UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF KENTUCKY
MARIA S. BAYNUM
DEBTOR CASE NO. 01-22252
LYDIA NOOE PLAINTIFF
VS. ADV. NO. 01-2048
MARIA S. BAYNUM DEFENDANT
This matter is before the court having been submitted on the record by Agreed Order entered herein on May 16, 2002. The plaintiff seeks to have a debt owed to her by the defendant declared nondischargeable pursuant to 11 U.S.C. ' 523(a), and/or to deny the defendant a discharge pursuant to 11 U.S.C. ' 727(a)(4)(C). This court has jurisdiction of this matter pursuant to 28 U.S.C. ' 1334(b); it is a core proceeding pursuant to 28 U.S.C. ' 157(b)(2)(I).
The record in this case shows that the defendant filed her Chapter 7 petition in this court on October 1, 2001. The plaintiff was listed as an unsecured creditor with a claim in the amount of $20,000.00. The plaintiff filed her complaint on November 15, 2001, alleging that she had obtained a default judgment against the defendant in the Campbell Circuit Court on April 9, 2001, on a complaint for breach of a partnership agreement and for fraud. The complaint states that the default judgment Aresulted from the fraudulent acts of Defendant with respect to a business that was operated by both Plaintiff and Defendant.@ She alleges that on account of the default judgment the defendant should be denied discharge pursuant to ' 727(a)(4)(C). The defendant filed her answer on January 2, 2002, in which she admitted everything except that her discharge should be denied. The parties were preparing to go to trial on this matter when they sought and obtained the approval of this court to submit the matter on the record.
The parties entered into joint stipulations which set out the following:
A1. Plaintiff was granted a Default Judgment in Campbell County Circuit Court.
2. The Default Judgment was referred to the Master Commissioner for a determination of damages. However, this Bankruptcy Petition was filed before damages were determined.
3. The Judgment is for all Counts of the Complaint, including fraud.
4. That there is a Default Judgment for Fraud and Breach of Contract in the Campbell Circuit Court.
5. That no damages were entered in the Campbell Circuit Court case.
6. That the Complaint and Judgment from the Campbell Circuit Court and Debtor=s Bankruptcy Petition are stipulated as to authenticity and admissibility into the evidence herein.@
Attached to the plaintiff=s memorandum is a copy of her state court complaint which alleges that the defendant induced the plaintiff to expend Atime, efforts, resources and work ... without share of profits,@ when the defendant Ahad no intention of honoring [their] partnership agreement.@ The complaint also alleges that the plaintiff was damaged as a result of the breach of the agreement. Also attached to the memorandum is a copy of the order granting the plaintiff=s motion for default judgment. The motion was based on the defendant=s failure to file an exchange of information and respond to requests for production of documents and interrogatories. The order states that the motion is sustained and that a hearing will be held to determine damages.
The sole issue before the court is the dischargeability of the debt to the plaintiff. Objection to discharge pursuant to ' 727(a)(4)(C) is neither applicable nor relevant here, as explained in 6 Collier on Bankruptcy, & 727.06 (Matthew Bender 3d. Ed. Revised):
The conduct of the debtor under section 727(a)(4)(C) must be done >in or in connection with the case= in which he or she is presently a debtor[.]
Section 727(a)(4)(C) covers any >extortion,= even using that word in the broad, general sense, and bribery. ...
It is necessary in order to sustain an objection under section 727(a)(4)(C) to establish
(a) knowledge and a fraudulent intent on the part of the debtor, and
(b) receipt of, or an attempt to obtain, or the giving or offering of, money, property, or advantage, or a promise of these, for a purpose, namely, action or forbearance in the case in which the offender is a debtor.
Section 727(a)(4)(C) clearly contemplates the denial of a discharge to debtors who accept a >bribe,=i.e., money or property, advantage or a promise of these for acting or forbearing to act in or in connection with the case. It also includes the giving or offering of a bribe by the debtor.
The court therefore moves on to the plaintiff=s allegation of nondischargeability. (It should be noted that the defendant has not addressed the dischargeability issue.)
In her Memorandum in Support of Objection to Discharge of the Debtor, filed herein on April 29, 2002, the plaintiff contends that the defendant=s debt to her must not be discharged pursuant to 11 U.S.C. ' 523(a)(2)(A). That section states in pertinent part that a debt Afor money, property, [or] services, ... to the extent obtained by false pretenses, a false representation or actual fraud, ...@ is excepted from discharge. The plaintiff argues that by her answer and her entry into the joint stipulations, the defendant has admitted fraud and that the court need go no further.
