Fielder v. King (In Re King)

United States Court of Appeals,

Fifth Circuit.

No. 96-40754

Summary Calendar.

In the Matter of Margee Daigle KING, Debtor.

Cecil FIELDER and Stacey Fielder, Appellants,

Margee Daigle KING, Appellee.

Jan. 9, 1997.

Appeal from the United States District Court for the Eastern District of Texas.

Before HIGGINBOTHAM, WIENER and BENAVIDES, Circuit Judges.

BENAVIDES, Circuit Judge:

This appeal involves a bankruptcy court's application of res judicata (claim preclusion) to

dismiss a creditor's nondischargeability complaint under Section 523(a)(2)(A) of the Bankruptcy

Code. 11 U.S.C. § 523(a)(2)(A). Section 523(a)(2)(A) permits creditors to challenge the

dischargeability in bankruptcy of "any debt ... for money ... to the extent obtained by ... false

pretenses, a false representation, or actual fraud...." Id.

Cecil and Stacey Fielder ("the Fielders") seek to prevent Margee Daigle King ("King") from

discharging a Texas state court judgment rendered against King in November of 1994. A jury

returned a verdict in favor of the Fielders, finding that King had breached a contract with the Fielders

and had committed fraud against them. The jury's verdict included actual damages ($270,530.67) and

punitive damages ($1.5 million). Initially, the state court rendered judgment on the jury's verdict.

Then, in response to a motion for new trial filed by King, the trial court substituted a new judgment

that limited the Fielders' award t o contract damages ($128,849.49) along with pre-judgment and

postjudgment interest. The state-court judgment does not reflect the reason that the court eliminated

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the Fielders' fraud damages.

One month after final judgment was rendered in favor of the Fielders, King filed for

bankruptcy under Chapter 7 of the Bankruptcy Code. The Fielders brought an adversary proceeding

against King in bankruptcy court, asserting that King's debt to them was nondischargeable under

Section 523(a)(2)(A) of the Bankruptcy Code. The bankruptcy court dismissed the Fielders'

complaint, holding that the Fielders' nondischargeability claim was barred by principles of res judicata.

The district court affirmed the dismissal.

II.

The bankruptcy court's claim preclusion analysis is sound, and if claim preclusion was

applicable in nondischargeability proceedings, the Fielders' nondischargeability complaint would be

barred. The United States Supreme Court in Brown v. Felsen, however, held that the doctrine of res

judicata does not apply in bankruptcy nondischargeability proceedings. 442 U.S. 127, 133-39, 99

S.Ct. 2205, 2211-13, 60 L.Ed.2d 767 (1979); Key v. Wise, 629 F.2d 1049, 1063-64 (5th Cir.1980)

(discussing Brown v. Felsen ). Consequently, we cannot affirm based on the reasoning of the

bankruptcy court.

Collateral estoppel (issue preclusion), however, provides a possible alternative basis upon

which to uphold the district court's affirmance. In Grogan v. Garner, the Supreme Court held that

issue preclusion, unlike claim preclusion, applies to bankruptcy nondischargeability proceedings. 498

U.S. 279, 284 n. 11, 111 S.Ct. 654, 658 n. 11, 112 L.Ed.2d 755 (1991); see Brown, 442 U.S. at 139

n. 10, 99 S.Ct. at 2213 n. 10. In this circuit, issue preclusion will prevent a bankruptcy court from

determining dischargeability issues for itself only if "the first court has made specific, subordinate,

factual findings o n the identical dischargeability issue in question ... and the facts supporting the

court's findings are discernible from that court's record." In re Dennis, 25 F.3d 274, 278 (5th

Cir.1994) (citations omitted), cert. denied, --- U.S. ----, 115 S.Ct. 732, 130 L.Ed.2d 636 (1995).

The state-court record presented for our review does not meet the requirements set out in

Dennis. The record reflects no "specific, subordinate, factual finding" that King's debt to the Fielders

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was not obtained by false pretenses, false representations, or actual fraud. Moreover, the record is

devoid of facts to support such a finding, even had such a finding been made.1 The party asserting

issue preclusion bears the burden of proof, Sysco Food Servs., Inc. v. Trapnell, 890 S.W.2d 796,

801-02 (Tex.1994),2 and hence would have the burden of bringing forward an adequate state-court

record.

