Bankruptcy Judge Schmetterer's Opinion (25)

Bankruptcy Caption: In re Daniel Paczesny

Bankruptcy No. 02 B 12387

Adversary Caption:

Adversary No.

Date of Issuance: September 19, 2002

Judge: Jack B. Schmetterer

Appearance of Counsel:

Attorney for Movant or Plaintiff: Daniel A. Edelman (Edelman, Combs & Latturner)

Attorney for Respondent or Defendant: Terry D. Weissman (Neal, Gerber & Eisenberg)

Trustee or Other Attorneys: Law Offices of Albert F. Ferolie; Hinshaw & Culbertson; Johnson & Associates; Office of the United States Trustee

UNITED STATES BANKRUPTCY COURT
NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION

IN RE	)
	)
DANIEL PACZESNY	)	No. 02 B 12387
	)
Debtor.	)

MEMORANDUM OPINION ON
MOTION OF ALLEGED DEBTOR TO DISMISS

For reasons stated below, the Motion of Alleged Debtor to dismiss the Involuntary Petition filed

by Windsor Thomas Group, Inc. (“Windsor”) against Daniel Paczesny under 11 U.S.C. § 303 is allowed

and the Involuntary Petition and this case are dismissed under 11 U.S.C. § 303(b) and (h)(1) because a

bona fide dispute exists as to the validity of the debt asserted.

The following history is undisputed by the parties.

Windsor loaned $24,000 to Paczesny and promptly confessed judgment against him using an

attorney selected by it. Judgment was entered in a Florida court without notice to Defendant for

$71,101.50. After waiting a year until the Florida judgment was incontestable under Florida law, Windsor

sought to register that judgment in Illinois. However, the state court judge ultimately refused to register the

judgment, ruling that it was obtained by fraud and that the Florida court did not have personal jurisdiction

over Paczesny. That judgment of the Illinois judge was not appealed and is final.

Followingthe Illinois courtruling, WindsorfileditsfirstInvoluntaryPetitionagainstPaczesnybased

on the Florida judgment. Because the Illinois court ruling showed a bona fide dispute over the asserted

judgment debt, that Involuntary Petition was dismissed under 11 U.S.C. § 303(b) and (h)(1).

Windsorthenfiled the present Involuntary Petition, this time alleging only the originalloanamount

of $24,000 plus interest, not the judgment. The claim asserted in that regard rests on the original note

evidencing debt, which was the original contract between the parties. Windsor is the only petitioning

creditor.

ThejudgmentinFloridastillstands. Under Florida law Paczesny cannot attack that judgment, and

Windsor still asserts its validity. Paczesny therefore argues inter alia that the original debt merged into the

Floridajudgment and cannotbeasserted or collectedonso longas thatFlorida judgment stands, asserting

the authority discussed below.

In Florida, the doctrine of the law of merger was set forth in Diamond R. Fertilizer Co. v. Lake

Packing, 743 So. 2d 547, 548-49 (Fla. App. 5 Dist. 1999), where it was stated:

The doctrine ofmergerprovidesthata causeofactionuponwhich an adjudication is predicated merges into the judgment and that, consequently, the cause of action’s independent existence perishes upon entry of the judgment. The doctrine of merger is based on the reasoning that the judgment is considered to be superior to the cause of action on which it is founded. By extinguishing the cause of action on which a judgment isbased, the doctrine ofmergerbars a subsequent actionforthe same cause. The doctrine of merger can be applied only to matters “between parties to the litigation or their successors, conclusively settled by the decision of the court.” That is, “in order to effect a merger of a lower obligation into a higher, the obligations must be between the same parties, and upon the same debt or claim.”

