Opinion
Case No. 18-54814 Adv. Pro. No. 18-02134
03-31-2020
IN RE: Chad CLINE, Debtor. Mark Helber, et al., Plaintiffs, v. Chad Cline, Defendant.
Robert Kaufman DiCuccio, Katz, Pryor & DiCuccio, LLP, Kristin E. Rosan, Taylor Paige Waters, Madison & Rosan, LLP., Columbus, OH, for Plaintiffs. David B. Schultz, Dublin, OH, for Defendant.
Robert Kaufman DiCuccio, Katz, Pryor & DiCuccio, LLP, Kristin E. Rosan, Taylor Paige Waters, Madison & Rosan, LLP., Columbus, OH, for Plaintiffs.
David B. Schultz, Dublin, OH, for Defendant.
MEMORANDUM OPINION AND ORDER DENYING PLAINTIFFS' MOTION FOR SUMMARY JUDGMENT
C. Kathryn Preston, United States Bankruptcy Judge
This cause came on for consideration of the Plaintiffs' Motion for Summary Judgment (Doc. #22), filed by Mark Helber and Patricia Helber (the "Plaintiffs") on January 10, 2020, and the Defendant Chad Cline's Memorandum in Opposition to Plaintiffs' Motion for Summary Judgment (Doc. #26) (the "Response"), filed by the debtor, Chad Cline (the "Defendant"), on January 31, 2020.
I. Jurisdiction
The Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334 and Amended General Order 05-02 entered by the United States District Court for the Southern District of Ohio, referring all bankruptcy matters to this Court. This matter is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(I). Venue is properly before this Court pursuant to 28 U.S.C. §§ 1408 and 1409.
II. Factual Background and Procedural History
The Plaintiffs' Complaint alleges the following facts: On or about September 26, 2017, the Plaintiffs entered into a Contract to Perform Work with the Defendant and his company, CMC Complete Construction LLC, for construction of a retaining wall on the Plaintiffs' real property. The Defendant proposed a cost-saving alternative to the original structural drawings of the retaining wall. The parties agreed that the Defendant was required to obtain approval of the new structural drawings from his engineer prior to construction. Between October 16, 2017 and November 20, 2017, the Defendant made assurances to the Plaintiffs that the engineer reviewed the structural drawings for approval and completed a new set of drawings based on the Defendant's proposal. Between November 2, 2017 and November 10, 2017, the Defendant began construction, but he failed to construct the retaining wall in a workmanlike manner and caused damage to the Plaintiffs' property. On or about November 20, 2017, during a meeting between the engineer, Patricia Helber, and the Defendant, the engineer indicated that he had never seen the structural drawings.
On March 8, 2018, the Plaintiffs filed a complaint (the "State Court Complaint") against the Defendant and his company in the Pickaway County, Ohio, Court of Common Pleas (the "State Court"), alleging breach of contract, fraud, intentional misrepresentation, and negligent misrepresentation. For each cause of action, the Plaintiffs alleged compensatory damages in excess of $25,000 and requested attorney fees for the Defendant's "bad faith" conduct. The Defendant did not answer the State Court Complaint. On June 11,2018, upon the Defendant's default, the State Court entered a judgment (the "Default Judgment") in favor of the Plaintiffs and found the Defendant and his company jointly and severally liable to the Plaintiffs for compensatory damages in the amount of $49,164.49. The State Court further held that the Plaintiffs propounded sufficient evidence of the Defendant's bad faith, entitling them to attorney fees in the amount of $8,823.45. Shortly thereafter, the Defendant filed a petition for relief under Chapter 7 of the Bankruptcy Code and sought discharge of the Plaintiffs' judgment and other debts.
The Plaintiffs filed a complaint commencing this adversary proceeding, seeking a determination that the damage award in the Default Judgment is nondischargeable debt pursuant to 11 U.S.C. § 523(a)(2) and (6). The Plaintiffs now move for summary judgment, asserting there is no genuine issue of material fact that the Defendant committed fraud upon the Plaintiffs; and the State Court found that the Defendant's conduct constituted fraud. The Defendant argues in the Response that the Plaintiffs essentially rely upon the doctrine of issue preclusion (also known as collateral estoppel), which does not apply to the Default Judgment because the State Court made no specific findings of fact.