King essentially argues that the substituted state-court judgment, which awarded contract

damages and denied "all relief not expressly granted," constitutes a specific finding that King did not

obtain the debt by false pretenses, false representation, or actual fraud. We disagree. The bare fact

that the state court awarded only contract rather than fraud damages does not preclude the

bankruptcy court from inquiring into the true nature of that debt. The bankruptcy court is not bound

by the "breach of contract" label that the state-court assi gned to the judgment awarded to the

Fielders. See Dennis, 25 F.3d at 277.3 We have admonished bankruptcy courts to "look beyond the

labels which state courts ... give obligations which debtors seek to have discharged." Id. (citations

and footnote with additional citations omitted). The fact that a state court labels a judgment

"contract damages" rather than "fraud damages" does not control the bankruptcy court if the state

court's determination did not necessarily include a finding regarding the dischargeability issue (i.e.,

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A full state-court record will not always or even often be required for the bankruptcy court to
apply issue preclusion. See In re Davis, 3 F.3d 113, 114-15 (5th Cir.1993). The record must,
however, provide a sufficient basis upon which the bankruptcy court may determine that the issue
to be decided was actually litigated and necessarily decided in state court. See In re Allman, 735
F.2d 863, 865 (5th Cir.) (citations omitted), cert. denied, 469 U.S. 1086, 105 S.Ct. 590, 83
L.Ed.2d 700 (1984).
2
Because King asked the bankruptcy court to give conclusive effect to a Texas state court
judgment, Texas rules of preclusion apply. In re Garner, 56 F.3d 677, 679 (5th Cir.1995).
Under Texas law, a party asserting issue preclusion must establish that (1) the facts sought to be
litigated in the second action were fully and fairly litigated in the prior action; (2) those facts were
essential to the judgment in the first action; and (3) the parties were cast as adversaries in the first
action. Bonniwell v. Beech Aircraft Corp., 663 S.W.2d 816, 818 (Tex.1984), quoted in Garner,
56 F.3d at 680.
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The Fielders need not have recovered a state-law fraud verdict in order to prevail on a claim
that the debt owed them was obtained by fraudulent behavior and consequently should not be
discharged. See Brown, 442 U.S. at 138-39, 99 S.Ct. at 2213.

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whether the debt was obtained by false pretenses, a false representation, or actual fraud).

The bankruptcy court itself stated that the determination that the Fielders' claim sounded in

contract rather than fraud was made for reasons "only known to the state court judge." Under these

circumstances, the state court's elimination of fraud damages can hardly be construed as a specific

factual finding regarding the federal law dischargeability issue. As the Fielders suggest, the state

court may have disallowed fraud damages, not because it disagreed with the jury's fraud finding, but

rather because under Texas law, "[w]hen the injury is only the economic loss to the subject of a

contract itself, the action sounds in contract alone." Southwestern Bell Tel. Co. v. DeLanney, 809

S.W.2d 493, 495 (Tex.1991) (quoting Jim Walter Homes, Inc. v. Reed, 711 S.W.2d 617, 618

(Tex.1986)). Under Jim Walter Homes and DeLanney, the nature of a plaintiff's injury can preclude

the plaintiff from recovering under a fraud theory, even if the defendant's conduct was fraudulent.

Consequently, if the state court eliminated the Fielders' fraud damages based on the rule of Jim

Walter Homes and DeLanney, that action would not constitute a finding, express or implied, that

King's debt for money was not obtained by false pretenses, a false representation, or actual fraud

within the meaning of Section 523(a)(2)(A).

III.

In sum, the state-court record does not contain a specific, subordinate factual finding that

King's debt was not obtained by false pret enses, a false representation, or actual fraud nor does it

contain any facts that would support such a finding. On this record, issue preclusion does not bar the

Fielders' nondischargeability complaint. Accordingly, the judgment of the district court is

REVERSED and the case is REMANDED with directions to remand to the bankruptcy court for

further proceedings.