United States Court of Appeals,
Fifth Circuit.
No. 94-40688.
In the Matter of William L. GARNER, Debtor.
William L. GARNER, Appellant,
v.
Kenneth E. LEHRER, Appellee.
June 29, 1995.
Appeal from the United States District Court for the Eastern
District of Texas.
Before KING, GARWOOD, and BENAVIDES, Circuit Judges.
KING, Circuit Judge:
In this case, we are confronted with questions surrounding the
preclusive effect of a state court judgment on the dischargeability
of a debt in a subsequent federal bankruptcy proceeding. In 1988,
Kenneth E. Lehrer filed suit against William L. Garner in Texas
state court. Garner answered Lehrer's petition, but Garner failed
to respond to Lehrer's request for admissions. The trial of the
state court suit was held in November of 1990. Although Garner
failed to appear for trial, the court heard evidence and entered a
judgment in favor of Lehrer. Subsequently, Garner sought the
protections of Chapter 7 of the Bankruptcy Code. In the bankruptcy
court, Lehrer objected to the discharge of the state court judgment
and sought summary judgment. The bankruptcy court granted Lehrer's
motion, and Garner appealed to the district court. The district
court affirmed the decision of the bankruptcy court. Garner
appeals, alleging that the state court judgment in this case should
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not have preclusive effect on the dischargeability of the debt. We
disagree, and consequently, we affirm the decision of the district
court.
I. BACKGROUND
Lehrer is an independent real estate and financial consultant.
In September of 1988, Lehrer filed a lawsuit in Texas state court
against Garner and businesses associated with Garner.
Specifically, Lehrer contended that Garner and the other defendants
intentionally and knowingly "misappropriated and used for their
benefit and gain [Lehrer's] identity and credentials in connection
with the sale and development of a real estate venture." On
October 10, 1988, Garner, through counsel, answered Lehrer's
complaint with a general denial, stating, in part, that "Defendants
deny each and every, all and singular, the allegations contained in
[Lehrer's] Original Petition and demand strict proof thereof."
Apparently, the case remained dormant until June of 1990, when
the court sent the parties a notice of trial setting advising them
that the matter was scheduled for trial during the week of November
19, 1990. On July 20, 1990, Lehrer served requests for admissions
on Garner and the other defendants, but Garner and the other
defendants did not respond.
The trial was held on November 19, 1990 as scheduled. Garner,
however, failed to appear. Nevertheless, the trial proceeded, and
evidence, including the testimony of Lehrer (taken by telephone),
was heard by the court. That same day, the court signed a judgment
in the case. In its judgment, the court found that "[b]ased on the
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testimony presented, ... [the] [d]efendants acted with spite,
ill-will and malice." Further, the court declared that Lehrer
"never authorized Defendants ... to use [his] name or resume in
their brochure and that ... Defendants did so without [Lehrer's]
consent." Accordingly, the court awarded Lehrer $200,000 in actual
damages, $600,000 in punitive damages, $2500 in attorneys fees, and
pre- and postjudgment interest.
Almost a year later, on October 3, 1991, Garner filed a
voluntary petition for bankruptcy relief under Chapter 7 of the
Bankruptcy Code. In late January of 1992, Lehrer objected to the
discharge of the judgment debt that Garner owed to him, and the
following summer, on August 19, 1992, Lehrer filed a motion for
summary judgment in the bankruptcy court. According to Lehrer, the
motion was proper because the state court had determined that the
debt was based on fraud, false pretense, or willful and malicious
injury, and therefore it was not dischargeable under section 523(a)
of the Bankruptcy Code.1 Moreover, Lehrer contended that the under
the full faith and credit requirements of 28 U.S.C. § 1739, "the
Court is bound by the finding in the state court judgment that the
debt arose from Section 523(a) conduct and is therefore excepted
from discharge."
After a hearing, the Bankruptcy Court found:
1
Section 523(a) of the Bankruptcy Code provides that certain
debts are not discharged through bankruptcy proceedings. The
section provides, in part, that "[a] discharge under this title
does not discharge an individual debtor form any debt ... for
willful and malicious injury by the debtor to another entity."
11 U.S.C. § 523(a)(6).
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that the facts involved were fair and fully litigated in the
prior action[,] ... that the facts were essential to the prior
litigation[, and] that the parties were adversaries which
meets the Texas law requirements. In that case, the record
establishes that the defendant debtor in this case had actual
notice of the hearing, his attorney filed an answer in the
matter and that following the hearing he had 30 days to file
a motion for a new trial.... [Garner] filed a response to the
complaint. And, after that, he failed to defend himself
against the claim. The Court finds that [Garner] had his day
in Court; that the requirements of 523(a)(6) were therefore
met. That is, the ... action by [Lehrer] as evidenced by
th[e] record, ... was done with the intent to harm, ... the
Court found malicious intention here and it caused an economic
injury to [Garner] and that these injuries were the proper
results of the action by [Lehrer] established in the state
[c]ourt record.
