Opinion
Case No. 98-9520-BHL-7, Adv. No. 99-9003
June 10, 1999
JUDGMENT
This adversary proceeding was initiated by Home Federal Savings Bank's Complaint Objecting to Discharge of Debt filed on January 11, 1999. The parties filed a Joint Motion for Summary Judgment on March 31, 1999, together with a Joint Stipulation of Fact. The Court, having reviewed the pleadings and applicable law, and based upon the stipulated facts filed herein, finds that the Plaintiff has failed to establish a basis for nondischargeability. Judgment is entered in favor of the Defendant and against the Plaintiff for the reasons stated in the attached Memorandum.
IT IS SO ORDERED AND ADJUDGED this __ day of June, 1999, at New Albany, Indiana.
MEMORANDUM
This matter is before the Court on a Joint Motion for Summary Judgment filed by the parties on March 31, 1999. The parties have stipulated to the following pertinent facts:
Although entitled a Joint Motion for Summary Judgment, the pleading is in the nature of a submission on stipulated facts. The parties have not briefed their respective positions, but instead, ask for the Court to rule based upon the facts as stipulated and presented by the parties. The Court, having drawn that distinction, shall not gauge the instant facts based upon a summary judgment standard of review.
1. On or about March 2, 1997, Rhonda Bode ["Bode"] issued a check payable to the Defendant, Arland Caffe ["Caffe"], drawn on the account of Charles E. Bode, Trucking Account, with Irwin Union Bank in the amount of Three Thousand Dollars ($3,000.00).
2. Bode requested that Caffe hold said check until September, 1997.
3. Caffe deposited said check on or about October 2, 1997, without any further communication from Bode.
4. The check issued to Caffe by Bode was returned to Plaintiff, Home Federal Savings Bank ["Home Federal"] by Irwin Union Bank marked "Insufficient Funds" on the 7th day of October, 1997.
5. Home Federal notified Caffe and Bode that said check was not honored and Home Federal demanded Three Thousand Dollars ($3,000.00).
6. On December 29, 1997, Home Federal filed a Complaint against Caffe and Bode in the Scott Circuit Court, under Cause No. 72C01-9712-CP-180, seeking recovery of said monies from these individuals.
7. On February 27, 1998, Home Federal obtained a Default Judgment against both Caffe and Bode.
8. Caffe and Bode have not paid the amount due Home Federal except that Home Federal has been informed that Bode has paid to Caffe the sum of Two Hundred Twenty-Five Dollars ($225.00) toward reimbursement for said insufficient funds and Caffe is prepared to deliver said funds to Home Federal for partial payment of the subject check.
9. On or about June 15, 1998, Bode filed a Chapter 13 bankruptcy petition in the United States Bankruptcy Court, Southern District of Indiana, Indianapolis Division, under Cause No. 98-07746-FJO-13.
10. Caffe immediately requested the Jackson County Prosecutor to consider criminal actions in regard to the subject check issued by Bode. Consequently, Bode entered into a letter agreement to pay the subject claim through Fifty Dollar ($50.00) monthly payments which will be delivered to Home Federal. Those payments will commence in April, 1999.
Discussion
The Plaintiff has generally alleged nondischargeability under 11 U.S.C. § 523 and 727. However, neither party has presented any evidence which would assist the Court in ascertaining the Defendant's subjective intent when the check was deposited. Although the check was issued in March, 1997, Bode told Caffe to "hold" the check until September, 1997, which he did. When the check was deposited in early October, 1997, it was subsequently returned marked "Insufficient Funds." While Home Federal might assert that Caffe would have known the check was "no good" prior to September, 1997, the Court finds no basis for that assumption subsequent to September, 1997.
Although not identified by Home Federal in its Complaint, it appears to assert a cause of action under § 523(a)(2)(A) and § 523(a)(12). The Court finds § 523(a)(12) to be inapplicable to the case at bar and will only address the merits of the Plaintiff's (a)(2)(A) claim.
Plaintiff's § 727 claim includes an allegation under subsection (a)(2) and (a)(4). Because there is absolutely no evidence that Caffe has transferred or concealed any property within a year of the filing, the Court rejects Plaintiff's 727(a)(2) claim without discussion.
11 U.S.C. § 523(a)(2)(A) provides that a debt is not discharged if that debt is for "money, services, or an extension, renewal, or refinancing of credit, to the extent obtained by — (A) false pretenses, a false representation, or actual fraud, . . ." The party objecting to discharge has the burden of establishing the foregoing elements. Selfreliance Fed. Credit Union v. Harasymiw (In re Harasymiw), 895 F.2d 1170, 1172 (7th Cir. 1990). Each element must be proven by a preponderance of the evidence. Grogan v. Garner, 498 U.S. 279, 291, 111 S.Ct. 654, 661, 112 L.Ed.2d 755 (1991). The Court also recognizes the well-established rule that "exceptions to discharge are to be construed strictly against a creditor and liberally in favor of the debtor." In re Scarlata, 979 F.2d 521, 524 (7th Cir. 1992) (quoting In re Zarzynski, 771 F.2d 304, 306 (7th Cir. 1994)).
