In re Harang, 634 B.R. 731 (6th Cir. BAP 2021)

Dear constituency list members of the Insolvency Law Committee, the following is a case update written by Joseph Boufadel, a partner at Salvato Boufadel LLP, analyzing a recent decision of interest:

SUMMARY

In In re Harang, 634 B.R. 731 (6th Cir. BAP 2021), the Bankruptcy Appellate Panel for the Sixth Circuit held that a bankruptcy court has the authority to impose conditions and incorporate prior factual findings in a dismissal order on a plaintiff’s voluntary motion to dismiss with prejudice an adversary proceeding under Rule 41 of the Federal Rules of Civil Procedure. 

To view the published opinion, click here.

FACTS

Debtor and plaintiff Jack W. Harang filed an adversary proceeding against the Internal Revenue Service, seeking a declaration that his tax debts were dischargeable. In the course of litigation, after it answered the complaint, the IRS obtained two discovery sanctions orders, which resolved certain factual findings against the debtor. These sanctions orders foreshadowed a loss at trial for the debtor. Prior to trial, however, the debtor filed a motion to dismiss his case with prejudice under Federal Rules of Civil Procedure (“Rule”) 41(a)(2).

The bankruptcy court heard the motion, announced its decision to dismiss the case, and directed the parties to agree on the form of the order. Because the parties could not agree to the language in the proposed dismissal order, the bankruptcy court prepared its own order, imposing conditions, incorporating prior findings, and dismissing the case with prejudice. 

The bankruptcy court’s order of dismissal recited the protracted history of the case and incorporated the court’s prior factual findings from the two sanctions orders, including findings that established the debtor’s ability but conscious refusal to pay his tax liabilities. The bankruptcy court also determined that dismissal would be with prejudice because the debtor had requested such dismissal and had not withdrawn the motion, and because the government was ready to proceed with trial. 

Concerned with the court’s imposition of these conditions and incorporation of prior factual determinations from the proceeding, the debtor appealed the order of dismissal—but not the two sanctions orders—to the Bankruptcy Appellate Panel for the Sixth Circuit, which affirmed.

REASONING

The BAP held that the bankruptcy court has the authority to impose conditions upon dismissal under Rule 41. In particular, Rule 41(a)(2) provides in relevant part that “[e]xcept as provided in Rule 41(a)(1) [dismissal prior to filing an answer or by stipulation of the parties], an action may be dismissed at the plaintiff’s request only by court order, on terms that the court considers proper.” 

The BAP disagreed with the debtor’s argument that the court lacked the authority to impose conditions on the dismissal because dismissal was “with prejudice.” The IRS had answered the complaint. Therefore, Rule 41 expressly permits the court to set the terms and conditions of dismissal, regardless of whether it is requested with or without prejudice, where the complaint was subject to dismissal under Rule 41(a)(2). The BAP found that the text of Rule 41 is clear, and there is no distinction between imposing conditions on dismissals with or without prejudice in the text of Rule 41.

The BAP also found that the bankruptcy court did not abuse its discretion in issuing the dismissal order on “terms that the court considers proper” under Rule 41(a)(2). At the hearing on the debtor’s motion to dismiss, the court advised that it would incorporate its prior orders and findings (not new factual findings) in its order of dismissal. The debtor had several opportunities to withdraw his motion and proceed to trial but failed to do so. The debtor was afforded an opportunity to confer with his counsel off the record at the hearing but again chose not to withdraw his request. The court then provided the parties an opportunity to agree to the language in the dismissal order but entered its own order after the parties failed to reach an agreement. 

The BAP dispensed with the debtor’s final argument that incorporating prior factual findings in a dismissal order is improper because of its potential res judicata effect on future litigation. The debtor confuses claim preclusion (res judicata) and issue preclusion (collateral estoppel). The issue preclusive effect of the dismissal order was not an issue ripe for determination because such future litigation had not commenced. The bankruptcy court did not rule on the issue preclusive effect of its order, which it left to a future court to decide. However, the voluntary dismissal with prejudice was res judicata as to the claims in the debtor’s complaint. The bankruptcy court’s incorporation of the procedural history and prior factual findings in the dismissal order—which expressed the court’s condemnation of the debtor’s misconduct in the proceeding—was proper.

AUTHOR’S COMMENTARY

I find it surprising that this opinion needed to be published. It seems obvious, almost tautological, that a bankruptcy court has the authority and discretion to address misbehavior among the parties before it and to reflect those findings in a (dismissal) order.

To rule otherwise, as the debtor advocated for, would create chaos. If correct, the debtor’s argument that no conditions may be set on a voluntary dismissal with prejudice would permit parties to avoid the consequences of their discovery abuses and bad acts, to avoid the potential of an unfavorable decision after expensive litigation, or to escape responsibility under contractual attorney’s fees provisions that would otherwise render them financially responsible.

These materials were written by ILC member Joseph Boufadel of Salvato Boufadel LLP in Los Angeles, California (Jboufadel@salvatoboufadel.com). Editorial contributions were provided by Kathleen Cashman-Kramer of Sullivan Hill Rez & Engel APLC in San Diego.