UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT
filed: December 31, 1991.
IN RE: RONALD C. CHERIPKA, SR., AND MICHELE CHERIPKA, DEBTORS; RONALD C. CHERIPKA, SR. AND MICHELE CHERIPKA
REPUBLIC INSURANCE COMPANY, APPELLANT.
On Appeal from the United States District Court for the Western District of Pennsylvania. (D.C. Civ. No. 91-00318)
Before: Sloviter, Chief Judge, Cowen and Weis, Circuit Judges
Opinion OF THE COURT
COWEN, Circuit Judge.
This is an appeal from an order of the United States District Court for the Western District of Pennsylvania affirming a bankruptcy court order that a debt owed by Michele Cheripka to the Republic Insurance Company was dischargeable in bankruptcy. At issue is the subsequent effect of a consent judgment rendered prior to any proceeding in bankruptcy, stating that the debt memorialized therein would not be dischargeable in bankruptcy. In this case the initial consent judgment was rendered in a district court proceeding. We find that this original district court consent judgment did not collaterally estop Michele Cheripka from raising the dischargeability issue in a subsequent bankruptcy proceeding. We also hold that the district court, on appeal from the order of the bankruptcy court, did not err in concluding that Republic failed to prove by a preponderance of the evidence that the debt was not dischargeable.
This case had its genesis on the night of August 25, 1984. That evening Michele and Ronald Cheripka attended a wedding during which both became intoxicated, Ronald much more so than Michele. En route from the wedding, the couple had a lengthy argument which continued when they arrived at their home and was observed by their live-in babysitter. The babysitter later testified that in the course of the argument, Ronald told Michele to take the children and whatever else she wanted from the house immediately because he was going to burn it down. As a result Michele, the babysitter, and the children departed from the Cheripka home that night, leaving Ronald there alone. In the early morning hours of August 26, 1984, the Cheripka family home was seriously damaged by fire. Investigators found substantial circumstantial evidence that the fire was the work of an arsonist. However, no criminal charges were filed against Ronald or Michele Cheripka.
The Cheripkas subsequently filed a claim for personal property losses with their insurer, Republic Insurance Company ("Republic") but Republic refused to honor the claim because it believed that Ronald Cheripka had intentionally burned the house, an act constituting a defense to liability under the terms of the policy. The Cheripkas then filed suit against Republic in state court for their personal property loss. Republic caused the action to be removed to the district court pursuant to diversity jurisdiction. 28 U.S.C. § 1332 (1988).
In its answer to the Cheripkas' complaint, Republic asserted that it was not obliged to pay for the Cheripka's personal property loss because Ronald had committed arson and Michele had intentionally concealed what had transpired on the night of August 25, 1984, once again a defense to liability under the terms of the policy. Although Republic contended in its answer that it was not obliged to pay the Cheripka's personal property claim, on March 14, 1985, Republic did pay to the mortgagee the balance due on the Cheripkas' mortgage on the house which was burned, because the policy required that Republic do so regardless of the validity of the Cheripkas' claim for personal property damaged by reason of the fire.*fn1 Republic then filed a counterclaim against the Cheripkas for the amount paid to the mortgagee.
Prior to trial the parties settled their respective claims. A consent order was signed and entered as a judgment in the district court on April 2, 1986. The order for judgment set forth the stipulations and terms of the parties' agreement.*fn2 The order provided that the judgment in favor of Republic against the Cheripkas would not be dischargeable in any future bankruptcy proceeding pursuant to 11 U.S.C. §§ 523(a)(2) & (a)(6)(1988), and that Republic could offer a certified copy of the order for judgment in any future bankruptcy proceeding as "conclusive evidence" of the nondischargeability of the judgment. The relevant excerpts of the order for judgment read as follows:
3. Pursuant to 11 U.S.C. Sections 523(a)(2) and (a)(6), neither the judgment in favor of Republic and against Cheripka nor any obligation of Cheripka to Republic created by this order shall be dischargeable in bankruptcy pursuant to 11 U.S.C. Sections 523 (a)(2) and (a)(6).
4. Republic may offer a certified copy of this order in any bankruptcy proceeding filed by Cheripka or either of them as conclusive evidence of the nondischargeability of the obligations of Cheripka or either of them to Republic.
Dist. Ct. Order of April 2, 1986 at 1-2. The stipulation and order also contained a schedule of payments to be made by the Cheripkas to Republic and provided that judgment would be entered in favor of Republic if the Cheripkas defaulted in their payments or declared bankruptcy.
The Cheripkas subsequently defaulted on the payments set forth in the schedule and Republic entered judgment against them jointly on May 29, 1987 in the amount of $30,824.34. On December 7, 1987, the Cheripkas filed petitions in bankruptcy under Chapter 7 of the Bankruptcy Code seeking to discharge, among other debts, the judgment entered on May 29, 1987 in favor of Republic. Republic offered the April 2, 1986 "nondischargeability" order for judgment to the bankruptcy court in opposition to the Cheripkas' motion to discharge their debt. The bankruptcy court held that the judgment against Michele Cheripka in favor of Republic was, nevertheless, dischargeable. However, based on the evidence proven in the bankruptcy proceeding that Ronald Cheripka had intentionally burned the Cheripka home, the bankruptcy court held that the judgment against Ronald Cheripka was not dischargeable. On the appeal of Republic from the order of the bankruptcy court which discharged Republic's judgment against Michele Cheripka, the district court affirmed.*fn3 Republic appeals to this court. We have jurisdiction to hear this appeal pursuant to 28 U.S.C. § 1291 (1988).
As an initial matter, we must consider the power of the district court to determine the dischargeability of debts in subsequently filed bankruptcy proceedings. Then we must ascertain whether the judgment of the district court has any res judicata effect on such subsequent bankruptcy proceedings.*fn4 Because no bankruptcy petition had been filed when the district court entered its judgment as to nondischargeability, we conclude that the district court lacked jurisdiction over the bankruptcy issue of dischargeability. As a result, the judgment of the district court as far as dischargeability is concerned could have no res judicata effect in a later bankruptcy proceeding.
Title 28 U.S.C. § 1334(b)(1988) provides that federal district courts have original although not exclusive jurisdiction over all civil proceedings arising under, arising in, or related to cases under Title 11 of the United States Code. Title 28 U.S.C. § 157(a)(1988) gives each district court the authority to refer any or all bankruptcy cases and proceedings to the bankruptcy judges for that district.*fn5 A district court may withdraw its reference of an action to the bankruptcy court under 28 U.S.C. § 157(d)(1988) and thereafter exercise jurisdiction over the action pursuant to 28 U.S.C. § 1334(b)(1988).
However, if an action is commenced in the district court and no bankruptcy petition has been filed, the district court has no authority to make determinations as to the dischargeability in bankruptcy of particular debts. "There is no provision in title 28, title 11 or elsewhere in the law which authorizes any federal court to exercise jurisdiction over any proceeding arising under title 11, or over any other bankruptcy issue, until a bankruptcy case is commenced by the filing of a petition." In re Gibbs, 107 Bankr. 492, 497 (Bkrtcy. D.N.J. 1989).
In Gibbs, as in this case, a district court entered a consent judgment, prior to the debtor's filing of a bankruptcy petition, containing an express provision rendering the debt represented in the judgment nondischargeable in bankruptcy. 107 Bankr. at 495 . In spite of the provision as to nondischargeability contained in the district court's order, the bankruptcy court in Gibbs held that the district court lacked subject matter jurisdiction to enter judgment on the issue of the dischargeability of a debt when no bankruptcy petition had been filed. Id. at 497.
