Metropolitan Health Corporation et al v. Scott

UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF NORTH CAROLINA
RALEIGH DIVISION
IN RE:
MARY THERESA SCOTT,
DEBTOR.
METROPOLITAN HEALTH CORPORATION
d/b/a METROPOLITAN HOSPITAL, a Michigan
corporation, and MICHAEL FAAS,
PLAINTIFFS
v.
MARY THERESA SCOTT,
DEFENDANT
CASE NO. 10-00794-8-JRL
Chapter 7
ADVERSARY PROCEEDING
NO. 10-00101-8-JRL
ORDER
This matter came before the court on the defendant’s motion to reconsider the court’s
order granting summary judgment in favor of the plaintiffs. A hearing was held on April 11,
2011, in Raleigh, North Carolina.
The defendant, Mary Scott, filed a voluntary chapter 7 bankruptcy petition on February 3,
2010. On May 5, 2010, the plaintiffs, Metropolitan Health Corporation (“Metropolitan
SO ORDERED.
SIGNED this 06 day of June, 2011.
________________________________________
J. Rich Leonard
United States Bankruptcy Judge
____________________________________________________________
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1One integral instance of employee misconduct was Ms. Scott’s alteration of board
meeting minutes that misrepresented what occurred and was in direct violation of protocol. The
tape recordings were of the meeting and proved that Ms. Scott’s alterations were misleading.
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Hospital”) and Michael Faas, filed the instant adversary proceeding to determine the
dischargeability of a debt owed to them. The debt is based on two orders issued in 2005 by the
United States District Court for the Western District of Michigan, requiring Ms. Scott to pay
$18,966.40 in statutory costs pursuant to 28 U.S.C. §1920 and $1,608,268.80 in attorneys’ fees
and expenses as sanctions for litigation misconduct. This court granted summary judgment in
favor of the plaintiffs on February 17, 2011, declaring the $1,608,268.80 sanctions debt
nondischargeable and the $18,966.40 in statutory costs dischargeable. The defendant now
requests the court reconsider its ruling regarding the dischargeability of the sanctions.
BACKGROUND
The sanctions issued against Ms. Scott were based on a lawsuit she filed for wrongful
termination. Ms. Scott received a percentage of a settlement of a qui tam action under the False
Claims Act (“FCA”), 31 U.S.C. §§ 3729 et seq., concerning false Medicare claims against
Metropolitan Hospital. The FCA contained an anti-retaliation provision to protect whistle
blowers such as Ms. Scott. When Ms. Scott was terminated from her employment with
Metropolitan Hospital, in the midst of the settlement, she filed the wrongful termination suit.
The anti-retaliation provision of the FCA allows for termination of employment where other,
non-discriminatory grounds for dismissal exist. The District Court not only found that these
non-discriminatory grounds existed, but that Ms. Scott knew of Metropolitan Hospital’s
legitimate reasons and failed to disclose tape recordings which established the legitimate
grounds. 1 Metropolitan Hospital moved for sanctions, attorneys’ fees and costs in light of Ms.
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After claiming she had lost the recordings, Ms. Scott later turned over the tapes, but only after
Metropolitan Hospital expended much time, effort and money litigating the suit.
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Scott’s misconduct. Ms. Scott’s delayed disclosure of the tapes and knowledge that her behavior
constituted legitimate grounds for dismissal were central to the District Court’s dispensation of
sanctions.
Ms. Scott later moved to North Carolina where she filed her chapter 7 petition with this
court. Metropolitan Hospital based its dischargeability action on 11 U.S.C. § 523(a)(6), arguing
that the sanctions awarded by the District Court constituted a debt incurred for a willful and
malicious injury caused by the debtor. This court found that it was collaterally estopped from
making its own determination as to the character of the debt because the District Court made
findings of fact that the sanctions were awarded as a result of Ms. Scott’s willful and malicious
conduct. Ms. Scott now moves that the court reconsider its ruling pursuant to Rule 59(e) of the
Federal Rules of Civil Procedure.
DISCUSSION
A party may move that the court amend an adverse judgment already entered against it
pursuant to Rule 59(e) if the court, in its discretion, finds there has been an intervening change of
controlling law, new evidence becomes available, or a need to correct a clear error or prevent
manifest injustice. Robinson v. Wix Filtration Corp. LLC, 599 F.3d 403, 411 (4th Cir. 2010).
The motion may not be used “to raise arguments which could have been raised prior to the
issuance of the judgment, nor may [it] be used to argue a case under a novel legal theory that the
party had the ability to address in the first instance.” Pacific Ins. Co. v. Am. Nat’l Fire Ins. Co.,
148 F.3d 396, 403 (4th Cir. 1998) cert. denied, 525 U.S. 1104 (1999). Ms. Scott requests the
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2Ms. Scott acknowledges that challenging the application of the elements is appropriate
as an appeal and not a Rule 59 motion.
