In re Stowell

• Citation: 113 BR 322
• Decision Date: 20 April 1990
• Docket Number: Bankruptcy No. 88-11334,Adv. No. 88-1126.
• Parties: In re Albert J. STOWELL and Sarah K. Stowell, Debtors. Benito CARDENAS and Maria De Jesus Maldonado, Plaintiffs, v. Albert J. STOWELL and Sarah K. Stowell, Defendants.
• Court: United States Bankruptcy Courts. Fifth Circuit. U.S. Bankruptcy Court — Western District of Texas

113 B.R. 322 (1990)

In re Albert J. STOWELL and Sarah K. Stowell, Debtors Benito CARDENAS and Maria De Jesus Maldonado, Plaintiffs, v. Albert J. STOWELL and Sarah K. Stowell, Defendants.

Bankruptcy No. 88-11334, Adv. No. 88-1126.

United States Bankruptcy Court, W.D. Texas, Austin Division.

April 20, 1990.

Harvey D. Caughey, Austin, Tex., for debtors.

Dale Ossip Johnson, Bearden & Johnson, Austin, Tex., for plaintiffs.

FIRST AMENDED MEMORANDUM OPINION

LARRY E. KELLY, Chief Judge.

On July 6, 1989 this court entered an order granting a Motion For Summary Judgment filed by Benito Cardenas and Maria De Jesus Maldonado (collectively "Plaintiff"). The Debtor-Defendant, Albert J. Stowell, timely filed a Motion For New Trial and/or For Additional Findings of Facts. Plaintiff also filed a timely Motion For Additional Findings of Facts. On October 30, 1989, this Court held an oral hearing on the Motions, and tentatively indicated that the Motions For New Trial and For Additional Findings of Facts would all be denied. However, after a thorough review of the file and the law, this court now has determined to grant Stowell's Motion For New Trial, modify its earlier memorandum opinion and to vacate its earlier Order Granting Plaintiff's Motion For Summary Judgment.¹

BACKGROUND FACTS

The factual basis for the Plaintiff's claims against Stowell is a Judgment Nihil Dicit which was signed and entered on December 17, 1987 in cause No. 388,917 styled Benito Cardenas and Maria De Jesus Maldonado, Plaintiffs versus Albert J. Stowell, Defendant in the 201st Judicial Court of Travis County, Texas. The state court judgment is a final judgment and is founded upon findings that money was obtained from Plaintiff by the Defendant Stowell by "false pretenses, false representations and/or actual fraud as well as by means of willful and malicious injury to the property of the Plaintiffs." In pertinent part, the state court judgment found that:

1. On or about January 25, 1985 Mr. Stowell and Plaintiffs entered into a contract for deed for a house known locally as 2208 Haskell Street, Austin, Texas.

2. Plaintiffs were native-born citizens of Mexico who could not speak, read or write English and who were unsophisticated in matters of real estate.

3. Mr. Stowell knew that the house he was selling to Plaintiffs had been condemned by the City of Austin and declared uninhabitable.

4. Mr. Stowell represented to Plaintiffs that the house was in good repair and that the fair market value of the house was in excess of $37,000.00.

5. The representations of Defendant and Defendant\'s business associate, David Rodriguez, as to the character, quality, condition and circumstances of the property were false and were knowingly made to Plaintiffs with the intent of fraudulently inducing Plaintiffs into the sale and purchase of the real property.

6. The property in question was burdened with judgment and tax liens that were not disclosed to Plaintiffs.

7. Plaintiffs relied on these misrepresentations and acted upon them to their detriment in that they (i) paid $7,000.00 for the house, (ii) paid $3,000.00 for repairs and (iii) were never able to occupy the house but had to return it to Mr. Stowell when they could not make the house habitable to the satisfaction of City of Austin inspectors.

8. The acts of Defendant were unconscionable within the meaning of the Texas Deceptive Trade Practices Act.

9. The acts of Defendant were wilful and with specific intent to fraudulently induce Plaintiffs into the sale and purchase of the property.

10. The foregoing facts as well as all other facts in support of the judgment herein have been established by Plaintiffs not merely by a preponderance of the evidence but by clear and convincing evidence.

Stowell filed this Chapter 7 proceeding on May 5, 1988 and Plaintiffs timely commenced this Adversary Proceeding to obtain a non-dischargeable judgment under 11 U.S.C. § 523(a)(2) and (6). Plaintiffs rely on the doctrine of res judicata or collateral estoppel, request that this court find that the substantive issues have been previously determined in the underlying state court action, and preclude Defendant Stowell from presenting any additional evidence on the issues relevant to the determination of dischargeability.

ISSUES PRESENTED

1. Whether a state court judgment has res judicata (i.e., claim preclusive) effect in a dischargeability action in federal bankruptcy court.

2. Whether a state court judgment has collateral estoppel (i.e., issue preclusion) effect in a dischargeability action in federal bankruptcy court and, if so, whether the federal or state test for collateral estoppel should be applied.

