Weatherby v. Gumpp

OCR transcription for search; preserved printed pages are authoritative

The court incorporates by reference in this paragraph and adopts as the findings and orders
of this court the document set forth below.

$/ RUSS KENDIG

Russ Kendig
United States Bankruptcy Judge

UNITED STATES BANKRUPTCY COURT
NORTHERN DISTRICT OF OHIO

EASTERN DIVISION
IN RE: ) CHAPTER 13
)
CHARLES F. GUMPP, ) CASE NO. 10-62464
)
Debtor. ) ADV. NO. 10-6090
)
MICHAEL WEATHERBY, ) JUDGE RUSS KENDIG
)
Plaintiff, )
)
v. )
)
CHARLES F. GUMPP, II, ) MEMORANDUM OF OPINION (NOT
) INTENDED FOR PUBLICATION)
Defendant. )

Plaintiffs motion for summary judgment is before the court. Plaintiff seeks a
determination that a debt owed to him by Defendant-debtor, arising from the sale of a vehicle in
2007, is nondischargeable under 11 U.S.C. § 523(a)(2)(A) and (6). Defendant submitted an

untimely response.’

' Plaintiff’s motion was filed on December 10, 2010. Under Local Bankruptcy Rule
9013-1(b), responses were due within fourteen days. Using the calculations in Federal Rule of
Bankruptcy Procedure 9006, the response deadline was December 27, 2010. Defendant’s

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The court has jurisdiction of this proceeding pursuant to 28 U.S.C. § 1334 and the general
order of reference entered in this district on July 16, 1984. Venue in this district and division is
proper pursuant to 28 U.S.C. § 1409. This adversary is a core proceeding under 28 U.S.C.

§ 157(b)(2)(D. The following constitutes the court’s findings of facts and conclusions of law

under Federal Rule of Bankruptcy Procedure 7052.

This opinion is not intended for publication or citation. The availability of this opinion,
in electronic or printed form, is not the result of a direct submission by the Court.

FACTS

Debtor operated a used car lot. In 2007, Debtor sold Plaintiff a 1966 Austin Healey.
Plaintiff later sued Debtor for violations of the Ohio Consumer Sales Practices Act (“CSPA”) in
connection with the transaction. On September 8, 2009, the Stark County Common Pleas Court

found, in a consent judgment and entry, that Plaintiff

committed unfair and deceptive acts or practices in violation
of the Consumer Sales Practices Act R.C. §1345.02 and Ohio
Administrative Code §109-4-3-09, by fraudulently misrepre-
senting the standard or quality of the vehicle in the text of the
on-line advertisement for the vehicle, knowingly making a mis-
leading statements (sic) of opinion regarding the condition of
the vehicle upon which Plaintiff was likely to rely to his detri-
ment, failing to provide the service history of the vehicle as
promised, failing to integrate into the written sales agreement
all material representations, and offering for sale (or assisting
in the sale) of more than five motor vehicles in the twelve
months preceding the subject transaction with Plaintiff without
being a licensed dealer pursuant to Ohio’s motor vehicle laws.

(Complaint, Exhibit 1, 8). The parties entered into a settlement agreement, effective August 1,
2009, whereby Debtor agreed to pay Plaintiff $30,000.00, plus statutory interest. Debtor
defaulted in May 2010 and filed a joint chapter 13 petition on June 7, 2010.

Plaintiff is listed as an unsecured creditor. Pursuant to the proposed plan, unsecured
creditors are not to receive any distribution.

Plaintiff filed an adversary complaint on September 1, 2010 seeking nondischargeability
of the debt under 11 U.S.C. § 523(a)(2)(A) and/or (6).

response was filed January 10, 2011. Plaintiff did not move to strike the response.

