A finding of fraud in U.S. Bankruptcy Court does not mean that the issue has already been decided for liability purposes in Pennsylvania courts, the state Superior Court has ruled in an apparent issue of first impression.
A unanimous three-judge panel of the court ruled in Weissberger v. Myers that the doctrine of collateral estoppel did not preclude arguments on whether a defendant, found by bankruptcy court to have debts that could not be discharged because of fraud, had committed fraud for purposes of a civil litigation.
The court’s ruling upheld a decision from the Montgomery County Court of Common Pleas denying the plaintiffs’ motion for summary judgment based on res judicata and collateral estoppel.
“Although the elements to prove fraud in the bankruptcy court and Pennsylvania state courts are similar, the Weissbergers’ burden to prove fraud by clear and convincing evidence as plaintiffs in a Pennsylvania state court is significantly heavier than their burden of preponderance of the evidence as creditors in the bankruptcy court,” said Senior Judge John L. Musmanno, who wrote the opinion. “Thus, the fact that the Weissbergers proved fraud by the preponderance of the evidence in the bankruptcy court does not establish that they met their burden of proving fraud by clear and convincing evidence.”
According to Musmanno, in January 2006, the plaintiffs in the case, Michael B. and Amy S. Weissberger contracted with Steven J. Myers and Steve Myers Carpentry Inc. to build an addition on their home and perform home repairs. Myers allegedly performed improper and substandard work, and deviated from an architectural design that the plaintiffs provided, Musmanno said. By September 2006, the Weissbergers had paid Myers and his company $40,000; however, the work had not been completed and the contractors never returned to the Weissbergers’ home, Musmanno said.
The Weissbergers filed an amended complaint in June 2008, alleging several causes of action, including breach of contract, violation of the Unfair Trade Practices and Consumer Protection Law, and fraud. Following discovery, Myers filed a petition for protection under Chapter 7 of the U.S. Bankruptcy Code, seeking to discharge his debt, Musmanno said.
According to Musmanno, the Weissbergers then filed an adversary complaint against Myers in bankruptcy court, seeking a determination that his debt was not dischargeable due to fraud.
Following a trial, the bankruptcy court found that the debt was not dischargeable because Myers had committed fraud, Musmanno said.
The Weissbergers then filed a motion seeking partial summary judgment on their claims based on res judicata and collateral estoppel; however, the trial court denied the motion and also denied the Weissbergers’ motion for reconsideration.
On appeal to the Superior Court, the Weissbergers argued that summary judgment should have been granted on the breach of contract, UTPCPL violation and fraud claims because the bankruptcy court had already decided Myers had committed fraud. The Weissbergers further argued that the bankruptcy court’s analysis is the same as the analysis the trial court must undertake with regard to fraud.
Musmanno noted that the Restatement (Second) of Judgments, Section 28, outlines exceptions to the application of collateral estoppel, and held that the doctrine does not apply when “the adversary has a significantly heavier burden than he had in the first action.”
The bankruptcy court, Musmanno said, used the preponderance of the evidence standard in making its decision. However, to prove fraud in the common pleas court, the Weissbergers needed to meet the clear and convincing evidence burden of proof.
In a footnote, Musmanno noted that Pennsylvania state courts have not addressed the specific situation, and cited several federal and state court decisions from across the country that have held similarly with respect to the issue, including the U.S. Supreme Court’s 1991 decision in Grogan v. Garner.
According to Musmanno, the record also lacked evidence to establish fraud.
“Moreover, the minimal evidence on record does not establish a finding of fraud by clear and convincing evidence,” Musmanno said. “Relatedly, the trial court did not err in denying the Weissbergers’ motion for partial summary judgment on their breach of contract and UTPCPL claims, as the record does not clearly show that there is no genuine issue of material fact.”
Plaintiffs attorney Joseph Silverstein of Green, Silverstein & Groff said that, had he been successful, his client would have dropped the charges not related to the breach of contract, violation of the UTPCPL and fraud claims, and the case would have gone straight to the damages portion of the litigation. He said he will now present much of the same case in the state court action.
“The evidence we put on in bankruptcy is the same evidence we will put on in the state court case,” he said. “Like it or not, at least there’s a definitive answer on that particular issue.”
Defense attorney Daniel P. Mudrick of Mudrick & Zucker did not respond to a call for comment.
(Copies of the 10-page opinion in Weissberger v. Myers, PICS No. 14-0630, are available from Pennsylvania Law Weekly. Please call the Pennsylvania Instant Case Service at 800-276-PICS to order or for information.) •