US Merchs. Fin. Grp. US Merchs. Fin. Grp., Inc. v. Martin (In re Martin) (Bankr. E.D. Tex., 2017)

Copy Citation

IN RE: LOUIS E. MARTIN, Jr. xxx-xx-8794 DebtorUS MERCHANTS FINANCIAL GROUP, INC. Plaintiff
v.
LOUIS E. MARTIN, JR. Defendant

Case No. 15-41103Adversary No. 15-4083

UNITED STATES BANKRUPTCY COURT FOR THE EASTERN DISTRICT OF TEXAS SHERMAN DIVISION

April 7, 2017

IN RE: LOUIS E. MARTIN, Jr. xxx-xx-8794 DebtorUS MERCHANTS FINANCIAL GROUP, INC. Plaintiff v. LOUIS E. MARTIN, JR. Defendant

Case No. 15-41103Adversary No. 15-4083

UNITED STATES BANKRUPTCY COURT FOR THE EASTERN DISTRICT OF TEXAS SHERMAN DIVISION

April 7, 2017

Chapter 7

FINDINGS OF FACT AND CONCLUSIONS OF LAW

        Upon trial of the complaint filed by the Plaintiff, U.S. Merchants Financial Group, Inc. ("Plaintiff" or "Merchants"), seeking a determination of whether an alleged debt owed to it by the Debtor-Defendant, Louis E. Martin, Jr. ("Defendant" or "Martin"), is dischargeable, the Court issues the following findings of fact and conclusions of law. The Plaintiff contends in its complaint that the debt is nondischargeable as a debt obtained by false pretenses, a false representation or actual fraud pursuant to 11 U.S.C. § 523(a)(2)(A),

Page 2

as a debt arising from a materially false written statement regarding the debtor's financial condition under § 523(a)(2)(B), and a debt for a willful and malicious injury under § 523(a)(6). After the trial, the Court took the matter under advisement. This decision disposes of all issues pending before the Court.

FINDINGS OF FACT From at least August 2002 through March 2013, Louis E. Martin, Jr and his business partner, Chuck Clark, formed, operated and were officers of 13 Florida Companies (collectively the "Martin-Clark Companies"). Each company operated from one of two common Florida addresses and shared common officers and registered agents. Several of the companies sold overlapping products such as road flares. In 2003-2004, the Defendant and Chuck Clark each owned approximately 50% of AOS, Inc a nominee entity that owned 50. 0% or 66. 7% of Synergy Design Group, Inc. ("Synergy"). In 2003-2004 Synergy purchased goods and/or services from Merchants. The purchase price was approximately $278, 000. 00. Merchants performed its obligations under the contract. Page 3

Synergy paid approximately $6, 700 to Merchants but failed to pay the remainder of the balance due. On March 15, 2004, Merchants sued Synergy in Los Angeles County, California Superior Court. On August 16, 2004, Merchants obtained a default judgment in its favor against Synergy for actual damages in the amount of $271, 679. 00, plus $296. 50 in costs, together with post-judgment interest accruing at 10% per annum (the "Synergy Judgment"). In its 2004 suit, Merchants did not seek, nor did it receive any recovery against Martin in his individual capacity. In 2004, Martin was a resident of Stuart, Florida. In approximately August 2009, Martin moved to The Colony, Texas. At that time, he was a 50% owner of a company known as Total Flare, Inc. On June 2, 2010, Merchants filed suit against Martin in Superior Court in California alleging Martin to be an alter ego of the judgment debtor, Synergy. The Merchants suit against Martin in California was dismissed for lack of personal jurisdiction. On December 8, 2010, Merchants filed suit against Martin in the 134th District Court in and for Dallas County, Texas (the "State Court Litigation"). Martin was served with citation on or about January 20, 2011. Page 4

The Plaintiff's state court petition alleged that Synergy was Martin's alter ego that Martin used to perpetrate a fraud upon Merchants and that Martin should be held personally liable for the Synergy Judgment. The state court trial between the Plaintiff and the Defendant in the State Court Litigation before the 134th Judicial District Court was conducted on March 26-27, 2013. The state court conducted a full evidentiary trial with consideration of all evidence in favor of the Plaintiff as well as the evidence supporting the defenses of the Defendant. On or about April 11, 2013, the 134th Judicial District Court entered judgment for Merchants piercing the corporate veil against Martin as a shareholder of Synergy pursuant to Texas Business and Organizations Code 21. 223(b) (the "State Court Judgment"). On April 11, 2013, the 134th Judicial District Court entered formal findings of fact and conclusions of law in support of the State Court Judgment in which, among other factual findings, it specifically found that: Page 5

