Durant v. Durant (In re Durant), Case No. 17–20232–MMH

586 B.R. 577

IN RE: Damond and Sharae DURANT, Debtors.

Damond Durant, Jr., Plaintiff,

v.Damond Durant, Sr., Defendant.

Case No. 17–20232–MMH

Adv. No. 17–00350–MMH

United States Bankruptcy Court, D. Maryland, at Baltimore.

Signed: June 19, 2018

Kim D. Parker, Law Offices of Kim Parker, P.A., Baltimore, MD, for Plaintiff.

Jeffrey M. Sirody, Jeffrey M. Sirody and Associates, P.A., Baltimore, MD, for Defendant.

MEMORANDUM OPINION

MICHELLE M. HARNER, U.S. BANKRUPTCY JUDGE

This matter requires the Court to consider how long a defendant may wait to raise defenses to an action, particularly where there appears to be no issues concerning notice and due process in the original proceeding. More specifically, may a defendant—with knowledge of a state court proceeding against him—take no action in that proceeding, but still contest the findings of the state court in a subsequent bankruptcy case? Does it matter that, in electing not to participate in the state court proceeding, the defendant allowed a default judgment to be entered, an evidentiary damages hearing to be held, and a final judgment on damages to be entered with no appeal or challenge?

The Court believes that it does matter. Although the Court appreciates that a defendant may desire to take a different strategic approach in a bankruptcy case and may even have valid defenses to the asserted claims, a defendant may not sit on his rights or wait to challenge the claims in what he may perceive to be a more favorable venue. Such an approach prejudices other parties to the original proceeding and contravenes important policy objectives (including finality and judicial economy) that underlie the doctrine of res judicata. Accordingly, as more fully explained below, the Court finds that the particular facts of this adversary proceeding satisfy the doctrine of issue preclusion under Maryland law and that grounds exist to grant the plaintiff's motion for summary judgment.

I. Relevant Background

Damond Durant, Sr. (the "Defendant") and Sharae Durant (collectively with the Defendant, the "Debtors") filed this chapter 7 case on July 28, 2017. The Debtors list approximately $452,146.00 in debt on the schedules to their chapter 7 petition. The overwhelming majority of this debt relates to a single judgment entered against the Defendant by the Circuit Court for Baltimore City on April 12, 2016 (the "State Court Judgment"). See Petition, Case No. 17–20232, ECF 1, 23; Ex. D, Am. Mot. Summ. J., ECF 24–6. This adversary proceeding concerns the dischargeability of the State Court Judgment under section 523(a)(4) of the U.S. Bankruptcy Code.¹

The State Court Judgment is based on the Defendant's conduct with respect to certain inheritance funds in the amount of $75,803.83 (the "Inheritance Funds") belonging to the Defendant's son, Damon Durant, Jr. (the "Plaintiff"). See Am. Mot. Summ. J. at 6–7, ECF 24; see also Transcript of Feb. 17, 2016 State Court Hearing ("State Court Tr.") 36–41, ECF 24–3.² The Plaintiff's late grandmother left him the Inheritance Funds in her Last Will and Testament (the "Will"). See Complaint, Ex. B, Am. Summ. J. (the "Complaint") at 2–3, ECF 24–4. Under the terms of the Will, the Defendant was given custody of the Inheritance Funds because the Plaintiff was still a minor at the time. Id. at 3. When the Plaintiff turned 21 years old, the Defendant gave him $100.00. Id. at 4; State Court Tr. 19–20, ECF 24–3. According to the Plaintiff, the Defendant told him that the remainder of the Inheritance Funds was gone and that he should do whatever he needed to do. See Complaint at 4; State Court Tr. 19–20, ECF 24–3.

The Plaintiff initiated litigation against the Defendant in the Circuit Court for Baltimore City (the "State Court") on January 16, 2015. The Plaintiff's complaint against the Defendant contained four counts sounding in fraud/intentional theft, breach of fiduciary duties, conversion, and unjust enrichment. See Complaint, ECF 24–4. The complaint sought actual damages, attorneys' fees, and other appropriate relief. Id. The State Court's docket indicates that the Writ of Summons was served on the Defendant on March 19, 2015, but that no Answer or other response was filed by the Defendant.³ See Ex. F., Am. Mot. Summ. J., ECF 24–7. Accordingly, the State Court entered a default judgment against the Defendant on September 29, 2015. See id.

