The Hanover Packard Group, LLC v. Blackwell

UNITED STATES BANKRUPTCY COURT
DISTRICT OF NEW MEXICO
In re: 	CLAUDE W. BLACKWELL, 	Case No. 7-08-14402 JA
Debtor.
THE HANOVER PACKARD GROUP, LLC,
Plaintiff,
v. 	Adversary No. 09-1099 J
CLAUDE W. BLACKWELL,
Defendant.
MEMORANDUM OPINION
THIS MATTER is before the Court on Plaintiff’s Motion for Summary Judgment
(“Motion”) (Docket No. 31) and supporting memorandum (Docket No. 32) filed by The
Hanover Packard Group, LLC, by and through its attorneys of record, Hinkle, Hensley,
Shanor & Martin, LLP (Nancy Cusack) and Haynes and Boone, LLP (Thomas J. Williams
and Ian T. Peck). Defendant, Claude W. Blackwell, pro se, opposes the Motion. See
Defendant’s Memorandum in Opposition to Plaintiff’s Motion for Summary Judgment
(Docket No. 33). At issue is whether a default judgment for fraud entered by a Texas state
district court in favor of The Hanover Packard Group, LLC (“Hanover/Packard”) against AV
Bar Reg., Inc. (“AV Bar”), a company in which Claude W. Blackwell was an officer and/or
director, conclusively establishes that the debt is non-dischargeable as to Mr. Blackwell
pursuant to 11 U.S.C. § 523(a)(2)(A) as a debt procured by a false representation, false
pretenses, or actual fraud. 	Because the Court finds that the state court default judgment does
not preclude litigation of the non-dischargeability issue in bankruptcy court, the Court will
deny the Motion.
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SUMMARY JUDGMENT STANDARDS
It is appropriate for the Court to grant summary judgment when the pleadings,
depositions, answers to interrogatories, and admissions on file, together with the affidavits, if
any show that there is no genuine issue as to any material fact and that the moving party is
entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c), made applicable to adversary
proceedings by Fed.R.Bankr.P. 7056. In considering a motion for summary judgment, the
Court must “‘examine the factual record and reasonable inferences therefrom in the light most
favorable to the party opposing summary judgment.’” Wolf v. Prudential Inc. Co. of America,
50 F.3d 793, 796 (10 th Cir. 1995)(quoting Applied Genetics Int’l, Inc. v. First Affiliated Sec.,
Inc., 912 F2d 1238, 1241 (10 th Cir. 1990)).
UNDISPUTED FACTS
The following facts are not in dispute:
1. 	AV Bar Reg., Inc. (“AV Bar”) was a corporation incorporated under the laws
of the State of Texas. See Motion, Exhibit E-1; Defendant’s Memorandum in
Opposition to Plaintiff’s Motion for Summary Judgment, ¶1.
2. 	Hanover/Packard filed a lawsuit suit against AV Bar in the 141st Judicial
District Court of Tarrent County, Texas alleging claims for breach of contract
and common law fraud (“State Court Action”). Plaintiff’s Original Complaint
to Determine Dischargeability of Debt Pursuant to 11 U.S.C. § 523(a)
(“Complaint”) (Docket No. 1), ¶ 20; Answer to Plaintiff’s Original Complaint
to Determine Dischargeability of Debt (“Answer”)(Docket No. 7), ¶ 20.
3. 	Defendant was not named as a defendant in the State Court Action. See
Motion, Exhibit D (copy of Plaintiff’s Original Verified Petition and
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Application for Injunctive Relief filed in the State Court Action, hereinafter the
“Petition”).
4. 	AV Bar did not file an answer to the Petition or otherwise appear. See Motion,
Exhibit C (copy of Final Judgment).
5. 	Hanover /Packard obtained a default judgment against AV Bar in the State
Court Action in the amount of $23,236,251.40 in actual damages, $1,000,000
in exemplary damages, and $50,000 in attorney’s fees. See Complaint, ¶ 20,
Answer, ¶ 20. 	See also, Motion, Exhibit C (copy of Final Judgment).
