610 B.R. 670
Bankr. D.N.M.2019Background
- Welch (plaintiff) invested in four California second-deed-of-trust investments arranged and managed by her nephew Giron (debtor); Giron handled documentation, foreclosures, and conveyed the properties to Welch’s trust.
- Giron later attempted to rescind three trustee’s deeds; Welch sued in California and obtained a default judgment on June 15, 2018 for about $20 million.
- The California default judgment did not identify specific causes of action or itemize factual findings supporting each damage award; it contains one finding that Giron’s conduct was done with “malice, oppression, or fraud.”
- Welch domesticated the California judgment in New Mexico on November 16, 2018 and then moved for summary judgment in bankruptcy seeking a declaration that the judgment is nondischargeable under 11 U.S.C. § 523(a)(2), (a)(4), and (a)(6).
- The bankruptcy court held the domesticated judgment establishes a valid debt (full faith and credit to amount) but refused to give the default judgment issue-preclusive effect for dischargeability, declined summary judgment, and set the matter for further proceedings.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the state-court judgment precludes relitigation of facts to establish nondischargeability under § 523 | Welch: The California default judgment’s findings should be given preclusive effect to prove nondischargeability | Giron: Bankruptcy court has exclusive power to determine dischargeability; default judgment lacks actually litigated findings | Court: Judgment is entitled to full faith and credit as a debt, but not issue-preclusive for dischargeability; summary judgment denied |
| Whether claim preclusion/res judicata bars relitigation of dischargeability | Welch: Claim preclusion should bar relitigation | Giron: Brown v. Felson prevents claim preclusion from resolving dischargeability in bankruptcy | Court: Claim preclusion unavailable for dischargeability determinations (Brown governs) |
| Whether issue preclusion applies given default judgment and domestication in NM | Welch: California law gives preclusive effect to default judgments; therefore issues were decided | Giron: Once domesticated in New Mexico, NM preclusion rules (which do not give preclusive effect to default judgments) apply; default lacks actual litigation | Court: New Mexico law controls for the domesticated judgment; NM does not give issue preclusive effect to defaults; court also declines to exercise equitable collateral estoppel on these facts |
| Whether the $20M judgment amount is itself nondischargeable without further proof | Welch: The whole judgment should be declared nondischargeable | Giron: No opposing evidence and the judgment lacks findings allocating nondischargeable conduct; impossible to apportion by default | Court: Amount is a valid debt (full faith and credit), but determining what portion (if any) is nondischargeable requires adjudication at trial under Cohen principles; summary judgment improper |
Key Cases Cited
- Brown v. Felson, 442 U.S. 127 (Supreme Court 1979) (claim preclusion cannot determine bankruptcy dischargeability)
- Marrese v. American Academy of Orthopaedic Surgeons, 470 U.S. 373 (Supreme Court 1985) (federal courts must apply state preclusion law to state judgments)
- Strickland v. City of Albuquerque, 130 F.3d 1408 (10th Cir.) (full faith and credit requires federal courts to give state judgments the same preclusive effect as state courts)
- Celotex Corp. v. Catrett, 477 U.S. 317 (Supreme Court 1986) (summary judgment burden rules)
- Cohen v. de la Cruz, 523 U.S. 213 (Supreme Court 1998) (nondischargeable debt includes all liability arising from the non-dischargeable conduct)
- Melnor v. Corey (In re Corey), 583 F.3d 1249 (10th Cir.) (default judgments generally do not have issue-preclusive effect)
- National Bank of Arizona v. Moore, 138 N.M. 496 (N.M. 2005) (domesticated foreign judgment is enforced under forum’s judgment-enforcement rules)