Garner, Matter of

• Decision Date: 29 June 1995
• Docket Number: No. 94-40688,94-40688
• Citation: 56 F.3d 677
• Parties: 33 Collier Bankr.Cas.2d 1449, Bankr. L. Rep. P 76,561 In the Matter of William L. GARNER, Debtor. William L. GARNER, Appellant, v. Kenneth E. LEHRER, Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 677

56 F.3d 677

33 Collier Bankr.Cas.2d 1449, Bankr. L. Rep. P 76,561

In the Matter of William L. GARNER, Debtor William L. GARNER, Appellant, v. Kenneth E. LEHRER, Appellee.

No. 94-40688.

United States Court of Appeals Fifth Circuit.

June 29, 1995.

Philip I. Palmer, Jr., Palmer & Palmer, Dallas, TX, for appellant.

Robert E. Mangum, Jr., Looper, Reed, Mark & McGraw, Dallas, TX, Jim M. Perdue, Jr., J. Cary Gray, Looper, Reed, Mark & McGraw, Houston, TX, for appellee.

Appeal from the United States District Court for the Eastern District of Texas.

Before KING, GARWOOD, and BENAVIDES, Circuit Judges.

KING, Circuit Judge:

In this case, we are confronted with questions surrounding the preclusive effect of a state court judgment on the dischargeability of a debt in a subsequent federal bankruptcy proceeding. In 1988, Kenneth E. Lehrer filed suit against William L. Garner in Texas state court. Garner answered Lehrer's petition, but Garner failed to respond to Lehrer's request for admissions. The trial of the state court suit was held in November of 1990. Although Garner failed to appear for trial, the court heard evidence and entered a judgment in favor of Lehrer. Subsequently, Garner sought the protections of Chapter 7 of the Bankruptcy Code. In the bankruptcy court, Lehrer objected to the discharge of the state court judgment and sought summary judgment. The bankruptcy court granted Lehrer's motion, and Garner appealed to the district court. The district court affirmed the decision of the bankruptcy court. Garner appeals, alleging that the state court judgment in this case should not have preclusive effect on the dischargeability of the debt. We disagree, and consequently, we affirm the decision of the district court.

I. BACKGROUND

Lehrer is an independent real estate and financial consultant. In September of 1988, Lehrer filed a lawsuit in Texas state court against Garner and businesses associated with Garner. Specifically, Lehrer contended that Garner and the other defendants intentionally and knowingly "misappropriated and used for their benefit and gain [Lehrer's] identity and credentials in connection with the sale and development of a real estate venture." On October 10, 1988, Garner, through counsel, answered Lehrer's complaint with a general denial, stating, in part, that "Defendants deny each and every, all and singular, the allegations contained in [Lehrer's] Original Petition and demand strict proof thereof."

Apparently, the case remained dormant until June of 1990, when the court sent the parties a notice of trial setting advising them that the matter was scheduled for trial during the week of November 19, 1990. On July 20, 1990, Lehrer served requests for admissions on Garner and the other defendants, but Garner and the other defendants did not respond.

The trial was held on November 19, 1990 as scheduled. Garner, however, failed to appear. Nevertheless, the trial proceeded, and evidence, including the testimony of Lehrer (taken by telephone), was heard by the court. That same day, the court signed a judgment in the case. In its judgment, the court found that "[b]ased on the testimony presented, ... [the] [d]efendants acted with spite, ill-will and malice." Further, the court declared that Lehrer "never authorized Defendants ... to use [his] name or resume in their brochure and that ... Defendants did so without [Lehrer's] consent." Accordingly, the court awarded Lehrer $200,000 in actual damages, $600,000 in punitive damages, $2500 in attorneys fees, and pre- and postjudgment interest.

Almost a year later, on October 3, 1991, Garner filed a voluntary petition for bankruptcy relief under Chapter 7 of the Bankruptcy Code. In late January of 1992, Lehrer objected to the discharge of the judgment debt that Garner owed to him, and the following summer, on August 19, 1992, Lehrer filed a motion for summary judgment in the bankruptcy court. According to Lehrer, the motion was proper because the state court had determined that the debt was based on fraud, false pretense, or willful and malicious injury, and therefore it was not dischargeable under section 523(a) of the Bankruptcy Code. ¹ Moreover, Lehrer contended that the under the full faith and credit requirements of 28 U.S.C. Sec. 1739, "the Court is bound by the finding in the state court judgment that the debt arose from Section 523(a) conduct and is therefore excepted from discharge."

