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May 2, 2010

Collateral Estoppel

Students, and many attorneys, have a difficult time understanding collateral estoppel.  This is because, I believe, the student has a difficult time conceptualizing two people suing each other for the same thing a second time.  The issue of course comes up all the time in bankruptcy.  Often people have been duking it out in court for some time when a bankruptcy filing comes along.  The pre-bankruptcy court has often made rulings on who owns something, the rights and priorities of secured creditors, how much some debt is or is not, who is liable for the debt and whether money is owed because of fraud or willful and malicious injury to someone.  Is the pre-bankruptcy ruling binding on the bankruptcy court?  Yes (usually), if collateral estoppel applies. 

From bankruptcy lawyer Arnie Wurhman comes a nice summary:

The Supreme Court has held that “collateral estoppel principles do indeed apply in discharge exception proceedings pursuant to §523(a).” Grogan v. Garner, 498 U.S. 279, 285 fn. 11, 111 S.Ct. 654 (1991). In the Ninth Circuit, collateral estoppel principles are applied in nondischargeability litigation to the extent that they would apply were the litigation being held in a court of the state where the original judgment was entered. In re Nourbakhsh, 67 F.3d 798, 800 (9th Cir. 1995), citing, Marrese v. American Academy of Orthopaedic Surgeons, 470 U.S. 373, 380 (1985).  This is true, in the Ninth Circuit, even in default cases.  Nourbaksh, supra, 67 F.3d at 800.
To my knowledge, most states find collateral estoppel should be applied where (1) there is indentity of the parties, (2) the issues are identical, and (3) the matter has been litigated to final conclusion.  See, e.g., Trucking Employees of North Jersey Welfare Fund, Inc. v. Romano, 450 So.2d 843, 845 (Fla. 1984); Mobil Oil Corp. v. Shevin, 354 So.2d 372, 374 (Fla. 1977).  Other states sometimes add that the issue must be "necessarily" decided in the prior litigation, and also be "decisive."  See, e.g., Buechel v. Bain, 97 N.Y.2d 295, 303, 740 N.Y.S.2d 252, 766 N.E.2d 914 (2001).  [California uses a similar standard, but I happened to have the New York quote lying around in a brief].
In short, you need to see how your Circuit applies the doctrine of collateral estoppel in 523 actions -- does it use a single Federal standard, or rely upon the principles applied in the state where the judgment originally arose -- and then see if the requirements apply in your particular case.  I bet if you Shephardize Grogan v. Garner, you'll find some cases applicable to your jurisdiction, and can figure it out from there.


What surprises attorneys is that collateral estoppel is not mandatory.  See Lopez v. Emergency Service Restoration, Inc. (In re Lopez),  367 B.R. 99  (9th Cir. BAP  Mar, 2007)(bankruptcy court not required to give preclusive effect to a state court ruling).  It would be a pretty weird set of facts to have a bankruptcy court refuse to apply collateral estoppel but it can happen. 

See also Pepper v Litton,  308 U.S. 295  (1939).  Pepper is probably the most often cited case in the bankruptcy world.  Justice Douglas says “Consequently this Court has held that for many purposes 'courts of bankruptcy are essentially courts of equity, and their proceedings inherently proceedings in equity'.”  In Pepper, the Supreme Court ruled that a bankruptcy court could ignore a judgment properly issued by a state court, at least in terms of claims allowance.   A few years later, thankfully the Supreme Court clarified the ruling in Heiser v. Woodruff,  327 U.S. 726 (1946) saying that "[W]e are aware of no principle of law or equity which sanctions the rejection by a federal court of the salutary principle of res judicata, which is founded upon the generally recognized public policy that there must be some end to litigation and that when one appears in court to present his case, is fully heard, and the contested issue is decided against him, he may not later renew the litigation in another court."

May 2, 2010 in Current Affairs | Permalink


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In TN, a client is sueing for money in Chancery Court. While in that Court, his bankruptcy was ordered reopened for reasons of fraud. He made an amended claim but failed to list the possible income from the Chancery Court that he is presently involved. Can the Defendant in Chancery Court get the case dismissed under the theory of collateral estoppel? If so, what case? Thanks

Posted by: mary clement | May 12, 2011 6:25:06 PM

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