In his dissent, Judge Weis argues that Gibbs cites no authority for the proposition that a district court, prior to the filing of a petition in bankruptcy, lacks jurisdiction to determine dischargeability. Dissent, infra at . (Weis, J., typescript at 3). However, the dissent offers no authority for the converse position and, in fact, simply chooses to read section 1334(b) broadly enough to grant a district court jurisdiction to decide any matter relating to bankruptcy at any time. Because we conclude that Congress' purpose in enacting the Bankruptcy Code was to resolve all matters relating to a debtor's insolvency in one proceeding, a process which is begun with the filing of a petition in bankruptcy, we do not read section 1334(b) as giving the district court, or any court, authority to make dischargeability determinations before a proceeding in bankruptcy is begun with the filing of a petition. Indeed, we believe that the dissent's reading of section 1334(b) would subvert the protections the Bankruptcy Code extends, not only to the debtor but to other creditors as well. Therefore, like the court in Gibbs, we conclude that the district court in this matter had no jurisdiction to determine the issue of dischargeability when it entered its order for judgment on April 2, 1986, because at that time the Cheripkas had not yet filed petitions in bankruptcy.
Support for the court's decision in Gibbs can be found in the Supreme Court's decision in Brown v. Felsen, which although arising in the context of a state court judgment, nonetheless illustrates the principle that the bankruptcy court is not constrained, by principles of res judicata or otherwise, by the previous judgment of any other court, state or federal, as to dischargeability, where no petition in bankruptcy has yet been filed. 442 U.S. 127 (1979). Prior to 1979, a conflict existed among the courts as to whether the doctrine of res judicata prevented a bankruptcy court from considering evidence, extrinsic to the record of a prior state court action, when determining whether a debt previously reduced to judgment was dischargeable in bankruptcy. See In re Wright, 584 F.2d 83 (5th Cir. 1978); In re Houtman, 568 F.2d 651 (9th Cir. 1978); In re Nicholas, 510 F.2d 160 (10th Cir.), cert. denied, 421 U.S. 1012, 44 L. Ed. 2d 680 , 95 S. Ct. 2417 (1975). The Supreme Court concluded in Brown that the doctrine of res judicata did not confine the bankruptcy court to a review of the judgment and record of a prior state court proceeding when determining whether a debt reduced to judgment is, in fact, nondischargeable. Brown, 442 U.S. at 138-39. The Court reasoned, in part, that the 1970 amendments to the Bankruptcy Code were enacted in order to take dischargeability questions*fn6 "away from state courts that seldom dealt with the federal bankruptcy laws and to give those claims to the bankruptcy court so that it could develop expertise in handling them." Id. at 136. As the Supreme Court recently noted, the 1970 amendments vested jurisdiction to determine certain dischargeability exceptions exclusively in the federal courts dealing with bankruptcy matters. Grogan v. Garner, 498 U.S. 279, 111 S. Ct. 654, 658n.10, 112 L. Ed. 2d 755 (1991).*fn7 While in this case the court that first determined dischargeability was actually a federal rather than a state court, the exclusive powers of the bankruptcy court are still implicated and dictate the same result. This is because at the time the district court issued judgment on the question of dischargeability, no bankruptcy petition had been filed. Therefore, the district court was not, at that time, sitting in its capacity as a bankruptcy court and had no more power than would a state court to determine the exclusive bankruptcy court issue of dischargeability. That is not to say, as the dissent suggests we mean, dissent, infra at (Weis, J., typescript at 5), that the district court lacked the "expertise" necessary to determine the issue of dischargeability. Instead, we simply hold that such expertise cannot be used with binding effect in bankruptcy prior to the filing of a petition in bankruptcy.
The progeny of Brown, including Gibbs, have concluded that a bankruptcy court is not prevented by another court's judgment, entered prior to the filing of a bankruptcy petition, from making its own determination as to dischargeability. Thus the judgment of a nonbankruptcy court, standing alone, does not have res judicata effect on the question of dischargeability in a subsequent bankruptcy proceeding, and principles of res judicata cannot be used to support Republic's assertion that the bankruptcy court erred in finding that Michele Cheripka's debt to Republic was dischargeable.
The next issue we must consider is whether the Cheripkas waived their right to have the bankruptcy court determine the issue of dischargeability when they consented to the entry of a "nondischargeable" judgment by the district court prior to the commencement of a bankruptcy proceeding. We conclude that the Cheripkas cannot be said to have waived their right to have the question of the dischargeability of their debt determined by a bankruptcy court.
Courts considering this issue have consistently held that for public policy reasons, parties may not contract away or otherwise waive their statutory right to seek a discharge of debts under Title 11 in advance of filing a bankruptcy action. Levinson, 831 F.2d at 1296 n.3; In re Ethridge, 80 Bankr. 581, 586 (Bkrtcy. M.D. Ga. 1987). Exceptions to the right to discharge, set forth in 11 U.S.C. § 523,*fn8 are strictly construed in order to further the "policy of affording the debtor a broad discharge and an effective fresh start." In re DiPierro, 69 Bankr. 279, 282 (Bkrtcy. W.D. Pa. 1987); see also Ethridge, 80 Bankr. at 586 ; In re Minor, 115 Bankr. 690, 693 (D. Colo. 1990). Indeed, if debtors could waive their statutory right to discharge prior to filing for bankruptcy, creditors could nullify the fresh start provided to debtors by the Bankruptcy Code at the original time of extending credit. Ethridge, 80 Bankr. at 586 . While we recognize that the evidence here does not suggest that Michele Cheripka was in any way forced to agree to nondischargeability of her debt, we nevertheless conclude that for policy reasons, the exceptions to the right to discharge should be strictly construed and should not depend on the voluntariness of the relationship between debtor and creditor. Based on the foregoing we conclude that the Cheripkas did not waive the issue of dischargeability, and the bankruptcy court was free to make an independent determination of the dischargeability of the Cheripkas' debt to Republic.
The bankruptcy court, as one of the grounds for its holding that the Cheripkas were not bound by the judgment of the district court as to dischargeability, stated that the requirements of section 524(c), governing reaffirmation agreements, were not satisfied in this case. Neither party raised the issue of section 524(c) or argued that it governs agreements entered into prior to discharge in a bankruptcy proceeding. Therefore, the issue of section 524(c)'s applicability is not before the court. If the issue were properly before the court, we would agree with the dissent that section 524(c) is not relevant here, not because its requirements are not met, as the bankruptcy court concluded, but because the section only applies after a debtor's debt has been discharged. In any event, we do not base our holding that the Cheripkas were not bound by the district court's "judgment" that their debt was nondischargeable on section 524(c) grounds and thus while we may accept the dissent's discussion of this matter, that discussion in no way affects our determination of the merits of this case.
In considering the effect, if any, that should be given to the district court's judgment of nondischargeability, entered prior to the filing of the bankruptcy petition, we look to the doctrine of collateral estoppel.*fn9 While the Supreme Court in Brown resolved the issue of the res judicata effect of prior state court judgments as to the dischargeability of debts in subsequent bankruptcy proceedings, it left undecided the related issue of the applicability of collateral estoppel to the same situation. The Court did offer guidance on this issue, however, in an oft-cited footnote in which it was suggested that if the state court's factual findings were based on standards identical to those used by the bankruptcy court in its dischargeability determination, the doctrine of collateral estoppel should be applied:
This case concerns res judicata only, and not the narrower principle of collateral estoppel. Whereas res judicata forecloses all that which might have been litigated previously, collateral estoppel treats as final only those questions actually and necessarily decided in a prior suit. If, in the course of adjudicating a state-law 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 litigation of those issues in the bankruptcy court.
