Glenn S. Morris & the Glenn S. Morris Trust v. Charron (In re Charron)

541 B.R. 656

In re: David W. Charron, Debtor.Glenn S. Morris and The Glenn S. Morris Trust, Plaintiffs,

v.David W. Charron, Defendant.

Case No: BG 14–07970

Adversary Proceeding No. 15–80086

United States Bankruptcy Court, W.D. Michigan.

Signed September 30, 2015

Ronald A. Spinner, Esq., Detroit, Michigan, attorney for Glenn S. Morris and the Glenn S. Morris Trust, Plaintiffs.

Perry G. Pastula, Esq., Wyoming, Michigan, attorney for David W. Charron, Debtor–Defendant.

OPINION DENYING DEFENDANT'S MOTION FOR SUMMARY JUDGMENT AND GRANTING PLAINTIFFS' CROSS MOTION FOR SUMMARY JUDGMENT

James W. Boyd, United States Bankruptcy Judge

I. INTRODUCTION AND ISSUE PRESENTED.

This adversary proceeding arises from prepetition litigation that the Kent County Circuit Court described as “protracted,” “ruinous,” and a “testament to the folly of all-out warfare in the civil justice system.”¹During the course of that litigation, David W. Charron (the “Debtor” or “Attorney Charron”), as lead counsel for one or more of the parties, was held in civil contempt for violating a court order and was ordered to pay Glenn S. Morris (collectively, in his individual capacity and as trustee for The Glenn S. Morris Trust, the “Plaintiff” or “Morris”) $363,506.77 in civil contempt sanctions. In this adversary proceeding, Morris seeks a determination that the civil contempt sanctions are excepted from the Debtor's chapter 7 discharge under § 523(a)(6) of the Bankruptcy Code.²

The Debtor has filed a motion for summary judgment, arguing that the contempt award was not compensation for injury to the Plaintiff or his property, and is therefore dischargeable. The Plaintiff has filed a cross motion for summary judgment, asserting that the state court contempt judgment establishes the “willful” and “malicious” nature of the debt under § 523(a)(6)and the doctrine of collateral estoppel. For the reasons that follow, the court shall deny the Defendant's motion for summary judgment and grant the Plaintiff's cross motion.

II. JURISDICTION.

The court has jurisdiction over this bankruptcy case. 28 U.S.C. § 1334. The bankruptcy case and all related proceedings have been referred to this court for decision. 28 U.S.C. § 157(a); L. Civ. R. 83.2(a) (W.D.Mich.). This nondischargeable debt action is a statutory core proceeding and this court has constitutional authority to enter a final order. 28 U.S.C. § 157(b)(2)(I)(determinations as to the dischargeability of certain debts); see, e.g.,Hart v. Southern Heritage Bank (In re Hart),564 Fed.Appx. 773, 776 (6th Cir.2014)(unpublished opinion) (notwithstanding the Supreme Court's decision in Stern v. Marshall,––– U.S. ––––, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011), the bankruptcy court has “constitutional authority to enter a final money judgment in a dischargeability action”). Further, even Stern claims may be decided by bankruptcy courts if the parties consent. Wellness Int'l Network, Ltd. v. Sharif,––– U.S. ––––, 135 S.Ct. 1932, 191 L.Ed.2d 911 (2015). While this is not a Stern claim, the parties have consented to this court entering a final order in this adversary proceeding. See Plaintiff's Complaint, AP Dkt. No. 1 at ¶ 3 (expressly consenting to entry of a final order); Defendant's Motion for Summary Judgment, AP Dkt. No. 4 at 1 & n.1 (stating that this is a core proceeding and referencing Plaintiff's jurisdictional statement).

III. FACTS AND PROCEDURAL BACKGROUND.

The contempt order at issue in this adversary proceeding arises from the Debtor's representation of R. Judd Schnoor (“Schnoor”) and the insurance agency of Morris, Schnoor & Gremel, Inc. (“MSG”) in various state court cases.³In July 2007, Morris filed a law suit in the Kent County Circuit Court, seeking dissolution of MSG, an entity which Morris and Schnoor owned as equal partners. (Exh. B at 2; Exh. H at 4.) The state court ultimately ordered Morris to sell his MSG stock to Schnoor for $2.5 million. (Exh. B at 2.) In return, Schnoor gave Morris a down payment of approximately $235,000 and a promissory note for the balance. (Id.at 2–3.) Morris retained a security interest in the MSG stock, but not the company's assets. (Id.at 3.)

Schnoor made some payments under the promissory note, but eventually became disgruntled with Morris and ceased making payments in the spring of 2008. (Id.) On August 20, 2008, the state court held a hearing to determine whether Schnoor should be held in contempt for his failure to make payments under the promissory note. (Id.) At the hearing, the parties agreed to entry of an order enjoining the transfer of MSG assets. (Id.) The Debtor appeared as counsel for Schnoor at the hearing. (Id.) When the court asked him if he had any objection to “maintaining the status quo for a week or two,” the Debtor responded, “Not for a week or two, your Honor.” (Id.) Consistent with the parties' agreement, the state court entered an order on August 22, 2008, stating:

IT IS FURTHER ORDERED that Defendant R. Judd Schnoor shall not transfer assets of Morris, Schnoor & Gremel, Inc., outside the ordinary course of business without authorization from the Court to do so.

