504 B.R. 852
Bankr. E.D. Mich.2014Background
- McCallum obtained a Michigan state-court default judgment against Pixley for $157,028.03 (plus costs and interest) after Pixley did not answer or participate in the action.
- The default judgment included counts for conversion and alleged fraud, and Pixley did not appeal or seek relief from the judgment.
- In the adversary, McCallum seeks nondischargeability of the debt under 11 U.S.C. § 523(a)(2)(A) and § 523(a)(6); summary judgment had previously been denied pending trial.
- Collateral estoppel questions center on which elements of the § 523(a)(2)(A) and § 523(a)(6) claims were actually litigated and necessarily determined in the state court default judgment.
- The court concluded Michigan law permits collateral estoppel to attach to true default judgments on an issue-by-issue basis, and Barnes v. Jeudevine supports preclusion of default judgments.
- The state court default judgment establishes Pixley’s conversion of $50,600 and related damages; the trial evidence shows willful and malicious injury under § 523(a)(6) based on that conversion, and Cohen v. de la Cruz tolls the nondischargeability of the entire judgment.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Does collateral estoppel preclude Pixley from contesting nondischargeability? | McCallum argues true-default collateral estoppel applies to establish nondischargeability elements. | Pixley argues collateral estoppel is all-or-nothing and may preclude only some elements or none. | Collateral estoppel applies on an issue-by-issue basis; Pixley is precluded for elements actually litigated and necessarily determined. |
| Are the § 523(a)(2)(A) elements actually litigated and necessarily determined by the default judgment? | McCallum contends the elements were established or can be established by collateral estoppel. | Pixley contends some elements were not pled or not necessarily determined. | Two elements (material misrepresentation and justifiable reliance) were not actually litigated in the default judgment; collateral estoppel cannot support nondischargeability under § 523(a)(2)(A) for those elements. |
| Are the § 523(a)(6) elements of willful and malicious injury satisfied by the default judgment? | McCallum argues the willful and malicious injury elements were actually litigated and established. | Pixley contends willfulness may not be necessarily determined under Michigan law for conversion. | Willful injury is satisfied; malicious injury is satisfied by the default judgment’s facts and the court’s findings, based on conversion. |
| Is the entire debt nondischargeable under 11 U.S.C. § 523(a)(6) due to Cohen v. de la Cruz? | McCallum asserts Cohen extends nondischargeability of the whole debt (including treble damages and fees) when § 523(a)(6) is involved. | Pixley may argue only the specific § 523(a)(6) injury is nondischargeable. | Under Cohen, the entire judgment debt (including treble damages and fees) is nondischargeable under § 523(a)(6). |
Key Cases Cited
- Grogan v. Garner, 498 U.S. 279 (1991) (collateral estoppel in nondischargeability actions; final judgments bind issues)
- Bay Area Factors v. Calvert (In re Calvert), 105 F.3d 315 (6th Cir. 1997) (state-law preclusion governs collateral estoppel in dischargeability actions)
- Barnes v. Jeudevine, 718 N.W.2d 311 (Mich. 2006) (default judgments may have preclusive collateral-estoppel effect)
- Phillips v. Weissert (In re Phillips), 434 B.R. 475 (6th Cir. BAP 2010) (default judgments can have collateral-estoppel effect on dischargeability issues)
- Sahn v. Estate of Brisson, 204 N.W.2d 692 (Mich. App. 1972) (actual-litigation equivalence of default judgments)
- Perry & Derrick Co. v. King, 180 N.W.2d 483 (Mich. App. 1970) (default judgments carry collateral-estoppel effect)
- Lichon v. American Universal Insurance Co., 459 N.W.2d 288 (Mich. 1990) (default judgments and collateral estoppel; later overruled by Barnes on the default judgment point)
- Cohen v. de la Cruz, 523 U.S. 213 (1998) (treble damages and related amounts are nondischargeable under 523(a)(6) if underlying fraud is nondischargeable)
- Esposito, 44 B.R. 817 (S.D.N.Y. 1984) (collateral estoppel can establish some elements; others may be proven by other evidence)