Brown, 442 U.S. at 139 n.10 (citations omitted).
Until quite recently, the applicability of collateral estoppel principles in bankruptcy discharge proceedings was still in doubt. The Supreme Court, recognizing that it had previously left the courts of appeals to fend for themselves on this issue, finally adopted the conclusion of a long line of cases holding that collateral estoppel does apply in discharge proceedings. Grogan, 111 S. Ct. at 658 n.11.*fn10 However, courts considering the actual application of collateral estoppel post- Brown have concluded that where the previous court's judgment does not contain factual findings sufficient to meet the requirements of dischargeability, the bankruptcy court "may properly refuse to accord collateral estoppel effect to the state court judgment." In re Allman, 735 F.2d 863, 865 (5th Cir.), cert. denied, 469 U.S. 1086, 83 L. Ed. 2d 700 , 105 S. Ct. 590 (1984); see also In re Halpern, 810 F.2d 1061, 1064 (11th Cir. 1987); Matter of Shuler, 722 F.2d 1253 (5th Cir.) cert. denied, 469 U.S. 817, 83 L. Ed. 2d 32 , 105 S. Ct. 85 (1984); Ethridge, 80 Bankr. at 587 . In keeping with the view adopted by the majority of courts, we stated in In re Ross, 602 F.2d 604 (3d Cir. 1979), that "the doctrine of collateral estoppel may be applicable to a dischargeability determination by the bankruptcy court." Id. at 607. In Ross, we held that in order for the doctrine to bar relitigation of the dischargeability issue, the bankruptcy court must find that
(1) the issue sought to be precluded must be the same as that involved in the prior action; (2) that issue must have been actually litigated; (3) it must have been determined by a valid and final judgment; and (4) the determination must have been essential to the prior judgment.
Id. at 607-608 (quoting Haize v. Hanover Ins. Co., 536 F.2d 576, 579 (3d Cir. 1976). Thus the doctrine will only prevent relitigation of issues that were actually and necessarily resolved by the nonbankruptcy court in the prior proceeding. In re Wallace, 840 F.2d 762, 765 (10th Cir. 1988); Combs v. Richardson, 838 F.2d 112, 115 (4th Cir. 1988); Levinson, 831 F.2d 1292.
As the dissent notes, the application of collateral estoppel becomes particularly complicated when the pre-bankruptcy determination as to dischargeability is contained in a consent judgment entered pursuant to stipulation by the parties, because in such a situation it is unclear whether the issue was actually and necessarily decided. As a general matter, a consent judgment entered upon stipulation of the parties, "should not be deprived of collateral estoppel effect by the fact that it was rendered upon the consent of the parties rather than as the result of an adversary trial." 1B James W. Moore et. al., Moore's Federal Practice para. 0.444 (2d ed. 1991). However, courts that have considered the question whether a pre-bankruptcy consent judgment precludes the issue of dischargeability have required that the parties clearly intended that the consent judgment would finally adjudicate the factual issues contained therein. See Levinson, 831 F.2d at 1296; Halpern, 810 F.2d at 1064. Moreover, courts considering this issue have held that if the consent judgment entered by the nonbankruptcy court does not contain detailed factual findings sufficient to demonstrate that one of the exceptions to section 523 of the Bankruptcy Code is satisfied, it should not be given preclusive effect in subsequent bankruptcy proceedings. See Allman, 735 F.2d at 865 (nothing in state court consent judgment suggests the court determined the factual issues necessary to a finding of "false pretenses" for section 523 purposes); Daniels, 91 Bankr. at 985 (stipulated judgment did not recite findings of fact or conclusions of law that clearly establish elements of fraud under section 523 so court correctly refused to give it collateral estoppel effect); Ethridge, 80 Bankr. at 587 (consent judgment did not contain findings of fact nor did it provide that it would have collateral estoppel effect so no error in not giving it collateral estoppel effect). Indeed, as the Supreme Court has noted, "[a] judgment entered with the consent of the parties may involve a determination of questions of fact and law by the court. But unless a showing is made that that was the case, the judgment has no greater dignity, so far as collateral estoppel is concerned, than any judgment entered only as a compromise of the parties." United States v. International Bldg. Co., 345 U.S. 502, 506, 97 L. Ed. 1182 , 73 S. Ct. 807 (1953).
Republic contends that Levinson compels the conclusion that collateral estoppel should apply in this situation to bar Michele Cheripka from litigating the dischargeability of her debt. In Levinson, the court upheld a bankruptcy court determination that a previously entered state court consent judgment estopped the debtor from relitigating the issue of dischargeability. 831 F.2d at 1296. However, in reaching its conclusion, the Levinson court stressed that it was doing so because the parties had stipulated to specific factual findings supporting nondischargeability, rather than having simply agreed that the debt would be nondischargeable. Id. Moreover, the parties in Levinson stated in the stipulation contained in the state court judgment that "malice [was] the gist of the action," the parties intended that the debt be nondischargeable, and in any future bankruptcy proceeding all of the allegations in the complaint and findings of the court would be taken as true. Pointing out that the debtor had admitted in the stipulation that he violated his fiduciary duties when he defalcated trust assets, the court held that principles of collateral estoppel barred relitigation of the issue of defalcation in a section 523 dischargeability proceeding. Id. at 1293. It should be noted that the Levinson court did not state that the mere intention of the parties, absent factual findings supporting dischargeabilty, would suffice.
Similarly, in Halpern, the parties entered into a consent judgment and the judgment contained an admission of certain facts, namely that the defendant made material misrepresentations, knew they were false at the time he made them, and made the statements with the intent to induce reliance on them. 810 F.2d at 1062. The defendant also admitted his conduct was "wilful, malicious and intentional and designed solely for the purpose of fraudulently deceiving the [plaintiff] bank." Id. Based on those admissions, the Court of Appeals for the Eleventh Circuit affirmed the bankruptcy court decision which gave collateral estoppel effect to the defendant's admissions, contained within the state court consent judgment. Id. at 1064.
The case before us presents a completely different scenario than that found in Halpern or Levinson or in the cases cited by the dissent. Here, the district court's judgment regarding dischargeability was entered pursuant to the consent of the parties. However, as noted in Part II of our opinion, the district court lacked the jurisdiction necessary to determine dischargeability at the time it rendered its "judgment." Therefore there was no valid "judgment" of dischargeability to which the bankruptcy court was bound to give collateral estoppel effect.
Moreover, the parties failed to include, either in the stipulation or anywhere in the record, factual findings to support the "judgment" that the debt owed by Michele Cheripka to Republic is nondischargeable in bankruptcy under 11 U.S.C. § 523(a)(6).*fn11 The district court did not determine any facts based on trial testimony before it, nor did it make any factual findings based on any other evidentiary hearing. This case does not call upon us to determine if the mere recital of facts in a consent judgment, without any hearing or findings by the court, would have binding effect in a subsequent bankruptcy proceeding. However, even if we did so determine, there were no facts set forth in the judgment here nor did the district court adopt facts proferred to it by the parties. We do not agree with the dissent's position that the intention of the parties is the controlling factor in determining the applicability of collateral estoppel in a case before the bankruptcy court. The complete lack of factual findings supporting this judgment and stipulation, in conjunction with the district court's lack of bankruptcy jurisdiction to determine dischargeability prior to the filing of a petition in bankruptcy, compels our conclusion that the consent judgment of the district court does not collaterally estop Michele Cheripka from litigating the issue of dischargeability under section 523.
