Bill Rothschild of Ogier, Rothschild, Rosenfeld & Ellis-Monroe, P.C., has an article in the current issue of Calendar Call, a publication of the General Practice and Trial Section of the State Bar of Georgia, entitled "Bankruptcy-Proofing Your Law Judgment: How Not to Try the Same Case Twice."  The article discusses steps litigators should take in non-bankruptcy courts to increase the chances the judgment may be deemed nondischargeable in a subsequent Bankruptcy case without having to re-litigate the entire case.

Here is a brief summary of the issues addressed in the article, with a few additional comments:

  • Section 523 of the Bankruptcy Code excepts some debts from discharge, including debts based upon fraud, misrepresentation, breach of fiduciary duty, and willful and malicious injury.
  • If a judgment is obtained in non-bankruptcy court, and the defendant subsequently files a Bankruptcy petition, the creditor may seek to have the debt excepted from discharge pursuant to Section 523.  This includes punitive damages and perhaps other costs included in the underlying judgment.
  • Collateral Estoppel may apply in the Bankruptcy proceeding, thus making it unnecessary for the judgment creditor to re-litigate the entire case.  In general, the requirements for collateral estoppel to apply are: (a) the issue in the prior action and the issue in the Bankruptcy court are identical, (b) the Bankruptcy issue was actually litigated in the prior action, (c) the determination of the issue in the prior action was a critical and necessary part of the judgment in that litigation, and (d) the burden of persuasion in the discharge proceeding must not be significantly heavier than the burden of persuasion in the initial action.
  •  Judgments for fraud, misrepresentation, breach of fiduciary duty and willful and malicious injury based upon Georgia law will often meet the requirements for collateral estoppel to apply, based upon the substantive elements of state law.
  • Depending on the specific language in the judgment, the Bankruptcy Court may grant partial summary judgment on the underlying claim but leaving open the issue of damages. If the underlying lawsuit included both dischargeable (such as breach of contract) and nondischargeable causes of action, and the final judgment is not clear as far as which claim the judgment was based upon, summary judgment may be denied.
  • A default judgment may satisfy the requirement that the issue actually be litigated in the prior court.  I recently litigated an adversary proceeding  in which the judgment creditor received a default judgment in Oklahoma state court, but the defendant filed a Chapter 7 petition before the state court held a trial on damages.  The Bankruptcy Court, after comparing the substantive elements of Oklahoma state law,  held that collateral estoppel applied to the judgment as far as liability, but it would be necessary to hold a trial on damages.  The proceeding was resolved with a settlement.
  •  An arbitration award may serve as the basis for the application of collateral estoppel in the Bankruptcy Court, if the state or federal court affirms the judgment and effectively converts it to a final judgment.  I recently obtained a judgment excepting a $1.6 million judgment from discharge, based on an arbitration award affirmed by the District Court.  The arbitration award itself was effectively a default award, as the defendant refused to participate.  Judge Mullins nevertheless found that collateral estoppel applied and the defendant had the opportunity to participate in the litigation.  Click here for a copy of the summary judgment brief (without voluminous exhibits) and click here for the Order granting summary judgment.

 Bill has several excellent tips for making your judgment as bankruptcy-proof as possible:

  • Review section 523 of the Code when drafting your complaint, and separate claim that may be nondischargeable.
  • Make your record by attempting to get specific findings of fact and conclusions of law, and even jury charges, that may later be consistent with the requirements of section 523. 
  •  If you negotiate a consent judgment, try to include specific findings of fact that comply with the requirements of section 523.  Obviously, if you represent the defendant, you may want to avoid such admissions or conclusions, thereby making the creditor litigate the case in Bankruptcy Court.

Bill’s article much more extensive that this brief summary, and he includes several case citations.  If you can get a copy of Calendar Call, or it is ultimately posted on the Georgia Bar website, read it.

 

Scott Riddle’s practice focuses on bankruptcy and litigation. Scott has represented Chapter 7 and 11 debtors, creditors, creditor committees, trustees, court-appointed receivers and other interested parties in bankruptcy cases and bankruptcy litigation.  For more information, click here.