- Category: Judge Somers
- Published on 18 July 2013
- Written by Judge Somers
SIGNED this 15th day of July, 2013.
For on-line use, but not print publication
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS
DAVID LEE DAVIS and
NANCY LYNN DAVIS,
CALVIN OPP CONCRETE, INC.,
DAVID LEE DAVIS,
CASE NO. 12-11958
ADV. NO. 12-5159
MEMORANDUM OPINION AND ORDER
DENYING DEFENDANT’S MOTION TO DISMISS,
GRANTING DEFENDANT'S MOTION FOR SUMMARY JUDGMENT, AND
DENYING PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT
Case 12-05159 Doc# 35 Filed 07/15/13 Page 1 of 14
In this adversary proceeding, Plaintiff Calvin Opp Concrete, Inc. (COCI) objects
under 11 U.S.C. § 523(a)(2), (a)(4), and (a)(6)1 to the discharge of its claim against
Debtor David Lee Davis (referred to herein as Debtor or Defendant). The matters under
advisement are Defendant’s Motion for Summary Judgment and Motion to Dismiss2 and
COCI's Motion of Summary Judgment.3 The Court has jurisdiction.4 For the following
reasons, the Court grants Defendant’s motion for summary judgment, denies Plaintiff’s
motion for summary judgment, and denies Defendant’s motion to dismiss.
COCI seeks to except from discharge a claim for $203,263.46, which is the
balance alleged to be owed on a default judgment entered against Debtor in favor of
COCI by the Sedgwick County District Court on August 3, 2011. The judgment arises
from an agreement between Debtor and COCI for Debtor to repair equipment owned by
1 Future references to title 11 in the text shall be to the section only.
2 Dkt. 21.
3 Dkt. 25.
4 This Court has jurisdiction over the parties and the subject matter pursuant to 28 U.S.C. §§
157(a) and 1334(a) and (b), and the Standing Order of the United States District Court for the District of
Kansas that exercised authority conferred by § 157(a) to refer to the District's bankruptcy judges all
matters under the Bankruptcy Code and all proceedings arising under the Code or arising in or related to a
case under the Code, effective July 10, 1984. Furthermore, this Court may hear and finally adjudicate this
matter because it is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(I). There is no objection to
venue or jurisdiction over the parties.
Case 12-05159 Doc# 35 Filed 07/15/13 Page 2 of 14
The details of the agreement are controverted. Debtor's version of the facts is
summarized as follows. In December 2010, when Debtor was unemployed, he agreed to
rebuild a 1996 Perkins engine for COCI. The estimated labor cost was approximately
$1300 and the estimated parts cost was approximately $2800. The engine was delivered
to Debtor. Approximately $4,400 was paid to Debtor for the repair of the Perkins engine.
The parties also agreed to a second project involving the rebuilding of a 1993 Ford
engine. The estimated total cost for labor and parts for the Ford engine was
approximately $4,400. The total estimated cost was advanced to Debtor, and the engine
delivered to him in January 2011. Later in January, Debtor began to use the funds
advanced to him by COCI for the purchase of parts for personal purposes and failed to
purchase the parts needed for either engine. Debtor informed COCI of this fact, and
approximately $2,200 more was advanced to him by COCI. The total funds advanced
were approximately $11,000. According to Debtor, he completed rebuilding the Perkins
engine and returned it to COCI in March. Although the engine job involving the 1993
Ford was not completed, it was returned to COCI at the same time. COCI’s allegations
imply that neither job was completed and the engines were not returned.
The following facts concerning the state court litigation are evidenced by
documents filed in this Court and are uncontroverted. On July 7, 2011, COCI filed suit
against Debtor in Sedgwick County District Court. The factual allegations in general
terms assert an agreement with Debtor to repair three items, the Ford engine and two
tractors, COCI’s advancement of funds, Debtor’s use of the advancement for personal
Case 12-05159 Doc# 35 Filed 07/15/13 Page 3 of 14
purposes, and Debtor’s failure to complete repair and return the engines to COCI. The
petition alleges claims for breach of contract, conversion by bailee, breach of fiduciary
duty, embezzlement/conversion, and fraud. For each count, COCI seeks an award of
damages in the amount of the advances for the Ford engine (approximately $4,400) and
the later advancement for parts ($2,200), plus interest, compensation for loss of use of the
equipment, and costs and fees. Personal service was made on the Debtor, but he did not
answer or otherwise appear. On August 3, 2011, without notice to Debtor or hearing, a
Journal Entry of Judgment was entered (Judgment). It granted judgment on all of the
counts alleged and awarded judgment for the amount requested in the petition. COCI
undertook garnishment proceedings to collect the Judgment.
