Opinion
CASE NO. 04-20147-RLJ-7, ADVERSARY NO. 07-2015.
July 23, 2008
MEMORANDUM OPINION
Introduction
Robert Warren Paige ("Paige"), defendant here and debtor in the underlying bankruptcy case, moves for summary judgment on the claims made by Kent Ries (the "Trustee"), the plaintiff here and chapter 7 trustee in the Paige bankruptcy case, in this adversary proceeding. By the second amended complaint, the Trustee asserts causes of action against Paige for fraud and misrepresentation, fraud in the inducement, breach of warranty, and conversion. He requests the following forms of relief: revocation of an order dismissing a prior adversary proceeding, actual and punitive damages, rescission of a settlement agreement between the Trustee and Paige, a preliminary injunction requiring the maintenance of certain life insurance policies and other accounts, and a revocation of the discharge that was previously granted to Paige in his bankruptcy case. Paige submits here that the Trustee's claims are barred by res judicata; that the Trustee's request for a partial rescission of the settlement agreement between them is improper; that the Trustee has no evidence of damages arising from Paige's improper conduct; that the Trustee's claims for revocation of discharge under section 727(d)(1) are time barred; that he (Paige) never acquired "property of the estate" for purposes of the section 727(d)(2) revocation of discharge claim; and that the Trustee does not allege and has no evidence of an act specified in section 727(a)(6) of the Bankruptcy Code for purposes of revoking Paige's discharge pursuant to section 727(d)(3).
Background Facts and Summary Judgment Standard
The Trustee's complaint alleges the same facts found by the Court in its March 28, 2007 Memorandum Opinion that was issued in connection with the Trustee's motion requesting sanctions against Paige (the "Motion for Sanctions"). There is no dispute between the parties regarding the facts that give rise to this lawsuit. The Court hereby incorporates its March 28, 2007 Memorandum Opinion and appends a copy hereto.
Summary judgment is proper if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, and other matters presented to the court show that there is no genuine issue of material fact and that the moving party is entitled to a judgment as a matter of law. Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 250 (1986); Washington v. Armstrong World Indus., Inc., 839 F.2d 1121, 1122-23 (5th Cir. 1988). On a summary judgment motion the inferences to be drawn from the underlying facts must be viewed in the light most favorable to the party opposing the motion. Anderson, 477 U.S. at 255. A factual dispute bars summary judgment when the disputed fact is determinative under governing law of the issue before the court. Id. at 250. The movant bears the initial burden of articulating the basis for the motion and identifying evidence which shows that there is no genuine issue of material fact. Celotex, 477 U.S. at 322. The respondent may not rest on the mere allegations or denials in its pleadings but must set forth specific facts showing that there is a genuine issue for trial. Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 586-87 (1986). "The judgment sought should be rendered if the pleadings, the discovery and disclosure materials on file, and any affidavits show there is no genuine issue as to any material fact and that the movant is entitled to judgment as a matter of law." FED. R. CIV. P. 56(c).
Discussion
(1) Res Judicata — In re Intelogic Trace, Inc.
As set forth in the March 28, 2007 Memorandum Opinion, the Court determined that Paige's conduct in taking and selling four classic cars was "intentional, deceitful, and done in bad faith. . . ." March 28, 2007 Memorandum Opinion at 11. The Court, therefore, sanctioned Paige in the amount of $80,000, which amount was, "in the Court's judgment, the minimum amount necessary to cover both the additional [attorneys'] fees and expenses incurred by the Trustee in recovering the proceeds from the four cars and to deter similar conduct by Paige . . ." in the future. March 28, 2007 Memorandum Opinion at 13. By his motion for summary judgment, Paige submits that the Court's ruling as set forth in the March 28, 2007 Memorandum Opinion forecloses any further recovery on causes of action that arise out of the same facts that gave rise to the Trustee's Motion for Sanctions. Paige submits that res judicata bars the present claims by the Trustee.
Paige argues that the Fifth Circuit's opinion in Osherow v. Ernst Young, LLP (In re Intelogic Trace, Inc.), 200 F.3d 382 (5th Cir. 2000), is controlling and compels application of res judicata to bar the Trustee's claims. The Trustee concedes that Intelogic Trace is instructive, but argues that the instant case can be distinguished. The Court agrees that Intelogic Trace is controlling; its application here is apparent upon a review of its facts and pertinent holdings.
(a) Facts and Holdings of Intelogic Trace
Shortly after emerging from chapter 11 in which its chapter 11 plan was confirmed, Intelogic Trace, Inc. filed a second bankruptcy case because of liquidity problems that arguably resulted from flawed financial projections prepared by its accounting firm, Ernst Young, in the prior bankruptcy. Intelogic Trace, 200 F.3d at 384-85. There was evidence that, after realizing that it would be short on cash and prior to the hearing on Ernst Young's fee application in the prior bankruptcy, Intelogic Trace, Inc. suspected that Ernst Young may have committed malpractice in the preparation of its financial projections. Id. at 389. Instead of objecting to the quality and value of Ernst Young's services at the fee application hearing, Intelogic Trace, Inc. used the potential malpractice claim as a bargaining chip to pursuade Ernst Young to reduce their total fees by $37,000 in return for Intelogic Trace, Inc.'s unqualified support for Ernst Young's fee application at the hearing. Id. at 385. The bankruptcy court approved Ernst Young's expenses and reduced fees at the hearing. Id.
Intelogic Trace, Inc.'s second bankruptcy case converted to chapter 7. Id. In the chapter 7 proceedings, Ernst Young filed a claim for the unpaid fees awarded it in the first bankruptcy. Id. On behalf of Intelogic Trace, Inc., the chapter 7 trustee brought a malpractice suit against Ernst Young based on the services it rendered in the prior chapter 11 bankruptcy. Id. Ernst Young moved for summary judgment on the ground that the trustee's claims were barred by res judicata, collateral estoppel, or waiver. Id. at 385-86. The bankruptcy court granted the motion and the district court affirmed. Id. at 386. On appeal, the Fifth Circuit concluded that the trustee's claims were indeed barred by res judicata and, therefore, never reached the questions of collateral estoppel or waiver. Id. at 391.
