#2153 signed 6-28-95; order denying reconsideration signed 7-28-95 (appended)
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS
ARNOLD LEE KORT,
CASE NO. 93-40744-7
ARTHUR H. STOUP,
ARNOLD LEE KORT,
ADV. NO. 93-7082
ORDER GRANTING PLAINTIFF PARTIAL SUMMARY JUDGMENT
This proceeding is before the Court for resolution of plaintiff Arthur H. Stoup's assertion that
collateral estoppel makes his claim against the debtor nondischargeable. The parties have
submitted a stipulation and filed briefs. In effect, Mr. Stoup seeks summary judgment on the
issue, and the Court will treat the pleadings as asking for such relief. Mr. Stoup appears by
counsel Frank P. Barker, III, of Barker & Bunch, P.C. The debtor had appeared by counsel
Richard C. Wallace and Joanne B. Stutz of Evans & Mullinix, P.A., but they have since
withdrawn from the representation.
The parties dispute the effect of a state court judgment. Following a trial, that court found the following facts to be true.
In January 1985, Mr. Stoup was an attorney partner in a law firm partnership, Stoup & Thompson (S&T), and the debtor, also an attorney, was the president, sole shareholder, sole director, registered agent for, and sole employee of a professional corporation, Arnold L. Kort, P.C. (PC). These businesses, along with one other, reached an agreement for PC to operate S&T's commercial and collections department. Among other things, some of PC's gross receipts, less specified expenses, were to be shared with S&T. Monthly, PC was to report to S&T its gross receipts and allowable expenses. S&T trusted the debtor and his corporation to report truthfully PC's gross receipts and expenses. The state court ruled that this agreement established a fiduciary relationship among S&T, PC, and the debtor personally.
In December 1986, S&T terminated its arrangement with the debtor and PC. Sometime later, the partnership dissolved, but the former partners joined in suing the debtor and PC. They proved that the debtor and his corporation intentionally misrepresented PC's gross income on the monthly statements submitted to S&T from April 1985 through November 1986, consequently understating S&T's share under the contract. Although they failed to keep proper and accurate records, the debtor and PC knew, or could have readily ascertained, PC's actual gross income. S&T had reasonably relied on the income and expense information supplied by the debtor and PC. All of PC's actions and representations were the debtor's actions and representations, and the debtor used PC as his alter ego.
As a result of the debtor's and PC's misrepresentations and fraud, S&T lost $15,337.08 in fee share and unauthorized expense charges, minus $2,020.10 that S&T owed the debtor and PC for several cases, for a net amount of $13,316.98. S&T lost another $6,396.72 because the debtor and PC (1) made unauthorized expenditures from certain accounts, (2) commingled fees and collections with costs advanced by clients, resulting in improper payments to certain companies, and (3) failed to account properly for cash deposited into certain accounts. S&T was entitled to a credit of $1,268.10 for an overpayment it made on a case. The state court also increased S&T's share of PC's gross receipts by $2,157.08 for expense items that were properly deductible from PC's gross but had not been paid by the time the case was tried. For all these items, the court awarded 9% simple prejudgment interest of $13,189.04, covering December 15, 1986, through April 15, 1993. Based on "special circumstances surrounding the fraudulent conduct" of the debtor and PC, the state court awarded S&T attorney fees and expenses of $13,596.74 incurred in pursuing the lawsuit, but refused to award interest on this amount. The state court also declared that S&T was entitled to be reimbursed for accounting fees of $6,248.50 incurred in pursuing the lawsuit, plus 9% simple prejudgment interest of $2,610.06, covering "the last day of the first part of the trial of this case when the accounting costs accrued" through entry of the judgment. The total awarded to Mr. Stoup and his ex-partner, "formerly d/b/a Stoup & Thompson," was $58,783.22. The state court declared the debtor and PC to be "jointly and severally liable" for the full amount of the judgment.
