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In re Molding Systems Engineering Corp.

November 22, 2005

IN RE: MOLDING SYSTEMS ENGINEERING CORPORATION, D/B/A MOLDING SYSTEMS ILLINOIS CORPORATION, A/K/A MOLDING SYSTEMS CORPORATION, DEBTOR,
JOHN HOWER, APPELLANT,
v.
MOLDING SYSTEMS ENGINEERING CORPORATION, D/B/A MOLDING SYSTEMS ILLINOIS CORPORATION, A/K/A MOLDING SYSTEMS ) CORPORATION, APPELLEE.



The opinion of the court was delivered by: Murphy, Chief District Judge

MEMORANDUM AND ORDER

BACKGROUND

On September 23, 2003, Debtor/Appellee Molding Systems Engineering Corporation (Molding Systems) filed a voluntary petition under Chapter 11 of the Bankruptcy Code (Bk. Ct. Doc. 1). Appellant John Hower (Hower) filed a claim as a judgment creditor for a state court judgment he had obtained in September 2003 against Molding Systems for unpaid commissions in excess of $500,000. That lawsuit was initiated in 1997. Molding Systems filed an objection to Hower's claim on the basis that Hower had filed an individual Chapter 7 bankruptcy in 1999, in which he failed to disclose his state court action as an asset. In response to Molding Systems' objection, Hower filed an affidavit stating that he filed his bankruptcy pro se in Florida in 1999. He also stated that he was not aware of the need to list the claim against Molding Systems but that he had told the Trustee assigned to his bankruptcy case about the claim and the Trustee did not tell him to amend his schedules to list the claim as an asset in his bankruptcy case. The affidavit also states that the state court verdict did not exclusively include claims that pre-dated his 1999 bankruptcy filing but included unpaid commissions through the date of the trial in 2003 (Bk. Ct. Doc. 175).

The bankruptcy court heard argument on Molding Systems' objection to Hower's claim on July 30, 2004 (Bk. Ct. Doc. 181). In his Opinion allowing the objection, United States Bankruptcy Judge Gerald D. Fines found that there was "no credible evidence" of the disclosure of the pending state court litigation to the bankruptcy Trustee (Bk. Ct. Doc. 189). Because Hower failed to abide by the bankruptcy laws in disclosing the litigation in his personal bankruptcy, Judge Fines found that Hower is judicially estopped from filing a claim in Molding Systems' bankruptcy (Id.). Hower appeals Judge Fines's decision allowing Molding Systems' objection and striking Hower's claim. This Court heard oral argument on the appeal on Tuesday, November 8, 2005.

ANALYSIS

Pursuant to 28 U.S.C § 158(a), the federal district courts have mandatory exclusive jurisdiction over appeals from final judgments, orders, and decrees of bankruptcy judges. The district court may affirm, modify, or reverse the bankruptcy judge's order, or remand with instructions for further proceedings. FED. R. BANKR. P. 8013. A reviewing court must accept a bankruptcy court's factual findings unless those findings are clearly erroneous. Id.; In re Excalibur Auto. Corp., 859 F.2d 454 (7th Cir. 1988). A bankruptcy court's conclusions of law, however, are reviewed de novo. Calder v. Camp Grove State Bank, 892 F.2d 629, 631 (7th Cir. 1990).

As clarified at the hearing, Hower's position can be broken down into four arguments:

(1) Judge Fines's opinion violates the Rooker-Feldman doctrine; (2) Judge Fines's opinion is barred by res judicata; (3) Judge Fines's finding that Hower's affidavit is not credible is clearly erroneous; and (4) judicial estoppel should not apply in this case. As briefly discussed during the hearing, the first two arguments can be disposed of with little discussion.

Rooker-Feldman

Generally speaking, the Rooker-Feldman doctrine bars a party from bringing an action in federal court to remedy an injury inflicted by the state court's decision. Jensen v. Foley, 295 F.3d 745, 747 (7th Cir. 2002). That party must pursue remedies through the state system until it seeks certiorari from the United States Supreme Court. Id. at 747-48. When the doctrine applies, there is no federal jurisdiction. Id. at 748.

It is true, as Hower's counsel pointed out during the hearing, that the doctrine also precludes federal jurisdiction over claims inextricably intertwined with a state court determination. Brokaw v. Weaver, 305 F.3d 660, 664-65 (7th Cir. 2002) ("the pivotal inquiry in applying the doctrine is whether the federal plaintiff seeks to set aside a state court judgment or whether he is, in fact, presenting an independent claim"). But this bankruptcy case clearly is not barred by the Rooker-Feldman doctrine. Molding Systems filed its petition pursuant to the Bankruptcy Code, and the fact that it did has nothing to do with reviewing the state court judgment. There are mechanisms for judgment creditors to file claims, as Hower attempted to do. The propriety of the disposition of his claim will be addressed below, but it has nothing to do with the Rooker-Feldman doctrine. The doctrine precludes lower federal courts from reviewing state court civil judgments; that is not what the bankruptcy court did.

Res Judicata

Res judicata, or claim preclusion, refers to "the preclusive effect of a judgment in foreclosing litigation of matters that were or could have been raised in an earlier suit." Garcia v. Village of Mt. Prospect, 360 F.3d 630, 634 n.6 (7th Cir. 2004). Under Illinois law, in order for res judicata to apply, the previous action must have (1) reached a final judgment on the merits; (2) involved the same parties or their privies as the current claims; and (3) constituted the same cause of action as the current claims. Id. at 635.*fn1 But a federal court can deny preclusion if the state court proceedings denied the parties a full and fair opportunity to litigate by falling below the minimum requirements of due process. Id. at 634.

Hower argues that the issue of his personal bankruptcy should have been raised in state court and because it was not, Molding Systems is barred from raising it here. It was not raised because Molding Systems did not know about it. In support of its objection to Hower's claim, Molding Systems filed an affidavit of its President, Anthony King, in which he stated that he first became aware of Hower's Chapter 7 bankruptcy on or about May 26, 2004, while conducting a search in connection with Hower's offer to purchase Molding Systems' assets by assuming all claims against it (Bk. Ct. Doc. 180). Expecting Molding Systems to raise a defense that it did not know it had seems unreasonable, but expecting it to raise a defense that it did not know it had and did not discover because of Hower's own non-disclosure is ...


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