Petition for Writ of Certiorari — Grogan v. Garner

. Supreme Court, U.S.

“ FILED

nee 1 «38

NO. JOSEPHA F. SPANIOL, UR.

CuBRK

IN THE SUPREME COURT

OF THE UNITED STATES

‘OCTOBER TERM, 1989

COY R. GROGAN and

JOHN H. HENSON, Petitioners,

Vv.

FRANK J. GARNER, JR., Respondent.

PETITION FOR WRIT OF CERTIORARI TO

THE UNITED STATES COURT OF APPEALS

FOR THE EIGHTH CIRCUIT

PETITION FOR WRIT OF CERTIORARI

Michael J. Gallagher

WASSBERG & GALLAGHER

One Main Plaza, Suite 840

4435 Main Street

Kansas City, MO 64111

(816) 756-0030

Counsel of Record

Glenn A. Jewell

COUNSEL FOR PETITIONERS

QUESTION PRESENTED

1. Must exceptions to discharge

under Bankruptcy Code Section 523(a) be

proven by the “preponderance of the

evidence" standard or by the "clear and

convincing evidence" standard?

CO ee a

TABLE OF CONTENTS

Page

QUESTION PRESENTED ....... i

OPT NEGine Gee So te te ee ove fh

JURISDICTION af ern. stare e: oe Seo

SZTATUZE TAVGENED «2 s+ 2 eo 2 ee eo

STATEMENT OF THE CASE ..... .3

REASONS FOR GRANTING THE WRIT. 10

I.

Il.

The Eighth Circuit's

decision that the

exceptions to discharge

under Bankruptcy Code

Section 523(a) require

proof by the "clear and

convincing evidence"

standard is in error and

is not supported by the

statutory language, or by

the legislative history,

and is in direct conflict

with decisions‘of the

fourth circuit and other

ll ee ee a ey oS er

The Eighth Circuit's

decision that the

exceptions to discharge

under Bankruptcy Code

Section 523(a) require

proof by the "clear and

convincing evidence"

standard is in error and,

if unchanged, will

eliminate the use of

collateral estoppel on

i

ale’ sell itis et, de than

the issue of

dischargeability in those

states which allow the

enumerated discharge

provisions to be proven

by a preponderance of the

ee ee ee ee ee ee

CONCLUSION a =. « 2) 6 4. f}f oe

APPENDIX

Opinion of the Court of

Appeals ...++-+e+-e+ e+ « « 38

Decision of the District

| ES TS Ee eee

Decision of the Bacay dae

GOUEG « « c« - « 30a

Denial of Rehearing ..... 42a

Section 523 of the aparece: taand

Cog@ . « « . ; 43a

TABLE OF AUTHORITIES

Cases:

Brown v. Felsen, 442 U.S.

S80 CiGsens «a. «© 6,36-897

Chrysler Credit Corp.

v. Rebhan, 842 F.2d 1257

et) UC) | we

Combs v. Richardson,

838 F.2d 112 (4th Cir. 1988).

Gleason v. Thaw, 236 U.S. 558

(1915) . . + . . . . . . 7 .

In re Baiata, 12 B.R. 813

(Bankr. E.D. N.Y¥.1981) ...

Page

, 21-22

14,15

12-14

-13-14

« « ii

» 787 F.2d 503 (10th

In re Black

0 EOE ee 8 ee

In re Boren, 47 B.R. 293

(Bankr. W.D. Ky. 1985),

modified, 50 B.R. 315 (1985)

in re Capparelli, 33 B.R. 360

(Bankr. S.D.N.Y.1983) ...

in re Hunter, 780 F.2d 1577

(226m Geese 2 % © © ec

In re Kimzey, 761 F.2d 421

(FER Geemeeees % wc Se e

In re Peoni, 67 B.R. 288

(Bankr.S.D.Ind.1986). .

-14,15

* * 11

> . 12

-14,15

11

—————- ee

In re Phillips, 804 F.2d 930

(GGm Gemsneeees 6 2.8) o ws «84,48

In re Shepherd, 56 B.R. 218

Cae AEED §~§6 «© 6 6-6 ¢ i= oe

Local Loan Co. v. Hunt, 292 U.S.

-, 9 2. Ss Pe

Matter of Van Horne, 823 F.2d

S300. tGGm Gae.keer) « « « 2 « © 46

Matter of Wintrow, 57 B.R. 695

(Bankr. S.D.Ohio 1986) ..... il

Sweet v. Ritter Finance Company

263 F.Supp. 540 (W.D.Va.1967). . 11

Statutes:

11 U.S.C. § 523. passim

Miscellaneous:

37 Am Jur. 2d § 468 .. -18,19

37 C.J.S. Fraud § 114... . . 20

3 Collier on Bankruptcy

7 523.08 (15th Ed.1989). ... .15

1978 U.S. Code Cong. & Ad.

ue eee © oe ee & © 8 ew ew BG

IN THE SUPREME COURT

OF THE UNITED STATES

OCTOBER TERM, 1989

COY R. GROGAN and

JOHN H. HENSON,

Petitioners,

Vv.

FRANK J . GARNER e JR *»,

Respondent.

PETITION FOR WRIT OF

CERTIORARI TO THE

UNITED STATES COURT OF

APPEALS FOR THE

EIGHTH CIRCUIT

Petitioners Coy R. Grogan and

John H. Henson respectfully pray that a

writ of certiorari issue to review the

judgment and opinion of the United

States Court of Appeals for the Eighth

Circuit, entered in the above-entitled

proceeding on August 9, 1989.

OPINIONS BELOW

The decision of the Court of Appeals

for the Eighth Circuit denying

rehearing has not been reported. It is

reprinted in the appendix hereto, p.

42a, infra.

The opinion of the Court of Appeals

for the Eighth Circuit has been

reported at 881 F.2d 579. It is

reprinted in the appendix hereto, p.ia,

infra.

The decision of the United States

District Court for the Western District

of Missouri (Whipple, D.J.) has not

been reported. It is reprinted in the

appendix hereto, p. 16a, infra.

The Memorandum of Opinion and Order

of the Bankruptcy Court for the Western

District of Missouri (Koger, B.J.) has

not been reported. It is reprinted in

the appendix hereto, p.30a, infra.

JURISDICTION

The judgment of the Eighth Circuit

Court of Appeals, in respondent's

favor, was entered August 9, 1989. The

Eighth Circuit Court of Appeals denied

a timely petition for rehearing on

September 12, 1989. The jurisdiction

of this Court is invoked under 28

U.S.C. § 1254(1).

STATUTE INVOLVED

11 U.S.C. 523. Exceptions to

Discharge.

As its provisions are lengthy, the

pertinent text of this statute is set

forth in the appendix hereto, p. 43a,

infra.

STATEMENT OF THE CASE

Petitioners originally brought suit

against respondent in the United States

District Court for the Western District

of Missouri. In that action, a jury

determined that respondent had: 1) com-

mitted common law fraud, under Missouri

law; 2) breached the fiduciary duty he

oved to petitioners; and 3) violated

section 10(b) of the Securities and

Exchange Act of 1934.

The jury awarded actual damages on

the above three counts and punitive

damages on the fraud count.

The Eighth Circuit Court of Appeals

affirmed the jury's judgment and award.

On October 21, 1985, respondent

filed a Petition for Relief under

Chapter 11 of the Bankruptcy Code,

requesting that petitioners’ judgment

against him be discharged.

On May 7, 1986, petitioners filed a

complaint in bankruptcy court which

sought a determination that

respondent's judgment debt was

nondischargeable under i1 U.S.C. § 523.

