Brief Fact Summary.
G. Garvin Brown III (Brown) appealed the judgment of the bankruptcy court to allow the discharge of a debt that was accrued via fraud and misrepresentation.
Synopsis of Rule of Law.
Res judicata does not prevent the litigation of fraud in bankruptcy court if similar issued of fraud could have been adjudicated in previous state court decisions.
G. Garvin Brown III (Brown) was the guarantor on a bank loan for Mark Felsen (Felsen) and his car dealership, Le Mans Motors, Inc. (Le Mans). The bank filed suit against Brown, Felsen, and Le Mans to collect moneys owed to the bank; Brown filed a crossclaim against Felsen and Le Mans claiming that he was induced to become guarantor on the loan based on fraud. Brown, Felsen, and Le Mans made a settlement where all three parties were responsible for the debt owed to the bank, and Felsen and Le Mans would be liable to Brown for his portion of the judgment. Felsen then filed bankruptcy and tried to discharge his debt to Brown. Brown claimed that under §17a of the Bankruptcy Act, Felsen could not discharge the debt because the debt was obtained through fraud. The bankruptcy court allowed Felsen to discharge the debt; the district court and the court of appeals affirmed.
Whether res judicata prevents the litigation of fraud if similar issues of fraud could have been adjudicated in previous state court decisions.
No. Congress decided that issues arising under § 17 of the Bankruptcy Act should be decided by bankruptcy court, and their jurisdiction should not be preempted by state judgment. The decision of the lower courts is reversed.
The United States Supreme Court has cautioned that res judicata should be invoked only after careful inquiry because it may govern grounds and defenses not previously litigated and therefore blockades unexplored paths that may lead to truth.View Full Point of Law
State and federal laws may address different issues regarding debt collection.