KSB

Judge Somers

08-11096 Hughes (Doc. # 32)

In re Hughes, 08-11096 (Bankr. D. Kan. Oct. 15, 2008) Doc. # 32

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Case: 08-11096 Doc #: 32 Filed: 10/14/2008

SO ORDERED.
SIGNED this 14 day of October, 2008.


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Dale L. Somers
UNITED STATES BANKRUPTCY JUDGE

Opinion Designated for Electronic Use, But Not for Print Publication
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS


In re:
CHRISTOPHER MICHAEL HUGHES, CASE NO. 08-11096-7
CHAPTER 7
DEBTOR.

OPINION DETERMINING STAY RELIEF SHOULD BE GRANTED TO
ALLOW CREDITORS TO PROCEED WITH STATE COURT LITIGATION
TO LIQUIDATE THEIR CLAIMS AGAINST THE DEBTOR, INCLUDING
THEIR CLAIMS FOR PUNITIVE DAMAGES

This matter is before the Court for a ruling on an amended stay relief motion filed
by Creditors Bonnie Jean Brungardt Scott, surviving spouse of Jeffery Wade Scott, the
estate of Jeffery Wade Scott by and through its administrator Bonnie Jean Brungardt
Scott, Jeffrey Wagner, and Adam Stein (docket no. 22). The matter was argued at a


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hearing on September 2, 2008. The Creditors appeared by counsel David G. Arst. The
Debtor appeared by counsel Thomas J. Lasater. The Court has reviewed the relevant
materials and considered counsels’ arguments, and is now ready to rule.

The Creditors want stay relief so their claims against the Debtor, including claims
for punitive damages, can be liquidated in state court. The Debtor wants the state court
lawsuit limited by the extent of insurance coverage available to him, or at least limited to
determining the amount of compensatory damages he might owe the Creditors, and wants
any punitive damage litigation to proceed only before this Court. As explained below, the
Court concludes the Creditors should be allowed to proceed in the state court to obtain
judgments determining the amount of both compensatory and punitive damages, if any,
the Debtor owes them, and also be allowed to recover on those judgments from any
insurance coverage that may be available to pay the claims. They must, however, return
to this Court to pursue claims that any judgments they may obtain are excepted from the
Debtor’s discharge and, so long as the stay remains in effect, to seek to recover from the
Debtor personally or from the bankruptcy estate if any distributable assets should be
discovered in the future.
FACTS

In July 2003, the Debtor was involved in an auto accident with several co-workers
in which Jeffery Wade Scott was killed, and Jeffrey Wagner and Adam Stein were
seriously injured. The accident occurred in Stafford County, Kansas. In 2004, Bonnie
Jean Brungardt Scott, on her own behalf and as administrator of the estate of Jeffery

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Wade Scott, sued the Debtor in a Kansas state court, seeking damages for his alleged
negligence in connection with the accident. In 2005, Jeffrey Wagner and Adam Stein
sued him in the same state court, seeking damages for the personal injuries they suffered.
The suits have been consolidated at least for trial, if not for all purposes.

On May 14, 2008, the Debtor filed a Chapter 7 bankruptcy petition. According to
the Debtor’s attorney, workers compensation issues had arisen in the state court lawsuit
that were resolved by an appeal.1 The Debtor interpreted the appellate ruling to be in his
favor, and mistakenly understood it to eliminate any liability he might have had to the
Creditors. Consequently, he did not include them as creditors in his original bankruptcy
papers, but only added them near the end of July. His bankruptcy filing was instead
prompted by over $400,000 in medical bills he owed as a result of injuries he suffered in
the accident. On July 7, the Chapter 7 trustee filed a report of no distribution and notice
of intended abandonment, indicating the Debtor’s creditors would receive nothing from
his bankruptcy estate.

On August 13, two of the Creditors filed a motion for stay relief, seeking to
proceed with the state court lawsuit. The same day, they filed a complaint seeking a
determination that the Debtor’s obligation to them was excepted from discharge under
§ 523(a)(9); the complaint was assigned Adversary No. 08-5167. The next day, both the
motion and the complaint were amended to add the other two creditors as parties seeking

1See Scott v. Hughes, 281 Kan. 642 (2006).

