In re Robben

In re: PAUL J. ROBBEN, DEBTOR.

No. 13-20814

United States Bankruptcy Court, D. Kansas

March 17, 2022

CHAPTER 7

MEMORANDUM OPINION AND ORDER GRANTING THE BARTLETT PARTIES' MOTION TO MODIFY THE DISCHARGE INJUNCTION TO ADJUDICATE CLAIMS IN STATE COURT

Since at least 2013, the Bartlett Parties^[1] have sought recovery from Debtor Paul J. Robben^[2] for losses incurred as a result of investments they made in 2008 in a failed real estate development managed by Debtor. The Bartlett Parties' goals are to obtain jury trial verdicts against Debtor in a nonbankruptcy court on state law tort claims and then to obtain a ruling in the adversary proceeding they filed in 2013 that the resulting judgments are excepted from discharge under various sections of § 523.^[3] Since Debtor was granted a discharge in 2014 under § 727, these goals can be accomplished only if this Court modifies the discharge injunction. The Court previously amended the injunction to allow litigation in federal district court. But that action was dismissed without a ruling on state law claims. After the dismissal was affirmed and with leave of this Court, the Bartlett Parties filed their claims in Johnson County, Kansas District Court. They now seek leave to litigate those claims to judgment. Although this matter has been pending for far too long, the Court finds that, despite the resulting additional delay, the best path is to grant relief from the discharge injunction to permit the Bartlett Parties to litigate their state law claims pending against Debtor in the Johnson County, Kansas District Court and to stay the dischargeability adversary proceeding until such proceedings are final.

I. Factual Background

The Bartlett Parties first asserted claims against the Debtor Paul J. Robben ("Robben") in federal district court in 2013. As a consequence, Robben filed for relief under Chapter 7 on April 3, 2013. The Bartlett Parties responded by filing an adversary proceeding to except their claims against Robben from discharge under § 523 (the "Dischargeability Complaint").^[4] The Dischargeability Complaint seeks only rulings on dischargeability and does not pray for rulings of this Court on Robben's liability or damages.

An unopposed motion for relief from stay to continue the federal district court litigation was granted. Thereafter, in 2014 Robben was granted a discharge, except as to those debts the Bankruptcy Court specifically finds are not dischargeable. In 2015, the Bartlett Parties filed a 32 count amended complaint in Kansas federal district court against Robben under state law tort claims, the Securities Exchange Act of 1934, and the Kansas Uniform Securities law. A jury trial was demanded.

This Court's order on the Bartlett Parties' first motion to modify the discharge injunction imposed by § 524(a)(2) was entered in January 2017. The order allowed the Bartlett Parties to pursue their claims against Robben in the federal district court that have elements that are the same as the exceptions to discharge in the sections of § 523 relied upon in the Dischargeability Complaint. Discovery was completed in the federal court litigation. Dispositive motions were filed. The district court ruled adversely to the Bartlett Parties on the federal securities law claim, the only claim within the original subject matter jurisdiction of the federal court, and declined to exercise supplemental jurisdiction over the remaining state law claims.

In response, the Bartlett Parties moved for relief from the discharge injunction to allow the filing of a petition in Johnson County, Kansas District Court asserting the state law claims that had been dismissed by the federal court. This Court granted the motion in October 2018, ruling that the Bartlett Parties could file the state court petition but not proceed with litigation, other than the filing and service of the proposed complaint, absent further order of this Court. The petition (the "Johnson County Petition") was filed on August 22, 2018. It alleges 14 counts against Robben, some claims against RDC, a limited liability company whose only member is Robben, and demands a jury trial.^[5]

The dismissal of the federal court action became final in 2021, after being affirmed by the Tenth Circuit Court of Appeals and denial of a petition for certiorari to the United States Supreme Court. This Court then held a status conference. Robben timely filed a motion for summary judgment, which was denied. The Bartlett Parties now seek modification of the discharge injunction to allow them to pursue the claims asserted against Robben in the Johnson County Petition and a stay of the Dischargeability Proceedings until such determination.