In analyzing whether res judicata barred the malpractice suit, the Fifth Circuit looked first to its prior opinion in Nilsen v. City of Moss Point, Mississippi to identify this Circuit's test for claim preclusion:
For a prior judgment to bar an action on the basis of res judicata, the parties must be identical in both suits, the prior judgment must have been rendered by a court of competent jurisdiction, there must have been a final judgment on the merits and the same cause of action must be involved in both cases.
Intelogic Trace at 386 (quoting Nilsen v. City of Moss Point, Miss., 701 F.2d 556, 559 (5th Cir. 1983) (en banc) (citation omitted)).
The only element of res judicata that was in dispute in Intelogic Trace was whether the trustee's malpractice suit involved the same cause of action as the fee application. Id. at 386.
To determine whether the same cause of action was involved, the Fifth Circuit applied the transactional test of the Restatement (Second) of Judgments. Id. The relevant part of the Restatement provides as follows:
(1) When a valid and final judgment rendered in an action extinguishes the plaintiff's claim pursuant to the rules of merger or bar . . ., the claim extinguished includes all rights of the plaintiff to remedies against the defendant with respect to all or any part of the transaction, or series of connected transactions, out of which the action arose.
Id. quoting RESTATEMENT (SECOND) OF JUDGMENTS § 24 (1982). The comments to the Restatement shed additional light on the nuances of the term "transaction" as it is used in section 24:
c. Transaction may be single despite different harms, substantive theories, measures or kinds of relief. A single transaction ordinarily gives rise to but one claim by one person against another. When a person by one act takes a number of chattels belonging to another, the transaction is single, and judgment for the value of some of the goods exhausts the claim and precludes the injured party from maintaining one action for the remainder. In the more complicated case where one act causes a number of harms to, or invades a number of different interests of the same person, there is still but one transaction; a judgment based on the act usually prevents the person from maintaining another action for any of the harms not sued for in the first action.
That a number of different legal theories casting liability on an actor may apply to a given episode does not create multiple transactions and hence multiple claims. This remains true although the several legal theories depend on different shadings of the facts, or would emphasize different elements of the facts, or would call for different measures of liability or different kinds of relief.
Id. quoting RESTATEMENT (SECOND) OF JUDGMENTS § 24 cmt. c (1982).
"The critical issue under [the transactional test] is whether the two actions under consideration are based on `the same nucleus of operative facts.'" Intelogic Trace, 200 F.3d at 386 (quoting Howe v. Vaughan (In re Howe), 913 F.2d 1138, 1144 (5th Cir. 1990)).
In Intelogic Trace, the Fifth Circuit held that the trustee's malpractice claim involved the same nucleus of operative facts as did the hearing on Ernst Young's fee application. Id. at 388. The court reasoned that,
[t]he central transaction involved in both Ernst Young's fee application and the Trustee's present claim was the provision of accounting services during the Chapter 11 reorganization. . . . By granting Ernst Young's fee application, the bankruptcy court implied a finding of quality and value in Ernst Young's services. Similarly, the Trustee's claims in the present suit arise from Ernst Young's alleged omissions in rendering the very same services considered by the bankruptcy court in the fee application hearing.
Id. at 387.
As Intelogic Trace, Inc. elected to support Ernst Young's fee application, subject to the $37,000 reduction of its fees, instead of using its potential malpractice suit as grounds to object to the fee application, it was precluded from later asserting its malpractice claim against the accounting firm. Id. at 390-91.
(b) Application of Intelogic Trace
The Court cannot distinguish the instant case from Intelogic Trace. On November 14, 2006, after learning that Paige had sold at auction four of the estate's classic automobiles without the Trustee's authorization, the Trustee brought his Motion for Sanctions in which he sought to compel Paige to turnover the four cars or, alternatively, to approve the "unauthorized" sale of the cars (with proceeds turned over to Ries as trustee), and sanctions. Over two months later, after completion of all discovery and preparation for the hearing, the Court heard the motion and took the matter under advisement.
In the interim, on December 21, 2006, after learning that Paige had placed the cars for auction without proper authorization, the auction house that had conducted the sale turned over the gross proceeds of $648,500 (without netting out fees, commission, or expenses) to the Trustee. Agreed Order Approving Motion to Approve Unauthorized Sale and Continuing Hearing on Motion to Sanction Debtor, Docket No. 314.
On March 28, 2007, the Court entered its order sanctioning Paige $80,000 for his conduct. Paige did not appeal the award of sanctions; he paid the $80,000 within the time period prescribed by the Court's order; the order became final.
On August 10, 2007, the Trustee brought the present adversary proceeding against Paige. The claims here are based on the same factual episode — Paige's wrongful taking and selling of the four classic automobiles without the Trustee's authorization.
As with Intelogic Trace, the only real debatable issue here concerning the application of res judicata is whether the same cause of action is involved both here and in the Motion for Sanctions. The parties are identical, the Court had jurisdiction to render the sanctions order and the order is a final ruling on the merits. The Trustee, by arguing that a sanctions order is not a ruling on a "substantive" claim, appears to also challenge whether the third element — final judgment on the merits — is met. The Trustee's argument rests on the faulty premise that the prior ruling must be a disposition of the same cause (or causes) of action asserted here or that a sanctions order is somehow different because it vindicates the dignity of the court. This argument, in the Court's view, is just another way of disputing whether the same cause of action is involved in both suits. The Court's sanction order was not appealed and is final; it disposed of the matters raised by the Trustee. The "merits" of the Trustee's claims made in the Motion for Sanctions were precisely the matters addressed by the Court. The Court's disposition of the Motion for Sanctions was not based on a matter of practice, procedure, jurisdiction or form. See 18A CHARLES ALAN WRIGHT, ARTHUR R. MILLER EDWARD H. COOPER, FEDERAL PRACTICE AND PROCEDURE § 4435 (2d ed. 2002).
