Opinion
Case No. 15-31659 Adv. No. 15-3085
01-19-2016
In re: DANIES CARMACK, Debtor INDIVIDUAL BUSINESS SERVICES, INC., ET AL, Plaintiffs v. DANIES CARMACK, Defendant
Chapter 7
DECISION OF THE COURT DENYING DEFENDANT'S MOTION TO DISMISS PLAINTIFFS' SECOND CLAIM FOR RELIEF [Adv. Doc. 4]
The court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 157(a) and 1334, and the standing General Order of Reference in this District. This matter is before the court on the Motion to Dismiss Plaintiffs' Second Claim for Relief on the Basis of Collateral Estoppel filed by Defendant-Debtor Danies Carmack [Adv. Doc. 4]; Plaintiffs' Memorandum in Opposition to Defendant's Motion to Dismiss Plaintiffs' Second Claim for Relief [Adv. Doc. 5]; and the Reply in Support of Motion to Dismiss Plaintiffs' Second Claim for Relief on the Basis of Collateral Estoppel [Adv. Doc. 6].
In the motion to dismiss, Defendant-Debtor, Danies Carmack ("Debtor") asserts that the second claim for relief in the Plaintiffs' complaint, a claim for nondischargeability of a debt as a "willful and malicious injury," should be dismissed. Dismissal is appropriate, according to the Debtor, because a prepetition state court judgment declining to award punitive damages based on actual malice is entitled to preclusive effect on the Plaintiffs' claim for a willful and malicious injury in this adversary proceeding. Essentially, the Debtor asserts that the state court's denial of punitive damages preclusively establishes that her actions are not willful and malicious for nondischargeability purposes.
The Plaintiffs respond that the judgment is not entitled to preclusive effect and the court agrees. In declining to find actual malice sufficient to award punitive damages, the state court applied a heightened standard of proof, that of clear and convincing evidence, whereas the standard applied to demonstration of a willful and malicious injury for nondischargeability purposes is the lesser preponderance of the evidence standard. Because the failure to meet the heightened standard of proof does not mean the evidence would fail to meet the lesser preponderance of the evidence standard required in this adversary proceeding, the court concludes that the state court judgment is not entitled to preclusive effect. Accordingly, the Debtor's motion to dismiss is denied.
FACTUAL AND PROCEDURAL BACKGROUND
Because this issue is being pursued by way of a motion to dismiss, the facts in the complaint as well as those incorporated into the complaint through the attached exhibits, are viewed as true for purposes of this decision. Following the Debtor's bankruptcy filing, Plaintiffs Individual Business Services, Inc. and The Citizens Motorcar Company dba America's Packard Museum (collectively "Plaintiffs") filed their adversary complaint against the Debtor requesting that the court determine that a specific debt owed by the Debtor to the Plaintiffs is nondischargeable and that the court deny the Debtor a discharge [Adv. Doc. 1]. The complaint includes the Plaintiffs' second claim for relief that the Debtor "willfully and maliciously" transferred assets to prevent Plaintiffs from collecting on a 2003 state court judgment rendering the debt owed to Plaintiffs nondischargeable pursuant to 11 U.S.C. § 523(a)(6) [Id., ¶¶ 52-58].
In her motion to dismiss, Debtor provides a lengthy narration that includes alleged facts neither found in the Complaint nor supported by evidentiary materials. These unsupported allegations are not considered by the court in its decision on Debtor's motion to dismiss.
On September 30, 2015, the Debtor filed a motion to dismiss the Plaintiffs' second claim for relief based on the preclusive effect to be given to a determination made in a prior state court judgment in the Plaintiffs' lawsuit filed against the Debtor and others in Montgomery County, Ohio, Case No. 2004 CV 08159 [Adv. Doc. 4, Ex. A (same as Adv. Doc. 1, Ex. K)]. In the state court lawsuit, Plaintiffs asserted that the Debtor transferred parcels of real property she owned and that the transfers were fraudulent under Ohio Revised Code § 1336.04 and § 1336.05 [Adv. Doc. 1, ¶ 14 and Ex. F]. On February 7, 2008, summary judgment was awarded to the Plaintiffs [Id., ¶ 17 and Ex. I]. Subsequent to the decision on summary judgment, a damages hearing was held on February 4, 2010 [Id., ¶ 18]. On April 23, 2010, the state court issued its Decision and Judgment Entry ("Damages Entry") awarding the Plaintiffs compensatory damages in the amount of $192,055.61 but rejecting the Plaintiffs' claim for punitive damages [Id., ¶ 18 and Ex. K, Damages Entry]. In denying the request for punitive damages, the trial court judge provided the following legal analysis:
The judgment is part of a long pre-petition litigation history between the Plaintiffs and Debtor that dates back to an earlier lawsuit and judgment obtained in 2003 [Adv. Doc. 1, ¶ 5].
