, 2015. The divorce was contentious and the dispute between the parties centered on the use of certain property during the incarceration of Plaintiff. Plaintiff's arbitration summary stated that "Alimony is not at issue. However, due to the extreme nature of [Defendant's] wanton theft and destruction of [Plaintiff's] house and belongings, the equitable division of property is at issue." The parties agreed to arbitration on October 13, 2015. The "Matrimonial Arbitration Acknowledgment and Agreement" entered into between the parties set forth the following issues "to be arbitrated:" "division of real and personal property, including ancillary issues related thereto;" "costs, expenses and attorney fees;" and "allocation of the parties' responsibility for marital debts." Other issues were identified in the agreement as "not applicable," including "spousal support."
A lengthy Arbitration Ruling was issued on August 25, 2016. Some of the relevant portions of that ruling are as follows:
Under "Summary of Conclusions," the arbitrator stated, in part:
Under "Award," the ruling stated, in relevant part:
The arbitrator also stated: "[n]either party sought nor is either party awarded spousal support, and same should be forever barred.
The Judgment of Divorce was issued by the Oakland County Circuit Court on November 3, 2016. Under "Spousal Support/Alimony," the judgment states: "It is hereby ordered that Plaintiff shall neither pay nor receive alimony from Defendant and alimony is forever barred. It is hereby ordered that Defendant shall neither pay nor receive alimony from Plaintiff and alimony is forever barred." Under "Property Settlement," the Judgment sets forth relevant portions of the arbitrator's "Award."
Defendant filed a voluntary petition under Chapter 7 of the Bankruptcy Code on December 5, 2017. Plaintiff brought this adversary proceeding on February 20, 2018, seeking a determination of nondischargeability for the $41,502.00 award in the Judgment of Divorce pursuant to § 523(a)(5) and § 523(a)(15). Defendant later converted her Chapter 7 case to a Chapter 13 case, and Plaintiff amended his complaint, adding a claim under § 523(a)(2). Plaintiff brought this Motion for Summary Judgment, arguing that he is entitled to summary judgment based on principles of collateral estoppel, res judicata, and the Rooker-Feldman doctrine. He argues that the state court order should be given preclusive effect with regards to its conclusions regarding the fraudulent actions of Defendant as well as with regard to its definition of the award as a "domestic support obligation." Defendant responded, arguing that there is a genuine issue of material fact regarding whether she had the necessary intent to deceive under § 523(a)(2). She also argues that the issue of fraud was not ripe for litigation during the arbitration proceeding. Plaintiff filed a reply brief on August 25, 2018.
The Court heard oral arguments on Plaintiff's motion on August 29, 2018, and took this matter under advisement.
This Court has subject matter jurisdiction over this proceeding under 28 U.S.C. § 1334(b), 28 U.S.C. § 157, and E.D. Mich. LR 83.50(a). This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(I) because the issues relate to the dischargeability of a particular debt.
Federal Rule of Civil Procedure 56 is made applicable in its entirety to bankruptcy proceedings by Federal Rule of Bankruptcy Procedure 7056. Rule 56(a) provides that summary judgment is proper if "the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." The moving party bears the burden "of showing `the absence of a genuine issue of material fact' as to an essential element of the non-movant's case." Street v. J.C. Bradford & Co., 886 F.2d 1472, 1479 (6th Cir. 1989) (quoting Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986)). "A `genuine' issue is one where no reasonable fact finder could return a judgment in favor of the non-moving party." Chudzinski v. Hanif (In re Hanif), 530 B.R. 655, 663 (Bankr. E.D. Mich. 2015) (quoting Berryman v. Rieger, 150 F.3d 561, 566 (6th Cir. 1998)).
The burden shifts to the nonmoving party once the moving party has met its burden, and the nonmoving party must then establish that a genuine issue of material fact does indeed exist. Janda v. Riley-Meggs Indus., Inc., 764 F.Supp. 1223, 1227 (E.D. Mich. 1991). The non-moving party "`must do more than simply show that there is some metaphysical doubt as to the material facts. If the record taken in its entirety could not convince a rational trier of fact to return a verdict in favor of the non-moving party, the motion should be granted.'" Hanif, 530 B.R. at 663 (quoting Cox v. Ky. Dep't of Transp., 53 F.3d 146, 150 (6th Cir. 1995)).