Consequently, the bankruptcy court granted Lehrer's motion for
summary judgment.
Garner appealed to the district court, and the district court
affirmed, noting that although a default judgment generally does
not "give rise to collateral estoppel, that is not what happened in
the state court litigation between Garner and Lehrer. The judgment
in the state court was not based upon the unsupported allegation in
a petition, but rather, on the evidence presented to the trial
judge."
Garner appeals, arguing that the district court erred in
determining that the state court proceeding was "fully and fairly
litigated" for collateral estoppel purposes and in failing to
require Lehrer to prove the fraud findings in an adversary
proceeding in the bankruptcy court. Garner further argues that
Congress has indicated a special federal interest in the area of
dischargeability of debts, and consequently, the state court
judgment, even if adequate for traditional res judicata purposes,
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should not have preclusive effect in Garner's bankruptcy. We
reject all of Garner's contentions.
II. DISCUSSION
Our inquiry into the preclusive effect of a state court
judgment is guided by the full faith and credit statute which
provides that the "judicial proceedings of any court of any ...
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 ... from which they are taken." 28 U.S.C. §
1738; see also Marrese v. American Academy of Orthopaedic
Surgeons, 470 U.S. 373, 380, 105 S.Ct. 1327, 1331-32, 84 L.Ed.2d
274 (1985) (discussing the statute). As the Supreme Court has
noted:
This statute directs a federal court to refer to the
preclusion law of the State in which judgment was rendered.
"It has long been established that § 1738 does not allow
federal courts to employ their own rules of res judicata in
determining the effect of state judgments. Rather, it goes
beyond the common law and commands a federal court to accept
the rules chosen by the State from which the judgment is
taken."
Marrese, 470 U.S. at 380, 105 S.Ct. at 1332 (quoting Kremer v.
Chemical Constr. Corp., 456 U.S. 461, 481-82, 102 S.Ct. 1883, 1898,
72 L.Ed.2d 262 (1982)). Further, we have noted that a "court's
decision to give full faith and credit to the state court judgment
... [is] a question of law, which we review de novo." Sanders v.
City of Brady (In re Brady, Texas Mun. Gas Corp.), 936 F.2d 212,
217 (5th Cir.), cert. denied, 502 U.S. 1013, 112 S.Ct. 657, 116
L.Ed.2d 748 (1991). In the instant case, the judgment in question
was entered by a Texas state court. Accordingly, we apply Texas
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rules of preclusion.2
Under Texas law, collateral estoppel "bars relitigation of any
ultimate issue of fact actually litigated and essential to the
judgment in a prior suit, regardless of whether the second suit is
based upon the same cause of action." Bonniwell v. Beech Aircraft
Corp., 663 S.W.2d 816, 818 (Tex.1984). Further, Texas law requires
that:
A party seeking to invoke the doctrine of collateral estoppel
must establish (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.
2
In his reply brief, Lehrer, argues that "federal rules of
collateral estoppel are to be applied in bankruptcy proceedings,
even as to state court actions." Garner relies on our decision
in Merrill v. Walter E. Heller & Co. (In re Merrill), 594 F.2d
1064, 1066 n. 1 (5th Cir.1979), where, in a bankruptcy case, we
applied federal rules of collateral estoppel to determine the
preclusive effect of a state court judgment. That case, however,
was decided before a number of Supreme Court decisions held that
"a federal court must give to a state-court judgment the same
preclusive effect as would be given that judgment under the law
of the State in which the judgment was rendered." Migra v.
Warren City Sch. Dist. Bd. of Educ., 465 U.S. 75, 81, 104 S.Ct.
892, 896, 79 L.Ed.2d 56 (1984); see also Parsons Steel v. First
Alabama Bank, 474 U.S. 518, 523, 106 S.Ct. 768, 771, 88 L.Ed.2d
877 (1986) ("[U]nder the Full Faith and Credit Act a federal
court must give the same preclusive effect to a state-court
judgment as another court of that State would give."); Marrese,
470 U.S. at 380, 105 S.Ct. at 1332 (noting that the statute
"directs a federal court to refer to the preclusion law of the
State in which judgment was rendered"); Kremer, 456 U.S. at 481-
82, 102 S.Ct. at 1898 ("[Section] 1738 does not allow federal
courts to employ their own rules of res judicata in determining
the effect of state judgments."). In our cases after these
decisions, we have applied state law to determine the preclusive
effect of state court judgments in bankruptcy proceedings. See,
e.g., In re Brady, Texas Mun. Gas Corp., 936 F.2d at 217 (noting
in a bankruptcy case that "[s]ection 1738 directs this federal
court to give the Texas judgment the same effect as it would have
in a Texas court").
