Opinion ID: 808392
Heading Depth: 4
Heading Rank: 2

Heading: “Necessarily Determined”

Text: The Michigan Supreme Court holds that “[a]n issue is necessarily determined only if it is ‘essential’ to the judgment.” Gates, 452 N.W.2d at 631 (citing Restatement (Second) of Judgments § 27 cmt. h (1982)). In City of Detroit v. Qualls, 454 N.W.2d 374 (Mich. 1990), the Michigan Supreme Court described the requirement further: ‘The issue to be concluded must be the same as that involved in the prior action. In the prior action, the issue must have been raised and litigated, and actually adjudged. The issue must have been material and relevant to the disposition of the prior action. The determination made of the issue in the prior action must have been necessary and essential to the resulting judgment.’ 1B Moore, Federal Practice, ¶ 0.443[1], p. 759. Qualls, 454 N.W.2d at 382-83. As previously noted, the state court judgment did not expressly indicate the basis for the money judgment awarded Plaintiffs. Nevertheless, the amount of the money judgment – $42,706.10 – suggests that it must have been based on Plaintiffs’ claim for statutory conversion, – the only claim of the four claims pleaded that includes treble damages. Indeed, the judgment awarded is precisely three times the $13,510.00 in damages, plus $2,176.10 in costs and attorney’s fees, sought in Plaintiffs’ motion for summary disposition. During argument before the bankruptcy court and in briefing before the Panel, the parties debated the issue preclusive effect under Michigan law of alternative claims for relief when the judgment is a general judgment only. See, e.g., McCurdie v. Strozewski (In re Strozewski), 458 B.R. 397, 405-07 (Bankr. W.D. Mich. 2011); Kasishke v. Frank (In re Frank), 425 B.R. 435, 440-42 (Bankr. W.D. Mich. 2010). The Panel, however, need not decide whether the Michigan Supreme Court would follow the Second Restatement of Judgments or revert to the view expressed in the First -11- Restatement of Judgments even though the Michigan Supreme Court has cited with approval to other portions of § 27 in the Second Restatement. See Lichon, 459 N.W.2d at 298-99 (comment e); Gates, 452 N.W.2d at 631 (comment h); Qualls, 454 N.W.2d at 382. Rather, the Panel agrees with the bankruptcy court that the record before the state court can lead to but one conclusion, that the state court judgment of $42,706.10 was based on Plaintiffs’ claim for treble damages for statutory conversion under Michigan Compiled Laws § 600.2919a. See also Restatement (Second) of Judgments § 27 cmt. f (“If it cannot be determined from the pleadings and other materials of record in the prior action what issues, if any, were litigated and determined by the verdict and judgment, extrinsic evidence is admissible to aid in such a determination.”). Accordingly, the bankruptcy court correctly deduced from the record before it that the state court judgment was based on Plaintiffs’ claim for statutory conversion. The Michigan conversion statute, Michigan Compiled Laws § 600.2919a, provides in pertinent part: (1) A person damaged as a result of either or both of the following may recover 3 times the amount of actual damages sustained, plus costs and reasonable attorney fees: (a) Another person’s stealing or embezzling property or converting property to the other person’s own use. (b) Another person’s buying, receiving, possessing, concealing, or aiding in the concealment of stolen, embezzled, or converted property when the person buying, receiving, possessing, concealing, or aiding in the concealment of stolen, embezzled, or converted property knew that the property was stolen, embezzled, or converted. Mich. Comp. Laws § 600.2919a(1)(a)-(b). Michigan Complied Laws § 600.2919a was amended in 2005. Prior to that time, the behavior described in subsection (b) was the only basis for “statutory conversion.” As a result, treble damages were only available when a third party had acquired the converted property. In 2005, “[t]he Legislature added 600.2919a(1)(a) so that a plaintiff could receive treble damages from the actual thief himself.” Joy & Middlebelt Sunoco, Inc. v. Fusion Oil, Inc., 2008 WL 283767, at , n.2 (E.D. Mich. Jan. 31, 2008) (citation omitted). In the present case, the factual allegations in the state court complaint suggest that the state court judgment was based on § 600.2919a(1)(a), as opposed to § 600.2919a(1)(b). Conversion under § 600.2919a(1)(b) does -12- not apply to the person who committed conversion. Instead, it “applies only to other persons, who buy, receive, possess, conceal, or aid in the concealment of stolen, embezzled, or converted property, with knowledge that the property was stolen, embezzled, or converted.” In re Pixley, 456 B.R. at 786. “The Michigan conversion statute does not define the word ‘converting’ or itself give elements for a conversion claim. Those are supplied by Michigan common law. The Michigan Supreme Court defines conversion as ‘any distinct act of domain wrongfully exerted over another’s personal property in denial of or inconsistent with the rights therein.’ ” In re Pixley, 456 B.R. at 78788 (quoting Dep’t of Agric. v. Appletree Mktg., L.L.C.,779 N.W.2d 237, 244 (Mich. 2010); Foremost Ins. Co. v. Allstate Ins. Co., 486 N.W.2d 600, 606 (Mich. 1992)). “ ‘Conversion may occur when a party properly in possession of property uses it in an improper way, for an improper purpose, or by delivering it without authorization to a third party.’ ” In re Pixley, 456 B.R. at 788 (quoting Appletree Mktg., L.L.C., 779 N.W.2d at 244-45). No intent to violate the property rights of another, or knowledge that another’s property rights are being violated, is required. In re Pixley, 456 B.R. at 788 (citing Michigan case law). The tort can be committed “unwittingly.” See Foremost Ins. Co., 486 N.W.2d. at 606. “ ‘[N]either good nor bad faith, neither care nor negligence, neither knowledge nor ignorance, are of the gist of the action.’ ” In re Pixley, 456 B.R. at 788 (quoting J. Franklin Interests, L.L.C. v. Meng, Docket No. 296525, 2011 WL 4501841, at  (Mich. Ct. App. Sept. 29, 2011)). Pursuant to § 523(a)(4), a Chapter 7 discharge will not discharge a debt “for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny.” Although Plaintiffs alleged that Debtor’s actions rose to the level of fraud, embezzlement and/or larceny, the bankruptcy court concluded that Debtor’s actions constituted only embezzlement. On appeal, Plaintiffs have not challenged the bankruptcy court’s determination that the other types of nondischargeability under § 523(a)(4) – defalcation and larceny – are inappropriate for summary judgment. Therefore, the Panel will not address the elements for nondischargeability under § 523(a)(4) for defalcation or larceny. -13- Federal law defines “embezzlement” under section 523(a)(4) as the fraudulent appropriation of property by a person to whom such property has been entrusted or into whose hands it has lawfully come. A creditor proves embezzlement by showing that he entrusted his property to the debtor, the debtor appropriated the property for a use other than that for which it was entrusted, and the circumstances indicate fraud. Brady v. McAllister (In re Brady), 101 F.3d 1165, 1172-73 (6th Cir. 1996) (citations and internal quotation marks omitted). Thus, Plaintiffs must show (1) they entrusted property to Debtor; (2) Debtor appropriated the property for a use other than that for which it was entrusted, and (3) the circumstances indicate fraud or deceit. See id. In the case currently on appeal, the bankruptcy court noted that conversion and embezzlement are similar. Because the allegations in the Complaint, which were deemed admitted, established conversion and described circumstances indicating fraud, the bankruptcy court concluded that Debtor’s actions constituted embezzlement. The Panel agrees with the bankruptcy court’s conclusion that the Michigan judgment for statutory conversion establishes the first two elements for embezzlement: (1) Plaintiffs entrusted property to Debtor, and (2) Debtor appropriated the property for a use other than that for which it was entrusted. See In re Brady, 101 F.3d at 1173. The bankruptcy court erred, however, when it concluded that the allegations in the complaintdescribing circumstances indicating fraud – the third element for nondischargeability under the embezzlement portion of § 523(a)(4) – were also a necessary element for statutory conversion under Michigan law. As noted above, statutory conversion under Michigan Compiled Laws § 600.2919a does not require circumstances indicating fraud. Section 600.2919a(a) defines statutory conversion as “[a]nother person’s stealing or embezzling property or converting property to the other person’s own use” (emphasis added). Allegations of fraud, even if deemed admitted based on a defendant’s default, cannot be “necessarily determined” for purposes of issue preclusion if they were not an essential element for a finding of statutory conversion. See In re Markowitz, 190 F.3d at 462 (in holding that the state court jury’s finding of legal malpractice did not decide issue of “willful and malicious injury” under § 523(a)(6), the Sixth Circuit noted that the state court recognized a requested special interrogatory on the question of willful and malicious injury “was neither necessary nor essential to [the state court] judgment”); In re Pixley, 456 B.R. at 787-89 (allegations in state court complaint that injury -14- to plaintiff was “willful” within the meaning of § 523(a)(6) were not “necessary to” or “essential to support” judgment for statutory conversion under Michigan law). And since Michigan law does not require circumstances of fraud for statutory conversion under Michigan Compiled Laws § 600.2919a(a), the state court judgment cannot have issue preclusive effect as to the third element of nondischargeability for embezzlement under § 523(a)(4). Therefore, the bankruptcy court erred when it granted summary judgment for Plaintiffs based on the issue preclusive effect of the prior state court judgment.