Plaintiff argues that he is entitled to summary judgment based on the principles of collateral estoppel, res judicata, and the Rooker-Feldman doctrine. However, the bankruptcy courts do not apply res judicata, also known as claim preclusion, in dischargeability proceedings since the United States Supreme Court held in Brown v. Felson, 442 U.S. 127, 136 (1979), that bankruptcy courts are endowed with exclusive jurisdiction to determine dischargeability actions. See Cresap v. Waldorf (In re Waldorf), 206 B.R. 858, 861 (Bankr. E.D. Mich. 1997). Similarly, while the Rooker-Feldman doctrine provides that a federal trial court may not review a state court decision, that doctrine does not require a federal court to surrender its own exclusive jurisdiction. Sill v. Sweeney (In re Sweeney), 276 B.R. 186, 195 (B.A.P. 6th Cir. 2002). Thus, under the Rooker-Feldman doctrine, a bankruptcy court may not review the merits of a debt, but it may within its exclusive jurisdiction determine whether that debt is dischargeable or not. Id.
While collateral estoppel, also known as issue preclusion, is applicable in bankruptcy dischargeability proceedings, see Grogan v. Garner, 498 U.S. 279, 284 (1991), a bankruptcy court must determine whether applicable state law would give collateral estoppel effect to the state court judgment, Bay Area Factors v. Calvert (In re Calvert), 105 F.3d 315, 317 (6th Cir. 1997). Under Michigan law, collateral estoppel applies when
Hinchman v. Moore, 312 F.3d 198, 202 (6th Cir. 2002) (quoting Darrah v. City of Oak Park, 255 F.3d 301, 311 (6th Cir. 2001) (citing People v. Gates, 452 N.W.2d 627, 630-31 (Mich. 1990))).
"An issue is `actually litigated' if it `is put into issue by the pleadings, submitted to the trier of fact, and determined by the trier of fact.'" Waldorf, 206 B.R. at 863 (quoting Latimer v. Mueller & Son, Inc., 386 N.W.2d 618, 627 (Mich. Ct. App. 1986)). A trial is not necessarily required for an issue to be "actually litigated." Latimer, 386 N.W.2d at 627. "Michigan law clearly dictates that summary disposition in the state court is a valid and final judgment." Thomas v. Ware (In re Thomas), 366 B.R. 727, 729-30 (E.D. Mich. 2007) (citing Allied Elec. Supply Co. v. Tenaglia, 602 N.W.2d 572, 573 (Mich. 1999)). If an issue is essential to the judgment, it is "necessarily determined." Gates, 452 N.W.2d. at 631.
Section 523(a)(2)(A) excepts from discharge debts "for money, property, services, or an extension, renewal, or refinancing of creditor, to the extent obtained by—(A) false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor's or an insider's financial condition."
To prevail on a claim under § 523(a)(2)(A), a plaintiff must show that:
Rembert v. AT&T Universal Card Servs., Inc. (In re Rembert), 141 F.3d 277, 280-81 (6th Cir. 1998) (citations and footnote omitted). Intent, under Rembert, is measured subjectively. Id. at 281.
The purpose of § 523(a)(2) is to prevent debtors from retaining the benefits of property obtained through fraud. XL/Datacomp, Inc. v. Wilson (In re Omegas Group, Inc.), 16 F.3d 1443, 1451 (6th Cir. 1994). Plaintiff must show each element by a preponderance of the evidence. Grogan v. Garner, 498 U.S. 279, 286 (1991). Even so, the Court must construe all of the exceptions to discharge strictly, and must give the benefit of the doubt to the debtor. See Rembert, 141 F.3d at 281; see also Walker v. Tuttle (In re Tuttle), 224 B.R. 606, 610 (Bankr. W.D. Mich. 1998) (recognizing "the axiom that requires this court to construe exceptions to the bankruptcy discharge narrowly and in favor of the debtor").
