In re Lynch

315 B.R. 173

In re Michael R. LYNCH, Debtor Betty Bryant as Conservator for Everald Grace Nichols, Plaintiff, v. Michael R. Lynch, Defendant.

Bankruptcy No. 01-21790 EEB. Adversary No. 01-1530 EEB.

United States Bankruptcy Court, District of Columbia.

September 22, 2004.

John L. Latta, John Case, Benson & Case, LLP, Denver, CO, for Plaintiff.

Michael R. Lynch, Bent County Correctional Facility, Las Animas, CO, pro se.

ORDER

ELIZABETH E. BROWN, Bankruptcy Judge.

THIS MATTER comes before the Court on the Defendant's Motion for Summary Judgment (the "Motion"), Plaintiffs Response, and Defendant's Reply, and on Plaintiffs Cross Motion for Summary Judgment (the "Cross Motion"), Defendant's Response, Plaintiffs Response to Order March 9, 2004, the Affidavit and Supplemental Affidavit of Defendant, and Plaintiffs Motion to Supplement Plaintiffs Response to Order March 9, 2004. The Court being otherwise advised in the premises, hereby FINDS and COCLUDES:

A. Background Facts

For purposes of ruling on the instant motions, the record considered by the Court is very sparse. It is comprised of copies of (1) the Amended Complaint, in Civil Action No. 00 CR 3757 (the "criminal action"), alleging theft and conspiracy to commit theft, of the Plaintiffs funds; (2) various jury instructions, including an instruction outlining the elements of theft under Colorado statute as applied to Defendant's alleged theft of Ms. Nichols' funds; (3) a Jury Verdict, finding Defendant guilty of theft in the criminal action; (4) a Judgment of Conviction, dated January 7, 2002, entered in the criminal action, imposing a sentence of incarceration on the Defendant of fourteen years; and (5) an Amended Judgment of Conviction, Sentence, dated May 20, 2003, in the criminal action, reducing the restitution award owed by Defendant from $161,192.00 to $160,989.26, and crediting Defendant with 556 days (as opposed to 58 days) served against a sentence of fourteen years. These filings show that the Defendant was convicted of the theft of Plaintiffs money, sentenced to fourteen years, and ordered to pay restitution in the amount of $160,989.26. It is undisputed that Defendant has appealed his conviction, which appeal remains pending, but which has not been stayed on appeal.

On the basis of these facts, in his Motion, Defendant has argued that the Court should enter summary judgment, dismissing the sole claim of Plaintiffs Amended Complaint, under Section 523(a)(4). His sole argument for dismissal is based on his allegation that a claim under this section requires that Plaintiff establish: (1) the existence of a "fiduciary relationship," within the meaning ascribed by the Tenth Circuit in In re Young, 91 F.3d 1367 (10th Cir.1996); and (2) an act of fraud or defalcation committed by the debtor/fiduciary. Plaintiff has responded by stating, among other things, that Section 523(a)(4) also includes acts of larceny and embezzlement as nondischargeable claims, which do not require a showing of a fiduciary relationship.

In her Cross Motion, Plaintiff seeks the entry of summary judgment on the basis that the prior criminal conviction precludes the Court from retrying the factual issues underlying her larceny claim, and requires the Court to enter judgment in her favor under Section 523(a)(4) for "larceny." The Defendant disputes that collateral estoppel applies to his prior conviction because: (1) Plaintiff was not a party to the criminal action; (2) his conviction is on appeal; and (3) he was convicted of "theft" not "larceny."

B. Section 523(a)(4) and Collateral Estoppel

A claim for nondischargeability under Section 523(a)(4) may rest on proof of larceny or embezzlement, without requiring proof of a fiduciary relationship. In re Wallace, 840 F.2d 762, 765 (10th Cir.1988). In other words, Section 523(a)(4) states three separate grounds for nondischargeability: (1) a claim for fraud or defalcation while acting in a fiduciary capacity, (2) embezzlement, and (3) larceny. Plaintiffs claim of larceny is sufficient to satisfy Section 523(a)(4) and, therefore, Defendant's Motion must be denied.

In determining the Cross Motion, the Court must consider whether Defendant's prior criminal conviction is sufficient to establish her claim of larceny. In a nondischargeability action under Section 523, the bankruptcy court makes the determination as to whether a particular debt is dischargeable. In making this determination, however, the doctrine of collateral estoppel may be invoked to bar relitigation of factual issues underlying the determination. In re Wallace, 840 F.2d 762 (10th Cir.1988). Collateral estoppel precludes relitigation of factual issues if:

(1) the issue to be precluded is the same as that involved in the prior state action,

(2) the issue was actually litigated by the parties in the prior action, and (3) the state court's determination of the issue was necessary to the resulting final and valid judgment.

Id. at 765.

