Grogan v. Garner

Decision Date15 January 1991
Docket NumberNo. 89-1149,89-1149
Citation112 L.Ed.2d 755,498 U.S. 279,111 S.Ct. 654
PartiesCoy R. GROGAN, et al., Petitioners v. Frank J. GARNER, Jr
CourtU.S. Supreme Court
Syllabus

Respondent Garner filed a petition for relief under Chapter 11 of the Bankruptcy Code, listing a fraud judgment in petitioners' favor as a dischargeable debt. Petitioners then filed a complaint in the proceeding requesting a determination that their claim should be exempted from discharge pursuant to § 523(a), which provides that a debtor may not be discharged from, inter alia, obligations for money obtained by "actual fraud." Presented with portions of the fraud case record, the Bankruptcy Court found that the elements of actual fraud under § 523 were proved and that the doctrine of collateral estoppel required a holding that the debt was not dischargeable. It and the District Court rejected Garner's argument that collateral estoppel does not apply because the fraud trial's jury instructions required that fraud be proved by a preponderance of the evidence, whereas § 523 requires proof by clear and convincing evidence. The Court of Appeals reversed, concluding that the clear-and-convincing evidence standard applies in fraud cases, since Congress would not have silently changed pre-§ 523(a) law, which generally applied the higher standard in common-law fraud litigation and in resolving dischargeability issues, and since the Code's general "fresh start" policy militated in favor of a broad construction favorable to the debtor.

Held: Preponderance of the evidence is the standard of proof for § 523(a)'s dischargeability exceptions. Neither § 523 and its legislative history nor the legislative history of § 523's predecessor prescribes a standard of proof, a silence that is inconsistent with the view that Congress intended to require a clear-and-convincing evidence standard. The preponderance standard is presumed to be applicable in civil actions between private parties unless particularly important individual interests or rights are at stake, and, in the context of the discharge exemption provisions, a debtor's interest in discharge is insufficient to require a heightened standard. Such a standard is not required to effectuate the Code's "fresh start" policy. Since the Code limits the opportunity for a completely unencumbered new beginning to the honest but unfortunate debtor by exempting certain debts from discharge, it is unlikely that Congress would have fashioned a proof standard that favored an interest in giving the perpetrators of fraud a fresh start over an interest in protecting the victims of fraud. It is also fair to infer from § 523(a)'s structure that Congress intended the preponderance standard to apply to all of the discharge exceptions. That they are grouped together in the same subsection with no suggestion that any particular exception is subject to a special standard implies that the same standard should govern all of them, and it seems clear that a preponderance standard is sufficient to establish nondischargeability of some claims. The fact that many States required proof of fraud by clear and convincing evidence at the time the current Code was enacted does not mean that Congress silently endorsed such a rule for the fraud discharge exception. Unlike many States, Congress has chosen a preponderance standard when it has created substantive causes of action for fraud. In addition, it amended the Bankruptcy Act in 1970 to make nondischargeability a question of federal law independent of the issue of the underlying claim's validity, which is determined by state law. Moreover, both before and after 1970, courts were split over the appropriate proof standard for the fraud discharge exception. Application of the preponderance standard will also permit exception from discharge of all fraud claims creditors have reduced to judgment, a result that accords with the historical development of the discharge exceptions, which have been altered to broaden the coverage of the fraud exceptions. Pp. 283-291.

881 F.2d 579 (CA8 1989), reversed.

STEVENS, J., delivered the opinion for a unanimous Court.

Michael J. Gallagher, Kansas City, Mo., for petitioners.

John G. Roberts, Jr., for the U.S., et al., as amici curiae in support of petitioners by special leave of Court.

Timothy K. McNamara, Kansas City, Mo., for respondent.

Justice STEVENS delivered the opinion of the Court.

Section 523(a) of the Bankruptcy Code provides that a discharge in bankruptcy shall not discharge an individual debtor from certain kinds of obligations, including those for money obtained by "actual fraud." 1 The question in this case is whether the statute requires a defrauded creditor to prove his claim by clear and convincing evidence in order to preserve it from discharge.