The causes of action in the present adversary are based on the same transaction as the Motion for Sanctions. The comment to the Restatement states as follows:
That a number of different legal theories casting liability on an actor may apply to a given episode does not create multiple transactions and hence multiple claims. This remains true although the several legal theories depend on different shadings of the facts, or would emphasize different elements of the facts, or would call for different measures of liability or different kinds of relief.
RESTATEMENT (SECOND) OF JUDGMENTS § 24 cmt. c (1982). The fact that the Trustee chose first to bring a contested matter instead of an adversary proceeding does not change the fact that the claims he now posits are based on the same nucleus of operative facts as the contested matter.
Although the four res judicata elements listed by the Nilsen court are present in this case, the Court must still determine whether the Trustee could and should have brought the present claims in the Motion for Sanctions proceedings — for res judicata will not bar these unlitigated claims unless the Trustee could and should have done so. See In re Howe, 913 F.2d at 1145; D-1 Enterprises, Inc. v. Commercial State Bank, 864 F.2d 36, 38 (5th Cir. 1989).
In making the determination, the Court must consider:
whether and to what extent [the Trustee] had actual or imputed awareness prior to [the Motion for Sanctions] hearing of a real potential for claims against [Paige] such as those asserted by the Trustee and whether the bankruptcy court possessed procedural mechanisms that would have allowed [the Trustee] to assert such claims.
Intelogic Trace, 200 F.3d at 388.
Here, the Trustee argues that res judicata should not bar his claims because there are facts pertinent to the causes of action he now brings that arose only after the hearing on the Motion for Sanctions. Such facts concern the Trustee's sales of the other cars of Bobladon, Ltd. that he was selling and his (the Trustee's) lack of knowledge regarding LaDon Paige's involvement in Paige's disposition of the four cars. Such facts do not alter the analysis, however. The core facts — Paige's unauthorized disposition of the four cars — underlie both actions. The Trustee knew the import of Paige's conduct; he asserted various damage models in his Motion for Sanctions. More important, the Fifth Circuit has rejected arguments similar to the Trustee's argument here. See id. at 388-89 (citing In re Howe, 913 F.2d at 1140-41; 1147) (rejecting an argument of former chapter 11 debtors against res judicata that "although they may have been aware of the basic facts underlying their claims, they were not aware of the significance of those facts.").
The facts were known and are relatively simple. The urgency of the situation — the potential loss of the four cars or their value — was met by the very action that was taken. The present causes of action could have been asserted, as well. The requests made by the Motion for Sanctions could have been included with a more formal action, i.e., a lawsuit like the one now before the Court.
The Court must also consider whether the bankruptcy procedures afforded the Trustee an opportunity to effectively litigate these claims at the Motion for Sanctions hearing. Intelogic Trace, 200 F.3d at 389 (citing Hendrick v. Avent, 891 F.2d 583, 586-87 (5th Cir. 1990); D-1 Enterprises, 864 F.2d at 40 (concluding that res judicata does not apply where the claim sought to be barred could not have been effectively litigated in the prior proceeding)).
Again, the Court is guided by the rationale of Intelogic Trace. There, the Fifth Circuit recognized that a fee application is a contested matter, but thought it indeterminate that the hearing on the fee application was merely a contested matter as opposed to a full-blown adversary proceeding. Id. at 389. "[T]he nature of the proceeding does not automatically determine whether [an] action is barred by res judicata." Id. (citation omitted).
Bankruptcy Rule 9014 dictates that "[t]he court may at any stage in a particular matter direct that one or more of the other rules in Part VII shall apply." FED. R. BANKR. P. 9014; Intelogic Trace, 200 F.3d at 390 (referencing 10 LAWRENCE P. KING, COLLIER ON BANKRUPTCY ¶ 7000, at 7000-1 (15th ed. 1983) ("Rule 9014 itself provides that certain of the rules in Part VII apply to contested matters and the court may direct that one or more other Part VII rules also shall apply."). The bankruptcy rules under Part VII are comparable to the Federal Rules of Civil Procedure. See id. (citing 10 LAWRENCE P. KING, COLLIER ON BANKRUPTCY ¶ 7000, at 7000-2 (15th ed. 1983)). The Federal Rules of Civil Procedure govern discovery in bankruptcy adversary proceedings per Bankruptcy Rules 7026-7037. Id. (citing FED. R. BANKR. P. 7026-7037).
After the foregoing exposition on the effectiveness of the bankruptcy procedures in coping with a malpractice claim at a fee application hearing, the Fifth Circuit noted that had Intelogic Trace, Inc. only informed the bankruptcy court of its concerns respecting Ernst Young's fees, "the bankruptcy court could have stayed the fee hearing and permitted time for discovery and development under the procedures available in Part VII of the Bankruptcy Rules." Id. at 390.
Thus, any claim by the Trustee in this case that the Motion for Sanctions hearing could not have provided for the effective litigation of his other substantive causes of action is refuted by Intelogic Trace.
The Trustee argues that the application of res judicata from a sanctions order is bad policy as it will require a party to bring every other conceivable cause of action it may have against an adverse party whenever a motion for sanctions is brought. The Trustee's policy argument overlooks the important fact that his particular Motion for Sanctions was not of the garden variety. Garden-variety motions for sanctions arise from facts and conduct that are separate from the facts of the underlying cause of action or matter, e.g., for refusal to comply with court orders, for contempt and the like. As reiterated above, the Motion for Sanctions was based on the same wrongful conduct by Paige that gives rise to the substantive causes of action raised here.
Just as in Intelogic Trace, the Court is faced with the question of whether a final judgment in a contested matter should bar a subsequent cause of action, or, as in this case, multiple causes of action, based on the same nucleus of operative facts. The Court concludes that it should.
