ERIC L. FRANK, Bankruptcy Judge.
Plaintiff Deborah Klein ("Klein") is the former spouse and judgment creditor of Defendant-Debtor Douglas Weidner ("the Debtor or Weidner"). Klein and the Debtor were divorced in California in 1999. Pursuant to the divorce decree, Klein was awarded spousal and child support. On June 2, 2008, after protracted litigation between the parties, the California state court entered judgment in Klein's favor in the amount of $548,797.07 for unpaid spousal and child support ("the California Judgment").
In August 2008, Klein commenced a lawsuit ("the District Court Action") against the Debtor in the United States District Court for the Eastern District of Pennsylvania ("the District Court"). In the District Court Action, Klein alleged that the Debtor fraudulently transferred certain assets to himself and his current wife as tenants by the entireties in an effort to evade payment of the California Judgment. In three (3) orders and opinions issued in 2010, the District Court found in Klein's favor, ordered that title to the transferred property be restored to the Debtor solely and awarded Klein punitive damages in an amount equal to the California Judgment.
In this adversary proceeding, Klein seeks a determination that the prior state and federal court judgments are nondischargeable under 11 U.S.C. § 523(a) and that the Debtor is not entitled to a general bankruptcy discharge pursuant to 11 U.S.C. § 727(a). In her amended complaint, Klein asserted twelve (12) claims, including four (4) claims under § 523(a) and seven (7) claims under § 727(a).
Relying on the findings of fact and conclusions of law entered in the District Court Action and the doctrine of collateral estoppel,
The summary judgment motion focuses largely on three (3) pre-petition transfers made by the Debtor. Two (2) of the three (3) transfers were transfers of the Debtor's interest in his residential real property; the other was a transfer of his ownership interest in a closely-held business. The residential real property transfers involved: (1) the transfer of ownership from the Debtor to himself and his current wife and (2) the grant of a mortgage to Robert Benedix ("the Benedix Mortgage").
As explained more fully below, I conclude that there are no material issues of fact in dispute and that Klein is entitled to
Consequently, I will enter judgment in Klein's favor and deny the Debtor's chapter 7 discharge.
On December 23, 2010, the Debtor filed a voluntary chapter 11 bankruptcy case. The case was converted to a chapter 7 on June 6, 2011. (See Bky. No. 11-31034, Doc. #69).
On April 5, 2011, Klein instituted this proceeding by filing a complaint asserting various claims under 11 U.S.C. § 523(a). (See Adv. No. 11-294, Doc. #1). After the Debtor answered and filed a counterclaim against Klein, the parties stipulated to allow Klein leave to amend her complaint.
On July 1, 2011, Klein filed a twelve count amended complaint ("the Amended Complaint"). (Adv. No. 11-294, Doc. #13). In addition to her allegations under § 523(a), Klein added claims objecting to the Debtor's general bankruptcy discharge under several subsections of § 727(a). The Debtor filed an answer to the Amended Complaint on August 10, 2011 and asserted two (2) counterclaims against Klein. (See Adv. No. 11-294, Doc. #19).
After a pretrial conference on January 25, 2012, the court entered an order granting Klein leave to file a dispositive motion prior to the commencement of discovery.
Klein and the Debtor were divorced in California in 1999. As part of the divorce decree, the Superior Court of Orange County, California ordered the Debtor to pay child and spousal support to Klein. Klein subsequently returned to the California state court to enforce the support obligations. On June 2, 2008, the state court entered the $548,797.07 California Judgment. Klein transferred the California Judgment to the Court of Common Pleas, Chester County, Pennsylvania on August 25, 2008.
On August 11, 2008, Klein commenced the District Court Action against the Debtor to avoid and recover certain alleged fraudulent transfers of the Debtor's property under the Pennsylvania Uniform Fraudulent Transfer Act, 12 Pa.C.S. §§ 5101 et seq., ("PUFTA"). Specifically, Klein sought to avoid the transfer of the Debtor's interest in the real property located at 1123 St. Matthew's Road, Chester Springs, Pennsylvania ("the Residence"), and the Debtor's interest in DMW Marine, LLC ("DMW Marine")
As stated earlier, the District Court Action resulted in three (3) separate written decisions.
The first decision granted, in part, Klein's motion for summary judgment. See Klein v. Weidner, 2010 WL 27910 (E.D.Pa. Jan. 6, 2010) ("Weidner I"). The District Court found that the Debtor's January 17, 2006 transfer of his interest in the Residence to himself and his wife as tenants by the entireties was fraudulent under 12 Pa.C.S. § 5104(a)(1).