II. Analysis

A. The Parties' Positions

In support of their motion for modification of the discharge injunction, the Bartlett Parties rely on the same factors which supported modification of the injunction in 2017, when they sought leave to pursue the federal district court litigation.

Robben responds that much has changed since the injunction was modified in 2017. He asks this Court to deny the motion because "it will be more efficient and economical to conduct one trial in bankruptcy court on all aspects of this case (dischargeability, liability. . ., and damages)."^[6]

B. Modification of the discharge injunction

When granting the Barlett Parties' motion for modification of the discharge injunction in 2017, this Court held that the factors relevant to stay relief under § 362 control and, in the absence of Tenth Circuit precedent, applied the factors identified in Curtis.^[7] Factors one, ten, eleven, and twelve were found most relevant. Those factors are:

(1) Whether the relief will result in a partial or complete resolution of the issues.

(10) The interest of judicial economy and the expeditious and economical determination of litigation for the parties.

(11) Whether the foreign proceedings have progressed to the point where the parties are prepared for trial.

(12) The impact of the stay on the parties and the "balance of hurt."^[8]

More than five years have passed since this Court held these factors supported modification to allow the Bartlett Parties to pursue their claims against Robben in federal court.

The first, tenth, and eleventh factors continue to support modification. Now, as before, neither denial nor granting of the motion will result in complete resolution of the issues in a single court. This Court has exclusive jurisdiction over dischargeability under §§ 523(a)(2), (a)(4), and (a)(6); if the motion is granted, the state court cannot rule on dischargeability. If the motion is denied, this Court cannot grant the relief sought by the Bartlett Parties in state court. The Dischargeability Complaint does not seek a ruling on liability and damages. In addition, the Bartlett Parties have steadfastly sought a jury trial on liability and damages. Even if liability, damages, and dischargeability were at issue in the Dischargeability Complaint, absent the parties' consent, which has not been given, ^[9] this Court could not conduct a jury trial, as demanded by the Bartlett Parties in the Johnson County Petition on the issues of liability and the amount of damages.^[10]

When opposing modification of the injunction, Robben suggests that this Court has jurisdiction to determine both his liability on the Bartlett Parties' claims and the dischargeability of those claims. This Court is not convinced.^[11] First, as stated above, the Dischargeability Complaint does not seek a ruling on liability and damages, and this Court knows of no basis to require the Bartlett Parties to supplement the relief sought. Second, absent consent, this Court's jurisdiction to enter a money judgment against Robben is uncertain. Although Tenth Circuit authorities holding that a bankruptcy court has jurisdiction to enter a money judgment on a state law claim as part of dischargeability litigation have not been reversed, ^[12] this position is now questionable. Collier states, "the historical justification for the exercise of bankruptcy jurisdiction to enter money judgments in nondischargarebility proceedings is questionable following the Supreme Court's decision in Stern v. Marshall . . . Thus, unless the parties consent, the entry of such judgments by a bankruptcy judge likely is improper."^[13] Adopting a controversial position on jurisdiction would be an invitation to further prolong this litigation.

The tenth factor, judicial economy and the expeditious determination of the litigation, favors modification of the discharge injunction. To the extent the Bartlett Parties do not prevail on their state law claims against Robben, the need for a decision on dischargeability will be eliminated. To the extent the Bartlett Parties do prevail in state court and the specific findings supporting liability are properly documented, the collateral estoppel effect of findings of fact in state court should simplify the dischargeability trial.

As to the eleventh factor relevant to modification of the injunction, readiness of the nonbankruptcy proceedings for trial, the Court has been advised that discovery on the state law claims was completed while the dispute was pending in federal court. The Johnson County Petition should be ready for trial.

The twelfth factor requires consideration of the impact of the lifting of the injunction on the parties and the "balance of hurt." As it was when ruling in 2017, this factor is difficult to evaluate. However, overall, the Court believes that the orderly decision of the dispute, with liability and damages being decided before dischargeability, actually avoids harm to both parties.

The Court therefore modifies the discharge injunction, but as previously held, such modification is granted...