MEMORANDUM OPINION AND ORDER REGARDING PLAINTIFF’S MOTION FOR SUMMARY JUDGMENT ON ITS COMPLAINT TO DETERMINE DISCHARGEABILITY OF DEBT
At issue in this core proceeding 1 is whеther a debt arising from a state court default judgment may be excepted from the debtor's general discharge pursuant to 11 U.S.C. § 523(a)(2), (a)(4) and (a)(6) by application of the doctrine of collateral es-toppel. The following constitutes findings of fact and conclusions of law pursuant to Bankruptcy Rule 7052.
The plaintiff in this proceeding seeks a determination that its claim of $101,873.62 which arises from a judgment obtained against the debtor, James Lee Stiles, and his partner, Russell Lane, in the Chancery Court of Shelby County, Tennessee is non-dischargeable as a matter of law. 2 In support of the relief sought, the plaintiff has furnishеd the Court with the record from the Chancery Court proceedings. This record contains no transcripts of any proceedings. Rather, it consists entirely of pleadings and documents which reflect that the judgment at issue is one of default granted pursuant to the plaintiff’s complaint which was filed after a business аrrangement between the parties for the development and management of a restaurant soured.
According to the Chancery Court complaint, the debtor and his former partner allegedly engaged in fraud, gross mismanagement of the business, conversion of corporate funds, use of corрorate opportunity for personal gain, and waste of capital assets to the plaintiff's detriment. In response to the complaint, the debtor filed an answer wherein the above recited allegations were denied.
From the record provided, it appears that after the debtor’s answer was filed, the plaintiff began attempts to undertake discovery necessary for trial and resolution of the disputed issues. Indeed, a “Motion, for Order to Compel Response to Request for Production of Documents” filed by the plaintiff resulted in an “Order Compelling Response ...” issued by the Chancery Court on July 10, 1987. Apparently, the debtor failed to comply with this order, and it was followed by a Motion for Default Judgment and Sanctions wherein the plaintiff sought a default judgment and sanctions against the debtor for failure to comply with the July 10 order. The motion for default judgment was subsequently denied but the motion for sanctions, in the form of attorney’s fees, was granted by a Chancery Court order of August 7, 1987. This order was followed by a “Notice to Take Deposition” with which the debtor apparently also failed to comply because on August 10, 1987, the plaintiff filed a second “Motion For Default Judgment and Sanctions” against the debtor for his failure tо cooperate with discovery efforts. A hearing on this motion was set for August 14, 1987, and having received no response from the debtor, the Chancellor granted the motion for default judgment.
The record further reflects that on this same date, an order was entered allowing counsel for the debtor to withdraw from that representation in the Chancery Court. Apparently, the debtor subsequently obtained new counsel and moved to set aside the default judgment asserting that he had not received notice of the motion, given his former attorney’s withdrawal from representation. The motion was denied and eventually this substitutе counsel was allowed to withdraw from representation of *83 the debtor. A third attorney was retained and a “Motion to Reconsider the [order] to Set Aside Default Judgment ...” was filed. This motion was also denied, and the plaintiff thereafter filed a “Motion For Hearing on Damage Issues.” This motion was disposed of, аfter a hearing in which the debtor participated, resulting in a Chancery Court order of March 8, 1988, awarding damages of $101,873.62 to the plaintiff.
The debtor subsequently filed a “Notice of Appeal” and a “Motion to Proceed as a Poor Person ...” The record contains no evidence of the dispositiоn of the “Motion to Proceed as a Poor Person ...;” however, the appeal was apparently never perfected and it was dismissed by the Tennessee Court of Appeals on October 25, 1988.
Following dismissal of the debtor’s appeal, the plaintiff began pursuing means of satisfying its judgment and, on August 15, 1988, obtained an order from the Chancery Court charging the debtor’s interest in the Ski Mountain Shopping Center Limited Partnership with the unsatisfied amount of the judgment debt.
Thereafter, the debtor and his wife filed their joint petition for Chapter 11 relief under the Bankruptcy Code with this Court. With this petition for relief, the debtor seeks, inter alia, to discharge some or all of the plaintiff’s claim. The plaintiff takes exception to the potential discharge of any portion of this debt and asserts that based on the Chancery Court judgment described above, collateral estoppel precludes discharge.
In order to grant the plaintiff’s requestеd relief, this Court must find that no genuine issue exists as to any material fact. Bankr.Rule 7056(c). Thus, the Court must find, based on the pleadings, depositions, answers to interrogatories, admissions on file and affidavits filed in this cause that the debtor engaged in “fraud or misrepresentation,” 3 “fraud or defalcation while acting in a fiduciary capacity” 4 or “willful and malicious injury” to the property 5 of the plaintiff as a matter of law.
It is the plaintiff’s position that the judgment on which the debt at issue rests easily supports such a finding because under state law a default judgment equals an admission of the allegations contained in the complaint. Moreover, according to the plaintiff, such a judgment is entitled to full faith and credit by this Court.
On the other hand, the debtor disputes that the plaintiff is entitled to a determination that the debt at issue is nondischargeable as a matter of law because the issues necessary to such a determination were not actually litigated in the Chancery Court.
With respect to this issue, it is well settled that the bankruptcy courts have exclusive jurisdiction for determination of the dischargeability of debts pursuant to 11 U.S.C. § 523(a)(2), (a)(4), and (a)(6). 11 U.S.C. § 523(c);
Spilman v. Harley,
First, the issue sought to be precluded [is] identical to the one in the prior аction. Second, the issue [has] been actually litigated in the prior action. Third, the prior determination ... resulted in a valid and final judgment. Lastly, the determination of the facts for which preclusion is sought [was] necessary to the outcome.
