IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
No. 92-2729
In the Matter of: William H. Davis, Debtor
JAMES L. SHEERIN,
Appellee,
versus
WILLIAM H. DAVIS,
Appellant.
Appeal from the United States District Court
for the Southern District of Texas
( September 15, 1993 )
Before GOLDBERG, HIGGINBOTHAM, and DAVIS, Circuit Judges.
HIGGINBOTHAM, Circuit Judge:
James Sheerin won a fraud judgment against William Davis in
Texas state court. Davis then took refuge in bankruptcy. We find
that Sheerin produced enough evidence before the bankruptcy court
to save his judgment from discharge. We also find that the
equitable remedies ordered by the Texas state court are not
dischargeable.
I.
William Davis and James Sheerin once owned the W.H. Davis
Company. Davis was the majority stockholder and Sheerin was the
minority owner. After Davis tried to freeze out Sheerin, Sheerin
sued and won in state court. The trial court found that Sheerin
owned a 45% interest in the corporation, a 45% interest in a
partnership, and six tracts of land found to be partnership assets.
It issued several orders and awards based on that finding,
including an award of $20,893 for Davis receiving informal
dividends to the exclusion of Sheerin, an order that Davis pay
$550,000 to buy out Sheerin's stock, and several equitable remedies
to preserve the value of Sheerin's interests in the corporation,
partnership, and the six tracts of land. A Texas court of appeals
affirmed the judgment in substantial part. Davis v. Sheerin, 754
S.W.2d 375 (Tex. App.—Houston [1st Dist.] 1988, writ denied).
Davis then filed for bankruptcy.
Sheerin objected to the dischargeability of the debts arising
from his judgment against Davis, contending that the facts he had
proven in state court established the elements of a
nondischargeable claim. The evidence at trial in the bankruptcy
court consisted of the state trial court judgment, the jury
instructions and answers to special issues, the appellate court
opinion, and testimony of the parties. Sheerin did not introduce
the trial record.
The bankruptcy court noted that the state appellate court
decision referred "in detail to certain undisputed evidence that
the trial court considered" (emphasis in original). The court
found this to be clear and convincing evidence that the debts of
$550,000 and $20,893 derived from acts of "defalcation while acting
in a fiduciary capacity" and were not dischargeable. 11 U.S.C.
2
§ 532(a)(4). The court also found that some of the equitable
remedies ordered by the state court were not dischargeable because
they are not "debts" within the meaning of 11 U.S.C. §§ 101(4) and
(11).1 Davis appealed to the district court.
In the meantime, the Supreme Court held that the standard of
proof for the dischargeability exceptions in § 523(a) is the
preponderance of the evidence standard. Grogan v. Garner, 111 S.
Ct. 654, 658-59 (1991). Because the bankruptcy court applied the
more stringent clear and convincing evidence standard, the district
court saw no need to remand and affirmed the decision. Davis then
appealed to this court.
II.
We first examine the conclusion that the $550,000 buy-out and
the $20,893 in damages ordered by the state court against Davis are
non-dischargeable debts pursuant to 11 U.S.C. §§ 523(a)(4). The
Supreme Court has recently reaffirmed that issue preclusion
principles apply in section 523(a) discharge exception proceedings.
Grogan, 111 S.Ct. at 658 & n.11. This circuit recognizes three
requirements for application of issue preclusion: (1) the issue to
be precluded must be identical to that involved in the prior
action; (2) in the prior action the issue must have been actually
litigated; and (3) the determination made of the issue in the prior
action must have been necessary to the resulting judgment. In re
1
The bankruptcy court found that Sheerin did not produce
sufficient evidence on other aspects of the state court judgment
and found them discharged. Sheerin does not appeal those
findings.
3
Shuler, 722 F.2d 1253, 1256 n.2 (5th Cir. 1984). Davis contends
that Sheerin's failure to introduce the trial record from the state
trial bars the use of issue preclusion. We have not imposed such
a requirement in the past and decline to do so today. See Matter of
Allman, 735 F.2d 863, 865 (5th Cir.), cert. denied, 469 U.S. 1086
(1984); Shuler, 722 F.2d at 1257; Carey Lumber Co. v. Bell, 615
F.2d 370, 376-78 (5th Cir. 1980). See also In re Church, 69 B.R.
425, 430 (Bankr. N.D. Tex. 1987) (stating that while a transcript
is "as detailed a record as is possible" the Fifth Circuit only
asks if "the record supporting the state court judgment is
sufficiently detailed"). See generally Jeffrey T. Ferriell, The
Preclusive Effect of State Court Decisions in Bankruptcy, 58 Am.
Bankr. L.J. 349, 360-61 (1984) ("[I]t is doubted whether a full
transcript should be required, or even whether it would be helpful,
in most cases."). The opinions and jury questions introduced in
this case have sufficient detail to allow the use of issue
preclusion.