At the trial of this matter before

Bankruptcy Judge Frank W. Koger,

petitioners offered the following four

exhibits to prove, by collateral

estoppel, that the judgment debt owed

petitioners was nondischargeable:

1) A copy of petitioners’ first

amended complaint;

2) A copy of respondent's addendum

to his brief to the Eighth Circuit

Court of Appeals, containing the jury

instructions, the verdict director, the

jury verdict and the District Court

judgment;

3) The opinion of the Eighth

Circuit Court of Appeals; and,

4) A letter from the Eighth Circuit

Court of Appeals transmitting the

opinion.

Petitioners’ then rested their case.

Respondent presented evidence by his

testimony, denying any wrongdoing

whatsoever.

The Bankruptcy Court, citing Brown

v. Felsen, 442 U.S. 127 (1979) as

authority, concluded that "the elements

to be proved under Section 523(a)(2)

must be compared with the elements

decided by the unanimous jury in the

District Court case, and, if identical,

as to content and standard,

[petitioners] have borne their burden."

See p. 36a, infra.

After comparing the elements to be

proved under Section 523(a)(2) to the

elements decided by the jury in the

District Court case, as embodied in the

record before it, the Bankruptcy Court

concluded the elements were the same.

Id. at 37a.

Further, the Bankruptcy Court

addressed respondent's contention that

in the District Court trial a

"preponderance of the evidence"

standard was applied, that a "clear and

convincing evidence" standard should be

- 6 -

— «= - om ee ee a ee ee oe ee

applied under section 523-and that the

two standards are totally dissimilar.

The Bankruptcy Court rejected

respondent's contention concluding that

"there is no real distinction between

‘preponderance of the evidence’ and

‘clear and convincing’ as regards

Section 523 litigation." See p. 40a,

infra.

Thus, the Bankruptcy Court, having

determined the issues had been fully

litigated and properly decided using

identical standards, applied collateral

estoppel to bar relitigation of the dis-

chargeability issues.

Respondent appealed the Bankruptcy

Court decision to the United States

Dis-rict Court for the Western District

of Missouri.

District Court Judge Dean Whipple,

in affirming the Bankruptcy Court's

decision in petitioners’ favor, stated

that,

Both sides were permitted

to try their case in full,

the jury was instructed to

render a verdict based upon

the facts and the law given

in the court's

instructions. A re-litiga-

tion of this case in

Bankruptcy Court on the

identical fact issues would

be to permit the party who

loses at a jury trial to

have a second day in court

on the same issue he and

his opponent were fully

heard previously. If

permitted, all like cases

would result in duplicitous

litigation resulting in an

unreasonable burden on the

bankruptcy court.

See p. 28a, infra.

Following the ruling of the District

Court, respondent aprealed to the

Eighth Circuit Court of Appeals,

seeking a holding that the jury's deter-

mination of fraud should have no

preclusive effect on the subsequent

bankruptcy proceeding under Section

523(a).

The Eighth Circuit determined that,

in the underlying case, the District

Court had applied Missouri substantive

law and instructed the jury that the

burden of proof for fraud is the

preponderance of the evidence. See p.

8a, infra.

In examining the burden of proof

under Section 523(a), the Eighth

Circuit noted in its opinion that the

Circuit Courts, and the bankruptcy

courts, are in conflict on this issue.

Furthermore, the Eighth Circuit stated

that "(t]he burden of proof for fraud

or any of the other exceptions from

discharge under Section 523(a) of the

Bankruptcy Code is far from clear. The

Bankruptcy Code is silent as to the

burden of proof necessary to establish

an exception to discharge under section

523(a), including the exception for

fraud." Id. at 9a.

Despite the noted conflict in the

Circuit Courts’and the Bankruptcy

Code’s silence on the issue, the Eighth

Circuit determined that the burden of

proof under Section 523(a) is "clear

and convincing evidence" and reversed

the decision of the District Court. See

p. i4a infra.

REASONS FOR GRANTING THE WRIT

I

The Eighth Circuit's

decision that the

exceptions to discharge

under Bankruptcy Code

Section 523(a) require

proof by the “clear and

convincing evidence"

standard is in error and is

not supported by the

statutory language, or by

the legislative history,

and is in direct conflict

with decisions of the

Fourth Circuit and other

Courts.

Section 523(a), which contains the

exceptions to discharge and their

elements, makes no mention of the stan-

dard of proof that is to be applied in

- 10 -

Oe EES °° -eee a a i

dischargeability proceedings. The

legislative history on § 523(a) is

scant and likewise contains no

reference to the proper standard of

proof. See 1978 U.S. Code Cong. & Ad.

News 5787, 6453.

The Bankruptcy Courts sheneelves are

split on the issue of whether the

proper standard of proof is

"preponderance of the evidence" or

"clear and convincing evidence".

Compare In re Shepherd, 56 B.R. 218,

221 (W.D. Va. 1985); In re Boren, 47

B.R. 293, 295 (Bankr. W.D. Ky. 1985);

In re Baiata, 12 B.R. 813, 817 (Bankr.

E.D. N.Y¥.1981); Sweet v. Ritter Finance —

Company, 263 F. Supp. 540, 543 (W.D.

Va. 1967) (applying preponderance of

the evidence standard) with In re

Peoni, 67 B.R. 288, 290 (Bankr. S.D.

Ind. 1986); Matter of Wintrow, 57 B.R.

695, 703 (Bankr. S.D. Ohio 1986); In re

- 11 =-

Capparelli, 33 B.R. 360, 366 (Bankr.

S.D. N.Y. 1983) (applying clear and

convincing evidence standard).

The Circuit Courts are also in

direct conflict on which standard is

correct.

The Fourth Circuit has determined

that the “preponderance of the

evidence" standard should be applied.

Combs v.. Richardson, 838 F.2d 112 (4th

Cir. 1988). In Combs, as in the instant

case, the Court addressed the

preclusive effect of a civil jury

verdict in a subsequent bankruptcy

proceeding. The Bankruptcy Court had

determined that a jury verdict of

assault against Combs prevented him

from relitigating the issue of whether

the judgment was grounded in a willful

and malicious injury. Therefore, the

bankruptcy court determined, Combs’

debt to Richardson was nondischargeable

under Section 523(a)(6) which states

- 12 -

that: "(a) A discharge under Section

727, 1141 or 1328(b) of this title does

not discharge an individual debtor from

any debt---(6) for willful and

malicious injury by the debtor to

another entity or to the property of

another entity."

In affirming the decision of the

bankruptcy court and dismissing Combs’

contention that the "clear and

convincing evidence" standard should be

applied to dischargeability

proceedings, the Fourth Circuit stated

that:

The Bankruptcy Code is

silent as to the standard

of proof necessary to

establish the exceptions to

discharge in § 523. In the

face of this silence,

courts may not imply a

higher standard than the

preponderance standard nor-

mally applied in civil

proceedings. Although the

‘fresh start’ philosophy of

bankruptcy law requires

that exceptions to

discharge ‘be confined to

those plainly expressed,’

Gleason v. Thaw, 236 U.S.

558, 562, 335 S.Ct. 287,

- 13 -

289, 59 L.Ed. 717 (1915),

this policy does not

justify judicial imposition

of a heavier burden of

proof on creditors seeking

to have a debt determined

nondischargeable under

§ 523(a)(6).

Combs, 838 F.2d at 116.