III. Standard of Review for Motions for Summary Judgment
Rule 56 of the Federal Rules of Civil Procedure, made applicable to adversary proceedings by Bankruptcy Rule 7056, provides that the Court "shall grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(a). The party seeking summary judgment bears the initial burden of "informing the ... court of the basis for its motion, and identifying those portions of the [record] which it believes demonstrate the absence of a genuine issue of material fact." Celotex Corp. v. Catrett , 477 U.S. 317, 323, 106 S. Ct. 2548, 91 L.Ed.2d 265 (1986). See also Fed. R. Civ. P. 56(c)(3).
If the movant satisfies this burden, the nonmoving party must then assert that a fact is genuinely disputed and must support the assertion by citing to particular parts of the record. Fed. R. Civ. P. 56(c)(1). The mere allegation of a factual dispute is not sufficient to defeat a motion for summary judgment; to prevail, the nonmoving party must show that there exists some genuine issue of material fact. See Anderson v. Liberty Lobby, Inc. , 477 U.S. 242, 247-48, 106 S. Ct. 2505, 91 L.Ed.2d 202 (1986). When deciding a motion for summary judgment, all justifiable inferences must be viewed in a light most favorable to the nonmoving party. Matsushita Elec. Indus. Co. v. Zenith Radio Corp. , 475 U.S. 574, 587, 106 S. Ct. 1348, 89 L.Ed.2d 538 (1986) ; Anderson , 477 U.S. at 255, 106 S.Ct. 2505. The Sixth Circuit Court of Appeals has articulated the following standard to apply when evaluating a motion for summary judgment:
[T]he moving [party] may discharge its burden by "pointing out to the ... court ... that there is an absence of evidence to support the nonmoving party's case." The nonmoving party cannot rest on its pleadings, but must identify specific facts supported by affidavits, or by depositions, answers to interrogatories,
and admissions on file that show there is a genuine issue for trial. Although we must draw all inferences in favor of the nonmoving party, it must present significant and probative evidence in support of its [position]. "The mere existence of a scintilla of evidence in support of the [nonmoving party's] position will be insufficient; there must be evidence on which the jury could reasonably find for the [nonmoving party]."
Hall v. Tollett, 128 F.3d 418, 422 (6th Cir. 1997) (citations omitted). A material fact is one whose resolution will affect the determination of the underlying action. See Tenn. Dep't of Mental Health & Mental Retardation v. Paul B., 88 F.3d 1466, 1472 (6th Cir. 1996). An issue is genuine if a rational trier of fact could find in favor of either party on the issue. See Schaffer v. A.O. Smith Harvestore Prods., Inc. , 74 F.3d 722, 727 (6th Cir. 1996). "The substantive law determines which facts are ‘material’ for summary judgment purposes." Hanover Ins. Co. v. Am. Eng'g Co. , 33 F.3d 727, 730 (6th Cir.1994). In determining whether each party has met its burden, the court must keep in mind that "[o]ne of the principal purposes of the summary judgment rule is to isolate and dispose of factually unsupported claims or defenses .... " Celotex , 477 U.S. at 323-24, 106 S.Ct. 2548.
IV. Analysis
Because the overarching purpose of the Bankruptcy Code is to provide a fresh start to those in need of relief from the efforts of creditors, exceptions to discharge are to be strictly construed against an objecting party. Rembert v. AT&T Universal Card Serv., Inc. (In re Rembert) , 141 F.3d 277, 281 (6th Cir. 1998). Thus, the Court must construe exceptions to discharge narrowly. Id. See also Ker v. Ker (In re Ker) , 365 B.R. 807, 812 (Bankr. S.D. Ohio 2007) ("In order to afford the honest but unfortunate debtor a fresh start, the Court narrowly construes exceptions to discharge."). However, the relief provided by the Bankruptcy Code is intended only for the "honest but unfortunate" debtor and not to protect perpetrators of fraud or those who engage in egregious conduct. Grogan, 498 U.S. at 287, 111 S.Ct. 654.
Grogan v. Garner , 498 U.S. 279, 286, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991).