The precise issue to be decided as concerns dischargeability is whether the defendant's conduct brought her within the purview of 11 U.S.C. ' 523(a)(2)(A). As stated in In re McLaren, 3 F.3d 958, 961 (6th Cir. 1993):
It is well established that in order to except a debt from discharge under section 523(A)(2)
'the creditor must prove that the debtor obtained money through a material misrepresentation that at the time the debtor knew was false or made with gross recklessness as to its truth. The creditor must also prove the debtor's intent to deceive. Moreover, the creditor must prove that it reasonably relied on the false representation and that its reliance was the proximate cause of the loss.'
Atassi v. McLaren (In re McLaren), 990 F.2d 850, 852 (6th Cir. 1993) (quoting Coman v. Phillips (In re Phillips), 804 F.2d 930, 932 (6th Cir. 1986). Additionally, the proper burden upon [the creditor]'"...was to show proof of ... fraud by a preponderance of the evidence only."' Id. at 853 (citing Grogan v. Garner, 498 U.S. 279, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991) ...).
As concerns the reliance requirement, the standard for excepting a debt from discharge as a fraudulent misrepresentation within the meaning of '523(a)(2)(A) is not reasonable reliance but the less demanding one of justifiable reliance on the representation. See Field v. Mans, 516 U.S. 59, 116 S. Ct. 437 (1995).
Contrary to the plaintiff=s contention, the defendant has not admitted that her conduct was fraudulent. Her answer and stipulations herein admit that the plaintiff received a judgment from the Campbell Circuit Court on her complaint there. This court must review the state court complaint and the order entered by the Campbell Circuit Court sustaining her motion for default judgment to determine whether all the elements of fraud were raised in the complaint and whether the court ruled on them in the order.
In Kentucky, a party bringing an action for fraud must establish six elements: Aa) material representation b) which is false c)known to be false or made recklessly d) made with inducement to be acted upon e) acted in reliance thereon and f) causing injury.@ United Parcel Serv. Co. v. Rickert, 996 S.W.2d 464, 468 (Ky. 1999). The state court complaint in this matter has only one count which raises an allegation of fraud. Count II alleges that the defendant induced the plaintiff to expend money, time and effort on a business when the defendant had no intention of honoring their partnership in this business. The complaint does not state what the defendant=s inducements were, or whether or how the defendant made a material representation which was false. The complaint further does not allege that the plaintiff relied on any material representation to her detriment. Any allegation in regard to loss or detriment references the claim of breach of the partnership agreement and not fraud.
Even if, however, the plaintiff got past the requirement of setting out all the elements of fraud, this court would have to be able to apply collateral estoppel to adopt the state court judgment. The order entered by the Campbell Circuit Court in response to the plaintiff=s motion for default judgment states only that the plaintiff=s motion is sustained. The plaintiff=s motion, after enumerating the defendant=s procedural deficiencies, requested that ADefendant=s Answer and all other Pleadings, if any, be stricken, that Judgment be entered in favor of the Plaintiff, and that a hearing be set for damages only.@ The order does not articulate a judgment for fraud, and certainly does not provide any way for this court to determine what relief was being awarded to the plaintiff, as the state court made no findings.
In Sill v. Sweeney (In re Sweeney), 276 B.R. 186, 193 (6th Cir. B.A.P. 2002), the Panel set out the requirement that Aa default judgment must contain express findings in order to be given preclusive effect in subsequent litigation between the parties.@ The state court order being considered here was not sufficiently specific, especially in view of the fact that it purported to rule on a multi-count complaint, to permit application of collateral estoppel. This court questions whether the Campbell Circuit Court order may even be considered a final judgment since it required a later hearing to determine damages.
As set out above, the requirements for demonstrating that a debt is nondischargeable pursuant to 11 U.S.C. ' 523(a)(2)(A) are the same as those for establishing common law fraud in Kentucky. Since the state court complaint does not allege, and the order on the plaintiff=s motion for default judgment does not establish the required elements in and of themselves, this court cannot make a determination of nondischargeability based only on the default judgment. In addition, the order is inadequate to permit application of collateral estoppel.
Review of other evidence submitted in preparation for the trial of this matter does not lend enough support to the plaintiff to help her make her case. The plaintiff filed a copy of a list of items purchased for the business and their cost; the defendant filed a copy of her bankruptcy petition, a copy of the lease for the business premises and a check for the first month=s rent, a profit and loss statement, and bank statements. There is no deposition testimony to be reviewed, nor were any affidavits submitted. There is nothing before the court that establishes fraud on the part of the defendant.
In consideration of the foregoing it is the opinion of this court that the defendant=s debt to the plaintiff is dischargeable in her bankruptcy case, and that the plaintiff=s complaint herein should be dismissed. An order in conformity with this opinion will be entered separately.
By the court -
Judge William S. Howard
David F. Fessler, Esq.
Robert E. Moffitt, Esq.