Four other Circuits are in conflict

with the Fourth Circuit and have

concurred with Eighth Circuit by

holding that the standard of proof for

discharge under section 523(a) is

"clear and convincing evidence". In re

Phillips, 804 F.2d 930, 932 (6th Cir.

1986); In re Kimzey, 761 F.2d 421,

423-24 (7th Cir. 1985); In re Black,

787 F.2d 503, 505 (10th Cir. 1986);

Chrysler Credit Corp. v. Rebhan, 842

F.2d 1257, 1262 (1ith Cir. 1988) and In _

re Hunter, 780 F.2d 1577, 1262 (11th

Cir. 1986). However, the Eighth Circuit

has noted the meager nature of the

authority these various circuits have

cited for requiring the more stringent

standard of proof:

- 14 -

The circuits applying the

Clear and convincing

standard have offered

various explanantions. All

the circuits cite to

various bankruptcy court

decisions applying the

Clear and convincing

standard. Two of the

circuits cite to 3 Collier

on Bankruptcy, 1523.08

(15th Ed. 1989) which }

states without explanation

that the appropriate burden

of proof is the clear and

convincing standard. In re

» 804 F.2d 930, 932

(6th Cir. 1986); In re

Black, 787 F.2d 503, 505

(10th Cir. 1986). Two of

the circuits state that the

clear and convincing

standard is necessary to

overcome the presumption of

innocence. In re Black, 787

F.2d 503, 505 (10th Cir.

1986); In re Hunter, 780

F.2d 1577, 1579 (ith Cir.

1986). Three circuits offer

no rational at all for

favoring the more stringent

standard. Chrysler Credit

9 842 F.2d

1257, 1262 (1ith Cir.

1988); In re Phillips, 804

F.2d 930, 932 (6th Cir.

1986); In re Kimzey, 761

F.2d 421, 423-24 (7th Cir.

1985).

See p. i1a-12a, infra.

- 15 -

The Eighth Circuit itself, in the

instant case and in Matter of Van

Horne, 823 F.2d 1285 (8th Cir. 1987),

relies heavily upon the "fresh start"

policy of the Bankruptcy Code for its

determination that the "clear and

convincing evidence" standard is the

proper standard of proof under

§ 523(a). This “fresh start" policy

provides for "a new opportunity in life

and a clear field for future effort, un-

hampered by the pressure and

discouragement of pre-existing debt,"

Brown v. Felsen, 442 U.S. at 128,

quoting, Local Loan Co. v. Hunt, 292

U.S. 234, 244 (1934).

Here, the “fresh start" policy has

been misapplied. By attempting to apply

this policy to Section 523(a), the

Eighth Circuit has failed to give

effect to the rule that "[b]y seeking

discharge, however, respondent placed

the rectitude of his prior dealings

- 16 -

squarely in issue, for, as the Court

has noted, the Act limits [the ‘fresh

start'] opportunity to the ‘honest but

unfortunate debtor,’ Brown v. Felsen,

442 U.S. at 128, quoting, Local Loan

Co. v. Hunt, 292 U.S. at 244.

Respondent has been found guilty of

common law fraud. Surely such a

determination would preclude him from

being termed an “honest but unfortunate

debtor." Therefore, the "fresh start"

policy favored by the Eighth Circuit

should not extend to respondent, thus

alleviating any need to enforce a

standard of proof more stringent than

"preponderance of the evidence."

II.

The Eighth Circuit's

decision that the

exceptions to discharge

under Bankruptcy Code

Section 523(a) require

proof by the "clear and

convincing evidence"

standard is in error and,

if unchanged, will

eliminate the use of

- 49 «

collateral estoppel on the

issue of dischargeability

in those states which allow

the enumerated discharge

provisions to be proven by

a preponderance of the

evidence.

As noted above, there is no

statutory or legislative history

support for the imposition of the

"clear and convincing evidence"

standard on dischargeability

proceedings under Section 523(a). The

Circuit Courts, by applying this more

stringent standard, absent legislative

authority, to Section 523(a)

proceedings have, in effect, created a

new statutory element. Legislative

drafting is obviously not within the

purview of the judical branch.

Issues of fact in civil cases are

ordinarily required to be determined by

the preponderance of the evidence. 37

Am Jur. 2d § 468. In addition, many

states allow fraud to be proved in a

civil case by a preponderance of the

- 18 -

evidence, "the same as any other

material fact in such a case." Id.

Missouri is such a state.

Other states require fraud to be

determined by "clear and convincing

evidence". Id. Still other states

require a showing of "clear and

convincing evidence" in some fraud ac-

tions and accept a showing of a

"preponderance of the evidence" in

other fraud actions. Id.

Furthermore, courts have held that

terms such as "clear and convincing",

"clear and positive", "clear, cogent

and convincing", "strong, clear and

convincing", et cetera, “mean only that

there must be a preponderance of

evidence sufficient to overcome the

presumption of innocence of moral

turpitude or crime, and, while the

evidence must be clear and convincing,

- 19 -

a El i A lil i i i ee ll el a ie le Bie.

such clear and convincing proof may be

met by a preponderance of the

evidence." 37 C.J.S. Fraud § 114.

Thus, it is evident that different

standards are applied by the various

states and often the same terminology

may have a different effective meaning

depending upon which jurisdiction

interprets such terminology. These

differing standards and interpretations

support the contention that the

bankruptcy courts should not impose a

higher standard of proof on Section

523(a) proceedings absent clear legisla-

tive authority.

If it is determined that Section

523(a) requires proof by a “clear and

convincing evidence" standard, such a

determination would negate prior civil

determinations, in those states which

adhere to the "preponderance of the

evidence standard", and require a

retrial in full before the bankruptcy

- 20 -

, -_— ~- _— wa eee, > i i tel BE Pk i ees ON et ee | a i I a ee as

court to determine issues of

dischargeability. Obviously, collateral

estoppel could not be utilized if it is

determined the later proceeding calls

for a higher standard of proof.

Such a determination would place

tremendous strain upon the resources of

bankruptcy courts across the nation.

The large volume of cases tried each

year by bankruptcy courts would be

increased substantially due to the

removal of collateral estoppel as a

means by which to prove

dischargeability or

non-dischargeability.

The judicial policy in favor of

collateral estoppel is clear and its

applicability to dischargeability

proceedings under § 523(a) (formerly

Bankruptcy Act § 17) is undeniable.

Brown v. Felsen, 442 U.S. at 139. As

this Court has stated: "If in the

course of adjudicating a state law

- 21-

question, a state court should

determine factual issues using

standards identical to those of § 17,

then collateral estoppel, in the

absence of countervailing statutory

policy, would bar relitigation of those

issues in the bankruptcy court." Id.

Therefore, due to the lack of

contrary statutory authority,

applicable state law and the need for

judicial economy, a determination

should be made that the “preponderance

of the evidence" standard is applicable

to dischargeability proceedings under

section 523(a) of the Bankruptcy Code.

The determination of this Court is

needed to resolve the conflict extant

in the Circuit Courts of Appeals and to

provide such courts guidance on this

issue.

