JASON D. WOODARD, Bankruptcy Judge.
This adversary proceeding comes before the Court for consideration of the Adversary Complaint to Determine Dischargeability of Debt (the "Complaint") (A.P. Dkt. # 1) filed by Custom Recycling Systems, Inc. (the "Plaintiff") against debtor Charles Nathan Blake (the "Defendant"). Phase one of a bifurcated trial on the adversary proceeding was held on August 7, 2014, at which time a representative of the Plaintiff, Daniel Skinner, counsel for the Plaintiff, Gary Street Goodwin, the Defendant, and counsel for the Defendant, T.K. Moffett, all appeared. Arguments were heard and certain documents were received into evidence by stipulation of the parties. The Court also heard testimony from several witnesses. This Court has jurisdiction pursuant to 28 U.S.C. §§ 151, 157(a) and 1334(b) and the United States District Court for the Northern District of Mississippi's Order Of Reference Dated August 6, 1984. This is a core proceeding as set forth in 28 U.S.C. § 157(b)(2)(I) and (J).
The Plaintiff seeks a determination that debts owed to the Plaintiff by the Defendant are nondischargeable pursuant to 11 U.S.C. § 523(a)(2)(A), (a)(4) and/or (a)(6). As a threshold matter, Plaintiff asserts that collateral estoppel applies and precludes
Prior to the litigation, the parties had a business relationship where Defendant performed repairs and service on several pieces of machinery and equipment owned by the Plaintiff. Sometime prior to or around 2007, the business relationship between the parties deteriorated and was eventually terminated. The Plaintiff contends that near the end of the business relationship, Defendant converted five items of equipment belonging to the Plaintiff.
On November 29, 2007, Plaintiff filed suit against Defendant and Blake Equipment Sales, LLC ("BES") in the District Court alleging conversion of Plaintiff's property (the "District Court Case"). Defendant retained counsel who remained as counsel of record for the duration of the District Court Case.
Defendant filed a Rule 12(b) Motion to Dismiss (the "Motion to Dismiss") (Ex. P-1C) on February 28, 2008, alleging that the District Court lacked subject matter jurisdiction to hear the suit.
On September 18, 2008, during the pendency of the District Court Case, the Defendant filed a voluntary petition for relief pursuant to Chapter 7 of Title 11 of the United States Code (the "Bankruptcy Code") in this Court. (Bankr. Dkt. # 1).
Around that same time, on September 23, 2008, counsel for the Defendant filed a Motion to Withdraw as Counsel for BES (but not Defendant). (Ex. P-1M). On September 25, 2008, the District Court entered an order denying the Motion to Withdraw as Counsel. The District Court made explicitly clear in its order that it would only allow counsel to withdraw in three circumstances: (1) when the rules of professional responsibility make it untenable for the attorney to continue; (2) when substitute counsel has been obtained by a party; and (3) when a party make clear an unequivocal and intelligent decision to proceed pro se. The Court found that none of the three circumstances applied, and that accordingly the Motion to Withdraw was not well-taken, and counsel was not excused from representing BES. (Ex. P-1P).
In March 2009, Plaintiff filed a Motion to Lift Automatic Stay (the "Motion to Lift Stay") (Bankr. Dkt. # 42) and a Motion for Extension of Deadline for Filing of Complaint to Determine Dischargeability (the "Motion for Extension") (Bankr. Dkt. # 47) in the Defendant's bankruptcy case. The Motion to Lift Stay asserted that the result in the District Court Case could resolve the dischargeability issue in this Court. Accordingly, Plaintiff requested that the automatic stay be lifted for the purpose of proceeding with the District Court Case to reduce that action to judgment. (Bankr. Dkt. # 42). Similarly, the Motion for Extension requested that if the Motion to Lift were granted, that the Plaintiff also be given until thirty days after any District Court judgment became non-appealable to file a complaint to determine dischargeability of certain debts in this Court. (Bankr. Dkt. # 47).
The automatic stay having been lifted by this Court, the parties proceeded with the District Court Case. (Ex. P-1S). Defendant failed to file an answer to the District Court Complaint. Evidence submitted to this Court without objection establishes
On April 5, 2010, Plaintiff filed an Application to Clerk for Entry of Default and Supporting Affidavit (Ex. P-1T) in the District Court Case, requesting that, in accordance with Rule 55(a) of the Federal Rules of Civil Procedure, an entry of default be entered against the Defendant for his failure to answer or otherwise defend the District Court Complaint. A clerk's default was thereafter entered. (Ex. P-IU). On April 6, 2010, Plaintiff also filed an Application to Court for Default Judgment and for Hearing (Ex. P-1V), requesting a default judgment against the Defendant. The Plaintiff requested that the District Court conduct an evidentiary hearing to determine damages and any other matter that the District Court may need to determine. The District Court granted the Application, but ordered the Plaintiff to file affidavits and other supporting evidence in lieu of a hearing. (Ex. P-1W). The District Court indicated that it would hold a hearing if there were substantial issues remaining following its review of the evidentiary submission. (Id.)