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relief. According to the motion, the state court lawsuit was scheduled for a jury trial
beginning on September 15. At the Creditors’ request, an expedited hearing on their
motion was set for September 2.

In response to the motion, the Debtor agreed the parties should return to state
court. He suggested the litigation should proceed there, however, only to the extent
insurance coverage is available to pay damages to the Creditors because, he asserted, any
compensatory damages that might be awarded beyond the insurance coverage are
dischargeable in his bankruptcy case. Finally, he argued the Creditors should not be
allowed to seek punitive damages from him in the state court suit. At the hearing, his
attorney supported this last point by claiming that even if punitive damages are
determined in the state court lawsuit, they will have to be tried again before this Court in
Adversary No. 08-5167. In response to a question from the Court, the attorney said he
had asked the Debtor’s insurer whether it would defend the Debtor against the punitive
damage claims (which are uninsurable in Kansas), but had not received an answer. The
insurer is defending against the compensatory damage claims.
DISCUSSION

1. Automatic stay
When the Debtor filed his bankruptcy petition, § 362(a)(1) of the Bankruptcy Code
stayed the Creditors from pursuing their state court lawsuit against him. Under
§ 362(d)(1), the Court may grant the stay relief the Creditors seek if it concludes there is
“cause” to do so. Whether to grant stay relief is committed to the discretion of

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bankruptcy courts, based on all relevant circumstances. Even when the requirements for
stay relief are satisfied, the Court may, in its discretion, deny it.2 Congress did not
specify when “cause” would exist for purposes of subsection (d)(1) so the stay should be
lifted to allow litigation involving the debtor in a bankruptcy case to proceed in another
forum, but Congress did intend for relief to be granted in such circumstances when
appropriate.3 In deciding whether “cause” has been shown, the Court must “balance the
potential hardship that will be incurred by the party seeking relief if the automatic stay is
not lifted, against the potential prejudice to the debtor and the debtor’s estate.”4 When
relief is sought to proceed with litigation in another forum, “[t]he relevant factors which
the court must consider include judicial economy, trial readiness, the resolution of
primary bankruptcy issues, the movant’s chance of success on the merits, the costs of
defense or other potential burdens to the estate, and the impact of the litigation on other
creditors.”5 Minimizing the duplication of litigation in separate forums and promoting the
efficient administration of the bankruptcy estate are proper concerns in deciding stay
relief questions.6

2In re Siciliano, 167 B.R. 999, 1010 (Bankr. E.D. Pa. 1994).
3Blan v. Nachogdoches County Hosp. (In re Blan), 237 B.R. 737, 739 (8th Cir. BAP 1999) (citing


H.R. Rep. No. 95-595, at 341 (1977); S.Rep. No. 95-989, at 50 (1978)).
4In re Paxson Electric Co., 242 B.R. 67, 70 (Bankr. M.D. Fla. 1999).
5Bergman v. Wintroub (In re Wintroub), 283 B.R. 743, 745 (8th Cir. BAP 2002); see Busch v.
Busch (In re Busch), 294 B.R. 137, 141 (10th Cir. BAP 2003) (listing 12 factors).
6Benedor Corp. v. Conejo Enters., Inc. (In re Conejo Enters., Inc.), 96 F.3d 346, 352 (9th Cir.
1996).
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2. Punitive damages under Kansas law
Everything before the Court indicates Kansas law governs the Creditors’ claims
against the Debtor. “In Kansas, punitive damages are awarded to punish the wrongdoer
for malicious, vindictive, or willful and wanton invasion of another’s rights, with the
ultimate purpose being to restrain and deter others from the commission of similar
wrongs. Punitive damages are not given upon any theory that the plaintiff has any just
right to recover them, but are given only upon the theory that the defendant deserves
punishment for his or her wrongful acts and that it is proper for the public to impose them
upon the defendant.”7

A Kansas statute, K.S.A. 60-3702, controls punitive damage awards in various
ways. Subsection (a) provides that the trier of fact is to determine, concurrent with all
other issues, whether punitive damages should be allowed, but if the trier of fact says yes,
the court is to determine the amount in a separate proceeding. Subsection (c) provides
that when punitive damages are sought, the plaintiff must prove by clear and convincing
evidence in the initial phase of the trial that the defendant acted toward the plaintiff “with
willful conduct, wanton conduct, fraud or malice.” Subsection (b) identifies seven factors
courts may consider in fixing the amount of punitive damages:

