2000 #16 STANTON 5-3-2000
IN RE: DREW V. STANTON (IN RE THOMAS W. AND MARY STANTON), Bankr. No. 99-50465,
Adversary No. 99-5022, Chapter 7;
The matter before the Court is Debtors-Defendants Thomas W. Stanton's and Mary Stanton's motion for
summary judgment. This is a core proceeding under 28 U.S.C. § 157(b)(2)(I). This letter decision and
subsequent order and judgment shall constitute the Court's findings and conclusions under F.R.Bankr.P. 7052.
As set forth below, the Court concludes that the debt owed by Debtors-Defendants Thomas W. Stanton and
Mary Stanton to Plaintiff Connie Drew is dischargeable. Summary judgment shall therefore be entered for
Debtors-Defendants Thomas W. Stanton and Mary Stanton.
Summary of facts. Over a 20-month period beginning in June 1991, Thomas W. Stanton and Mary Stanton
borrowed some $500,000.00 from Connie Drew ("Drew"). When the Stantons failed to repay her, Drew
commenced an action against them in Pennington County Circuit Court. (1)
In Count IV of her amended state court Complaint, Drew alleged that Thomas W. Stanton "exercised deceit
and fraud . . . to secure the [loans]" and that Mary Stanton "worked jointly with [Thomas W.] Stanton to
accomplish said fraud and deceit." In particular, Drew alleged that Thomas W. Stanton failed to "fully
disclose the circumstances and disposition of the funds . . .; the likelihood of repayment . . .; the responsibility
of others for repayment . . .; and [the] Stantons' financial condition." (2)
On September 11, 1997, a Judgment of Dismissal was entered in the state court proceeding, dismissing
Count IV of Drew's amended state court complaint "on the merits, and with prejudice," pursuant to the
Honorable Lee Anderson's August 11, 1997 letter opinion and September 9, 1997 Findings of Fact and
Conclusions of Law. In his Findings of Fact and Conclusions of Law, Judge Anderson specifically found that
Drew had failed to comply with the Stantons' discovery requests; had failed to adequately explain her
inability to comply with such discovery requests; had "intentionally disregarded, obstructed, and delayed the
Court's discovery Orders . . ."; had "destroyed documents after [the Stantons] sought discovery of such
documents"; and had "deceived the Court as to the existence and possible availability of the subject
documents . . ." Judge Anderson then concluded that Drew's "actions and statements in regards [sic] to
production of the subject documents constitute bad faith, fault and an intentional destruction of discoverable
evidence" and that dismissal of Count IV of Drew's amended state court complaint, with prejudice, was both
necessary and appropriate. Drew did not appeal the Judgment of Dismissal.
The Stantons ("Debtors") filed a petition for relief under chapter 7 on September 20, 1999. On December 20,
1999, Drew filed an adversary complaint to determine the dischargeability of the debt owed to her. In her
adversary complaint, Drew alleged that Debtor Thomas W. Stanton made certain representations to her
regarding the use to which the funds he borrowed from her would be put (3) that those representations were
false, and that the debt owed to her should therefore be excepted from Debtors' discharge pursuant to 11
U.S.C. § 523(a)(2)(A). (4)
On January 20, 2000, Debtors filed their answer, in which they admitted borrowing money from Drew, but
generally denied the balance of Drew's adversary complaint. On that same date, Debtors filed a motion for
summary judgment, supported by Debtor Thomas W. Stanton's affidavit. On March 31, 2000, Debtors filed a
supplemental memorandum in support of their motion. On April 3, 2000, Drew filed a response to Debtors'
motion. Finally, on April 4, 2000, Debtors filed a letter supplement to their motion. The matter was taken
under advisement.
Summary judgment. Summary judgment is appropriate when "there is no genuine issue [of] material fact
and . . . the moving party is entitled to a judgment as a matter of law." F.R.Bankr.P. 7056 and F.R.Civ.P.