The Supreme Court's recent Grogan v. Garner decision does not
require presentation of the trial record to the bankruptcy court.
The successful plaintiffs in Grogan introduced only "portions of
the record" from the prior state case into evidence before the
bankruptcy court. 111 S.Ct. at 656. Those portions included
copies of the creditor's first amended complaint, the jury
instructions, the jury verdict, the district court judgment, the
appellate court opinion, and a letter from the appellate court
transmitting the opinion. The trial transcript was not introduced.
4
In re Garner, 73 B.R. 26, 27 (Bankr. W.D. Mo. 1987) (bankruptcy
opinion in Grogan).
Having found that Sheerin's failure to introduce the trial
transcript is not a per se bar to the application of issue
preclusion, we turn to the specific dischargeability issues
contested by the parties. The controlling Code provision is
section 523(a)(4), excepting from discharge "any debt . . . for
fraud or defalcation while acting in a fiduciary capacity,
embezzlement, or larceny."2 "Defalcation" includes willful
neglects of duty unaccompanied by fraud or embezzlement. Matter of
Moreno, 892 F.2d 417, 421 (5th Cir. 1990); Carey Lumber, 615 F.2d
at 375-76; Central Hanover Bank & Trust v. Herbst, 93 F.2d 510 (2d
Cir. 1937) (L. Hand, J.).
We begin by reviewing Sheerin's allegations in state court and
the evidence supporting them. The $550,000 debt arises from the
jury's finding that Davis entered a conspiracy to deprive Sheerin
of his stock ownership in W.H. Davis Co.3 The trial court reasoned
that this behavior showed Davis had "acted oppressively" toward
Sheerin and ordered that Davis buy Sheerin's stock. The court of
appeals affirmed this conclusion, clarifying the meaning of
"oppressive conduct":
2
Sheerin also contested discharge under section 523(a)(6),
which excepts from discharge "any debt . . . for willful and
malicious injury by the debtor to another entity or to the
property of another entity." The bankruptcy court only relied on
§ 523(a)(4). As we find its reliance on § 523(a)(4) to have been
proper we do not reach the applicability of any other sections.
3
The findings about the conspiracy are in answer to special
issues 23-26.
5
burdensome, harsh and wrongful conduct, a lack of probity and
fair dealing in the affairs of a company to the prejudice of
some of its members, or a visible departure from the standards
of fair dealing, and a violation of fair play on which every
shareholder who entrusts his money to a company is entitled to
rely.
Davis v. Sheerin, 754 S.W.2d 375, 382 (Tex. App.—Houston [1st
Dist.] 1988, writ denied) (quoting Baker v. Commercial Body
Builders, Inc., 507 P.2d 387, 393 (Ore. 1973)). It cited the
following undisputed evidence as supporting the trial court's
conclusion that oppressive conduct had occurred:
(1) [The Davises] claimed that [Sheerin] had gifted them his
stock in the late 1960's, even though the records of the
corporation and income tax returns through 1986 clearly show
[Sheerin] as a 45% stockholder, and [the Davises] and/or their
son had made several attempts to purchase [Sheerin's] stock in
the 1970's and 1980's;
(2) a letter from the corporation's attorney dated May 16,
1979, referred to appellant Davis' "wish to avoid declaring
dividends and disburse the surplus in the form of bonuses to
the officers of the corporation" and the fact that such action
may result in an allegation by [Sheerin] of "fraudulent intent
to deny a shareholder his right to dividends" and "would
probably be characterized as a direct effort to deny a
shareholder his dividends."
Id. at 382.
The $20,893 judgment debt arises from Davis's receipt of
informal dividends by making profit sharing contributions for his
own benefit and to the exclusion of Sheerin. The jury found that
these contributions were willfully made in breach of a fiduciary
duty and were the proximate cause of damages to Sheerin.4 The
judge entered a judgment for $20,893 based on those findings.5
4
These answers are to special issues 30A-30D.
5
The jury found in special issue 31 that Sheerin had
suffered no damages, but the judge granted Sheerin's JNOV motion
6
This decision was supported by the letter of May 16, 1979,
detailing Davis' wish to disburse surplus funds to the
corporation's officers.
These findings are sufficient to prevent discharge of both
debts under section 523(a)(4). They result from the actual
litigation of facts necessary to obtain judgment against Davis, and
they describe willful acts by Davis contrary to his fiduciary
obligations as an officer of the W.H. Davis Company. See Gierson
v. Parker Energy Partners, 737 S.W.2d 375, 377 (Tex. App.—Houston
[14th Dist.] 1987, no writ). The debt arose from a remedy imposed
because of those acts. Accordingly, we affirm the district court's
finding that Sheerin's $20,893 and $550,000 judgment debts avoid
discharge.
III.