The United States Supreme Court held in the case of Husky Int'l Elec., Inc. v. Ritz, 136 S.Ct. 1581, 1586 (2016), that "actual fraud" under § 523(a)(2)(A) does not require a false representation. In Husky, the debtor was the principal of a debtor corporation that had previously transferred assets without consideration to other companies he controlled in order to avoid payment to creditors of the initial debtor corporation. Id. at 1585. The Husky Court held that forms of fraud other than false representations, such as the fraudulent conveyance scheme present in that case, can constitute "actual fraud" under § 523(a)(2)(A).
Section 523(a)(5) excepts from discharge debts "for a domestic support obligation."
Generally, in determining whether a debt falls within one of the exceptions of section 523, the statute is construed narrowly against the creditor and liberally in favor of the debtor. Keeney v. Smith (In re Keeney), 227 F.3d 679, 683 (6th Cir. 2000); Boroff v. Tully (In re Tully), 818 F.2d 106, 110 (1st Cir. 1987); Murphy and Robinson Inv. Co. v. Cross (In re Cross), 666 F.2d 873, 879-80 (5th Cir. 1982). An exception to this general rule exists for the term "support," which is given a broad construction to promote the Congressional policy that favors enforcement of obligations for spousal and child support. See Goans v. Goans (In re Goans), 271 B.R. 528, 531 (Bankr. E.D. Mich. 2001) (citing Bailey v. Bailey (In re Bailey), 254 B.R. 901, 905 (B.A.P. 6th Cir. 2000)). Congressional policy regarding § 523(a)(5) has always been to ensure that support obligations would not be dischargeable. Id.
Making a determination as to whether an obligation is in the nature of support in bankruptcy is a federal question. In re Calhoun, 715 F.2d 1103, 1107 (6th Cir. 1983). The absence of specific language designating an obligation as alimony, maintenance, or support does not foreclose a finding that an obligation is in fact such. See, e.g., Fitzgerald v. Fitzgerald (In re Fitzgerald), 9 F.3d 517, 520 (6th Cir. 1993). In Calhoun, 715 F.2d at 1109-10, the Sixth Circuit Court of Appeals established an analytical framework for determining when an obligation, not specifically designated as alimony, maintenance, or support, is nonetheless in the nature of support and therefore non-dischargeable. This four-step analysis is as follows:
Fitzgerald, 9 F.3d at 520 (citing Calhoun, 715 F.2d at 1109-10). The burden of proving the obligations at issue are in the nature of support is on the creditor. Id.
The Sixth Circuit Court of Appeals revisited the issue of nondischargeability under § 523(a)(5) in two subsequent cases. In Fitzgerald, 9 F.3d at 521, the Sixth Circuit recognized that the Calhoun test had been applied more broadly than intended and stated that the second element, also known as the "present needs" tests, did not apply in situations where "the only question is whether something denominated as alimony is really alimony and not, for example, a property settlement in disguise." Finally, in Sorah v. Sorah (In re Sorah), 163 F.3d 397, 401 (6th Cir. 1998), the Sixth Circuit stated that when a state court order specifically labels an award as support, and the award has all the indicia of support, the obligation should be conclusively presumed to be support.
Id. Bankruptcy courts "need not limit their analyses to consideration of the three indicia discussed above, but may also consider other factors." McNamara v. Ficarra (In re McNamara), 275 B.R. 832, 837 (E.D. Mich. 2002) (citing Sorah, 163 F.3d at 401).