The principles of judicial estoppel likewise do not prevent Michele Cheripka from seeking discharge of the debt owed to Republic. As an initial matter, the issue of judicial estoppel was not raised in the court below, nor was it raised by either party in this appeal. Except in those cases where exceptional circumstances exist, "an issue not raised in the district court will not be heard on appeal." Franki Foundation Co. v. Alger-Rau & Associates, Inc., 513 F.2d 581, 586 (3d Cir. 1975). This court has previously held that where a party makes an inconsistent argument in another court but his adversary fails to raise the issue of judicial estoppel in the district court, no "exceptional circumstances" exist which would warrant our consideration of the issue on appeal. Altman v. Altman, 653 F.2d 755, 758 (3d Cir. 1981). While the dissent cites Matter of Cassidy, 892 F.2d 637 (7th Cir.), cert. denied, 498 U.S. 812, 111 S. Ct. 48 , 112 L. Ed. 2d 24 (1990), in support of its position that an appellate court may consider the issue of judicial estoppel sua sponte, dissent infra at (Weis, J., typescript at 21), the dissent fails to recognize that we are bound by our own previous opinion in Altman, not by another court of appeals' decision on the same matter. U.S. Court of Appeals for the Third Circuit, Internal Operating Procedures, § 9.1 (1990) (court in banc consideration required to overrule holding of previous panel set forth in published opinion).
In any event, even if the issue of judicial estoppel had not been waived, we do not agree that the doctrine prevents Michele Cheripka seeking discharge in this case. This court explained the doctrine of judicial estoppel in Scarano v. Central R.R., 203 F.2d 510 (3d Cir. 1953). In Scarano we held that the doctrine applied when "intentional self-contradiction is being used as a means of obtaining unfair advantage in a forum provided for suitors seeking justice," and emphasized that a plaintiff who obtains relief from an adversary "by asserting and offering proof to support one position may not be heard later in the same court to contradict himself in an effort to establish against the same adversary a second claim inconsistent with his earlier contention." Id. (emphasis added).
This case does not involve a plaintiff "asserting and offering proof to support one position." Moreover, those courts that have found a party to be judicially estopped have done so because the party sought to be estopped from asserting a contradictory position had prevailed in the prior action because the prior court had "accepted" the party's contrary position. See Teledyne Industries, Inc. v. N.L.R.B., 911 F.2d 1214, 1218 (6th Cir. 1990); United States v. 49.01 Acres of Land, More or Less, 802 F.2d 387, 390 (10th Cir. 1986); Konstantinidis v. Chen, 200 U.S. App. D.C. 69, 626 F.2d 933, 939 (D.C. Cir. 1980).
In this case, it cannot be said that any particular "position" was "urged" upon or "argued" before the district court which would warrant the application of judicial estoppel. The district court simply entered an order for judgment, within which was contained the agreement of the parties. We have found only one case discussing consent judgments in the context of judicial estoppel. In that case, Teledyne Industries, the Court of Appeals for the Sixth Circuit held that agreed orders lacking any findings did not constitute "judicial acceptance" for the purpose of applying judicial estoppel. 911 F.2d at 1218. Similarly, the consent judgment here was void of factual findings "accepted" by the court and thus we conclude there was no "judicial acceptance" in this case.
Moreover, the primary purpose of the doctrine of judicial estoppel is to protect the integrity of the courts, not to protect the litigants. Teledyne, 911 F.2d at 1218; Merrill Lynch, Pierce, Fenner & Smith Inc. v. Georgiadis, 903 F.2d 109, 114 (2d Cir. 1990); Matter of Cassidy, 892 F.2d at 641. While the dissent states that the case did not go to trial in the district court "on the strength of the debtor's agreement that the consent judgment would be conclusive evidence," dissent, infra at (Weis, J., typescript at 25), there is no evidence that the district court entered judgment on that basis. Whether the parties, among themselves, made such an agreement in all likelihood had no effect on the district court's entry of judgment and thus we cannot say that the integrity of the district court has been impugned. In short, we find the doctrine of judicial estoppel inapplicable here.
Finally, Republic contends that, in any event, the district court erred in affirming the bankruptcy court's independent decision that the debt owed by Michele Cheripka was dischargeable in bankruptcy. Determinations as to the dischargeability of debts under section 523 are reviewed under the clearly erroneous standard. Chrysler Credit Corp. v. Rebhan, 842 F.2d 1257, 1261 (11th Cir. 1988); In re Hunter, 771 F.2d 1126, 1129 n.3 (8th Cir. 1985). Nondischargeability, under any of the provisions of section 523, must be established by a preponderance of the evidence. Grogan, 111 S. Ct. at 659. We do not agree with Republic that the district court committed clear error when it affirmed the bankruptcy court's conclusion that Republic failed to establish, by a preponderance of the evidence, that Michele Cheripka's debt was not dischargeable under 11 U.S.C. §§ 523(a)(6) or 523(a)(2)(A).
Title 11 U.S.C. § 523(a)(6) excepts from discharge in bankruptcy any debt "for willful and malicious injury by the debtor to another entity or to the property of another entity." In this case, the Cheripka house was the collateral for the mortgage which Republic held. Therefore, Republic had a security or "property" interest in the Cheripkas' house to the extent they were an assignee/subrogee of that original mortgage under the terms of their policy with the Cheripkas. The issue then, is whether Republic proved, by a preponderance of the evidence, that Michele Cheripka was involved in the "willful and malicious" injury to that property.
The bankruptcy court concluded, based on the evidence before it, that Republic failed to establish Michele Cheripka's involvement in the destruction of the Cheripka home. Republic contends in its brief that "surely if . . . the evidence surrounding Ronald Cheripka rises to the level of clearly convincing, the evidence as to Michele Cheripka meets the burden of preponderance of the evidence." Brief of Appellant at 17. However, Republic's only "proof" of wrongdoing on Michele's part is the stipulation which resulted in the district court judgment that the debt would be nondischargeable and we have determined that the stipulation has no effect in this later bankruptcy proceeding. Accordingly, we cannot say that the district court committed clear error in discharging Michele Cheripka's debt to Republic.
Republic also contends that the district court erred in not finding Michele Cheripka's debt nondischargeable under 11 U.S.C. § 523(a)(2)(A). Section 523(a)(2)(A) provides that debts for "money, property, services, or an extension, renewal, or refinancing of credit to the extent obtained by -- false pretenses, a false representation, or actual fraud" shall not be dischargeable in bankruptcy. According to Republic, the Cheripkas secured Republic's payment of the balance of their mortgage by falsely representing to Republic that they were not responsible for the fire.
The bankruptcy court rejected this contention, noting that even if the Cheripkas had committed arson and misrepresented that fact to Republic, their debt would remain dischargeable because Republic had failed to demonstrate reliance by Republic on that misrepresentation. See In re Singleton, 37 Bankr. 787, 792 (Bkrtcy. D. Nev. 1984) (reliance is a necessary element of any section 523(a)(2)(A) exception). The record supports the conclusion of the bankruptcy court and we hold, therefore, that the district court did not commit clear error when it refused to hold that Michele Cheripka's debt was nondischargeable under section 523(a)(2)(A).
In sum, we hold that the district court correctly concluded that the original district court consent judgment did not collaterally estop Michele Cheripka from litigating the dischargeability of her debt to Republic under section 523. In addition, the district court did not err in finding that Republic failed to prove, by a preponderance of the evidence, that the debt owed by Michele Cheripka was nondischargeable under either section 523(a)(6) or section 523(a)(2)(A). We will affirm the district court judgment in all respects.
