stating Brown v. Felsen “held that the doctrine of res judicata does not apply in bankruptcy nondischargeability proceedings” and reversing bankruptcy court’s holding that claim preclusion barred plaintiff’s § 523(a)(2)(A) complaint where state court—without explanation—removed the jury’s award of damages for fraud upon motion of the debtor
How later courts described this case
- stating Brown v. Felsen “held that the doctrine of res judicata does not apply in bankruptcy nondischargeability proceedings” and reversing bankruptcy court’s holding that claim preclusion barred plaintiff’s § 523(a)(2)(A) complaint where state court—without explanation—removed the jury’s award of damages for fraud upon motion of the debtor
- discussing Brown v. Felsen, 442 U.S. 127, 99 S.Ct. 2205, 60 L.Ed.2d 767 (1979)
Written by the judges who cited it.
The opinion
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,
v.
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.
I.
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.,
1
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.
3
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.
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