Colorado West Transp., Inc. v. McMahon, Civ.A. No. 1:07-CV-285-ODE.

• Decision Date: 13 August 2007
• Docket Number: Civ.A. No. 1:07-CV-285-ODE.
• Citation: 380 B.R. 911
• Parties: COLORADO WEST TRANSPORTATION, INC., Appellant, v. Arthur H. McMAHON, Jr., Appellee.
• Court: U.S. District Court — Northern District of Georgia

380 B.R. 911

COLORADO WEST TRANSPORTATION, INC., Appellant, v. Arthur H. McMAHON, Jr., Appellee.

Civ.A. No. 1:07-CV-285-ODE.

United States District Court, N.D. Georgia, Atlanta Division.

August 13, 2007.

COPYRIGHT MATERIAL OMITTED

Gustav H. Small, Jr., Kelly S. Scarbrough, Cohen Pollock Merlin Axelrod & Small, Atlanta, GA, Hana F. Brilliant, Ugo Colella, Katten Muchin Rosenman, LLP, Washington, DC, for Plaintiff.

Mathew Anthony Schuh, Jason Brian Godwin, Taylor Busch Slipakoff & Duma LLP, Atlanta, GA, for Appellee.

ORDER

ORINDA D. EVANS, District Judge.

This case is before the Court on Appellant Colorado West Transportation Co., Inc.'s Appeal from a decision by the United States Bankruptcy. Court for the Northern District of Georgia. Appellant has also filed a Request for Oral Argument [Doc. 4]. For the reasons set forth below, the decision of the Bankruptcy Court is REVERSED and REMANDED and; the Request for Oral Argument is DENIED.

I. Background

A. Facts

The factual background of this case is undisputed, and the Court reproduces the factual summary of the Bankruptcy Court. In re McMahon, 356 B.R. 286, 289-90 (Bankr.N.D.Ga.2006).

In July 1996, Colorado West Transportation, Inc. ("Colorado West") sued McMahon in a Colorado court seeking unspecified damages based on fraud arising out of Colorado West's purchase in 1994 of the assets of Telluride Mountain Investments, Inc. ("TMI"), a corporation controlled by McMahon, The complaint also asserted a claim for adjustments to the purchase price based solely on the contract in the liquidated amount of $24,839. (PX-1(A)).¹

McMahon moved to dismiss for lack of service and jurisdiction (PX-1(E)), but withdrew the motion (PX-1(I), (J)). Instead of filing an answer, he moved to dismiss and/or for summary judgment, seeking dismissal of the complaint for failure to join TMI as an indispensable party, for lack of specificity in pleading fraud, and because certain contractual provisions barred the claims (PX-1(K)).

Because of the existence of disputed material facts, the Colorado court refused to dismiss (PX-D) and set a status conference for June 26, 1997. (PX-1, docket sheet). After McMahon's lawyers withdrew because McMahon could not pay them (PX-1(0)), the court rescheduled the status conference for July 23. The court's minute order stated in pertinent part, "[McMahon] will be expected to participate in all future [hearings] and should [he] fail to do so [he] may suffer default with an entry of judgment against [him]." (PX-1, docket sheet; next to last page of P1(0)).

McMahon did not attend the status conference (PX-1; docket sheet; last page of PX-1(O)), and Colorado West moved for default judgment on July 30 (PX-A). Attached to the motion for default judgment was an affidavit of Colorado West's principal, Sid Brotman, that states the basis for Colorado West's damages on the fraud claim. According to the affidavit, McMahon made false representations that overstated TMI's historical income. Because Mr. Brotman based the purchase price On a multiple of income, the affidavit concludes, Colorado West paid $375,000 more than it would have paid based on TMI's true income. The affidavit also requested damages on the contract claim in the liquidated amount of $24,829.

Although the notice to McMahon of the filing of the motion for default judgment stated that he had three days from the date of service on July 30 to respond (PX-B), the trial court entered default judgment two days later, on August 1, 1997 (PX-Q). The default judgment recites that McMahon had failed to appear at the status conference and that he was indebted to Colorado West in the amount of $399,829, plus interest. The judgment made no finding that McMahon had engaged in fraud.

The judgment did not specify how much was awarded on each of the two claims. Nevertheless, it is clear that the total judgment amount of $399,829 is the sum of the damages of $24,829 on the contract claim and $375,000, the amount the affidavit claims as damages due to fraud. It is, therefore, arithmetically clear that the default judgment awarded $375,000 on the fraud claim.

Some five years later, McMahon moved to set aside the default judgment in the Colorado court on the grounds that it had been entered without three days' prior notice as Colorado procedure requires and that he had meritorious defenses (P1(S)). On November 5, 2002, the court denied the motion, concluding that the failure to give proper notice was not jurisdictional and that McMahon had not sought relief within a reasonable time as Colorado law requires (PX-E).

McMahon filed his chapter 7 bankruptcy case on October 21, 2004. Colorado West seeks a determination that McMahon's liability under the default judgment is excepted from discharge under 11 U.S.C § 523(a)(2)(A) due to the fact that Colorado West's cause of action was based on fraud.