(2) Trustee's Estoppel Argument
The Trustee contends that arguments made by Paige's counsel at the hearing on the Motion for Sanctions estops Paige from now raising res judicata as a bar to the present causes of action. The Trustee has not, in his pleadings, articulated the precise legal theory that he is relying on. At the hearing, however, he argued that judicial estoppel applied. The Court, therefore, construes this general estoppel argument as one of judicial estoppel.
In Superior Crewboats, Inc. v. Primary P I Underwriters ( In re Superior Crewboats, Inc.), one of the Fifth Circuit's most recent pronouncements on the doctrine of judicial estoppel, the court set forth the background, policy, and elements of the doctrine:
Judicial estoppel is a common law doctrine that prevents a party from assuming inconsistent positions in litigation. The purpose of the doctrine is to protect the integrity of the judicial process by preventing parties from playing fast and loose with the courts to suit the exigencies of self interest. Importantly, because judicial estoppel is designed to protect the judicial system, not the litigants, detrimental reliance by the party opponentis not required. Generally, judicial estoppel is invoked where intentional self-contradiction is being used as a means of obtaining unfair advantage in a forum provided for suitors seeking justice. This circuit, however, has recognized three particular requirements: (1) the party is judicially estopped only if its position is clearly inconsistent with the previous one; (2) the court must have accepted the previous position; and (3) the non-disclosure must not have been inadvertent.
374 F.3d 330, 334-35 (5th Cir. 2004) (internal citations and quotations omitted). The third element was described more broadly in another case as requiring that "the party did not act inadvertently." Jethroe v. Omnova Solutions, Inc., 412 F.3d 598, 600 (5th Cir. 2005).
The Fifth Circuit has explained that the doctrine typically focuses on the positions taken by the parties in their pleadings. Brandon v. Interfirst Corp., 858 F.2d 266, 268 (5th Cir. 1988). Thus, as a general rule, "the doctrine applies in cases where a party attempts to contradict his own sworn statements in the prior litigation." Id. (citing USLIFE Corp. v. U.S. Life Ins. Co., 560 F.Supp. 1302, 1304-05 (N.D. Tex. 1983)). However, a federal court is entitled to rely upon statements made by counsel in open court, as a matter of federal procedure, for purposes of judicial estoppel. Ergo Science, Inc. v. Martin, 73 F.3d 595, 600 (5th Cir. 1996).
In the present case, counsel for Paige, Mr. Seckel, made some comments during the hearing on the Trustee's Motion for Sanctions that could be construed as taking the position that res judicata would not bar any substantive claims by the Trustee after the Motion had been decided. One such comment was as follows:
And the thing that concerns me, Judge, is that this sanction hearing, regardless of the outcome of it, does not resolve that particular issue, [i.e., whether the Debtor breached the settlement agreement or made actionable misrepresentations to the Trustee] which is something I thought I heard the trustee argue in his motion is it's either sanction them or I'm going to bring an adversary proceeding. Well, if you sanction [the Debtor], [the Trustee] can still bring an adversary proceeding.
(Closing Arguments on Motion to Sanction Debtor, p. 75, lines 11-17). Later, in arguing that the Motion for Sanctions and any potential substantive causes of action held by the Trustee are two separate things, Paige's counsel stated: "[I]f you entered a sanction today against Dr. Paige, it would not be in lieu of any of these other claims that the trustee has articulated." (Closing Arguments on Motion to Sanction Debtor, p. 85, lines 23-25). Again, Mr. Seckel later argued that "what the Trustee is doing is not in lieu of bringing other claims, because those claims still exist." (Closing Arguments on Motion to Sanction Debtor, p. 86, lines 12-14). Taken as a whole, Paige's position was that his misconduct was not sanctionable, e.g., as an act of civil contempt, but instead might be the basis of an adversary proceeding brought by the Trustee and that resolution of the sanctions matter would not resolve substantive claims.
Assuming, for a moment, that the position taken by Paige was not inadvertent, had the Court accepted it and refused to enter a sanction against Paige, Paige may well be judicially estopped from later arguing, when faced with an adversary brought by the Trustee, that the hearing on the Motion for Sanctions finally resolved all of the substantive causes of action on the merits since such a position would be inconsistent with the position taken at the hearing.
Here, counsel's closing arguments on the Motion for Sanctions were not clearly inconsistent with Paige's argument now that res judicata bars the substantive causes of actions the Trustee now asserts. The thrust of Mr. Seckel's argument is that liability under a sanctions order must rest on grounds separate from liability under any substantive claims of the estate and, as a logical inference from that, that resolution of the sanctions matter would not affect any of the estate's other claims. Part of that argument was that Paige did not commit any sanctionable conduct, even if he did commit some sort of actionable conduct. Now that the Trustee has asserted several substantive causes of action against Paige, Paige argues that any such claims should be barred by res judicata since his liability under the sanctions order rested on the same facts upon which the Trustee is basing his present claims. The two positions are not clearly inconsistent. Thus, the first element of judicial estoppel is not met. Even if the two positions are clearly inconsistent, the remaining two elements would have to be met for judicial estoppel to apply.
With respect to the second element of the judicial estoppel test, it is noteworthy that the positions espoused by Paige at the sanctions hearing were positions taken only in closing arguments and in response to the Trustee's conflation of substantive causes of action with his sanction's request by his assertion of various damage models. Paige's previous position was not a sworn position in his pleadings — a requirement under the general rule for judicial estoppel.
Furthermore, at the hearing on the Trustee's Motion for Sanctions, Paige lost. The Court did not accept Paige's position that he had not committed any sanctionable conduct. ( See March 28, 2007 Memorandum Opinion at 10-11.) The Court found that Paige violated his duty under the Code to cooperate with the Trustee. Granted, it is not necessary for a party to obtain a formal judgment in order for a court to have accepted his position; it is enough "that the first court has adopted the position urged by the party, either as a preliminary matter or as part of a final disposition." In re Coastal Plains, Inc., 179 F.3d 197, 206 (5th Cir. 1999) (quoting Reynolds v. Comm'r of Internal Revenue, 861 F.2d 469, 473 (6th Cir. 1988)). But the Court did not go that far under the present facts.