The second decision, issued after a trial held on January 11-13, 2010, resolved the dispute regarding the Debtor's January 2006 transfer of his interest in DMW Marine to himself and his current wife as tenants by the entireties. See Klein v. Weidner, 2010 WL 571800 (E.D.Pa. Feb. 17, 2010) ("Weidner II"). In Weidner II, the District Court held that the DMW Marine transfer was actually and constructively fraudulent under PUFTA. See 12 Pa.C.S. §§ 5104(a)(1), (a)(2) and 5105. The District Court also found in Klein's
In its third decision, the District Court evaluated whether Klein was entitled to an award of punitive damages. See Klein v. Weidner, 2010 WL 2671450 (E.D.Pa. July 2, 2010) ("Weidner III").
The Benedix Mortgage transaction is related to, but also distinct from, the 2 Transfers that were found to be fraudulent
In Weidner II, the District Court drew an adverse inference against Weidner based upon his assertion of his Fifth Amendment privilege and concluded that Weidner participated in the forgery of his wife's signature on the Benedix Mortgage. Weidner II, 2010 WL 571800, at *2. More pertinent to this adversary proceeding, the District Court also found that
Id. at *6 (emphasis added).
Later, in Weidner III, the District Court was more explicit, particularly with regard to the Debtor's state of mind in granting the Benedix Mortgage. The District Court found that "Weidner intended ... his dilatory and harassing actions ... [including] forging his wife's name on a loan encumbering the Property, to prevent Klein from collecting the debt and to impede the enforcement of a court order." Weidner III, 2010 WL 2671450, at *9. In evaluating the "reprehensibility" of the Debtor's conduct for purposes of awarding punitive damages, the District Court specifically referenced the grant of the Benedix Mortgage by stating:
Id. at *6 (emphasis added).
In further evaluating "reprehensibility," the District Court also examined whether Weidner acted with "intentional malice, trickery, or deceit" or whether his behavior was "mere accident." Id. at *9. The District Court found that it was "uniquely positioned to assess Weidner's intent" after it heard Weidner testify and perceived his demeanor on the witness stand. Id. The District Court concluded that the Debtor:
Id. (emphasis added).
Klein moved for summary judgment on Counts 1 through 4 of her Amended Complaint, which asserted claims under 11 U.S.C. § 727(a)(2)(A), (a)(2)(B), (a)(4)(A), and (a)(4)(C).
11 U.S.C. § 727(a) provides, in pertinent part:
To prove a claim for denial of discharge under § 727(a)(2)(A), a plaintiff must prove that the Debtor:
E.g., Rosen v. Bezner, 996 F.2d 1527, 1531 (3d Cir.1993); In re DiLoreto, 266 Fed. Appx. 140, 144 (3d Cir.2008) (nonprecedential); In re Coley, 433 B.R. 476, 487 (Bankr.E.D.Pa.2010); In re Rose, 397 B.R. 740, 742 (Bankr.M.D.Pa.2008); In re Spitko, 357 B.R. 272, 301 (Bankr.E.D.Pa.2006).
The language of § 727(a)(2)(A) is disjunctive; therefore, a plaintiff is not required to prove fraud, but can prevail by proving an intent to hinder or delay.
Summary judgment should be granted when the moving party demonstrates "there is no genuine issue as to any material fact and the movant is entitled to judgment as a matter of law." Fed. R.Civ.P. 56(a).
Under Rule 56, the moving party is entitled to judgment as a matter of law if the court finds that the motion alleges facts which, if proven at trial, would require a directed verdict in favor of the movant. Fitzpatrick v. City of Atlanta, 2 F.3d 1112, 1115 (11th Cir. 1993). "[I]t is inappropriate to grant summary judgment in favor of a moving party who bears the burden of proof at trial unless a reasonable juror would be compelled to find its way on the facts needed to rule in its favor on the law." United States v. Donovan, 661 F.3d 174, 185 (3d Cir.2011) (quoting El v. Se. Pa. Transp. Auth., 479 F.3d 232, 238 (3d Cir.2007)). If the moving party meets its initial burden, the responding party may not rest on the pleadings, but must designate specific factual averments through the use of affidavits or other permissible evidentiary material which demonstrate a genuine issue of material fact to be resolved at trial. Celotex Corp. v. Catrett, 477 U.S. 317, 324, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-50, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986).