After the debtor questioned Mr. Stoup's right to assert the full amount of the state court judgment
against him, Mr. Stoup submitted an affidavit swearing that Mr. Thompson had assigned his
interest in the judgment to Mr. Stoup. The debtor has not complained about the presentation of
this affidavit or questioned the truth of Mr. Stoup's assertion.
DISCUSSION AND CONCLUSIONS
Federal Rule of Civil Procedure 56, governing grants of summary judgment, is made applicable to bankruptcy proceedings by Federal Rule of Bankruptcy Procedure 7056. FRCP 56 provides that this Court must grant summary judgment "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." In considering a motion for summary judgment, the Court must examine all the evidence in the light most favorable to the party against whom summary judgment is sought. Summary judgment is inappropriate if an inference can be deduced from the facts which would allow the nonmovant to prevail. The court must consider factual inferences tending to show triable issues in the light most favorable to the existence of those issues. Where different ultimate inferences may properly be drawn, summary judgment should be denied. United States v. O'Block, 788 F.2d 1433, 1435 (10th Cir. 1986).
As a preliminary matter, citing no authority, the debtor suggests that the state court judgment was awarded to the legal entity of Stoup & Thompson, not just Mr. Stoup, and that Mr. Stoup is not entitled to enforce more than one-half of the judgment. The first suggestion is wrong. While the state court's judgment frequently refers to Stoup & Thompson, the final declaration of the judgment clearly states that it is awarded to Mr. Stoup and Mr. Thompson who formerly did business as Stoup & Thompson, not to the partnership itself. The second suggestion must fail as well. Even assuming the debtor could otherwise have limited Mr. Stoup to one-half of the judgment, he no longer can in the face of Mr. Stoup's uncontroverted affidavit that Mr. Stoup presently owns all interests in the judgment.
The debtor also suggests that some of the state court's findings and conclusions concerned his corporation and not him personally. This suggestion is wrong. While some specific findings mention only PC and not the debtor, as noted in the facts stated above, the debtor owned and held all relevant positions in the corporation. Not surprisingly, the state court specifically found that all actions and representations of the corporation were the debtor's as well, and that the corporation was the debtor's alter ego. In sum, the state court found the debtor could not hide behind the corporate shield, and declared him personally liable for the full judgment. Thus, any findings that did not expressly name the debtor were nevertheless applicable to him personally.
Although the parties have discussed Mr. Stoup's motion in terms of "res judicata" and "collateral estoppel," the Tenth Circuit, along with other federal courts, has followed the lead of the Supreme Court and instead calls the concepts "claim preclusion" and "issue preclusion." Carter v. City of Emporia, 815 F.2d 617, 619 n. 2 (10th Cir. 1987); see also 18 Wright, Miller & Cooper, Fed. Prac. & Pro.: Jurisdiction, §4402 (1981) (discussing and explaining changing terminology, and citing cases). "Claim preclusion" refers to the doctrine that forbids litigating in a later suit claims that were or should have been litigated in a prior suit; "issue preclusion" refers to the doctrine that forbids relitigating in a later suit issues that were adequately litigated in a prior suit. 18 Wright, Miller & Cooper, Fed. Prac. & Pro.: Jurisdiction, §4402; Hybert v. Shearson Lehman/American Express, Inc., 688 F.Supp. 320, 325 (N.D.Ill. 1988). The question in this case is whether issue preclusion makes Mr. Stoup's judgment nondischargeable.
The requirements of issue preclusion (or collateral estoppel) are:
(1) the issue to be precluded is the same as that involved in the prior state action, (2) the issue was actually litigated by the parties in the prior action, and (3) the state court's determination of the issue was necessary to the resulting final and valid judgment.
