Spilman v. Harley

• Citation: 656 F.2d 224
• Decision Date: 07 August 1981
• Docket Number: No. 80-3015,80-3015
• Parties: Bankr. L. Rep. P 68,272 Gail SPILMAN, Plaintiff-Appellant, v. Darryl M. HARLEY, Defendant-Appellee.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 224

656 F.2d 224

Bankr. L. Rep. P 68,272

Gail SPILMAN, Plaintiff-Appellant, v. Darryl M. HARLEY, Defendant-Appellee.

No. 80-3015.

United States Court of Appeals Sixth Circuit.

Argued June 8, 1981.

Decided Aug. 7, 1981.

Gail Spilman, pro se.

Stuart L. Richards, Cincinnati, Ohio, for defendant-appellee.

Before LIVELY and KENNEDY, Circuit Judges, and CECIL, Senior Circuit Judge.

CORNELIA G. KENNEDY, Circuit Judge.

This case requires this Court to decide the yet unresolved issue whether a bankruptcy judge must consider every question of dischargeability of a debt de novo or whether the parties are collaterally estopped by a prior state court judgment determining the nature of the debt?

Appellant is a judgment creditor of appellee. The Court of Common Pleas of Hamilton County, Ohio awarded appellant $207,748.95 for personal injuries caused when appellee, allegedly intoxicated, drove his car onto the sidewalk, striking appellant. The judgment was entered July 28, 1977. April 11, 1978, appellee filed a petition for voluntary bankruptcy. He listed four creditors the major one was appellant. Appellant moved for a determination that the debt was nondischargeable and attached the state court judgment. Appellee moved for judgment on the pleadings on the grounds that appellant had not shown appellee acted willfully or maliciously and the state court judgment specifically recited the court found "no wanton, wilful misconduct" by appellee. The Bankruptcy Court stated that it had before it only the judgment in the state court proceedings and was unable to tell if the judgment was a consent judgment or a judgment after jury trial. It ruled that even assuming it was a consent judgment, appellant was collaterally estopped from asserting that appellee acted willfully and held the debt was discharged in bankruptcy. The District Court affirmed the Bankruptcy Court.

Appellant, who appeared before the Bankruptcy Court and this Court pro se, raises several arguments. She argues the opinion of the Bankruptcy Court is too vague because it relied upon the state court judgment even though it would not determine its nature. She argues she did not consent to the judgment but demanded a jury trial and that her attorney who represented her in the state court accepted the judgment without her permission. ¹

Appellant's complaints about the vagueness of the Bankruptcy Court's opinion or the actions of her attorney are without merit. Under the analysis used by the Bankruptcy Court the nature of the state court proceeding made no difference. If her attorney had acted without permission, she may have a claim against him but that claim must be pursued in state court. Since the state court awarded all the monies prayed for, however, it is difficult to see what her lawyer could have done but accept the judgment no jury issue remained.

Her argument that she did not have the opportunity to present evidence in the state court proceeding on the issue of willfulness and maliciousness does have merit.

The Bankruptcy Act provides that the bankruptcy court shall grant the debtor a discharge (unless certain conditions exist, see 11 U.S.C. § 727), but not all debts are dischargeable. Section 17 of the Bankruptcy Act excepts certain kinds of debts; pertinent here is § 17(a)(8) which excepts actions for malicious and willful injury caused by the debtor to another or his property. See 11 U.S.C. § 523(a)(6) (formerly 11 U.S.C. § 35(a)(8)). Unless the bankruptcy court determines the personal injury to be willful and malicious, the debt is discharged. See 11 U.S.C. § 523(c).

The power to determine dischargeability was granted to bankruptcy courts by the 1970 Amendments to the Bankruptcy Act. Congress intended to take the determinations governed by 11 U.S.C. § 523(c) away from state courts and grant exclusive jurisdiction in the bankruptcy courts. See Brown v. Felsen, 422 U.S. 127, 99 S.Ct. 2205, 2211-12, 60 L.Ed.2d 767 (1979); Matter of Pigge, 539 F.2d 369, 371 (4th Cir. 1976). ²

The Supreme Court in Brown, supra, recognizing the exclusive jurisdiction of the bankruptcy courts, held that a bankruptcy court was not precluded by res judicata from considering extrinsic evidence on an issue which would have been litigated in the prior state court proceeding but was not. In that case, the state suit had been settled by a stipulation but the stipulation did not indicate upon which cause of action the liability was based or whether or not the bankrupt had committed fraud. The Court rejected res judicata in a dischargeability proceeding. It reasoned that where the issues in state court were not identical to those in the bankruptcy proceeding, the parties would have little incentive to litigate them and that an express ruling by state courts on dischargeability questions would undermine the congressional intent to vest jurisdiction within the bankruptcy courts. See 99 S.Ct. at 2211-12. However, the Court distinguished the application of collateral estoppel and expressly left open the question whether or not collateral estoppel would apply. See 99 S.Ct. at 2213 n. 10. Collateral estoppel treats as final only those questions actually and necessarily decided in a prior suit. If a state court should determine factual issues using standards identical to those in dischargeability proceedings, then collateral estoppel if held to be applicable and in the absence of countervailing statutory policy would bar relitigation of those issues in the bankruptcy court.