6. 	The default judgment found that AV Bar was liable to Hanover/Packard for
common law fraud. 	See Complaint,¶ 37; Answer, ¶ 37. See also, Motion,
Exhibit C (copy of Final Judgment).
DISCUSSION
Hanover/Packard raises the following arguments in support of its Motion: 1) that res
judicata, the Full Faith and Credit Act, and the Rooker-Feldman doctrine preclude relitigation
of its fraud claim and establish as a matter of law that the debt at issue is non-dischargeable
under 11 U.S.C. § 523(a)(2)(A); and 2) that Defendant is personally liable for the debt by
operation of Tex. Tax Code § 171.255 or because he is the alter ego of AV Bar.1 Because the
1 Hanover/Packard has offered no evidence on summary judgment to support its claim that Defendant is the alter
ego of AV Bar. The fact that the Bankruptcy Court for the Northern District of Texas, Fort Worth Division
substantively consolidated the bankruptcy cases of AV Bar and Christopher Blackwell, Defendant’s son, or that
Christopher Blackwell’s discharge was denied fails to establish that Defendant is the alter ego of AV Bar. The
case law cited by Hanover/Packard merely states that “[a] stockholder may be in privity with his corporation . . .
such that a judgment against the later is res judicata as to the former if the two are found to be alter egos.”
Dudley v. Smith, 504 F.2d 979, 982 (5 th Cir. 1974)(emphasis added). But Plaintiff has not offered any evidence
on summary judgment to establish as a matter of law that Defendant is AV Bar’s alter ego or that AV Bar
comingled its funds with Defendants’ funds. Further, as discussed below, Hanover/Packard has not established
that Defendant is in privity with AV Bar for purposes of collateral estoppel. Finally, Defendant’s Answer
contests Hanover/Packard’s assertion that he is a shareholder of AV Bar. See Complaint, ¶ 22 (asserting that
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Court finds that neither res judicata, Full Faith and Credit, nor the Rooker-Feldman doctrine
applies to bar litigation of the non-dischargeability issue raised in this adversary proceeding,
the Court need not address Hanover/Packard’s second argument.
Full Faith and Credit
Under the Full Faith and Credit Act,2 federal courts are required to give full faith and
credit to judgments entered by all courts in the United States, meaning that “a federal court
must give the same preclusive effect to a state-court judgment as another court of that State
would give.” Parsons Steel, Inc. v. First Alabama Bank, 474 U.S. 518, 523, 106 S.Ct. 768,
771, 88 L.Ed.2d 877 (1986). Thus, when reviewing the preclusive effect of a state court
judgment under the mandates of the Full Faith and Credit Act, the court must “look to the
preclusion law of the state in which the judgment was rendered.” In re Putvin, 332 B.R. 619,
625 (10 th Cir. BAP 2005)(citing Marrese v. Am. Acad. of Orthopaedic Surgeons, 470 U.S.
373, 380, 105 S.Ct. 1327, 84 L.Ed.2d 274 (1985)). 	The judgment entered in the State Court
Action was entered in Texas. Therefore, the Court must look to Texas law to determine
whether the judgment bars relitigation of the issues raised in this adversary proceeding.
Collateral Estoppel
Collateral estoppel, also known as issue preclusion, “is designed to promote judicial
efficiency, protect parties from multiple lawsuits and prevent inconsistent judgments by
precluding the relitigation of issues.” Sysco Food Services, Inc. v. Trapnell, 890 S.W.2d 796,
Defendant and Christopher Blackwell were the owners of AV Bar); Answer, ¶ 22 (stating that Defendant is not a
stockholder of AV Bar).
2 The Full Faith and Credit Act, provides, in relevant part: “The . . . judicial proceedings of any court of any
such State . . . shall have the same full faith and credit in every court within the United States and its Territories
and Possessions as they have by law or usage in the courts of such state . . . .” 28 U.S.C. § 1728. The Full Faith
and Credit Act “codifies the Full Faith and Credit Clause of the Constitution, Art. IV § 1.” Phelps v. Hamilton,
122 F.3d 1309, 1318 (10th Cir. 1997).
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801 (Tex. 1994)(citing Lytle v. Household Mfg., Inc., 494 U.S. 545, 553, 110 S.Ct. 1331,
1337, 108 L.Ed.2d 504 (1990)(remaining citations omitted)). Under Texas law, a party
asserting collateral estoppel must establish the following elements:
(1) the facts sought to be litigated in the second action were fully and fairly
litigated in the first action;
(2) those facts were essential to the judgment in the first action; and
(3) the parties were cast as adversaries in the first action.