A Trial Court may award punitive damages and attorney fees in an appropriate fraudulent conveyance case. However, the finding of fraudulent conveyance in and of itself is not sufficient to warrant the awarding of punitive damages and attorney fees. In virtually every fraudulent conveyance case there is an intent to defeat the interests of a creditor and likely some ill will between the debtor and creditor. If that were sufficient then every fraudulent conveyance case would warrant punitive damages and attorney fees. That is not the law.[Id., Ex. K, Damages Entry, pp. 2-3]. The state court continued with the following legal and factual conclusions:
Not only must the creditor establish the underlying cause of action for fraudulent transfer, ". . . but must also prove that the debtor acted with actual malice when making the fraudulent transfer." Actual malice requires a showing of either: (1) hatred, ill will, or a spirit of revenge, or (2) a [conscious] disregard for the rights of others that had great probability of causing substantial harm. "Further, this element has been termed [conscious], deliberate or intentional and requires the party to possess knowledge of the harm that might be caused by his behavior."
For the awarding of punitive damages, ". . . . the aggravated mental state of actual malice is distinct from the mental state, if any, necessary to establish the underlying fraudulent conveyance. To recover punitive damages, not only must the underlying fraudulent conveyance be found, but it must also be shown that the debtor acted with actual malice when making the fraudulent conveyance."
A burden of proof to recover punitive damages is by clear and convincing evidence. "Clear and convincing," means evidence that provides in the mind of the trier of fact a firm belief or conviction as to the facts sought to be established.
This court has already determined that the activity engaged in by the Defendants constituted fraudulent conveyances of property. The sole issue currently before this Court is whether the conduct of the Defendants supports a finding of punitive damages.
There is no question that the Defendants were angry and felt betrayed by Robert Signom. Their conduct, including the website and the disciplinary complaints show that, and Defendants have conceded their anger. However, being merely angry is not sufficient in this court's opinion to demonstrate the kind of malice necessary to award punitive damages. It is certainly understandable, rightly or
wrongly, that a defendant might be angry and upset when a plaintiff seeks and obtains a judgment. The Defendants contend that the transfers were merely performed in the normal course of business. There is evidence before this Court demonstrating that the conveyances were in the normal course of business and for "estate planning." as well as this court's finding of an effort to defeat creditors. Merely transferring property to defeat creditors does not, in this court's opinion, support a claim for punitive damages.[Id., Ex K, Damages Entry, pp. 3-4].
Accordingly, this Court finds that the Plaintiff has failed to establish by clear and convincing evidence that the Defendants' conduct was with malice sufficient to justify the award of punitive damages or that defendants had a conscious disregard that had a great probability of causing substantial harm. Accordingly, the demand of Plaintiff for punitive damages is denied.
The Damages Entry contained footnote citations to case law that have been deleted for purposes of this decision.
While the Debtor and other defendants appealed the entry of summary judgment against them, the Plaintiffs did not cross-appeal the state court's rejection of their request for punitive damages [Adv. Doc. 1, ¶ 22 and Ex. O, p. 11 (portion of appellate decision noting that Plaintiffs did not file a cross-appeal from the decision rejecting punitive damages)].
On appeal, the Second District Court of Appeals concluded that genuine issues of material fact existed with regard to the issue of whether property was fraudulently transferred [Adv. Doc. 1, Ex. O, p. 2]. Consequently, the award of summary judgment to the Plaintiffs was reversed "on the issue of the fraudulent transfers only" and remanded to the trial court for further proceedings [Id.]. After the remand, a bench trial was held May 8, 2012 [Adv. Doc. 1, ¶ 23]. The trial court concluded that the transfers were fraudulent and again awarded judgment in favor of the Plaintiffs on July 3, 2012 in the amount of $192,055.61 plus interest [Id., ¶ 23 and Ex. P].