(1) The likelihood at the time of the alleged misconduct that serious harm would arise
from the defendant's misconduct;
(2) the degree of the defendant's awareness of that likelihood;
7Hayes Sight & Sound, Inc., v. ONEOK, Inc., 281 Kan. 1287, syl. ¶¶ 11 & 12 (2006).
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(3) the profitability of the defendant's misconduct;
(4) the duration of the misconduct and any intentional concealment of it;
(5) the attitude and conduct of the defendant upon discovery of the misconduct;
(6) the financial condition of the defendant; and
(7) the total deterrent effect of other damages and punishment imposed upon the
defendant as a result of the misconduct, including, but not limited to, compensatory,
exemplary and punitive damage awards to persons in situations similar to those of the
claimant and the severity of the criminal penalties to which the defendant has been or
may be subjected.
A plaintiff seeking punitive damages will probably need to present evidence concerning
most of these factors during the initial phase of the trial in order to convince the trier of
fact that punitive damages should be allowed, although evidence of the defendant’s
financial condition and the deterrent effect of other sanctions imposed on the defendant
might be excluded as irrelevant or overly prejudicial during that phase. In any event, so
long as the same court presides over both phases of the trial, much less evidence will need
to be presented during the punitive damage phase than if a different court presides over
only that phase.

3. Applying the law to the facts of this case
In this case, the parties agree at least one trial must be held so the Creditors’ claims
against the Debtor can be resolved. The Creditors want to litigate all aspects of their
claims in one jury trial in the state court. The Debtor concedes some aspects of the claims
should be tried there, but contends even if the punitive damage claims were tried there,
they would have to be tried a second time before this Court. After considering the

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circumstances, the Court concludes judicial economy and trial readiness, coupled with the
secondary nature of the Creditors’ assertion their claims are not dischargeable and the
absence of any impact on the bankruptcy estate or the Debtor’s other creditors, establish
that the claims for compensatory and punitive damages should all be determined in the
state court lawsuit.

Clearly, judicial economy can be better served by having all the Creditors’ damage
claims decided before one court. Most, if not all, of the evidence that will be presented to
try to establish the compensatory damage claims would have to be presented again if a
different court were asked to fix the amount of punitive damages to allow under K.S.A.
60-3702. Just as clearly, the one court where the claims should be decided is the state
court. Kansas state district courts regularly handle personal injury negligence cases
arising out of automobile accidents (while this Court does not), and have the
qualifications and experience to do so. They are more likely than this Court to have
experience determining the amount of punitive damages under K.S.A. 60-3702(b). This
case was scheduled to be tried to a jury in the state court, and any issues tried instead
before this Court (except for fixing the amount of any punitive damage award) would
have to be tried to a jury unless all the parties agreed to a bench trial. Kansas state courts
regularly preside over jury trials, but this Court does not. Resolving the Creditors’
damage claims against the Debtor requires none of this Court’s special expertise in
dealing with questions that arise only or most often in bankruptcy cases. The
dischargeability of the Creditors’ claims comes within the Court’s routine experience, but

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will only have to be determined if the Creditors succeed in proving the Debtor is liable to
them; if they fail, the dischargeability question will evaporate. Furthermore, when the
Debtor filed for bankruptcy, two of the Creditors’ claims had already been pending in
state court for at least three years, and the other Creditors’ claims had been pending there
for at least two. The trial was scheduled to take place just four months after the Debtor
filed, so the parties must have completed most of their trial preparation by then, and the
state court was prepared to proceed with the trial.

The Court cannot agree with the Debtor that a second trial on punitive damages
will be required in Adv. No. 08-5167 if those claims are decided before the state court.
The question whether the Creditors are entitled to judgments for compensatory and
punitive damages against the Debtor is not the same as the question whether such
damages should be excepted from his discharge. However, issue preclusion (or collateral
estoppel) often applies in dischargeability actions after a state court judgment has
determined whether a debtor is liable to a creditor.8 So long as the parties make sure the
state court jury verdict is sufficiently clear,9 issue preclusion should prevent any need to
relitigate any punitive damage questions before this Court in Adversary No. 08-5167.

