A Civil Litigator's Guide to Collateral Estoppel and Dischargeability in Bankruptcy
| Publication year | 1987 |
| Pages | 1990 |
1987, November, Pg. 1990. A Civil Litigator's Guide to Collateral Estoppel and Dischargeability in Bankruptcy
Most civil litigators typically will find themselves in situations where they need to know the consequences of a particular resolution of a lawsuit in the event that the defendant later files bankruptcy. This article discusses the application of collateral estoppel in the Bankruptcy Court; specifically, default judgments, summary judgments, consent judgments and judgments rendered after trial.
Situation No. 1: A defendant in state court is sued on theories of both contract and fraud. Plaintiff is admittedly owned money under the contract, but defendant vehemently denies the fraud allegation that, had plaintiff not received false financial information from the defendant, plaintiff would never have entered into the contract in the first place. Becuase of the fraud allegation, exemplary damages are sought. The plaintiff agrees with a settlement offer whereby defendant will confess judgment on the contract claim but the fraud claim will be dismissed with prejudice. What is the result if the defendant later files bankruptcy? Will the fraud exception to discharge be inapplicable because the fraud claim was dismissed with prejudice?
Situation No. 2: The defendant in Situation No. 1 says he plans to file bankruptcy anyway in six months. He wants the settlement described in Situation No. 1, but if he cannot get it without incurring substantial attorney's fees, he will just default because he cannot afford a defense. What is the result if defendant files bankruptcy after the default judgment has entered? May the debt be dischargeable even though the state court judgment has already entered finding fraud?
Situation No. 3: Defendant's attorney files an answer, thinking it will lead to the settlement set forth in Situation No. 1. Plaintiff refuses the settlement offer and files a motion for summary judgment on both theories. Defendant refuses to pay his attorney's fees, his attorney withdraws, and defendant fails to respond to the summary judgment motion. May the debt be dischargeable even though judgment has entered finding fraud?
Situation No. 4: The case in Situation No. 1 proceeds to trial on both theories. What is the result in the subsequent bankruptcy if plaintiff wins on the fraud claim? If defendant wins on the fraud claim?
Situation No. 5: Plaintiff in Situation No. 1 is convinced that the fraud claim unnecessarily complicates the case, and that defendant probably would not be able to pay exemplary damages even if they were awarded. Therefore, he only sues for the breach of contract. Plaintiff is aware that he will never be able to sue for fraud because of the bar of res judicata. Nevertheless, in the defendant's bankruptcy proceeding subsequent to the state court judgment, will the plaintiff still be able to object to dischargeability of the judgment debt based on fraud?
There are two premises necessary to an understanding of the questions raised above. First, collateral estoppel treats as final those questions actually and necessarily decided in a prior suit. It requires that the precise issue in the later proceedings had been raised in the prior proceeding, that the issue was actually litigated, and that the determination was necessary to the outcome.(fn1)
The second premise necessary to an understanding of the questions raised above is that § 523(a) of the Bankruptcy Reform Act of 1978 ("Bankruptcy Code")(fn2) provides for exceptions to discharge; that is, even though the debtor has been granted a discharge, there are types of debts for which the discharge does not apply.(fn3) For three out of the ten exceptions to discharge set forth in § 523, the creditor must file a complaint to determine dischargeability in the Bankruptcy Court within sixty days of the first date set for the meeting of creditors, or the debt will be discharged despite the fact that it may fit within...
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