Reliance Ins Co v. Pancake ( 1997 )


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  •                                REVISED
                     United States Court of Appeals,
    
                                Fifth Circuit.
    
                                 No. 96-10798
    
                             Summary Calendar.
    
              In the Matter of Kenneth L. PANCAKE, Debtor.
    
                      Kenneth L. PANCAKE, Appellee,
    
                                      v.
    
                 RELIANCE INSURANCE COMPANY, Appellant.
    
                                March 12, 1997.
    
    Appeal from the United States District Court for the Northern
    District of Texas.
    
    Before POLITZ, Chief Judge, and DAVIS and DENNIS, Circuit Judges.
    
         POLITZ, Chief Judge:
    
         Reliance Insurance Company appeals the district court's order
    
    reversing and remanding these proceedings to the bankruptcy court
    
    for a determination whether the debt of Kenneth Pancake to Reliance
    
    is nondischargeable.   For the reasons assigned we affirm.
    
                                  Background
         Pancake, a loan officer at Sunbelt Savings Association, stands
    
    accused by Reliance of loaning money to borrowers that he knew to
    
    be uncreditworthy in exchange for kickbacks.        Reliance, a surety
    
    for Sunbelt, sued Pancake in Texas state court seeking to recover
    
    the losses it sustained as a result of Pancake's alleged fraud.
    
    Pancake filed an answer which the court struck because Pancake
    
    failed to comply with discovery orders.       Pancake did not appear at
    
    
                                       1
    trial and the court entered a default judgment in the amount of
    
    $455,703.31.
    
         Pancake subsequently filed for bankruptcy.               Reliance sought a
    
    ruling       from   the    bankruptcy    court     that    Pancake's    debt    was
    
    nondischargeable because it was based on the state court judgment
    
    against Pancake in the fraud suit. 1              The bankruptcy court granted
    
    summary judgment for Reliance;                however, on appeal the district
    
    court reversed, holding that the state court default judgment was
    
    not entitled        to    preclusive    effect.      The   district    court   then
    
    remanded for further proceedings to determine whether Pancake's
    
    debt was nondischargeable. Reliance timely appealed to this court.
    
                                           Analysis
    
             Reliance contends that the district court erred in failing to
    
    give preclusive effect to the state court judgment.               At the outset
    
    we note that claim preclusion or res judicata is inapplicable in
    
    bankruptcy nondischargeability proceedings.2                Issue preclusion or
    
    collateral estoppel, however, may be applied in such matters.3
    
                Because the judgment against Pancake was entered in Texas
    
    state court we apply the Texas law of issue preclusion.4                       Under
    
    Texas law a party is collaterally estopped from raising an issue
    
    when:       (1) the facts sought to be litigated in the second case were
    
         1
            See 11 U.S.C. §§ 523(a)(2), 523(a)(4), 523(a)(11).
        2
         Brown v. Felsen, 
    442 U.S. 127
    , 
    99 S. Ct. 2205
    , 
    60 L. Ed. 2d 767
    (1979); In re King, 
    103 F.3d 17
     (5th Cir.1997).
            3
          Grogan v. Garner, 
    498 U.S. 279
    , 
    111 S. Ct. 654
    , 
    112 L. Ed. 2d 755
     (1991); King.
         4
            In re Gober, 
    100 F.3d 1195
     (5th Cir.1996).
    
                                              2
    fully and fairly litigated in the first;          (2) those facts were
    
    essential to the prior judgment;        and (3) the parties were cast as
    
    adversaries in the first case.5         The parties agree that elements
    
    (2) and (3) were met herein;     therefore, the only relevant inquiry
    
    is whether the fraud was fully and fairly litigated in state court.
    
         We have held under Texas law that where the court enters a
    
    default judgment after conducting a hearing or trial at which the
    
    plaintiff meets his evidentiary burden, the issues raised therein
    
    are considered fully and fairly litigated for collateral estoppel
    
    purposes.6    In the case at bar, however, we agree with the district
    
    court that the record before us fails to demonstrate that the state
    
    court conducted a hearing in which Reliance met its burden of
    
    proving that Pancake defrauded Sunbelt.        The only indication that
    
    the state court held a hearing comes from the final judgment, in
    
    which the court states that it heard "the evidence and arguments of
    
    counsel."     That statement alone does not establish that Pancake
    
    received a full and fair adjudication on the issue of fraud.           We
    
    therefore conclude and hold that the state court judgment does not
    
    have preclusive effect.
    
             We note that in a post-answer default judgment, i.e., where
    
    the defendant files an answer but fails to appear at trial, the
    
    court may not enter judgment based solely upon the pleadings;          the
    
    plaintiff     must   present   evidence    sufficient   to   satisfy   the
    
    
        5
         In re Garner, 
    56 F.3d 677
     (5th Cir.1995) (citing Bonniwell v.
    Beech Aircraft Corp., 
    663 S.W.2d 816
     (Tex.1984)).
         6
            Id.
    
                                        3
    traditional evidentiary burden.7          In the case at bar the court
    
    entered judgment after striking Pancake's answer, thus creating a
    
    situation similar to that where no answer is filed, i.e., a
    
    no-answer default judgment.8         In that context the defendant is
    
    deemed to admit the plaintiff's pleadings and, thus, judgment may
    
    be entered based upon those pleadings.9       For purposes of collateral
    
    estoppel, however, the critical inquiry is not directed at the
    
    nature of the default judgment but, rather, one must focus on
    
    whether an issue was fully and fairly litigated.       Thus, even though
    
    Pancake's   answer   was   struck,   if   Reliance   can   produce   record
    
    evidence demonstrating that the state court conducted a hearing in
    
    which Reliance was put to its evidentiary burden, collateral
    
    estoppel may be found to be appropriate.       All of that remains to be
    
    determined and we express no opinion thereon.
    
         The judgment appealed is AFFIRMED.
    
    
    
    
         7
          Stoner v. Thompson, 
    578 S.W.2d 679
     (Tex.1979).
         8
          See Gober at 1204 ("Under Texas law, once the court strikes
    the defendant's answer as a discovery sanction, the defendant is
    placed in the same legal position as if he had filed no answer at
    all."); Fears v. Mechanical & Indus. Technicians, 
    654 S.W.2d 524
    ,
    529 (Tex.App.1983, writ ref'd n.r.e.) ("The final judgment in this
    case was essentially in the posture of a no-answer default made so
    by the court's striking of defendant's answer.").
         9
          Garner;   Stoner.
    
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