The Court first addresses the argument that Plaintiff is entitled to summary judgment on his claim under § 523(a)(5). Plaintiff cites Sorah to argue that when an award is labeled as support and has all the indicia of support, it should be conclusively presumed to be support. See Sorah, 163 F.3d at 401. While Sorah is applicable, the Sorah analysis of other courts leads this Court to reach an opposite result. For example, in Andrus v. Ajemian (In re Andrus), 338 B.R. 746, 754 (Bankr. E.D. Mich. 2006), the court applied Sorah and found that only two of the three traditional indicia of support were present in that case and thus considered additional factors. One relevant factor was that the award was in the exact amount of the net of the debits and credits set forth under the "property settlement" section of the judgment. Id. at 755. Also, there was a "bankruptcy acknowledgment" that attempted to "preemptively overrule" any dischargeability determination by a bankruptcy court in the future. Id. The court noted that there is no authority to do so and that this appears to violate the Bankruptcy Code. Id. at 756. Even though the award was included in the "alimony" section of the judgment and was set up as monthly payments over a period of time, the court ultimately decided that it was a property settlement. Id.
Regarding the application of the first Sorah factor to this case, Plaintiff argues that the state court labeled the award support due to the language in the Arbitration Ruling, which was later incorporated in the Judgment of Divorce, defining the award as a "domestic support obligation." The Court cannot, however, take this language in isolation. In fact, this language was placed in the "Property Settlement" section of the Judgment of Divorce, and under "Spousal Support/Alimony," the judgment made it clear that neither party is to receive or pay alimony. Moreover, the Arbitration Ruling itself recognized that "[n]either party sought nor is either party awarded spousal support, and same should be forever barred." The Court therefore concludes that the state court order did not label the award as support. To the contrary, it appears that the award is recognized as a property settlement but the language defining it as a "domestic support obligation" was included for the sole purpose of the bankruptcy waiver, which is an improper attempt to decide an issue within the exclusive jurisdiction of the bankruptcy courts. See Andrus, 338 B.R. at 756 ("the attempt by the `bankruptcy acknowledgment' to indiscriminately make all obligations of both [parties] non-dischargeable does not in any way override this Court's application of the Sorah factors or otherwise help [the party seeking a nondischargeability finding]"). At best, the first Sorah factor does not favor either party. With regard to the second Sorah factor, because the payment of the award is to be made directly from Defendant to Plaintiff and is not an assumption of a third-party debt, this is an indication of an award of support that favors Plaintiff. On the other hand, the award is not contingent upon such events as death, remarriage, or eligibility of Social Security benefits, and, thus, the third Sorah factor suggests a property settlement and not support and favors Defendant.
Because only one of the three indicia of support set forth in Sorah is present here, the Court will consider other factors in this case. The summaries prepared by both parties prior to the arbitration acknowledge that the issues revolved primarily around the distribution of property. Plaintiff's summary specifically stated that "[a]limony is not at issue," while "the equitable division of property is at issue." Also, the arbitration agreement entered into between the parties clearly stated that spousal support was not applicable, while the "division of real and personal property" was to be arbitrated. Thus, it is evident that the parties did not intend for the award to be support. Cf. McNamara, 275 B.R. at 837 (stating that because "[f]or almost ten years the locus of the parties' dispute centered on the appropriate level of alimony," the decision to characterize the debt as non-dischargeable alimony was not difficult). Moreover, the Arbitration Ruling itself clearly based the judgment amount on the value of the property at issue. In this respect, this case is similar to Andrus, 338 B.R. at 755, where the award was in the exact amount of the net of the debits and credits set forth under the "property settlement" section of the judgment.
In sum, only one of the three Sorah factors is present here and the remaining factors all point to a finding that the award was a property settlement and not support. Thus, the Court need not conclusively presume that the state court intended to create a support order. Plaintiff is not entitled to summary judgment on his claim under § 523(a)(5).
The Court now considers the argument that Plaintiff is entitled to summary judgment on his claim under § 523(a)(2). Plaintiff argues that collateral estoppel applies to the arbitrator's findings regarding the fraudulent actions of Defendant. Defendant disagrees and argues that there is a genuine issue of material fact as to whether she had the requisite intent to deceive. She also argues that the issue of fraud was not ripe for litigation, because the arbitrator exceeded the scope of the parties' agreement by deciding this issue.
Under Michigan law, collateral estoppel principles apply to factual findings made during an arbitration proceeding.
