Heck v. Adamson

UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF COLUMBIA
In re
WILLIAM C. ADAMSON,
Debtor.
____________________________
BRIAN T. HECK,
Plaintiff,
v.
WILLIAM C. ADAMSON,
Defendant.
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Case No. 09-00623
(Chapter 7)
Adversary Proceeding No.
09-10042
Not for Publication in
West’s Bankruptcy Reporter
MEMORANDUM DECISION RE MOTION TO DISMISS COMPLAINT
This addresses the defendant’s motion to dismiss the
complaint under Fed. R. Civ. Proc. 12(b)(6). 	For the reasons set
forth below, I will deny the motion.
I
On July 20, 2009, the debtor, William Adamson, filed a
voluntary petition for bankruptcy under chapter 7 of the
Bankruptcy Code (11 U.S.C). 	Thereafter, the plaintiff, Brian
Heck, instituted the above-captioned adversary proceeding seeking
The document below is hereby signed.
Signed: June 27, 2010.
_____________________________
S. Martin Teel, Jr.
United States Bankruptcy Judge
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to have the court declare his claim non-dischargeable under
§ 523(a)(2), (4) and (6) and further rule that a constructive
trust imposed by a judgment was unaffected by Adamson’s
bankruptcy discharge, and that a related lis pendens remains in
place. 	The facts as alleged in the plaintiff’s complaint are as
follows.
Adamson and Heck were in a romantic relationship from 2002
to 2005. 	During the relationship they lived together in a
condominium at 2141 P Street, NW #506 (“P Street Property”). 	In
2002 Adamson signed, but did not record, a quitclaim deed naming
Heck as a grantee of the P Street Property. 	Shortly thereafter,
the parties refinanced the P Street Property placing both names
on the mortgage and Heck began paying half of all the mortgage
payments thereafter.
In February 2005 the relationship ended and the parties
orally agreed that the P Street Property would be sold and the
proceeds split evenly. 	In reliance on this agreement, Heck
continued to make monthly mortgage, insurance, tax and
condominium fee payments from the time he moved out in April 2005
until the property was sold in November 2005. 	Leading up to the
sale, Adamson continued to reassure Heck that he would receive
half the proceeds from the sale and relying on these assurances
Heck did not file a notice of lis pendens. 	On November 18th,
2005, Adamson sold the P Street Property and ten days later used
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1 	It appears that the property subject to the constructive
trust may be worth less than the liens on the property, such that
a constructive trust would yield Heck nothing.
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the proceeds to buy a house at 2332 Naylor Road, SE Washington,
DC (“Naylor Road Property”). 	Instead of informing Heck of the
sale or his new purchase, Adamson told Heck’s agent on November
28th that the closing for the P Street Property kept being put
off and had not yet happened.
On May 9, 2006, Heck filed a complaint against Adamson for
breach of contract, conversion, fraud, estoppel, constructive
trust and unjust enrichment in the Superior Court of the District
of Columbia. 	On February 25, 2008, Judge Odessa Vincent entered
a judgment awarding $87,217.50 in damages against Adamson in
favor of Heck for the breach of contract and conversion claims
and imposing a constructive trust in favor of Heck against the
Naylor Road Property.
II
Adamson does not contend that the claim relating to the
constructive trust and the lis pendens should be dismissed, but
instead seeks dismissal of the § 523(a)(2), (4), and (6) claims. 1
In his motion to dismiss Adamson sets forth three bases for
dismissal: res judicata (claim preclusion), collateral estoppel
(issue preclusion), and the statute of limitations. 	I will
address each in turn.
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A.
Adamson first bases his motion to dismiss on the doctrine of
res judicata, or claim preclusion. 	Specifically, Adamson argues
that Heck’s non-dischargeability complaint is barred because he
previously filed a complaint in the D.C. Superior Court on the
same set of facts, and did not, for example, include fraud in a
fiduciary capacity as a basis for that complaint.