56(c). An issue of material fact is genuine if it has a real basis in the record. Hartnagel v. Norman, 953 F.2d
394, 395 (8th Cir. 1992) (quotes therein). A genuine issue of fact is material if it might affect the outcome of
the case. Id. (quotes therein).
The matter must be viewed in the light most favorable to the party opposing the motion. F.D.I.C. v. Bell,
106 F.3d 258, 263 (8th Cir. 1997);Amerinet, Inc. v. Xerox Corp., 972 F.2d 1483, 1490 (8th Circ. 1992)
(quoting therein Matsushita Elec. Industrial Co. v. Zenith Radio, 475 U.S. 574, 587-88 (1986), and citations
therein). Where motive and intent are at issue, disposition of the matter by summary judgment may be more
difficult. Cf. Amerinet, 972 F.2d at 1490 (citation omitted).
The movant meets his burden if he shows that the record does not contain a genuine issue of material fact and
he points out that part of the record that bears out his assertion. Handeen v. LeMaire, 112 F.3d 1339, 1346
(8th Cir. 1997 (quoting therein City of Mt. Pleasant v. Associated Electric Coop, 838 F.2d 268, 273, (8th Cir.
1988)). No defense to an insufficient showing is required. Adickes v. S.H. Kress & Co., 398 U.S. 144, 156
(1970) (citation therein); Handeen, 112 F.3d at 1346.
If the movant meets his burden, however, the non movant, to defeat the motion, "must advance specific facts
to create a genuine issue of material fact for trial." Bell, 106 F.3d at 263 (quoting Rolscreen Co. v. Pella
Products of St. Louis, Inc., 64 F.3d 1202, 1211 (8th Cir. 1995)). The non movant must do more than show
there is some metaphysical doubt. He must show he will be able to put on admissible evidence at trial
proving his allegations. Bell, 106 F.3d 263 (citing Kiemele v. Soo Line R.R. Co., 93 F.3d 472, 474 (8th Cir.
1996), and JRT, Inc. v. TCBY System, Inc., 52 F.3d 734, 737 (8th Cir. 1995).
Res judicata. In their motion for summary judgment, Debtors argue that Drew's complaint is barred by res
judicata. The term res judicata is often used loosely to refer to both "claim preclusion" and "issue
preclusion." See W.A. Lang Co. v. Anderberg-Lund Printing Co. (In re Anderberg-Lund Printing Co.), 109
F.3d 1343, 1346 (8th Cir. 1997). Claim preclusion (or res judicata, in its truest sense) "bars relitigation of the
same claim between parties or their privies where a final judgment has been rendered upon the merits by a
court of competent jurisdiction." Plough v. West Des Moines Community School District, 70 F.3d 512, 517
(8th Cir. 1995) (quoting Smith v. Updegraff, 744 F.2d 1354, 1362 (8th Cir. 1984)). Issue preclusion (or
"collateral estoppel") "applies to legal or factual issues 'actually and necessarily determined,' with such a
determination becoming 'conclusive in subsequent suits based on a different cause of action involving a party
to the prior litigation.'" W.A. Lang Co., 109 F.3d at 1346 (citing Montana v. United States, 440 U.S. 147,
153 (1979)). The principles of both res judicata and collateral estoppel are generally applicable in federal
bankruptcy proceedings. Id. (citing Katchen v. Landy, 382 U.S. 323, 334, (1966)). In determining the
preclusive effect of a particular judgment, the bankruptcy court must look to the law of the state in which the
judgment was entered. Harmon Industries v. Browner, 191 F.3d 894, 902 (8th Cir. 1999).
Under South Dakota law, the Court must consider the following four factors to determine whether res
judicata (5) will apply: four factors to determine whether res judicata (6) will apply:
(1) [w]hether the issue decided in the former adjudication is identical to the present issue;
(2) whether there was a final judgment on the merits;
(3) whether the parties in the two actions are the same or in privity; and
(4) whether there was a full and fair opportunity to litigate the issues in the prior adjudication.
