In the Summer of 2014, we wrote about a Chapter 7 bankruptcy case in the U.S. Bankruptcy Court for the Western District of Michigan (the “Bankruptcy Court”) involving an intra-family squabble. Our analysis focused on the Bankruptcy Court’s decision related to cross motions for summary judgment filed by the parties, and whether the doctrine of “collateral estoppel ”was applicable to the claims being asserted by the parties in an adversary proceeding pending in the bankruptcy.

While bankruptcy offers a fresh start to debtors, it’s not always a fast fresh start, as evidenced by the fact that the Bankruptcy Court recently published another opinion in the same adversary proceeding relating to a similar claim and again analyzing the applicability of collateral estoppel.

THE BACKGROUND

In the case, Trost v. Trost1, Sherry Trost, the plaintiff, sought to except from discharge debt owed by the debtors (her stepson Zachary and his wife Kimberly) to her. The debt related to an ownership dispute involving videotapes and other memorabilia from a television show,Michigan Outdoors, that was created and operated by Fred Trost, Sherry’s late husband and Zachary’s father. Sherry alleged that she became the owner of these assets after Fred died, and that the debtors/defendants converted the property to their own use.

Before the bankruptcy, Sherry sued Zachary and Kimberly in U.S. District Court, and obtained a judgment for common law conversion under Michigan law. Following two appeals which upheld the judgment, the debtors filed their Chapter 7 case, and Sherry initiated the adversary proceeding objecting to the discharge of the debt. Both parties filed motions for summary judgment.

Sherry argued that the defendants are precluded by collateral estoppel from asserting that they did not obtain her property through false representation or other fraudulent means, and thus the debt they owe to her is non-dischargeable pursuant to section 523(a)(2)(A) of the Bankruptcy Code. Section 523(a)(2)(A) excepts from discharge “any debt - for money, property, [or] services...to the extent obtained by false pretenses, a false representation, or actual fraud….”

The defendants argued in their motion that the jury in the prior litigation determined that they were not liable for fraud and fraudulent misrepresentation, and thus - pursuant to collateral estoppel - the debt is entitled to discharge.

ANALYSIS OF THE ISSUES

Collateral estoppel is a doctrine by which an earlier decision reached by a court in a lawsuit between the parties is conclusive as to the issues, therefore precluding them from being relitigated in subsequent proceedings involving the same parties. The doctrine requires that the precise issues must have been raised in the prior litigation, that those issues were actually litigated, and that the determination as to the issues was necessary to the outcome.

Plaintiff’s arguments relate to the judgment in her favor in the prior District Court litigation concerning her claim for common law conversion. The jury instructions in the prior litigation included language that: “To establish [a claim for common law conversion] Plaintiff has the burden of proving that Defendant or Defendants obtained Plaintiff’s property by deceit and/or false representations.” Because the jury instruction included language regarding “deceit and/or false representations,” plaintiff argued that the “verdict, the judgment and affirmation of the judgement depended directly on the issue litigated, whether Defendants obtained Plaintiff’s property through deceit and/or false representation.”

The Bankruptcy Court, however, denied plaintiff’s motion, explaining that after a review of the entire District Court record “it does not appear that the jury, or the District Court for that matter, made any finding that the Defendants obtained the Plaintiff’s property through ‘deceit and/or false representations.’”

The Bankruptcy Court further explained that, even if the jury had found “deceit and/or false representation,” it would not have been “necessary” to the common law conversion claim. A finding of “deceit and/or false representation” is not necessary “to establish common law conversion" under Michigan law.

Accordingly, because a finding of “deceit and/or false representation” was never made by the jury in the District Court, and even if it was, such a finding was not necessary to determine common law conversion, plaintiff was not entitled to collateral estoppel.

The Bankruptcy Court also denied defendants’ motion for summary judgment in which they argued that plaintiff was collaterally estopped from claiming fraud because the jury rendered a verdict in which it found that plaintiff had not satisfied her burden with respect to claims related to fraud. The Bankruptcy Court agreed with plaintiff’s argument that summary judgment in favor of defendants was not warranted because the burden of proof in the adversary proceeding (preponderance of the evidence) is not the same as it was in the District Court case (clear and convincing evidence).

The Bankruptcy Court set forth two rules which can be used to determine whether to apply collateral estoppel where different burdens of proof exist:

  1. If the burden of proof in the prior proceeding was greater than the burden of proof in the present proceeding, the plaintiff would not be collaterally estopped from relitigating an unfavorable determination in the prior proceeding.
  2. If the burden of proof in the prior proceeding was less than or equal to the burden of proof in the present proceeding and all other elements of collateral estoppel are satisfied, the plaintiff would be collaterally estopped from relitigating an unfavorable determination in the prior proceeding.