BANKRUPTCY CORNER
Default Judgments and Collateral Estoppel
JASON S . RIGOLI Default Judgments and Collateral Estoppel
Determining dischargeability of a debt is the exclusive jurisdiction of the bankruptcy courts . See St . Laurent v . Ambrose ( In re St .
Laurent ), 991 F . 2d 672 , 676 ( 11th Cir . 1993 ) ( citations omitted ). Notwithstanding , the exclusive jurisdiction of the bankruptcy courts creditors do not have re-litigate every issue that was litigated in an underlying lawsuit . Grogan v . Garner , 498 U . S . 279 , 284 n . 11 , 111 S . Ct . 654 , 658 , 112 L . Ed . 2d 755 ( 1991 ) ( Collateral estoppel principles apply to dischargeability proceedings .).
Collateral Estoppel
Collateral estoppel , or issue preclusion , bars prelitigation of an issue previously decided in judicial or administrative proceedings if the party against whom the prior decision is asserted had a " full and fair opportunity " to litigate that issue in an earlier case . Allen v . McCurry , 449 U . S . 90 , 95 , 101 S . Ct . 411 , 415 , 66 L . Ed . 2d 308 ( 1980 ). The substantive collateral estoppel law that is applied depends upon which court entered the prior judgment .
If the prior judgment was rendered by a state court , then the collateral estoppel law of that state must be applied to determine the judgment ' s preclusive effect . St . Laurent , 991 F . 2d at 676 . See also Marrese v . Am . Acad . of Orthopaedic Surgeons , 470 U . S . 373 , 380 ( 1985 ) ( holding that the full faith and credit statute , 28 U . S . C . § 1738 , “ directs a federal court to refer to the preclusion law of the State in which judgment was rendered ”).
If the prior judgment was entered by a federal district court , then at least in the 11th Circuit the plaintiff would have to demonstrate “ the following four elements present : ( 1 ) the issue in the prior action and the issue in the bankruptcy court are identical ; ( 2 ) the bankruptcy issue was actually litigated in the prior action ; ( 3 ) the determination of the issue in the prior action was a critical and necessary part of the judgment in that litigation ; and ( 4 ) the burden of persuasion in the discharge proceeding must not be significantly heavier than the burden of persuasion in the initial action .” Bush v . Balfour Beatty Bahamas ( In re Bush ), 62 F . 3d 1319 , 1322 ( 11th Cir . 1993 ).
Application of Collateral Estoppel to General Default Judgment under Florida Law to a Multicount Complaint
The 11th Circuit recently issued an opinion in Harris v . Jayo ( In re Harris ), Case No . 19-11286 , 2021 U . S . App . LEXIS 20845 *, -- F . 4th -- , 2021 WL 2946295 ( 11th Cir . July 14 , 2021 ) addressing this very issue . In Harris the plaintiff obtained a generalized default judgement in Florida on his multicount complaint . Id . at * 3 . An adversary proceeding was then filed in the bankruptcy court where the bankruptcy court collaterally estopped the debtor from re-litigating the issues on which the default was entered and entered a judgement in favor of the plaintiff-creditor . Id . at * 3-4 . Debtor appealed to the district court which affirmed . Ibid . Debtor appealed to the 11th Circuit . Ibid .
The 11th Circuit found that the lower courts had improperly relied upon In re Bush , 62 F . 3d 1319 , supra , in applying collateral estoppel , because Bush dealt with a default judgment from a federal district court and the default judgment in Harris was Florida state court judgment , Harris , at * 3 , which means Florida collateral estoppel applies .
The 11th Circuit had to determine how Florida treats judgments that do not specify the grounds upon which the judgment is granted . The 11th Circuit found that Florida has not addressed this issue yet but predicted that Florida would not give preclusive effect to a general default judgment . Harris , at * 13 .
The application of Harris requires additional review of the underlying complaint as well . In Harris the plaintiff ’ s underlying complaint “ alleges several alternative ( and inconsistent ) factual grounds for a legal claim , and each of those grounds would be independently sufficient to establish the claim ,” id . at * 14 , making it impossible to tell which of the grounds the general default judgment was based on . Ibid . The 11th Circuit continued “ if one of those alternative factual grounds is insufficient to meet the elements [ necessary for nondischargeability ] under the Bankruptcy Code , the issues cannot be deemed identical .” Ibid .
Consequently , I would argue that if the underlying complaint has several alternative theories , each of which independently satisfies the elements necessary for a non-dischargeable claim , then a bankruptcy court could apply collateral estoppel consistent with Florida law and avoid relitigating the issue in the bankruptcy court .
Application of Collateral Estoppel to General Default Judgment under Federal Law to a Multicount Complaint
A default judgment from a federal court would require a different analysis altogether . In general , the federal law is that collateral estoppel is not applied to default judgments because they were not “ actually litigated .” Bush , 62 F . 3d at 1323 ( citations omitted ).
There does seem to be an exception to this general rule , which relates to whether the defaulting party “ actively participated ” in the underlying proceeding , id . at 1324-26 , which the court in Bush ultimately follows . Ibid .
Conclusion
When addressing the application of collateral estoppel to an action in bankruptcy court , determine which law of collateral estoppel will apply ( state law or federal ), how that jurisdiction applies collateral estoppel , and , if the judgment to which collateral estoppel is being asked to be applied is based on a complaint that contains any claim that would not satisfy the elements of a dischargeability cause of action .
This article submitted by Jason S . Rigoli , Furr and Cohen , P . A ., 2255 Glades Road , Suite 301E , Boca Raton , FL 33431 , jrigoli @ furrcohen . com
1
Bush acknowledges that there is case law contrary to the general rule that collateral estoppel does not apply to default judgments under federal law . Id . at 1324 .
PBCBA BAR BULLETIN 9