Debtor, and his wife, filed for relief under Chapter 7 on July 19, 2012. On August
15, 2012, COCI filed a proof of claim for $203,263.46 based upon the August 3, 2011
Judgment. COCI filed this adversary proceeding on October 3, 2012. It seeks under §
523(a)(2), (a)(4), and (a)(6) and the doctrine of collateral estoppel to except the Judgment
from discharge as a debt for property obtained by false pretenses or fraud, for fraud while
acting in a fiduciary capacity, and for willful and malicious injury. Debtor moves for
summary judgment setting forth his version of the facts and contending COCI is not
entitled to invoke collateral estoppel with respect to a default judgment and further, that
the adversary complaint should be dismissed for failure to plead its claims with
particularity. COCI, in addition to controverting Debtor's verison of the facts, responds
that Debtor's motion for summary judgment is barred by the Rooker-Feldman doctrine
Case 12-05159 Doc# 35 Filed 07/15/13 Page 4 of 14
and collateral estoppel and the motion to dismiss should be denied. COCI also moves for
summary judgment relying upon the doctrine of collateral estoppel and the state court's
findings of Debtor's liability for fraud, breach of fiduciary duty, and
A. DEBTOR’S MOTION TO DISMISS IS DENIED.
Debtor’s Motion to Dismiss is based upon two arguments: (1) that the compliant is
deficient because it improperly relies upon incorporation by reference of the state court
pleadings; and (2) failure to allege facts in support of necessary elements of claims for
exception to discharge under § 523(a)(2), (a)(4), and (a)(6). The Court finds neither of
these arguments sufficient to dismiss the complaint.
COCI’s complaint prays for a ruling that its judgment is excepted from discharge
under the doctrine of collateral estoppel. Attached to the complaint are copies of the state
court petition, the return of service, and the Judgment. These documents are incorporated
by reference, thereby providing the factual basis of a pr ior judgment as required for a
denial of discharge based upon collateral estoppel.
Contrary to Debtor’s assertion, incorporation of exhibits by reference is permitted
in pleadings. Rule 7010 provides that Fed. R. Civ. P. 10 applies in adversary
proceedings. Subsection (c) of that rule provides: “A copy of a written instrument that is
an exhibit to a pleading is a part of the pleading for all purposes.” The complaint shall
not be dismissed because it incorporates exhibits by reference.
Case 12-05159 Doc# 35 Filed 07/15/13 Page 5 of 14
Debtor’s argument that the complaint should be dismissed because essential
elements of the three exceptions to discharge are not alleged is likewise without merit.
As stated above, the complaint alleges denial of discharge based upon the collateral
estoppel effect of the Judgment, not based upon the factual allegations regarding Debtor’s
conduct. The Court will consider whether the Judgment contains the elements required
for exception to discharge when discussing the applicability of collateral estoppel.
B. THE DEBTOR’S MOTION FOR SUMMARY JUDGMENT IS
GRANTED; THE PLAINTIFF’S MOTION FOR SUMMARY JUDGMENT IS
1. Since the adversary complaint alleges denial of discharge based upon
collateral estoppel and the facts concerning the state court litigation are
uncontroverted, the Court does not determine which facts concerning the
underlying transaction are controverted.
When moving for summary judgment Debtor sets forth a statement of facts
supported by his affidavit and exhibits. In response, COCI controverts Debtor’s
statements and provides additional facts.5 Because the Court understands the adversary
complaint to be alleging exceptions to discharge under the doctrine of collateral estoppel,
the Court does not identify the controverted and uncontroverted facts as to the underlying
transaction. Rather, it has satisfied itself that there are no controverted facts relating to
the allegations of the state court petition, service on Debtor, and the entry of Judgment.
5 The Court makes no finding whether the statements by either party comply with the applicable
requirements of the bankruptcy rules.
Case 12-05159 Doc# 35 Filed 07/15/13 Page 6 of 14
These uncontroverted facts are sufficient to grant Debtor summary judgment on the
claims asserted in the adversary complaint.