LEGAL ANALSYIS
A. Legal Standard for Determining a Motion to Dismiss
In her motion, Debtor requests dismissal of the second claim in the complaint without reference to the appropriate standard for dismissal. The court presumes that the Debtor pursues dismissal of the second claim pursuant to Federal Rule of Civil Procedure ("Rule") 12(b)(6) for the alleged failure of the Plaintiffs to state a claim upon which relief can be granted. Fed. R. Civ. P. 12(b)(6) (incorporated in bankruptcy adversary proceedings by Federal Rule of Bankruptcy Procedure 7012).
In assessing the complaint on a motion to dismiss, the court must keep in mind that it is to test the legal sufficiency of the Plaintiffs' claims for relief and not to weigh the evidence. Perry v. United Parcel Serv., 90 Fed. Appx. 860, 2004 WL 193203, at *1 (6th Cir. Jan. 30, 2004); Armengau v. Cline, 7 Fed. Appx. 336, 2001 WL 223857, at *5 (6th Cir. March 1, 2001). The court must construe the complaint in the light most favorable to the Plaintiffs, accept its factual allegations as true, and draw reasonable inferences in favor of the Plaintiffs. Michael v. Javitch, Block & Rathbone, LLP, 825 F.Supp.2d 913, 918 (N.D. Ohio 2011). As such, the court is limited to considering the content of the complaint although the court may also consider matters of public record and exhibits attached to the complaint. Id.
To survive the motion, the complaint "must contain either direct or inferential allegations respecting all the material elements to sustain a recovery under some viable legal theory." Varljen v. Cleveland Gear Co., Inc., 250 F.3d 426, 429 (6th Cir. 2001). See also Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 563 (2007) (noting that the accepted pleading standard is that "once a claim has been stated adequately, it may be supported by showing any set of facts consistent with the allegations in the complaint"). "[A] plaintiff's obligation to provide the 'grounds' of his 'entitlement to relief' requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do[.]" Twombly, 550 U.S. at 555 (further citations omitted) (holding that the factual allegations must be enough to raise a right to relief above the speculative level).
B. Whether Plaintiffs' Second Claim for Relief is Subject to Dismissal
In her motion to dismiss, the Debtor asserts that the state court Damages Entry, to the extent that it rejected the Plaintiffs' claim for punitive damages, should have preclusive effect in this adversary proceeding requiring the dismissal of the Plaintiffs' claim for a nondischargeable debt based on a willful and malicious injury. More specifically, the Debtor relies on the doctrine of collateral estoppel which applies in the context of a nondischargeability proceeding to prevent the re-litigation of issues already decided. Grogan v. Garner, 498 U.S. 279, 284-85 (1991). Where the issue previously litigated is part of a state court judgment, a bankruptcy court will determine whether to give preclusionary effect to the judgment based on the preclusionary principles of the relevant state. Sill v. Sweeney (In re Sweeney), 276 B.R. 186, 189 (B.A.P. 6th Cir. 2002) (citing Markowitz v. Campbell (In re Markowitz), 190 F.3d 455, 461 (6th Cir. 1999)). Consequently, in order for issues decided in the Damages Entry to have preclusive effect in this adversary proceeding, the issues must be entitled to such effect under Ohio's doctrine of collateral estoppel.
1. Collateral Estoppel Doctrine
Under Ohio law, there are four prerequisites to the application of collateral estoppel:
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.Sweeney, 276 B.R. at 189; Miller v. Grimsley (In re Grimsley), 449 B.R. 602, 609 (Bankr. S.D. Ohio 2011). In the case at hand, there appears to be no dispute that the parties to the prior suit are the same as in this adversary proceeding and that the issue of punitive damages was fully and actually litigated in the prior suit.
