Robert A. Saurber General Contractors, Inc. v. McAndrews

UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF OHIO
WESTERN DIVISION
In Re
ROBERT F. McANDREWS
Debtor
ROBERT A. SAURBER GENERAL
CONTRACTORS, INC.
Plaintiff
vs.
ROBERT F. McANDREWS, II
Defendant
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Case No. 05-11217
Chapter 7
Judge Hopkins
Adversary Case No. 05-1115
ORDER GRANTING SUMMARY JUDGMENT MOTION, IN PART,
AND DENYING SUMMARY JUDGMENT MOTION, IN PART
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.
Dated: September 16, 2005
____________________________________________________________
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1 The Defendant, a subcontracor, is alleged to have wrongly cashed checks issued by the Plaintiff,
a general contractor, and made jointly payable to the subcontractor and its material suppliers. The Plaintiff
obtained a state court judgment against the Defendant for breach of contract.
2
Presently before the Court is a summary judgment motion (“Motion”) (Doc. 13) filed by
the Defendant, Robert F. McAndrews, II.
The Plaintiff, Robert Saurber General Contractors, Inc., commenced this adversary
proceeding with the filing of a complaint to determine dischargeability or, in the alternative, to
deny the discharge. By his Motion, the Defendant argues that the doctrine of collateral
estoppel precludes the Plaintiff from litigating the dischargeability issue.
The Plaintiff’s dischargeability action is brought under 11 U.S.C. § 523(a)(2), (4) and/or
(6). The facts upon which the action is premised, a dispute between a general contractor and
a subcontractor, served as the basis for a state court action between the parties.1 In state
court, the Plaintiff asserted causes of action for breach of contract, replevin, unjust
enrichment, conversion and fraud.
The Defendant now argues that the Plaintiff is estopped from proceeding under §
523(a)(2), (4) and/or (6) because the state court purportedly ruled in the Defendant’s favor on
the issues of fraud and malice. In relevant part, the state court ruled as follows:
Regarding the propriety of assessing [punitive] damages . . . to punish
the defendants and to set an example for others, such a result is not warranted.
McAndrews certainly acted intentionally in the sense that he cashed the checks
made out to himself and various suppliers without obtaining the endorsements
of the other payees. It is also true that he did not pay off his suppliers
immediately or even in a timely fashion. These lapses, however, did not
represent a malicious intent or an intent to defraud in a broad sense. These
actions were indicative of a slip-shod approach to business affairs
characterized by plaintiff’s counsel as the “rob Peter to pay Paul” principle of
paying bills. They do not, however, evince conduct intended to result in
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permanently retaining unearned money or leaving the suppliers unpaid. Thus
punitive or exemplary damages are unwarranted.
(Emphasis added.) The Defendant relies upon the highlighted language to support his
estoppel argument.
COLLATERAL ESTOPPEL
Federal courts afford state court judgments the same preclusive effect that the
judgment possesses under state law. Marrese v. Am. Acad. of Orthopedic Surgeons, 470
U.S. 373, 380 (1985). Under Ohio law, the doctrine of collateral estoppel “precludes the
relitigation of an issue that has been ‘actually and necessarily litigated and determined in a
prior action.’” Metrohealth Med. Center v. Hoffmann-LaRoche, Inc., 80 Ohio St.3d 212, 217
(1997). The Court agrees with the Defendant that the issue of malice, the second of the two
elements which must be proven to make out a prima facie case under § 523(a)(6), was
actually and necessarily decided by the state court. Thus, the Plaintiff is estopped from
proceeding under § 523(a)(6). However, the Court does not believe that the issue of fraud
was actually and necessarily decided by the state court, leaving the Plaintiff free to proceed
in this Court under § 523(a)(2) and (4).
MALICE
“Under § 523(a)(6), “‘malicious’ means in conscious disregard of one’s duties or
without just cause or excuse.” Monsanto Co. v. Trantham (In re Trantham), 304 B.R. 298,
308 (B.A.P. 6th Cir. 2004). This is virtually the same standard applied under Ohio law to
determine the merit of a punitive damages award.
Punitive damages . . . are available upon a finding of actual malice.
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“Actual malice” for these purposes is . . . a conscious disregard for the rights
and safety of other persons that has a great probability of causing substantial
harm.”
Calmes v. Goodyear Tire & Rubber Co., 61 Ohio St.3d 470, 473 (1991). Because this issue
was decided in favor of the Defendant by the state court, the Plaintiff is estopped from further
proceeding under § 523(a)(6). See McCain Foods USA Inc. v. Shore (In re Shore), 317 B.R.
536, 543 (B.A.P. 10th Cir. 2004) (In establishing liability for punitive damages in prepetition
state court action, identity of issues existed between the punitive portion of the state court
judgment and the malicious injury element of the creditor's § 523(a)(6) action in bankruptcy
court.).
FRAUD
The issue of fraud, on the other hand, was not actually decided by the state court. The
judgment rendered by the judge in state court is based solely on the breach of contract cause
of action. The state court judgment did not decide the merits of the fraud cause of action, thus
collateral estoppel does not bar relitigation of that claim in bankruptcy court.
The Defendant relies upon the state court’s language highlighted above: “These
lapses, however, did not represent . . . an intent to defraud in a broad sense.” (Emphasis
added.) When read in context, however, the quoted language can only be viewed as part of
the state court’s analysis on the issue of punitive damages. Moreover, as noted above, the
issue of whether punitive damages are merited under Ohio law has nothing to do with the
issue of fraudulent intent. Because the issue of whether the Defendant defrauded the Plaintiff
was not actually and necessarily decided by the state court, the doctrine of collateral estoppel
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does not preclude the Plaintiff from proceeding under § 523(a)(2) and (4).
RES JUDICATA
At the September 1, 2005 pretrial conference in this proceeding, counsel for the
Defendant asserted a defense under res judicata. Specifically, counsel argued that the
Plaintiff should have prosecuted the fraud issue in state court. Had the Plaintiff failed to plead
fraud in its state court complaint, the Court would agree. But that was not the case. The
Plaintiff asserted fraud and the state court merely entered judgment on other grounds.
Moreover, the Plaintiff's argument is inconsistent with Brown v. Felsen, 442 U.S. 127 (1979),
wherein the Supreme Court held that the doctrine of res judicata does not apply to
dischargeability actions in bankruptcy court where the prior judgment was obtained in state
court. InBrown, the Supreme Court reasoned that issues regarding dischargeability are often
not relevant to the state court causes of action and that, except in very rare circumstances,
bankruptcy courts should be permitted to rule on dischargeability issues. Id. 134-35.
Accordingly, the doctrine of res judicata cannot be raised as a bar to the claims being
asserted under § 523(a)(2) and (4).
CONCLUSION
For the foregoing reasons, the Motion is hereby GRANTED to the extent that the
doctrine of collateral estoppel precludes the Plaintiff from proceeding under § 523(a)(6). On
the other hand, the Motion is hereby DENIED as to the Plaintiff’s action under § 523(a)(2) and
(4).
Counsel is hereby directed to be available for a final telephonic pretrial conference on
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December 12, 2005, at 2:00 p.m.
Copies to:
Robert A. Goering, Esq.
bgoering@fuse.net
William P. Coley, Esq.
ohbkr@coleylaw.com
U.S. Trustee
ustpregion09.ci.ecf@usdoj.gov
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