Frigaard v. Seffens, 599 N.W. 2d 646, 648 (S.D. 1999) (citing Springer v. Black, 520 N.W.2d 77, 79 (S.D.
1994) (citations omitted)).
In this case, the first factor is dispositive. The state court did not, and indeed could not, address the
dischargeability of the debt owed to Drew. While the validity of a creditor's claim is determined by state law,
see Grogan v. Garner, 498 U.S. 279, 283 (1991) (citing Vanston Bondholders Protective Comm. v. Green,
329 U.S. 156, 161 (1946)), the dischargeability of the debt giving rise to that creditor's claim is determined by
federal law. Id. at 284 (citing Brown v. Felsen, 442 U.S. 127, 129-130, 136 (1979)). Only the bankruptcy
court has jurisdiction to determine the dischargeability of a debt allegedly incurred through fraud. Id. (citing
Brown, 442 U.S. at 135-136). Thus, res judicata does not bar Drew's nondischargeability complaint.
Collateral estoppel. That is not to say, however, that the state court's decision to dismiss Count IV of
Drew's complaint "on the merits, and with prejudice," is not entitled to deference. Under South Dakota law, a
party may be collaterally estopped from relitigating an issue if:
(1) [t]he issue decided in the prior adjudication was identical with the one presented in the action in question;
(2) [t]here was a final judgment on the merits;
(3) [t]he party against whom the plea is asserted was a party or in privity with a party to the prior
adjudication; and
(4) [t]he party against whom the plea is asserted had a full and fair opportunity to litigate the issue in the
prior litigation.
SDDS, Inc. v. State of South Dakota, 569 N.W.2d 289, 294 (S.D. 1997) (citingGrand State Property, Inc. v.
Woods, Fuller, et al., 556 N.W.2d 84, 87 (S.D. 1996) (citation omitted)).
Debtors have clearly established the first and third elements. To prevail in this adversary proceeding, Drew
must prove that Debtor Thomas W. Stanton made certain misrepresentations to induce Drew to lend him
money. That is precisely the issue framed by Count IV of Drew's amended state court complaint, and Drew
was necessarily a party to the state court proceeding.
The second and fourth elements are a bit more problematic. While the Judgment of Dismissal in the state
court proceeding recites that it was "on the merits, and with prejudice," it was in fact entered as a sanction for
Drew's failure to comply with Debtors' discovery requests. The merits of Drew's allegations were never
heard, considered, or ruled upon. Similarly, while it could be said that Drew had a full and fair opportunity to
litigate the issue of Debtor Thomas W. Stanton's alleged misrepresentations in the state court proceeding, the
fact remains that the issue was never actually litigated.
In her brief, Drew points out that Debtors failed to cite any authority for giving res judicata effect to a
judgment entered as a discovery sanction. Indeed, no such authority appears to exist in South Dakota. The
South Dakota Supreme Court has been equally silent on the issue of the collateral estoppel effect of such a
judgment. In the absence of any such authority, the Court is left to determine how it thinks the South Dakota
Supreme Court woulddecide if presented with the question. See Jurrens v. Hartford Life Insurance Co., 190
F.3d 919, 922 (8th Cir. 1999). In making its determination, the Court "may consider relevant state precedent,
analogous decisions, considered dicta, . . . and any other reliable data." Lindsay Manufacturing Co. v.
Hartford Accident & Indemnity Co., 118 F.3d 1263, 1268 (8th Cir. 1997) (quoting Ventura v. Titan Sports,
Inc., 65 F.3d 725, 729 (8th Cir. 1995), cert. denied, 516 U.S. 1174 (1996)).