- 22 -

b. wee + Biles) Gre! FA od 7 — - A om wees of b. fh te» —_ es en.) Se ss as ee eh ee Ma. ee Aa eee " io ee P

CONCLUSION

For these reasons, this Petition for UNITED STATES COURT OF APPEALS

FOR THE EIGHTH CIRCUIT

Certiorari should be granted. If

petitioners are correct in urging that

NO. 88-1991

the Eighth Circuit applied the wrong

standard of proof, the decision of the

In Re: Frank J. Garner, Jr. *

District Court should be reinstated. *

Debtor. *

Respectfully submitted, *%

John R. Henson and *

Coy R. Grogan, ‘

Appellees, *

*

Vv. e

; 840 *

4435 Main Street Frank J. Garner, Jr., *

Kansas City, MO 64111 *

(816) 756-0030 Appellant. *

Counsel of Record Appeal from the United States District

Court for the Western District of Mis-

souri

Glenn A. Jewell

COUNSEL FOR PETITIONERS

Submitted: December 13, 1988

Filed: August 9, 1989

pis 23 = -ia-

..)_ =. a? a

-

Before HEANEY* and FAGG, Circuit

Judges, and HANSON,** Senior District

Judge.

HEANEY, Circuit Judge.

This case addresses the preclusive

effect of an earlier civil jury deter-

mination of fraud on a subsequent

bankruptcy proceeding under section

523(a) of the Bankruptcy Code. The

bankruptcy court held that the earlier

trial precluded redetermination of the

issue of fraud, and the district court

adopted the bankruptcy court's view. We

reverse because the earlier proceeding

used a lesser standard of proof.

I. BACKGROUND

* The Honorable Gerald W. Heaney

assumed senior status on December

31, 1988.

** The HONORABLE WILLIAM C. HANSON,

United States Senior District

Judge for the Northern and

Southern Districts of Iowa,

sitting by designation.

-2a-

aS oo eS Se! CS mh. eee eee = .f ’

- The underlying case was tried before

a jam in United States District Court

for the Western District of Missouri.

The jury found that Frank Garner had

committed common law fraud; breached a

fiduciary duty owed to the appellees;

and violated section 10(b) of the

Securities and Exchange Act of 1934.

The jury awarded actual damages on all

three counts and punitive damages on

the fraud count. Garner appealed to

this Court. We affirmed but reduced

the amount of damages recovered.

Grogan v. Garner, 806 F.2d 829 (8th

Cir. 1986).

On October 21, 1985, the appellant

filed a petition for relief under Chap-

ter 11 of the Bankruptcy Code and

listed the above judgment as a

dischargeable debt. On May 7, 1986,

the appellees filed an application for

an exception to discharge, alleging

-3a-

7, ~~ oe. ee es

- - 1 ,

that the judgment was a debt obtained

by fraud under 11 U.S.C. §523(a)(2).

At trial in the bankruptcy court, the

appellees presented, inter alia, the

jury verdict, the district court's judg-

ment in their favor, and rested. The

appellant testified that he had not com-

mitted a fraud. The bankruptcy court

ruled that the fraud issue had been

litigated to a valid and final judgment

at the earlier jury trial and,

therefore, the debtor was collaterally

estopped from relitigating the fraud

issue. For this reason, the bankruptcy

court ruled that the judgment against

the appellant was nondischargeable

under section 523(a)(2)(A).

The debtor contended below that,

while the same elements were applied, a

lesser standard of proof was used in

the initial fraud proceeding than is

required to prove fraud under federal

-4a-

—— a

bankruptcy law.1 Specifically, the

creditors were permitted to establish

fraud, at the first trial, by the

preponderance of the evidence. At a

dischargeability proceeding in

1

While the standard of proof may

differ, a careful examination of

state law and the jury instructions

used in this case reveals that the

elements of fraud for Missouri

common law purposes and federal

bankruptcy purposes are the same.

For the elements of fraud under

federal law, see Sweet v. Ritter

Fin. Co., 263 F. Supp. 540 (W.D. Va.

1967). Both require a representa-

tion that was false and that the

person committing the fraud had

knowledge of the falsity. In

addition, both require that the

person asserting fraud materially

relied on the representation and

that this reliance proximately

caused damage. The identical

substantive issues were thereby

resolved. The other requirements

for collateral estoppel are also

present. The issue of fraud was

actually litigated and was not part

of a stipulated, consent or default

judgment. The underlying judgment

was final and valid. The

termination of fraud was essential

to that judgment.

-5a-

bankruptcy, one must establish the ele-

ments of fraud, the appellant argues,

by clear and convincing evidence.

Thus, the appellant argues that he is

entitled to a new trial on the issue of

fraud.

II. DISCUSSION

In Brown v. Felsen, 442 U.S. 127,

139-40 (1979), the Supreme Court

concluded that the exclusive jurisdic-

tion granted to bankruptcy courts to

resolve questions of dischargeability

under section 17a(2) of the Bankruptcy

Act also prevented the application of

Claim preclusion -- res judicata -- to

resolve questions of dischargeability4

In footnote 10 of Brown v. Felsen, the

2 Section 17 of the Bankruptcy Act

was replaced by section 523 of the

Bankruptcy Code, but the two

provisions are substantially the

same. Brown v. Felsen, 442 U.S. at

129 n.l.

-6a-

a = —

Supreme Court suggested that issue

preclusion -- collateral estoppel --

could still be applied in a later dis-

chargeability proceeding. "If, in the

course of adjudicating a state-law ques-

tion, a state court should determine

factual issues using standards identi-

cal to those of §17, then collateral

estoppel, in the absence of countervail-

ing statutory policy, would bar

relitigation of those issues in the

bankruptcy court." Jd. at 139 n.10.

A. Burden of Proof Applied in the un-

derlying Case

In the underlying case, the federal

district court applied Missouri substan-

tive law. In deciding whether the deb-

tor had defrauded his creditors, the

court instructed the jury as follows:

In these instructions, you are told

that your verdict depends on

whether or not you believe certain

propositions of fact submitted to

you. The burden of causing you to

believe a proposition of fact is

-7a-

upon the party who relies upon that

proposition. In determining whether

or not you believe any such proposi-

tion, you must consider only the

evidence and the reasonable inferen-

ces derived from the evidence. If

the evidence in the case does not

cause you to believe a particular

proposition submitted, then you can-

not return a verdict requiring

belief of that proposition.

Upon review of this instruction, along

with the other instructions, we

conclude that the district court

instructed the jury that the burden of

proof for fraud is the preponderance of

evidence. The appellant did not object

to this instruction. The jury returned

a verdict finding that Garner had com-

mitted fraud. The trial court rejected

the appellant's post-trial motions. We

affirmed concluding, inter alia, that

there was substantial evidence to sup-

port a finding of fraud. Grogan v.

Garner, 806 F.2d at 836.

—_ ——$" <<.

>) a

i

Ht eh tie a ie el DE i ell i a ee,

B. Burden of Proof under Section

523(a) of the Bankruptcy Code

The burden of proof for fraud or any

of the other exceptions from discharge

under section 523(a) of the Bankruptcy

Code is far from clear. The Bankruptcy

Code is silent as to the burden of

proof necessary to establish an excep-

tion to discharge under Section 523(a),

including the exception for fraud.

Both the appellate courts and the

bankruptcy courts are split as to

whether the standard is clear and con-

vincing evidence or preponderance of

the evidence.

There are six circuits that have com-

mented on the burden of proof for fraud

under section 523(a).1 Chrysler Credit |

Corp. v. Rebhan, 842 F.2d 257, 1262

(11th Cir. 1988); Combs v. Richardson,

838 F.2d 112, 116 (4th Cir. 1988);

Matter of Van Horne, 823 F.2d 1285,

-9a-

1287 (8th Cir. 1987); In re Phillips,

804 F.2d 930, 932 (6th Cir. 1986); In

re Black, 787 F.2d 503, 505 (10th Cir.

1986); In re Hunter, 780 F.2d 1577,

1579 (11th Cir. 1986); In re Kimzey,

761 F.2d 421, 423-24 (7th Cir. 1985).

Only the Fourth Cirvuit has adopted the

preponderance of the evidence standard.