Section 523(c)(1) gives the bankruptcy courts exclusive
jurisdiction to determine the dischargeability of debts excepted
from discharge under paragraph (2), (4) or (6) of section 523(a).
4 Collier on Bankruptcy ¶523.29 (Alan N. Resnick & Henry J.
Sommer eds., 16th ed.); see also In re DiGeronimo, 354 B.R. 625,
639 (Bankr. E.D.N.Y. 2006) (Section 523(c) vests “the Bankruptcy
Courts exclusive jurisdiction to make determinations of
non-dischargeability under Sections 523(a)(2), (4), (6), or
(15)”). 	Because Heck could not have brought a dischargeability
action in D.C. Superior Court under § 523(a)(2), (4) or (6) of
the Bankruptcy Code, his claim is not barred by res judicata and
Adamson’s motion to dismiss on this basis fails.
Furthermore, the Supreme Court has recognized the uniqueness
of non-dischargeability actions in bankruptcy and exempted them
from the doctrine of res judicata stating that “neither the
interests served by res judicata . . . 	nor the policies of the
Bankruptcy Act would be well served by foreclosing petitioner
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from submitting additional evidence to prove his case.” 	Brown v.
Felsen, 442 U.S. 127, 132 (1979). 	The Court viewed a non-
dischargeability action as a creditor’s attempt to meet “the new
defense of bankruptcy which [debtor] has interposed between [him]
and the sum determined to be due him,” rather than an attack on
the validity of the prior state court judgment. Id. at 133.
Thus, the Court concluded that the “fact that a conscientious
creditor has previously reduced his claim to judgment should not
bar further inquiry into the true nature of the debt,” and thus,
“the bankruptcy court is not confined to a review of the judgment
and record in the prior state court proceeding when considering
the dischargeability [of a debt].” Id. at 138-39.
While Heck’s non-dischargeability claim arises from the same
set of facts as the previous litigation in D.C. Superior Court,
the case law is clear that such non-dischargeability actions are
not barred by res judicata.
B.
Adamson next argues that the doctrine of collateral
estoppel, or issue preclusion, should bar certain issues from
being relitigated. 	Specifically, Adamson is concerned about the
relitigation of any claim of fraud. 	He argues that Heck should
not be able to relitigate fraud or any claim that may have
elements of fraud in this proceeding because Judge Vincent struck
the fraud claim in a directed verdict in D.C. Superior Court.
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In Brown v. Felsen, discussed above, the Supreme Court noted
that its decision only concerned res judicata and not the
narrower principle of collateral estoppel. Id. at 129 n.10. 	In
Grogan v. Garner, the Supreme Court clarified that “collateral
estoppel principles do indeed apply in discharge exception
proceedings pursuant to § 523(a).” 	498 U.S. 279, 285 n.11
(1991). 	The Court did not explicitly say what those principles
were, but it did reference the Restatement (Second) of Judgments
(1982). Id. 284. 	Section 28 of the Restatement says that
“[a]lthough an issue is actually litigated and determined by a
valid and final judgment, and the determination is essential to
the judgment, relitigation of the issue in a subsequent action
between the parties is not precluded in the following
circumstances: . . . (4) The party against whom preclusion is
sought had a significantly heavier burden of persuasion with
respect to the issue in the initial action than in the subsequent
action; the burden has shifted to his adversary; or the adversary
has a significantly heavier burden than he had in the first
action.” 	Restatement (Second) of Judgments § 28 (1982). 	Shortly
after the Supreme Court’s Grogan 	decision, the Eleventh Circuit
ruled that “the principle of collateral estoppel dealing with
differences in the burdens of persuasion must be included . . .
in our list of collateral estoppel requirements.” 	In re Yanks,
931 F.2d 42, 43 (11th Cir. 1991). 	The D.C. Circuit has also
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2 This court is required to apply the collateral estoppel
law of the District of Columbia, as the judgment at issue was
entered by a court of the District of Columbia. 	See Stanton v.
