UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF KENTUCKY
MARTIN L. VAUGHAN and
NICCOLETTE G. VAUGHAN
DEBTORS CASE NO. 94-10441
HUGO CARTER, et al. PLAINTIFFS
VS. ADV. NO. 95-1009
MARTIN L. VAUGHAN DEFENDANT
This matter is before the Court on the plaintiffs' Motion for Summary Judgment filed herein on June 12, 1996. The defendant had an opportunity to respond, but did not, and on October 30, 1996, the matter was heard. Counsel for the plaintiffs appeared to argue the motion; no one appeared for the defendant. At the conclusion of the hearing, the Court took the matter under consideration. 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 plaintiffs initiated this matter by the filing of their Complaint Objecting to Dischargeability of Indebtedness on April 3, 1995. The defendant filed his pro se Answer on May 3, 1995, the only pleading he has filed in this matter. The Complaint represented that on March 3, 1993, the plaintiffs filed a state court action in Georgia against a group of defendants including Martin L. Vaughan, the defendant herein ("Vaughan") and Dealers Association Plan ("DAP"), an entity of his. The suit was later removed to the United States District Court for the Northern District of Georgia ("the District Court"), as Case No. 193-CV-766-ODE. It was certified there as a class action.
The suit involved a health plan ("the Plan") set up by the Georgia Independent Automobile Dealers Association to provide benefits to Association members who subscribed to the Plan. The plaintiffs alleged that Vaughan set up DAP to act as third-party administrator of the Plan, and alleged breaches of fiduciary duties, fraud, and failure to pay insurance benefits when due. After removal of the case to District Court, the plaintiffs filed an Amended Complaint in December 1993 alleging fraud, breach of contract, Racketeering Influenced and Corrupt Organizations ("RICO") Act violations, and breach of fiduciary duties.
After more than three years of litigation, the District Court entered default judgment against Vaughan and DAP, and ordered that all pleadings of these two defendants be stricken. Finally, on September 30, 1996, the District Court awarded judgment to the plaintiff class against the defendants in the aggregate sum of $13,396,307.00, finding, inter alia, that Vaughan and DAP were fiduciaries, and that they breached their duties as fiduciaries.
The court further found that Vaughan's and DAP's involvement with the Plan violated the RICO Act. The court found that Vaughan caused the Plan participants to pay $813,957.00 in excessive administrative fees, and to pay other improper fees and commissions, all of which he was ordered to disgorge. Attorneys' fees and costs were to be awarded in a separate order. The court observed that Vaughan was in bankruptcy and that "the ultimate distribution of any monies recovered should be handled through the Vaughan Bankruptcy."
The plaintiffs' Motion for Summary Judgment herein requests that the judgment debt against Vaughan be declared nondischargeable by virtue of the default judgment entered in the underlying case. That judgment set out that Vaughan is indebted to the plaintiffs for fraud while acting in a fiduciary capacity. The plaintiffs assert that Vaughan is collaterally estopped from litigating the question of the dischargeability of these debts herein. Collateral estoppel may be employed in cases involving dischargeability questions if the precise issue was raised in the prior proceeding between the same parties or parties in privity with them, if it was actually litigated, and if its determination was necessary to the outcome of the prior proceeding.
The record of the proceeding in District Court establishes that the issue of whether Vaughan committed fraud while acting in a fiduciary capacity was raised between the parties herein, and its determination was necessary to the outcome of that proceeding. In any instance where a default judgment is entered, however, the critical question is whether or not the issue was "fully litigated."
The record appears to support the contention that the issue was fully litigated as to Vaughan. The docket of the District Court proceeding shows that he was represented by several counsel, that motions were filed on his behalf, and orders entered in regard to him from the inception of the proceeding in April 1993 until he was found to be in default in September 1995. Vaughan's participation in this proceeding is evident.
If the prior proceeding herein had been in state court, this Court would have been required to determine whether that state would give collateral estoppel effect to a default judgment. Here, however, the prior proceeding herein was in a federal district court. Therefore, this Court must determine what the federal standard is, and follow it.
In In re Bush, 62 F.3d 1319 (11th Cir. 1995), a default judgment had been entered against the debtor in a prior federal district court proceeding. The Circuit Court observed that the "general federal rule" is that "a default judgment will not support the application of collateral estoppel..." Id., at 1323. The court points out, however, that there is authority for giving preclusive effect to a prior default judgment in a dischargeability proceeding. It cites several decisions in support of this proposition, including In re Wilson, 72 B.R. 956, 959 (Bkrtcy.M.D.Fla. 1987), from which it quotes as follows:
'Debtor/defendant was given the full opportunity to defend himself in the [prior] action and he chose not to do so. Debtor/defendant could have reasonably foreseen the consequences of not defending an action based in part on fraud. It would be undeserved to give debtor/defendant a second bite at the apple when he knowingly chose not to defend himself in the first instance.'
The Bush court was similarly reluctant to give the debtor a "second bite at the apple" in view of the fact that he had "actively participated in the prior action over an extended period of time" and then "engaged in dilatory and deliberately obstructive conduct..." In re Bush, 62 F.3d at 1324.
The court found further support for this position in the 9th Circuit Court's decision in In re Daily, 47 F.3d 365, 368-69 (1995), from which it quoted:
'Daily did not simply decide the burden of litigation outweighed the advantages of opposing the [plaintiff's] claim and fail to appear. He actively participated in the litigation, albeit obstructively, for two years before judgment was entered against him. A party who deliberately precludes resolution of factual issues through normal adjudicative procedures may be bound, in subsequent, related proceedings involving the same parties and issues, by a prior judicial determination reached without completion of the usual process of adjudication. In such a case the 'actual litigation' requirement may be satisfied by substantial participation in an adversary contest in which the party is afforded a reasonable opportunity to defend himself on the merits but chooses not to do so.
In re Bush, 62 F.3d at 1324. Based on this reasoning, the court found that it did not offend due process for a debtor to be held to the consequences of a default judgment in a subsequent bankruptcy proceeding. Id., at 1325.
This Court agrees with the reasoning of the Bush and Daily courts. Vaughan had every opportunity to litigate the District Court case, and did for a significant period of time. He, too, should be denied a "second bite at the apple" because he chose not to see that litigation through to its conclusion. This Court therefore finds that the plaintiffs' Motion for Summary Judgment should be sustained, and that Vaughan's debt to them for fraud while acting in a fiduciary capacity should be declared nondischargeable pursuant to 11 U.S.C.'523(a)(4). An order in conformity with this opinion will be entered separately.
By the Court -
Peter C. Adams, Esq.
Thomas E. Bulleit Jr., Esq., Trustee