The most that can be said, under the present circumstances, is that the Court was very sensitive to, and guarded against, the issuance of an order that was based upon a damage model that, in turn, flowed from substantive causes of action. ( See March 28, 2007 Memorandum Opinion at 8.) The Court did not accept Paige's argument; judicial estoppel likewise fails on the second element.
Finally, the Court must determine whether Paige's two respective positions, at the hearing on the Motion for Sanctions and at the summary judgment hearing, were not inadvertent. That is, the Court must determine whether Paige intentionally tried to play fast and loose with the Court to meet the exigencies of the moment by arguing at the sanctions hearing that res judicata would not bar any of the Trustee's subsequent claims only to turn around and argue at the summary judgment hearing that it should bar such claims. It seems clear, under the present facts, that such an argument would be a stretch of what actually happened. Judicial estoppel fails on the third element as well.
(3) Remaining Summary Judgment Points
As res judicata bars the Trustee's claims, the Court briefly addresses certain of Paige's other points.
First, on Paige's argument that partial rescission is improper, the Court finds that this argument has been rendered moot because the Trustee announced at the hearing on the summary judgment that his settlement with LaDon Paige, Paige's wife, and her dismissal from this suit, means Paige gave up nothing in the settlement agreement. The Trustee owned Paige's pre-bankruptcy interest in Bobladon, Ltd., the entity that held the four cars. It was therefore LaDon Paige's interest that was at issue. According to the Trustee, there is no need to pursue a partial rescission claim. The pleadings do not presently request a total rescission. This issue is no longer a live issue.
The Court agrees with Paige's argument that the Trustee has presented no admissible evidence to establish damages. The Trustee admitted at the hearing that he has not obtained and would not be presenting any expert testimony to establish that he could have obtained a greater value for the four cars than the $648,500 that was obtained by Paige and which has been recovered by the Trustee, or that his auction of all of the Bobladon, Ltd. cars with the four classic cars included would have netted more for the estate than has been obtained by the Trustee. The Trustee's self-serving statement that he thinks he would have received more value does not defeat Paige's point.
On section 727(d)(1), revocation of discharge claim, the Trustee conceded that the complaint was not timely filed to preserve this claim.
The Court will not address the Trustee's revocation of discharge claims under section 727(d)(2) or (d)(3). Such claims have also been made by a creditor in Paige's bankruptcy case.
Conclusion
The Fifth Circuit in Intelogic Trace indicated that its decision was a close call. See Intelogic Trace at 391. This case, likewise, presents the Court with difficult issues. But while the Trustee argues that there are meaningful distinctions between the present case and Intelogic Trace, the Court discerns no legal or conceptual distinction that would justify a different result. The Court, upon the foregoing authorities, concludes that res judicata bars the claims made here by the Trustee.
MEMORANDUM OPINION
The Court considers the motion of Kent Ries ("Ries"), the chapter 7 trustee, requesting that the Court sanction the debtor, Robert Paige ("Paige"), for his unauthorized taking and selling of four classic cars.
Ries's motion, titled "Motion to Compel Debtor to Turnover or Alternatively to Approve Unauthorized Sale and to Sanction Debtor," also requested, as indicated by the title, that Paige be directed to turnover the four classic cars. Upon agreement by the parties and upon their motion, the Court issued its order, entered on December 15, 2006, approving the sale of the four cars with the proceeds, $648,500, remitted to the trustee for the benefit of the bankruptcy estate. The remaining issue, therefore, is whether Paige should be sanctioned for selling the four cars without the trustee's knowledge or consent.
The Court has jurisdiction over this matter under 28 U.S.C. § 1334(b); this is a core proceeding pursuant to 28 U.S.C. § 157(b)(2). This Memorandum Opinion contains the Court's findings of fact and conclusions of law. Bankruptcy Rule 7052.
Background Facts
Paige filed this chapter 7 case on February 6, 2004. Ries is the appointed chapter 7 trustee charged with the responsibility of administering the assets in Paige's bankruptcy estate. Paige is a medical doctor; in 2004, he was paid $869,810 from his professional association.
This case has spawned several lawsuits and other contested matters, including an objection to certain of Paige's exemptions, which was converted to an adversary proceeding; an adversary complaint by the trustee seeking to recover certain alleged fraudulent transfers; and a declaratory judgment action initiated by LaDon Paige, Paige's wife, to which the trustee filed a counterclaim. Following the trial of the exemption adversary on November 15, 2005, the principal parties involved in the various disputes began discussing a global settlement. The parties involved in such negotiations were Ries, as bankruptcy trustee representing the interests of the bankruptcy estate, Paige, and Paige's non-filing spouse, LaDon Paige. Settlement discussions culminated in a settlement conference held on December 14, 2005, at which time the terms of a global settlement were agreed upon.
The actual parties to the Settlement andMutual Release Agreement are Dr. Robert WarrenPaige, LaDon Carper Paige, Robert W. Paige, LaDon Carper Paige and Glenda J. Carper, as Co-Trustees of the Robert Clayton Paige Trust #1992 and the William Clarke Carper Paige Trust #1992 under a trust indenture dated May 4, 1992, Bobladon, Ltd. d/b/a Catco and Maverick Enterprises, BobladonManagement, L.L.C., Blessen Road Investments, L.L.C., Robert Warren Paige, M.D., P.A., Paige Real Estate Investments, L.P., Riders-in-the-Sky, Inc., and chapter 7 trustee, Kent David Ries, in his capacity as chapter 7 trustee and on behalf of the bankruptcy estate of Robert W. Paige.
