Meindl v. Genesys Pacific Technologies

• Decision Date: 22 September 1999
• Docket Number: No. 98-2270,98-2270
• Citation: 204 F.3d 124
• Parties: (4th Cir. 2000) In Re: GENESYS DATA TECHNOLOGIES, INCORPORATED, Debtor. JOHN MEINDL; GENESYS DATA TECHNOLOGIES, INCORPORATED, Plaintiffs-Appellants, v. GENESYS PACIFIC TECHNOLOGIES, INCORPORATED, Defendant-Appellee.
• Court: U.S. Court of Appeals — Fourth Circuit

Page 124

204 F.3d 124 (4th Cir. 2000)

In Re: GENESYS DATA TECHNOLOGIES, INCORPORATED, Debtor.

JOHN MEINDL; GENESYS DATA TECHNOLOGIES, INCORPORATED, Plaintiffs-Appellants, v. GENESYS PACIFIC TECHNOLOGIES, INCORPORATED, Defendant-Appellee.

No. 98-2270.

UNITED STATES COURT OF APPEALS, FOR THE FOURTH CIRCUIT.

September 22, 1999, Argued.

February 9, 2000, Decided.

[Copyrighted Material Omitted]

ARGUED: Dale Andrew Cooter, COOTER, MANGOLD, TOMPERT & WAYSON, P.L.L.C., Washington, D.C., for Appellants. Thomas Christopher Dame, GALLAGHER, EVELIUS & JONES, L.L.P., Baltimore, Maryland, for Appellee. ON BRIEF: Donna S. Mangold, COOTER, MANGOLD, TOMPERT & WAYSON, P.L.L.C., Washington, D.C.; Morton A. Faller, SHULMAN, ROGERS, GANDAL, PORDY & ECKER, P.A., Rockville, Maryland, for Appellants. Stephen A. Goldberg, Michael W. Skojec, GALLAGHER, EVELIUS & JONES, L.L.P., Baltimore, Maryland, for Appellee.

Before WILKINS, WILLIAMS, and MOTZ, Circuit Judges. Judge Motz wrote the opinion, in which Judge Wilkins and Judge Williams joined

OPINION:

DIANA GRIBBON MOTZ, Circuit Judge:

This case raises the question of whether a default judgment entered by a state court must be accorded full faith and credit when offered as the basis for a creditor's claim in a subsequent federal bankruptcy proceeding. If a default judgment would be entitled to preclusive effect under state law it must be given such effect in bankruptcy claims allowance proceedings, absent express congressional intent to create an exception to the full faith and credit statute for such proceedings. We find that unless the default judgment is void, Hawai'i law would afford it preclusive effect. Hawai'i law is unsettled, however, on whether this judgment is void under Hawai'i Rules of Civil Procedure Rule 54(c) and thus not entitled to preclusive effect. We therefore certify the single question of whether the judgment is void under state law to the Supreme Court of Hawai'i.

I.

In 1991, Genesys Pacific Technologies, Inc. (Pacific) filed suit against Genesys Data Technologies, Inc. (Data) in Hawai'i trial court on a variety of claims related to a contract between Data, a seller of optical disk based imaging systems, and its franchisee, Pacific. The complaint did not request damages in a specific amount but claimed "general, special, treble, and punitive damages in an amount to be determined at trial." At the outset of the litigation Data filed an answer and engaged in discovery, but it eventually ceased defending the action.

Pacific moved for entry of a default and sent a notice of the motion to Data's Maryland office. The Hawai'i court granted the motion. Pacific then moved for a default judgment against Data in the amount of $ 1,262,067.24 and again provided Data with notice of the motion. In support of that motion, Pacific submitted the affidavits of its attorney and of its president, Neil Alper, who itemized the damages to include $ 252,067.24 in various incidental losses, $ 750,000 in lost profits, and $ 250,000 in punitive damages. Pacific also sought attorneys' fees in the amount of $ 10,000. On April 22, 1993, following a hearing that Data did not attend, the Hawai'i court entered a default judgment in the requested amount. Data did not file post-judgment motions, take an appeal, or in any other manner contest the default order or the amount of damages assessed in the Hawai'i courts. In 1994 Pacific enrolled the judgment in Maryland and filed various discovery requests to facilitate recovery on the judgment.

Data had closed its business operations in Maryland in 1992 when its secured lender foreclosed on all of its assets. In late 1993, however, Data and others filed suit against the Maryland law firm of Weinberg and Green for malpractice and breach of fiduciary duty. In May of 1996, after a jury awarded Data and the other plaintiffs over $ 25 million in compensatory damages, but before the jury could consider a punitive damage award, the plaintiffs settled with Weinberg and Green for an undisclosed amount.

Notwithstanding that settlement, Data refused to honor Pacific's default judgment. Pacific initiated involuntary bankruptcy proceedings against Data and filed a claim in those proceedings based on its Hawai'i default judgment. Data and its principal John Meindl (collectively Data) objected to Pacific's assertion of the claim, contending that the Hawai'i judgment was based on no real debt, was procured by fraud, and was void.