On August 27, 2010, the Plaintiff filed a Motion for Determination of Damages and for Entry of Default Judgment Awarding Damages (the "Motion for Default") (Ex. P-1X), which included the affidavit of Daniel Skinner, president of the Plaintiff (Ex. P-1X, "A"), a copy of the Defendant's deposition taken April 13, 2010 (Ex. P-1X, "B"), various documents relating to the purchase and sale of the equipment in question (Ex. P-1X, "Collective C"), the attorney's fee affidavit of Mr. Goodwin (Ex. P-1X, "D"), and a deposition transcript of Justin Hastings, vice president of the Plaintiff (Ex. P-1X, "E").
On September 24, 2010, the District Court entered the District Court Judgment. (Ex. P-1Y). In the District Court Judgment, the court specifically stated that its decision was made after consideration of the affidavits and documentary exhibits. The Court explained that its findings were based on evidence showing that the Defendant had wrongfully come into possession of, or wrongfully detained, equipment belonging to the Plaintiff. Although one of the five items of equipment in question was returned to the Plaintiff during the pendency of the litigation, the District Court found that the remaining four items "were converted by the defendants in a malicious and willful manner, due to the defendant's own financial condition." (Ex. P-1Y) (emphasis added). The District Court further found that the Defendant had converted $26,000.00 in equipment sale proceeds belonging to the Plaintiff. Accordingly, the District Court ordered that Plaintiff recover judgment from Defendant in the total amount of $149,446.35. Of that amount, the District Court awarded $133,200.00 in compensatory damages and $16,246.35 in punitive damages.
The doctrine of collateral estoppel
In determining whether a federal court judgment has preclusive effect, the federal standard applies.
See, e.g., Bradberry v. Jefferson Cnty., Tex., 732 F.3d 540, 548 (5th Cir.2013); Kerr-McGee, 793 F.Supp. at 694; Rain Bird Corporation v. Salisbury (In re Salisbury), 331 B.R. 682, 685-86 (Bankr. N.D.Miss.2005). All three elements are satisfied in this case.
Plaintiff's claims in both this Court and the District Court are largely the same — the Defendant converted Plaintiff's property and thereby caused injury to the Plaintiff. Upon review of the Motion for Default and the evidence submitted therewith, the District Court found that the Plaintiff had converted four pieces of equipment owned by the Plaintiff, as well as $26,000.00 of equipment sale proceeds also belonging to the Plaintiff.
The tort of conversion involves "a wrongful possession, or the exercise of a dominion in exclusion or defiance of the owner's right, or of an unauthorized and injurious use, or of a wrongful detention after demand." Stevens v. Smith, 71 So.3d 1230, 1233 (Miss.Ct.App.2011) (citing Cmty. Bank, Ellisville, Miss. v. Courtney, 884 So.2d 767, 772-73 (¶ 10) (Miss.2004)(quoting Smith v. Franklin Custodian Funds, Inc., 726 So.2d 144, 149 (¶ 20) (Miss.1998))). There is a conversion only when there is "intent to exercise dominion or control over goods which is inconsistent with the true owner's right." First Investors Corp. v. Rayner, 738 So.2d 228, 234 (Miss.1999). The intent required does not have to be that of a wrongdoer. Id. That is to say, one may be liable for the tort of conversion even if acting under a good-faith mistake of fact or law. Walker v. Brown, 501 So.2d 358, 361 (Miss.1987). See also Masonite Corp. v. Williamson, 404 So.2d 565, 567-68 (Miss.1981) ("[N]either a mistake of fact on the part of [the defendant] ... nor [his] good faith ... is a defense to this action of conversion.")
Although the act of conversion can be "intentional" or "unintentional" (for lack of a better term), the Plaintiff has always alleged both before this Court and the District Court that the Defendant's actions were intentional. Because the District Court specifically found, based on the evidence before it, that the Defendant's acts of conversion were "willful and malicious," this Court finds that the issue litigated in the District Court is identical to the issue before this Court.
It also bears noting that the Defendant's bankruptcy case had already been filed by the time the District Court Judgment was entered. The Order Lifting Stay entered by this Court specifically provided that the facts alleged in the District Court litigation, if proven in that court, could constitute an exception to discharge in this Court. The District Court and all parties were aware of the District Court Case's connection to the bankruptcy case, and the District Court specifically found that the Defendant's actions were willful and malicious, not simply that conversion had occurred.
