Anderson v. Fisher (In re Anderson)
520 B.R. 89
| 6th Cir. BAP | 2014Background
- Kenneth and Linda Anderson (Debtors) were defendants in a Tennessee state-court suit alleging fraud and related torts arising from sale of lots in a development; plaintiffs obtained a penalty default judgment after the Debtors repeatedly failed to comply with discovery and court orders.
- The state court judgment struck the Debtors’ answer and found they committed fraud, misrepresentation, deceit, and several torts; a damages hearing was scheduled but Debtors filed bankruptcy before damages were fixed.
- James and Ruby Fisher (Creditors) sued in the bankruptcy court under 11 U.S.C. § 523(a)(2)(A) (fraud nondischargeability), seeking to have the state-court judgment given preclusive effect.
- The bankruptcy court granted partial summary judgment, concluding the state penalty default judgment was entitled to full faith and credit and collateral estoppel, making the fraud debt nondischargeable; remaining claims were dismissed and damages to be set in state court.
- Debtors appealed, arguing the bankruptcy court erred by giving preclusive effect to the default judgment (relying on Spilman/Brown line) and that Calvert was wrongly decided; the Panel affirmed without reaching a separate summary-judgment affidavit issue.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether a Tennessee penalty/default judgment is entitled to preclusive effect under 28 U.S.C. § 1738 and collateral estoppel in a § 523(a)(2)(A) action | Fisher: State-court fraud findings are identical to § 523(a)(2)(A) elements and were actually litigated; thus collateral estoppel applies | Andersons: Default judgment wasn’t actually litigated (rely on Spilman/Brown); dischargeability should be excepted from full faith and credit for defaults | Panel: Affirmed — penalty/default judgment entitled to preclusive effect because Debtors actively participated so issues were actually litigated and state law would give effect; collateral estoppel applies |
| Whether Brown v. Felsen or Spilman require federal preclusion law (not state law) for dischargeability | Debtors: Brown/Spilman mean federal preclusion governs and prevent precluding relitigation after state default judgment | Fisher: Brown addressed res judicata only; Marrese and later Sixth Circuit precedent require applying state preclusive effect first | Panel: Rejected Debtors’ reading of Brown/Spilman; applied Full Faith and Credit analysis and controlling circuit precedents |
| Whether Calvert’s rule that default judgments may be given preclusive effect is valid here | Fisher: Calvert governs; if state would preclude, bankruptcy must give effect | Debtors: Calvert was wrongly decided and conflicts with Spilman | Panel: Followed Calvert and related Sixth Circuit authorities; affirmed application |
| Whether the state-court fraud findings were actually litigated and necessary to judgment | Fisher: Debtors answered, had counsel, participated in discovery; fraud was necessary to default judgment | Andersons: Default judgment was a sanction, not actual adjudication on the merits | Panel: Found conduct equated to ‘‘penalty/default’’ where issues were actually litigated (like Bursack); collateral estoppel applies |
Key Cases Cited
- Rally Hill Productions, Inc. v. Bursack, 65 F.3d 51 (6th Cir. 1995) (default entered after active participation can preclude relitigation of issues in dischargeability action)
- Bay Area Factors v. Calvert (In re Calvert), 105 F.3d 315 (6th Cir. 1997) (federal courts must give state-court default judgments preclusive effect if state law would do so)
- Marrese v. American Academy of Orthopaedic Surgeons, 470 U.S. 373 (1985) (Full Faith and Credit requires federal courts to consult state law to determine preclusive effect)
- Grogan v. Garner, 498 U.S. 279 (1991) (collateral estoppel principles apply in § 523 dischargeability proceedings; preponderance standard)
- Brown v. Felsen, 442 U.S. 127 (1979) (res judicata principles do not bar a creditor from bringing a dischargeability action in bankruptcy; limited to claim preclusion)
- Spilman v. Harley, 656 F.2d 224 (6th Cir. 1981) (earlier Sixth Circuit decision emphasizing issues must be actually litigated for issue preclusion)