The court's role is not to weigh the evidence, but to determine whether there is a disputed, material fact for resolution at trial. Anderson, 477 U.S. at 249, 106 S.Ct. 2505. A genuine issue of material fact is one in which the evidence is such that a reasonable fact finder could return a verdict for the non-moving party. Id. at 248, 106 S.Ct. 2505. The court must view the underlying facts and make all reasonable inferences therefrom in the light most favorable to the party opposing the motion. Pennsylvania Coal Ass'n v. Babbitt, 63 F.3d 231, 236 (3d Cir.1995); United States v. 717 South Woodward St., 2 F.3d 529, 533 (3d Cir.1993). Thus, if it appears that the evidence "is so one-sided that one party
A party's burden of proof plays an essential role in determining the merits of a summary judgment motion. Where, as here, the movant is the plaintiff and has the burden of proof at trial, the movant must show that no reasonable jury could find for the non-moving party. Fitzpatrick, 2 F.3d at 1115. The movant "must produce enough evidence to justify a directed verdict in its favor in order to meet its initial burden." Nat'l State Bank v. Fed. Reserve Bank of New York, 979 F.2d 1579, 1582 (3d Cir.1992); see also In re Newman, 304 B.R. 188, 193 (Bankr. E.D.Pa.2002). Thus, in order to prevail on her Motion, Klein must demonstrate that she has sufficiently established each element of her objection to discharge claim under § 727(a) and that the Debtor has not come forward with evidence to create a triable factual dispute as to any element.
Because the Debtor's "intent" is an element of Klein's cause of action under 11 U.S.C. § 727(a)(2)(A), some further discussion of the propriety of summary judgment is warranted.
A debtor's motivation or intent generally is considered to be a question of fact, not ordinarily subject to resolution on a motion for summary judgment. See In re Crater, 286 B.R. 756, 760-61 (Bankr. D.Ariz.2002); In re Okan's Foods, 217 B.R. 739, 755 (Bankr.E.D.Pa.1998); see also Wishkin v. Potter, 476 F.3d 180, 184 (3d Cir.2007) ("Issues such as intent and credibility are rarely suitable for summary judgment"); Coley, 433 B.R. at 493 ("proof of fraudulent intent is not especially susceptible to disposition by summary judgment").
Notwithstanding the general principle stated above, in some cases, the issue of intent may be determined at the summary judgment stage. A court may infer an intent to hinder or delay creditors "where the debtor has committed some act of deception ... that would justify a finding that the debtor improperly intended to forestall creditors from realizing on their claims."
In this adversary proceeding, Klein asserts that the intent issue was decided by the District Court and that collateral estoppel applies to that finding. If Klein is correct, the issue is not subject to relitigation and therefore, it cannot be a disputed issue of material fact.
There is no dispute the first and second elements of Klein's § 727(a)(2)(A) claim are satisfied: the Debtor owned the Residence and transferred an interest in the property by granting the Benedix Mortgage. See 11 U.S.C. § 101(54) (transfer includes creation of lien); In re Rose, 425 B.R. 145,
The only issue is whether the Debtor had the intent to hinder, delay or defraud a creditor when he granted the Benedix Mortgage.
Klein relies on the doctrine of collateral estoppel to support her request for summary judgment on the § 727(a)(2)(A) claim. By way of issue preclusion, Klein argues that the District Court's findings mandate the conclusion that the Debtor had the requisite scienter under § 727(a)(2)(A) when he granted the Benedix Mortgage and therefore, she has proven all of the elements necessary for the denial of discharge.
The Debtor contends that his intent is a disputed issue of material fact.
The general rule of issue preclusion is: "[w]hen an issue of fact or law is actually litigated and determined by a valid and final judgment, and the determination is essential to the judgment, the determination is conclusive in a subsequent action between the parties, whether on the same or a different claim." Jean Alexander Cosmetics, Inc. v. L'Oreal USA, Inc., 458 F.3d 244, 249 (3d Cir.2006) (quoting Restatement (Second) of Judgments § 27 (1982)).
The prior judgment at issue in this adversary proceeding is a judgment of the federal district court that arose in an action based upon federal diversity jurisdiction. Federal common law determines the preclusive effect of a federal judgment. Taylor v. Sturgell, 553 U.S. 880, 891, 128 S.Ct. 2161, 171 L.Ed.2d 155 (2008) (citing Semtek Int'l Inc. v. Lockheed Martin Corp., 531 U.S. 497, 507-08, 121 S.Ct. 1021, 149 L.Ed.2d 32 (2001)). In federal diversity cases, "federal law incorporates the rules of preclusion applied by the State in which the rendering court sits." Taylor, 553 U.S. at 891 n. 4, 128 S.Ct. 2161 (citation omitted).