This Court is not left to compare the factors of "willful and malicious" with the specific intent to commit conversion — the District Court already specifically found that the items were converted in a willful and malicious manner. The District Court's use of such precise language with regard to intent leads this Court to the conclusion that the District Court knew that it was an important consideration in the bankruptcy case.
Although the District Court Case resulted in a default judgment, the doctrine of collateral estoppel may still apply. "The failure of a defendant to attend the trial does not prevent issue preclusion in a subsequent action, so long as the prior action was actually litigated in the defendant's absence." In re Evans, 252 B.R. 366, 369 (Bankr.N.D.Miss.2000). In Pancake v. Reliance Insurance Co. (In re
Id. at 1244-45.
Hence, Pancake mandates that the analysis to be undertaken by this Court is whether the District Court record supports a finding by this Court that the issue was fully and fairly litigated in the District Court.
At trial before this Court, the parties stipulated to the admission of extensive evidence relied upon by the District Court. (Ex. P-1). By submitting these documents into evidence at trial before this Court, the Plaintiff has satisfied the burden set forth by the Fifth Circuit in Partcake. See Sanders v. Nunley (In re Nunley), 237 B.R. 907 (Bankr.N.D.Miss.1999) (collateral estoppel applied in a dischargeability action to a federal District Court default judgment when based on an evidentiary record). Although the District Court Judgment was a default judgment, that judgment was entered only after consideration of an evidentiary record. The Defendant had notice of all hearings and filings leading up to the District Court Judgment, and actually participated in the District Court Case for some time.
It is true that in Mississippi the act of conversion does not always require a tortfeasor to act willfully and maliciously. As stated above, conversion has been committed when there is "intent to exercise dominion or control over goods which is inconsistent with the true owner's right." Rayner, 738 So.2d at 234. The intent required does not have to be that of a wrongdoer. Id. However, § 523(a)(6) requires a creditor to show an injury to person or property by the debtor was both willful and malicious.
In determining whether or not a debt arises from "willful and malicious injury," the United States Supreme Court has held that subsection (a)(6) applies to "acts done with the actual intent to cause injury," and does not except from discharge debts arising only from negligently or recklessly inflicted injuries. Kawaauhau v. Geiger, 523 U.S. 57, 59, 118 S.Ct. 974, 975-76, 140 L.Ed.2d 90 (1998). Following the Supreme Court's analysis in Kawaauhau, the Fifth Circuit has held that "[a]pplying the Supreme Court's pronouncement ... for a debt to be nondischargeable, a debtor must have acted with `objective substantial certainty or subjective motive' to inflict injury." In re Williams, 337 F.3d 504, 508 (5th Cir.2003) (citing Miller v. J.D. Abrams, Inc. (In re Miller), 156 F.3d 598, 603 (5th Cir.1998)). Furthermore, "Kawaauhau held that a willful injury, in this context, is a `deliberate or intentional injury, not merely a deliberate or intentional act that leads to injury.'" In re Shcolnik, 670 F.3d 624, 629 (5th Cir.2012)(emphasis original). In analyzing this standard, the Fifth Circuit has stressed that the requisite intent may be found where the Defendant acted with "objective substantial certainty or subjective motive" to inflict injury. Williams, 337 F.3d at 508 (citing Miller, 156 F.3d at 603).
In the dispute between these two parties, not only was there objective substantial certainty that the Defendant's actions would cause injury when Plaintiff's property was converted, but Defendant admitted it was his intent to cause the injury. In the deposition of the Defendant, submitted to the District Court as part of the evidentiary basis for the Motion for Default, Defendant explained that money was owed to him by the Plaintiff for work done on the Plaintiff's equipment and for other work done for the Plaintiff. (Ex. P-1X, "B"). Defendant maintained that he kept Plaintiff's equipment in response to Plaintiff's failure to pay him for work done. The equipment was likewise sold by the Defendant to satisfy the debts allegedly owed to him by the Plaintiff.
The facts, allegations, pleadings and evidence have always been exclusively concerned with willful and malicious intent. The Plaintiff has never alleged otherwise and gave the District Court no evidence that the conversion was unintentional. The parties and the District Court were aware that the District Court Case would be a precursor to a nondischargeability suit in this Court. Accordingly, the District Court specifically requested evidentiary submissions before rendering the Default Judgment, and then in that Default Judgment specifically chose to include the willful and malicious finding. As such, this Court finds that for purposes of collateral estoppel analysis, the determination of the issue of intent in the prior litigation was a critical and necessary part of the judgment in that earlier action.
Based on the review of the evidence considered by the District Court in
