Matter of Trewyn, Bankruptcy No. 81-0020.

• Decision Date: 15 July 1981
• Docket Number: Bankruptcy No. 81-0020.
• Citation: 12 BR 543
• Parties: In the Matter of Francis Laverne TREWYN, Debtor. Daniel LONG, Jr., Plaintiff, v. Francis Laverne TREWYN, Defendant.
• Court: U.S. Bankruptcy Court — Western District of Wisconsin

12 B.R. 543 (1981)

In the Matter of Francis Laverne TREWYN, Debtor Daniel LONG, Jr., Plaintiff, v. Francis Laverne TREWYN, Defendant.

Bankruptcy No. 81-0020.

United States Bankruptcy Court, W.D. Wisconsin.

July 15, 1981.

Mark A. Schulz, Wickhem, Consigny, Andrews & Hemming, S.C., Janesville, Wis., for plaintiff.

Joel B. Winnig, Madison, Wis., for defendant.

OPINION

ROBERT D. MARTIN, Bankruptcy Judge.

The Debtor, Francis Trewyn, d/b/a Frank's Service, entered into a contract with Daniel Long, Jr., to replace Long's home's flat roof with a hipped roof for $7,200 in February of 1979. Long made an initial payment of $5,200. Pursuant to that contract, Trewyn removed a portion of Long's roof. Trewyn never completed the roof replacement. Long commenced an action in Rock County Circuit Court and was awarded a default judgment which stated:

3. The Defendant, Frank Trewyn, made false representations to the Plaintiff with intent to deceive the Plaintiff and that the Defendant, Frank Trewyn, obtained money from the Plaintiff, Long, as a result of such misrepresentations; ...

The court awarded Long $13,813.38 damages plus costs of $375.11. On November 12, 1980, Frank Trewyn filed a chapter 7 bankruptcy petition. Long commenced this action to determine whether Trewyn's debt to Long is nondischargeable pursuant to 11 U.S.C. § 523(a)(2)(A).

Res judicata is inapplicable to dischargeability questions. Justice Blackmun, writing for a unanimous court stated:

In sum, 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. Felson, 442 U.S. 127, 138, 139, 99 S.Ct. 2205 2212, 2213 60 L.Ed.2d 767, 776 (1979).

No reason exists why the rationale of the Brown decision should not be utilized in dealing with cases under Section 523(a)(2), (4), and (6) of the 1978 Bankruptcy Reform Act. Under both the old and the new Acts, Congress has endowed the bankruptcy courts with exclusive jurisdiction to handle dischargeability questions arising from the factual situation set forth in the cited sections. In Re Eskenazi, 3 C.B.C.2d 20, 6 B.C.D. 1140, 6 B.R. 366, Bankr.L.Rep. (CCH) ¶ 67,663 (Bkrtcy. 9th Cir. 1980).

The state court judgment may not be given collateral estoppel effect either.

There is no room for the application of the technical doctrine of collateral estoppel in determining the nondischargeability of debts described in section 17a(2), (4), and (8) of the Bankruptcy Act. In re Houtman, 568 F.2d 651 (9th Cir. 1978).

Section 17(a)(2) is the predecessor and substantial twin of § 523(a)(2), the Code section applicable here. Therefore, the Houtman rule still applies and this court is not bound by the Rock County Court's finding that Trewyn obtained money from Long as a result of Trewyn's false statement.

What is required is that the bankruptcy court consider all relevant evidence, including the state court proceedings, that is offered by the parties, or requested by the court, and on the basis of that evidence determine the nondischargeability of judgment debts which the creditors contend are described in section 17(a)(2), (4), and (8). Houtman at p. 654.

The same procedure is applicable under § 17(a)(2)'s successor, § 523(a)(2)(A).

Bankruptcy Rule 407 allocates the burden of proof stating, "at the trial on a complaint objecting to a discharge, the plaintiff has the burden of proving the facts essential to his objection." Although the rule places the burden of proof on the plaintiff, it does not state the standard of proof required. The standard of proof required under § 17(a)(2) was determined by Judge Mabey in In Re Huff, 1 C.B.C.2d 171, 1 B.R. 354, Bankr.L.Rep. (CCH) ¶ 67,269 (D.Utah 1979):

Pursuant to this "fresh start" policy, it has been said that exceptions to discharge should be strictly construed in favor of the bankrupt.... This rule of construction and the purposes and policies behind the Bankruptcy Act must be taken in conjunction with the obvious purpose of § 17a(2), which is to prevent only the discharge of the dishonest debtor who possessed an "intent to deceive" his creditor.

Where dishonesty, or fraud, is at issue, the courts have typically required a higher standard of proof. In view of the scienter requirement and an "intent to deceive" imposed in the § 17a(2) exception, the reasoning behind the traditional requirement of a higher standard of proof for fraud or dishonesty is equally applicable here....

"The purposes of the Act would seem to intend a greater burden on a creditor than a mere tipping of the scales in its favor." Thus, a finding that the burden of proof in a § 17a(2) case requires a creditor to prove his case by clear and convincing evidence would most effectively carry out the purposes of the Bankruptcy Act and the intent of the § 17 exceptions to discharge. In Re Huff, at 173.

Once again because the requirements of § 523(a)(2)(A) of the Code are essentially the same as § 17(a)(2) of the Act, the same standard of proof should apply. The "clear and convincing" standard has been applied in two § 523(a)(2) cases, In Re Netherland, 3 C.B.C.2d 687, 8 B.R. 679, Bankr.L.Rep. (CCH) ¶ 67,905 (Bkrtcy.W.D.Va.1981) and In Re Lyon, 3 C.B.C.2d 644, 8 B.R. 152, Bankr.L.Rep. (CCH) ¶ 67,750 (Bkrtcy.D.Me. 1981).

Although a state court judgment based on fraud was sufficient in Houtman to establish a prima facie case, the Houtman court had the complete record of the state court action available. The only evidence of the state court action this court received was a copy of the judgment. The judgment, as drafted, lacked any detailed statement of its basis in facts. No pleadings...