Brown v. Felsen
442 U.S. 127 (1979)

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U.S. Supreme Court

Brown v. Felsen, 442 U.S. 127 (1979)

Brown v. Felsen

No. 78-58

Argued February 21, 1979

Decided June 4, 1979

442 U.S. 127

CERTIORARI TO THE UNITED STATES COURT OF APPEALS

FOR THE TENTH CIRCUIT

Syllabus

In the settlement of a state court collection suit, respondent stipulated that petitioner should have judgment against respondent. Shortly thereafter, respondent filed for bankruptcy, and petitioner sought to establish that respondent's debt to him was not dischargeable because it was the product of respondent's fraud, deceit, and malicious conversion, and thus came within §§ 17a(2) and (4) of the Bankruptcy Act, which provide that such debts are not affected by a discharge. The bankruptcy court granted summary judgment for respondent. The court held that the record in the state court proceeding did not establish that respondent had committed fraud, and res judicata barred petitioner from offering additional evidence to prove the underlying nature of the debt. The District Court, and Court of Appeals affirmed.

Held: The bankruptcy court is not confined to a review of the judgment and record in the prior state court proceeding when determining the dischargeability of respondent's debt. When a debtor asserts the new defense of bankruptcy, res judicata does not bar the creditor from offering additional evidence to meet that defense. A contrary rule would force premature federal issues on the state courts and would frustrate the command of the Bankruptcy Act that only honest debts are to be discharged. Pp. 442 U. S. 131-139.

Reversed.

BLACKMUN, J., delivered the opinion for a unanimous Court.

MR. JUSTICE BLACKMUN delivered the opinion of the Court.

The issue here is whether a bankruptcy court may consider evidence extrinsic to the judgment and record of a prior

Page 442 U. S. 128

state suit when determining whether a debt previously reduced to judgment is dischargeable under § 17 of the Bankruptcy Act, 11 U.S.C. § 35.

I

Petitioner G. Garvin Brown III was a guarantor for respondent Mark Paul Felsen and Felsen's car dealership, Le Mans Motors, Inc. Petitioner's guarantee secured a bank loan that financed the dealership's trading in Lotus, Ferrari, and Lamborghini automobiles. In 1975, the lender brought a collection suit against petitioner, respondent, and Le Mans in Colorado state court. Petitioner filed an answer to the bank's complaint, and a cross-claim against respondent and Le Mans. The answer and the cross-claim, by incorporating the answer, alleged that respondent and Le Mans induced petitioner to sign the guarantee "by misrepresentations and nondisclosures of material facts." App. 35. The suit was settled by a stipulation. It provided that the bank should recover jointly and severally against all three defendants, and that petitioner should have judgment against respondent and Le Mans. Neither the stipulation nor the resulting judgment indicated the cause of action on which respondent's liability to petitioner was based. Because the case was settled, respondent's sworn deposition was never made part of the court record.

A short time later, respondent filed a petition for voluntary bankruptcy, and sought to have his debt to petitioner discharged. Through discharge, the Bankruptcy Act provides "a new opportunity in life and a clear field for future effort, unhampered by the pressure and discouragement of preexisting debt," Loal Loan Co. v. Hunt,292 U. S. 234, 292 U. S. 244 (1934). By seeking discharge, however, respondent placed the rectitude of his prior dealings squarely in issue, for, as the Court has noted, the Act limits that opportunity to the "honest but unfortunate debtor." Ibid. Section 14 of the Act, 11 U.S.C. § 32, specifies that a debtor may not obtain

Page 442 U. S. 129

a discharge if he has committed certain crimes or offenses. Section 17a, the focus of this case, provides that certain types of debts are not affected by a discharge. These include, under § 17a(2),

"liabilities for obtaining money or property by false pretenses or false representations . . . or for willful and malicious conversion of the property of another"

and, under § 17a(4), debts that "were created by his fraud, embezzlement, misappropriation, or defalcation while acting as an officer or in any fiduciary capacity." [Footnote 1]

In the bankruptcy court, petitioner sought to establish that respondent's debt to petitioner was not dischargeable. Petitioner alleged that the guarantee debt was the product of respondent's fraud, deceit, and malicious conversion, and so came within §§ 17a(2) and 17a(4). Petitioner contended that respondent had prepared false title certificates, sold automobiles out of trust, and applied the proceeds to private purposes. Respondent answered and moved for summary judgment. Respondent said that the prior state court proceeding did not result in a finding of fraud, and contended that res judicata barred relitigation of the nature of respondent's debt to petitioner, even though the application of § 17 had not been in issue in the prior proceeding.

Before 1970, such res judicata claims were seldom heard in federal court. Traditionally, the bankruptcy court determined whether the debtor merited a discharge under § 14, but left the dischargeability under § 17 of a particular debt to the court in which the creditor sued, after bankruptcy, to enforce his prior judgment. Typically, that court was a state court. In 1970, however, Congress altered § 17 to require creditors to apply to the bankruptcy court for adjudication

Page 442 U. S. 130

of certain dischargeability questions, including those arising under §§ 17a(2) and 17a(4). [Footnote 2] In In re Nicholas, 510 F.2d 160, cert. denied, 421 U.S. 1012 (1975), the United States Court of Appeals for the Tenth Circuit, confronting for the first time the res judicata question presented here, resolved it by holding that, in determining the dischargeability of a claim previously reduced to judgment, the District Court had properly limited its review to the record and judgment in the prior state court proceeding. The Court of Appeals found that its decision accorded with the majority rule among state courts previously considering the question.

The bankruptcy court here, bound by Nicholas, somewhat reluctantly [Footnote 3] confined its consideration to the judgment, pleadings, exhibits, and stipulation which were in the state court record. It declined to hear other evidence, and it refused to consider respondent's deposition that had never been made part of that record. The court concluded that, because neither the judgment nor the record showed that petitioner's allegation of misrepresentation was the basis for the judgment on the cross-claim against respondent, the liability had not been shown to be within §§ 17a(2) and 17a(4). The court granted summary judgment for respondent and held that the debt was dischargeable. App. 44-48.

Both the United States District Court for the District of Colorado, id. at 49, and the United States Court of Appeals for the Tenth Circuit affirmed. In an unpublished opinion, the Court of Appeals followed Nicholas, applied res judicata, and said that the prior consent decree was conclusive as to the nature of respondent's liability. The court noted that neither the stipulation nor the judgment mentioned fraud, and the

Page 442 U. S. 131

court said that petitioner had not even met the state requirement that fraud be pleaded with specificity. See Colo.Rule Civ.Proc. 9(b). The court agreed that respondent's debt was dischargeable. App. 556.

Since Nicholas was decided, every other Court of Appeals that has considered the question has rejected res judicata and held that extrinsic evidence may be admitted in order to determine accurately the dischargeability under § 17 of a debt previously reduced to judgment in state court. [Footnote 4] We granted certiorari to resolve this conflict. 439 U.S. 925 (1978).

II

Res judicata ensures the finality of decisions. Under res judicata, "a final judgment on the merits bars further claims by parties or their privies based on the same cause of action." Montana v. United States,440 U. S. 147, 440 U. S. 153 (1979). Res judicata prevents litigation of all grounds for, or defenses to, recovery that were previously available to the parties, regardless of whether they were asserted or determined in the prior proceeding. Chicot County Drainage Dist. v. Baxter State Bank,308 U. S. 371, 308 U. S. 378 (1940); 1B J. Moore, Federal Practice

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