Davis also argues that the equitable remedies of resulting
trust, partition in kind, deed reformation, appointment of a
receiver, and dissolution of a partnership ordered by the state
court against him are dischargeable. He notes that discharge of
debts is proper if the underlying claim is a "right to equitable
remedy for breach of performance if such breach gives rise to a
right to payment." 11 U.S.C. § 101(5)(B). He contends that since
failure to perform his obligations under any of the equitable
remedies would justify an award of money damages, all the remedies
are dischargeable.
and entered judgment for $20,893 based on the jury's findings on
the previous special issues.
7
We decline to define "claim" so broadly. Section 101(5)(B) is
designed to cause the liquidation of contingent claims for money
damages that are alternatives to equitable remedies:
Section 101(4)(B) . . . is intended to cause the
liquidation or estimation of contingent rights of payment
for which there may be an alternative equitable remedy
with the result that the equitable remedy will be
susceptible to being discharged in bankruptcy. For
example, in some States, a judgment for specific
performance may be satisfied by an alternative right to
payment in the event performance is refused; in that
event, the creditor entitled to specific performance
would have a `claim' for purposes of a proceeding under
title 11.
Ohio v. Kovacs, 105 S.Ct. 705, 708 (1985) (quoting 124 Cong. Rec.
32393 (1978) (remarks of Rep. Edwards)). The ability of a debtor
to choose between performance and damages in some cases is not the
same as a debtor's liability for money damages for failing to
satisfy an equitable obligation. See In re Chateaugay Corp., 944
F.2d 997, 1007-08 (2d Cir. 1991). While section 101(5)(B)
encourages creditors to select money damages among from alternative
remedies, it does not require creditors entitled to an equitable
remedy to select a suboptimal remedy of money damages.
With that background established, we examine the disputed
remedies to determine if alternate remedies of money damages
exists. The first three remedies affect six tracts of land once
owned by the parties' partnership. The trial court found that
Sheerin was entitled to a 45% interest in the tracts and then
ordered reformation of the title deeds to reflect that interest,
placement of Sheerin's interest in a resulting trust under Davis's
control to prevent its misuse, and sale of the properties to be
8
followed by proportional sharing of the proceeds. The court of
appeals affirmed except for the forced sale. It noted that Texas
law favors a fair and equitable partition in kind over a forced
sale and division of proceeds. Davis, 754 S.W.2d at 388. It then
reversed the judgment awarding a forced sale because of a lack of
findings showing that the property was not susceptible to division
and ordered a partition in kind in its place.
We find that the resulting trust remedy does not have a money
damage alternative. The judgment says nothing about money. It
simply notes that Sheerin owns a 45% fee simple interest in those
tracts, and that Davis will be charged with using his legal title
to the property "for the use and benefit" of both Sheerin and
himself "according to their respective ownership interests." Under
such circumstances Texas law does not view the payment of money as
an alternative to the maintenance of the equitable owner's interest
in the property, even though the law may provide for an award of
money damages. See Fitz-Gerald v. Hull, 150 Tex. 39, 237 S.W.2d
256, 262-64 (1951). This remedy is analogous to an injunction
preventing Davis from committing future wrongs, an intangible
command incapable of precise monetary estimation. See Chateaugay,
944 F.2d at 1008; In re Oseen, 133 B.R. 527, 530 (Bankr. D. Idaho
1991). Cf. Kovacs, 105 S.Ct. at 710 (discharging a claim when the
creditor's equitable relief "had been converted into an obligation
to pay money"). See generally Douglas Laycock, The Death of the
Irreparable Injury Rule, 103 Harv. L. Rev. 688, 716-17 (1990). We
find that bankruptcy did not discharge this remedy.
9
We take a similar view of the remedy of reformation. The
trial court viewed this as a prospective remedy imposed "in order
to prevent further inequitable conduct on the part of . . . Davis."
Money is not an alternative to this kind of command. This remedy
is also not dischargeable.
The third remedy is partition in kind of the property. As a
general matter, a forced sale can be an alternative to this remedy.
But it is not a preferred remedy under Texas law. See Rayson v.
Johns, 524 S.W.2d 380, 382 (Tex. Civ. App.—Texarkana 1975, writ
ref'd n.r.e.). It is also a remedy that the Texas court of appeals
found to be unavailable given the jury findings in this case.
Because under Texas law no alternate remedy exists we find this
remedy nondischargeable as well.
The last two remedies involve the court's treatment of the
business associations between the parties. The trial court ordered
that a receiver be appointed to "conserve the assets of W.H. Davis
Co.," and that the real estate partnership between Sheerin and
Davis be dissolved. Davis correctly concedes that these remedies
are not dischargeable. Rather, he contests the nondischargeability
of debts that might arise from these remedies in the future: debts
which might flow to Davis from the services rendered by the
receiver, and debts which might flow to Davis from the dissolution
of the partnership. We decline to analyze the dischargeability of
these hypothetical debts until their properties become more
certain. See Middle South Energy, Inc. v. City of New Orleans, 800
F.2d 488, 490-91 (5th Cir. 1986).
10
AFFIRMED.
11