IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
_____________________
No. 01-20579
Summary Calendar
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In The Matter Of: DENNIS RODNEY BAILEY
Debtor.
DENNIS RODNEY BAILEY,
Appellant,
versus
DAVID COOK; ANNA COOK,
Appellees.
__________________________________________________________________
Appeal from the United States District Court
for the Southern District of Texas, Houston
USDC No. H-01-CV-652
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March 13, 2002
Before JOLLY, DAVIS and STEWART, Circuit Judges.
PER CURIAM:*
In this appeal, the debtor, Dennis Bailey, challenges the
bankruptcy court’s determination that a debt based on a pre-
petition state court judgment in favor of David and Anna Cook is
nondischargeable. Under 11 U.S.C. § 523(a)(2)(A), a debt is
nondischargeable in bankruptcy if it involves money that was
obtained by “false pretenses, a false representation, or actual
*
Pursuant to 5TH CIR. R. 47.5, the Court has determined that
this opinion should not be published and is not precedent except
under the limited circumstances set forth in 5TH CIR. R. 47.5.4.
1
fraud.” Because the state court jury’s findings with respect to
the Cooks’ common law fraud claim satisfy the definition of “actual
fraud” under § 523, we conclude that collateral estoppel bars
relitigation of the issue in bankruptcy court. Accordingly, we
affirm the judgment of the district court.
I
In October 1999, a Texas state court entered judgment against
Bailey and in favor of the Cooks. The jury in that case found that
Bailey committed both common law and statutory fraud against the
Cooks and that Bailey had “actual awareness of the falsity of the
representation or promise” involved in the fraud.1 Based on these
and other findings, the jury awarded the Cooks $15,000 in damages.
Shortly after this judgment was entered, Bailey filed a voluntary
petition for bankruptcy under Chapter 7 of the Bankruptcy Code.
The Cooks then filed this action objecting to the discharge of
Bailey’s debt to them on the ground that their state court judgment
fit within a statutory discharge exception for debts arising out of
fraud. The bankruptcy court eventually granted summary judgment in
favor of the Cooks, holding that collateral estoppel barred
relitigation of whether the debt was based on fraudulent conduct by
Bailey. The district court affirmed, and this appeal followed.
II
Bailey argues that the bankruptcy court and district court
1
Apparently, Bailey failed to refund the Cooks’ earnest money
and down payment on a new home.
2
erred by giving preclusive effect to the jury’s findings in the
state court proceedings. Specifically, he argues that collateral
estoppel does not apply here because the state court jury’s
findings on fraud, when read in conjunction with instructions
issued by the court, do not meet the requirements for fraud under
the exception to discharge established in 11 U.S.C. § 523(a)(2)(A).
Thus, the question is whether the state court jury decided the same
issue that the bankruptcy court would have to decide under § 523.
The Supreme Court has “clarif[ied] that collateral estoppel
principles do indeed apply in discharge exception proceedings
pursuant to § 523(a).” Grogan v. Garner, 498 U.S. 279, 284 & n.11
(1991). Under federal law, collateral estoppel bars relitigation
of an issue if: “(1) the issue at stake [is] identical to the one
involved in the prior action; (2) the issue [was] actually
litigated in the prior action; and (3) the determination of the
issue in the prior action [was] a part of the judgment in that
earlier action.” In re Southmark Corp., 163 F.3d 925, 932 (5th
Cir. 1999) (citation omitted). Only the first element is disputed
here –- that is, whether the issue at stake in the federal
bankruptcy proceedings is identical to that decided in the state
court. Resolution of this question turns on a comparison of the
elements of the exception to discharge in § 523(a)(2)(A) and the
state court jury instructions and findings.
Section 523(a)(2)(A) provides that a bankruptcy discharge does
not apply to any debt “for money, property, [or] services . . . to
3
the extent obtained by . . . false pretenses, a false
representation, or actual fraud, other than a statement respecting
the debtor's or an insider's financial condition.” We have
construed “actual fraud” in this context to require proof that:
“(1) the debtor made representations; (2) at the time they were
made the debtor knew they were false; (3) the debtor made the
representations with the intention and purpose to deceive the
creditor; (4) that the creditor relied on such representations; and
(5) that the creditor sustained losses as a proximate result of the
representations.” Matter of Bercier, 934 F.2d 689, 692 (5th Cir.
1991) (citation and internal quotation marks omitted). Under this
definition, “fraud implied in law which may exist without
imputation of bad faith or immorality, is insufficient,” Allison v.
Roberts, 960 F.2d 481, 483 (5th Cir.1992) (internal quotation marks
omitted), because the provision applies only to “debts obtained by
frauds involving moral turpitude or intentional wrong” in which the
misrepresentations were “knowingly and fraudulently made.” Matter
of Martin, 963 F.2d 809, 813 (5th Cir. 1992).
In the present case, the jury specifically found that Bailey
committed both common law fraud and statutory fraud against the
Cooks. The jury instructions defined common law fraud as (1) a
material misrepresentation (2) “made with knowledge of its falsity
or make recklessly without any knowledge of the truth” (3) with the
intention of inducing reliance by the other party and (4) the other
party actually relied on the misrepresentation to its detriment.
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Since this definition does not seem to require that the
misrepresentation be “knowingly and fraudulently made,” Bailey
argues that the state court proceedings did not decide the same
issue that was before the bankruptcy court under § 523(a)(2)(A).
But we do not have to reach this question because the jury here
found more than common law fraud: It also found that Bailey had
“actual awareness of the falsity of the representation or promise”
that was found to be fraudulent.2 Thus, we think it is clear that
the state court jury’s findings address all of the elements of
fraud required under 11 U.S.C. § 523(a)(2)(A).
Because the state court judgment in this case satisfies the
requirements for collateral estoppel, the bankruptcy court and
district court correctly held that relitigation of the “actual
fraud” issue under § 523 is barred.
III
For the reasons set out above, the judgment of the district
court is
AFFIRMED.
2
Although this finding apparently was made in connection with
the jury’s finding on statutory fraud, we see no reason to limit
its effect to that claim.
5