In Stewart Title Guar. Co. v. Park (In re Park), 2021 Bankr. LEXIS 3539 (Bankr. C.D.Cal. December 29, 2021), the United States Bankruptcy Court for the Central District of California, Los Angeles Division held that a chapter 7 debtor was precluded from contesting the nondischargeability of his indebtedness arising from a default judgement entered against him. In reaching this holding, the Bankruptcy Court applied California law on issue preclusion to determine the preclusive effect of an existing state court judgement. In Park, prior to filing bankruptcy, the chapter 7 debtor had a default judgement entered against him in state court on account of both fraud and constructive fraud. The debtor had represented to Stewart Title’s predecessor-in-interest that the real estate investors he was working with needed a $200,000 loan, and if the predecessor-in-interest agreed to provide the loan, then the loan would be secured by a first deed of trust against property located in Upland, California. After agreeing to the terms, depositing the money into escrow, and receiving the deed of trust, the predecessor-in-interest was served with a complaint filed by the owners of the Upland property, alleging that their signatures on the deed of trust had been forged. Upon assuming the defense of the action pursuant to a title insurance policy, Stewart Title filed a cross-complaint against the debtor, alleging that he committed both fraud and constructive fraud by causing the signatures on the deed of trust to be forged.
After the debtor filed his chapter 7 bankruptcy petition, Stewart Title filed a non-dischargeability action under 11 U.S.C. §§ 523(a)(2)(A) and 523(a)(6) and moved for summary judgement. “To prevail on a § 523(a)(2)(A) claim on the grounds of false pretenses or false representation, a creditor must prove that: 1) the debtor made the representations; 2) that at the time he knew they were false; 3) that he made them with the intention and purpose of deceiving the creditor; 4) that the creditor relied on such representations; and 5) that the creditor sustained the alleged loss and damage as the proximate result of the misrepresentations being made.” In re Park, 2021 Bankr. LEXIS 3539, at *9. As for the Section 523(a)(6) claim, that section “excepts from discharge debts arising from a debtor’s ‘willful and malicious’ injury to another person or to the property of another.” Id. at *10.
The Bankruptcy Court found that the prior default judgement was excepted from the debtor’s discharge pursuant to both Sections 523(a)(2)(A) and 523(a)(6) as the issues were precluded from being litigated. California preclusion law requires that: (1) the issue sought to be precluded is identical to the issue decided in a former proceeding; (2) the issue was actually litigated in the former proceeding; (3) the issue was decided in the former proceeding; (4) the decision in the former proceeding was final and on the merits; and (5) the party against whom preclusion is sought was the same as the party to the former proceeding.
The Bankruptcy Court held that each of the elements necessary to constitute issue preclusion were present in the instant case. The Bankruptcy Court found that the underlying fraud claim in the default judgement was composed of the same issues provided for in Section 523(a)(2)(A) and Section 523(a)(6). The Bankruptcy Court also found that these issues were actually litigated and necessarily decided by the default judgement as the debtor had actual knowledge of the litigation and had sufficient notice. Finally, the Bankruptcy Court found that the default judgement was final and on its merits and that the same parties were clearly involved. The Bankruptcy Court held that public policy supported preclusion, as “the avoidance of an unnecessary trial promotes the public policy against vexatious litigation”. The Bankruptcy Court thus granted the motion for summary judgement in favor of Stewart Title.
California law disfavors unnecessary litigation in favor of “preserving the integrity… [of] judgements that have been obtained after both parties were afforded the opportunity to litigate the matter”. Therefore, a debtor may be precluded from contesting the nondischargeability of indebtedness arising from a prior state court judgement. According to Park, this same rule may apply in cases of default judgement.