Combs v. Richardson, 838 F.2d 112, 116

(4th Cir. 1988). We, however, have

followed the majority rule and applied

the clear and convincing standard. Mat-

ter of Van Horne, 823 F.2d at 1287.

Several bankruptcy courts have

also applied the more lenient

standard. See, e.g., In re

Baiata, 12 B.R. 813, 817 (Bkrtcy.

E.D. N.Y. 1981); Sweet vy. Ritter

Finance Co., 263 F.Supp. 540, 543

(W.D. Va. 1967).

-10a-

————————

The circuits applying the clear and

convincing standard have offered

various explanations. All the circuits

cite to various bankruptcy court

decisions applying the clear and

convincing standard. Two of the

circuits cite to 3 Collier on

Bankruptcy, 7523.08 (15th Ed. 1989)

which states without explanation that

the appropriate burden of proof is the

clear and convincing standard. [In re

Phillips, 804 F.2d 930, 932 (6th Cir.

1986); In re Black, 787 F.2d 503, 505

(10th Cir. 1986). Two of the circuits

state that the clear and convincing

standard is necessary to overcome the

presumption of innocence. [In re Black,

787 F.2d 503, 505 (10th Cir. 1986); In

re Hunter, 780 F.2d 1577, 1579 (11th

Cir. 1986). Three circuits offer no

rationale at all for favoring the more

stringent standard. Chrysler Credit |

-liia-

wn, —_ tt i i i I ee ee yorecen ere ae eee eS ee! ae

Corp. v. Rebhan, 842 F.2d 1257, 1262

(11th Cir. 1988); In re Phillips, 804

F.2d 930, 932 (6th Cir. 1986); In re

Kimzey, 761 F.2d 421, 423-24 (7th Cir.

1985). This Circuit concluded that the

stricter standard was appropriate since

the general policy of bankruptcy is to

provide the debtor with the opportunity

for a fresh start and the courts

should, thereby, construe provisions of

the Bankruptcy Code favoring the debtor

broadly. Matter of Van Horne, 823 F.2d

at 1287.

We are not persuaded to alter our

view of the proper standard of proof

for fraud under section 523 of the

Bankruptcy Code by the arguments of the

Fourth Circuit. The Fourth Circuit

reasoned, in concluding that all the

exceptions to discharge contained in

section 523 of the. Code are governed by

the preponderance of the evidence stan-

er

-12a-

dard, that the balance of the "fresh

start" policy and the policies implicit-

ly announced by Congress when it

created the exceptions to discharge

does not require a heightened standard

of proof. Combs v. Richardson, 838

F.2d 112, 116 (4th Cir. 1988). We are

not convinced. While the legislative

history is scant on this issue, we feel

that it is fair to presume that

Congress was aware that the prevailing

view at the time of adoption was that

fraud, for both section 523 and state

common law purposes, had to be proved

by clear and convincing evidence. In

addition, the Fourth Circuit's manner

of interpretation effectively reads the

"fresh start" policy out of any

provision of the Code, provided that

provision could be interpreted as con-

flicting with the “fresh start" policy.

We do not believe that principles of

~13a-

a Sass As ee Le ee ee lee ee oe ! SY So

, . 4 Se ee a ee ee a ee ae ee | le a 2 ela ee

statutory interpretation dictate such a A true copy.

reading where Congress has not express- Attest:

ly announced a contrary result. There- CLERK, U.S. COURT OF APPEALS,

fore, we continue to follow the . EIGHTH CIRCUIT

standard set forth in Matter of Van q

Horne, 823 F.2d 1285, 1287 (8th Cir.

1987).

Finally, we cannot agree with the

bankruptcy court and the district court

that the preponderance of the evidence

standard and the clear and convincing

standard are the same in this context.

The Supreme Court has in a recent

series of cases stated that the two

standards are in function and in prac-

tice different. See Price Waterhouse —

v. Hopkins, 109 S. Ct. 775 (1989) and

cases cited therein. In this instance, b

the higher standard protects the "fresh y

start" policy. Accordingly, the : é

decisions of the bankruptcy court and

the district court are reversed.

~—-i4a- -15a-

IN THE UNITED STATES DISTRICT

COURT FOR THE

WESTERN DISTRICT OF MISSOURI

WESTERN DIVISION

JOHN R. HENSON AND

COY R. GROGAN,

No.87-0434-CV-W- 1

)

)

‘

Plaintiffs, )

Vv. )

)

)

FRANK J. GARNER,Jr.)

Defendant

ORDER

This is an appeal by the debtor,

Frank J. Garner, Jr., from the

Bankruptcy Court's decision that the

judgment obtained against him by appel-

lees John H. Henson and Coy R. Grogan

should not be dischargeable in his

bankruptcy proceeding.

The damage case was originally tried

before a jury in the United States Dis- |

trict Court for the Western District of

Missouri. The jury found that appellant

Frank J. Garner had committed common

law fraud; breach of fiduciary duty

-16a-

owed to appellees John H. Henson and

Coy R. Grogan; and that he violated Sec-

tion 10(b) of the Securities and

Exchange Act of 1934. The jury awarded

appellees actual damages on all three

counts and punitive damages on the

fraud count. The jury's judgment and

award was affirmed by the United States

Circuit Court of Appeals for the Eighth

Circuit at 806 F.2d 829.

The Bankruptcy Court, after hearing

the evidence presented on the issue of

dischargeability of the judgment, found

that the fraud issue had been litigated

in the U.S. District Court and that the

debtor should be collaterally estopped

from relitigating the issues behind the

judgment obtained by appellees in the

U.S. District Court.

On October 21, 1985, the appellant

filed his petition for relief under

-17a-

Chapter 11 of the Bankruptcy Code and

listed the judgment obtained against

him by appellees, as a dischargeable

debt under the Bankruptcy Code.

On May 7, 1986, in appellees filed

their complaint for determination that

their judgment debt was non-discharge-

able pursuant to 11 U.S.C. § 523(a)(2).

Trial on the dischargeability issue was

held on January 6, 1987, at which time

the appellees introduced no testimony

but did offer four exhibits, to-wit:

(1) a copy of appellees’ first amended

petition (Exhibit #1); (2) a copy of

the addendum to appellant's brief filed

with the Eighth Circuit Court contain-

ing instructions to the jury, and the

verdict directors as well as the jury

verdict and the district court's judg-

ment (Exhibit #2); (3) the opinion of

the Eighth Circuit.Court of Appeals af-

firming the appellee's judgment against

-18a-

—Taer” 6 oT Sl le ee ee ae ee ee ee es ;. — + ===. 344°" oe .

appellant (Exhibit #3); and (4) a let-

ter from the Eighth Circuit

transmitting the opinion (Exhibit #4).

Appellant then presented evidence by

his testimony, denying any wrongdoing

whatsoever.

After the filing of post-trial

briefs, the Bankruptcy Court by way of

a memorandum opinion and order, ruled

that the identical issues had been

tried in the U.S. District Court jury

trial that the Bankruptcy Court tried,

and that collateral estoppel should

apply, thus making appellees’ district

court judgment against appellant non-

dischargeable under § 523(a)(2)(A).

The Bankruptcy Court in its opinion

found for the purposes of determining

the dischargeability of a debt under

§ 523, there is no real distinction bet-

ween the “preponderance of the

-19a-

evidence" and “clear and convincing

evidence" burden of proof standards.

Appellees appeal this ruling of the

Bankruptcy Court.