Sysco, 890 S.W.2d at 801 (citations omitted).
Ordinarily, default judgments obtained upon the failure of a defendant to answer a complaint
are not entitled to collateral estoppel effect under Texas law. See In re Fitch, 349 B.R. 133,
142 (Bankr. N.E.Tex. 2006)(“No-answer default judgments are generally not entitled to
preclusive effect in Texas.”)(citing Gober v. Terra +Corp., 100 F.3d 1195, 1204 (5th Cir.
1996) and Crain v. Limbaugh (In re Limbaugh), 155 B.R. 952, 955 (Bankr. N.D.Tex. 1993)).
Courts reason that “no-answer default judgments fail to meet the ‘actually litigated’ prong of
the issue preclusion test.” Gober, 100 F.3d at 1204 (citations omitted).
Here, the Final Judgment entered in the State Court Action recites that AV Bar “failed
to appear and answer, and wholly made default.” See Motion, Exhibit C. 	Thus the Final
Judgment appears to be a “no-answer” default. 	Further, Defendant Claude Blackwell was
not a named party to the State Court Action. Because he was not a named party, he had no
obligation to answer the Petition filed in the State Court Action. 	Thus, even if the default
judgment determined facts at issue here (i.e., fraud) that were essential to the entry of the
judgment in the State Court Action, Hanover/Packard has not established all elements
necessary to meet the requirements for collateral estoppel under Texas law.
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With regard to the third requirement, although strict mutuality of parties is no longer
required, the party against whom collateral estoppel is asserted must have been in privity with
a party to the first action. Sysco, 890 S.W. 2d at 801-802. 	Whether a party is in privity with
a party to the first action must be examined on a case-by-case basis in light of the particular
circumstances. 	HECI Exploration Co. v. Neel, 982 S.W.2d 881, 890 (Tex. 1998). See also,
Benson v. Wanda Petroleum Co., 468 S.W.2d 362, 363 (Tex. 1971)(recognizing that the
determination of whether a party is in privity for purposes of res judicata “requires careful
examination into the circumstances of each case as it arises.”)(citation omitted). For purposes
of collateral estoppel, parties are in privity when “(1) they control an action even if they are
not parties to it; (2) their interests are represented by a party to the action; or (3) they are
successors in interest, deriving their claims through a party to the prior action.” HECI
Exploration¸982 S.W. 2d at 890. See also, McCoy v. Hernandez, 203 F.3d 371, 374 (5th Cir.
2000)(same). However, “privity is not established by the mere fact that persons may happen
to be interested in the same question or in proving the same set of facts.” Benson, 468 S.W.2d
at 363. 	Rather, “privity connotes those who are in law so connected with a party to the
judgment as to have such an identity of interest that the party to the judgment represented the
same legal right.” Id. (citation omitted).
Hanover/Packard has not demonstrated that Defendant stands in privity with AV Bar
for purposes of collateral estoppel. 	There is no evidence before the Court that Defendant in
fact controlled the litigation on behalf of AV Bar in the State Court Action. Further, because
the State Court Action did not assert a claim against Defendant personally, and because
judgment was entered by default, it is not fair to conclude that AV Bar adequately represented
Defendant’s interests in the State Court Action, or that Defendant should have had reason to
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know that Hanover/Packard would later seek to hold Defendant liable for the judgment it
obtained against the company. See Parklane Hosiery Co., Inc. v. Shore, 439 U.S. 322, 330,
99 S.Ct. 645, 58 L.Ed.2d 552 (1979)(acknowledging that offensive use of collateral estoppel
may be unfair to the defendant when the defendant “may have [had] little incentive to defend
vigorously, particularly if future suits are not foreseeable.”)(citation omitted). 	Thus the fact
that Defendant may have known about the State Court Action is insufficient for the Court to
conclude that collateral estoppel should be applied to grant Hanover/Packard summary
judgment based on the default judgment entered in the State Court Action against AV Bar.