Under Pennsylvania law, in order for collateral estoppel to apply, five (5) elements must be met:
E.g., Spyridakis v. Riesling Group, Inc., 398 Fed.Appx. 793, 797 (3d Cir.2010) (nonprecedential); In re Jacobs, 381 B.R. 147, 161 (Bankr.E.D.Pa.2008) (citing Cohen v. Workers' Comp. Appeal Bd. (City of Philadelphia), 589 Pa.498, 909 A.2d 1261, 1264 (Pa.2006)). But see Greenway Ctr., Inc. v. Essex Ins. Co., 475 F.3d 139 (3d Cir.2007) (applying four-part test for collateral estoppel, exclusive of "essential to the judgment" element); Tucker v. Phila. Daily News, 577 Pa. 598, 848 A.2d 113 (2004) (same).
The Debtor argues that collateral estoppel is inapplicable because § 727(a)(2)(A) is not identical to § 5104 of PUFTA. This argument is without merit in the circumstances presented here. For collateral estoppel to apply, the causes of action in the two (2) proceedings need not be identical. It is "the issue" that must be identical.
The issue in this adversary proceeding is whether the Debtor's grant of the Benedix Mortgage was motivated by an intent to hinder, delay or defraud a creditor. In evaluating the Debtor's state of mind, the District Court found in both Weidner II and Weidner III that the Debtor acted with such intent.
No extended discussion of this question is necessary. On its face, the issue decided by the District Court in Weidner III in considering the degree of "reprehensibility" of the Debtor's conduct" is identical to the issue presented here: what was the Debtor's intent when he entered into the Benedix Mortgage transaction?
As stated earlier, the District Court made its findings regarding the Debtor's scienter in the Benedix Mortgage transfer primarily in connection with its discussion and decision whether to award punitive damages. The Debtor's improper intent in the Benedix Mortgage transaction was only one of a number of facts considered by the court in determining that the imposition of punitive damages was warranted. Thus, before applying collateral estoppel, it is fair to consider whether the District Court's findings regarding the Debtor's intent was "essential" to its decision in Weidner III.
Also, as the Debtor points out in his response to the Motion, the District Court based its decision in both Weidner I and Weidner II on alternative legal grounds. Not only did the District Court set aside the transfers as having been made with an "actual intent" to hinder, delay or defraud a creditor pursuant to 12 Pa.C.S. § 5104(a)(1), the court also invoked PUFTA's "constructive fraud" provisions as a basis for its decisions.
The two (2) issues described above are different. To resolve the first issue, it is necessary to engage in a case-specific evaluation of the role that the issue said to be precluded actually played in the prior court's decision. The second issue involves a general policy determination that is a question of law. Therefore, I will consider the two (2) issues separately.
The concept of "essentiality" is somewhat elusive in the context of evaluating the applicability of collateral estoppel to a prior court's factfinding. Comment j to the Restatement (First) of Judgments § 68 (1942) ("Restatement (First)") suggested that a party should not be precluded from relitigating intermediate or evidentiary facts relied upon by a court in making an "ultimate" finding of fact.
The Restatement (Second) of Judgments § 27 (1982) ("Restatement (Second)") rejects the approach of the Restatement (First) and advocates a different legal standard for evaluating "essentiality:"
Restatement (Second) § 27 cmt. j (Reporters Notes) (emphasis added).
The bankruptcy court must apply collateral estoppel in the same manner as the Pennsylvania state courts. To do so, the court must predict how the Pennsylvania Supreme Court would resolve the issue. If the Pennsylvania Supreme Court has not provided guidance, the court must examine the decisional law of the Pennsylvania intermediate courts and decisions of federal courts and other jurisdictions that discuss the issue. See, e.g., Buczek v. Continental Cas. Ins. Co., 378 F.3d 284, 288 n. 2 (3d Cir.2004); Rush v. Scott Specialty Gases, Inc., 113 F.3d 476, 486 (3d Cir. 1997); Wiley v. State Farm Fire & Cas. Co., 995 F.2d 457, 459-60 (3d Cir.1993); In re Jack Greenberg, Inc., 240 B.R. 486, 501 (Bankr.E.D.Pa.1999).