In the present case, the Plaintiffs claim that the judgment debt is nondischargeable under 11 U.S.C. § 523(a)(2) and (6). Section 523(a)(2) provides, in pertinent part:
(a) A discharge under section 727 ... o f this title does not discharge an individual debtor from any debt—
...
(2) for money, property, [or] services ... t o the extent obtained by—
(A) false pretenses, a false representation, or actual fraud ....
11 U.S.C. § 523(a)(2)(A). Section 523(a)(6) provides, in pertinent part:
(a) A discharge under section 727 ... o f this title does not discharge an individual debtor from any debt—
...
(6) for willful and malicious injury by the debtor to another entity or to the property of another entity.
The Plaintiffs fail to articulate any theory or develop any legal argument in support of the Motion for Summary Judgment. Inasmuch as it appears that the Plaintiffs are relying on the Default Judgment, the Court assumes that the Plaintiffs' theory rests on the doctrine of issue preclusion. The application of issue preclusion in a dischargeability action depends on whether the prior state court judgment would be afforded preclusive effect under the law of the state where it was rendered. Markowitz v. Campbell (In re Markowitz), 190 F.3d 455, 461 (6th Cir. 1999) ; Ed Schory & Sons, Inc. v. Francis (In re Francis), 226 B.R. 385, 388 (6th Cir. BAP 1998). Under Ohio law, a party asserting issue preclusion must establish four elements:
1) A final judgment on the merits in the previous case after a full and fair opportunity to litigate the issue; 2) The issue must have been actually and directly litigated in the prior suit and must have been necessary to the final judgment; 3) The issue in the present suit must have been identical to the issue in the prior suit; 4) The party against whom estoppel is sought was a party or in privity with the party to the prior action.
Yust v. Henkel (In re Henkel), 490 B.R. 759, 771 (Bankr. S.D. Ohio 2013) (quoting Sill v. Sweeney (In re Sweeney), 276 B.R. 186, 189 (6th Cir. BAP 2002) ).
The Plaintiffs assert that the Defendant "knowingly and maliciously made representations" to the Plaintiffs regarding the structure and that the State Court found that the Defendant's conduct constituted fraud. Pls.' Mot. Summ. J. 5. However, the State Court made no such finding, and the Default Judgment is too vague to be given preclusive effect. "To be entitled to preclusive effect, a judgment should have sufficient detail to enable a subsequent court to have a clear understanding of the prior court's ruling without having to speculate about the scope of the prior court's findings of fact and conclusions of law." Henkel, 490 B.R. at 781-82 (citing Sweeney, 276 B.R. at 194 ). "This is particularly true in the context of a nondischargeability determination because it is only those damages proximately caused by the fraud that may be given preclusive effect." Id. at 782 (citations omitted). Thus, "[w]hen a final judgment is entered in multiple claims and there is no way to determine which specific claims on which the judgment is rendered, application of the doctrine of issue preclusion is not appropriate." Custom Kilns, Inc. v. Pierron (In re Pierron) , 448 B.R. 228, 236 (Bankr. S.D. Ohio 2011) ; Schmidt v. Panos (In re Panos) , 573 B.R. 723, 738 (Bankr. S.D. Ohio 2017).
The Default Judgment is very short—one page. The sole paragraph other than the decretal paragraph reads, in relevant part, as follows:
Upon the evidence propounded by Plaintiffs ... this Court hereby FINDS that the Defendants ... are jointly and severally liable to the Plaintiffs for compensatory damages in the amount of [$49,164.49]. Further, this Court hereby FINDS that Plaintiffs propounded sufficient evidence of Defendants' bad faith and an award of reasonable attorney fees is warranted; therefore, this Court holds that Defendants are jointly and severally liable to Plaintiffs for [$8,823.45] in reasonable attorney fees.
Pls.' Mot. Summ. J. Ex. 3, at 15.