The issue raised by the appellant on

appeal and to be taken up by this court

is whether or not the burden of proof

to prove common law fraud and the bur-

den of proof standard required to be

utilized by the Bankruptcy Court in a

dischargeability suit are the same stan-

dard or are they sufficiently different

as to require a bankruptcy court to re-

litigate the issues tried before the

District Court jury.

Standard of Appellate Review

The findings of fact made by the

Bankruptcy Court are not to be set

aside unless they are clearly

erroneous. Bankruptcy Rule 8013. The

Bankruptcy Court's conclusions of law

-20a-

X Sp tee

are to be given de novo review. In re

Newcomb, 744 F2d 621, 625 (8th

Cir.1985).

Findings

The Bankruptcy Court, in its amended

memorandum opinion and order found that

the identical factual issues tried and

decided by a unanimous jury in the dis-

trict court case were the same facts

required to be determined by the

Bankruptcy Code to determine if a debt

had been obtained by fraud and thus not

dischargeable.

The Bankruptcy Court then determined

that the issues had been fully

litigated and properly decided using

identical standards, and collateral es-

toppel applied to bar relitigation of

those issues in the Bankruptcy Court,

as stated in Brown v. Felsen, 442 U.S.

-21la-

‘

ams ee ee a a

>i =

127, 60 L.Ed.2d 767, 99 S.Ct. 2205

(1979).

The Bankruptcy Court in its memoran-

dum makes reference to the discussion

in footnote 6 by Judge Stewart of the

In re: Cur] case, analyzing how the ap-

parent conflict as to the two standards

of the burden of proof have arisen. In_

re Curl, 49 B.R. 302 (Bankr. W.D. Mo.

1985). This court agrees with the

memorandum and finding of the

Bankruptcy Court that for purposes of

litigation under § 523 of the

Bankruptcy Court to determine dischar-

geability of debts, there is no

difference in the standard to apply.

This court will therefore affirm the

finds of the Bankruptcy Court in regard

to that issue.

-22a-

This court will further affirm the

judgment by finding that the standard

of proof becomes more of an exercise in

semantics for the courts and has no dis-

tinguishable feature that can be

pointed out to a jury as to how a fac-

tual issue is to be decided by them.

Appellant argues that the burden of

proof used in the underlying jury trial

before the U.S. District Court is the

common law burden of proof of the

"preponderance of the evidence."

This court, in reviewing the

Bankruptcy Court file, notes that

Exhibit 2 introduced by appellants,

does not have Missouri Approved Instruc-

tion 3.01 (burden of proof instruction)

as a part of the exhibit and this court

must therefore assume as indicated in

the briefs of the appellant, that the

standard MAI 3.01 burden of proof

instruction was used, to-wit:

-23a-

3.01 [1981 Revision]

Burden of Proof--General

In these instructions, you are told

that your verdict depends on whether or

not you pelieve certain propositions of

fact submitted to you. The burden of

causing you to believe a proposition of

fact is upon the party whose claim [or

defense] depends upon that proposition.

In determining whether or not you

believe any such proposition, you must

consider only the evidence and the

reasonable inferences derived from the

evidence. If the evidence in the case

does not cause you to believe a

particular proposition submitted, then

you cannot return a verdict requiring

belief of that proposition.

Obviously the words “preponderance of

the evidence" are not used anywhere in

this instruction.

To understand the intent and purpose

of the MAI 3.01 Burden of Proof instruc-

tion, it is necessary to read the 1963

Report to the Missouri Supreme Court at

page xxxvii in the MAI Approved Instruc-~

tions, 3rd Edition. A reading of that

report advises the réader that the in-

tent of the burden of proof instruction

is to simply and accurately tell the

-24a-

ek et ee Ak es ed te i i ie blinds Ye | We i ee A a a en dt i ne

:

jury what is meant by burden of proof

and to use such terms as

"preponderance," or "greater weight" in

an instruction without some further ex-

planation, could be understood by a

jury as requiring proof which removes

all doubt. It goes on to say, "after

studying decisions of nearly every

court in the country, we concluded that

attempts to explain universally adds to

the confusion." It is obvious from a

reading of this report that the M.A.I.

drafting committee ran into the same

problem that is facing this court today

and has faced courts throughout the

land. It appears that the Committee's

intent was to try to resolve this seman-

tic jungle by merely attempting in as

simple language as possible to tell the

jury the person seeking to recover must

prove the proposition of fact on which

the party relies. Thus it appears to

-25a-

this court that the general burden of

proof instructions should not be

categorized or placed in either

category requiring a “preponderance of

the evidence" or requiring “clear and

convincing evidence", but merely requir-

ing the parties seeking recovery in a

jury trial to put forth evidence to con-

vince the triers of the fact that they

are entitled to recovery.

In making these findings, the court

is mindful of the fact that there are

MAI burden of proof instructions for

specific types of cases in which the

instructions use the language "clear

and convincing." The use of these bur-

den of proof instructions arose from

curt decision or statutory

requirements, to-wit: (1) in cases

whether there is a question as to

whether or not a gift was given to a

person by a decedent because that stan-

-26a-

ee |

|

ee Oe AE ee OEE PT Pee ee ee a Ee eee ee ee ee

:

dard was set by the Missouri Supreme

Court in the case of In re Passman's —

Estate, 537 S.W.2d 380 (MAI 3.04);

(2) in libel and slander cases in which

Missouri recognized the actual malice

standard set forth by the United States

Supreme Court case New York Times |

Company v. Sullivan, 376 U.S. 254, 84

S.Ct. 710, 11 L.Ed.2d 686 (1964) (MAI

3.05); and (3) to determine if an

individual should be committed because

of mental disease or defect as required

by statute, § 632.475, RSMo 1986.

The keystone of our legal system is

to give litigants a full opportunity to

present their side of the litigation

and allow a court or jury to reach a

decision, and then abide by that

decision.

-27a-

This has been done in this case. Ap-

pellant’s trial in the U.S. District

Court used Missouri Civil Instructions.

Both sides were permitted to try their

case in full, the jury was instructed

to render a verdict based upon the

facts and the law given in the tourt’s

instructions. A re-litigation of this

case in Bankruptcy Court on the identi-

cal fact issues would be to permit the

party who loses at a jury trial to have

a second day in court on the same issue

he and his opponent were fully heard

previously. If permitced, all like

cases would resulc in duplicitous

litigation resulting in an unreasonable

burden on the bankruptcy court.

The court therefore adopts the find-

ings of the Bankruptcy Court and incor-

porates them in these findings by

reference, and affirms the decision of

the Bankruptcy Court.

-28a-

IT IS SO ORDERED.

Dean Whipple

U.S. District Judge

DATED: February 29, 1988.

-29a-

ate ee Ee

IN THE UNITED STATES BANKRUPTCY COURT

FOR THE WESTERN DISTRICT OF . none

In Re:

Frank J. Garner, )Case No. 85-0375-52

Jr.

Debtor

John R. Henson &

Coy R. Grogan,

Plaintiffs,

Vv. Adv. No. 83-183-2

Frank J. Garner,

- ee

)

)

)

)

)

)

)

)

)

)

)

)

)

)

)

)

Defendant. )

MEMORANDUM OPINION AND ORDER

This adversary action by two

creditors seeking to avoid discharge of

debtor on their respective claims came

to an abrupt halt at the conclusion of

creditors’ case when debtor elected to

present no evidence and stood on his

oral Motion for Dismissal made when the

plaintiff/creditors rested. Creditors

had each obtained a jury verdict

against debtor in the United States Dis-

trict Court for the Western District of

-30a-

Missouri, before the petition for reor-

ganization was filed. Debtor had

appealed the resulting judgments to the

Eighth Circuit Court of Appeals. That

latter tribunal affirmed the judgments

post petition and this Section 523 ad-

versary proceeding, having been timely

filed, proceeded to trial. Creditors

did not offer the transcript of the

proceedings in the District Court case.

