Opinion
Case No. 12-31537-svk
01-10-2013
In re William E. Eiseman and Nancy E. Eiseman, Debtors.
Chapter 11
MEMORANDUM DECISION DENYING DEBTORS'
MOTION FOR RELIEF FROM STAY
This is a proceeding asking the Court to modify the automatic stay so that litigation may continue in state court. What is unusual is that the request comes from the Debtors. After due consideration, this request is denied.
The Debtor, William Eiseman, is a defendant in Milwaukee County Circuit Court litigation that spanned four judges and close to four years. The Plaintiffs, Triangle Plaza, LLC and Triangle Plaza II, LLC (the "Triangle entities") sued the Debtor, and entities he controlled for: (i) intentional misrepresentation, (ii) negligent misrepresentation, (iii) negligence, (iv) breach of fiduciary duty, (v) unjust enrichment, and (vi) violation of Wisconsin securities law. One of the Debtor's affiliated defendants, Banta Trails, LLC, filed an AAA arbitration claim against Triangle Plaza, II, and the arbitrator ruled in Banta's favor. The Debtor was not a party to the arbitration, and the arbitrator's December 10, 2010 decision stated, "[The Debtor] and Castle Realty Associates, Inc. were not a party to the arbitration proceedings and no issues were considered or addressed as it relates to those defendants in the civil suit." On March 11, 2011, based on a Motion for Partial Summary Judgment, the Circuit Court dismissed the fraud, misrepresentation and securities law claims against the Debtor "on the grounds of claim preclusion." The case proceeded on the other claims, but no trial ever occurred. The Triangle entities blame the Debtor for continuously adjourning the proceedings. On the eve of the final pretrial conference, the Debtor filed this Chapter 11 case.
The Triangle entities filed an adversary proceeding claiming that the Debtor's debts are nondischargeable. The Debtor answered, denied the claims, and raised defenses including claim preclusion, issue preclusion, law of the case and the Rooker-Feldman doctrine. The Triangle entities filed a Motion for Summary Judgment, arguing that these doctrines and defenses do not apply to bar the dischargeability determination. In response, the Debtor filed the instant Motion for relief from stay, seeking to return to the Milwaukee County Circuit Court to allow a final order to be entered dismissing the fraud and securities violation claims, "saving the cost of re-litigating the Claims before this Court." The Triangle entities oppose this Motion, noting that the state court does not have the ability to make discharge determinations and that the parties will be forced to litigate dischargeable claims in order to achieve a final judgment that the Triangle entities will appeal, causing more expense and delay.
Courts have identified twelve factors to be weighed in deciding whether a bankruptcy court should modify the stay to permit litigation to continue in another forum. These are: (1) whether relief would result in a partial or complete resolution of the issues; (2) lack of any connection with or interference with the bankruptcy case; (3) whether the other proceeding involves the debtor as a fiduciary; (4) whether a specialized tribunal with the necessary expertise has been established to hear the cause of action; (5) whether the debtor's insurer has assumed full responsibility for defending it; (6) whether the action primarily involves third parties; (7) whether litigation in another forum would prejudice the interests of other creditors; (8) whether the judgment claim arising from the other action is subject to equitable subordination; (9) whether movant's success in the other proceeding would result in a judicial lien avoidable by the debtor; (10) the interests of judicial economy and the expeditious and economical resolution of litigation; (11) whether the parties are ready for trial in the other proceeding; and (12) impact of the stay on the parties and the balance of harms. In re Sonnax Indus., 907 F.2d 1280 (2d Cir. 1990) (citing In re Curtis, 40 Bankr. 795, 799-80 (Bankr. D. Utah 1984).
In this case, factors (4), (5), (6), (7), (8) and (9) do not apply. Factor (3), whether the other proceeding involves the debtor as a fiduciary, also is not implicated, although the Triangle entities claim that the Debtor committed fraud in a fiduciary capacity in their dischargeability complaint. The other factors - all related to judicial economy, efficiency and balancing the interests of the parties - weigh heavily in support of denying the Debtor's Motion for Relief from Stay.
Granting the relief requested by the Debtor would not result in complete resolution of the issues. Only a bankruptcy court can grant a discharge, and the bankruptcy court has exclusive jurisdiction to determine the dischargeability of a debt based on fraud, willful and malicious conduct and the like. 11 U.S.C. § 523(c); Stoll v. Conway, 148 B.R. 881, 883 (Bankr. E.D. Wis. 1992). Therefore, after more potentially protracted proceedings, including an appeal, in the state court, the litigation will return to this Court for the discharge determination.
