PREMIER CAPITAL LLC v. CRAWFORD (2019)

MEMORANDUM AND ORDER PURSUANT TO RULE 1:28

Defendant Cynthia Crawford appeals from the portion of the judgment in favor of the plaintiff, Premier Capital, LLC (Premier), following a bench trial on Premier's claims brought under the Uniform Fraudulent Transfer Act, G. L. c. 109A (UFTA).⁴ The primary issue before us is whether the Superior Court judge erred in giving preclusive effect to findings made in an adversary bankruptcy proceeding between Premier and Cynthia's husband, Richard Crawford.⁵ Because we conclude that Cynthia was not in privity with Richard and that the judge erred in giving preclusive effect to the Bankruptcy Court judge's findings, we vacate the portion of the judgment in favor of Premier with respect to Cynthia.

Background. Premier brought its claim under the UFTA in Superior Court against Cynthia to collect on a debt owed by Richard. While the Superior Court action was pending, Richard filed for bankruptcy. To protect its interests, Premier filed an adversary proceeding in the Bankruptcy Court objecting to the requested discharge under 11 U.S.C. § 727(a)(2)(A) (2012), which provides that the Bankruptcy Court shall not grant a discharge if “the debtor, with intent to hinder, delay, or defraud a creditor ․ has transferred, removed, destroyed, mutilated, or concealed ․ property of the debtor, within one year before the date of the filing of the petition.”

In the adversary proceeding, the Bankruptcy Court judge found the following. Richard transferred a variety of assets (income, including approximately $ 255,000 worth of income in 2003 alone; North Carolina real estate; and antique automobiles) to Cynthia. All of those assets, minus some unspecified portion of the income that was used for household expenses, were transferred with the intent to defraud Premier. The transfers occurred well more than one year before Richard filed for bankruptcy; during the one year before Richard filed for bankruptcy, Cynthia no longer held any of the transferred income or had any equity in the North Carolina real estate. The Bankruptcy Court judge thus relied on the antique automobiles to find that Richard concealed assets within one year of filing for bankruptcy.

Upon the conclusion of the bankruptcy proceeding, Premier filed the within case against Cynthia in Superior Court, where Premier alleged that Richard transferred money to Cynthia with the intent to hinder, delay, or defraud Premier. In the Superior Court action, the Bankruptcy Court judge's findings, including the fact that Richard transferred approximately $ 255,000 to Cynthia in 2003, were given preclusive effect. However, because the Bankruptcy Court judge found that some portion of the approximately $ 255,000 was used for household expenses and thus not transferred to defraud Premier, the Superior Court judge allowed the parties to present evidence on that narrow issue. The scope of trial was further limited to transfers that occurred between February 9, 2003, and the end of 2003.

Discussion. A party is precluded from litigating an issue if “(1) there was a final judgment on the merits of the prior adjudication; (2) the party against whom preclusion is asserted was a party (or in privity with a party) to the prior adjudication; and (3) the issue in the prior adjudication was identical to the issue in the current adjudication” and was essential to the earlier judgment. Tuper v. North Adams Ambulance Serv., Inc., 428 Mass. 132, 134 (1998). Whether issue preclusion applies is a question of law that we review de novo. See Alicea v. Commonwealth, 466 Mass. 228, 234 (2013).

Cynthia does not dispute that there was a final judgment or that the issue in the bankruptcy proceeding was both identical to the issue in the Superior Court and essential to the judgment in the bankruptcy proceeding. The sole basis for her argument is that she was not in privity with Richard in the bankruptcy proceeding.

Privity is an elusive concept, and no single definition of that term applies to all cases. DeGiacomo v. Quincy, 476 Mass. 38, 43 (2016). In this case, we look to “the nature of the nonparty's interest, whether that interest was adequately represented by a party to the prior litigation, and whether binding the nonparty to the judgment is consistent with due process and common-law principles of fairness.” Id. at 43-44. “The examination essentially reduces itself to an inquiry whether the party against whom preclusion is asserted participated in the prior proceeding, either by himself or by a representative.” Bourque v. Cape Southport Assocs., LLC, 60 Mass. App. Ct. 271, 274 (2004).

