In re Eadie, Bankruptcy No. 83-04948-R

• Decision Date: 06 August 1985
• Docket Number: Adv. No. 84-0128-R.,Bankruptcy No. 83-04948-R
• Citation: 51 BR 890
• Parties: In re William A. EADIE, Debtor. Richard L. BEND, D.C., K.S.J. Murkowski, D.C., and S.S. White, D.C., and Ronald Semlow, D.C., Plaintiffs, v. William A. EADIE, Defendant.
• Court: U.S. Bankruptcy Court — Eastern District of Michigan

51 B.R. 890 (1985)

In re William A. EADIE, Debtor.

Richard L. BEND, D.C., K.S.J. Murkowski, D.C., and S.S. White, D.C., and Ronald Semlow, D.C., Plaintiffs, v. William A. EADIE, Defendant.

Bankruptcy No. 83-04948-R, Adv. No. 84-0128-R.

United States Bankruptcy Court, E.D. Michigan.

August 6, 1985.

Donald J. Gasiorek, Southfield, James O'Toole, Sterling Heights, for plaintiffs.

Alan P. Goldstein, Southfield, for defendant.

ORDER GRANTING PLAINTIFFS' MOTION FOR SUMMARY JUDGMENT

STEVEN W. RHODES, Bankruptcy Judge.

This matter is before the Court on a motion for summary judgment filed by plaintiffs Richard L. Bend, K.S.J. Murkowski, and S.S. White.¹ They contend that a prior judgment against the defendant precludes his relitigation of the issues in this case. The Court agrees and grants the motion for summary judgment.

I.

On July 27, 1983, the plaintiffs instituted an action in Wayne County Circuit Court against William Eadie. The complaint alleged that Eadie fraudulently represented that he could organize a concert to raise funds for the Council for Scoliosis, a charitable organization in which the plaintiffs are involved. The complaint further alleged that in reliance upon these representations, the plaintiffs advanced $42,250.00 to Eadie, and that such funds were used by Eadie for his personal benefit. On October 23, 1983, the state court entered a default judgment in favor of the plaintiffs because of the defendant's failure to cooperate in the discovery process. A constructive trust was imposed on the defendant's property in the amount of $42,250.00 plus interest at the statutory rate.

Thereafter, Eadie filed a petition in bankruptcy pursuant to the Bankruptcy Code, 11 U.S.C. § 101 et seq. On February 22, 1984, this adversary proceeding was commenced, claiming that the debt evidenced in the prior judgment is nondischargeable under 11 U.S.C. § 523(a)(2) as a debt obtained through false representations.

In this motion, the plaintiffs contend that the state court judgment is entitled to collateral estoppel effect in this dischargeability proceeding and that it prevents relitigation of the issues of fraud and misrepresentation. The plaintiffs contend that collateral estoppel applies because the precise issues that were raised in the state court proceedings would have to be addressed to determine the issue of dischargeability. Spilman v. Harley, 656 F.2d 224 (6th Cir. 1981).

Noting that the doctrine of collateral estoppel also requires that the identical issue was actually litigated in the prior proceeding, Spilman v. Harley, supra, the plaintiffs contend that the prior state court judgment was a decision on the merits because the parties might have had their controversy determined if they had presented all the evidence and the court had applied the law. Gursten v. Kenney, 375 Mich. 330, 134 N.W.2d 764 (1965). In this regard, the plaintiffs contend that the state court obtained jurisdiction over Eadie, that Eadie had retained an attorney to represent him in the state court proceedings, and that he could have raised any applicable defenses in those proceedings. Thus, the plaintiffs conclude that the fact that a default judgment was entered does not deprive the judgment from being characterized as a decision on the merits.

The debtor contends that because the bankruptcy court has exclusive jurisdiction to determine the dischargeability of a debt, a state court judgment does not operate as res judicata on this issue, and summary judgment is therefore not appropriate.

II.

In Spilman v. Harley, supra, the Court of Appeals for the Sixth Circuit addressed the issue of whether a bankruptcy court must consider every question of dischargeability of a debt de novo, or whether the parties are collaterally estopped by a prior court judgment determining the nature of the debt. The court began by citing Brown v. Felsen, 442 U.S. 127, 99 S.Ct. 2205, 60 L.Ed.2d 767 (1979), in which the Supreme Court recognized the exclusive jurisdiction of the bankruptcy courts to determine dischargeability, and held that a bankruptcy court is not precluded by res judicata from considering evidence on an issue which could have been litigated in the prior state court proceeding but was not. The Spilman court noted, however, that Brown v. Felsen expressly left open the question of whether collateral estoppel would apply.