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bankruptcy court’s judgment declaring the sanctions debt nondischargeable be reconsidered to
correct a clear error or prevent manifest injustice. In particular, Ms. Scott argues the court erred
not in the application of the elements of collateral estoppel, but in the determination that the
doctrine should be applied at all. 2
As discussed in the order granting summary judgment in favor of Metropolitan Hospital,
federal actions are given a preclusive effect when the following four elements are satisfied:
(1) the issue sought to be precluded was the same as that involved in the prior
action;
(2) that issue was actually litigated;
(3) it was determined by a valid and final judgment; and
(4) the determination was essential to the prior judgment.
Combs v. Richardson, 838 F.2d 112, 115 (4th Cir. 1988) (citing In re Ross, 602 F.2d 604, 607-08
(3rd Cir. 1979)). Yet, even where the elements of collateral estoppel are satisfied, the doctrine
should not be applied where it would be inequitable to do so. See, e.g., PenneCom B.V. v.
Merrill Lynch & Co., Inc., 372 F.3d 488, 493 (2d Cir. 2004) (“collateral estoppel is an equitable
doctrine–not a matter of absolute right”); Nations v. Sun Oil Co., 705 F.2d 742, 745 (5th Cir.
1983) (stating application of collateral estoppel “is controlled by the principles of equity”).
The discussion of whether application of collateral estoppel would be equitable is
influenced by the type of collateral estoppel at issue. Defensive collateral estoppel occurs when
“a defendant seeks to prevent a plaintiff from asserting a claim the plaintiff has previously
litigated and lost against another defendant.” Parklane Hosiery Co., Inc. v. Shore, 439 U.S. 322,
326 n.4 (1979). Offensive use occurs when “the plaintiff seeks to foreclose the defendant from
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litigating an issue the defendant has previously litigated unsuccessfully in an action against
another party.” Id. Mutual collateral estoppel, which can be either defensive or offensive,
occurs when the parties to the prior and present actions are identical. See id. at 326. Since
Metropolitan Hospital sought and was awarded sanctions by the District Court, and subsequently
requested those findings have a preclusive effect in the dischargeability action, the use of
collateral estoppel is mutual, because the parties to the prior and present actions are identical.
In a case of mutual collateral estoppel, the Restatement Second of Judgments lists various
factors to consider in applying the doctrine:
(1) The party against whom preclusion is sought could not, as a matter of law,
have obtained review of the judgment in the initial action; or
(2) The issue is one of law and (a) the two actions involve claims that are
substantially unrelated, or (b) a new determination is warranted in order to take
account of an intervening change in the applicable legal context or otherwise to
avoid inequitable administration of the laws; or
(3) A new determination of the issue is warranted by differences in the quality or
extensiveness of the procedures followed in the two courts or by factors relating
to the allocation of jurisdiction between them; or
(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; or the adversary has a significantly heavier burden than he had
in the first action; or
(5) There is a clear and convincing need for a new determination of the issue (a)
because of the potential adverse impact on the public interest or the interests of
persons not themselves parties in the initial action, (b) because it was not
sufficiently foreseeable at the time of the initial action that the issue would arise
in the context of a subsequent action, or (c) because the party sought to be
precluded, as a result of the conduct of his adversary or other special
circumstances, did not have an adequate opportunity or incentive to obtain a full
and fair adjudication in the initial action.
Restatement (Second) of Judgments §28 (1982). Courts have found these factors influential in
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refraining from applying collateral estoppel. See, e.g., McHan v. C.I.R., 558 F.3d 326, 331 (4th
Cir. 2009) (declining to apply collateral estoppel because burdens of proof differed in both
actions and ran in different directions); National R.R. Passenger Corp. v. Penn. Public Utility
Comm’n, 288 F.3d 519, 525-26, 528 (3d Cir. 2002) (examining whether the same issue of law
arose in substantially unrelated circumstances and whether there was an intervening change in
the applicable legal context); Cohen v. Bucci, 905 F.2d 1111, 1113 (7th Cir. 1990) (holding that
debtor had same incentive to defend himself in fraudulent transfer action as he did in subsequent
discharge denial action based on that fraudulent transfer and thus the issue had a preclusive
effect).