Some courts have held that collateral estoppel should not apply in dischargeability determinations because of the bankruptcy court's exclusive jurisdiction. See In re Rahm, 641 F.2d 755, 757 (9th Cir. 1981); In re Houtman, 568 F.2d 651, 653 (9th Cir. 1978); In re Day, 4 B.R. 750, 754-55 (D.Ct., S.D.Ohio 1980); Matter of Stevens, 476 F.Supp. 147, 149 (D.N.J.1979); In re Godfrey, 472 F.Supp. 364, 370-71 (M.D.Ala.1979); In re Blessing, 442 F.Supp. 68, 70-71 (S.D.Ind.1977); In re Burns, 357 F.Supp. 176, 178 (D.Kan.1972); In re Rainey, 1 B.R. 569, 570-71 (Bkrtcy., D.Ore.1979). Some courts which hold that collateral estoppel does not generally apply will accept the facts recited in a judgment as true where the judgment was a consent judgment or the bankrupt consented to certain allegations. See Carey Lumber Co. v. Bell, 615 F.2d 370, 377-78 (5th Cir. 1980); Matter of Kasler, 611 F.2d 308, 309-10 (9th Cir. 1979); Matter of Nadler, 424 F.Supp. 1106, 1107-08 (E.D.Mo.1976). The Ninth Circuit would hold that the state court judgment may establish a prima facie case of non-dischargeability, but the bankrupt may rebut and the bankruptcy court is not bound by the determinations of the state court. See Lawrence T. Lasagna, Inc. v. Foster, 609 F.2d 392, 396 (9th Cir. 1979).

Other courts, including most bankruptcy courts, would apply collateral estoppel where the issue was previously litigated by the parties. See Matter of Ross, 602 F.2d 604, 607-08 (3d Cir. 1979); Matter of Merrill, 594 F.2d 1064, 1066-67 (5th Cir. 1979); In re Pitner, 6 B.R. 731 (E.D.Tenn.1980); Matter of Herman, 6 B.R. 352, 359-60 (D.Ct., S.D.N.Y.1980); Franks v. Thomason, 4 B.R. 814, 820-21 (D.Ct., N.D.Ga.1980); National Homes Corp. v. Lester Industries, Inc., 336 F.Supp. 644, 648 (W.D.Va.1972); In re Whitmore, 7 B.R. 835, 838-39 (Bkrtcy., N.D.Ga.1980); Matter of Allen, 3 B.R. 355, 357-58 (Bkrtcy., W.D.N.Y.1980); In re Willis, 2 B.R. 566, 568-69 (Bkrtcy., M.D.Ga.1980); Matter of Wuttke, 2 B.R. 362, 364-65 (Bkrtcy., D.N.J.1980); In re Manitta, 1 B.R. 393, 394 (Bkrtcy., C.D.Cal.1979); In re Meade Land and Development Co., Inc., 1 B.R. 279, 283-84 (Bkrtcy., E.D.Pa.1979); Matter of Evans, 1 B.R. 229, 231 (Bkrtcy., S.D.Fla.1979); Truesdail v. Hall, 1 B.R. 130, 132 (Bkrtcy., E.D.Mich.1979); In re Webster, 1 B.R. 61, 63-64 (Bkrtcy., E.D.Va.1979).

Applying collateral estoppel 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. The determination whether or not a certain debt is dischargeable is a legal conclusion based upon the facts in the case. The bankruptcy court has the exclusive jurisdiction to make that legal conclusion. It must apply the statute to the facts and decide to discharge or not. Therefore, res judicata does not apply to prevent litigation of every issue which might have been covered in the state court proceeding on the debt. However, that Congress intended the bankruptcy court to determine the final result dischargeability or not does not require the bankruptcy court to redetermine all the underlying facts. As the Court held in Brown, where the facts necessary for a dischargeability determination were not necessary to the determination in the prior judgment, the parties should not be bound or else the parties would always have to anticipate future bankruptcy proceedings and the state courts would be deciding facts not necessary to the state proceedings but only relevant to a possible future bankruptcy proceeding. In effect, state courts would then be deciding issues directly concerning dischargeability, contrary to congressional intent. However, where the factual issues necessary for dischargeability determination were also necessary to the state court determination, the parties would not have to anticipate the bankruptcy proceedings and the state courts would not be determining issues irrelevant to the state proceedings. Collateral estoppel is applied to encourage the parties to present their best arguments on the issues in question in the first instance and thereby save judicial time. There is no reason to suppose that parties will not vigorously present their case on issues necessary to the state court proceeding or that the bankruptcy court will be any more fair or accurate than the state court in the determination of the facts. Thus, there is no reason to allow relitigation of facts previously litigated...