In re Tam, 136 B.R. 281, 285 (Bankr.D.Kan. 1992). Mr. Stoup first argues the state court's judgment is nondischargeable under 11 U.S.C.A. §523(a)(2)(A). That section provides that a debtor may not discharge a debt which arose because: (1) the debtor made representations; (2) the debtor knew them to be false when made; (3) the debtor made the representations with the intent to deceive the creditor; (4) the creditor reasonably relied on the representations; and (5) the creditor suffered a loss as a proximate result of the representations. In re Pressgrove, 147 B.R. 244, 246 (Bankr.D.Kan. 1992). The state court found that the debtor intentionally misrepresented PC's gross income on monthly statements submitted to S&T from which S&T's share of that income would be computed, and that S&T reasonably relied on those misrepresentations. These actions proximately caused S&T to lose the fee shares of $13,316.98 and $6,396.72, or a total of $19,713.70. The prejudgment interest added on these amounts would have been awarded to compensate for S&T's loss of the use of the money it should have had up until the judgment was entered. The misrepresentations also caused the former partners to incur attorney and accountant fees in their lawsuit against the debtor and PC. The prejudgment interest on the accountant fees would have been awarded to compensate for the former partners' loss of the use of the money they had paid the accountants and resulted from the debtor's actions as well. However, the state court's findings do not indicate what caused S&T to overpay the debtor $1,268.10 in connection with a case. The state court's award of $2,157.08 does not appear to have resulted from the debtor's misrepresentations but instead from his and PC's failure to pay certain expense items that, under the contract, were properly deductible from PC's gross income. Therefore, the state court's judgment precludes the debtor from relitigating under §523(a)(2)(A) the dischargeability of (1) $13,316.98 amounts, (2) the $6,248.50 in accounting fees plus the prejudgment interest of $2,610.06, and (3) the attorney fees and expenses of $13,596.74.
Mr. Stoup also contends the state court's judgment is nondischargeable under §523(a)(4). That provision precludes the discharge of any debt "for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny." The state court found that PC's agreement with S&T created a fiduciary relationship between S&T and the debtor. The misrepresentations of income and expenses that made parts of the judgment nondischargeable under §523(a)(2)(A) also constitute fraud or defalcation under this subsection. Consequently, the same items that are nondischargeable under subsection (a)(2)(A) are also nondischargeable under this subsection. However, as noted above, the Court is not convinced the state court necessarily concluded that the amounts awarded because of S&T's overpayment to PC and PC's failure to pay expenses arose from the debtor's fraudulent actions.
The state court awarded prejudgment interest in a lump sum on the amounts not yet shown to be nondischargeable together with some of those which have been. Consequently, this Court must calculate the prejudgment interest attributable to the lost fee shares which it has determined to be nondischargeable. The relevant amount is $19,713.70. Simple interest on that amount at 9% is $4.86 per day. The state court awarded prejudgment interest on this amount from December 15, 1986, through April 15, 1993, a total of 2,311 days. The total prejudgment interest on the lost fee shares is therefore $11,231.46.
For these reasons, the Court concludes that Mr. Stoup is entitled to partial summary judgment. The $19,713.70 in lost fee shares plus $11,231.46 prejudgment interest, $6,248.50 in accounting fees plus prejudgment interest of $2,610.06, and the attorney fees and expenses of $13,596.74--a total of $53,400.46--are hereby declared to be nondischargeable under 11 U.S.C.A. §523(a)(2)(A) and (a)(4).
The parties are directed to inform the Court by written pleading filed on or before July 28, 1995, whether they intend to continue to litigate the dischargeability of the remaining portions of the state court judgment. If so, they should ask the clerk's office to schedule a final pretrial conference; if not, they should submit a proposed final order.
IT IS SO ORDERED.
Dated at Topeka, Kansas, this 28th day of June, 1995.
JAMES A. PUSATERI
CHIEF BANKRUPTCY JUDGE
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS
In re: )
ARNOLD LEE KORT, ) CASE NO. 93-40744-7
ARTHUR H. STOUP, )
v. ) ADV. NO. 93-7082
ARNOLD LEE KORT, )
ORDER DENYING MOTION TO RECONSIDER
This proceeding is before the Court on defendant-debtor Arnold Lee Kort's motion to reconsider the Court's June 28, 1995, order granting partial summary judgment to plaintiff Arthur H. Stoup. That order determined that certain portions of a judgment entered by a Missouri state court were nondischargeable under 11 U.S.C.A. §523(a)(2)(A) and (a)(4). The parties had submitted the matter for decision based on a stipulation and briefs. The matters raised in the motion are easily disposed of, so the Court will not wait for the plaintiff to file a response before ruling.