Instead, they introduced only four ex-

hibits and rested.

Those four exhibits were:

Exhibit 1: A copy of creditors’ first

amended complaint.

Exhibit 2: A copy of debtor's addendum

to the brief of debtor to

the Eighth Circuit, contain-

ing instruct long, to the

jury and the Verdict Direc-

-31a-

al 7 i Ni A i i a li Oe i eh il 6 i Ot

tor as well as the jury ver-

dict and the District Court

judgment.

Exhibit 3: The opinion of the Eighth

Circuit Court of Appeals.

Exhibit 4: Letter from Eighth Circuit

Court of Appeals transmit-

ting the opinion.

The Court, cman. is required to

determine from the exhibits if

creditors have made a case and

established all elements necessary

under Section 523.

The original District Court complaint

is drawn in five counts. Count I

alleged a common law fraud, potentially

cognizable under Section 523(a)(2).

Count II alleged a breach of fiduciary

duty, potentially cognizable under Sec-

tion 523(a)(4). Count III alleged a

use of interstate instrumentality to

make alleged misrepresentations. This

-32a-

oe eee eS ane es ee. eee eee ere ee a a ae ee ee ee ee eee a nh ee ee ee ee oe i

—_—* , ‘ , rm ba

:

Count adds nothing in a bankruptcy

proceeding under Section 523. Count IV

alleged a RICO violation which again,

adds nothing to a bankruptcy proceeding

under Settion 523. For the reasons

stated hereafter, the Court will to con-

sider only Count I or the common law

fraud Count.

The jury instructions in Count I re-

quired the jury to find in Instruction

Number 6 and Instruction Number 23

(respectively to each creditor):

First: That debtor made a represen-

tation to each creditor.

Second: That the representation was

false.

Third: That the representation was

material in causing each

creditor's decision.

Fifth: That each creditor relied

on the debtor's representa-

tion.

-33a-

Sixth: That as a direct result of

such representation each

creditor was damaged.

Seventh: That each creditor did not

1 discover the alleged fraud

until a later date.

The jury verdict was unanimous in favor

of each creditor and against the debtor

on Count I, as well as two other

counts. After the filing of post trial

motions, the District Court ruled:

"Here there clearly was

sufficient evidence to support

the jury's conclusion that defen-

dant...intentionally defrauded

plaintiffs."

The United States Court of Appeals for

the Eighth Circuit unanimously affirmed

and held that there was sufficient

evidence to support the verdict.

Since 1970, the bankruptcy courts

have been the sole arbiter of what

debts are not discharged by a

bankruptcy proceeding. Brown v._

-34a-

Felsen, 442 U.S. 127, 99 S.Ct. 2205

(1979) tells us that: "... are the type

of questions that Congress intended the

bankruptcy court would resolve," (1i.c.

2112). Although that opinion dealt

only with a state court judgment, there

is no reason to suspect that the same

rule would not apply to judgments

rendered in Federal Courts also. The

question then becomes did the judgment

in the District Court constitute so

Similar a finding of fraud in that ac-

tion as to provide a basis for the

bankruptcy court to determine that Sec-

tion 523 fraud was committed thereby

rendering the judgment nondischarge-

able, or is the debtor collaterally

estopped from relitigating those issues

of fact determined by a prior finding

thereon. Again Brown v. Felsen Id.

footnote 10, page 2213, sup-

plies the answer. "If in the course of

-35a-

adjudicating a state-law question, a

state court should determines factual

issues using standards identical to

those of Section 17, then collateral

estoppel, in the absence of countervail-

ing statutory policy, would bar

relitigation of those issues in the

bankruptcy court." Thus, the Court is

led to the conclusion that the elements

to be proved under Section 523(a)(2)

must be compared with the elements

decided by the unanimous jury in the

District Court case, and, if identical,

as to content and standard, creditors

have borne their burden.

Under Section 523(a)(2) those

elements are:

(1) Utterance or issuance of a

representation,

(2) Proof of the falsity of the

representation,

-36a-

(3) Proof of knowledge on the part

of the maker of that falsity,

(4) Intent to mislead or deceive

the alleged victim by the

maker,

(5) Reliance on the representation

by the victim,

(6) Proof that damage occurred to

the alleged victim.

(See Sweet v. Ritter Finance Company,

263 F. Supp. 540 (W.D. Va. 1967).

By comparing these standards with in-

structions Number 6 and Number 23, it

appears to the Court that very element

required to be found by the Court in

the dischargeability hearing was

already found by the jury in the

District Court verdict. Further those

findings received the judicial seal of

approval from the District Court in its

Order of August 7, 1986, when it

stated: "Here, there clearly was suffi-

-37a-

cient evidence to support the jury's

conclusion that defendant violated his

fiduciary duty and intentionally

defrauded plaintiffs." The Court of

Appeals, Eighth Circuit, stated: "We

find substantial evidence, as did the

jury, to support proof of fraud

committed by Garner against the plain-

tiffs."

Therefore, although this Court

believes and holds that whe Bankruptcy

Court is the sole arbiter of Section

523 dischargeability vel non, neverthe-

less where identical factual issues

have been fully litigated and properly

decided using identical standards by

courts of appropriate jurisdiction, col-

lateral estoppel bars relitigation of

those issues in this Court. This leads

to the final question to be determined

by this Court, i.e., were identical

standards used?

-38a-

In defendant's brief, the point is

made that the standard in the District

Court trial was "preponderance of the

evidence" while the standard should be

"clear and convincing" and that the two

are totally dissimilar. If defendant's

point is well taken, then obviously col-

lateral estoppel does not come into

play and there is insufficient evidence

before the Court to determine dischar-

geability. The Honorable Dennis J.

Stewart, Chief Bankruptcy Judge of this

District, had occasion to explore this

identical question in a footnote to his

opinion in Matter of Curl, 49 B.R. 302

(Bkr. W.D. Mo. 1985), see footnote 6.

Tnis Court, although not bound wy that

ruling, frankly considers it net only

the best exposition of how the apparent

divergence arose, but strongly

recommends that any counsel engaged in

Section 523 litigation regard that

-39a-

opinion (and the footnotes) as required

reading for a thorough understanding of

the elements of proof and the

applicability of evidentiary standards.

Accordingly, this Court concludes that

there is no real distinction between

"preponderance of the evidence" and

"clear and convincing" as regards

Section 523 litigation.

Inexorably then, the Court concludes

that through collateral estoppel,

creditors sustained the burden of proof

and through their exhfbits sustained

the burden as to all elements of

dischargeability. The judgment

rendered on common law fraud which was

pled in Count I of plaintiff's original

complaint in Federal District Court is,

therefore, ruled to be

nondischargeable. No ruling is neces-

Sary on any other Count, even Count II,

the alleged fiduciary breach, inasmuch

-40a-

as only one recovery may be had by

creditors. Although this result is in

favor of creditors, the Court must

point out that it believes better prac-

tice would be to introduce the

transcript in such a proceeding, and

that creditors in similar proceedings

run a substantial risk of not present-

ing the Court with sufficient evidence

upon which to base a ruling when they

rely upon collateral estoppel alone.