To determine the nature of Cynthia's interest and whether Richard adequately represented that interest in the bankruptcy proceeding, we begin by reviewing Premier's claims against Cynthia and Richard. In both the bankruptcy proceeding and the Superior Court action, Premier had to prove that Richard transferred assets to Cynthia with the “actual intent to hinder, delay, or defraud” Premier. G. L. c. 109A, § 5 (a) (1). See 11 U.S.C. § 727(a)(2) (2012). However, the similarities end there. In the bankruptcy proceeding, Premier introduced evidence regarding a variety of different transfers occurring over nearly one decade, whereas the Superior Court action was limited to specific income transfers made in 2003. Moreover, Richard could prevail, regardless of whether and why a transfer was made to Cynthia, if neither one of them had an interest in the asset during the year before Richard filed for bankruptcy. See 11 U.S.C. § 727(a)(2)(A) (2012). This defense was not available to Cynthia.

Due to these differences between the bankruptcy proceeding and the Superior Court action, we conclude that Richard did not adequately represent Cynthia's interest. Cynthia did not want the entry in Superior Court of a monetary judgment against her individually. She could protect this interest only by disproving that Richard transferred income to her in 2003 with the intent to hinder, delay, or defraud Premier. In the context of the bankruptcy proceeding, which involved a much wider scope of transfers and a defense that obviated the need for Richard to focus on any individual transfer, it would have been impractical for Richard to represent Cynthia's interest.

In fact, the record shows that the 2003 income transfers to Cynthia were not a focus of the bankruptcy proceeding. A litigation paralegal for Premier testified regarding summaries that she prepared showing approximately $ 255,000 worth of deposits into Cynthia's checking account in 2003. Even though the same litigation paralegal testified that not all of those deposits came from Richard, the Bankruptcy Court judge found that Richard transferred approximately $ 255,000 to Cynthia in 2003, a finding that Richard had no interest in appealing despite its importance to Cynthia in the Superior Court action. Based on this record, it is clear that Richard did not understand himself to be acting in a representative capacity and that the Bankruptcy Court judge did not take care to protect Cynthia's interest. See DeGiacomo, 476 Mass. at 48 (adequate representation requires that party to prior litigation knowingly acted “in representative capacity or the original court took care to protect” interests of nonparty).

Over-all considerations of fairness also do not support the conclusion that Cynthia was in privity with Richard in the bankruptcy proceeding. Richard's stake in the bankruptcy proceeding was very different from Cynthia's stake in the Superior Court action. In the bankruptcy proceeding, Richard was defending his ability to obtain a bankruptcy discharge, whereas the Superior Court action involved the possibility of a monetary judgment being entered against Cynthia individually. In these circumstances, especially considering that the 2003 income transfers to Cynthia were not a focus of the bankruptcy proceeding, binding Cynthia to the Bankruptcy Court findings is not consistent with common-law principles of fairness. See Tuper, 428 Mass. at 136 (over-all considerations of fairness not met due to disparity between stakes of proceedings).

Conclusion. We conclude that the Superior Court judge erred in giving preclusive effect to the Bankruptcy Court judge's findings.⁶ We vacate the portion of the judgment that entered in favor of Premier on count one of its complaint against Cynthia.

So ordered.

Vacated in part.

FOOTNOTES

4.   Cynthia also appeals from the order denying her motion for reconsideration.

5.   Because Cynthia and Richard share a surname, we will refer to them by their first names to avoid confusion.

6.   We note that Cynthia raises several other arguments on appeal. We need not address those arguments because they are best addressed, if necessary, in the first instance in the trial court after consideration of any new evidence.