3. Whether the elements of the appropriate test are met in this case.

4. Whether the Motion For Summary Judgment should be granted.

DISCUSSION

I. Contrasting Res Judicata With Collateral Estoppel:

1.01 Bankruptcy courts are increasingly confronted with the res judicata or collateral estoppel effect, if any, of state court judgments in subsequent bankruptcy proceedings. One commentator has succinctly defined these two concepts:

"Res judicata and collateral estoppel are the two primary devices for insuring the finality of judicial decisions. Res judicata or "claim preclusion" . . . prevents relitigation of claims or defenses available to the parties in a prior suit. Collateral estoppel or "issue preclusion" prevents parties from relitigating only those issues actually and necessarily litigated in a prior proceeding." Ferriell, The Preclusive Effect of State Court Decisions in Bankruptcy, 58 American Bankruptcy Law Journal 349, 350 (1985).

1.02 Restatement (Second) of Judgments (1982) deals with the preclusive effects of judgments in civil actions. Its introductory chapter states:

"Preclusive effects refers to limitation on the opportunity in a second action to litigate claims or issues that were litigated, or could have been litigated, in a prior action. In general terms, these limitations include the rules of claim preclusion and issue preclusions . . . the rule of claim preclusion . . . is that a party ordinarily may not assert a civil claim arising from a transaction with respect to which he has already prosecuted such a claim, whether or not two claims wholly correspond to one another. The rule of issue preclusion, sometimes referred to as collateral estoppel . . . is that a party ordinarily may not relitigate an issue that he fully and fairly litigated on a previous occasion." Restatement (Second) Judgments (1982), Chapter 1, pg. 1. (hereafter "Restatement").

1.03. Two important U.S. Supreme Court cases also contrast these two concepts:

"In this opinion we use the term `claim preclusion\' to refer to `res judicata\' in a narrow sense, i.e., the preclusive effect of a judgment in foreclosing litigation of matters that should have been raised in an earlier suit. In contrast, we use the term `issue preclusion\' to refer to the effect of a judgment in foreclosing relitigation of a matter that has been litigated and decided." See Migra v. Warren City School District Board of Education, 465 U.S. 75, 81, 104 S.Ct. 892, 896, 79 L.Ed.2d 56, 63 (1984); see also Marrese v. American Academy of Orthopaedic Surgeons, 470 U.S. 373, 105 S.Ct. 1327, 84 L.Ed.2d 274 (1985).

1.04. Plaintiffs have argued in part that this Court is bound by the principles of res judicata to find that Stowell's actions determined in the state court judgment to be actual fraud, result in a non-dischargeable debt pursuant to 11 U.S.C. § 523(a)(2) and (6). This argument is easily disposed of. Res judicata applies only when an attempt is made to twice litigate the same claim. Montana v. United States, 440 U.S. 147, 153, 99 S.Ct. 970, 973, 59 L.Ed.2d 210 (1979). The claim litigated in the state court was based on common law fraud principles and on the Texas Deceptive Trade Practices Act. The claim being litigated in this Adversary Proceeding arises under federal law and will determine the question of whether the judgment debt can be discharged. These are patently not the same claim. The U.S. Supreme Court has also held that res judicata does not apply where a pre-petition state court judgment is urged to prove a dischargeability suit before a bankruptcy court:

. . . We reject respondent\'s contention that res judicata applies here and we hold that the bankruptcy court is not confined to a review of the judgment and record in the prior state court proceedings when considering the dischargeability of respondent\'s debt.

Brown v. Felsen, 442 U.S. 127, 140, 99 S.Ct. 2205, 2213, 60 L.Ed.2d 767 (1979). This point in Plaintiff's Motion For Summary Judgment is denied.

II. Application of Collateral Estoppel in Bankruptcy Dischargeability Litigation.

2.01. In Brown, the Supreme Court distinguished the Application of Collateral Estoppel while expressly leaving open the question of whether or not collateral estoppel would apply in bankruptcy dischargeability litigation.

"This case concerns res judicata only and not the narrower principle of collateral estoppel. . . . If in the course of adjudicating a state law question, a state court should determine factual issues using standards identical to those of § 17 of the former Bankruptcy Act; similar to § 523 of the present Bankruptcy Code), then collateral estoppel, in the absence of countervailing statutory policy, would bar relitigation of those issues in the bankruptcy court." Brown, 442 U.S. at 139 n. 10, 99 S.Ct. 2213 n. 10.

2.02. Several Circuit opinions have addressed the issue of collateral estoppel in bankruptcy dischargeability litigation. The Ninth Circuit held that, in appropriate circumstances, a prior judgment may be prima facie evidence of the facts contained therein, but it will never be granted issue preclusive effect. In re Rahm, 641 F.2d 755, 757 (9th Cir.1981), cert. denied, 454 U.S. 860, 102 S.Ct. 313, 70 L.Ed.2d 157 (1981). Other circuits have found that issue preclusion may be...