8See Marrese v. v. American Academy of Orthopaedic Surgeons, 470 U.S. 373, 379-86 (1985)
(through issue preclusion, state court judgment could prevent relitigation of questions in later federal
suit); see also Brown v. Felsen, 442 U.S. 127, 139 n. 10 (1979) (state court determination of factual issues
under standards identical to dischargeability standards contained in Bankruptcy Code could bar
relitigation of those issues in bankruptcy court).

9Since the Creditors contend the Debtor’s obligation to them is excepted from discharge under 11

U.S.C.A. § 523(a)(9), the jury might be asked to answer a special question (assuming there was evidence
to support it) whether the Creditors’ damages were caused by the Debtor’s unlawful operation of a motor
vehicle while he was intoxicated from using alcohol, a drug, or another substance.
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In addition, the Supreme Court’s decision in Cohen v. de la Cruz10 indicates
§ 523(a)(9) must be read to except from discharge any liability imposed on a debtor for
causing death or personal injury while unlawfully operating a motor vehicle while
intoxicated, whether the liability is for compensatory damages, punitive damages, or both.
If the Creditors’ claims for punitive damages would have to be tried again before this
Court even after they have been decided in the state court, Cohen would mean their
claims for compensatory damages would likewise have to be tried again here. In other
words, Cohen indicates the Debtor’s concession that the compensatory damage claims
may be tried in the state court conflicts with his argument that the punitive damage claims
should not be because they will have to be tried here anyway. Either both types of claims
would have to be relitigated here or neither of them would have to be.

Because the Debtor’s bankruptcy estate has no assets, the estate’s trustee has no
reason to contest the Creditors’ claims and the estate will incur no costs in the state court
lawsuit. Similarly, resolution of the Creditors’ claims will not affect the Debtor’s other
creditors, except in the unlikely event estate assets are discovered in the future. Even the
Debtor would have little or no reason to contest the Creditors’ claims if they were not
seeking to have them excepted from his discharge.

In the state court, the Debtor is being represented by an attorney hired by his
insurance company to defend against the Creditors’ claims. In the course of defending

10523 U.S. 213, 217-23 (1998) (ruling § 523(a)(2)(A)’s fraud exception to dischargeability covers
not only compensatory damages, but also awards authorized by a state statute of treble damages, attorney
fees, and costs).

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against the claims for compensatory damages during the initial phase of the trial, that
attorney will probably also provide at least a minimal defense to the claims for punitive
damages. That defense should not add significantly to the company’s defense costs
during that phase. The insurance company might not defend the Debtor if further
proceedings are required for the court to determine the amount of punitive damages to
allow, but if the punitive damage claims were left entirely to be tried before this Court,
the insurance company would almost certainly pay, up to the limits of the Debtor’s
policy, any compensatory damages awarded by the state court and provide no attorney to
defend the Debtor here on the punitive damage claims, shifting the full defense burden to
the Debtor.

CONCLUSION

For these reasons, the Court concludes the Creditors should be granted stay relief
to have all their claims against the Debtor, including those for punitive damages, tried in
the state court. The relief granted applies to both phases of the trial called for by K.S.A.
60-3702. The Creditors will be authorized to collect any judgments they may obtain only
from the Debtor’s insurance company and only to the extent his policy provides coverage.
Otherwise, so long as the stay remains in effect, the Creditors will be required to return to
this Court to pursue their dischargeability claims or to seek permission to enforce any
judgments against the Debtor and any other assets he may have. Proceedings on the
Creditors’ dischargeability complaint, Adv. No. 08-5167, will be stayed pending
resolution of the state court lawsuit or further order of this Court.

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The foregoing constitutes Findings of Fact and Conclusions of Law under Rules
7052 and 9014(c) of the Federal Rules of Bankruptcy Procedure and Rule 52(a) of the
Federal Rules of Civil Procedure. A judgment based on this ruling will be entered on a
separate document as required by FRBP 9021 and FRCP 58.

# # #

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