WEIS, Circuit Judge, dissenting.
The debtor in this case signed an acknowledgment that the terms of the consent judgment had been explained to her, and that she understood and agreed to the court order.*fn1 Despite this solemn commitment made in the district court, the bankruptcy court permitted the debtor to renege on her agreement and have the debt discharged. I cannot condone such a flagrant instance of a litigant playing fast and loose with the courts.
The debtor, in effect, argues that the power to grant a discharge rests exclusively in the bankruptcy court and that adjudications of other courts have little or no effect in that determination. I find three flaws in this argument. First, a federal district court may have jurisdiction to address the issue of dischargeability in advance of bankruptcy and furthermore a collateral challenge may be barred. Second, a bankruptcy court must recognize the issue preclusive effect of prior judgments. Finally, a party may be judicially estopped from adopting a position contrary to that taken before another tribunal.
The district court's consent judgment is divided into two operative parts. The first rules directly on dischargeability; the second, alternatively, provides that the consent judgment shall be conclusive evidence. Thus, the second part does not purport to be a ruling by the district court on discharge per se, but rather requires a formal determination by the bankruptcy court consistent with the evidentiary stipulation. The bankruptcy court held that neither provision was effective.
28 U.S.C. § 1334(b) gives "the district courts . . . original but not exclusive jurisdiction" in two settings:
(1) "civil proceedings arising under title 11," and
(2) civil proceedings "arising in or related to cases under title 11."
This distinction has meaning. Only the second portion of subsection (b) refers to "cases," which are initiated when a petition in bankruptcy has been filed. The majority apparently relies on this provision in concluding that, because no bankruptcy petition had been filed, the district court had no jurisdiction.
The majority, however, does not explain why the first setting referred to in subsection (b), "civil proceedings arising under Title 11," does not grant jurisdiction in circumstances where a "case" in bankruptcy does not exist. Similarly, the bankruptcy judge in In re Gibbs, 107 Bankr. 492, 497 (Bankr. D.N.J. 1989), cited by the majority, found nothing in Title 28 authorizing any proceeding arising under Title 11 until a bankruptcy case is commenced, but he did not explain how he reached that conclusion. Although ipse dixit serves an admirable purpose in shortening over-long judicial opinions, the technique is generally used when the statement reflects long-settled questions. That is not so in this instance.
1 Collier on Bankruptcy para. 3.01[c][iii] (L. King ed., 15th ed. 1991) briefly discusses the "civil proceedings arising under" clause in section 1334(b) and states that the phrase is to be broadly interpreted as it is in 28 U.S.C. § 1331 ("civil actions arising under the Constitution, laws or treaties of the United States"). The treatise cites actions commenced after a bankruptcy case has been closed, sometimes dealing with discharge, as examples of "proceedings arising under." A pending bankruptcy "case," therefore, is not a prerequisite to application of section 1334(b). If the statute grants jurisdiction to the district court after a bankruptcy case has been closed, it is reasonable to conclude that authorization similarly exists for "proceedings" instituted before the petition is filed.
Collier on Bankruptcy does not discuss, for example, the possibility of a declaratory judgment preceding the filing of a bankruptcy petition, but I find nothing in the language of section 1334(b) that would prohibit it. The instances where a district court would grant a declaratory judgment would most likely be rare. That does not mean, however, that the court lacks jurisdiction entirely.
Brown v. Felsen, 442 U.S. 127, 60 L. Ed. 2d 767 , 99 S. Ct. 2205 (1979), in its discussion of the 1970 amendments to the Bankruptcy Act, does not support the majority or In re Gibbs. Congress enacted those amendments to the Bankruptcy Act to meet certain post-bankruptcy discharge abuses that had appeared. Many creditors had pursued a policy of suing a debtor in state court after the close of bankruptcy, alleging fraud or some similar ground of non-dischargeability. Because most debtors believed that they were free of the obligation, they often did not contest the state court suits and defaulted. Execution on the judgments then went forward because discharge in bankruptcy was waived if not affirmatively pleaded in the state court.
Those debtors who did appear and assert the bar of bankruptcy were obliged to prove dischargeability. Thus the state courts were called upon to adjudicate that issue. The 1970 amendments to then section 17(c)(2) of the Bankruptcy Act were designed to end this practice by giving bankruptcy courts the exclusive jurisdiction to decide dischargeability. Creditors challenging dischargeability were now required to bring such actions in the bankruptcy court. See the discussion in In re Olmstead, 608 F.2d 1365, 1367 (10th Cir. 1979); see also H.R. Rep. No. 1502, 91st Cong., 2d Sess. 1 (1970), reprinted in 1970 U.S.C.C.A.N. 4156, 4156-57; S. Rep. No. 1173, 91st Cong., 2d Sess. 2 (1970).
Those provisions were, in general, carried over to the new Bankruptcy Code when enacted in 1978, although the exclusivity provision of former section 17(e)(2) was not deemed necessary in view of the expansive provisions of other sections of the new Bankruptcy Code. See 3 Collier on Bankruptcy, supra, para. 523.05.
In 1970, the "bankruptcy courts" consisted of district judges and referees in bankruptcy. Consequently, when Brown v. Felsen speaks of the bankruptcy court developing an "expertise in handling" discharge claims, the reference was to district judges and referees as contrasted with state court judges. District judges possessed the expertise that Congress had in mind. The 1970 amendments were directed to removing jurisdiction from state courts, not federal courts. That legislation was not intended to create a jurisdictional chasm between federal judges sitting in district courts and sitting as bankruptcy judges.
Moreover, there is another basis for questioning the majority's position on jurisdiction. In discussing the quality of a judgment that acts as res judicata, a respected treatise states: "judgments that rest on stipulations . . . or consent to the very judgment itself should be given effect according to the intention of the parties." 18 C. Wright, A. Miller & E. Cooper, Federal Practice & Procedure § 4427, at 271 (1981).
Asserting that the validation by consent process carries over in most instances to collateral attacks on jurisdiction, the treatise concludes: "Today, it is safe to say that most federal court judgments are res judicata notwithstanding a lack of subject matter jurisdiction." Id.
§ 4428, at 272. After citing Chicot County Drainage Dist. v. Baxter State Bank, 308 U.S. 371, 84 L. Ed. 329 , 60 S. Ct. 317 (1940), the authors continue: "it seems clear that federal court judgments are binding notwithstanding a simple lack of subject matter jurisdiction without regard to whether the jurisdictional question was litigated." 18 C. Wright, A. Miller & E. Cooper, supra, § 4428, at 282.
In Chicot County, the Court was confronted with a plea of res judicata based on a previous adjudication in a district court. 308 U.S. at 373. Jurisdiction for the previous suit was based on a statute that was later declared unconstitutional. No challenge to jurisdiction having been raised in the first case, the Supreme Court held that although the judgment there might have been attacked on direct review it could not be assailed collaterally. The parties having failed to raise the jurisdictional question and have it determined initially could not raise the issue in a subsequent suit. Id. at 376-78; see also Insurance Corp. of Ireland, Ltd. v. Compagnie Des Bauxites De Guinee, 456 U.S. 694, 702n.9, 72 L. Ed. 2d 492 , 102 S. Ct. 2099 (1982); Kock v. Government of Virgin Islands, 811 F.2d 240, 243 (3d Cir. 1987).