Following the settlement conference, the parties began working on a formal settlement agreement and their due diligence related to same. By the settlement, the Paiges desired to resolve the various exemption issues, the fraudulent transfer suit relating to their children's trusts, the suit regarding LaDon Paige's separate property which, in turn, related to a post-nuptial agreement with Paige and issues regarding Paige's professional association. The estate, via the trustee Ries, desired to recover assets, either cash or property, for use in making distributions to creditors. A key aspect of the settlement from the estate's perspective was LaDon Paige's agreement to waive any claim to an entity, Bobladon, Ltd., in exchange for the estate waiving any community property interest to certain personal property that she claimed as her separate property. Bobladon, Ltd. did business under at least two other names, one, "Catco," which held several classic cars and motorcycles; and the other, "Paige Real Estate," which owned a storage building for Catco for use in storing the classic automobiles and motorcycles. It also owned six duplexes and a rental house. The issue of whether Paige, at the time of the bankruptcy filing, owned a one-half undivided interest in Bobladon, Ltd. or the entirety of the interest in Bobladon, Ltd. was resolved by the settlement with the bankruptcy estate receiving the entire interest in Bobladon, Ltd.
The parties signed the settlement agreement on June 7, 2006. The Court approved the settlement by its order entered on July 12, 2006, on Ries's motion seeking approval of the compromise. The parties closed the deal on August 10, 2006. As part of the settlement, eleven of the thirty classic vehicles and motorcycles owned by Bobladon, Ltd. were sold back to Paige for $854,538.03, which was the stated "book value" for the vehicles. Bobladon, Ltd., and thus the bankruptcy estate, retained the remaining nineteen vehicles. The settlement agreement specifically provides that the estate's ownership of Bobladon, Ltd. was effective as of February 6, 2004, the petition date.
The parties and their respective counsel attended the August 10, 2006 closing of the settlement agreement, along with representatives from Amarillo National Bank, FirstBank Southwest, and Dudley Stanley, a creditor of Paige. The documents were signed and the parties ostensibly worked out the logistics for having titles to the various vehicles transferred to reflect the agreement. Specifically, each title was reviewed and physically transferred to either the bankruptcy estate or Amarillo National Bank (for the debtor). Two titles were missing and Paige promised to deliver the missing two titles to the trustee. In addition, at the August 10, 2006 closing, the actual location of each car to be retained by Bobladon, Ltd. was supposedly verified by Paige. The "verified" locations for the cars to be retained by Bobladon, Ltd. were consistent with an inspection by Ries on February 6, 2006.
A few weeks prior to the closing, Paige called Ries to inquire about purchasing additional vehicles from the bankruptcy estate. Ries told Paige that such a sale was possible, but would have to take place after the closing of the settlement and upon notice in accordance with bankruptcy procedures. Ries also told Paige that his acceptance of any proposal would depend solely on whether any such sale was in the estate's best interest. On July 27, 2006, Paige submitted an offer to purchase seven of the nineteen vehicles that were to be retained by Bobladon, Ltd. under the settlement agreement. At the August 10, 2006 closing, however, Paige told the trustee that he was no longer interested in purchasing the seven vehicles, but indicated another offer may be forthcoming. Ries told Paige that he would consider any offers, but that the estate's auctioneer, Assiter Associates, would be handling all sales negotiations concerning the vehicles.
Immediately after the August 10, 2006 closing, Ries began plans to liquidate the Bobladon, Ltd. assets. He hired real estate brokers to sell the Paige real estate properties and began negotiations with Barrett-Jackson Auction Company of Scottsdale, Arizona, with which the estate's main auctioneer, Assiter Associates, had an affiliation. Barrett-Jackson is a leading auctioneer of classic vehicles. The trustee obtained an offer from Barrett-Jackson regarding the rate of commission, and other expenses, along with an agreement to highlight the vehicles held by Bobladon, Ltd. at a scheduled January 2007 Barrett-Jackson auction. On or about September, 2006, Ries learned from his auctioneer that four of the nineteen cars were missing. At this same time, specifically on September 14, 2006, Paige submitted to Ries a handwritten fax offer to purchase the missing four cars. Over the next few weeks, the trustee's auctioneer was able to locate the four cars and learned that they had been moved to a Canadian auction house previously used by Paige, RM Auctions, Inc. The trustee then learned that the four missing cars had been sold by Paige through RM Auctions on August 5, 2006, at the Meadow Brook Hall in Rochester, Michigan. The sale took place, therefore, one week prior to the closing of the global settlement agreement. Paige's removal and sale of the four cars was not authorized by or known to the trustee. The total gross sales price received at the sale through RM Auctions, Inc. for the four cars was $648,500. By agreement between the trustee on the one hand and RM Auctions, Inc. and Paige on the other hand, and approved by this Court, the $648,500 was turned over to the trustee and the titles delivered to the purchasers at the RM Auction, Inc. auction.
The offer made by Paige for the seven cars on July 27, 2006, included the four missing cars at an aggregate price for the four cars of $565,000, the so-called "book value" for the four cars. His subsequent offer for the four cars, on September 14, 2006, after Ries learned the cars were missing, was $657,000.
At the hearing on the motion for sanctions, Paige was called as an adverse witness by the trustee, but, in response to all questions, he asserted his Fifth Amendment privilege and refused to testify.
Discussion
The issue before the Court is whether the Court can and should sanction Paige for his conduct in taking and selling the four cars without the trustee's, Ries', consent or knowledge, and, in fact, before he had entered into the settlement agreement with the trustee. Ries contends that Paige's actions "were unconscionable, lacked any resemblance of the good faith required by the settlement agreement he signed with the Estate, and are in direct violation of his statutory duties under Bankruptcy Code § 521." Severe sanctions are justified, according to Ries, because Paige's actions were taken in an attempt to profit himself at the estate's expense and are consistent with Paige's conduct throughout the case that has resulted in "generally meritless litigation at every turn."
