In In re Zuckerman (Zuckerman v. Crigler), Case No. CC-19-1200-TaFS, published on April 10, 2020, the Ninth Circuit Bankruptcy Appellate Panel (“BAP”) upheld the Bankruptcy Court’s summary judgment for non-dischargeability under Section 523(a)(2) based on an underlying state court judgment against the debtor.
In Zuckerman, the debtor responded to the complaint in state court but failed to respond to requests for admission and thus, the court deemed as admitted various specific findings that the debtor engaged in fraud, including intentional misrepresentation, promise without any intent to perform, and others. Trial was held in state court but debtor did not appear and judgment was entered against him. The court later vacated the judgment and held trial again about a year later. At that time, the debtor did not appear but his counsel did. Counsel tried to get the case dismissed or trial postponed but the court denied it. Counsel stated his and the debtor’s strategy was to not proceed with the trial. The court then held an uncontested trial and again, judgment was entered against the debtor.
On appeal, the BAP went through the elements of issue preclusion, finding that it applies and upheld the Bankruptcy Court’s summary judgment against the debtor for non-dischargeability. The debtor made various arguments, seemingly thinking that if he threw enough at the wall, something would stick, but none of it worked. For example, the debtor tried to argue the state court judgment was a default judgment. The BAP dismissed that because the debtor responded to the complaint and participated in trial, but chose not to attend trial. As such, the judgment was not a default judgment but rather a judgment after an uncontested trial. The BAP left open the possibility that the judgment could be based solely upon the “deemed admitted” requests for admission to demonstrate that the issues were actually litigated although here, that was not the only basis for the judgment. The debtor argued that the judgment should be vacated because there were no express findings made but that rule is only applicable in a default judgment and as such, was not applicable here.
Ultimately, the BAP agreed with the Bankruptcy Court that summary judgment was proper where the underlying judgment found at multiple places that the debtor was liable for fraud and awarded punitive damages. The judgment was upheld as non-dischargeable.
These cases come up somewhat often and showcase that debtors must be very careful to be active in state court cases to ensure there are no specific findings of fraud. If specific findings are made, a bankruptcy will not alleviate the debtor of liability.