I do not choose to rest my dissent on the ground that the district court had the authority to rule definitively on dischargeability, but it is by no means a foregone conclusion that the district court lacked jurisdiction or that the judgment is open to collateral attack. Those questions are at least open ones that I need not, and do not, decide here. My preference is to demonstrate that the bankruptcy court should have held that the debtor was estopped from seeking a discharge.
As stated in one respected treatise,
"Federal courts ordinarily do not encounter issue preclusion problems arising from the limited jurisdiction of one federal court or the exclusive jurisdiction of another. . . . Federal courts should adhere to a rule that redetermination of an issue is only justified, if at all, by very special circumstances surrounding the competence of one federal court as compared to another."
18 C. Wright, A. Miller & E. Cooper, supra, § 4423, at 218. This case does not present such special circumstances.
Whatever doubt may have existed that collateral estoppel applied to dischargeability challenges was dispelled by the Supreme Court in Grogan v. Garner, 498 U.S. 279, 111 S. Ct. 654, 112 L. Ed. 2d 755 (1991). Acknowledging some lack of definity in its previous opinions, the Court said, "We now clarify that collateral estoppel principles do indeed apply in discharge exception proceedings pursuant to § 523(a)." Id. at 658 n.11. We had previously reached the same conclusion, In re Braen, 900 F.2d 621, 630 (3d Cir. 1990); In re Ross, 602 F.2d 604, 607 (3d Cir. 1979), as did virtually every other Court of Appeals. To the extent that collateral estoppel applies, bankruptcy courts are bound by, and may not disregard, previous adjudications in either state or federal courts.
Collateral estoppel, usually termed issue preclusion, may be created in two contexts. Failure to distinguish between these two settings has often led to confusion over the application of the doctrine.
First, issue preclusion may be established by a case that is litigated in the adversary system through to judgment. In that situation, facts and law are determined by the court. When specific issues in the first case can be identified and were necessarily adjudicated, they are generally binding in a subsequent case.
The second scenario arises when the first case is resolved through the use of a consent judgment. In this instance, the parties agree to the entry of a judgment that may or may not contain stipulations of fact and law. Although no matters are actually litigated, "the judgment may be conclusive . . . with respect to one or more issues, if the parties have entered an agreement manifesting such an intention." 1 Restatement (Second) of Judgments § 27 cmt. (e) (1982). "If they have in their compromise indicated clearly the intention that the decree to be entered shall not only terminate the litigation of claims but, also, determine finally certain issues, then their intention should be effectuated." Kaspar Wire Works v. Leco Eng'g & Mach. Co., 575 F.2d 530, 539 (5th Cir. 1978); see also Green v. Ancora-Citronelle Corp., 577 F.2d 1380, 1383 (9th Cir. 1978).
A consent judgment "does not reflect the considered judgment of a judicial officer," but has been forged by the parties as an adjustment of conflicting claims. Kaspar Wire Works, 575 F.2d at 538. Nevertheless, it is more than "an inter partes contract; . . . when [a court] has rendered a consent judgment it has made an adjudication." Id. at 538-39 (quoting 1B Moore's Federal Practice para. 0.409, at 1030).
This Court has not treated consent judgments lightly. Interdynamics, Inc. v. Firma Wolf, 653 F.2d 93, 96-97 (3d Cir.), cert. denied, 454 U.S. 1092 (1981), held: "[A] consent decree, although negotiated by the parties, is a judicial act. Such a decree possesses the same force with regard to res judicata and collateral estoppel as a judgment entered after a trial on the merits." In Bandai America, Inc. v. Bally Midway Mfg. Co., 775 F.2d 70, 74 (3d Cir. 1985), we said: "In subsequent litigation between the parties to a settlement agreement resulting in a consent decree, litigation of issues resolved in the agreement is precluded."
In some bankruptcy cases, courts have misunderstood the applicability of issue preclusion because of their failure to appreciate the difference between the exclusive jurisdiction of bankruptcy courts to discharge debtors and the factors that form the basis for those dischargeability determinations. My previous comments highlight the reasons why Congress removed jurisdiction from the state courts to determine dischargeability of debts.
The history recounted in Brown v. Felsen, 442 U.S. 127, 60 L. Ed. 2d 767 , 99 S. Ct. 2205 (1979), together with the Court's reluctance at that juncture to take a position on issue preclusion, led some bankruptcy courts to overemphasize the exclusive jurisdiction factor. These courts either refused to recognize the preclusive effect of consent judgments or limited preclusion to consent judgments containing explicit factual findings. In Grogan, however, the Supreme Court made clear that exclusivity to rule on discharge does not give bankruptcy courts the right to ignore, or otherwise limit, collateral estoppel in dischargeability proceedings. 111 S. Ct. at 658 n.11.
Significantly, in Brown v. Felsen the Supreme Court commented that the 1970 amendments were adopted to correct post-bankruptcy abuses. To apply the amendments as some courts have, to prohibit estoppel in any form arising from pre-bankruptcy litigation, is a distortion of the text and purposes of the legislation. Most of those courts have emphasized the desirability of a discharge.
The 1970 amendments, however, do not authorize bankruptcy courts to favor dischargeability to the exclusion of other considerations. The Bankruptcy Code is intended to give debtors a fresh start, but as the Supreme Court said in Grogan : "We have previously held that a debtor has no constitutional or 'fundamental' right to a discharge in bankruptcy." Id. at 659. In referring to the "fresh start" policy, the Court has been "careful to explain that the Act limits the opportunity for a completely unencumbered new beginning to the 'honest but unfortunate debtor.'" Id.
The Court thus echoed its caution in Brown v. Felsen that, by seeking a discharge in bankruptcy, the debtor places "the rectitude of his prior dealings squarely in issue." 442 U.S. at 128. Similarly, the 1970 exclusivity amendments should not be used to elevate the "fresh start" goal over other valid interests, such as the protection of the integrity and efficiency of the courts. An undue preoccupation with dischargeability is reflected in those cases where courts have failed to focus on the intent of the parties in denying preclusive effect to prior consent judgments on dischargeability.
The terms of a consent judgment are important in a dischargeability context. If the parties' stipulation does no more than assess the amount of debt without any indication of the facts on which the judgment is based, there is no record on which to base issue preclusion. Generally, that form of judgment is unhelpful whether the result of a litigated case or a consent decree. See, e.g., In re Shuler, 722 F.2d 1253, 1256-58 (5th Cir. 1984); In re Allman, 735 F.2d 863, 865 n.2 (5th Cir. 1984) ("In the absence of a specific recital finding fraud on the part of the debtors, we can only assume that 'the state court limited itself to a statement of the validity of the indebtedness.'"). In the cited cases, the state record contained no indication of the parties' intent or the court's findings with respect to facts pertinent to dischargeability in bankruptcy. Cf. Lawlor v. National Screen Serv. Corp., 349 U.S. 322, 326, 99 L. Ed. 1122 , 75 S. Ct. 865 (1955) (consent decree for dismissal with prejudice did not refer to the parties' intention as to preclusion, particularly as to future litigation); United States v. International Bldg. Co., 345 U.S. 502, 504-06, 97 L. Ed. 1182 , 73 S. Ct. 807 (1953) (consent decree did not refer to preclusive intent nor express understanding of parties).
