MEMORANDUM OPINION OVERRULING CREDITOR RANDY BURLESON'S PRECLUSION ARGUMENTS
CYNTHIA A. NORTON, Chief Bankruptcy Judge.
After the Chapter 7 Debtors Timothy and Carolyn Ferguson waived their discharge,
The facts are undisputed. Randy Burleson, acting through an entity he owned, leased premises to the Debtors' business entity, TC Liquor & Smoke Shops, Inc. The Debtors did not personally guarantee the lease. Burleson sought to make the Debtors personally liable for his losses,
Patricia Ann Brown was appointed as the Chapter 7 Trustee, and opened an asset estate.
At the hearing on the claim objection, the Court agreed with the Trustee. Noting that the state court trial on Burleson's suit was still months away, the Court observed that the Trustee could move to estimate the claim under 11 U.S.C. § 502(c) if the Trustee desired to close the bankruptcy estate before the state court trial was held. The Trustee then filed a § 502(c) motion to estimate the claim, but before the hearing, Burleson entered into the consent judgment with the Debtors in state court. Burleson then filed Claim 7-3 for $150,000. Finding that the filing of the amended claim for $150,000 rendered the Trustee's estimation motion moot, the Court advised that if the Trustee still had reason to challenge Burleson's claim, she would need to file a new objection. The Trustee did so, leading to the present dispute.
For purposes of this dispute, the parties agreed to bifurcate the issues to allow the Court to rule on the legal issue of whether the Trustee is barred by the state court judgment before deciding the merits of the Trustee's claim objection.
Burleson argues that the Trustee is bound by the state court judgment and is therefore precluded under Rooker-Feldman, full faith and credit, res judicata, and waiver doctrines from objecting to his claim. The Trustee responds that she is not bound by the state court's consent judgment, for two reasons: she was not a party to the state court action nor in privity with the parties, and the state court did not decide the matter on the merits. The Court agrees with the Trustee.
Introduction: Standards for Resolving Objections to Claim
A filed proof of claim is deemed allowed unless a party in interest objects. 11 U.S.C. § 502(a). A claim is not allowed to the extent that it is unenforceable against the debtor, "under any agreement or applicable law." 11 U.S.C. § 502(b)(1). "A proof of claim executed and filed in accordance with these rules shall constitute prima facie evidence of the validity and amount of the claim." Fed. R. Bankr. Proc. 3001(f).
Once the court is satisfied that the proof of claim is filed in accordance with the applicable rules, the burden is on the objector to show, through rebuttal evidence, that the claim should be wholly or partially disallowed. In re Dove-Nation, 318 B.R. 147, 152 (B.A.P. 8th Cir. 2004). If the objecting party comes forward with sufficient rebuttal evidence to support a claim objection, then the ultimate burden of persuasion shifts to the claimant to show entitlement to the claim. Id; see also In re Thompson, 260 B.R. 484, 487 n.10 (Bankr. W.D. Mo. 2001) (describing the burden-shifting framework). In the context of the Trustee's claim objection, the Court considers each of Burleson's arguments in turn.
Burleson argues that the Rooker-Feldman doctrine bars the Trustee from objecting to his claim. The Rooker-Feldman doctrine operates to preclude the losing party in state court from attacking the state court judgment — in effect, "appealing" the state court judgment — in federal court. Exxon Mobil Corp. v. Saudi Basic Indus. Corp., 544 U.S. 280, 287 (2005) (Rooker-Feldman confined to state court "losers"); Knutson v. City of Fargo, 600 F.3d 992, 995 (8th Cir. 2010) (quoting Johnson v. De Grandy, 512 U.S. 997, 1005-06 (1994)) ("[A] party losing in state court is barred from seeking what in substance would be an appellate review of the state judgment."). Here, it is undisputed that the Trustee was never a party to Burleson's state court lawsuit against the Debtors.
Full Faith and Credit, Collateral Estoppel, And Res Judicata
Burleson also argues that other claim and issue preclusion doctrines bar the Trustee from objecting to his claim. The Court disagrees.
First, with respect to "Full Faith and Credit": The judicial proceedings of any state court "shall have the same full faith and credit in every court within the United States and its Territories and Possessions as they have by law or usage in the courts of such State." 28 U.S.C. § 1738. This means that a federal court must give a state court judgment the same preclusive effect as it would receive under the law of the state where the decision was rendered. Migra v. Warren City Sch. Dist. Bd. of Educ., 465 U.S. 75, 81 (1984). Both issue and claim preclusion fall within the broad umbrella of full faith and credit. See Knutson, 600 F.3d at 996 (citing Exxon Mobil, 544 U.S. at 293). Under the plain meaning of the full faith and credit statute, federal courts must apply state preclusion law in their analysis. Id.; see also Marrese v. American Acad. of Orthopaedic Surgeons, 470 U.S. 373, 386 (1985); Bicknell v. Stanley, 118 B.R. 652, 660-61 (S.D. Ind. 1990). Full faith and credit applies equally in bankruptcy cases as it does in other federal cases. See, e.g., In re Byard, 47 B.R. 700 (Bankr. M.D. Tenn. 1985).
