Collateral Estoppel - Not a Rule, An Option

California judgment debtors who want to relitigate dischargeability issues (like fraud and willful and malicious injury) got a boost from the BAP. On March 27, 2007 the Bankruptcy Appellate Panel for the Ninth Circuit decided In re Lopez, 2007 WL 1128811. The Plaintiff, Emergency Service Restoration, had already obtained a judgment for damages for misappropriation of trade secrets in California Superior Court. The Superior Court judge entered a written statement of decision finding that the debtor’s conduct was willful and malicious. After the judgment became final for purposes of appeal, the Debtor’s chapter 7 petition was filed.

Sounds like an easy and obvious case to apply collateral estoppel, or "issue preclusion" on summary judgment in a dischargeability action. That’s just what Central District Bankruptcy Judge Thompson did. The problem was, the BAP concluded from the record, that Judge Thompson thought that she was compelled to apply collateral estoppel in order to give full faith and credit to the Superior Court judgment under the Rooker-Feldman doctrine. That’s the holding of cases like In re Williams, 280 B.R. 857 (Bankr. App. 9th Cir 2002), and In re Audre, Inc., 216 B.R. 19 (Bankr. App. 9th Cir. 1997). Williams and Audre have now been expressly overruled by Lopez.

The BAP believes that its earlier Rooker-Feldman decisions were disapproved by the Supreme Court in Exxon Mobil Corp. v. Saudi Basic Indus. Corp., 125 S.Ct. 1517 (2005), The Lopez opinion observes that Exxon "severely constrained" the Rooker-Feldman doctrine, and made clear that it has nothing to do with issue preclusion. Now, according to the BAP, dischargeability cases are independent federal claims, which can be decided in a manner inconsistent with a state judgment based on exactly the same facts.

The BAP held in Lopez that application of collateral estoppel is a matter of discretion in California. It remanded the case so that the Bankruptcy Court could consider the Debtor’s arguments which mitigated against applying collateral estoppel. For example, the Debtor contended that he had been improperly denied a jury trial, and that his lawyer had gotten into a “screaming match” with the Superior Court judge.

Whither comity with the state courts? We now are going to be re-examining the judgments of state courts based on the fairness of the proceedings. Did the debtor have the effective assistance of counsel in the state court case? Was the debtor out of money at the time so that the case could not be properly defended? Lopez even invites the Bankruptcy Court to assess the decorum of the Superior Court case and to revisit rulings on issues like the right to a jury trial. Bankruptcy judges: if you decline on the record to consider matters like this then you may get reversed. Consider it all and you won’t get reversed except for abuse of discretion, whatever that might be in this context.