Ries requests that the Court issue a monetary sanction and, in assessing an amount of such sanction, use a multiple of $126,500, which is the difference between $775,000, the high end projected value of the four cars, and $648,500, the amount for which the cars sold. Ries contends that the estate is out the attorney's fees and costs incurred in recovering the four cars (or their proceeds), and has been otherwise damaged in an indeterminate amount by Paige's conduct, including the cost to the estate from Ries being diverted from other matters in the case, the loss in value to the entire vehicle inventory caused by the delay of the proposed estate's sale, and a loss of value in the remaining vehicles from a lack of "star power" represented by the four sold cars. Ries submits that the egregious nature of Paige's conduct, as well as the indeterminate amount of certain of the losses and damages to the estate, justify the use of a multiplier. Ries's motion also requests imposition of a constructive trust against assets retained by Paige as a means to secure "any damage award assessed by [the] Court."
Paige admits that he had no authority to sell the four cars and that he did so without the trustee's knowledge or consent. He argues, however, that given that the estate ultimately recovered the $648,500, which Paige submits is a good value for the four cars, the estate has not been damaged. Paige has offered to pay the trustee's reasonable and actual attorney's fees and costs incurred in dealing with the matter. Apart from his offer to pay the trustee's attorney's fees and costs, Paige argues that the Court does not have authority to issue a sanction against him. Paige contends that the trustee's claim for sanctions is an attempt to recover damages arising from potential substantive causes of action and that the Court cannot essentially short-circuit the due process requirements of a full blown lawsuit. Paige also raises defenses he has to the trustee's claims and potential causes of action to further underscore his position. For example, Paige points out that the four cars are assets of Bobladon, Ltd. and not the bankruptcy estate; the estate, therefore, holds the ownership interests of Bobladon, Ltd. and Bobladon, Ltd. potentially has a claim against Paige, not the trustee on behalf of the estate. Paige took nothing from the estate, it is argued. Next, Paige submits that he did not violate any promise he made under the settlement agreement because, under the precise terms of the settlement agreement, he warranted Bobladon's inventory of cars as existed on November 30, 2005, which inventory included the four cars and was, as of that date, accurate. Paige argues that the trustee's use of $775,000 as part of a damage formula is invalid because such amount represents an estimate only, and a high-end estimate at that, and the actual amount obtained, the $648,500, is fair and reasonable and a product of a duly held and advertised auction. Paige disputes the logic of the trustee's contention that the estate was damaged by Paige robbing the estate of the opportunity to sell the four cars with the other inventory of cars thereby decreasing the value of the remaining inventory. Just because a sale is bigger does not make it better, Paige argues. Paige states that there is no evidence indicating that he intended to keep the proceeds. Finally, Paige submits that contempt cannot constitute a basis for sanctions as no court order is at issue.
Section 105 of the Bankruptcy Code
The Court agrees with Paige to the extent that he argues that the Court should not base either its authority to sanction or the amount of a sanction on potential substantive causes of action held by the trustee. The Court is of the opinion, however, that sanctions are appropriate in this case and that it need not resort to substantive causes of action to justify a sanction against Paige. Section 105 of the Bankruptcy Code allows the bankruptcy court to issue any order that is "necessary or appropriate to carry out the provisions" of the Bankruptcy Code. 11 U.S.C. § 105(a). Consistent with the Supreme Court's decision in Chambers v. NASCO, Inc., 501 U.S. 32 (1991) (recognizing district courts' inherent power to sanction), a bankruptcy court's authority under section 105 comports with its inherent power to sanction. See, generally, Conner v. Travis County, 209 F.3d 794 (5th Cir. 2000); see, e.g., In re Rainbow Magazine, Inc., 77 F.3d 278, 283-84 (9th Cir. 1996) ("There can be little doubt that bankruptcy courts have the inherent power to sanction vexatious conduct presented before the court. The inherent power is recognized in the statutory grant Congress has provided the bankruptcy courts." (citing § 105(a))); In re Clark, 223 F.3d 859, 864 (8th Cir. 2000) (§ 105 gives bankruptcy courts broad power to implement provisions of bankruptcy code and to prevent abuse of bankruptcy process, which includes power to sanction for abuses of process (cited case omitted)).
The Fifth Circuit has recognized the bankruptcy court's inherent power to sanction and has enumerated some basic requirements. "The imposition of sanctions using inherent powers must be accompanied by a specific finding of bad faith. We have reversed sanctions awards when . . . the district court merely made general complaints about the sanctioned party." Goldin v. Bartholow, 166 F.3d 710, 722 (5th Cir. 1999). Continuing, the court elaborated
[m]oreover, the standard for the imposition of sanctions using the court's inherent powers is extremely high. The court must find that the "very temple of justice has been defiled" by the sanctioned party's conduct. . . . We find that the imposition of sanctions using the court's inherent powers when no bad faith is specifically found and the record does not support the required high level of culpability constitutes an abuse of discretion.
Id. at 722-3. In another case, the Fifth Circuit explained the need for restraint and caution when assessing sanctions and described its approach on review.
We review a district court's imposition of sanctions under its inherent power for abuse of discretion. Nonetheless, the threshold for the use of inherent power sanctions is high. The inherent power is not a broad reservoir of power, ready at an imperial hand, but a limited source; an implied power squeezed from the need to make the court function. Perhaps for this reason, we have repeatedly emphasized that, where the inherent power is involved, our review is not perfunctory. As the Supreme Court has explained, `[b]ecause inherent powers are shielded from direct democratic controls, they must be exercised with restraint and discretion.'
Crowe v. Smith, 151 F.3d 217, 226 (5th Cir. 1998) (internal quotations and citations omitted).
Paige's Duties Under Section 521 of the Bankruptcy Code
Paige, as with any debtor, has certain duties imposed by the Bankruptcy Code. These include the duties set forth at section 521(a)(3) and (a)(4) of the Bankruptcy Code. These provisions state as follows:
(a) The debtor shall —
. . .
