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
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 ...