Meyer v. Rigdon

• Decision Date: 22 September 1994
• Docket Number: No. 93-3743,93-3743
• Citation: 36 F.3d 1375
• Parties: , Bankr. L. Rep. P 76,119 Arthur MEYER (through his estate), Dorothy Watson, Harold Nees, George Patterson, and Ross Strauch (through the co-administrator of his Estate, Arlene Long), as assignees of Federal Deposit Insurance Corp., Plaintiffs-Appellees, v. Robert Albert RIGDON, Defendant-Appellant.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 1375

36 F.3d 1375

26 Bankr.Ct.Dec. 117, Bankr. L. Rep. P 76,119

Arthur MEYER (through his estate), Dorothy Watson, Harold Nees, George Patterson, and Ross Strauch (through the co-administrator of his Estate, Arlene Long), as assignees of Federal Deposit Insurance Corp., Plaintiffs-Appellees, v. Robert Albert RIGDON, Defendant-Appellant.

No. 93-3743.

United States Court of Appeals Seventh Circuit.

Argued May 13, 1994.

Decided Sept. 22, 1994.

George Plews (argued), Donn H. Wray, Plews & Shadley, Indianapolis, IN, for appellees.

William Garrison (argued), Jeanette E. Bahnke, Saikley, Garrison & Colombo, Danville, IL, for appellant.

Before CUDAHY, KANNE, and ROVNER, Circuit Judges.

KANNE, Circuit Judge.

Robert Rigdon was the president of People's State Bank of Clay County, Indiana. He was also a member of the Bank's board of directors and owned a controlling interest in the Bank. In August of 1984, the Federal Deposit Insurance Corporation ("FDIC") and the Indiana Department of Financial Institutions determined that the Bank was insolvent. Thereafter, the Bank was closed and the FDIC was appointed receiver of the Bank pursuant to 12 U.S.C. Sec. 1821(e). The FDIC then brought suit against Rigdon and the other members of the Bank's board of directors--Arthur Meyer, Dorothy Watson, Harold Nees, George Patterson, and Ross Strauch and Arlene Long as co-administrators of the estate of Ross Strauch--in the United States District Court for the Southern District of Indiana. The FDIC's complaint alleged, inter alia, that the defendants breached their fiduciary duty to the Bank in "managing, conducting, supervising, and directing the Bank's making, supervising and collecting of loans." The FDIC's complaint further itemized specific instances in which the defendants had allegedly breached their fiduciary responsibilities.

The district court entered a default judgment against Rigdon in the FDIC case because he failed to respond to the complaint. Thereafter, the FDIC assigned its default judgment to Rigdon's co-defendants ("Meyer Defendants") under the terms of a settlement agreement dated July 24, 1989. The Meyer Defendants subsequently filed a motion in the Indiana federal court requesting the court enter a final money judgment against Rigdon based on the default judgment. The district court granted the motion and entered a money judgment against Rigdon in the amount of $1,613,181.43.

In February of 1992, Rigdon filed a bankruptcy petition under chapter seven of the Bankruptcy Code in the United States Bankruptcy Court for the Central District of Illinois. Shortly thereafter, the Meyer Defendants filed a complaint in the bankruptcy court seeking a determination as to whether Rigdon could discharge his debt arising from the Indiana federal court judgment. The Meyer Defendants subsequently filed a motion for summary judgment in the Bankruptcy Court, arguing, inter alia, that Rigdon's debt was not dischargeable under 11 U.S.C. Sec. 523(a)(11). That provision provides in pertinent part:

(a) A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt--

(11) provided in any final judgment, unreviewable order, or consent order or decree entered in any court of the United States or of any state, issued by a Federal depository institutions regulatory agency, or contained in any settlement agreement entered into by the debtor, arising from any act of fraud or defalcation while acting in a fiduciary capacity committed with respect to any depository institution or insured credit union.

Rigdon argued that section 523(a)(11) was not controlling because the judgment at issue was a default judgment and under the prevailing case law, default judgments are not entitled to preclusive effect in discharge exception proceedings. The bankruptcy court granted the Meyer Defendant's motion for summary judgment. According to the bankruptcy court, the default judgment "fits within the definition of 'any final judgment' under Sec. 523(a)(11)." The court stated that "had Congress intended to exempt default judgment[s] obtained by Federal depository regulatory institutions from the scope of the term 'any final judgment,' it could easily have done so by wording the statute differently."

Rigdon appealed to the district court, again claiming that section 523(a)(11) does not apply to default judgments. Rigdon further argued that section 523(a)(11) was inapplicable because the FDIC's complaint did not allege that he had committed acts of "defalcation." The district court rejected Rigdon's arguments. First, the court found that the "plain, straightforward and unqualified language of Sec. 523(a)(11)" dictates the outcome of the dischargeability issue and prevents relitigation of the issue in either the bankruptcy court or the district court. Second, the court found that the word "defalcation" encompasses "the failure to carry out fiduciary duties," which is precisely what the FDIC's complaint charged. Rigdon now appeals to this court.