(Id.at 4, sometimes referred to herein as the “Injunctive Order”.) At a subsequent hearing, counsel for Morris requested that the August 22, 2008, order remain in effect until further order of the court. (Id.) No party, including the Debtor, objected, and the state court granted that request. (Id.) In so doing, the court noted that the Injunctive Order, as originally drafted, did not contain any time restrictions and was intended to continue until the court ordered otherwise. (Id.)

While the state court action against Schnoor remained pending, and despite the court order enjoining the transfer of MSG's assets, Schnoor and the Debtor undertook efforts to sell MSG's assets to a friendly buyer. (Id.) In November 2008, the assets were transferred to New York Private Insurance Agency, LLC (“NYPIA”), in transactions orchestrated by the Debtor and Schnoor. (Id.at 1, 4–6.) The Debtor's law firm, Charron & Hanisch, P.L.C. (“C & H”), “served as a middleman” in the sale by initially taking possession of MSG's assets pursuant to a security interest C & H held for repayment of attorney's fees. (Id.at 6.) After obtaining possession of the assets, C & H sold the assets to NYPIA. (Id.) When these transactions occurred, the August 22, 2008, Injunctive Order remained in effect. (Id.at 6.)

The transfer of the MSG assets triggered much subsequent litigation. In February 2009, the Plaintiff filed a verified complaint against MSG, C & H, NYPIA, and the Debtor individually in the state court, asserting fraudulent transfer, “commercially unreasonable sale,” fraud, and conversion causes of action relating to the transfer of the MSG assets to C & H and/or NYPIA. (Exh. G.) The Debtor filed a motion for summary judgment on the claims against him personally, and the state court granted that motion. The court held that, “[a]lthough Attorney David Charron was integrally involved in the transactions that gave rise to this lawsuit,” there was no basis on which to hold the Debtor personally liable for fraud or conversion of the MSG assets. (Exh. F at 10.) The dismissal of the claims raised by the Plaintiff against the Debtor in the 2009 lawsuit was upheld on appeal. (Exh. H.)

In addition, on May 19, 2011, the Kent County Circuit Court entered an order requiring Schnoor, MSG, the Debtor, C & H, and NYPIA to show cause why they should not be held in civil contempt for violating the Injunctive Order. (Exh. B at 1.) After holding a hearing and considering the parties' arguments, the state court issued a detailed Opinion and Order Setting Forth Findings of Civil Contempt against the Debtor, MSG, and C & H (the “Contempt Opinion”).⁴(Exh. B.)

In the Contempt Opinion, the state court specifically stated that it viewed the Debtor's possible violations of the Injunctive Order as being in the nature of civil contempt. (Id.at 10.) As to the applicable legal standard for a finding of civil contempt, the opinion explained that Michigan law requires “clear and unequivocal” proof of the contempt, but does not require a “finding of willful disobedience of a court order.” (Id.(citing In re Contempt of Robertson,209 Mich.App. 433, 439, 531 N.W.2d 763 (1995)and Davis v. Detroit Fin. Review Team,296 Mich.App. 568, 625, 821 N.W.2d 896 (2012).) Instead, the court indicated that to hold a party in civil contempt, it only needed to “ ‘find that the [alleged contemnor] was neglectful or violated its duty to obey an order of the court.’ ” (Id.at 10–11 (citing Contempt of United Stationers Supply Co.,239 Mich.App. 496, 501, 608 N.W.2d 105 (2000).)

Notwithstanding its explanation of the applicable legal standard, the state court's Contempt Opinion is replete with factual findings that the Debtor was aware of the Injunctive Order and knowingly undertook the sale of MSG's assets in violation of its terms. For example, the court found that “Attorney Charron and Judd Schnoor were acutely aware that the sale of MSG's assets violated the court order of August 22, 2008.” (Id.at 6.) The court further found “as a fact that they understood that the sale of MSG's assets ... in November 2008 violated that court order.” (Id.at 8.) As support for these findings, the court cited an October 14, 2008, email authored by the Debtor, which contained a “detailed explanation of the difficulties caused by the existing [Injunctive Order].” (Id.at 6.) The email acknowledges that the Injunctive Order requires court approval prior to any transfer of MSG's assets outside of the ordinary course of business. (Id.at 7.) Given this restriction, the Debtor's email suggests that there are two options: either file a motion to obtain court approval of the transfer or transfer the assets without court approval, and argue afterwards that the transfer was made “in the ordinary course.” (Id.) The court found that this email “[spoke] volumes about Attorney Charron's view of the propriety of his firm's sale”...