District of Columbia Court of Appeals, 127 F.3d 72, 77 (D.C. Cir.
1997). 	This is not altered by the litigation being bankruptcy
dischargeability litigation. 	The federal courts routinely apply
to bankruptcy dischargeability litigation the rule under such
decisions as Migra v. Warner City Sch. Dist. Bd. of Educ., 465
U.S. 75, 81 (1984), that a federal court must apply the
collateral estoppel law of the state in which the judgment at
issue was rendered. 	See, e.g., Gayden v. Nourbakhsh (In re
Nourbakhsh), 67 F.3d 798, 800 (9th Cir. 1995); Rally Hill
Productions, Inc. v. Bursack (In re Bursack), 65 F.3d 51, 53 (6th
Cir. 1995).
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adopted this view stating that “[c]ogent precedent supports the
position that preclusive effect should not be given to the first
determination when the party sought to be precluded had a heavier
burden (or his adversary had a lighter burden) in the first
proceeding than in the second.” 	Whelan v. Abell, 953 F.2d 663,
668 (D.C. Cir. 1992) (internal quotations omitted). 	The District
of Columbia Court of Appeals follows the same approach. See
$345.00 in U.S. Currency v. District of Columbia, 544 A.2d 680,
682 n.6 (D.C. 1988); Ringgold v. District of Columbia Dept. of
Emplymt. Servs., 531 A.2d 241, 243 n.3 (D.C. 1987); Evans v.
United States, 417 A.2d 963, 964 n.4 (D.C. 1980). 2
In In re Chivers the court was confronted with the same
argument presented by Adamson in this case. 275 B.R. 606 (Bankr.
D. Utah 2002). 	In that case, the debtor argued that allegations
of false representations and false pretenses were subsumed in the
elements of actual fraud, and that previous litigation on a fraud
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count in state court, which he successfully defended against,
should estop a creditor from bringing a non-dischargeability
claim under § 523(a)(2). Id. at 618.
The court’s ruling rested on the difference between the
standard of proof needed to support a Utah fraud count and the
standard needed to win a dischargeability action under
§ 523(a)(2). 	In bankruptcy the “standard of proof for
dischargeability exceptions in 11 U.S.C. § 523(a) is the ordinary
preponderance-of-the-evidence standard.” 	Grogan, 498 at 291. In
Utah, however, the standard of proof for fraud is clear and
convincing evidence. 	Faced with these different standards, the
court ruled that the previous state court action would not be
given preclusive effect because “while the evidence against [the
debtor] in the District Court Action was insufficient to meet the
clear and convincing standard, it may be sufficient to meet the
lesser preponderance standard in order to satisfy the
requirements of § 523(a)(2)(A).” Id. at 618.
This court is faced with a similar situation in the present
case. 	The standard of proof for fraud under D.C. law is clear
and convincing evidence, In re Estate of Nethken, 978 A.2d 603,
607 (D.C. 2009), while per Grogan the standard in a
dischargeability action is preponderance-of-the-evidence. 	Thus,
the D.C. Superior Court’s finding that there was not clear and
convincing evidence to establish fraud against Adamson does not
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control the outcome in a § 523(a)(2) dischargeability action in
which the evidentiary standard is preponderance-of-the-evidence.
Adamson also argues that Judge Vincent’s refusal to award
punitive damages establishes that Heck did not sufficiently prove
the element of malice, which must be found to award punitive
damages. 	If Heck were precluded from relitigating the issue of
malice then his claim of non-dischargeability under § 523(a)(6)
would fail. Like fraud, however, proof by clear and convincing
evidence is required to award punitive damages under D.C. law,
Jonathan Woodner Co. v. Breeden, 665 A.2d 929, 937 (D.C. 1995),
and again, Grogan governs the standard of proof in
dischargeability actions. 	Thus, any D.C. Superior Court findings
on the claims for punitive damages or fraud cannot be given
preclusive effect in this dischargeability action since a higher
standard of proof was applied in the previous litigation.