In re McQueen,
Indeed, where these factors are ascertainable, the vast majority of courts considering application of сollateral estoppel have found it applicable.
See, e.g., Spilman v. Harley, supra; Wheeler v. Laudani,
As in the instant proceeding, the
Byard
case involved the issue of whether a default judgment against a debtor should be given collateral estoppel effect in the plaintiff-creditor’s subsequently filed discharge-ability action under 11 U.S.C. § 523.
Further, according to the Byard Court: In the opinion of this court, there is nothing in the Bankruptcy Code or Congressional statements of intent in the enactment of § 523 indicating that some kinds of state court judgments — those that are fully and actually litigated by the state court — can have issue preclu-sive effect in § 523 litigation but other kinds of state court judgments cannot— for example, a default judgment like the one here at issue. There is no compelling statement of federal bankruptcy law which expressly or impliedly excepts to the normal operation of § 1738 where the state court judgment for which issue pre-clusive effect is sought is a default judgment ...
There is nothing about the issues here sought to be precluded which suggests intervention of any strong federal bankruptcy policy prohibiting application of § 1738. Fraud, conversion and misappli *85 cation of funds are issues well within the regular compеtence and experience of state courts. Under these circumstances, it is the holding of this court that there is no compelling statement of federal bankruptcy law which would expressly or impliedly forbid application of § 1738 to give issue preclusive effect of this default judgment.
Not surprisingly, the plaintiff relies on the
Byard
decision as support for its position, and obviously the conclusion therein strongly supports a finding that the default judgment at issue here is entitled to be given preclusive effect given that state law would result in such.
Patterson v. Rockwell Int’l.,
If the important issues were not actually litigated in the рrior proceeding, as is the case with a default judgment, then collateral estoppel does not bar relitigation in the bankruptcy court.
... neither the pleadings nor the general verdict [of the prior adjudication] reflects that the issue of [dischargeability] was actually litigated and necessary to the verdict. Thus, based on the record at hand, collateral estoppel would not operate to bar relitigation of this issue.
These directives are founded upon the above mentioned
Brown v. Felsen
decision, which unlike those cases relied upon by the
Byard
Court, discussed the effect to be givеn prior judgments in the bankruptcy-dischargeability context.
Brown v. Felsen, supra.
As discussed above, the
Brown
decision stands for the proposition that because of the exclusive jurisdiction given the bankruptcy courts for resolution of § 523(a)(2), (4), and (6) dischargeability issues, res judicata is not applicable in proceedings positing those issues. However, aсcording to
Brown,
in the interest of judicial economy, claim preclusion or collateral estoppel may be applicable to issues “actually and necessarily decided in a prior suit.”
Obviously, the Sixth Circuit has construed the “actually and necessarily decided” language of
Brown v. Felsen
to mean “actually litigated.”
Contra, In re Byard,
Although neither of these Courts, nor this Court, quarrels with the
Byard
Court’s conclusion that the initial determination should be what effect state law would give to issues determined in a prior adjudication, the
Hall
and
Morrison
Courts, as does this Court, disagree with the ultimate
Byard
conclusion that there is no compelling statement of federal bankruptcy law which justifies a “departure from the general rule that state law determines the collateral es-toppel effect of a state court judgment” when the issue presented is the effect of default judgments in § 523(a)(2), (4) and (6) dischargeability proceedings.
In re Hall,
It is not just the exclusive jurisdiction of thе bankruptcy courts over some dis- *86 chargeability issues but also the problem of premature litigation of dischargeability issues that requires the court to deny collateral estoppel effect to a prebank-ruptcy default judgment.
In the case at bar, the Court is presented with a state court default judgment granted pursuant to the plaintiffs motion for such raised because the debtor failed to comply with discovery requests. As mentioned above, there is no transcript of the state court proceeding, which resulted in the judgment, for this Court’s consideration. Thus, there has been no showing that the issues of the dеbtor’s alleged fraud or defalcation while acting in a fiduciary capacity or willful and malicious injury to the plaintiff’s property were actually litigated and necessary to the prior judgment. As such, notwithstanding the fact that this default judgment would be binding on the debtor in a subsequent state court proceeding, the dеfault judgment as to liability is not binding so as to preclude the debtor’s discharge of the judgment debt.
The amount of the damages assessed by the state court against the debt- or is binding however as the record reflects that that issue was actually litigated with the debtor’s full participation.
From the above findings and conсlusions, it is HEREBY ORDERED that:
The plaintiff’s motion for summary judgment on the issue of dischargeability of its prior state court judgment is DENIED; but, a further pre-trial and scheduling conference in this adversary proceeding is set for October 22, 1990, at 9:30 a.m., in Courtroom 680, 200 Jefferson Avenue, Memphis, Tennessee; and
The plaintiff’s motion for summary judgment on the issue оf the amount of damages awarded in the state court action is GRANTED.
SO ORDERED.
Notes
. 28 U.S.C. § 157(b)(2)(I).
. Although the complaint filed in this proceeding seeks a determination that the plaintiffs claim is nondischargeable as to both Sherrie and James Stiles, the motion for summary judgment is apparently only applicable to Mr. Stiles because the Chancery Court judgment on which it is founded is only against Mr. Stiles.
. 11 U.S.C. § 523(a)(2).
. 11 U.S.C. § 523(a)(4).
.11 U.S.C. § 523(a)(6).
. These principles are codified at 28 U.S.C. § 1738 which provides in pertinent part:
The ... judicial proceedings of any Court of such state ... shall have the same full faith and credit in every court within the United States ... as they have by law or usage in the courts of such state ...