Petitioners brought an action against respondent alleging that he had defrauded them in connection with the sale of certain corporate securities. App. 16-25. Following the trial court's instructions that authorized a recovery based on the preponderance of the evidence, a jury returned a verdict in favor of petitioners and awarded them actual and punitive damages. Id., at 28-29. Respondent appealed from the judgment on the verdict, and, while his appeal was pending, he filed a petition for relief under Chapter 11 of the Bankruptcy Code, listing the fraud judgment as a dischargeable debt.

The Court of Appeals for the Eighth Circuit reduced the damages award but affirmed the fraud judgment as modified. Grogan v. Garner, 806 F.2d 829 (1986). Petitioners then filed a complaint in the bankruptcy proceeding requesting a determination that their claim based on the fraud judgment should be exempted from discharge pursuant to § 523. App. 3-4. In support of their complaint, they introduced portions of the record in the fraud case. The Bankruptcy Court found that all of the elements required to establish actual fraud under § 523 had been proved and that the doctrine of collateral estoppel required a holding that the debt was therefore not dischargeable. In re Garner, 73 B.R. 26 (WD Mo.1987).

Respondent does not challenge the conclusion that the elements of the fraud claim proved in the first trial are sufficient to establish "fraud" within the meaning of § 523.2 Instead, he has consistently argued that collateral estoppel does not apply because the jury instructions in the first trial merely required that fraud be proved by a preponderance of the evidence, whereas § 523 requires proof by clear and convincing evidence. Both the Bankruptcy Court 3 and the District Court 4 rejected this argument.

The Court of Appeals, however, reversed. In re Garner, 881 F.2d 579 (CA8 1989). It recognized that the "Bankruptcy Code is silent as to the burden of proof necessary to establish an exception to discharge under section 523(a), including the exception for fraud," id., at 581, but concluded that two factors supported the imposition of a "clear and convincing" standard, at least in fraud cases. First, the court stated that the higher standard had generally been applied in both common-law fraud litigation and in resolving dischargeability issues before § 523(a) was enacted, and reasoned that it was unlikely that Congress had intended silently to change settled law.5 Second, the court opined that the general "fresh start" policy that undergirds the Bankruptcy Code militated in favor of a broad construction favorable to the debtor.6

The Eighth Circuit holding is consistent with rulings in most other Circuits,7 but conflicts with recent decisions by the Third and Fourth Circuits.8 The conflict, together with the importance of the issue, prompted us to grant certiorari, 495 U.S. 918, 110 S.Ct. 1945, 109 L.Ed.2d 308. We now reverse.

I

At the outset, we distinguish between the standard of proof that a creditor must satisfy in order to establish a valid claim against a bankrupt estate and the standard that a creditor who has established a valid claim must still satisfy in order to avoid dischargeability. The validity of a creditor's claim is determined by rules of state law. See Vanston Bondholders Protective Comm. v. Green, 329 U.S. 156, 161, 67 S.Ct. 237, 239, 91 L.Ed. 162 (1946).9 Since 1970, however, the issue of nondischargeability has been a matter of federal law governed by the terms of the Bankruptcy Code. See Brown v. Felsen, 442 U.S. 127, 129-130, 136, 99 S.Ct. 2205, 2208-2209, 2211, 60 L.Ed.2d 767 (1979).10

This distinction is the wellspring from which cases of this kind flow. In this case, a creditor who reduced his fraud claim to a valid and final judgment in a jurisdiction that requires proof of fraud by a preponderance of the evidence seeks to minimize additional litigation by invoking collateral estoppel. If the preponderance standard also governs the question of nondischargeability, a bankruptcy court could properly give collateral estoppel effect to those elements of the claim that are identical to the elements required for discharge and which were actually litigated and determined in the prior action. See Restatement (Second) of Judgments § 27 (1982).11 If, however, the clear-and-convincing standard ap- plies to nondischargeability, the prior judgment could not be given collateral estoppel effect. § 28(4). A creditor who successfully obtained a fraud judgment in a jurisdiction that requires proof of fraud by clear and convincing evidence would, however, be indifferent to the burden of proof regarding nondischargeability, because he could invoke collateral estoppel in any event.12

In sum, if nondischargeability must be proved only by a preponderance of the evidence, all creditors who have secured fraud judgments, the elements of which are the same as those of the fraud discharge exception, will be exempt from discharge under collateral estoppel principles. If, however, nondischargeability must be proved by clear and convincing evidence, creditors who secured fraud judgments based only on the...

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