The Default Judgment does not specify the causes of action on which the Plaintiffs were granted judgment. Nor does it provide any detailed factual findings or legal conclusions. The damages award is not directly allocated to any of the causes of action alleged in the State Court Complaint. The Plaintiffs' State Court Complaint alleged breach of contract, fraud, intentional misrepresentation, and negligent misrepresentation. A breach of contract action, without demonstrating an intent to deceive, does not support a nondischargeability claim. Launder v. Doll (In re Doll), 585 B.R. 446, 463 (Bankr. N.D. Ohio 2018) (citing Risk v. Hunter (In re Hunter), 535 B.R. 203, 218 (Bankr. N.D. Ohio 2015) ). Negligent misrepresentation hinges on conduct which may not rise to the level of actual intent or willfulness required under 11 U.S.C. § 523(a)(2) or (6), respectively. A judgment awarding damages in the aggregate on various dischargeable and nondischargeable claims, without explaining the basis for the award, lacks the necessary specificity for issue preclusion to apply. Panos, 573 B.R. at 735-36. Because the Default Judgment fails to allocate the debt between the purportedly nondischargeable claims (e.g., fraud) and dischargeable claims (e.g., breach of contract, negligent misrepresentation), issue preclusion is not appropriate.
Under Ohio law, the elements of negligent misrepresentation are:
One who, in the course of his business, profession or employment, or in any other transaction in which he has a pecuniary interest, supplies false information for the guidance of others in their business transactions, is subject to liability for pecuniary loss caused to them by their justifiable reliance upon the information, if he fails to exercise reasonable care or competence in obtaining or communicating the information.
Delman v. City of Cleveland Heights , 41 Ohio St. 3d 1, 4, 534 N.E.2d 835 (1989) (quoting Restatement ( Second ) of Torts § 552(1) (1965) ). Negligent misrepresentation has limited application, only applying to "limited circumstances in which a person, in the course of business, negligently supplies false information, knowing that the recipient either intends to rely on it in business, or knowing that the recipient intends to pass the information on to a foreseen third party or limited class of third persons who intend to rely on it in business." Corporex Dev. & Constr. Mgmt., Inc. v. Shook, Inc., 106 Ohio St. 3d 412, 2005-Ohio-5409, 835 N.E.2d 701, at ¶ 9 (2005) (emphasis added).
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It appears that the Plaintiffs are attempting to draw a correlation between the State Court's finding of "bad faith" conduct and 11 U.S.C. § 523(a)(2) or (6). But the Plaintiffs fail to illustrate how a bad faith finding for the purposes of awarding attorney fees brings the Default Judgment within the parameters of any provision of 11 U.S.C. § 523. Under Ohio law, a prevailing party in a civil action may recover reasonable attorney fees by proving bad faith conduct of the opposing party. Reagans v. MountainHigh Coachworks, Inc., 117 Ohio St. 3d 22, 31-32, 2008-Ohio-271, 881 N.E.2d 245 (2008). Bad faith is described as, among other things, "a dishonest purpose, moral obliquity, conscious wrongdoing, breach of a known duty through some ulterior motive or ill will partaking of the nature of fraud." Hoskins v. Aetna Life Ins. Co., 6 Ohio St. 3d 272, 276, 452 N.E.2d 1315 (1983) (emphasis added) (quoting Slater v. Motorists Mut. Ins. Co., 174 Ohio St. 148, 151, 187 N.E.2d 45 (1962) ). Bad faith does not correlate to nefarious conduct under 11 U.S.C. § 523(a)(2)(A) and (6), because it does not necessarily require a finding of actual fraud, a false representation, false pretenses, or willful and malicious injury. As such, the Default Judgment does not have sufficient detail for this Court to adequately understand the State Court's ruling without having to speculate about the scope or reasoning of the decision. Thus, the Court finds that the Default Judgment does not have preclusive effect in this case and does not support the Plaintiffs' nondischargeability claim.
V. Conclusion
The Default Judgment does not meet the requirements to be afforded preclusive effect in this adversary proceeding. Thus, the Court cannot find that there are no genuine issues of material fact or that the Plaintiffs are entitled to judgment as a matter of law that the judgment debt is nondischargeable pursuant to 11 U.S.C. § 523(a)(2) or (6).
For the foregoing reasons, the Plaintiffs' Motion for Summary Judgment (Doc. #22) is DENIED. A trial will be set in this matter by separate notice.
IT IS SO ORDERED.