Ordinarily, the discharge determination would turn on the application of issue preclusion or the Rooker Feldman doctrine. But those doctrines require a final judgment, and the Order at issue here is not a final Order. The Triangle entities point out that, until the Order is final, the Circuit Court could reconsider its decision. But even assuming the Circuit Court's Order dismissing the fraud and securities violation claims was final, issue preclusion requires that the issues in the prior action must have been actually litigated and necessarily determined. Worldwide Prosthetic Supply, Inc. v. Mikulsky (In re Mikulsky), 301 B.R. 726, 728-29 (Bankr. E.D. Wis. 2003). "The party asserting the doctrine [of issue preclusion] has the burden of proving that all of the threshold requirements have been met. . . . To meet this burden, the moving party must have pinpointed the exact issues litigated in the prior action and introduced a record revealing the controlling facts." Honkanen v. Hopper (In re Honkanen), 446 B.R. 373, 382 (B.A.P. 9th Cir. 2011) (explaining further that "[r]easonable doubts about what was decided in the prior action should be resolved against the party seeking to assert preclusion"). Based on the record before this Court, it is questionable whether the issues of the Debtor's alleged fraud or securities violations were ever litigated. The Debtor was not a party to the arbitration, and the Circuit Court dismissed the claims based on "claim preclusion." The record from the Circuit Court proceeding provides no basis for me to determine what findings were made by the state court. The Debtor can certainly supplement the record in defending the nondischargeability complaint.
Balancing the rights and interests of the parties and considering the notions of judicial economy also support keeping this dispute in the bankruptcy court. Upon the Debtor's bankruptcy filing, the Triangle entities should be allowed to pursue their claims on the merits, including seeking a determination that the Debtor's debts are not dischargeable. The Debtor is, of course, entitled to dispute the claims and defend against the dischargeability complaint. The issue comes down to which court should decide the dispute. The Triangle entities persuasively argue that judicial economy is served by keeping this dispute in bankruptcy court, which, after all, is the forum the Debtor chose. Although the case has been pending in state court since 2009, the latest assigned judge took over the case on July 30, 2012, a few days before the Debtor filed Chapter 11. If the case returns to the Circuit Court, before a final order can be entered on the potentially nondischargeable claims, that court will need to dispose of the claims for unjust enrichment. But those claims are dischargeable in bankruptcy and could quickly be determined or estimated in the claims objections process in this Court. In the absence of extraordinary circumstances not present here, neither the Debtor nor the Triangle entities should be required to spend the time and resources required to conduct a full blown civil trial in the state court on the dischargeable claims.
Moreover, once a final judgment is entered by the state court, the Triangle entities indicate that they will appeal the dismissal of their fraud and securities violation claims. Again, time and money will be expended, and the result could be (1) affirming the dismissal, which may or may not result in factual findings that will have preclusive effect in this Court; or (2) reversing the dismissal, leading to a trial of these additional claims in state court. By denying the Debtor's motion, and keeping the discharge determination in this Court, considerable time and expense should be saved by all parties. This benefits the Debtor's other creditors as well. The presence of a nondischargeable debt no doubt will influence the Debtor's plan of reorganization. By keeping the litigation in this Court, creditors and parties in interest can be kept apprised of the progress of the dischargeability determination.
The Debtor could have gone to trial in state court and allowed the litigation to proceed to its conclusion. Instead, a week before the final pretrial conference, he filed a Chapter 11 petition, staying the litigation. When the Triangle entities responded with a nondischargeability complaint, the Debtor filed a Motion seeking to return to the state court, now claiming that there will be a prompt resolution there. However, the ultimate issue is whether the alleged debt is dischargeable, and that issue can best and most readily be determined here. Especially when the disputes between the parties will be resolved in the context of dischargeability litigation, the Court should not modify the stay to permit state court litigation to proceed. See In re Henderson, 352 B.R. 439 (Bankr. N.D. Tex. 2006).
The Debtors' Motion for Relief from Stay should be denied. The Court will enter a separate Order, consistent with this Memorandum Decision.
By the Court:
____________________
Susan V. Kelley
U.S. Bankruptcy Judge