Noting that the lower courts disagree as to whether collateral estoppel should apply in dischargeability proceedings, the Spilman court concluded that its application "is logically consistent with the Supreme Court's decision in Brown and the exclusive jurisdiction of the bankruptcy courts while at the same time encouraging judicial economy." 656 F.2d at 227. The court stated, however, that this doctrine requires that the precise issue in the later proceedings was raised in a prior proceeding, that the issue was actually litigated, and that the determination was necessary to the outcome. 656 F.2d at 228. In discussing these requirements, the court stated:

If the important issues were not actually litigated in the prior proceeding, as is the case with a default judgment, then collateral estoppel does not bar relitigation in the bankruptcy court. See Commonwealth of Massachusetts v. Hale, 618 F.2d 143, 146 (1st Cir.1980); Matter of McMillan, 579 F.2d 289, 293 (3d Cir. 1978); Matter of Pigge, supra, 539 F.2d 369 at 373 1976; In re Cooney, 8 B.R. 96, 98-99 (Bkrptcy., W.D.Ky.1980); In re Richards, 7 B.R. 711, 714 (Bkrtcy., S.D.Fla.1980); In re Ashley, 5 B.R. 262, 264 (Bkrtcy., E.D.Tenn.1980); In re McKenna, 4 B.R. 160, 162 (Bkrtcy., N.D. Ill.1980); Matter of Mallory, 1 B.R. 201, 202 (Bkrtcy., N.D.Ga.1979).

Thus, before applying the doctrine of collateral estoppel, the bankruptcy court must determine if the issue was actually litigated and was necessary to the decision in the state court. To do this, the bankruptcy court should look at the entire record of the state proceeding, not just the judgment, see Matter of Herman, supra, 6 B.R. 352 at 357 (D.Ct., S.D.N.Y.1980); National Homes Corp. v. Lester Industries, Inc. supra, 336 F.Supp. 644 at 648 (W.D.Va.1972); Webster, supra, 1 B.R. at 63, or hold a hearing if necessary, see Matter of Ross, supra, 602 F.2d 604 at 608 (3d Cir.1979). 656 F.2d at 228. (Emphasis added).

In In re Byard, 47 B.R. 700 (Bankr.M.D. Tenn.1985), the plaintiff requested that a state court default judgment against the debtor be given collateral estoppel effect in the dischargeability action before the court. The plaintiff's argument was based on the "full faith and credit" statute, 28 U.S.C. § 1738, which provides in pertinent part:

The . . . judicial proceedings of any court of any state . . . shall have the same full faith and credit in every court within the United States and its Territories and Possession as they have by law or usage in the courts of such state.

In Byard, the court noted that the principles of "full faith and credit" have undergone re-examination and clarification in several recent Supreme Court opinions, and that the rule as stated by the Supreme Court is that "a federal court must give to a state court judgment the same preclusive effect as would be given that judgment under the law of the state in which the judgment was rendered." 47 B.R. at 701-02 (citing Migra v. Warren City School District Board of Education, 465 U.S. 75, 104 S.Ct. 892, 79 L.Ed.2d 56 (1984); Marrese v. American Academy of Orthopaedic Surgeons, ___ U.S. ___, 105 S.Ct. 1327, 84 L.Ed.2d 274 (1985); McDonald v. West Branch, 466 U.S. 284, 104 S.Ct. 1799, 80 L.Ed.2d 302 (1984); Kremer v. Chemical Construction Corp., 456 U.S. 461, 102 S.Ct. 1883, 72 L.Ed.2d 262 (1982), reh'g denied, 458 U.S. 1133, 103 S.Ct. 20, 73 L.Ed.2d 1405 (1982). See also City of Canton, Ohio, et al. v. Maynard, 766 F.2d 236, (6th Cir., 1985)).

The court stated, however, that federal courts in bankruptcy cases, including the court in Spilman v. Harley, supra, had overlooked this general rule and have applied federally developed rules of issue preclusion without regard to the relevant state law. 47 B.R. at 703-04. Further, the court stated that this practice can have significant effects:

This adversary proceeding illustrates the very real effect on litigants of selecting a federal rule for application of collateral estoppel rather than the test which would be applied by the state of judgment. As demonstrated below, it is the law of Kansas that Harris\' default judgment would be entitled to issue preclusive effect on the factual issues decided by the state court. However, applying the federal rule articulated in Spilman leads to the opposite result. The "actually litigated" requirement is the problem for the plaintiff. The Spilman court noted that "if the important issues were not actually litigated in the prior proceeding, as is the case with a default judgment, then collateral estoppel does not bar relitigation in the bankruptcy court." Spilman at 228. 47 B.R. at 704.

Thus, the court predicted that if the Court of Appeals were to consider the issues presented in Spilman in light of recent developments in the law of full faith and credit, the court would address the collateral estoppel question differently. 47 B.R. at 704-05.

Specifically, the court held that the Supreme Court in Marrese v. American Academy, supra, set forth the manner in which federal courts must determined the preclusive effect of state court judgments. In Marrese, the Supreme Court had held that once the preclusive effect is determined under the law of the state of origin, the court must determine whether any federal statute expressly or impliedly creates an exception to the usual application of § 1738. 105 S.Ct. at 1331-35.

On the facts before it, the Byard court determined that the default judgment would preclude relitigation under Kansas law. Applying the second step of the Marrese analysis, the court further held:

In the opinion of this court, there is nothing

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