Home Federal, by asking this Court to recognize its state court judgment, would presumably assert that the Court may forego the above analysis since a prior adjudication estops the Debtor from relitigating the issue of fraud. While Home Federal does not actually address the issue of collateral estoppel, the Court must ascertain whether such doctrine may be invoked to establish fraud under section 523(a)(2)(A).
The Full Faith and Credit Clause of the United States Constitution provides that federal courts are to accord state court judgments such weight as would be applied in the courts of the state in which the judgment was rendered. Art. IV, section 1 U.S. Constitution. Thus, the application of collateral estoppel is appropriate in bankruptcy proceedings as long as "the state litigation actually and necessarily decided the relevant issue." Klingman v. Levinson, 831 F.2d 1292, 1295 (7th Cir. 1987). That Court stated:
Where a state court determines factual questions using the same standards as the bankruptcy court would use, collateral estoppel should be applied to promote judicial economy by encouraging the parties to present their strongest arguments. . . . Thus, if the requirements for applying collateral estoppel have been satisfied, then that doctrine should apply to bar relitigation of an issue determined by a state court.
Id. Pursuant to the mandate of section 1738, the preclusive effect of a state court judgment is to be measured by the applicable state law. Bicknell v. Stanley, 118 B.R. 652 (Bankr.S.D.Ind. 1990).
In order for the Court to give collateral estoppel effect to the state court judgment, the following elements must be met:
1) the issue sought to be precluded must be the same as that involved in the prior action; 2) the issue must have been actually litigated; 3) the determination of the issue must have been essential to the final judgment; and 4) the party against whom estoppel is invoked must be fully represented in the prior action.
Klingman, 831 F.2d 1292, 1295; Bicknell, 118 B.R. 652.
The judgment against the debtor, rendered by the Scott Circuit Court, is entitled to collateral estoppel effect only if all of the foregoing requirements are met. Because the judgment was rendered by default, however, the Court finds that Caffe did not have a full and fair opportunity to litigate the matter. For collateral estoppel to apply under the foregoing analysis, a party must be fully represented in the earlier litigation. Klingman, 831 F.2d at 1295; and see, McCandless v. Merit Sys. Protection Bd., 996 F.2d 1193, 1198 (Fed. Cir. 1993); Mother's Restaurant, Inc. v. Mama's Pizza, Inc., 723 F.2d 1566, 1569 (Fed. Cir. 1983); Martin v. United States, 30 Fed.Cl. 542, 546 (Fed.Cl. 1994), aff'd; Koppie v. Busey, 832 F. Supp. 1245 (N.D.Ind. 1992), aff'd; In re Austin, 138 B.R. 898, 909 (Bankr.N.D.Ill 1992). The Court concludes, therefore, that collateral estoppel does not apply to bar Caffe from litigating the issue of fraud before this Court.
Having ascertained that collateral estoppel does not apply, then, the Court must proceed to evaluate the Plaintiff's claim under 523(a)(2)(A), which provides that a debt is not discharged if that debt is for "money, services, or an extension, renewal, or refinancing of credit, to the extent obtained by — (A) false pretenses, a false representation, or actual fraud, . . ." Prior to the 1995 Supreme Court ruling in Field v. Mans, 116 S.Ct. 437, the Seventh Circuit held that a creditor must prove three elements to succeed on a claim of false representation:
First, the creditor must prove that the debtor obtained the money through representations which the debtor either knew to be false or made with such reckless disregard for the truth as to constitute a willful misrepresentation. The creditor also must prove that the debtor possessed scienter, i.e., an intent to deceive. Finally, the creditor must show that it actually relied on the false representation, and that its reliance was reasonable.
In re Kimzey, 761 F.2d 421, 423 (1985). The Supreme Court, in Field v. Mans, supra, subsequently concluded that reliance need not be reasonable to assert a nondischargeability claim. The Plaintiff's 523(a)(2)(A) claim fails at the onset of the foregoing analysis since it has not proven, by a preponderance of the evidence, that Caffe knew that the check was not funded at the time he deposited the check into his account.
Although Kimzey is often cited for its 523(a)(2)(A) analysis, Kimzey's fourth requirement, that the creditor prove the statutory requirements by clear and convincing evidence, has been overruled by the Supreme Court case of Grogan v. Garner, 498 U.S. 279.
Because the Plaintiff bears the burden of proving nondischargeability based upon a preponderance of the evidence, and because it has failed to do so, it's claim must fail. For all of the foregoing reasons, the Court finds that the subject debt is not excepted from discharge under 11 U.S.C. § 523 (a)(2)(A). The Plaintiff's § 727 claim must fail for the same reasons. There is no evidence before this Court which would establish that the Debtor "knowingly and fraudulently" made a false oath or account, presented a false claim, or obtained monies from the Plaintiff for acting or forbearing to act.
For all of the foregoing reasons, the Court finds that the Plaintiff's Motion for Summary Judgment should be, and is, DENIED. Because the Plaintiff has failed to establish a basis for nondischargeability, the Court grants judgment against the Plaintiff and in favor of the Defendant.
IT IS SO ORDERED AND ADJUDGED this __ day of June, 1999, at New Albany, Indiana.