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In re McMillan

filed: June 21, 1978.

IN THE MATTER OF MCMILLAN, JOHN SMITH A/K/A MCMILLAN, JOHN S. A/K/A MCMILLAN, JOHN, BANKRUPT, (D.C. NO. B-75-150 IN BANKRUPTCY); IN THE MATTER OF MCMILLAN, MARY, BANKRUPT, (D.C. NO. B-75-151 IN BANKRUPTCY); FREEDOM FINANCE CO., INC. APPELLANT


APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW JERSEY.

Gibbons and Hunter, Circuit Judges and Weber,*fn* District Judge. Gibbons, Circuit Judge, concurring.

Author: Weber

WEBER, District Judge.

This case raises the question of whether a bankrupt's creditor has made a prima facie case that his claim is nondischargeable under 11 U.S.C. § 35(a)(2) (Supp. 1977)*fn1 by introducing into evidence only the state court record and default judgment grounded in fraud.*fn2

Appellees John and Mary McMillan filed voluntary petitions in bankruptcy on January 27, 1975, and were duly adjudicated bankrupt and released from all dischargeable debts. On April 2, 1975, the appellant, Freedom Finance Company, filed in bankruptcy court a complaint which sought to have the McMillans' obligation to it declared nondischargeable. In support of this claim, appellant argues that a default judgment by the Ocean County, New Jersey district court that the bankrupts had been guilty of fraud in failing to disclose the full amount of their indebtedness when applying to Freedom Finance for a loan, as a matter of law, compelled a determination that the debt in question was nondischargeable. After this issue was briefed and argued by the parties, the bankruptcy judge ruled that he was

"still bound to ascertain for . . . [himself] that the elements of an exception to dischargeability established by § 17a(2), have been fully proven by the Plaintiff. This cannot be accomplished by mere reference to the wording of an earlier judgment. Rather this court must review the prior proceedings and determine whether Plaintiff has shown the elements of conduct required of the Bankrupt. . . ."

under that section.*fn3

At the hearing on this claim, appellant failed to produce any proof other than the Ocean County judgment and record and, having found this insufficient, the bankruptcy judge dismissed the complaint and held the debt to be dischargeable. On appeal, the district court adopted the opinion of the bankruptcy judge and affirmed.

Prior to 1970, a bankruptcy court granted the bankrupt a general discharge but did not rule on whether any specific obligation was nondischargeable on statutory grounds. Any judgment creditor could seek to enforce or execute on his claim in the appropriate forum, which would litigate the issue of dischargeability if the bankrupt raised his discharge as a bar. To do this, the court would examine the record of the judgment sought to be enforced to determine the nature of the judgment. In 1970, Section 17c was amended to its present form. The effect of this change was to vest in the bankruptcy court exclusive jurisdiction to determine the dischargeability of debts allegedly falling within 17a(2). See Herzog, Bankruptcy Act and Rules, 1975 Collier Pamphlet Edition at 61. The problem in this case, then, involves two analytically separate questions:

(1) Apart from any special nature of a bankruptcy case, what is the collateral estoppel effect of the state court judgment in this case on the bankruptcy proceedings?

(2) If the doctrine of collateral estoppel would apply so that the bankrupt could be barred from relitigating facts necessary to the judgment rendered by the state court, do the federal policies in bankruptcy cases supersede the policy of finality of judgments represented by the doctrine of collateral estoppel?

One of the recent cases on collateral estoppel in this Circuit is Haize v. Hanover Insurance Co., 536 F.2d 576, 579 (3d Cir. 1976) wherein the doctrine was defined as follows:

"Restatement of Judgments § 68(1)(1942) states:

'Where a question of fact essential to the judgment is actually litigated and determined by a valid and final judgment, the determination is conclusive between the parties in a ...


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