After a hearing, the Bankruptcy Court found:

that the facts involved were fair and fully litigated in the prior action[,] ... that the facts were essential to the prior litigation[, and] that the parties were adversaries which meets the Texas law requirements. In that case, the record establishes that the defendant debtor in this case had actual notice of the hearing, his attorney filed an answer in the matter and that following the hearing he had 30 days to file a motion for a new trial.... [Garner] filed a response to the complaint. And, after that, he failed to defend himself against the claim. The Court finds that [Garner] had his day in Court; that the requirements of 523(a)(6) were therefore met. That is, the ... action by [Lehrer] as evidenced by th[e] record, ... was done with the intent to harm, ... the Court found malicious intention here and it caused an economic injury to [Garner] and that these injuries were the proper results of the action by [Lehrer] established in the state [c]ourt record.

Consequently, the bankruptcy court granted Lehrer's motion for summary judgment.

Garner appealed to the district court, and the district court affirmed, noting that although a default judgment generally does not "give rise to collateral estoppel, that is not what happened in the state court litigation between Garner and Lehrer. The judgment in the state court was not based upon the unsupported allegation in a petition, but rather, on the evidence presented to the trial judge."

Garner appeals, arguing that the district court erred in determining that the state court proceeding was "fully and fairly litigated" for collateral estoppel purposes and in failing to require Lehrer to prove the fraud findings in an adversary proceeding in the bankruptcy court. Garner further argues that Congress has indicated a special federal interest in the area of dischargeability of debts, and consequently, the state court judgment, even if adequate for traditional res judicata purposes, should not have preclusive effect in Garner's bankruptcy. We reject all of Garner's contentions.

II. DISCUSSION

Our inquiry into the preclusive effect of a state court judgment is guided by the full faith and credit statute which provides that the "judicial proceedings of any court of any ... state shall have the same full faith and credit in every court within the United States ... as they have by law or usage in the courts of such State ... from which they are taken." 28 U.S.C. Sec. 1738; see also Marrese v. American Academy of Orthopaedic Surgeons, 470 U.S. 373, 380, 105 S.Ct. 1327, 1331-32, 84 L.Ed.2d 274 (1985) (discussing the statute). As the Supreme Court has noted:

This statute directs a federal court to refer to the preclusion law of the State in which judgment was rendered. "It has long been established that Sec. 1738 does not allow federal courts to employ their own rules of res judicata in determining the effect of state judgments. Rather, it goes beyond the common law and commands a federal court to accept the rules chosen by the State from which the judgment is taken."

Marrese, 470 U.S. at 380, 105 S.Ct. at 1332 (quoting Kremer v. Chemical Constr. Corp., 456 U.S. 461, 481-82, 102 S.Ct. 1883, 1898, 72 L.Ed.2d 262 (1982)). Further, we have noted that a "court's decision to give full faith and credit to the state court judgment ... [is] a question of law, which we review de novo." Sanders v. City of Brady (In re Brady, Texas Mun. Gas Corp.), 936 F.2d 212, 217 (5th Cir.), cert. denied, 502 U.S. 1013, 112 S.Ct. 657, 116 L.Ed.2d 748 (1991). In the instant case, the judgment in question was entered by a Texas state court. Accordingly, we apply Texas rules of preclusion. ²

Under Texas law, collateral estoppel "bars relitigation of any ultimate issue of fact actually litigated and essential to the judgment in a prior suit, regardless of whether the second suit is based upon the same cause of action." Bonniwell v. Beech Aircraft Corp., 663 S.W.2d 816, 818 (Tex.1984). Further, Texas law requires that:

A party seeking to invoke the doctrine of collateral estoppel must establish (1) the facts sought to be litigated in the second action were fully and fairly litigated in the prior action; (2) those facts were essential to the judgment in the first action; and (3) the parties were cast as adversaries in the first action.

Id. In the instant case, there is no question that the last two elements of Texas's test for collateral estoppel were met. Garner, however, contends that the district court erred in finding that the state court claim was fully and fairly litigated so as to provide for collateral estoppel in his bankruptcy proceeding. Specifically, Garner argues that the state court entered a default judgment against him, and such "a default prove-up does not met the required standard" for collateral estoppel. We disagree.

Some commentators have noted that "[i]n the case of a judgment entered by ... default, none of the issues is actually litigated." Restatement (Second) of Judgments Sec. 27 cmt. e (1982); see also 18 Charles A. Wright, Arthur R. Miller, & Edward H. Cooper, Federal Practice and Procedure Sec. 4442 (1981) (noting that a default judgment should not support issue preclusion because "the essential foundations of issue preclusion are lacking for want of actual litigation or actual decision of anything ... [and because] a defendant may suffer a default for many valid reasons other than the merits of the plaintiff's claim"). On the other hand, "[w]hen an issue is...