B. Bankruptcy Court Proceedings

The Bankruptcy Court held a trial, and determined that Colorado West had failed to prove all the elements of fraud necessary to except the judgment from discharged pursuant to § 523(a)(2)(A). In re McMahon, 356 B.R. at 290. The Bankruptcy Court further determined that, pursuant to Colorado state law:

issue preclusion does not apply when a default judgment results from a debtor's abandonment of litigation prior to the filing of an answer, the commencement of discovery, and development of issues on the merits, rather than from abusive litigation tactics, and the trial court did not actually adjudicate any issues.

Id. at 296. Accordingly, the Bankruptcy Court declined to give preclusive effect to the Colorado state court's prior default judgment against McMahon. Id.

The Bankruptcy Court found that even if Colorado law requires giving preclusive effect to the default judgment against McMahon; § 523(c) of the Bankruptcy. Code implicitly repeals the Full Faith and Credit Statute, 28 U.S.C. § 1738, with respect to the, preclusive effect of state court default judgments. Id. at 297. Finally, the Bankruptcy Court concluded that, to the extent it had discretion to apply issue preclusion, it would not, apply issue preclusion in the instant action. Id. at 304.

II. Jurisdiction and Standard of Review

This Court has jurisdiction to review orders of bankruptcy judges under 28 U.S.C. § 158. "On appeal, the bankruptcy court's findings of fact are not to be set aside unless clearly erroneous, but questions of law may be freely examined." Fed.R.Bankr.P. 8013; see also State Farm Mutual Auto. Insurance Co. v. Fielder, 799 F.2d 656, 657 (11th Cir.1986). This Court must examine the bankruptcy court's factual findings for clear error but will review issues of law de novo, In re Goerg, 930 F.2d 1563, 1566 (11th Cir.1991).

III. Issues on Appeal

The parties have presented five issues on appeal:

(1) Whether the Bankruptcy Court erred in holding that the dischargeability provision of the Bankruptcy Code (11 U.S.C. § 523) impliedly repealed the Full Faith and Credit statute (28 U.S.C. § 1738).

(2) Whether the Bankruptcy Court erred in holding that, under Colorado law, a state-court default judgment was not entitled to collateral estoppel effect in bankruptcy dischargeability proceedings.

(3) whether the Bankruptcy Court erred in holding that, under federal law, a state-court default judgment was not entitled to collateral estoppel effect in bankruptcy dischargeability proceedings.

(4) Whether the Bankruptcy Court erred in holding that, in the exercise of its discretion, a state-court default judgment was not entitled to collateral estoppel effect, in bankruptcy dischargeability proceedings.

(5) Whether the Bankruptcy Court erred in holding that Appellant did not prove that Appellee's' representations were false or that Appellant justifiably relied on those representations.

IV. Request for Oral Argument

Because the filings of the parties were sufficient to determine the issues on appeal/Colorado West's Request for Oral Argument [Doc. 4] is DENIED.

V. Discussion

A. The Full Faith and Credit Statute and the Dischargeability, Provisions of the Bankruptcy Code

Colorado West argues that the Bankruptcy Court erred in determining that the dischargeability provisions of the Bankruptcy Code, 11 U.S.C. § 523, implicitly repealed the Full Faith and Credit statute, 28 U.S.C. § 1738. Pursuant to 28 U.S.C. § 1738, the judicial proceedings of any State are granted "the same full faith and credit" in federal court as they would receive in the State's courts. In other words, federal courts must "give the same preclusive effect to state court judgments that those judgments would be given in the courts of the State from which the judgments emerged." Kremer v. Chemical Const. Corp., 456 U.S. 461, 466, 102 S.Ct. 1883, 72 L.Ed.2d 262 (1982).

Although there are exceptions to § 1738, an exception "will not be recognized unless a later statute contains an express or implied repeal." Id. at 468, 102 S.Ct. 1883. In deciding if an implied exception to § 1738 has been created, the "general question is whether the concerns underlying a particular grant of exclusive jurisdiction, justify a finding of an implied partial repeal of § 1738." Marren v. Am. Acad. of Orthopaedic Surgeons, 470 U.S. 373, 386, 105 S.Ct. 1327, 84 L.Ed.2d 274 (1985). The determination "will depend an the particular federal statute as well as the nature of the claim or issue involved in the subsequent federal action.... [T]he primary consideration must be the intent of Congress." Id. The Supreme Court has rarely found an implied repeal of § 1738, "due to the relatively stringent standard for such findings, namely, that there be an `irreconcilable conflict' between the two federal statutes at issue," Matsushita, Elec. Indus. Co., Ltd. v. Epstein, 516 U.S. 367, 381, 116 S.Ct. 873, 134 L.Ed.2d 6 (1996).

It is undisputed that § 523 of the Bankruptcy Code does not expressly repeal § 1738 in dischargeability litigation. It is likewise undisputed that §. 523...