In their response, the Plaintiffs appear to focus on the second prerequisite for collateral estoppel: that the willful and malicious nature of the transfers was not an issue actually and fully litigated in the state court matter [Adv. Doc. 5, p. 6]. However, the substance of their argument is that the issues actually litigated in state court are not identical to the elements and standard of proof necessary to prove a willful and malicious injury. The court considers this an argument relevant to the third rather than second prerequisite of collateral estoppel. --------
The focus of the parties is instead on the third prerequisite: whether the issue decided in the prior suit is identical to the issue in the present one. The Debtor relies on the state court's determination that, although the Plaintiffs were entitled to compensatory damages, the Plaintiffs failed to establish, by clear and convincing evidence, that the conduct of the Debtor and other defendants in fraudulently transferring property was with actual malice sufficient to justify the award of punitive damages. The Debtor asserts that the state court's determination regarding actual malice is sufficiently identical to requirements under § 523(a)(6) to conclusively establish that the Debtor's actions are not willful and malicious. The analysis requires a comparison of the requirements for proving a willful and malicious injury under § 523(a)(6) with the state court requirements for awarding punitive damages.
2. Elements and Standard of Proof: 11 U.S.C. § 523(a)(6)
Section 523(a)(6) of the Bankruptcy Code provides that a discharge does not discharge an individual debtor from any debt for a "willful and malicious injury by the debtor to another entity or the property of another entity[.]" 11 U.S.C. § 523(a)(6). The terms "willful" and "malicious" are distinct and both requirements must be met for a debt to be nondischargeable pursuant to § 523(a)(6). Wilmers v. Yeager (In re Yeager), 500 B.R. 547, 551 (Bankr. S.D. Ohio 2013) aff'd ___ B.R.___, 2015 WL 5579440 (S.D. Ohio Sept. 23, 2015). In the case of Kawaauhau v. Geiger, 523 U.S. 57, 61-63 (1998), the Supreme Court clarified that in order for an injury to be willful, it was not sufficient for a debtor's acts to be intentional but also that the acts be committed with the intent to cause injury. The Sixth Circuit further clarified the standard by holding that the debtor must be found to have desired to cause the harm or had knowledge that the harm was substantially certain to result from the debtor's actions. Markowitz v. Campbell (In re Markowitz), 190 F.3d 455, 464-65 (6th Cir. 1999). Because a debtor will rarely admit to a subjective intent to cause injury, a bankruptcy court may consider circumstantial evidence that tends to establish what the debtor may have actually known when taking the actions. Yeager, 500 B.R. at 551.
In addition, a plaintiff must demonstrate that the injury was malicious, meaning that it arose out of a conscious disregard of one's duties or without just cause or excuse. Schafer v. Rapp (In re Rapp), 375 B.R. 421, 436 (Bankr. S.D. Ohio 2007). It does not require ill-will or specific intent. Yeager, 500 B.R. at 551.
Significant to the parties dispute is the standard of proof in a bankruptcy nondischargeability proceeding. In Grogan v. Garner, the United States Supreme Court was faced with determining the appropriate standard of proof to hold a debt excepted from discharge pursuant to 11 U.S.C. § 523(a). See Grogan v. Garner, 498 U.S.279, 285 (1991). Although it considered the clear and convincing standard, the Supreme Court concluded that Congress intended the ordinary preponderance of the evidence standard "to govern the applicability of all the discharge exceptions" in § 523(a). Id. at 285-88. Consequently, for the debt at issue in this adversary proceeding to be nondischargeable pursuant to § 523(a)(6), the Plaintiffs must prove a willful and malicious injury by the ordinary preponderance of the evidence standard. See Monsanto Co. v. Trantham (In re Trantham), 304 B.R. 298, 306 (B.A.P. 6th Cir. 2004).
3. Elements and Standard of Proof: Punitive Damages in State Court
Turning to the Damages Entry, the state court thoroughly explained the elements it considered and the standard of proof it applied to its consideration of punitive damages. To be awarded punitive damages in a fraudulent transfer action, the state court noted that not only must the underlying fraudulent transfer be proven, but the plaintiffs must "also prove that the debtor acted with actual malice when making the fraudulent transfer" [Adv. Doc. 1, Ex. K, Damages Entry, p. 2]. Citing Kemp v. Kemp, 831 N.E.2d 1038 (Ohio Ct. App. 2005), the state court determined that actual malice requires a showing of either: (1) hatred, ill will, or a spirit of revenge, or (2) a conscious disregard for the rights of others that had great probability of causing substantial harm [Id.]. "Further, this element has been termed [conscious], deliberate or intentional and requires the party to possess knowledge of the harm that might be caused by his behavior" [Id.].