Res Judicata
In its Motion, Hanover/Packard acknowledges that collateral estoppel principles can
apply to dischargeability actions, but then appears to rely on the doctrine of res judicata as
interpreted under Texas law to conclude that the default judgment entered in the State Court
Action against AV Bar conclusively establishes that the debt is non-dischargeable. 	The
doctrine of res judicata does apply generally to bankruptcy proceedings. In re Griego,64 F.3d
580, 584 (10 th Cir. 1995)(citing DePaolo v. United States (In re DePaolo), 45 F.3d 373, 376
(10 th Cir. 1995)). However, res judicata does not preclude the subsequent litigation of a non-
dischargeability action in bankruptcy court because issues of non-dischargeability fall within
the exclusive jurisdiction of the bankruptcy court. See Brown v. Felson, 442 U.S. 127, 99
S.Ct. 2205, 60 L.Ed. 2d 767 (1979)(holding that creditor was not barred by res judicata from
asserting subsequent non-dischargeability claim against debtor such that the bankruptcy court
was not confined to a review of the prior state court judgment when considering the
dischargeability of the debt). Consequently, “res judicata cannot be applied to preclude
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litigation of the elements of . . . [dischargeability] claims for relief.” In re Hampton, 272 B.R.
1, 2 (Bankr.D.Wyo. 2001).3
This legal precept applies regardless of whether the debtor-defendant raises res
judicata as a defense to a subsequent non-dischargeability action, as in Brown v. Felson, or a
creditor raises res judicata offensively in an attempt to obtain summary judgment on a claim
for non-dischargeability.4 Hanover/Packard’s contention that it is entitled to summary
judgment on its non-dischargeability claim against Defendant because, under Texas law,
default judgments enjoy preclusive effect under res judicata principles, is, therefore,
misplaced.5
Rooker-Feldman Doctrine
Similarly, the Rooker-Feldman Doctrine is inapplicable. “‘As a general rule, the
Rooker-Feldman doctrine prevents bankruptcy courts from exercising subject matter
jurisdiction over claims if doing so would require them to engage in an appellate review of a
state court judgment.’” Osborn v. Miller (In re Miller), 2010 WL 2490666, *5 (Bankr.D.Kan.
June 16, 2010)(quoting Dickerson, Colliding Judgments: Applying the Rooker-Feldman
Doctrine in Bankruptcy Cases, 14 J. Bankr.L. & Prac. 4 art. 2 (2005)). 	As explained by the
Supreme Court in Exxon Mobil Corp. v. Saudi Basic Indus. Corp., 544 U.S. 280, 125 S.Ct.
1517, 161 L.Ed.2d 454 (2005), the doctrine is
3See also Haas v. Huddleston (In re Huddleston), 157 B.R. 35, 36 (Bankr.N.D.Okla. 1993)(stating that “[r]es
judicata does not apply in actions for exception to discharge.”); Davis v. Massey (In re Massey), 228 B.R. 686,
690 (Bankr.S.D.Ind. 1998)(stating that “[b]ecause of the exclusive jurisdiction of the bankruptcy court over
issues of Section 523(a)(2), (4), (6), and (15) non-dischargeability, res judicata does not apply to actions
pursuant to those subsections of Section 523(a).”)(citation omitted).
4 See, e.g., Hampton, 272 B.R. at 2 (res judicata established the amount of the debt, but could not be used to
establish the character of the debt as non-dischargeable); Huddleston, 157 B.R. at 36.
5 Cf. Mattson v. Hawkins (In re Hawkins), 231 B.R. 222, 231 (D.N.J. 1999)(acknowledging that under New
Jersey law, res judicata applies to default judgments, but concluding that, in accordance with Brown v. Felson,
the state court default judgment could have “absolutely no claim preclusion effect on these dischargeability
proceedings.” Consequently, the court denied plaintiff-creditor’s motion for summary judgment premised on the
doctrine of res judicata.).
