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What Good is a State Court Judgment in Bankruptcy?

Published March 11, 2014 by Sasser Law Firm

In a bankruptcy case, certain kinds of debts are not discharged. Recent tax liability, most student loans, and domestic support obligations are some of the most common examples of non-dischargeable debts. Other kinds of non-dischargeable debts are determined by very fact-specific examinations of a debtor’s actions and intentions. Did a debtor commit fraud? Did he willfully and maliciously injure the property of another? Unlike a tax or student loan, which usually comes with a tidy label attached to it that no one can argue with, the question of whether a debt was the result of wilful and malicious injury remains very much unanswered until a judge’s ruling.

But what kind of judge? What if a creditor obtains a judgment in state court where there is a finding of “wilful injury” against the defendant and that defendant subsequently files a bankruptcy case? To what extent can the creditor rely on the state court’s finding of fact and demand that the bankruptcy court look no further than the findings in the previous ruling in determining the dischargeability of the debt?

In December, our firm participated in litigation involving this precise question. Last week, Judge Hummrickhouse issued her decision in our client’s favor. What we successfully argued was that only if the state court judgment’s finding of facts were identical with those required by the bankruptcy code, could the bankruptcy court be “collaterally estopped” from entering any ruling other than what the state court determined. In our case, the issue dealt with whether a Massachusetts state law finding that our client “knowingly or wilfully engaged in in deceptive acts” was a lesser standard than the bankruptcy code’s language requiring a finding of “wilful and malicious injury.” The judge ruled that it was.

This ruling does not mean that the debt is necessarily dischargeable, only that the issue remains to be litigated and decided by the bankruptcy judge. The state court judgment may prove the existence of a debt, but it does not prove the existence of a non-dischargeable one. Only the bankruptcy court can do that, now.

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