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ANALYSIS

Plaintiff moved for summary judgment under Federal Rule of Bankruptcy Procedure 7056
which incorporates Federal Rule of Civil Procedure 56 into bankruptcy practice. As the movant,
Plaintiff bears the initial burden of proof, being tasked with the “responsibility of informing
the... court of the basis for its motion, and identifying those portions [of the record] . . . which it
believes demonstrate the absence of a genuine issue of material fact.” Celotex Corp. v. Catrett,
477 U.S. 317, 323 (1986). When the movant also bears the burden of persuasion on an issue, this
initial showing means movant is required to demonstrate all essential elements of its claim. See
Prestige Capital Corp. v. Michigan Gage and Mfg., LLC, 2010 WL 2787438 (E.D. Mich. 2010)
(reporter citation not yet available); Brixey v. Confer (In re Confer), 277 B.R. 374 (Bankr. S.D.
Ohio 2002). According to Rule 56(a),the court is to enter summary judgment “if the movant
shows that there is no genuine dispute as to any material fact and the movant is entitled to
judgment as a matter of law.” In reviewing a motion for summary judgment, a court must
construe the evidence in the light most favorable to the nonmoving party. Adickes v. S.H.Kress

& Co., 398 US. 144, 158-59 (1970).

Plaintiff primarily relies on the state court judgment as the foundation for summary
judgment, using it offensively. According to Plaintiff, the consent judgment was a finding of
fraud under the Ohio Consumer Sales Practices Act and there is no reason to relitigate the fraud
claim for nondischargeability purposes: the consent judgment should merely be used as the basis
for finding the debt nondischargeable. However, Plaintiff doesn’t whisper of the doctrines which
would allow this court to rely on the consent judgment from the state court, namely res judicata

and collateral estoppel.

The doctrines aren’t addressed by Defendant, either. Instead, Defendant claims the
transaction was handled through a corporation, and he is therefore shielded from liability. He
also argues that Plaintiff failed to prove any actual damages.

I. Res Judicata

Res judicata, also known as claim preclusion, “bars further claims by parties or their
privies based on the same cause of action.’ See Brown v. Felsen, 442 U.S. 127, 131 (1979)
(citing Montana v. U.S., 440 U.S. 147, 153 (1979)). The basic premise is that if a claim has been
decided by a court, it shouldn’t be redetermined. The Supreme Court has slightly discounted this
premise in bankruptcy dischargeability actions, however, concluding that the question of
dischargeability of a debt is in the province of the bankruptcy court. Brown involved some
parallel facts to the present case. The state court had entered a stipulated judgment between the
parties in a state court action. The action did not specify the cause of action that was settled.
When Felsen filed bankruptcy, Brown acted to have the debt declared nondischargeable. The
bankruptcy court utilized only matters in the state court record in rendering the debt
dischargeable. The Supreme Court found the bankruptcy court was not so confined in its

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examination of the state court judgment:

Refusing to apply res judicata here would permit the bankruptcy
court to make an accurate determination whether respondent in
fact committed the deceit, fraud and malicious conversion which
petitioner alleges. These questions are now, for the first time,
squarely in issue. They are the type of question Congress intended
that the bankruptcy court would resolve. That court can weigh all
the evidence, and it can also take into account whether or not peti-
tioner’s failure to press these allegations at an earlier time betrays
a weakness in his case on the merits.

Brown at 138. Asa result, res judicata is not applicable to foreclose this court from considering
dischargeability of the debt owed Plaintiff. See also Bay Area Factors v. Calvert (In re Calvert),
105 F.3d 315 (6" Cir. 1997); Spilman v. Harley, 656 F.2d 224 (6" Cir. 1981).

Il. Collateral Estoppel

Collateral estoppel, also known as issue preclusion, is a bar to relitigation of issues which
have previously been determined. “[A] fact or a point that was actually and directly at issue in a
previous action, and was passed upon and determined by a court of competent jurisdiction, may
not be drawn into question in a subsequent action between the same parties or their privies,
whether the cause of action in the two actions be identical or different.” Fort Frye Teachers
Ass’n, OEA/NEA v. State Emp’t Relations Bd., 81 Ohio St.3d 392, 395 (1998) (citing Norwood
v. McDonald, 142 Ohio St. 299 (1943) (other citations and references omitted)).

Unlike res judicata, collateral estoppel is available in dischargeability actions. Grogan v.
Garner, 498 U.S. 279 (1991); Calvert, 105 F.3d 315; Spilman, 656 F.2d 224. Under the charge
of the Full Faith and Credit clause of the United States Constitution, Article IV, § 1, and its
statutory codification, 28 U.S.C. § 1738, federal courts give full faith and credit to state court
judgments in the same manner a state court affords the judgment preclusive effect. See also
Calvert, 105 F.3d 315. Thus, whether collateral estoppel can be used to preclude issues must be

reviewed under Ohio law.

