Com. of Mass. v. Hale

• Decision Date: 18 March 1980
• Docket Number: No. 79-1513,79-1513
• Citation: 618 F.2d 143
• Parties: , Bankr. L. Rep. P 67,378 COMMONWEALTH OF MASSACHUSETTS, Plaintiff, Appellant, v. Vincent HALE, Defendant, Appellee.
• Court: U.S. Court of Appeals — First Circuit

Page 143

618 F.2d 143

6 Bankr.Ct.Dec. 177, Bankr. L. Rep. P 67,378

COMMONWEALTH OF MASSACHUSETTS, Plaintiff, Appellant, v. Vincent HALE, Defendant, Appellee.

No. 79-1513.

United States Court of Appeals First Circuit.

Argued Jan. 11, 1980.

Decided March 18, 1980.

Robert D. Cohan, Asst. Atty. Gen., Consumer Protection Division, Public Protection Bureau, Dept. of Atty. Gen., Boston, Mass., for plaintiff, appellant.

Edward P. Holzberg, Salem, Mass., for defendant, appellee.

Before COFFIN, Chief Judge, CAMPBELL and BOWNES, Circuit Judges.

LEVIN H. CAMPBELL, Circuit Judge.

On February 12, 1976, the Attorney General of Massachusetts, acting for the Commonwealth, filed a complaint in state court against Vincent Hale (and two corporations said to be under Hale's control) pursuant to the provisions of Mass.G.L. c. 93A, the so-called State Consumer Protection Act. See Slaney v. Westwood Auto, Inc., 366 Mass. 688, 322 N.E.2d 768 (1975) (describing the operation of c. 93A). The complaint alleged that the defendants had engaged in a variety of specified acts and practices proscribed by section 2 of the Act, which provides that, "Unfair methods of competition and unfair or deceptive acts or practices in the conduct of any trade or commerce are hereby declared unlawful." Basically the complaint charged the defendants with making deceptive and misleading representations to purchasers of their products and with failure to perform contractual and statutory obligations. ¹ The complaint indicated that the action had been commenced "on behalf of the individuals who have suffered harm" as a result of the defendants' unlawful behavior, see Mass.G.L. c. 93A, § 4, and requested both injunctive relief and an award of damages "sufficient to make whole all consumers injured by the defendants' (conduct)." Hale neither answered the complaint nor appeared to challenge its allegations. On August 4, 1976, state procedural and notice requirements having been met, the state court entered a partial default judgment against the three defendants on the issue of liability only. ² Injunctive relief was granted with damages to be determined at a subsequent evidentiary hearing. Such a hearing was held in late January 1977, the court receiving testimony and affidavits of some 18 consumers. Hale again failed to appear. The court assessed damages in an amount in excess of $20,000, and Hale was later ordered to pay $50 per month towards satisfaction of that judgment.

On January 23, 1978, Hale filed a voluntary petition in bankruptcy listing the Commonwealth as an unsecured creditor. The Commonwealth commenced an action in the bankruptcy court under section 17 of the Bankruptcy Act, 11 U.S.C. § 35, to have Hale's debt to it declared nondischargeable. It subsequently moved for judgment on the record, contending that the issue of nondischargeability could be determined solely by reference to the record of the state court proceedings. Following oral argument on this question, the bankruptcy judge denied the Commonwealth's motion, refusing to "accept the state court default judgment and record as conclusive proof of the issues relevant to dischargeability . . . ." The district court affirmed and this appeal followed. ³

The Commonwealth's main argument is that through the doctrine of collateral estoppel the state court default judgment for violations of the Consumer Protection Act provides sufficient basis for a finding of nondischargeability under sections 17(a)(2) and 17(a)(8) of the Bankruptcy Act, 11 U.S.C. §§ 35(a) (2) and (8). ⁴ It is far from settled, particularly in light of the 1970 Amendments to the Bankruptcy Act which grant the bankruptcy courts exclusive jurisdiction to find dischargeability, that "there is . . . room for the application of the technical doctrine of collateral estoppel in determining the nondischargeability of debts described in section 17(a)(2), (4), and (8) of the Bankruptcy Act." In re Houtman, 568 F.2d 651, 653 (9th Cir. 1978). See Brown v. Felsen, 442 U.S. 127, 139 n.10, 99 S.Ct. 2205, 2213 n.10, 60 L.Ed.2d 767 (June 4, 1979). Several courts and commentators have taken the position that collateral estoppel has no role to play in the dischargeability determination. See In re Houtman, supra; In re Pigge, 539 F.2d 369 (4th Cir. 1976); In re Blessing, 442 F.Supp. 68 (S.D.Ind.1977); 1A Collier on Bankruptcy, P 17.16(6) at 1650.1-1650.2. But see In re Ross, 602 F.2d 604 (3d Cir. 1979). There is the further question here, moreover, whether, even assuming collateral estoppel is generally applicable in section 17 discharge proceedings, the doctrine may be invoked where the prior judgment was entered by default. See In re McMillan, 579 F.2d 289, 292 (3d Cir. 1978) ("(B)ecause the bankrupts did not 'actually litigate' the (state court) case, not even facts which were necessary to that (default) judgment can collaterally estop them from litigating the same issues in the bankruptcy case"). See also In re Mallory, Nos. B78-1521A; B78-1522A, slip op. (N.D.Ga. Nov. 20, 1979); 1B Moore's Federal Practice, P 0.444(2) at 4005 and 1979-80 Cumulative Supp. at 204. But see United States v. McQuatters, 370 F.Supp. 1286 (W.D.Tex.1973) (pre-1970 amendments).