Turning to Missouri preclusion law, "[r]es judicata precludes the same parties from relitigating the same claim ("claim preclusion"); collateral estoppel precludes the same parties from relitigating an issue which has been previously adjudicated ("issue preclusion")." Stine v. Warford, 18 S.W.3d 601, 605 (Mo. Ct. App. 2000) (citing Oates v. Safeco Ins. Co. of America, 583 S.W.2d 713, 719 (Mo. banc 1979)). Collateral estoppel requires:
Stine, 18 S.W.3d at 606 (citing Galaxy Steel & Tube, Inc. v. Douglass Coal & Wrecking, Inc., 928 S.W.2d 420, 422 (Mo. Ct. App. 1996)). A judgment "on the merits" for collateral estoppel purposes means a judgment "rendered after argument and investigation and when it is determined which party is in the right, as distinguished from a judgment rendered upon some preliminary or technical point, or by default, and without trial." Metal Exch. Corp. v. J.W. Terrill, Inc., 173 S.W.3d 672, 677 (Mo. Ct. App. 2005) (emphasis added) (quoting Hayes v. United Fire & Cas. Co., 3 S.W.3d 853, 856 (Mo. Ct. App. 1999)).
In his suggestions in support, Burleson states that a consent judgment is "accorded the same force as other judgments and is conclusive of matters adjudicated." This Court agrees that a consent judgment is conclusive of matters adjudicated and may be final and binding in some instances, but notes that a different standard applies here: the consent judgment must be "on the merits" and "rendered after argument and investigation." This Court cannot find any cases that have given collateral estoppel effect to a consent judgment under Missouri law, and Burleson cites none. This is because a consent judgment, and specifically the one entered here, is not "on the merits" for purposes of collateral estoppel. For this reason alone, this Court declines to apply collateral estoppel against the Trustee. See, e.g., State v. Huesemann, 942 S.W.2d 424, 429-30 (Mo. Ct. App. 1997) (noting that the factfinder accepted the parties' stipulations and did not "independently review" the facts, and thus that the consent order entered pursuant to a settlement between the parties was not "on the merits"); Seifner v. Treasurer of State, 362 S.W.3d 59, 65 (Mo. Ct. App. 2012) (because the administrative body failed to engage in independent fact-finding and instead accepted the parties' stipulations, the consent order was not a judgment "on the merits," and collateral estoppel was inappropriate); Ishmon v. St. Louis Bd. of Police Comm'rs, 415 S.W.3d 144, 151 (Mo. Ct. App. 2013) ("Consent Judgment vacated and this cause is remanded to the trial court for adjudication on the merits").
Here, the consent judgment was entered into without a trial. Although it is signed by a state court judge, the judge's only role is to ensure that there is consent by all parties. See Mo. Rev. Stat. § 517.121. For these reasons, the consent judgment is insufficient to support collateral estoppel. This Court is also concerned with the privity requirement for collateral estoppel, but will address this requirement in the context of res judicata, which also requires privity.
Res judicata, unlike collateral estoppel, may be appropriate where the issue was not actually litigated. See King Gen. Contractors, Inc. v. Reorganized Church of Jesus Christ of Latter Day Saints, 821 S.W.2d 495, 500 (Mo. 1991). Res judicata requires:
"It has long been recognized that for privity to exist, the interest between a debtor and a trustee must be so similar that "[t]he [debtor] was [the trustee's] virtual representative in the prior action." In re Fordu, 209 B.R. 854, 863 (B.A.P. 6th Cir. 1997), aff'd, 201 F.3d 693 (6th Cir. 1999) (internal quotations omitted) (quoting In re Shuman, 78 B.R. 254, 256 (B.A.P. 9th Cir. 1987)). One court has said that the trustee is not the "virtual representative" of one creditor or the debtor, because the trustee has much broader duties. See Shuman, 78 B.R. at 256; see also In re Marlar, 252 B.R. 743, 757 (B.A.P. 8th Cir. 2000) (citation and internal quotations omitted) ("Because the trustee is invested with extraordinary rights . . . as a general representative of . . . creditors, he is not bound, either on res judicata or judicial collateral estoppel grounds by the prior state proceedings."); In re Stepp, no. 11-16121, 2013 WL 4853328, at *4-*5 (Bankr. N.D. Ohio Sept. 22, 2013) (finding that the trustee was not in privity with the debtor's ex-spouse as to a divorce proceeding because the trustee did not actively participate in the divorce proceeding or succeed to the ex-spouse's interest). Although courts have on occasion held that the trustee may represent the interests of other creditors in litigation, see, e.g., U.S. v. Schnick, 66 B.R. 491 (W.D. Mo. 1986), the opposite is not necessarily true. See, e.g., Shuman, 78 B.R. at 256 ("The defense of a cause of action by a debtor pre-bankruptcy does not necessarily represent the rights of a bankruptcy trustee.").
In this bankruptcy case, the Trustee is a fiduciary for all unsecured creditors of the bankruptcy estate. Because she owes a duty to the estate, she cannot be in privity with either the Debtors or Burleson in the state court lawsuit under the circumstances of this case. Unprotected by the automatic stay,
In sum, neither the Debtors' nor Burleson's interest was so similar that either could be said to be in privity with the Trustee. Without privity, res judicata does not bind the Trustee from attacking Burleson's consent judgment.
For these reasons, the Court concludes as a matter of law that the Trustee is not barred from challenging Burleson's claim through her claim objection. This Court notes, however, that Burleson's claim benefits from prima facie validity, and that the Trustee shoulders the burden to produce rebuttal evidence to show why the claim should be disallowed in whole or in part. If the Trustee adduces such evidence, the burden would then shift back to Burleson, who has the burden of proof on his veil-piercing theory under applicable Missouri law.
IT IS SO ORDERED.