Heck has also sued for a determination that the debt is
nondischargeable under § 523(a)(4) as one for fraud or
defalcation in a fiduciary capacity. 	The Superior Court
dismissed Heck’s fraud claim on the basis that no fraud occurred,
and if Heck is asserting the same factual grounds for fraud in a
fiduciary capacity, he would be precluded under state law from
obtaining a judgment for fraud in a fiduciary capacity. 	If a
judgment for a monetary recovery based on fraud in a fiduciary
capacity is barred, there cannot be a nondischargeable debt for
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fraud in a fiduciary capacity. 	In his motion, Adamson summarizes
the fraud allegations in the Superior Court, but he has neglected
to file a copy of the complaint in the Superior Court. 	So we do
not know whether the claims of fraud in the Superior Court match
the claims of fraud in a fiduciary capacity in this court.
Moreover, § 523(a)(4) makes nondischargeable as well any debt for
defalcation in a fiduciary capacity. 	“[A] ‘defalcation’ for
purposes of this statute does not have to rise to the level of
‘fraud,’ ‘embezzlement,’ or even ‘misappropriation.’” 	Quaif v.
Johnson, 4 F.3d 950, 955 (11th Cir. 1993) (citing Central Hanover
Bank & Trust Co. v. Herbst, 93 F.2d 510, 512 (2d Cir. 1937)
(Learned Hand, J.)). 	Accordingly, if the debt arose from
defalcation in a fiduciary capacity, collateral estoppel does not
bar Heck’s § 523(a)(4) claim.
Heck also asserts that the claim is nondischargeable under
§ 523(a)(4) as a debt for larceny. 	Adamson contends that fraud
is an element of larceny, citing United States v. Dixon, 469 F.2d
940 (D.C. Cir. 1972), and that Heck could not recover a monetary
judgement for larceny because his fraud claims have been
dismissed. 	But Heck did not sue on larceny in the Superior
Court, and we do not have the complaint in the Superior Court to
enable us to ascertain whether the allegations of fraud in the
Superior Court match the fraud upon which Heck would rely in
seeking to bar dischargeability based on larceny.
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C.
The last argument Adamson makes is that the statute of
limitations has run on Heck’s claim that Adamson breached a
fiduciary duty. 	Heck is not filing an independent action for
breach of fiduciary duty in a state court, but rather opposing
the discharge of a debt under § 523(a)(4), which provides that a
debt for fraud or defalcation while acting in a fiduciary
capacity is not dischargeable. 	If Heck can establish that
Adamson’s debt arose from fraud or defalcation while acting in a
fiduciary capacity, res judicata will not bar the § 523(a)(4)
claim for reasons previously discussed. 	Pursuant to Rule 4007(c)
of the F. R. Bankr. P., a complaint to determine the
dischargeability of a debt under § 523(a)(4) must generally be
filed no later than 60 days after the first date set for the
meeting of the creditors under § 341(a). 	In this case, the
creditors’ meeting was held on August 27, 2009, making the
deadline to oppose dischargeability October 26, 2009. 	Heck’s
complaint was filed on that day and, therefore, was timely filed.
III
The doctrine of res judicata, or claim preclusion, does not
apply to non-dichargeability proceedings in a bankruptcy case.
Collateral estoppel does apply, but in this case the
prerequisites for applying it are not satisfied since the
standard of proof for the issue sought to be precluded is lower
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12	O:\TEEL\Trentman\Adamson Motion to Dismiss3.wpd
in bankruptcy than in the previous forum. 	The claims in this
adversary proceeding were also brought within the applicable
statute of limitations.
IV
Pursuant to the foregoing, it is
ORDERED that the defendant’s motion to dismiss is denied.
[Signed and dated above.]
Copies to: All counsel of record.
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