In Re: Bailey

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this opinion should not be published and is not precedent except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.

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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

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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.

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