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confined to cases of the kind from which the doctrine acquired its name: cases
brought by state court losers complaining of injuries caused by state-court judgments
rendered before the district court commenced and inviting district court review and
rejection of those judgments. Rooker-Feldman does not otherwise override or
supplant preclusion doctrine or augment the circumscribed doctrines that allow federal
courts to stay or dismiss proceedings in deference to state-court actions.
Exxon Mobil Corp., 544 U.S. at 284.
Here, Hanover/Packard, the party asserting that Rooker-Feldman prevents this Court from
reviewing the judgment entered in the State Court Action, was the prevailing party in the
State Court Action, not the losing party. 	Defendant is not attempting to “undo” the judgment
against AV Bar entered in the State Court Action. Rather, Defendant is simply defending the
non-dischargeability action filed by Hanover/Packard against the Defendant personally.
Consequently Rooker-Feldman is inapplicable.6 The Rooker-Feldman doctrine does not
prevent the bankruptcy court from deciding an independent claim (such as the claim for
nondischargability), even if such claim “‘denies a legal conclusion that a state court has
reached.’” In re Sweeney, 276 B.R. 186, 195 (6th Cir. BAP 2002)(quoting GASH Assocs. v.
Village of Rosemont, 995 F.2d 726, 728 (7th Cir. 1993)). In sum, while the Rooker-Feldman
doctrine precludes the Court from reviewing the merits of the debt or setting aside the default
judgment that establishes the debt, it remains within the Court’s exclusive jurisdiction to
determine whether the debt embodied in the judgment is dischargeable. Sweeney, 276 B.R. at
194.
6 See, e.g., Jacobus v. Binns (In re Binns), 328 B.R. 126, 131-132 (8th Cir. BAP 2005)(finding that the “case
simply does not present a situation covered by the Rooker-Feldman doctrine – the state court losers (the Debtors)
are not trying to obtain a review and a rejection of the Default Judgment; to the contrary, the state court winner
(the Plaintiff) is trying to offensively use the Default Judgment to establish the basis for a derivative claim, i.e., a
determination of non-dischargeability.”); Custom Heating & Air, Inc. v. Andress (In re Andress),345 B.R. 358,
368 (Bankr.N.D.Okla. 2006)(finding it an inappropriate use of Rooker-Feldman by the state court plaintiff “as
an offensive weapon to prevent this Court from determining whether a debt may be discharged in bankruptcy.”);
Miller, 2010 WL 2490666 at *6 (same; concluding that Rooker-Feldman could not serve as a basis to grant
plaintiff summary judgment on her non-dischargeability claim under § 523(a)(6)).
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CONCLUSION
Based on the foregoing, the Court concludes that the Motion must be denied. Neither
The Full Faith and Credit Act, res judicata, nor the Rooker-Feldman doctrine applies to
establish that the debt represented by the default judgment entered against AV Bar in the State
Court Action is non-dischargeable as to Defendant. 	Hanover/Packard has also not
established all elements required for collateral estoppel to apply. 	The judgment entered in
the State Court Action determined that AV Bar committed common-law fraud, established the
amount of the debt at issue, and is binding on AV Bar. But the judgment entered in the State
Court Action against AV Bar does not entitle Hanover/Packard to summary judgment as to
whether it has a non-dischargeable fraud claim against Defendant. 	Finally, because
Hanover/Packard is not entitled to summary judgment based on the default judgment entered
in the State Court Action, the Court does not reach Hanover/Packard’s argument that
Defendant should be held liable for the debt of AB Bar pursuant to the Texas Tax Code §
171.255. An order will be entered consistent with this opinion.
___________________________________
ROBERT H. JACOBVITZ
United States Bankruptcy Judge
Date entered on docket: 	July 29, 2010
COPY TO:
Ian T Peck
Thomas J. Williams
Haynes and Boone, LLP
Attorneys for Plaintiff
201 Main Street
Suite 2200
Fort Worth, TX 76102
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Nancy S Cusack
Hinkle Hensley Shanor & Martin, LLP
Attorney for Plaintiff
PO Box 2068
Santa Fe, NM 87504-2068
Claude W. Blackwell
Defendant
PO Box 4224
Roswell, NM 88202-4224
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