In Illinois, the doctrine of the law of merger was set forth in Doerr v. Schmitt, 375 Ill. 470, 31

N.E.2d 971, at 972 (1941):

“The general rule is, that by a judgment at law or decree in chancery, the contract or instrument uponwhich the proceeding is based becomes entirely merged in the judgment. By the judgment of the court, itlosesallofits vitality and ceases to bind the parties to its execution. Its force and effect are then expended, and all remaining legal liability is transferred to the judgment or decree. Once becoming merged in the judgment, no further action at law or suit in equity can be maintained on theinstrument.” This rule was reaffirmed in PeoriaSavingsLoan&Trust Co. v. Elder, 165 Ill. 55, 45 N.E. 1083, and has never been departed from. The same rule is stated by Freeman in his treatise on judgments, fifth edition, volume 2, section 546, in this language: “Courts, in order to give a proper and just effect to a judgment, sometimes look behind, to see uponwhat it wasfounded,justas theywould,inconstruingastatute,seek to ascertain the occasion and purpose of its enactment. The cause of action, though it may beexaminedto aid ininterpreting the judgment, can never again become the basis of a suit between the same parties. It has lost its vitality; it has expended its force and effect. All its power to sustain rights and enforce liabilities has terminated in the judgment or decree. It ‘is drowned in the judgment,’and musthenceforthbe regardedasfunctus officio.” It is said in Gaines v. Miller, 111 U.S. 395, 4 S.Ct. 426, 28 L.Ed. 466, that where a judgment is obtained for money the demand is merged in the judgment and a suit cannot be brought on the claim for the moneybut the onlyremedyisto enforcethe judgment or bringanothersuit on the judgment.

Inthe case atbar,Windsorobtainedajudgment onFebruary23, 1999,intheTenthJudicialCircuit

of Polk County, Florida,case No. GCG-99-448, inthe amount of $71,101.50 based upon the “contract

between the parties” referred to at page two of the pending Involuntary Petition. That judgment is still in

fullforceandeffect. Since the Florida judgment still stands, the “contract between the parties” was at least

arguably merged into that judgment. Thus, as the case is presented here Windsor probably cannot sue on

the contract since the contract was merged into the judgment. Rather, Windsor’s only recourse is to

enforce the judgment. However, as earlier determined the judgment itself is subject to a bona fide dispute

between the parties, and as such could not form the basis of the earlier Involuntary Bankruptcy Petition.

And because the note apparently merged into the judgment, a bona fide dispute lies over the purported

debt claimed here. While Windsor argues reasons why the merger doctrine should not be recognized in

this case, the dispute over it is evident and certainly bona fide.

In this Circuit, the standard for determining whether a debt is subject to a bona fide dispute was

enunciated in Matter of Busick, 831 F.2d 745, 750 (7th Cir. 1987):

. . . [T]he bankruptcy court must determine whether there is an objective basis for either a factual or legal dispute as to the validityofthe debt. However, “[t]he statute does not require the court to determine the outcome of any dispute, only its presence or absence. Only a limited analysis of the claims at issue is necessary.”

Inadoptingthis standard,the EighthCircuit CourtofAppeals noted in In re Rimell, 946 F.2d 1363, 1365

(8th Cir. 1991):

The court’sobjective istoascertainwhethera disputethatisbona fide exists; the court is not to actually resolve the dispute.

It is Windsor’s burden to show that its claim is not subject to a bona fide dispute in light of the

foregoing history. Id. It has not met that burden. The absence of a bona fide dispute is a jurisdictional

prerequisite. In re Onyx Telecommunications, Ltd., 60 B.R. 492, 496 (Bkrtcy. S.D.N.Y. 1985). The

presence of such dispute here means that the pending Involuntary Petition must be dismissed.

Because a bona fide dispute therefore exists as to the validity of the debt presently asserted, the

pending Involuntary Petition must and will be dismissed by separate order.

A suit was filed in state court relating to the foregoing and other issues. That suit was removed to

this Court as an Adversary proceeding now pending here. But because the bankruptcy case is being

dismissed, the related Adversary will also be dismissed by separate order for lack of jurisdiction.

All other issues raised by the parties in pleadings on the alleged Debtor’s Motion to Dismiss, and

hisseparate but related Motion for Judgment on the Pleadings, neednotand thereforewillnotbe reached

and are reserved for adjudication by state courts.

ENTER:

Jack B. Schmetterer

United States Bankruptcy Judge Entered this 19th day of September 2002