In Ohio, four conditions must be established to invoke the collateral estoppel doctrine:

1) A final judgment on the merits in the previous case
after a full and fair opportunity to litigate the issue;

2) The issue must have been actually and directly liti-
gated in the prior suit and must have been necessary to
the final judgment; 3) The issue in the present suit must
have been identical to the issue in the prior suit; 4) The
party against whom estoppel is sought was a party or in

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privity with the party to the prior action.

Sill v. Sweeney (In re Sweeney), 276 B.R. 186 (B.A.P. 6 Cir. 2002) (citations omitted).

It is not disputed that the state court entry satisfied the first condition for collateral
estoppel. The parties involved had an opportunity to litigate the issues, but chose to settle the
matter and the consent judgment was a final adjudication of their conflict. “Consent decrees
have the same res judicata and collateral estoppel effects as judgments resolving disputed
issues.” Scott v. City of East Cleveland, 16 Ohio App.3d 429, 431 (1984) (citing Horne v.
Woolever, 170 Ohio St. 178, 182 (1959); Columbus v. Stilson & Assoc., 90 Ohio App.3d 608
(Ohio App. 10 Dist. 1993)). With similar ease, the court also concludes that the fourth
requirement of mutuality is established: the parties to the nondischargeability action are identical
to the parties involved in the state court lawsuit. As a result, the first and fourth prongs are

satisfied.

Whether the second criterion is met gives the court more pause. Some courts find that a
consent judgment does not meet the “actually litigated” requirement for collateral estoppel. See
Simmons Capital Advisors, Ltd. v. Bachinski (In re Bachinski), 393 B.R. 522 (Bankr. S.D. Ohio
2008). In Bachinski, the bankruptcy court found that Ohio law was split on this issue. Id. at 536
(offering an overview of the issue, as well as a small survey of cases on both sides of the issue)
(citations omitted). Upon review of Ohio law, this court is of the opinion that the Ohio Supreme
Court would deem a consent judgment to meet the ‘actually litigated” prong for application of
collateral estoppel. See, e.g., Sponseller v. Sponseller, 144 N.E. 48 (1924); Gilbraith v. Hixson,

32 Ohio St.3d 127 (1987).

Sponseller involved an agreement between a husband and a wife, in the process of a
dissolution, who agreed to an alimony award of real property to the wife. The land was later
subject to a partition action in which the husband attempted to collaterally attack the alimony
award. The Ohio Supreme Court opined on the nature of consent judgments and stated

the law has been broadly laid down that as between parties sui

juris, and in the absence of fraud, a judgment or decree of a court
having jurisdiction of the subject-matter, and rendered by consent
of the parties, though without any ascertainment by the court of

the truth of the facts averred, is as binding and conclusive between
the parties and their privies as if the suit had been an adversary one,
and the conclusions embodied in the decree had been rendered upon
controverted facts and due consideration thereof by the court.

15 Ruling Case Law, pp. 643-646.
Sponseller at 400. The court reached a parallel conclusion in Gilbraith.

In Gilbraith, Mr. Gilbraith was established to be the parent of a minor child, as

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acknowledged in the parties’ separation agreement and by consensual entry in a legitimization
proceeding in probate court. He later attempted to challenge his parentage based on mistake
when he was sued for child support arrears. Although mainly addressing issues of res judicata,
the Ohio Supreme Court confirmed its Sponseller position: “[i]mplicit in the rule is the
recognition that a judgment entered by consent, although predicated upon an agreement between
the parties, is an adjudication as effective as if the merits had been litigated and remains,
therefore, just as enforceable as any other validly entered judgment.” Gilbraith at 129 (citing
Sponseller, 110 Ohio St. 399 and Ohio State Medical Bd. v. Zwick, 59 Ohio App.2d 133, 139-
140 (1978)). The Ohio Supreme Court posits that a consent decree is a ruling by the court as if
the litigation had occurred. Because of the interrelatedness of res judicata and collateral estoppel,
see Grava v. Parkman Twp., 653 N.E.2nd 226 (1995), this court finds no reason to apply these
principles merely to res judicata. The pronouncements from the Ohio Supreme Court directly
speak to the conclusion that the findings in an agreed judgment are deemed to have been actually

litigated.