While the above questions are intriguing and might be critical in another case, they need not be answered here. Even assuming arguendo that ordinary concepts of collateral estoppel would be applicable in a bankruptcy dischargeability action where the state court judgment underlying the disputed debt has been entered by default, the Commonwealth would not be entitled to bypass a further hearing given the instant facts. Application of the doctrine of collateral estoppel could at most prevent Hale from relitigating in the dischargeability proceeding those matters "necessary" or "essential" to support the earlier entered default judgment. See 1B Moore's Federal Practice, P 0.444(2) at 4005; Sandler v. Silk, 292 Mass. 493, 500, 198 N.E. 749, 751-52 (1935); Watts v. Watts, 160 Mass. 464, 36 N.E. 479 (1894). Comparing the elements essential to establishing both a Chapter 93A, § 2 Consumer Protection Act violation and a section 17(a)(2) or (8) finding of nondischargeability, we believe that the minimum misconduct required to make out a Chapter 93A claim falls short of that needed to support a section 17 nondischargeability determination.

Chapter 93A, entitled "Regulation of Business Practices in Consumer Protection," has been described by the Massachusetts Supreme Judicial Court as a "statute of broad impact" creating "new substantive rights and provid(ing) new procedural devices for the enforcement of those rights." Slaney v. Westwood Auto, Inc., supra, 322 N.E.2d at 772. See Commonwealth v. DeCotis, 366 Mass. 234, 316 N.E.2d 748, 755 n.8 (1974). The substantive heart of the statutory scheme, section 2, makes unlawful, inter alia, "unfair or deceptive acts or practices in the conduct of any trade or commerce . . . ." The Massachusetts courts have made it clear that "the definition of an actionable 'unfair or deceptive act or practice' goes far beyond the scope of the common law action for fraud or deceit." ⁵ Slaney, supra, 322 N.E.2d at 779. Of critical importance to the present controversy is the fact that under Chapter 93A it is unnecessary for a prevailing plaintiff to establish that the defendant knew his allegedly deceptive representations were false; similarly, a Chapter 93A plaintiff need not prove his actual reliance upon defendant's representations. Slaney, supra, 322 N.E.2d at 779.

The standards for nondischargeability under sections 17(a)(2) and (8) of the Bankruptcy Act are narrower. Under section 17(a)(2), which makes nondischargeable, inter alia, a debt based upon a liability for obtaining money or property by false pretenses or false representations, "(i)t must . . . affirmatively appear that (the) representations were knowingly and fraudulently made, and that they were relied upon by the other party." 1A Collier on Bankruptcy P 17.16 at 1635-36. In addition, a fraudulent intent to deceive is generally required. In re Houtman, 568 F.2d 651, 655 (9th Cir. 1978) (debtor, among other things, must have made the representations at the time knowing they were false, with the intention and purpose of deceiving the creditor); Wright v. Lubinko, 515 F.2d 260 (9th Cir. 1975). Likewise, to secure a finding of nondischargeability under section 17(a)(8) for willful and malicious injuries to the person or property of another the requisite knowledge and intent must be proven. See 1A Collier on Bankruptcy P 17.17 at 1652-53; Den Haerynck v. Thompson, 228 F.2d 72, 74 (10th Cir. 1955). Cf. In re Nance, 556 F.2d 602, 610-11 (1st Cir. 1977).

Thus, it would be possible for a state court to find a violation of chapter 93A, § 2 for behavior which lacks the characteristics of misconduct necessary to support a section 17(a)(2) or (8) finding of nondischargeability. Given this, and the further fact that the complaint underlying the state default judgment lacked any allegation of the existence of the knowledge and intent required under section 17, we believe the entry of that judgment could in no event bind the bankruptcy court on the issue of nondischargeability.

Notions of collateral estoppel aside, the Commonwealth argues alternatively, "there is a preponderance of evidence on record sufficient to establish nondischargeability." In support of this argument the Commonwealth cites to various passages gleaned from the consumer affidavits introduced at the state court hearing on the issue of damages. We see no error, however, in the lower court's refusal, without its own evidentiary hearing, to base a section 17 determination of nondischargeability entirely on these affidavits previously introduced at a hearing in the state court. The affidavits were received by the state court solely to establish monetary damages, rather than for the matters for which they are now cited.

We are not...