There are several good reasons to give collateral estoppel effect to a judgment entered as a discovery
sanction. First, refusing to do so would effectively render nugatory S.D.C.L. § 15-6-37(b)(2)(C), as any
party "sanctioned" by having her case dismissed could simply refile her complaint. Second, the Court should
not in essence condone and excuse the behavior of litigants who abuse the processes and dignity of the court,
much less reward them with an undeserved second bite of the apple. Third, in cases such as this one, in which
a litigant has been found to have intentionally destroyed relevant and material evidence, it would be
completely unfair to ask the other party to proceed without such evidence. Finally, it would not be equitable
to permit a litigant, who by her own actions has prevented a matter from being fully and fairly litigated, to
complain that the matter was not actually litigated.
Other courts have found such reasons persuasive. See, e.g., Wolstein v. Docteroff (In re Docteroff), 133 F.3d
210, 215 (3rd Cir. 1997) ("We do not hesitate in holding that a party . . . who deliberately prevents resolution
of a lawsuit should be deemed to have actually litigated an issue for purposes of collateral estoppel
application."); Bush v. Balfour Beatty Bahamas, Limited (In re Bush), 62 F.3d 1319, 1324 (11th Cir. 1995)
("Such abuse of the judicial process must not be rewarded by a blind application of the general rule denying
collateral estoppel effect to a default judgment.");Federal Deposit Insurance Corp. v. Daily, (In re Daily), 47
F.3d 365, 368 (9th Cir. 1995) ("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.").
Conclusion. The Court finds that the South Dakota Supreme Court would give collateral estoppel effect to a
judgment entered as a discovery sanction, for the reasons and based on the authority cited above. Drew is
therefore collaterally estopped from raising allegations that Debtor Thomas W. Stanton fraudulently induced
her to lend him money. That being so, she cannot prevail under 11 U.S.C. § 523(a)(2)(A). Debtors are
entitled to judgment as a matter of law.
Debtors' Motion for Summary Judgment is granted, and judgment shall be entered for Debtors. The parties
shall bear their own costs and attorney fees. Counsel for Debtors shall prepare an appropriate order.
1. Connie Drew v. Tom Stanton, Mary Stanton, and Costello, Porter, Hill, Heisterkamp & Bushnell, Civ. No. 96-125.
2. Drew's amended state court complaint included three additional counts. In Count I, Drew sought recovery on the four notes evidencing the loans. Drew prevailed against the Stantons on this count. In Count II, Drew sought recovery from Thomas W. Stanton's law firm for its alleged negligence in, among other things, failing to supervise him. Drew did not prevail on this count. Finally, in Count III, Drew sought recovery from Thomas W. Stanton's law firm for its alleged negligence in failing to protect her interests in unrelated litigation. The Court cannot discern from the record before it whether Drew prevailed on this count.
3. In particular, Drew alleged that Debtor Thomas W. Stanton represented to her that the money "was being used for an investment into [sic] the Cripple Creek Colorado Casino" and "was needed to cure construction costs and expenses in excess of what was anticipated."
4. Section 523(a)(2)(A) provides:
A discharge under section 727 . . . does not discharge an individual debtor from any debt -
(2) for money, property, services, or an extension, renewal, or refinancing of credit, to the extent
obtained by -
(A) false pretenses, a false representation, or actual fraud . . .
5. The South Dakota Supreme Court draws the same distinction between res judicata and collateral estoppel as outlined above. See Merchants State Bank v. C.E. Light, 458 N.W. 2d 792, 794 (S.D. 1990)("It is perhaps easier to visualize the distinction by conceptualizing res judicata as 'claim preclusion' and collateral estoppel as 'issue preclusion.'") (citation omitted).
6. The South Dakota Supreme Court draws the same distinction between res judicata and collateral estoppel as outlined above. See Merchants State Bank v. C.E. Light, 458 N.W. 2d 792, 794 (S.D. 1990)("It is perhaps easier to visualize the distinction by conceptualizing res judicata as 'claim preclusion' and collateral estoppel as 'issue preclusion.'") (citation omitted).