However, there is an additional requirement for this criterion that states that the issue
must not merely have been actually litigated, but also necessary to the final judgment. In the
motion for summary judgment, Plaintiff presents two issues: a fraud/misrepresentation claim
under section 523(a)(2) and a section 523(a)(6) claim for willful and malicious injury. The court
must determined “whether the factual issues in the state court proceeding were applied “using
standards identical to those in the dischargeability proceedings[.]’” Longbrake v. Rebarchek (In
re Rebarchek), 293 B.R. 400, 407-8 (Bankr. N.D. Ohio 2002) (citing Spilman, 656 F.2d at 226

(other citations omitted)).

As the court in Rebarchek pointed out, 523(a)(2) nondischargeability claims and claims
for violations of the Ohio Consumer Sales Practices Act are not necessarily identical. However,
the factual findings in Rebarchek were sufficient to support a nondischargeability finding. The

court finds the same in this case.
Section 523(a)(2) actions require proof of the following:

(1) the debtor obtained money through a material misrepresentation
that, at the time, the debtor knew was false or made with gross reck-
lessness as to its truth; (2) the debtor intended to deceive the creditor;
(3) the creditor justifiably relied on the false representation; and (4) its
reliance was the proximate cause of loss.

Rembert v. AT&T Universal Card Sves. (In re Rembert), 141 F.3d 277, 280-81 (6 Cir. 1998)
(citing Longo v. McLaren (In re McLaren ), 3 F.3d 958, 961 (6th Cir.1993)). The state court
consent judgment contains findings to support each and every element of a section 523(a)(2)

claim. As stated in paragraph eight of the judgment:

Defendant committed unfair and deceptive acts or practices in

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violation of the Consumer Sales Practices Act... by fraudulently
misrepresenting the standard or quality of the vehicle in the text
of the on-line advertisement for the vehicle, knowingly making a
misleading statements (sic) of opinion regarding the condition of
the vehicle upon which Plaintiff was likely to rely to his detriment,
failing to provide the service history of the vehicle as promised,
failing to integrate into the written sales agreement all material
representations, and offering for sale (or assisting in the sale of
more than five motor vehicles in the twelve months preceding the
subject transaction with Plaintiff without being a licensed dealer
pursuant to Ohio’s motor vehicle laws.

(Plaintiff's M. Summ. J. Exhibit 1). Paragraph nine states that Plaintiff was damaged as a result
of the acts of Defendant.

The proof for a fraudulent misrepresentation claim under Ohio law is nearly identical to
that of a 523(a)(2) action under the bankruptcy code. The required elements are:

(1) arepresentation or, when there is a duty to disclose, conceal-
ment of a fact, (2) which is material to the transaction at hand,

(3) made falsely, with knowledge of its falsity, or with such utter
disregard as to whether it is true or false that such knowledge may
be inferred, (4) with the intent of misleading another into relying
upon it, (5) with justifiable reliance on the misrepresentation or
concealment, and (6) an injury proximately caused by that reliance.

Deutsche Bank Nat’I Trust Co. v. Pevarski, 187 Ohio App.3d 455 (Ohio App. 4" Dist. 2010)
(citing Gaines v. Preterm-Cleveland, Inc., 33 Ohio St.3d 54 (1987); Burr v. Stark Cty. Bd. of
Commrs., 23 Ohio St.3d 69 (1986), at paragraph two of the syllabus)). Since the consent
judgment references Defendant’s fraudulent misrepresentation, and outlines the specific facts of
those actions, and a claim for fraudulent misrepresentation under Ohio law is nearly identical to
the proof required under the bankruptcy code, the court concludes that the consent judgment does

satisfy the third condition for application of collateral estoppel.

CONCLUSION

Upon finding that the four collateral estoppel conditions are satisfied, collateral estoppel
is available to Plaintiff. Application results in the conclusion that the factual issues were
litigated previously and cannot be relitigated in this court. Since the findings in the consent
judgment appear to be the same findings which would support a finding of nondischargeability
under section 523(a)(2), Plaintiff's count for nondischargeability is meritorious. The underlying
debt is non-dischargeable. This finding makes further inquiry of the section 523(a)(4) or (6)

claims unnecessary.

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An order will be issued in accordance with this opinion.

#t # #t

Service List:

G Ian Crawford
116 Cleveland Ave. N.W., Suite 800
Canton, OH 44702

John H Hornbrook

1400 N Market Ave
Canton, OH 44714-2608

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