2. Under the facts of this case, Plaintiff cannot prevail on its allegations of
exceptions to discharge under the doctrine of collateral estoppel.
The doctrine of collateral estoppel (issue preclusion) applies in discharge litigation
under § 523.6 It “prevents a party that has lost the battle over an issue in one lawsuit from
relitigating the same issue in another lawsuit.”7 When the issue previously litigated was
heard in state court, the bankruptcy court applies the law of collateral estoppel of the
relevant state.8 In Kansas, collateral estoppel operates to preclude the relitigation of
issues that were actually decided in a prior proceeding.9 The elements of collateral
estoppel stated by the Kansas Supreme Court are: “(1) a prior judgment on the merits
which determined the rights and liabilities of the parties on the issue based upon ultimate
facts . . .; (2) the parties must be the same or in privity; and (3) the issue litigated must
have been determined and necessary to support the judgment.”10
In this case, the Judgment does not satisfy these elements as to any of the
exceptions to discharge relied upon. There are three reasons for this conclusion.
6 Grogan v. Garner, 498 U.S. 279, 284-85 (1991).
7 Melnor, Inc. v. Corey (In re Corey), 583 F.3d 1249, 1251 (10th Cir. 2009).
8 4 Collier on Bankruptcy ¶ 523.06 (Alan N. Resnick & Henry J. Sommer eds.-in-chief, 16th ed.
9 Tilzer v. Davis, Bethune & Jones, L.L.C., 288 Kan. 477, 487, 204 P.3d 617, 624 (2009).
10 Waterview Resolution Corp. v. Allen, 274 Kan. 1016, 1023, 58 P.3d 1284, 1290 (2002)
(quoting Regency Park v. City of Topeka, 267 Kan. 465, 478, 981 P.2d 256, 265 (1999)).
Case 12-05159 Doc# 35 Filed 07/15/13 Page 7 of 14
First, the Judgment on the claims of fraud, breach of fiduciary duty, and
embezzlement/conversion was entered because of Debtor’s failure to answer the
complaint or otherwise appear. In Turner, 11 this Court held that a default judgment does
not satisfy the “actually litigated” requirement of Kansas collateral estoppel law. That
analysis is applicable to this case. It is:
Under the majority view, as stated in the Restatement
(Second) of Judgments, a default judgment does not meet the
actually litigated test.12 Prior litigation goes to the heart of the
rationale for collateral estoppel.13 The Kansas Supreme Court
has recognized that collateral estoppel is a policy to preclude
the re-litigation of issues which were previously actually
litigated.14 It also has followed the Restatement (Second) of
Judgments with respect to collateral estoppel issues.15
Although the Court has not found any Kansas appellate
decisions expressly holding that collateral estoppel does not
apply when the issue was determined by a default judgment in
the prior action, other bankruptcy judges in this district have
relied upon such a requirement.16 "Most courts have . . . been
reluctant to invoke collateral estoppel where the debtor did
not fully participate in the prior litigation or where a default
11 Total Petroleum, Inc. v. Turner (In re Turner), 2012 WL 6680363 (Bankr. D. Kan. Dec. 21,
12 Restatement (Second) of Judgments §§ 27-29 (current through August 2012).
14 E.g, Tilzer v. Davis, Bethune & Jones, L.L.C., 288 Kan. at 487, 204 P.3d at 624.
15 E.g, KPERS v. Reimer & Koger Assocs., Inc., 262 Kan. 635, 671, 941 P.2d 1321, 1345 (1997).
16 Schreibman v. Zanetti-Gierke (In re Zanetti-Gierke), 212 B.R. 375, 380 (Bankr. D. Kan. 1997)
(“The ‘actually litigated’ standard requires the resolution of a dispute following a full trial on the merits.”;
KC Coring & Cutting Const., Inc. v. McArthur (In re McArthur), 391 B.R. 453, 458 (Bankr. D. Kan.