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Id. In the instant case, there is no question that the last two
elements of Texas's test for collateral estoppel were met. Garner,
however, contends that the district court erred in finding that the
state court claim was fully and fairly litigated so as to provide
for collateral estoppel in his bankruptcy proceeding.
Specifically, Garner argues that the state court entered a default
judgment against him, and such "a default prove-up does not met the
required standard" for collateral estoppel. We disagree.
Some commentators have noted that "[i]n the case of a judgment
entered by ... default, none of the issues is actually litigated."
Restatement (Second) of Judgments § 27 cmt. e (1982); see also 18
Charles A. Wright, Arthur R. Miller, & Edward H. Cooper, Federal
Practice and Procedure § 4442 (1981) (noting that a default
judgment should not support issue preclusion because "the essential
foundations of issue preclusion are lacking for want of actual
litigation or actual decision of anything ... [and because] a
defendant may suffer a default for many valid reasons other than
the merits of the plaintiff's claim"). On the other hand, "[w]hen
an issue is properly raised, by the pleadings or otherwise, and is
submitted for determination and is determined, the issue is
actually litigated" for collateral estoppel purposes. Restatement
(Second) of Judgments § 27 cmt. d (1982).
In the instant case, the judgment entered in the state court
was not a simple default judgment. According to Texas law, a
default judgment is a judgment entered after no answer has been
filed. See Stoner v. Thompson, 578 S.W.2d 679, 683 (Tex.1979). By
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contrast, the Texas Supreme Court has described the "judgment where
a defendant has answered but fails to appear for trial" as a
"post-answer "default' judgment." Id.; accord Green v. McAdams,
857 S.W.2d 816, 818 (Tex.App.1993, no writ).
In a simple default judgment, "it is said that the
non-answering party has "admitted' the facts properly pled and the
justice of the opponent's claim." Stoner, 578 S.W.2d at 682. The
Texas Supreme Court has described a different situation for a
post-answer default, which "constitutes neither an abandonment of
defendant's answer nor an implied confession of any issues thus
joined by the defendant's answer." Id. Accordingly, "[i]n a
post-answer default, the defendant's answer places the merits of
the plaintiff's cause of action at issue." Green, 857 S.W.2d at
818. Thus, in a post-answer default judgment situation,
"[j]udgment cannot be entered on the pleadings, but the plaintiff
in such a case must offer evidence and prove his case as in a
judgment upon a trial." Stoner, 578 S.W.2d at 682; see also
Green, 857 S.W.2d at 818 ("At the hearing on the post-answer
default, the plaintiff must carry his burden to prove the elements
of his action.").
In the state court proceedings, Garner answered Lehrer's
complaint with a general denial, and then he failed to appear for
trial. The district court conducted a trial in Garner's absence,
and "based on the testimony presented to the Court, the Court
f[ound] and conclude[d] that Plaintiff, Kenneth Eugene Lehrer [was]
entitled to recover judgment against Defendants." This decision
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was reached after Garner answered Lehrer's complaint and after a
trial in which Lehrer put on evidence sufficient to carry his
burden of proof. According to Texas law, the issues were properly
raised and actually litigated; accordingly, we find they were
fully and fairly litigated for collateral estoppel purposes. See
Restatement (Second) of Judgments § 27 cmt. d (1982) ("When an
issue is properly raised, by the pleadings or otherwise, and is
submitted for determination and is determined, the issue is
actually litigated.").
Garner argues that even if the fraud issues were fully and
fairly litigated, the state court judgment should not be given
preclusive effect in the bankruptcy court because bankruptcy is an
"area[ ] where Congress has indicated a special federal interest."
Once again, we disagree.
In Marrese, the Supreme Court recognized that in certain areas
of exclusive federal jurisdiction, courts may find an express or
implied repeal of the full faith and credit statute. Marrese, 470
U.S. at 386, 105 S.Ct. at 1334-35. The finding of a state court in
the context of a federal bankruptcy discharge is, however, not such
an area.