1. Mutuality of the Parties

The Defendant argues that the Court cannot give preclusive effect to his criminal conviction because Plaintiff was not a party to the criminal action. In Colorado and the Tenth Circuit, however, the requirement of strict mutuality of parties has been abolished. The evolution of the mutuality requirement in the use of collateral estoppel is detailed in Glosser v. Posner (In re Ivan F. Boesky Securities Litigation), 848 F.Supp. 1119, 1122-23 (S.D.N.Y.1994):

Until relatively recently, the use of collateral estoppel was limited by the requirement of "mutuality," whereby neither party could use a prior judgment as an estoppel against the other unless both parties were bound by the prior judgment. See Parklane Hosiery v. Shore, 439 U.S. 322 at 326, 99 S.Ct. at 649, 58 L.Ed.2d 552 (1979) (describing end of mutuality limitation); 10 Louis Loss & Joel Seligman, Securities Regulation 4757 (3d ed.1993) (recounting how "the mutuality dam burst"). Moreover, even after the mutuality requirement was abolished, a distinction was made between defensive and offensive use of collateral estoppel. Defensive use of collateral estoppel precludes a plaintiff, who has lost in a prior action, from relitigating issues by merely naming a new adversary. Offensive use of collateral estoppel permits a plaintiff, who was not party to the prior action, to estop a defendant from relitigating issues which the defendant litigated and lost in the prior action.

The Tenth Circuit has permitted the use of offensive non-mutual collateral estoppel. See State Farm Fire & Casualty Co. v. Mhoon, 31 F.3d 979, 985-86 (10th Cir.1994)(observing that New Mexico jurisprudence, like federal law, approves the use of non-mutual offensive collateral estoppel and that a jury in a prior criminal case had already determined defendant's actions to be intentional). Colorado courts also allow the use of collateral estoppel without requiring strict mutuality of parties. See Antelope Co. v. Mobil Rocky Mountain, Inc., 51 P.3d 995, 1003 (Colo.App.2001)(employing offensive use of nonmutual collateral estoppel); Central Bank of Denver v. Mehaffy, 940 P.2d 1097 (Colo.App.1997)(discussing application of defensive and offensive use of nonmutual collateral estoppel, and applying defensive nonmutual collateral estoppel).

In the present case, Plaintiff seeks to employ collateral estoppel against the Defendant offensively. This use of collateral estoppel is not prohibited in this jurisdiction. Nor does its use in this particular case offend the requirements of due process. The Defendant has already had a full and fair opportunity in the criminal action to litigate the factual issues raised in this case. Since the prior litigation was a criminal proceeding and the potential jail sentence was substantial, the Defendant had sufficient motivation to defend the prior action.

2. Finality of the Prior Judgment

Defendant argues that the Court cannot give preclusive effect to his criminal conviction because it is on appeal. Plaintiff asserts that an otherwise final judgment is effective for purposes of collateral estoppel, even if it is on appeal. The clear weight of authority supports Plaintiffs position.

Under federal law, the pendency of an appeal does not alter the finality of a judgment for purposes of collateral estoppel or res judicata, unless the appeal removes the entire case to the appellate court and constitutes a proceeding de novo. See, e.g., Ruyle v. Continental Oil Co., 44 F.3d 837, 846 (10th Cir.1994); Bui v. IBP, Inc., 205 F.Supp.2d 1181, 1189 (D.Kan.2002). Although the Colorado Supreme Court has not expressly ruled on the issue, the Colorado Court of Appeals has adopted the same rule as the federal courts. Miller v. Lunnon, 703 P.2d 640, 643 (Colo.App.1985). The Miller Court relied, in part, on an earlier decision in an administrative appeal in Jefferson County School Dist. No. R-l v. Indus. Comm'n, 698 P.2d 1350 (Colo.App.1984), which, in looking at the collateral estoppel effect of a judgment before an administrative proceeding, held:

The law on this subject is not uniform in other jurisdictions, but we believe that the better rule has been adopted by the federal courts. Under this rule it is presumed that, even though pending appeal, a decision rendered by a competent tribunal is correct. Kurek v. Pleasure Driveway & Park District, 557 F.2d 580 (7th Cir.1977); United States v. Abatti, 463 F.Supp. 596 (S.D.Cal.1978); Rust v. First National Bank, 466 F.Supp. 135 (D.Wyo.1979); Denham v. Shellman Grain Elevator, Inc., 444 F.2d 1376 (5th Cir.1971). Some states also follow this principle. See also Restatement (Second) of Judgments § 13 comments f and g (1982). We adopt this rule and hold that the pendency of a review proceeding does not suspend the operation of an otherwise final administrative action unless the review removes the entire case to the appellate court for de novo consideration or is suspended by a supersedeas order.

698 P.2d at 1352-53 (citation...