Although one treatise expresses doubt about the preclusive effect of consent judgments when a judicial determination of issues is not present, the text does concede: "But on the other hand, we believe that a preclusion ought to result from a judgment on an agreement, to the extent that the parties agreed to be precluded." 1B J. Moore, J. Lucas & T. Currier, Moore's Federal Practice para. 0.444, at 814 (2d ed. 1991). Another work agrees, "Preclusion is appropriate if it is clear that the parties intended it, a conclusion that seems most likely when the result parallels claim preclusion by sustaining a course of conduct the parties meant to permit." 18 C. Wright, A. Miller & E. Cooper, supra, § 4443, at 388.
In re Halpern, 810 F.2d 1061, 1064 (11th Cir. 1987), was a case where a consent judgment contained not only a stipulation on admitted facts establishing fraud, but also a statement that the defendant would not seek a discharge in bankruptcy in a subsequent proceeding. Issue preclusion was applied and the debtor was denied a discharge. Because it had before it both stipulated facts as well as record evidence of the parties' intent, the Court had no necessity to determine if the demonstrated intent to forego dischargeability alone was sufficient.
In Klingman v. Levinson, 831 F.2d 1292, 1293 (7th Cir. 1987), a consent judgment included a stipulation of facts establishing defalcations by a fiduciary, as well as a statement of the debtor's intention that the obligation "not be dischargeable in any bankruptcy or similar proceeding." The Court applied issue preclusion in determining that the debt was not dischargeable.
In reaching its conclusion, the Klingman Court listed four factors necessary for the application of issue preclusion:
(1) Identity of issues;
(2) Actual litigation of the issue;
(3) Determination of the issue as essential to the earlier judgment; and
(4) Party against whom preclusion is to be invoked must have been represented. Id. at 1295.
That recital was unnecessary. Consideration of those factors is appropriate with litigated judgments, but "actual litigation" and "issues essential to the earlier judgment" are largely irrelevant when considering the preclusive effect of a consent judgment. Instead, the focus should be on the intent of the parties.
In Klingman, the Court of Appeals failed to distinguish between situations arising under litigated and consent judgments. This led the Court to questionable dictum in a footnote. "As the bankruptcy court properly noted, the stipulation that the debt owed to [the creditor] would 'not be dischargeable in any bankruptcy or similar proceeding' did not constitute a waiver of [the debtor's] right to have a bankruptcy court determine the dischargeability of the debt." Id. at 1296 n.3.
Although that statement can be read to hold appropriately that the ultimate ruling in dischargeability must be made by the bankruptcy court, the bankruptcy court had unfortunately, and incorrectly, gone much further in saying:
"[This] Court gives no weight to that portion of . . . the state court's order that specifically stated that the parties agreed that the debt would not be discharged by the debtor in bankruptcy. The debtor has not contracted away the right to a bankruptcy discharge because he may not do so in advance of his bankruptcy case for public policy reasons."
In re Levinson, 58 Bankr. 831, 836 (Bankr. N.D. Ill. 1986), aff'd, 831 F.2d 1292 (7th Cir. 1987).
The bankruptcy judge's stated disregard of the clearly expressed intention of the parties to a consent judgment was not justified by language in the Code. Although 11 U.S.C. § 524(a) voids any judgment that establishes pre-discharge personal liability of a debtor, that subsection speaks only to the effect given a judgment after a discharge is granted. 11 U.S.C. § 727(a)(10) provides for a written "waiver" of discharge, but that section does not apply to the discharge of a specific liability and comes into play only when all of the party's debts are affected. 4 Collier on Bankruptcy, supra, para. 727.12.
Some bankruptcy courts have denied effect to consent judgments by invoking the provisions of 11 U.S.C. § 524(c) enacted by Congress to regulate reaffirmation of discharged debts. Once again, the misapplication of the section of the Code is demonstrated by its history. The reasons that led to section 524 were explained on the House floor.
Under the laws of most states, reaffirmation of a debt previously discharged furnished consideration to make that debt enforceable after bankruptcy. Finance companies had developed a practice of refusing to advance money to an individual who had obtained a discharge for a previous loan unless he or she agreed to repay the discharged debt in addition to a new loan. See 124 Cong. Rec. 32,392 (1978) (statement of Rep. Butler). Current 11 U.S.C. § 524(c)-(d) and its predecessor were designed to curb such post-bankruptcy abuses.
The straightforward reason why section 524(c) does not apply here is that this is not a reaffirmation arrangement. Reference to, and incorporation of, section 524(c) is neither supported by the Code nor warranted by policy. In addition to reference to its historic purposes, a review of the text demonstrates the inapplicability of that provision here.
Section 524(c) provides that "an agreement" between creditor and debtor where consideration is "based on a debt that is dischargeable . . . is enforceable . . . whether or not such discharge of such debt is waived, only if (1) such agreement was made before the granting of the discharge." Subsection (1) requires that an "agreement" must be made before discharge "was" granted. The use of the past tense indicates that section 524(c) applies only after discharge. By its terms, 524(c) does not affect an agreement that is entered into before discharge and is asserted in a proceeding contesting the grant of a discharge.
Section 524(c) does not apply to a proceeding for obtaining or contesting discharge -- nor does it purport to address such matters as issue preclusion in the adjudication of an action to deny a discharge.*fn2 Bankruptcy courts have failed to confine section 524(c) to its proper setting. See In re Levinson, 58 Bankr. at 837 ; In re DiPierro, 69 Bankr. 279, 282 (Bankr. W.D. Pa. 1987); In re Ethridge, 80 Bankr. 581, 585 (Bankr. M.D. Ga. 1987). The bankruptcy court's reference to that section here was erroneous and led to a misapprehension of the proper relationship between the district court's adjudication and dischargeability. The failure to recognize that section 524(c) applies only after a discharge has been granted was a basic error in reasoning.
In effect, the bankruptcy judge's rulings would produce a situation in which effective dischargeability waivers applicable to specific debts could only be secured during the progress of a case in the bankruptcy court and in accordance with section 524. The Code contains no such radical restrictions. If Congress had intended to limit waivers in such a fashion, it would have said so as it did with general waivers under section 727(a)(10). If individuals are free to waive constitutional rights, surely they may freely and voluntarily forego a statutory benefit absent a specific legislative prohibition to the contrary.
Nor do policy considerations justify a bankruptcy judge's disregard of parties' clearly expressed intentions that a consent judgment have preclusive effect. Contrary to intimations in the majority opinion, typescript at 19, the trial court need not hold a hearing and issue findings of fact before preclusive effect can be given a consent judgment. A stipulation of fact by the parties is adequate. See Klingman, 831 F.2d at 1293, 1295; Halpern, 810 F.2d at 1062, 1064-65.
I agree that sound public policy suggests that bankruptcy courts should carefully scrutinize two party agreements that contract away dischargeability. History demonstrates situations in which finance companies and banks refused to lend money to individuals unless they agreed not to seek dischargeability. Economic pressure on those individuals was strong enough to make waiver seem a necessity. In that scenario, those whom Congress wished to protect and to give the advantage of a fresh start lost the benefits of bankruptcy.*fn3
That is a far cry, however, from the circumstances where a consent judgment is filed in a court of record, and debtors represented by counsel are fully advised of the consequences of their actions. Concern about ill-advised waivers is outweighed by countervailing policy considerations of judicial integrity, efficiency, and forum neutrality.
By recognizing the preclusive effect of consent judgments that include stipulated facts, courts have effectively held that, in this form, pre-bankruptcy waivers of dischargeability will in practice be given effect. Even under such cases as Klingman and Halpern on which the majority relies, the parties may effectively waive discharge of a designated debt, provided the consent judgment contains a factual recital. Thus the test is based on draftsmanship, not substance. No policy reason, but only a mechanical adherence to form, supports a distinction between consent judgments that unequivocally express assent without a recitation of facts and those that do contain factual findings.