This passage from the Restatement (Second) set out above was quoted with approval in Zarnecki v. Shepegi, 367 Pa.Super. 230, 532 A.2d 873, 879 (1987). My research reveals no line of contrary cases. In these circumstances, I conclude that the more modern approach set out in the Restatement (Second) accurately states Pennsylvania law on the subject. See also Christine Davis, 10 Standard Pennsylvania Practice 2d § 65:114 (2012). Thus, before a party is precluded from relitigating an issue, Pennsylvania law requires that the court be satisfied that the parties recognized the issue as important in the first proceeding and the court's finding was an integral part of its decision making process and not mere dictum. See generally Matson v. Housing Authority of City of Pittsburgh, 326 Pa.Super. 109, 473 A.2d 632, 636 (1984) (collateral estoppel not applicable to "dictum").
My review of the District Court's decision convinces me that the circumstances surrounding the Debtor's grant of the Benedix Mortgage (including the forgery of his wife's signature on the loan documents and his intent in entering into
Finally, I consider whether the District Court's use of alternative legal grounds for determining the 2 Transfers to be fraudulent transfers strips its findings regarding the Debtor's actual intent of preclusive effect.
In Jean Alexander Cosmetics, the Third Circuit Court of Appeals, after acknowledging a split among the federal courts of appeal, held that "independently sufficient alternative findings should be given preclusive effect." 458 F.3d at 255. The Court reasoned:
Id. at 254-55.
Jean Alexander Cosmetics involved a prior adjudication of a federal administrative agency, not a state court. Therefore, it did not involve the application of Pennsylvania law.
The only potential disputed issue material fact in this adversary proceeding is whether the Debtor had the intent to hinder, delay or defraud a creditor when he granted the Benedix Mortgage. For the reasons explained above, I conclude that the issue was decided adversely to him in the District Court Action and that he is precluded from relitigating the issue by the doctrine of collateral estoppel.
Consequently, Klein will be granted judgment in her favor under § 727(a)(2)(A) and the Debtor's chapter 7 bankruptcy discharge will be denied.
1. The Motion is
2.
3. The Debtor's discharge is
4. A status hearing is
DMW Marine filed a voluntary chapter 11 petition on May 17, 2011, which was converted to a chapter 7 shortly thereafter. (See Bky. No. 11-13953).
Weidner I, 2010 WL 27910, at *2-3.
The District Court also engaged in an analysis of the constitutional due process limitations of the size of punitive damages awards. Id. at *8 ("To determine the constitutionality of a punitive damages award, courts consider: (1) the degree of reprehensibility of the defendant's misconduct; (2) the disparity between the actual or potential harm suffered by the plaintiff and the punitive damages award; and (3) the difference between the punitive damages awarded by the jury and the civil penalties authorized or imposed in comparable cases.") (internal quotations and citation omitted).
Weidner III, 2010 WL 2671450, at *2-4 (footnotes omitted).
If the facts found in the first case are "historical facts," then the differences between the elements of the legal claims in the two (2) proceedings are immaterial in the collateral estoppel analysis. See In re Jacobs, 381 B.R. 128, 143-44 (Bankr.E.D.Pa.2008). On the other hand, if the findings in the first case were mixed fact/law in nature, the second court must evaluate the applicable legal principles employed in the initial factfinding and determine whether they are congruent with the legal principles related to the facts asserted to be precluded from relitigation in the second proceeding.
Here, the Debtor has not argued that the District Court's findings regarding his intent in granting the Benedix Mortgage was a mixed fact/law question. Even if the District Court's finding could be so characterized, the Debtor has not identified any legal standards employed by the District Court in finding that the Debtor intended to hinder or delay Klein when he entered into the Benedix Mortgage transaction or articulated any differences between those standards and those applicable in this adversary proceeding. In short, the Debtor has presented no convincing argument that the issue decided by the District Court was not identical to the issue before this court for purposes of issue preclusion.
Charles A. Wright and Arthur R. Miller, Federal Practice and Procedure § 4421 (West 2012).
I question the propriety of resolving the counterclaims in this adversary proceeding rather than through the contested matter process in the main bankruptcy case. As a result, the counterclaims are susceptible to dismissal without prejudice. However, in the Motion, Klein did not request dismissal of the counterclaims and the parties did not discuss them in their memoranda. Therefore, I will schedule a status hearing to discuss with counsel the appropriate procedure for addressing the merits of the counterclaims.