2008) (“except in limited circumstances not present here, default judgments are not given preclusive
Case 12-05159 Doc# 35 Filed 07/15/13 Page 8 of 14
judgment has been entered against the debtor."17 Because the
exceptions to discharge are construed strictly in favor of the
debtor, when collateral estoppel is invoked as a basis to deny
discharge of a particular debt, a strict construction of the
elements of collateral estoppel is appropriate.18
Second, even if the issues determined by the Judgment were eligible for collateral
estoppel treatment because they were entered other than by default, the third element of
Kansas collateral estoppel, that the issue previously litigated must have been determined
and necessary to support the judgment, is not satisfied. The Judgment awards damages
for all counts in the petition -breach of contract, conversion by bailee, breach of
fiduciary duty, embezzlement/conversion, and fraud. The factual basis of the dispute
between COCI and Debtor is a contract to repair engines. COCI’s most straight forward
claim is breach of contract, and the damages awarded in the Judgment could be sustained
if breach of contract had been the only claim alleged. None of the findings as to fraud,
breach of fiduciary duty, or embezzlement/conversion are necessary to support the
Judgment. The third element required for collateral estoppel under Kansas law is not
Third, the issues determined by the Judgment do not include all of the elements
required for the exceptions to discharge under § 523(a)(4) or (a)(6). The first of these
17 4 Collier on Bankruptcy at ¶ 523.06.
18 In re Turner, 2012 WL 6680363 at *4 (footnotes are in the Turner decision but have been
renumbered for this opinion). An earlier opinion of this Court, Gilmore v. Gilmore (In re Gilmore), 2004
WL 2044116 (Bankr. D. Kan. July 16, 2004), holding that under Kansas law a judgment by default
qualifies as a judgment on the merits for collateral estoppel purposes, is rejected to the extent it is
inconsistent with Turner and this opinion.
Case 12-05159 Doc# 35 Filed 07/15/13 Page 9 of 14
exceptions is for debts “for fraud or defalcation while acting in a fiduciary capacity.”19
For purposes of the exception, the existence of a fiduciary relationship is determined
under federal law.20 “[A]n express or technical trust must be present for a fiduciary
relationship to exist under § 523(a)(4).”21 “[A] general fiduciary duty of confidence,
trust, loyalty, and good faith” is not sufficient to establish a fiduciary relationship for
purposes of the exception, and the relationship must be shown to have existed prior to the
creation of the debt in question.22
Neither the breach of fiduciary duty allegations in the petition nor the findings in
the Judgment come close to satisfying this standard. The petition alleges that “Plaintiff
[COCI] and Defendant [Debtor] had a business relationship wherein Plaintiff placed trust
and confidence in Defendant to perform and promised . . . to purchase parts and complete
repair services.” Further, that Debtor “had a duty to act for Plaintiff in good faith and
with loyalty to use the Plaintiff’s advanced fees to purchase parts and complete repair
services.” The Judgment recites that the allegation in the “Plaintiff’s Petition are
uncontroverted and true,” are incorporated by reference, and are “the findings of fact by
the Court to support this judgment.” There is no allegation of an express or technical
19 11 U.S.C. § 523(a)(4).
20 Fowler Brothers v. Young (In re Young), 91 F.3d 1367, 1371 (10th Cir. 1996).
22 Id. at 1372.
Case 12-05159 Doc# 35 Filed 07/15/13 Page 10 of 14
trust; the petition alleges only an implied trust arising from a business relationship. This
is an insufficient basis for denial of discharge.
Likewise the allegations of the petition and the findings in the Judgment are
insufficient to satisfy the elements for denial of discharge for “willful and malicious
injury by the debtor to another entity or to the property of another entity” under §
523(a)(6). Without proof of both a willful act and malicious injury the objection to
discharge fails.23 The exception covers “only acts done with the actual intent to cause
injury.”24 In order to constitute a willful act, the debtor must intend to cause the
consequences of his act or believe that the consequences are substantially certain to
follow.25 The malicious element requires proof that “the debtor either intend the resulting
injury or intentionally take action that is substantially certain to cause the injury.”26
“[N]ondischargeability takes a deliberate or intentional injury, not merely a deliberate or
intentional act that leads to injury.”27
Neither the factual allegations of the petition nor the findings in the Judgment
satisfy the definition of willful and malicious injury applicable in discharge litigation. In
response to Debtor’s arguments in support of summary judgment, COCI relies on the
23 Panalis v. Moore (In re Moore), 357 F.3d 1125, 1129 (10th Cir. 2004).
24 Kawaauhau v. Geiger, 523 U.S. 57, 61 (1998).
25 In re Moore, 357 F.3d at 1129 (citing Mitsubishi Motors Credit of Amer., Inc. v. Longley (In re
Longley), 235 B.R. 651, 657 (10th Cir. BAP 1999)).