The arbitrator found that Plaintiff was entitled to a judgment in the amount of $24,000 due to Defendant's fraudulent conveyance of two vehicles. Under Husky, 136 S. Ct. at 1586, fraudulent conveyance schemes can constitute "actual fraud" under § 523(a)(2)(A). The Supreme Court reasoned in Husky that "anything that counts as `fraud' and is done with wrongful intent is `actual fraud.'" Id. Thus, for collateral estoppel to apply, the arbitrator must have found fraud as well as the requisite wrongful intent. See, e.g., Maxwell v. Maxwell (In re Maxwell), 509 B.R. 286, 290 (Bankr. E.D. Cal. 2014) (finding collateral estoppel inapplicable because the state court judgment for breach of fiduciary duty did not include a finding of wrongful intent which is required for purposes of § 523(a)(4)); Hermoyian, 466 B.R. at 376 (applying collateral estoppel principles for purposes of a nondischargeability determination only to the portion of the Arbitration Award sufficiently supported by findings establishing all of the elements of § 523(a)(2)).
The arbitrator found that Defendant fraudulently conveyed Plaintiff's camper and truck and made specific findings regarding Defendant's intent, including finding her actions "deliberate" and her testimony that Plaintiff wanted her to sign the titles in his name as incredible. Thus, the issue of the fraudulent conveyance of the two vehicles was actually litigated and necessarily determined during the arbitration proceeding. The Court also finds that Defendant had the opportunity to fully and fairly litigate this issue despite her assertion that the arbitrator went outside the scope of the agreement by deciding it. The arbitration agreement stated that the "division of real and personal property, including ancillary issues related thereto" was to be arbitrated. Moreover, Plaintiff's arbitration summary included allegations that Defendant retitled two of Plaintiff's vehicles by taking "the titles from [Plaintiff's] files and sign[ing] them over to herself while [he] was in jail without his consent or permission." Thus, Defendant was on notice that the conveyance of the vehicles was at issue during the arbitration proceeding and had the opportunity to present evidence, including her own testimony, with regard to the matter. In sum, the Court finds that the findings in the Arbitration Ruling regarding the fraudulent conveyance of the two vehicles are sufficient to satisfy Plaintiff's burden of proving "actual fraud" under § 523(a)(2).
The remaining amount of the judgment, however, was not based on any specific findings of fraud. With regards to the award in the amount of $1,200 for the cost of returning the pool to its prior location, the arbitrator found that Defendant was "without any legal justification or right to remove the pool from the property." The arbitrator also awarded Plaintiff $6,302 for moving "more property from the house than she should have." Finally, $10,500 of the award was based on Defendant's "misuse" of the home. The arbitrator found that Defendant made no payments on the house but used the house for profit for a period of seven months and stated that "equity" demanded some kind of pay-back. Thus, not only did the arbitrator not find that Defendant's actions constituted fraud with regard to the remaining property, he also did not make any findings of a wrongful intent. In conclusion, the Court finds that the arbitrator's findings do not satisfy Plaintiff's burden of proof in establishing the elements of fraud under § 523(a)(2) for the items beyond the two vehicles.
In sum, even though the arbitrator stated in his summary that his award was based on his findings of fraud, only the portion of the award based on the value of the two vehicles is sufficiently supported by specific findings regarding fraud. Thus, the Court finds that $24,000 of the judgment amount is nondischargeable due to the preclusive effect of the arbitrator's findings regarding the fraudulent conveyance of the two vehicles, but collateral estoppel does not apply to the remaining portion of the judgment.
For the foregoing reasons, the Court denies Plaintiff's Motion for Summary Judgment as to his claim under § 523(a)(5) and grants his Motion for Summary Judgment in part and denies it in part as to his claim under § 523(a)(2). Because this Opinion does not resolve this adversary proceeding in its entirety and because it may impact the Defendant's pending Chapter 13 case, the Court will schedule a telephonic status conference to address how the parties wish to proceed.
Counsel for Plaintiff is directed to prepare an order consistent with this Opinion and the entry of order procedures of this Court.