Collateral Estoppel and Dischargeability Proceedings
In the May 2002 issue of Code to Code, I examined the requirements for the application of collateral estoppel in adversary proceedings to determine the dischargeability of a debt. This article will address the remaining issues regarding collateral estoppel and the dischargeability of debts.
In order for the doctrine of collateral estoppel to be applicable, the issue must have been actually litigated.1 The "actually litigated" requirement has been described in the following manner:
Issue preclusion (collateral estoppel) does not apply unless the issue to be precluded in the subsequent action was actually litigated and decided in the prior action. Only matters that were actually litigated and determined in the first proceeding cannot later be relitigated. For issue preclusion to apply, the particular issue in the prior proceeding must have been actually litigated and actually decided.2
In Princess House Inc. v. Kraft (In re Kraft),3 the court ruled that the doctrine of collateral estoppel was inapplicable because the prior litigation did not determine whether the debtor had acted maliciously. A jury found that the debtor had interfered with the plaintiff's contractual relationships and wrongfully misappropriated trade secrets. The plaintiff commenced an adversary proceeding to have the debt declared non-dischargeable pursuant to Bankruptcy Code §523(a)(6). The court held that collateral estoppel was inapplicable because the issue of malice, as employed in §523(a)(6), was never before the jury. Consequently, the issue of malice was never actually litigated, so that the prior judgment did not operate as collateral estoppel with respect to that issue in the dischargeability litigation.
A confession of judgment may serve as the basis for collateral estoppel in a dischargeability proceeding.4 In Nier v. Hansen (In re Hansen),5 on the eve of trial the debtor entered into a stipulation and confession of judgment. The debtor admitted the allegations contained in the Second and Third claims for relief which were predicated upon fraud. Subsequently, the debtor filed for chapter 7, and the judgment-creditor filed a complaint objecting to the dischargeability of its debt pursuant to Bankruptcy Code §§523(a)(2)(A) and 523(a)(6). The court ruled that the doctrine of collateral estoppel was applicable. The debtor had the opportunity to actually litigate the issues; however, the debtor declined to expend the resources to litigate the issues or face the possible sanctions.
Collateral estoppel is not afforded to a prior judgment if the judgment was entered on default.6 A default judgment is not given preclusive effect because no issue has been actually litigated.7 The following observations have been made concerning default judgments and collateral estoppel:
However, the preponderent view, and we think the better one, is that, as a general proposition, a default judgment has no collateral estoppel effect. To invoke the doctrine of collateral estoppel in default causes is not only an oppressive application of the doctrine, but also misconceives the nature of a default judgment.8
Bankruptcy courts have declined to apply the doctrine of collateral estoppel in dischargeability proceedings when the judgment in the prior non-bankruptcy proceeding was a default judgment.9 In In re Ianelli,10 a default judgment had been entered against the debtor in U.S. District Court. One of the issues before the court was whether the default judgment would be the basis for applying collateral estoppel in a dischargeability proceeding. The court answered the question in the negative, stating:
The threshold question in the instant case is whether the second requirement [that issue must have been actually litigated] for establishing collateral estoppel has been satisfied. The court of appeals for the Second Circuit has specifically endorsed this requirement. "The relevant issue (must have been) actually litigated and determined in the prior" proceeding. In the case at bar no issues were actually litigated because the prior judgment was procured by default. Consequently, the doctrine of collateral estoppel does not bar relitigation by this court of the issues included in the default judgment.11
Similarly, in Graham v. Billings (In re Billings),12 the issue before Judge Feller was whether a default judgment could be employed as the basis for collateral estoppel in a dischargeability proceeding. Again, the preceding issue was answered in the negative. Judge Feller stated:
Where, as here, the prior judgment obtained in the non-bankruptcy action was obtained by default, the relevant issues have not been actually litigated, and accordingly collateral estoppel does not bar the defendant in the non-bankruptcy action from attempting to prove facts necessary to defeat such an action in the context of a later dischargeability proceeding.13
A consent judgment may be the basis of collateral estoppel depending on the intent of the parties.14 In Roeder v. Brown (In re Brown),15 for example, the court held that a consent judgment could not act as the basis for collateral estoppel because the debtor party lacked the requisite intent that the disposition be binding in later litigation of the same issue. The court stated:
The mere recitation by Roeder's lawyer that "judgment creditor acknowledges this debt is non-dischargeable in bankruptcy" may indicate the intent of the lawyer and Roeder, but it does not indicate that Brown had the same intent. Nothing in the documentation shows that Brown, who was unrepresented by counsel, understood or agreed that he would be precluded in a later bankruptcy case from asking the court to determine whether the consent judgment was dischargeable. Accordingly, the court finds that the issues sought to be precluded were not litigated by the parties in the prior state court action and cannot be given preclusive effect.16
