Professional Documents
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United States Court of Appeals, Third Circuit
United States Court of Appeals, Third Circuit
2d 289
or not. A plaintiff 'cannot justly complain that the defendant has not seen
fit to set up defenses and raise issues for the purpose of enabling him to
settle facts for future possible controversies.' " Vol. 1B Moore's Federal
Practice P 0.444(2) at 4006-07 (footnotes omitted).
This is in accordance with the approach preferred by the treatise writers
dealing with this question in the bankruptcy context, who advocate a rule
allowing the bankruptcy court to relitigate factual issues determined by
the state court in every 17 a(2) case. See Volume 1A Collier on
Bankruptcy, (14th Ed.), P 17.16, pp. 1650-1650.3; Cowan's Bankruptcy
Law and Practice, Supplement, 433 at p. 102 (1973). Clearly, adoption
of the result urged upon us by the appellant giving full collateral estoppel
effect to all facts necessarily determined by a prior default judgment
would in bankruptcy court determinations under 17 a(2)
" . . . necessarily defeat a major federal policy of granting exceptions to
discharge only in certain circumstances specified by the bankruptcy Act . .
.
The court also wishes to point out that creditors should not be encouraged
to go into state courts prior to bankruptcy seeking default judgments based
upon fraud. Such a circumstance would create an injustice greater than
that which the 1970 amendments were intended to cure."
Opinion of the Bankruptcy Judge, Appendix at 45-46. For these reasons the
order of the court below will be affirmed.
I agree that the order of the district court must be affirmed. In all cases covered
by 28 U.S.C. 1738, federal courts must give state court judgments the same
full faith and credit they have in the state of origin. In this case, the collateral
estoppel effect of the Ocean County District Court judgment is determined by
the law of New Jersey. In Texas Co. v. Di Gaetano, 71 N.J.Super. 413, 432, 177
A.2d 273, 283 (1962), the Superior Court of New Jersey, Appellate Division,
stated the effect to be given a prior default judgment:
4 is to be noted that judgment here was entered by default, and while such a
it
judgment is conclusive as an adjudication between the parties of whatever is
essential to support the judgment, it is conclusive only as to such matters or issuable
facts as were properly averred in the complaint. Girard Trust Co. v. McGeorge, 128
N.J.Eq. 91, 101, 15 A.2d 206 (Ch. 1940). A judgment by default does not estop a
As the majority correctly observes, Freedom Finance did not adequately plead
in the state court complaint all the elements required to avoid discharge by
section 17a of the Bankruptcy Act, 11 U.S.C. 35. Under New Jersey law the
McMillans are, therefore, entitled to a fresh determination of dischargeability
by the bankruptcy court.
But I find no reason to rest our decision on New Jersey law. Even if state law
on the preclusive effect of the judgment were to the contrary (which it is not), I
would vote to affirm the order of the district court in this case. Section 1738 is
not without exceptions. Federal habeas corpus is one illustration of the
proposition. See Townsend v. Sain, 372 U.S. 293, 83 S.Ct. 745, 9 L.Ed.2d 770
(1963); Fay v. Noia, 372 U.S. 391, 83 S.Ct. 822, 9 L.Ed.2d 837 (1963). In my
opinion, this is another.
1A Collier on Bankruptcy P 17.15, at 1628.2 n.45c (14th ed. 1973). See also
H.R.Rep. No. 91-1502, 91st Cong. 2d Sess. (1970), reprinted in (1970)
U.S.Code Cong. & Ad.News, p. 4156.
10
The issue in this case is whether a finance company holding the same type of
debt can evade the congressional intent by securing a state court judgment
against a delinquent borrower in anticipation of his bankruptcy. I think that the
answer should be no, and that we should admit an exception to the federal duty
to recognize state court judgments imposed by 1738. When Congress
expressly identifies an abuse, when it has the constitutional power to correct it,
and when as here it exercises that power, then the courts should give the
congressional act its full effect. While I agree with the majority's analysis as far
as it goes, I would prefer to rest the affirmance on this more fundamental
reason.
Honorable Gerald J. Weber, United States District Judge for the Western
District of Pennsylvania, sitting by designation
In its Tentative Draft no. 1 (1973), the ALI has proposed the following revised
version of Section 68
"Issue Preclusion General Rule
When an issue of fact or law is actually litigated and determined by a valid and
The bankruptcy judge, after reviewing the state court transcript and pleadings,
concluded that Freedom Finance had failed satisfactorily to demonstrate that:
"(1) Defendant made such representations knowing they were false;
(2) Defendant made such representations with the intention and purpose of
deceiving the Plaintiff;
(3) Plaintiff actually relied upon such misrepresentations; and
(4) Plaintiff suffered damage as the proximate result of such representations
having been made." Appendix at p. 43.
He further noted that Freedom Finance Co.'s 1973 loan to the McMillans was
the sixth to them in a period of five years and intimated that this fact cast doubt
on the appellant's ability to prove that it had relied on the misrepresentations in
the 1973 application in making that loan.
As to points 1, 3 and 4, however, it seems to us that the testimony offered at the
state court hearing would have been sufficient to support findings against the
McMillans on these points.
We have read and considered those cases cited to us by appellant on this point
and find in them nothing to the contrary. While a default judgment does have a
res judicata effect which bars either party from again litigating the Same cause
of action, as held by the court, in for example, Riehle v. Margolies, 279 U.S.
218, 49 S.Ct. 310, 73 L.Ed. 669 (1929), the appellant has here, as in other
sections of its brief, confused res judicata and collateral estoppel