SO ORDERED this 24th day of February,

1987.

{/s/ Frank Koger

Bankruptcy Judge

-41la-

UNITED STATES COURT OF APPEALS

FOR THE EIGHTH CIRCUIT

NO. 88-1991WM

In Re: Frank J. Garner, Jr.

Debtor.

John R. Henson and

Coy R. Grogan,

Appellees,

Vv.

Frank J. wusnid » JE.,

*eeeenenenneen He ee He

Appellant.

Appeal from hina States District

Court for the Western District of Mis-

souri

Appellees’ petition for rehearing has

been considered by the court and is

denied.

September 12, 1989

Order Entered at the Direction of the

Court:

(/s/ Robert D. St. Vrain)

Clerk, U.S. Court of Appeals, Eighth

Circuit

-42a-

SECTION 523. (11 U.S.C. § 523)

§ 523. Exceptions to discharge.

(a) A discharge under section 727,

1141, 1228(a), 1228(b), or 1328(b) of

this title does not discharge an

individual debtor from any debt--

(1) for a tax or a customs duty--

(A) of the kind and for the

periods specified in section 3

507(a)(2) or 507(a)(7) of this

title, whether or not a claim for

such tax was filed or allowed;

(B) with respect to which a

return, if required--

(i) was not filed; or

(ii) was filed after the

date on which such return was

last due, under applicable law

Or under any extension, and

-43a-

after two years before the date

of the filing of the petition;

or

(C) with respect to which the

debtor made a fraudulent return or

willfully attempted in any manner

to evade or defeat such tax;

(2) for money, property, services,

or an extension, renewal or refinanc-

ing of credit, to the extent obtained

by--

(A) false pretenses, a false

representation, or actual fraud,

other than a statement respecting

the debtor's or an insider's finan-

cial condition;

(B) use of a statement in writ-

ing--

(i) that is materially

false;

-44a-

,

(ii) respecting the debtor's

or an insider's financial condi-

tion;

(iii) on which the creditor

to whom the debtor is liable

for such money, property, ser-

vices, or credit reasonably

relied; and

(iv) that the debtor caused

to be made or published with

intent to deceive; or

(C) for purposes of

subparagraph (A) of this

paragraph, consumer debts owed to

a single creditor and aggregating

more than $500 for "luxury goods

or services" incurred by an

individual debtor on or within

forty days before the order for

relief under this title, or cash

advances aggregating more than

$1,000 that are extensions of con-

-45a-

sumer credit under an open end

credit plan obtained by an

individual debtor on or within

twenty days before the order for

relief under this title, are

presumed to be nondischargeable:

"luxury goods or services" do not

include goods or services reasonab-

ly acquired for the support or

maintenance of the debtor or a

dependent of the debtor; an exten-

sion of consumer credit under an

open end credit plan is to be

defined for purposes of tnis sub-

paragraph as it is defined in the

Consumer Credit Protection Act (15

U.S.C.1601 et seq.);

(3) neither listed nor scheduled

under section 521(1) of this title,

with the name, if known to the

debtor, of the creditor to whom such

debt is owed, in time to permit--

-46a-

(A) if such debt is not of a

kind specified in paragraph (2),

(4), or (6) of this subsection,

timely filing of 6. pecae of claim,

unless such creditor had notice or

actual knowledge of the case in

time for such timely filing; or

(B) if such debt is of a kind

specified in paragraph (2), (4),

or (6) of this subsection, timely

filing of a proof of claim and

timely request for a determination

of dischargeability of such debt

under one of such paragraphs, un-

less such creditor had notice or

actual knowledge of the case in

time for such timely filing and

request;

(4) for fraud or defalcation while

acting in a fiduciary capacity, embez-

zlement, or larceny;

-47a-

‘

(5) to a spouse, former spouse, or (B) such debt includes a

child of the debtor, for alimony to, liability designated as

maintenance for, or support of such alimony, maintenance, or

spouse or child, in connection with a support, unless such liability

separation agreement, divorce decree is actually in the nature of

or other order of a court of record, alimony, maintenance, or

determination made in accordance with support;

State or territorial law by a govern- (6) for willful and malicious in-

mental unit, or property settlement jury by the debtor to another entity

agreement, but not to the extent that- or to the property of another entity;

ae (7) to the extent such debt is for

(A) such debt is assigned to a fine, penalty, or forfeiture

another entity, voluntarily, by payable to and for the benefit of a

operation of law, or otherwise governmental unit, and is not compen-

(other than debts assigned pur- sation for actual pecuniary loss,

suant to section 402(a)(26) of other than a tax penalty--

the Social Security Act, or any (A) relating to a tax of a kind

such debt which has been not specified in paragraph (1) of

assigned to the Federal Sovern- this subsection; or

ment or to a State or any

political subdivision of such

State); or

-48a- -49a-

(B) imposed with respect to a

transaction or event that occurrec

before three years before the date

of the filing of the petition;

(8) for an educational loan made,

insured, or guaranteed by a governmen-

tal unit, or made under any program

funded in whole or in part by a

governmental unit or a non-profit in-

stitution, unless--

(A) such loan first became due

before five years (exclusive of

any applicable suspension of the

repayment period) before the date

of the filing of the petition; or

(B) excepting such debt from

discharge under this paragraph

will impose an undue hardship on

the debtor and the debtor's depen-

dents;

(9) to any entity, to the extent

that such debt arises from a judgment

or consent decree entered in a court

of record against the debtor wherein

liability was incurred by such debtor

as a result of the debtor's operation

of a motor vehicle while legally in-

toxicated under the laws or

regulations of any jurisdiction

within the United States or its ter-

ritories wherein such motor vehicle

was operated and within which such

liability was incurred; or

(10) that was or could have been

listed or scheduled by the debtor in

a prior case concerning the debtor

under this title or under the

Bankruptcy Act in which the debtor

waived discharge, or was denied a dis-

charge under section 727(a)(2), (3),

~5ia-

(4), (5), (6), or (7) o« -...8 title,

or under section 14c(1), (2), (3),

(4), (6), or (7) of such Act.

(b) Notwithstanding subsection (a) of

this section, a debt that was excepted

from discharge under subsection (a)(1),

(a)(3), or (a)(8) of this section,

under section 17a(1), 17a(3), or 17a(5)

of the Bankruptcy Act, under section

439A of the Higher Education Act of

1965 (20 U.S.C. 1087-3), or under sec-

tion 733(g) of the Public Health

Service Act (42 U.S.C. 294f) in a prior

case concerning the debtor under this

title, or under the Bankruptcy Act, is

dischargeable in a case under this

title unless, by the terms of

subsection (a) of this section, such

debt is not dischargeable in the case

under this title.

-§2a-

— oo...

-.

(c) Except as provided in subsection

(a)(3)(B) of this in section, the deb-

tor shall be discharged from a debt of

a kind specified paragraph (2), (4), or

(6) of subsection (a) of this section,

unless, on request of the creditor to

whom such debt is owed, and after

notice and a hearing, the court deter-

mines such debt to be excepted from dis-

charge under paragraph (2), (4), or

(6), as the case may be, of subsection

(a) of this section.

(d) If a creditor requests a

determination of dischargeability of a

consumer debt under section (a)(2) of

this section, and such debt is

discharged, the court shall grant judg-

ment in favor of the debtor for the

costs of, and a reasonable attorney's

fee for, the proceeding if the court

finds that the position of the creditor

was not substantially justified, except

-53a-

that the court shall not award such

costs and fees if special circumstances

would make the award unjust.

-54a-

NT eee eee See ee