Even if rote reasoning is used to support a decision here, it is noteworthy that the consent judgment does not, by its terms, purport to "waive" a discharge. Instead, paragraph 4 states that the consent judgment shall operate as "conclusive evidence of the non-dischargeability" of the debtors' obligation to Republic. This language impliedly recognizes the authority of a bankruptcy court to adjudicate dischargeability. Rather than listing in detail the factual matters underlying the consent judgment, as in Halpern and Klingman, this provision operates in a shorthand way to achieve precisely the same ends. The intention of the parties was clearly expressed in the consent judgment and failing to give it effect places form over substance.*fn4
The creditor's contention does not rest on a simple contract, but on a stipulation of a party leading to an adjudication. The resulting consent order explicitly expresses the parties' intent to be bound. No provision in the Code requires a bankruptcy court to allow a debtor to evade such a forthright, considered, deliberate commitment.
Although the creditor here can make a strong case for issue preclusion, it appears to me that an even better alternative is to apply judicial estoppel. As this case demonstrates, the line between collateral estoppel and judicial estoppel is often blurred. "Judicial estoppel" is sometimes called "preclusion of inconsistent positions." In Patriot Cinemas, Inc. v. General Cinema Corp., 834 F.2d 208, 212 (1st Cir. 1987), the Court defined the doctrine generally as precluding a party from asserting a position in one legal proceeding which is contrary to a position it has already asserted in another.
In Scarano v. Central R.R., 203 F.2d 510 (3d Cir. 1953), Judge Hastie, speaking for this Court, found it unnecessary to define precisely the limits of judicial estoppel. He said it applied when "intentional self-contradiction is being used as a means of obtaining unfair advantage in a forum provided for suitors seeking justice." Id. at 513. He emphasized that "[a] plaintiff who has obtained relief from an adversary by asserting and offering proof to support one position may not be heard later in the same court to contradict himself in an effort to establish against the same adversary a second claim inconsistent with his earlier contention." Id. That conduct exemplifies "playing 'fast and loose with the courts,'" which cannot be tolerated. Id.
As the Court observed in Patriot Cinemas, "the function of judicial estoppel is to protect the integrity of the courts. An effective legal system depends upon norms of candor and responsibility." 834 F.2d at 214. Of particular interest, in view of the circumstances here, the Court concluded that representations by parties that they will abandon claims present a stronger argument for application of the doctrine than do even the classic cases. "If parties feel free to select contradictory positions before different tribunals to suit their ends, the integrity and efficacy of the courts will suffer." Id.
When a party to a consent judgment has expressly agreed not to press a claim in other litigation, the necessity for underlying assertions and offers of proof disappears because those factors have been merged into the agreement. Therefore, the cases cited by the majority where specific undertakings were lacking are inapposite. Teledyne Indus. v. N.L.R.B., 911 F.2d 1214 (6th Cir. 1990) (details of settlement not explained); Merrill Lynch Fenner & Smith, Inc. v. Georgiades, 903 F.2d 109 (2d Cir. 1990) (no agreement but conduct toward a third person cited).
In Allen v. Zurich Ins. Co., 667 F.2d 1162, 1166 (4th Cir. 1982), the Court commented that formulating general principles in this area is not easy, but circumstances in which neither collateral estoppel, nor equitable estoppel, nor election of theories would apply might still justify consideration of judicial estoppel. Following Allen 's suggestion of flexibility, In re Cassidy, 892 F.2d 637, 642 (7th Cir.), cert. denied, 498 U.S. 812, 111 S. Ct. 48, 112 L. Ed. 2d 24 (1990), cautioned that for the same reasons courts decline to set definitive limits to fraud, "it may be advisable not to prescribe too many rules for the application of a doctrine designed to protect the integrity of the courts." It should not be used where it would be unjust, but should be applied where failure to do so would work an injustice.*fn5
The Cassidy Court applied judicial estoppel to preclude a debtor from relitigating dischargeability of his tax debt in bankruptcy after he had taken an inconsistent position in an earlier appeal to the Court of Appeals. "[Appellant's] maneuverings were clearly intended to delay the inevitable day of reckoning, and in maneuvering he is trying to whipsaw this court. That is exactly the evil that the doctrine of judicial estoppel was meant to avoid." Id. at 641. The Court clarified "that it is not the court that is bound by [the debtor's] actions, but only [the debtor] himself. Estoppel does not eliminate a claim or defense, but only prohibits a particular party from asserting it." Id. at 642.
As we said in Delgrosso v. Spang & Co., 903 F.2d 234, 241 (3d Cir. 1990), "judicial estoppel focuses on the relationship between the litigant and the judicial system, and seeks to preserve the integrity of the system." To the same effect, Oneida Motor Freight, Inc. v. United Jersey Bank, 848 F.2d 414, 419 (3d Cir. 1988), commented that judicial estoppel "applies to preclude a party from assuming a position in a legal proceeding inconsistent with one previously asserted. Judicial estoppel looks to the connection between the litigant and the judicial system while equitable estoppel focuses on the relationship between the parties to the prior litigation."*fn6
The debtor argues that this Court should not consider judicial estoppel because it was first raised sua sponte on appeal and cites Altman v. Altman, 653 F.2d 755 (3d Cir. 1981), as support for her position.
The Cassidy Court concluded, however, that because the doctrine is intended to protect the courts rather than the litigants an appellate court can raise the issue on its own motion. 892 F.2d at 641; cf. Allen v. Zurich, 667 F.2d at 1168 n.5. In those cases, the Courts of Appeals determined that because judicial estoppel goes to the integrity of the judicial process, an appellate court may raise the issue on its own motion. I join in that approach.
Moreover, Altman is worlds apart from the circumstances before us. In that case, the appellant did not refer to estoppel in any shape or form in the trial court, but used inconsistent testimony in an unrelated proceeding solely to attack credibility on cross-examination. Here, by contrast, the parties, the bankruptcy judge, and the district court all focused on "estoppel." Although they discussed the matter in terms of issue preclusion, all were aware that the fundamental question in the case was whether the debtor's actions in agreeing to the consent judgment would estop her in the bankruptcy court. The bankruptcy judge, for example, wrote: "We are hesitant to say that an Order which approved that bargain cannot be binding in the very proceeding for which its use was intended." In another portion of the opinion she wrote: "The first issue which must be resolved is whether the Order . . . is binding upon this Court . . . or, under principles of collateral estoppel, as a prior adjudication which prevents us from evaluating the evidence of dischargeability." In their briefs, Republic and the debtor discuss collateral estoppel, citing In re Ross, Klingman, Grogan, and other cases.
Estoppel, whether it be termed "collateral" or "judicial," is the inescapable issue in this case and has been from the beginning. We should not refuse to meet it by relying on nothing more than label sophistry. Invocation of "judicial" estoppel surely comes as no surprise to anyone. See Allen v. Zurich, 667 F.2d at 1168 n.5 (finding application of judicial estoppel proper because of "its close relationship to the directly contested issue of collateral estoppel").
Application of judicial estoppel is eminently just in this case. On the strength of the debtor's agreement that the consent judgment would be conclusive evidence, the case did not go to trial in the district court but, instead, was settled by an agreement that would provide the creditor with less than the amount due. The consent judgment is clear and precise, and was signed by the debtors only after explanation by their counsel. The judgment was not entered casually or without an appreciation of its consequences. It should be enforced.
I would reverse the judgment of the district court and of the bankruptcy court.
December 30, 1991