(3) if a trustee is serving in the case . . ., cooperate with the trustee as necessary to enable the trustee to perform the trustee's duties under this title;
(4) if a trustee is serving in the case . . ., surrender to the trustee all property of the estate and any recorded information, including books, documents, records, and papers, relating to property of the estate . . .;
A debtor may be sanctioned for failing to cooperate with the trustee, an obligation that encompasses surrender of estate assets, as required under the Bankruptcy Code. In re Cochener, 2007 WL 460910 (Bankr. S.D. 2007) (The debtor and the debtor's son were sanctioned for failing to appear at the 341 meeting, refusing to cooperate with the trustee, and for allowing estate property to be damaged resulting in extensive losses to its value.). As the bankruptcy court said in In re Stinson, 269 B.R. 172 (Bankr. S.D. Ohio 2001),
[a] chapter 7 debtor has an affirmative duty to cooperate with the case trustee in the administration of the bankruptcy estate. This includes a duty to surrender to the trustee all property of the estate. . . . Where a debtor fails to cooperate with the case trustee, the trustee is then forced to expend estate resources in pursuing the debtor's cooperation, which results in the reduction of the distribution to creditors.
Id. at 176 (internal citations omitted).
Paige's Conduct
Paige knows, and has always known, that he held an interest in Bobladon, Ltd. at the time he filed his bankruptcy case. He knew exactly what cars Bobladon, Ltd. owned, both at the time of the filing of the case and at the time he entered into the settlement agreement. Paige wrongfully took and sold the four cars without the trustee's consent. His offers to purchase the four cars from the trustee reflect an intent to both conceal the sale from the trustee and to profit himself from the sale. Paige's conduct constitutes a failure to cooperate with the trustee and to account to the trustee regarding estate property. His conduct violates his duties under sections 521(a)(3) and (a)(4). That the cars are owned by Bobladon, Ltd., which itself is the estate asset rather than the cars, does not excuse Paige. The four cars constituted major assets of Bobladon, Ltd. and therefore dramatically affected its value. It is disingenuous to argue the distinction. Paige's conduct was intentional, deceitful, and done in bad faith and falls squarely within the Court's purview and power under section 105 of the Bankruptcy Code.
The Amount of the Sanction
The Court now turns to the amount of the sanction. The District Court for the Northern District of Texas reviewed monetary sanctions imposed under rule 9011 for a bad faith filing and referenced the Fifth Circuit's view on monetary sanctions.
. . . [W]hile monetary sanctions may be appropriate, the Fifth Circuit Court of Appeals has continuously stated that "the basic principle governing the choice of sanction is that the least severe sanction adequate to serve the purpose should be imposed." The range of "appropriate" sanctions is far-reaching and may include "a warm friendly discussion on the record, a hard-nosed reprimand in open court, compulsory legal education, monetary sanctions, or other measures appropriate to the circumstances."
Midwest Properties No. Two v. Big Hill Inv. Co., Inc., 93 B.R. 357, 361 (N.D. Tex. 1988) (citing Thomas v. Capital Sec. Serv., Inc., 836 F.2d 866, 883 (5th Cir. 1988) (en banc)).
Attorney's fees incurred because of a party's bad faith behavior might also reasonably be assessed. While sanctioning Bank of New York, the Eleventh Circuit noted "[u]nder appropriate circumstances, it is within a court's discretion to assess attorney's fees on a party, or even to dismiss its lawsuit, for actions taken in bad faith." In re Sunshine Jr. Stores, Inc., 456 F.3d 1291, 1305 (11th Cir. 2006). The Fifth Circuit has recently affirmed a decision by the District Court for the Northern District of Texas that considered the defendants' reasonable litigation expenses and attorney's fees and used them as a measure of sanctions awarded under Rule 11. In Skidmore Energy, Inc. v. KPMG, 455 F.3d 564, 568 (5th Cir. 2006), the Circuit court stated, "[t]he district court's calculation of reasonable fees and expenses was not clearly erroneous. The court conducted the lodestar analysis by multiplying the reasonable number of hours expended in defending the suit by the reasonable hourly rates for the participating lawyers." The Supreme Court has also approved an award of attorney's fees even when the court relies on its discretionary inherent powers. In Chambers v. NASCO, Inc., 501 U.S. 32, 44 (1991), the Court stated
[a] primary aspect of that discretion is the ability to fashion an appropriate sanction for conduct which abuses the judicial process. As we recognized in Roadway Express, outright dismissal of a lawsuit . . . is a particularly severe sanction, yet is within the court's discretion. Consequently, the "less severe sanction" of an assessment of attorney's fees is undoubtedly within a court's inherent power as well.
(internal citation omitted). There the Court affirmed an assessment of the opposing party's entire attorney's fee as a sanction for bad faith conduct.
Paige is a medical doctor who draws a substantial annual income. The Court naturally assumes he has a significant level of sophistication, which serves to underscore the egregious nature of his conduct. The Court is of the opinion and concludes that a sanction in the amount of $80,000 is the minimum amount required to deter similar conduct on Paige's part in the future.
Conclusion
In assessing the sanction here, the Court is mindful of the Fifth Circuit's caveat in United States v. Sutton, where the court stated that section 105(a) "does not authorize the bankruptcy courts to create substantive rights that are otherwise unavailable under applicable law, or constitute a roving commission to do equity." 786 F.2d 1305, 1308 (5th Cir. 1986). The sanction here is derived from the Court's inherent power to sanction and serves as a means to ensure that Paige satisfies his obligations and duties under the Bankruptcy Code, specifically his obligation to cooperate with the trustee's efforts to administer estate assets. This case has gone on much too long; it is imperative that the trustee wrap-up his administration of this case. To accomplish this, it is likewise imperative that Paige cooperate fully with the trustee. The amount of the sanction is, in the Court's judgment, the minimum amount necessary to cover both the additional fees and expenses incurred by the trustee in recovering the proceeds from the four cars and to deter similar conduct by Paige for the balance of the trustee's administration of this case.
The Court denies the request for a constructive trust, but does so without prejudice to a claim for constructive trust made in a formal adversary proceeding. The sanction shall be made payable to Kent Ries, the chapter 7 trustee, and shall be distributed to the estate's creditors in accordance with the priorities established by the Bankruptcy Code.