Significantly, the state court explained that the standard of proof to recover punitive damages is by "clear and convincing evidence" [Id., p. 3]. "'Clear and convincing,' means evidence that provides in the mind of the trier of fact a firm belief or conviction as to the facts sought to be established." [Id. at p. 3]. It is an intermediate standard, "being more than a mere preponderance, but not to the extent of such certainty as required beyond a reasonable doubt as in criminal cases." In the Matter of R.M., 997 N.E.2d 169, 181 (Ohio Ct. App. 2013) (citing In re Estate of Haynes, 495 N.E.2d 23 (Ohio 1986)).
4. Application of Heightened Standard of Proof Establishes that the Damages Entry is Not Entitled to Preclusive Effect
The difference in the Plaintiffs' standard of proof to be awarded punitive damages in an Ohio state court and to prove a "willful and malicious" injury in this adversary proceeding is significant and dispositive on whether the Damages Entry is entitled to preclusive effect. "Given that the burden[] of proof . . .for an award of punitive damages in Ohio (clear and convincing) [is] higher than the burden of proof required under § 523(a)(6) (preponderance of the evidence), a determination that the evidence does not meet the heightened standards does not demonstrate that the evidence also failed to meet the lesser burden of proof under § 523(a)(6)." Yeager v. Wilmers, ___ B.R. ___, 2015 WL 5579440, at *5 (S.D. Ohio Sept. 23, 2015)). The court agrees and follows Yeager and the determinations by other courts that a state court's denial of punitive damages for actual malice under a heightened standard of proof does not preclude the Plaintiffs from proving the elements of a § 523(a)(6) willful and malicious injury under the lesser preponderance of the evidence standard. Id. See also Custom Kilns, Inc. v. Pierron (In re Pierron), 448 B.R. 228, 241-42 (Bankr. S.D. Ohio 2011); S.L. Pierce Agency, Inc. v. Painter (In re Painter), 285 B.R. 669, 675 (Bankr. S.D. Ohio 2002).
In the Damages Entry, the state court explicitly applied a heightened evidentiary standard when it concluded that the Plaintiffs "failed to establish by clear and convincing evidence that the Defendants' conduct was with malice sufficient to justify the award of punitive damages or that defendants had a conscious disregard that had a great probability of causing substantial harm" [Adv. Doc. 1, Ex. K, Damages Entry, pp. 3-4]. Nonetheless, the Debtor argues that the heightened standard does not prevent the application of collateral estoppel because the state court made specific factual findings when it determined that the Debtor lacked the kind of actual malice required for punitive damages. This court disagrees with the Debtor's argument that the state court's factual findings are conclusive. The factual findings in the Damages Entry include evidence of more than one reason for the Debtor's conveyances of property [Id., p. 3]. While there was evidence that the conveyances were made in the normal course of business and for estate planning, there was also evidence that the Debtor and other defendants were "angry" and that the transfers were made in an effort to defeat creditors [Id.]. Weighing this type of conflicting evidence under the clear and convincing standard could provide a different result than weighing the evidence under the lesser preponderance of the evidence standard applicable in this adversary proceeding. The court concludes that the Damages Entry does not preclusively establish that the evidence would be insufficient to prove a willful and malicious injury pursuant to § 523(a)(6). Consequently, the Damages Entry is not entitled to preclusive collateral estoppel effect.
CONCLUSION
For the reasons stated above, the court concludes that the Damages Entry relied on by the Debtor is not entitled to collateral estoppel effect as to the Plaintiffs' second claim for relief in the complaint. Defendant-Debtor Danies Carmack's Motion to Dismiss Plaintiffs' Second Claim for Relief on the Basis of Collateral Estoppel [Adv. Doc. 4] is, therefore, DENIED.
SO ORDERED.
This document has been electronically entered in the records of the United States Bankruptcy Court for the Southern District of Ohio.
IT IS SO ORDERED.
/s/ _________
Lawrence S. Walter
United States Bankruptcy Judge Dated: January 19, 2016 cc: Christina M Flanagan
Bieser, Greer & Landis LLP
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