Page 6

Page 7

Page 8

Page 9

The 134th Judicial District Court ultimately concluded that: On July 8, 2013, the Debtor initiated an appeal of the State Court Judgment. On October 4, 2013, the Debtor filed an affidavit stating that he had a negative net worth in order to appeal without posting a bond. Upon appeal, the State Court Judgment was affirmed by the Texas Court of Appeals for the Fifth District of Texas in Dallas on December 8, 2014. Thus, Merchants is a creditor of Martin by virtue of the State Court Judgment. Martin filed his petition for relief under Chapter 7 of the United States Bankruptcy Code in this Court on June 18, 2015. Page 10

Merchants timely filed its Complaint to Determine Dischargeability of Debt and Objection to Discharge on September 15, 2015, seeking, as amended by the Joint Pretrial Order, to except its claim arising from the State Court Judgment from the scope of any discharge otherwise granted to Martin. The vast majority of the factual and/or legal issues raised by Martin in his defense before this Court were, or should have been, presented in the State Court Litigation for determination. The presentation of such issues constitute an impermissible collateral attack upon the factual determinations arising from the State Court Litigation. Browning v. Prostock 165 S.W.3d 336 346 (Tex. 2005); Union Planters Bank Nat. Ass'n v. Salih 369 F. 3d 457, 462 (5th Cir. 2004). These issues include, but are not limited to: The parties in this adversary case are identical to those in the State Court Litigation. The issues as determined by the 134th Judicial District Court in the State Court Litigation were essential to that court's judgment. Page 11

All of the issues as determined by the 134th Judicial District Court were fully and fairly litigated in the State Court Litigation. Accordingly, Martin is collaterally estopped from relitigating those factual determinations that necessarily support the judgment issued in the State Court Litigation. With specific reference to the facts germane to a § 523(a)(2)(A) nondischargeability determination, Martin is thus barred by the principles of collateral estoppel from relitigating the factual determinations arising from the State Court Litigation including the following: Page 12

In each respect , such false representations by Martin constitute a knowing and fraudulent falsehood conveyed to Merchants that described past or current facts. Merchants justifiably relied upon the false representations of Martin to its detriment. To the extent any of these findings of fact constitute conclusions of law, the Court expressly adopts them as such. CONCLUSIONS OF LAW The Court has jurisdiction to consider the adversary complaint in this proceeding pursuant to 28 U.S.C. § 1334 and § 157. This Court has authority to enter a final judgment in this adversary proceeding since it statutorily constitutes a core proceeding as contemplated by 28 U.S.C. § 157(b)(2)(I) and (O) and meets all constitutional standards for the proper exercise of full judicial power by this Court. In an action to determine the dischargeability of a debt, the creditor has the burden of proof under a preponderance of the evidence standard. Grogan v. Garner 498 U.S. 279 286 (1991). "Intertwined with this burden is the basic principle of bankruptcy that exceptions to discharge must be strictly construed against a creditor and liberally construed in favor of a debtor so that the debtor may be afforded a fresh start. " FNFS Ltd. v. Harwood (In re Harwood) 637 F. 3d 615, 619 (5th Cir. 2011) (citing Hudson v. Raggio & Raggio Inc. (In re Hudson) 107 F. 3d 355, 356 (5th Cir. 1997)). The fact that there is a debt owing by the Defendant to the Plaintiff is established through the factual findings and judgment issued in the State Court Litigation. However, this Court retains exclusive jurisdiction to determine whether that debt is dischargeable. Grogan v. Garner 498 U.S. 279 285, n. 11, (1991); Fielder v. King (Matter of King) 103 F. 3d 17, 19 (5th Cir. 1997). Page 13