First, Mr. Kort has submitted a copy of the proposed findings and conclusions which were submitted to the state court on his behalf. Mr. Stoup's judgment was entered by the state court following trial based on that court's findings of fact and conclusions of law. This Court's partial summary judgment was based on an analysis of the state court's ruling. Through his then-counsel, Mr. Kort agreed this Court could decide the dischargeability questions based on the materials submitted, and it is too late now to ask the Court to consider other materials that were readily available at the time of submission.
Next, Mr. Kort notes that the state court judgment was appealed to the Missouri court of appeals. The stipulation submitted to the Court included this fact, but Mr. Kort's attorneys asserted no arguments based on it. Perhaps they were aware that "[t]he established rule in the federal courts is that a final judgment retains all of its res judicata consequences pending decision of the appeal." 18 Wright, Miller & Cooper, Fed. Prac. & Pro., Jurisdiction, §4433 at 308 (1981). Consequently, the fact the state court judgment was on appeal would have had no effect on this Court's decision even if Mr. Kort had timely complained that the state judgment was not final because he had appealed it. If the state court appeal is decided in Mr. Kort's favor before a final judgment is entered in this case, Mr. Kort may then ask the Court to modify its decision accordingly. If this Court enters a final judgment before the appeal is decided, he may appeal this Court's decision to protect against its binding effect in case the state appellate court decides in his favor. In fact, even if this Court's decision becomes a final, nonappealable judgment before the state appellate court rules in his favor, he could seek relief from the nondischargeable judgment through a motion under Federal Rule of Civil Procedure 60(b)(5), made applicable here by Federal Rule of Bankruptcy Procedure 9024. See 18 Wright, Miller & Cooper, Fed. Prac. & Pro., Jurisdiction, §4433 at 310; 11 Wright, Miller & Kane, Fed. Prac. & Pro., Civil 2d, §2863 (1995).
Mr. Kort complains that Mr. Stoup's affidavit swearing that his co-plaintiff in the state court had assigned his interest in the judgment to Mr. Stoup is not "the best evidence" and the assignment was not attached to the affidavit. The affidavit was attached to a pleading filed on February 15, 1994, long before the Court issued its decision in June 1995, and this is the first time Mr. Kort has raised any question about it. His concern comes much too late. He also assumes the assignment was written rather than oral, although the affidavit does not indicate whether this is true. Perhaps there is no document that would be "the best evidence" of the assignment. Finally, Mr. Kort has not submitted any evidence to suggest that no such assignment was made--the only fact relevant to this Court's ruling. The Court will not reconsider its decision simply because Mr. Kort now wants a new chance to test whether Mr. Stoup was lying in his affidavit.
Mr. Kort points out that the Court noted in its order that his counsel had withdrawn. This, he suggests, caused him "to be jeopardized." However, the parties had submitted a stipulation, plaintiff's brief, defendant's brief, and plaintiff's reply brief before the Court rendered its decision, and Mr. Kort's attorneys did not seek permission to withdraw until nearly four months after the last of these pleadings was filed. By then, the issues decided in the June 28, 1995, order were fully submitted for decision, so the Court cannot agree that Mr. Kort was "jeopardized" in any way by the withdrawal.
Finally, Mr. Kort asserts that he intends to continue to litigate the dischargeability of the state court judgment. Of course, the present motion demonstrates his intent. That fact, however, is not a reason for this Court to amend its order.
For these reasons, Mr. Kort's motion to reconsider is hereby denied.
IT IS SO ORDERED.
Dated at Topeka, Kansas, this 28th day of July, 1995.
JAMES A. PUSATERI
CHIEF BANKRUPTCY JUDGE