In determining whether to allow Pacific's claim, the bankruptcy court found that Alper's affidavit filed in support of the default judgment contained some fraudulent material representations involving an office lease, and thus disallowed that portion of the claim. However, the court allowed the remainder of the claim as well as pre-petition interest and additional attorneys' fees. On appeal from the bankruptcy court, the district court allowed Pacific's entire claim, concluding that the Full Faith and Credit Clause prevented the bankruptcy court from disturbing the Hawai'i judgment in any way.

Data now asserts that both the bankruptcy court and the district court erred in failing to disallow all claims based on the default judgment. We review the legal conclusions of the bankruptcy court and district court de novo and the bankruptcy court's findings of fact for clear error.

II.

The district court correctly recognized that all federal courts must give full faith and credit to valid state court judgments. The court misspoke, however, in suggesting that the source of that mandate is the United States Constitution; the Full Faith and Credit Clause requires states to accord full faith and credit to the judgment of other states. U.S. Const. art. IV, 1. Rather, a federal statute directs federal courts to afford state court judgments full faith and credit. See 28 U.S.C.A. 1738 (West 1994); see also Kremer v. Chemical Constr. Corp., 456 U.S. 461, 466, 72 L. Ed. 2d 262, 102 S. Ct. 1883 (1982).

Section 1738 provides that state judicial proceedings "shall have the same full faith and credit in every court within the United States . . . as they have by law or usage in the courts of such State . . . from which they are taken." 28 U.S.C.A. 1738. The Supreme Court has expressly held that the full faith and credit statute "directs a federal court to refer to the preclusion law of the State in which judgment was rendered." Marrese v. American Academy of Orthopaedic Surgeons, 470 U.S. 373, 380, 84 L. Ed. 2d 274, 105 S. Ct. 1327 (1985). Thus, 1738 "does not allow federal courts to employ their own rules of res judicata in determining the effect of state judgments. Rather, it goes beyond the common law and commands a federal court to accept the rules chosen by the State from which the judgment is taken." Kremer, 456 U.S. at 481-82.

Federal courts are to follow a two-step process in determining whether 1738 should apply in a particular situation. See Marrese, 470 U.S. at 381 (citing Kremer, 456 U.S. at 466-68). First, a federal court must look to state law to determine the preclusive effect of the state court judgment. Id. If state law would not bar relitigation of an issue or claim decided in the earlier proceeding, then the inquiry ends --a federal court will not give the state court judgment preclusive effect either. If state law would afford the judgment preclusive effect, however, then a federal court must engage in a second step--it must determine if Congress created an exception to 1738. Id. Only if "some exception to 1738 applies" can a federal court refuse to give a judgment the preclusive effect to which it is entitled under state law. Id. An exception "will not be recognized unless a later statute contains an express or implied partial repeal" of 1738. Kremer, 456 U.S. at 468.

Such repeals are rare. Indeed, in concluding that the Securities Exchange Act did not implicitly repeal the full faith and credit statute, the Supreme Court explained that, "as a historical matter, we have seldom, if ever, held that a federal statute impliedly repealed 1738 . . . due to the relatively stringent standard . . . that there be an 'irreconcilable conflict' between the two federal statutes at issue." Matsushita Elec. Indus. Co. v. Epstein, 516 U.S. 367, 380-81, 134 L. Ed. 2d 6, 116 S. Ct. 873 (1996) (quoting Kremer, 456 U.S. at 468).

Without suggesting any explicit, or implicit, repeal of 1738, Data nonetheless maintains that the res judicata principles codified in 1738 somehow apply less stringently in the context of bankruptcy claims allowance proceedings. Citing the "paramount equitable powers of bankruptcy courts to prevent the perpetration of fraud and collusion," Data argues that, in determining whether to allow Pacific's claim, the bankruptcy court should not have been barred from reviewing Data's allegation that Pacific obtained the Hawai'i judgment through the submission of a fraudulent affidavit. Case law, however, does not support such a sweeping exception to 1738.

We recognize that in the context of proceedings to determine the dischargeability of debt, bankruptcy courts do have the discretion to hear certain claims of fraud that would otherwise be barred by res judicata. See Brown v. Felsen, 442 U.S. 127, 60 L. Ed. 2d 767, 99 S. Ct. 2205 (1979). This discretion exists because in dischargeability proceedings, as the Brown court emphasized, the claim of fraud arises, not to dispute the validity of the underlying debt, but rather "to meet . . . the new defense of bankruptcy which [the debtor] has interposed between [the creditor] and the sum determined to be due him." Id. at 133. But when a bankruptcy court is considering the validity of a claim upon which debt is based, no new special bankruptcy defense is involved and so res judicata applies as it ordinarily would. As the Court explained in Grogan v. Garner, 498 U.S. 279, 283-84, 112 L. Ed. 2d 755, 111 S. Ct. 654 (1991), "the issue of nondischargeability has been a matter of...