26 Id. (quoting Hope v. Walker (In re Walker), 48 F.3d 1161, 1164 (11th Cir. 1995)).
27 Kawaauhau, 523 U.S. at 61.
Case 12-05159 Doc# 35 Filed 07/15/13 Page 11 of 14
Judgments for conversion by bailee and embezzlement/conversion as the basis for
collateral estoppel as to the willful and malicious injury exception to discharge. But the
allegations concerning conversion are that COCI delivered money and property to Debtor,
that COCI did not consent to Debtor’s appropriating the money and personal property for
Debtor’s own use, and that Debtor refused to return the money and property. Neither
willfulness nor maliciousness is alleged. As to embezzlement/conversion, the petition
alleges Debtor “wrongfully and intentionally misappropriated and retained Plaintiff’s
money and personal property for his own use.” Again, neither willfulness nor
maliciousness are alleged. The Judgment merely incorporated the allegations of the
Petition as the findings of fact; it made no findings of either willfulness or maliciousness.
The Court therefore grants Debtor’s motion for summary judgment and denies
COCI’s motion for summary judgment. The doctrine of collateral estoppel is not
applicable to bar Debtor from litigating whether his conduct in the performance of his
agreement with COCI to repair the engines was such that COCI’s claim is excepted from
3. The Rooker-Feldman Doctrine does not bar Debtor’s motion for summary
COCI argues that the Rooker-Feldman Doctrine would be violated by a grant of
summary judgment to Debtor. But that doctrine has no applicability where a debtor is
opposing the plaintiff’s reliance upon the collateral estoppel effect of a state court
judgment as the basis for denial of discharge.
Case 12-05159 Doc# 35 Filed 07/15/13 Page 12 of 14
“As a general rule, the Rooker-Feldman doctrine prevents bankruptcy courts from
exercising subject matter jurisdiction over claims if doing so would require them to
engage in an appellate review of a state court judgment.”28 The Supreme Court in its
2005 decision in Mobil Oil clarified the application of the Rooker-Feldman doctrine by
The Rooker-Feldman doctrine, we hold today, is confined to
cases of the kind from which the doctrine acquired its name:
cases brought by state-court losers complaining of injuries
caused by state-court judgments rendered before the district
court proceedings commenced and inviting district court
review and rejection of those judgments. Rooker-Feldman
does not otherwise override or supplant preclusion doctrine or
augment the circumscribed doctrines that allow federal courts
to stay or dismiss proceedings in deference to state-court
Defendant’s objection to COCI’s reliance on the doctrine of collateral estoppel
does not fall within this definition. It is COCI, the party who prevailed in state court, who
has brought the dischargeability complaint. COCI is not complaining of an injury caused
by the state court judgment. The holding that the findings made in the state court
judgment do not have collateral estoppel effect in this subsequent dischargeability
litigation is not in effect an appellate review of the state court judgment.
28 Dickerson, Colliding Judgments: Applying the Rooker-Feldman Doctrine in Bankruptcy Cases,
14 J. Bankr. L. & Prac. 4 Art. 2 (2005).
29 Exxon Mobil Corp. v. Saudi Basic Indus. Corp., 544 U.S. 280, 284 (2005).
Case 12-05159 Doc# 35 Filed 07/15/13 Page 13 of 14
The Court denies Debtor’s motion to dismiss the complaint, when construed as
alleging that the Judgment is excepted from discharge under the doctrine of collateral
estoppel. If COCI wishes to proceed with asserting that its claim is excepted from
discharge other than on the basis of collateral estoppel, leave is hereby granted to file an
amended complaint with in 21 days of the entry of this order. If an amended complaint
is not timely filed, this action shall be dismissed.
The Debtor’s motion for summary judgment based upon the inapplicability of
collateral estoppel is hereby granted. The Plaintiff’s motion for summary judgment based
upon the doctrine of collateral is hereby denied.
The foregoing constitute Findings of Fact and Conclusions of Law under Rule
7052 of the Federal Rules of Bankruptcy Procedure which makes Rule 52(a) of the
Federal Rules of Civil Procedure applicable to this proceeding.
IT IS SO ORDERED.
Case 12-05159 Doc# 35 Filed 07/15/13 Page 14 of 14
- << Prev