Collateral Estoppel

"Collateral Estoppel or, in modern usage, issue preclusion, 'means simply that when an issue of ultimate fact has once been determined by a valid and final judgment, that issue cannot again be litigated between the same parties in any future lawsuit. '" Schiro v. Farley 510 U.S. 222 232 (1994) (internal quotations omitted). In other words, "once an issue is actually and necessarily determined by a court of competent jurisdiction, that determination is conclusive in subsequent suits based on a different cause of action involving a party to the prior litigation. " Montana v. U. S 440 U.S. 147 153 (1979) (citing Parklane Hosiery Co. v. Shore 439 U.S. 322 326 n. 5 (1979)). "To preclude parties from contesting matters that they have had a full and fair opportunity to litigate protects their adversaries from the expense and vexation attending multiple lawsuits, conserves judicial resources, and fosters reliance on judicial action by minimizing the possibility of inconsistent decisions. " Id. at 153-54. In the bankruptcy dischargeability context, "parties may invoke collateral estoppel in certain circumstances to bar re-litigation of issues relevant to dischargeability" and satisfy the elements thereof. Raspanti v. Keaty (In re Keaty) 397 F. 3d 264 (5th Cir. 2005) (quotation marks omitted). In other words, when an issue that forms the basis for the creditor's theory of non-dischargeability has been actually litigated in a prior proceeding, neither the creditor nor the debtor may relitigate those grounds. RecoverEdge L. P. v. Pentecost 44 F. 3d 1284, 1294 (5th Cir. 1995). While the doctrine of issue preclusion applies in bankruptcy dischargeability litigation, a bankruptcy court retains exclusive jurisdiction to determine whether a debt is dischargeable. Grogan v. Garner 498 U.S. 279 284 n. 11 (1991). The inquiry into the preclusive effect of a state court judgment is guided by the full faith and credit statute, which states that "judicial proceedings . . . shall have the same full faith and credit in every court within the United States . . . as they have by law or usage in the courts of such State . . . from which they are taken. " 28 U.S.C. § 1738 (1994). Thus, federal courts look to the principles of issue preclusion utilized by the forumPage 14

state in which the prior judgment was entered. Schwager v. Fallas (In re Schwager) 121 F. 3d 177, 181 (5th Cir. 1997).

Because the judgment against the Defendant was entered in a Texas state court, this Court applies the Texas law of issue preclusion. Pancake v. Reliance Ins. Co. (In re Pancake) 106 F. 3d 1242, 1244 (5th Cir. 1997); Gober v. Terra + Corp. (In re Gober) 100 F. 3d 1195 (5th Cir. 1996). The doctrine of collateral estoppel (issue preclusion) "is designed to promote judicial efficiency, protect parties from multiple lawsuits, and prevent inconsistent judgments by precluding the relitigation of any ultimate issue of fact actually litigated and essential to the judgment in a prior suit. " Sysco Food Servs Inc. v. Trapnell 890 S.W.2d 796 801 (Tex. 1994); Tarter v. Metropolitan Sa v. & Loan Ass'n 744 S.W.2d 926 927 (Tex. 1988). "The doctrine applies when the party against whom collateral estoppel is asserted had a full and fair opportunity to litigate the issue in the prior suit. " Eagle Properties Ltd v. Scharbauer 807 S.W.2d 714 721 (Tex. 1991); Texas Dept. of Public Safety v. Petta 44 S.W.3d 575 579 (Tex. 2001). Specifically, a party is collaterally estopped from raising an issue under Texas law when: (1) the facts sought to be litigated in the second case were fully and fairly litigated in the first; (2) those facts were essential to the prior judgment; and (3) the parties were cast as adversaries in the first case. Bonniwell v. Beech Aircraft Corp 663 S.W.2d 816 818 (Tex. 1984); MGA Ins. Co. v. Charles R. Chesnutt P. C 358 S.W.3d 808 817 (Tex. App. - Dallas 2012, no pet. ). "Once an actually litigated and essential issue is determined, that issue is conclusive in a subsequent action between the same parties. " Van Dyke v. Boswell O'Toole Davis & Pickering 697 S.W.2d 381 384 (Tex. 1985). For the purposes of collateral estoppel under Texas law, an issue was "actually litigated" when it was properly raised, by the pleadings or otherwise, and it was submitted for determination, and determined. Id citing RESTATEMENT (SECOND) OF JUDGMENTS § 27 cmt. d (1982); In re Calderon 96 S.W.3d 711 721 (Tex. App. - Tyler 2003, orig. proceeding). In the context of issue preclusion, "issue" and "fact" are interchangeable. The purpose of the reviewing court is to determine the specific facts brought that were already established through full and fair litigation. Page 15

As stated in the Fifth Circuit decision in Fielder v. King (Matter of King) 103 F. 3d 17, 19 (5th Cir. 1997): As the party asserting the preclusive effect of the findings arising from the State Court Litigation, Merchants has the burden of proof on all elements of collateral estoppel. The State Court Judgment was rendered on the merits after a contested trial by the 134th Judicial District Court and is now a final judgment. The rendition of the State Court Judgment in favor of Merchants and against Martin, rendering Martin personally liable for the Synergy Judgment, was affirmed on appeal. Nondischargeability Under 523(a)(2)(A): Debt Arising by Fraud False Pretenses or False Representation