Ms. Scott’s motion primarily focuses on the third factor and portions of the fifth—that
the deficient quality and extensiveness of the procedures followed by the District Court weigh
against applying collateral estoppel and that Ms. Scott did not have an adequate opportunity to
obtain a full and fair adjudication in the initial action. These concerns stem from the lack of an
evidentiary hearing held by the District Court in awarding sanctions and in determining the
extent of attorneys’ fees incurred. Ms. Scott argues that while the lack of a hearing may not have
been a reversible error on the part of the District Court, it is a deficiency that should render the
findings non-conclusive for purposes of collateral estoppel.
The court does not find the District Court’s decision not to hold an evidentiary hearing
sufficient equitable grounds for refraining from applying collateral estoppel. Although the
procedure of the District Court is not one this court might have chosen under the circumstances,
the procedure followed does not rise to the level of injustice or unfairness such that this court
should ignore the findings reached. Particularly persuasive is the fact that the Sixth Circuit, on
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3Situations in which it would be unfair to apply non-mutual offensive collateral estoppel
were discussed in Parklane Hosiery Co., 439 U.S. at 328-31, and summarized in Jack Faucett
Assocs., Inc. v. Amer. Telephone and Telegraph Co., 744 F.2d 118, 125-26 (D.C. Cir. 1984).
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appeal, did not take issue with the lack of evidentiary hearing. The Sixth Circuit noted that
“dispositive motions are routinely decided on papers filed by the parties.” Scott v. Metropolitan
Health Corp., 234 F. App’x 341, 359 (6th Cir. 2007). The District Court based its findings on
numerous and voluminous affidavits, exhibits, depositions, briefs, replies, and sur-replies, all of
which the District Court examined and cited to in its opinions. Again, while this court may have
chosen to hold an evidentiary hearing, the procedure chosen is not such a deficiency that the
principles of collateral estoppel should not be followed.
Declining to apply mutual collateral estoppel is something that should be done in
extraordinary circumstances where one or more of the equitable considerations listed above are
present. As it relates to the fifth factor discussed in the Restatement, declining to apply the
doctrine for inadequate opportunity or incentive to obtain a full and fair adjudication should only
occur where a “clear and convincing need for a new determination of the issue” is established.
Restatement (Second) of Judgments §28(5). In a broader context, the distinction between mutual
and non-mutual collateral estoppel highlights this need. Until the Supreme Court’s decision in
Blonder-Tongue Labs., Inc. v. Univ. of Illinois Found., 402 U.S. 313 (1971), the principle of
mutuality governed. Parties or their privies to both actions had to be identical for the prior
judgment to be determinative in the second. Blonder-Tongue Labs., Inc., 402 U.S. at 320-21.
The Supreme Court overruled the strict adherence to the principle of mutuality of estoppel—in
that case as it related to patent infringement—and allowed for collateral estoppel to apply to
different parties in subsequent actions, subject to certain equitable considerations.3 Therefore,
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mutuality of estoppel is a foundational characteristic considered by courts in this area of law.
When the parties to both actions are identical, the arguments supporting the doctrine—judicial
economy, consistency, and incentive for vigorous and thorough litigation—are at their strongest.
The equitable considerations that weigh against applying collateral estoppel must be clearly and
definitively present when mutuality exists to justify refraining from applying the doctrine.
Additionally, Ms. Scott argues that the pending Rule 60(b) motion before the Sixth
Circuit is further equitable grounds for not giving the District Court’s findings preclusive effect.
Although a Rule 60(b) motion does not necessarily impact a court’s determination of whether a
judgment is “final” for collateral estoppel purposes, Ms. Scott argues the motion, which deals
with jurisdictional issues and recent Supreme Court law governing recusal, should influence this
court’s equitable analysis. The court finds it inconsistent to determine that the pending motion
does not impact the finality of the District Court’s decision under the elements of collateral
estoppel, and at the same time hold that, out of fairness, the pending motion renders the decision
less reliable or worthy of having a preclusive effect. Of further persuasion is the fact that
Metropolitan Hospital recently moved for relief from the automatic stay in order to proceed in
defending Ms. Scott’s appeal and obtain a resolution from the Sixth Circuit. The court denied
that motion, allowing Ms. Scott to stay the litigation she instituted, particularly in light of
mounting legal costs associated with it. However, Ms. Scott cannot benefit from the
contradicting positions—that as to this motion, the pending appeal is grounds to amend the
judgment against her, while as to the motion for relief from stay, it would benefit the debtor and
the estate to halt the appellate proceedings.
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CONCLUSION
The court finds no equitable grounds for declining to apply the doctrine of collateral
estoppel to the District Court’s findings that the sanctions were based on Ms. Scott’s willful and
malicious injury to Metropolitan Hospital and Mr. Faas. Based on the foregoing, the motion to
reconsider is DENIED.
END OF DOCUMENT
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