The State Court then held an evidentiary hearing on damages relating to the default judgment. Only the Plaintiff and his counsel appeared at the damages hearing. See State Court Tr. 37, ECF 24–3. The State Court proceeded to hear evidence on the damages request, including the Plaintiff's testimony. The Plaintiff testified that the Defendant would not allow him to use any of the Inheritance Funds until he turned 21 years old, but then when he requested the money, the Defendant told him that all of the money was gone. See id. at 14–16, 18–20. Although the Plaintiff testified that he did not know what happened to the money, he observed certain changes in the Defendant's spending habits, including the purchase of a motorcycle shortly after the Defendant received the Inheritance Funds, and various vacations that the Defendant and his wife took after that time. See id. The State Court made several findings and observations that are relevant to this adversary proceeding, including:

• "[The Defendant] has failed to appear having been given notice of today's hearing, having failed to respond to any process or notices from this Court." Id. at 37.

• "I've looked at the conduct of [the Defendant] and I find it to be, as I said at the outset, aside from being heartbreaking to hear that somebody's been treated like this, it's reprehensible." Id. at 39.

• "The fact that [the Defendant] made repeated statements to [the Plaintiff] knowing full well that they were false, that he couldn't touch the money while he was spending it on himself, to me, clearly shows, by clear and convincing evidence, that there was actual malice, that [the Defendant] knew exactly what he was doing." Id.

After a full review of the record, the State Court entered the State Court Judgment, awarding the Plaintiff $75,804.83 in actual damages ("Actual Damages"), $70,000.00 in non-economic damages ("Non–Economic Damages"), and $227,414.49 in punitive damages ("Punitive Damages"). See Ex. D, Am. Mot. Summ. J., ECF 24–6.

The State Court Judgment was indexed and recorded on April 12, 2016. See Ex. F., Am. Mot. Summ. J., ECF 24–7. Also around this time, the Plaintiff garnished the Defendant's wages and was in the process of discovery and other efforts to enforce and collect on the judgment. Id. The Defendant filed a Suggestion of Bankruptcy in the State Court on August 23, 2017. Id. The State Court then entered an order providing that the "action [was] STAYED as to all claims against [the Defendant] and the proceedings deferred to the Bankruptcy Court in accordance with Section 362 of Title 11 of the United States Code." Id.

Following the commencement of this chapter 7 case, the Plaintiff initiated this adversary proceeding by filing a complaint against the Defendant under section 523(a)(4) of the Code (the "Adversary Complaint"). ECF 1. The Adversary Complaint was timely filed in accordance with section 523(c) and Bankruptcy Rule 4007(c).⁴ By the Adversary Complaint, the Plaintiff seeks a determination that the entire amount of the State Court Judgment—i.e., $373,219.32, plus post-judgment interest and cost—is nondischargeable in this chapter 7 case under section 523(a)(4) of the Code. The Defendant filed an Answer to the Adversary Complaint on December 18, 2017, asserting, among other things, that the State Court Judgment, which was a judgment entered by default, is not binding in this proceeding. ECF 23.

Shortly thereafter, the Plaintiff filed his Amended Motion for Summary Judgment (the "Motion"). ECF 24. By the Motion, the Plaintiff posits that the State Court's findings of fact made during the evidentiary hearing on the damages award memorialized by the State Court Judgment are binding on this Court under the doctrine of issue preclusion. The Defendant filed an Objection to the Motion, arguing that the State Court Judgment has no res judicata effect (under either the claim or issue preclusion doctrine) because it was a default judgment. ECF 29. The Court held a hearing on the Motion and the related pleadings on February 22, 2018 (the "Hearing").⁵ At the Court's invitation, both parties filed post-hearing briefs. ECF 37, 38.

II. Jurisdiction and Legal Standards

The Court has jurisdiction over this adversary proceeding pursuant to 28 U.S.C. § 1334, 28 U.S.C. § 157(a), and Local Rule 402 of the United States District Court for the District of Maryland. This proceeding is a "core proceeding" under 28 U.S.C. § 157(b)(2).

Rule 56 of the Federal Rules of Civil Procedure, made applicable to this adversary proceeding by Bankruptcy Rule 7056, governs the Motion for Partial Summary Judgment. A moving party may be entitled to judgment as a matter of law under Civil Rule 56 in the absence of any genuine issue of material fact. Fed. R. Civ. P. 56. See Emmett v. Johnson , 532 F.3d 291, 297 (4th Cir. 2008) (citing Celotex Corp. v. Catrett , 477 U.S. 317, 322–23, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986) ). See also Guessous v. Fairview Prop. Inv., LLC , 828 F.3d 208, 216 (4th Cir. 2016) (discussing standards for summary judgment). "When a party has submitted sufficient evidence to support its request for summary judgment, the burden shifts to the nonmoving party to show that there are genuine issues of material fact." Emmett , 532 F.3d at 297. Courts generally will grant summary judgment "unless a reasonable jury could return a verdict for the nonmoving party on the evidence presented." Stanley Martin Cos. v. Universal Forest Prods. Shoffner LLC , 396 F.Supp.2d 606, 614 (D. Md. 2005) (citations omitted).

A court must view the evidence on summary judgment in the light most favorable to the nonmoving par...