Discussion

We, like the district court, review the bankruptcy court's factual findings for clear error and its legal conclusions de novo. In re Wiredyne, Inc., 3 F.3d 1125, 1126 (7th Cir.1993). The proper construction of section 523(a)(11) is a legal issue which we review de novo. Oviawe v. INS, 853 F.2d 1428, 1431 (7th Cir.1988).

Applicability of section 523(a)(11)

The Bankruptcy Code delineates several exceptions to the normal rule that all debts are dischargeable in bankruptcy. For instance, under section 523(a)(4) a debtor may not discharge any debt resulting from "fraud or defalcation while acting in a fiduciary capacity...." The bankruptcy court normally makes an independent determination as to whether a debt is excepted from discharge under section 523(a)(4). See In re Bercier, 934 F.2d 689, 692 (5th Cir.1991) ("The bankruptcy court has exclusive jurisdiction to determine dischargeability of these debts."). However, if a court of competent jurisdiction has previously entered judgment against the debtor for "fraud or defalcation while acting in a fiduciary capacity," the debtor may not relitigate the underlying facts in the bankruptcy court. In other words, the doctrine of collateral estoppel ¹ applies in bankruptcy discharge exception proceedings. Klingman v. Levinson, 831 F.2d 1292, 1294-1295 (7th Cir.1987); Grogan v. Garner, 498 U.S. 279, 285 n. 11, 111 S.Ct. 654, 658 n. 11, 112 L.Ed.2d 755 (1991) ("Our prior cases have suggested, but have not formally held, that the principles of collateral estoppel apply in bankruptcy proceedings under the current Bankruptcy Code.... We now clarify that collateral estoppel principles do indeed apply in discharge exception proceedings pursuant to Sec. 523(a).").

Collateral estoppel is a judge-made doctrine that serves the "dual purpose of protecting litigants from the burden of relitigating an identical issue with the same party or his privy and of promoting judicial economy by preventing needless litigation." Parklane Hosiery Co. v. Shore, 439 U.S. 322, 326, 99 S.Ct. 645, 649, 58 L.Ed.2d 552 (1979) (citation omitted). For collateral estoppel to apply, four elements must be met: "(1) the issue sought to be precluded must be the same as that involved in the prior litigation, (2) the issue must have been actually litigated, (3) the determination of the issue must have been essential to the final judgment, and (4) the party against whom estoppel is invoked must be fully represented in the prior action." La Preferida, Inc. v. Cerveceria Modelo, S.A. de C.V., 914 F.2d 900, 906 (7th Cir.1990).

As Rigdon correctly points out, a default judgment is normally not given preclusive effect under the collateral estoppel doctrine because no issue has been "actually litigated." In re Cassidy, 892 F.2d 637, 640 n. 1 (7th Cir.), cert. denied, 498 U.S. 812, 111 S.Ct. 48, 112 L.Ed.2d 24 (1990). However, because collateral estoppel is a common law creature, it can, of course, be pre-empted by Congressional action.

Pre-emption is essentially an issue of Congressional intent. Allis-Chalmers Corp. v. Lueck, 471 U.S. 202, 208, 105 S.Ct. 1904, 1910, 85 L.Ed.2d 206 (1985) ("The purpose of Congress is the ultimate touchstone.") (citation omitted). In determining Congress' intent, we initially focus on the state of the law as it existed prior to the passage of section 523(a)(11). Under section 523(a)(4), a debtor was already prevented from discharging any debt "for fraud or defalcation while acting in a fiduciary capacity." Section 523(a)(11) also prevents a debtor from discharging a debt arising from his "fraud or defalcation while acting in a fiduciary capacity." Section 523(a)(11) is narrower than section 523(a)(4), in that it applies only to acts of fraud or "defalcation" "committed with respect to any depository institution or insured credit union." Nonetheless, as is readily apparent, any debt dischargeable under section 523(a)(11) was already dischargeable under section 523(a)(4). Why then did Congress go to the trouble of enacting section 523(a)(11)?

The simple answer is that Congress wanted to expand the preclusive effect given certain prior actions in bankruptcy discharge exception proceedings. In order to invoke collateral estoppel, an issue must have been "actually litigated" in the prior action. Accordingly, default judgments are not given preclusive effect in subsequent court proceedings. Nor are most consent decrees. Consent decrees, "while settling the issue definitively between the parties, normally do not support an invocation of collateral estoppel." La Preferida, 914 F.2d at 906 (citations omitted). "The rationale behind this general rule is that issues underlying a consent judgment generally are neither actually litigated nor essential to the judgment." Id. (citation omitted). Collateral estoppel may only be applied to consent decrees if " 'the parties could reasonably have foreseen the...