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In re Townsel

United States District Court, E.D. Michigan, Southern Division

March 27, 2017

In re DUANE TOWNSEL, II, Debtor.
v.
RECON MANAGEMENT GROUP, LLC, Appellee. DUANE TOWNSEL, II, Appellant, Bankr. No. 15-50803 Adv. Pro. No. 15-04836

          Honorable Thomas J. Tucker, Judge

          OPINION AND ORDER

          Honorable Linda V. Parker, Judge

         This matter is before the Court on appeal from the United States Bankruptcy Court for the Eastern District of Michigan, with the Honorable Thomas J. Tucker presiding. Debtor and Appellant Duane Townsel, II (“Townsel”) appeals Judge Tucker's decision holding that Townsel was collaterally estopped from challenging the default judgment that determined that his debt to Recon Management Group (“Recon”) was nondischargeable as a debt for embezzlement. For the reasons that follow, this Court affirms Judge Tucker's decision.

         I. Standard of Review

         The bankruptcy court's findings of fact are reviewed under the clearly erroneous standard. Fed.R.Bankr.P. 8013. “A finding of fact is clearly erroneous ‘when although there is evidence to support it, the reviewing court, on the entire evidence, is left with the definite and firm conviction that a mistake has been committed.' ” United States v. Mathews (In re Matthews), 209 B.R. 218, 219 (B.A.P. 6th Cir. 1997) (quoting Anderson v. City of Bessemer City, 470 U.S. 564, 573 (1985)). The bankruptcy court's conclusions of law are reviewed de novo. Nuvell Credit Corp. v. Westfall (In re Westfall), 599 F.3d 498, 501 (6th Cir. 2010). This means the Court reviews the law independently and gives no deference to the conclusions of the bankruptcy court. Myers v. IRS (In re Meyers), 216 B.R. 402, 403 (B.A.P. 6th Cir.1998). “[I]f a question is a mixed question of law and fact, then [the reviewing court] must break it down into its constituent parts and apply the appropriate standard of review for each part.” Investors Credit Corp. v. Batie (In re Batie), 995 F.2d 85, 88 (6th Cir. 1993).

         II. Factual and Procedural Background

         This bankruptcy matter arises from Townsel's conviction of embezzlement in November 2002 before the Wayne County Circuit Court. (ECF No. 6 at Pg ID 328.) Townsel was convicted of embezzlement for taking computers and software from Lear Corporation. (ECF No. 5 at Pg ID 315.) On January 8, 2003, he was sentenced to probation for three years, required to pay $500 per month in restitution or prison, and serve 50 hours of community service. (ECF No. 3 at Pg ID 160.) Townsel was discharged from probation on September 19, 2006. (Id. at Pg ID 162.) While Townsel had not yet completed his restitution payments, the Wayne County Circuit Court stated that restitution could be collected in a civil action. (Id.) Recon provided security for Lear Corporation when Townsel stole the computers and software. (Id. at Pg ID 234.) Recon subsequently chose to pay Lear the amount of the property stolen. (Id.)

         On August 22, 2007, Recon Management Group LLC filed suit against Townsel to recover the unpaid restitution amounting to $57, 231.00 in the Wayne County Circuit Court. (Id. at Pg ID 164-67.) In the complaint, Recon stated that “[Townsel] was ordered to pay restitution to Plaintiff pursuant to his felony criminal conviction in Wayne County Circuit Court, Case 02-012003 People v. Townsel, in the amount of $65, 171.00 on 1-8-07.” (Id. at Pg ID 166.) After Townsel failed to answer the state court complaint, the Wayne County Circuit court entered a true default judgment in favor of Recon. (Id. at Pg ID 169.) The default judgment, entered on November 16, 2007, amounted to $57, 231 in damages and $150 in costs. (Id.)

         On July 17, 2015, Townsel filed a petition for Chapter 7 bankruptcy. (Id. at Pg ID 171-209.) Recon filed an adversary complaint to have its debt excepted from the discharge pursuant to 11 U.S.C. §§ 523(a)(2)(A) and (a)(4). (Id. at Pg ID 13.) Recon argued that Townsel was collaterally estopped from relitigating any issue related to the default judgment and therefore, his debt to Recon was excepted from discharge. In the Complaint, Recon stated that “[o]n January 8, 2007, Defendant [Townsel] was ordered to pay restitution to Plaintiff pursuant to his felony conviction for embezzlement in the Wayne County Circuit Court, Case No. 02-012003, People v. Townsel, in the amount of $65, 171.00.” (Id.) In response, Townsel argued that collateral estoppel did not apply because the issue of embezzlement was not alleged on Recon's state court complaint. (Id. at Pg ID 245.)

         In an order entered on March 9, 2016, Judge Tucker determined that Townsel's debt to Recon, as a result of the state court default judgment entered in 2007, is nondischargeable as a debt for embezzlement under 11 U.S.C. § 523(a)(4). 11 U.S.C. § 523(a)(4) provides that:

A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt-
(4) for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny[.]

         Judge Tucker relied on the word “embezzlement” within the bankruptcy code to determine whether the issue was actually litigated. In particular, Judge Tucker looked to see “whether all of the required elements for the Court to find the debt at issue to be nondischargeable as a debt under Section 523(a)(4), were actually litigated” in the 2007 proceeding. (ECF No. 3 at Pg ID 290.) Judge Tucker determined that the criminal conviction of embezzlement that Townsel was charged with in 2002 “necessarily includes all of the elements for a finding of non-dischargeability of that debt under Section 523(a)(4) for embezzlement.” (Id. at Pg ID 297.)

         After establishing that the definition of embezzlement under the statute convicting Townsel and under the bankruptcy code are the same, Judge Tucker turns to whether Recon incorporated the 2002 embezzlement conviction in the case. Judge Tucker finds that Recon does allege embezzlement by Townsel by referencing Townsel's state court criminal embezzlement case. (Id. at Pg ID 298.) Judge Tucker ultimately finds that the default judgment necessarily determined the elements of embezzlement based on the well pleaded allegations in Recon's ...


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