In a case regarding prior federal court proceedings, the
Supreme Court recently clarified 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,
111 S.Ct. 654, 658 n. 11, 112 L.Ed.2d 755 (1991). We have found
that a similar outcome results from state court judgments. In
9
Harold V. Simpson and Co. v. Shuler (In re Shuler), 722 F.2d 1253
(5th Cir.), cert. denied, 469 U.S. 817, 105 S.Ct. 85, 83 L.Ed.2d 32
(1984), we noted that:
collateral estoppel—arising from an earlier nonbankruptcy
suit's determination of subsidiary facts that were actually
litigated and necessary to the decision—may properly be
invoked by the bankruptcy court to bar relitigation of those
issues, even though the bankruptcy court retains the exclusive
jurisdiction to determine the ultimate question of the
dischargeability [of the debt] under federal bankruptcy law
..., based upon the facts so based and other evidence before
the court.
In re Shuler, 722 F.2d at 1255; see also Lacy v. Dorsey (In re
Lacy), 947 F.2d 1276, 1277 (5th Cir.1991). Accordingly, in that
case, we found that a bankruptcy court could, under certain
circumstances, give collateral estoppel effect to a state court
default judgment. In re Shuler, 722 F.2d at 1255-56; see also In
re Lacy, 947 F.2d at 1277 (discussing In re Shuler ). Moreover, in
In re Lacy, we noted that under similar circumstances "an agreed
judgment is entitled to collateral estoppel effect." In re Lacy,
947 F.2d at 1277. Simply put, when a state court, after a "full
and fair" adjudication, determines an issue, a bankruptcy court may
give that determination collateral estoppel effect.
Finally, Garner argues that the bankruptcy and district
courts erred in finding that the state court's determination that
Garner acted with "spite, ill-will, and malice" toward Lehrer
constituted a finding of "willful and malicious injury" within the
meaning of § 523's exclusions of discharge. Again, we find that
Garner's contentions are without merit.
On several occasions, "we have defined "willful and malicious'
10
under section 523(a)(6) to mean "without just cause or excuse.'
Willful means intentional and malicious adds the absence of just
cause or excuse." Seven Elves, Inc. v. Eskenazi, 704 F.2d 241, 245
(5th Cir.1983); accord Chrysler Credit Corp. v. Perry Chrysler
Plymouth, Inc., 783 F.2d 480, 486 (5th Cir.1986); see also 3
Collier on Bankruptcy ¶ 523.16 (Lawrence P. King ed., 14th ed.
1979) (discussing the definition of "willful and malicious" as used
in § 523(a)(6)). Under Texas law, malice "means ill will or evil
motive or such gross indifference or reckless disregard for the
rights of others as to amount to wanton and willful action,
knowingly and unreasonably done." Dahl v. Akin, 645 S.W.2d 506,
515 (Tex.App.1982), aff'd, 661 S.W.2d 917 (Tex.1983), cert. denied,
466 U.S. 938, 104 S.Ct. 1911, 80 L.Ed.2d 460 (1984).
In his petition, Lehrer alleged that "Defendants intentionally
and knowingly misappropriated [Lehrer's] name." Moreover, as
Garner notes, "the state trial court found that [Lehrer's]
testimony supported a finding of "spite, ill-will, and malice.' "
We agree with the district court that the Texas definition of
malicious conduct encompasses the intentional conduct undertaken
"without just cause or excuse" that we have defined as precluding
discharge under § 523(a)(6). Thus, we conclude that the state
court's finding included a determination that Garner acted with
malice.
Our conclusion is further supported by the fact that the state
court awarded punitive damages against Garner. Under Texas law,
punitive damages are available "only if the claimant proves that
11
the ... harm with respect to which the claimant seeks recovery of
exemplary damages results from: (1) fraud; (2) malice; or (3)
gross negligence." Tex.Civ.Prac. & Rem.Code Ann. § 41.003. As the
district court noted, "[t]he state court litigation did not involve
allegations of fraud or gross negligence; therefore the award of
exemplary damages was based on malice." Accordingly, we find no
error in the determination that the state court's finding had
collateral estoppel effect in the § 523(a)(6) action. See Hoskins
v. Yanks (In re Yanks), 931 F.2d 42, 43 (11th Cir.1991) ("The
collateral effect of the judgment is not affected by the fact that
the jury could have premised its award on either [of two] theories
because "malice for purposes of 523(a)(6) can be established by a
finding of implied or constructive malice.' " (quoting Chrysler
Credit Corp. v. Rebhan, 842 F.2d 1257, 1263 (11th Cir.1988)).
III. CONCLUSION
For the foregoing reasons, we AFFIRM the judgment of the
district court.
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