On the other hand, in Klingman v. Levinson,17 the Seventh Circuit held that a consent judgment could be the basis for collateral estoppel because the parties' intent that the judgment be binding was clear from the record. The consent judgment involved the same issues involved in the bankruptcy case, and the defendant was represented in the prior proceeding. If parties to a consent decree indicate their intention that the decree shall terminate the litigation and determine finally certain issues, then their intention should be effectuated. The stipulation provided that the debt would be non-dischargeable. The Seventh Circuit stated:
In the consent decree entered into in this case, the parties specifically provided that the debt owed to Ms. Klingman would "not be dischargeable in any bankruptcy or similar proceeding and that in any subsequent proceeding all of the allegations of the complaint and findings of this court may be taken as true and correct without further proof. In this situation, it is certainly reasonable to conclude that the parties understood the conclusive effect of their stipulation in a future bankruptcy proceeding. Consequently, the consent judgment should be given collateral estoppel effect.18
The doctrine of collateral estoppel requires that the issue must have been necessarily decided in the prior proceeding. One of the leading treatises on federal civil procedure has made the following comments concerning issue preclusion and necessarily decided requirement:
Issue preclusion attaches only to determinations that were necessary to support the judgment entered in the first action. Two common explanations are offered to justify this requirement. First, the tribunal that decided the first case may not have taken sufficient care in determining an issue that did not affect the result, even though the parties vigorously litigated the issue. Second, appellate review may not be available to ensure the quality of the initial decision.19
If a prior litigation does not resolve an issue that is necessary to the judgment rendered in that litigation, then the doctrine of collateral estoppel will not be applied in the dischargeability proceeding.20 In Mickle v. United States (In re Mickle),21 the court declined to apply the doctrine of collateral estoppel because it was not necessary to the prior litigation for the tax court to determine whether the debtor had attempted to defraud the United States or willfully avoid or defeat the payment of taxes. The determination in the prior proceeding did not establish that the debtor acted fraudulently in filing certain tax returns or that he willfully attempted to evade or defeat any tax. Consequently, the prior judgment could not be employed as collateral estoppel to prove the elements required for a cause of action under Bankruptcy Code §523(a)(1)(C).
Courts have applied the doctrine of collateral estoppel when all of the criteria have been satisfied.22 In Freer v. Weinstein (In re Weinstein),23 the beneficiaries of various trusts had obtained a judgment against the debtor for breach of fiduciary duty. The parties made cross-motions for summary judgment. One of the issues before the bankruptcy court was whether the indebtedness resulting from the prior state court judgment was a non-dischargeable obligation under Bankruptcy Code §523(a)(4). The court ruled that the debtor was collaterally estopped from relitigating the issue as to whether he was a fiduciary because that issue was had already been tried to judgment before the state court. Therefore, there were identical issues involved in both actions. The issue of defalcation was also before the state court because the state court jury had found that the debtor had paid himself excessive commissions. The issues were fully litigated because the debtor had contested the allegations in state court for several years. The judgment was also a final judgment because all of the debtor's avenues of appeal had been exhausted. Finally, the state court's determinations were essential to its judgment. The plaintiffs' state court suit for damages and removal of the debtor as trustee were predicated upon the state court's finding that the debtor had breached his fiduciary duty. Under these circumstances, the debtor was estopped from arguing that the requirements of §523(a)(4) were not satisfied.
5 131 B.R. 167 (D. Colo. 1991). Return to article
6 Lee v. United States, 124 F.3d 1291, 1295-96 (Fed. Cir. 1997); Marlee Electronics Corp. v. Antonakis (In re Antonakis), 207 B.R. 201, 204-05 (Bankr. E.D. Cal. 1997); Graham v. Billings (In re Billings), 94 B.R. 803, 808 (Bankr. E.D.N.Y. 1989). Return to article
7 Meyer v. Rigdon, 36 F.3d 1375, 1379 (7th Cir. 1994); United States v. Gottheiner (In re Gottheiner), 703 F.2d 1136, 1140 (9th Cir. 1983); Hall v. Mady (In re Mady), 159 B.R. 487, 489 (Bankr. N.D. Ohio 1993). Return to article
9 See, e.g., Hall v. Mady (In re Mady), 159 B.R. 487, 489 (Bankr. N.D. Ohio 1993); Graham v. Billings (In re Billings), 94 B.R. 803, 808 (Bankr. E.D.N.Y. 1989); In re Ianelli, 12 B.R. 561 (Bankr. S.D.N.Y. 1981). Return to article
22 See, e.g., Rally Hill Productions Inc. v. Bursack (In re Bursack), 65 F.3d 51 (6th Cir. 1995) (collateral estoppel applied in §523(a)(2) dischargeability proceeding); Filbeck v. Clegg (In re Clegg), 189 B.R. 818 (Bankr. N.D. Okla. 1995) (collateral estoppel applied in §523(a)(5) proceeding); Staggs v. Forrester (In re Staggs), 177 B.R. 92 (collateral estoppel applied in §523(a)(6) proceeding). Return to article