Adair v. Stutsman Constr., L.L.C. (In re Adair)

Summarized by David Treacy , U.S. Bankruptcy Court, Eastern District of Kentucky
9 months 4 days ago

Case Type:

Consumer

Case Status:

Reversed and Remanded

Citation:

No. 24-30273 (5th Circuit, May 20,2025) Published

Tag(s):

Ruling:

In a 2-1 decision, the Fifth Circuit held a bankruptcy court erred in refusing to consider a debtor's unclean hands defense to a claim to except a state court judgment debt from discharge under 11 U.S.C. § 523(a)(6). The bankruptcy court mistakenly applied issue preclusion as (1) the one-page judgment did not establish the defense was "actually litigated" in state court, and (2) the debtor couldn't have raised an unclean hands defense in state court under Louisiana law. The case was remanded to the bankruptcy court to consider the defense "in the first instance."

Procedural context:

The dissent would have upheld the bankruptcy court's judgment in the creditor's favor, which a district court had affirmed. It perceived the debtor could have raised a factual defense at the trial court and did not, concluding: "That the state court litigation ended in a bare, one-page default judgment with no findings of fact or conclusions of law is beside the point. The issue could have been adjudicated but went unraised—entirely due to [the debtor's] own inaction. Res judicata bars a second bite at the apple." The dissent also believed the circuit court could have affirmed the bankruptcy court's decision "on grounds other than those relied upon by the district court when the record contains an adequate and independent basis for that result[,]" explaining "[t]here is no evidence in this record that [the creditor] acted fraudulently or in bad faith" and "the record supports the conclusion that [the] debt arose from a willful and malicious injury."

Facts:

Appellant/Debtor Ross Shaun Adair hired Appellee/Creditor Stutsman Construction, L.L.C. to perform repairs to his home. After an insurance company disbursed funds to pay the balance owed for Stutsman's work, Adair refused to pay Stutsman based on Adair's purported concerns about the quality and completeness of Stutsman's work. As a result, Stutsman filed a state court breach of contract lawsuit against Adair in Louisiana state court. After Adair did not appear at trial, the state court entered a default judgment in Stutsman's favor. Separately, Adair filed a complaint with Stutsman's licensing board. The board issued violations to Stutsman related to its work for Adair--to which Stutsman plead guilty. Some time later, Adair filed a chapter 13 petition in the U.S. Bankruptcy Court for the Middle District of Louisiana, and Stutsman filed an adversary proceeding to have the judgment debt excepted from Adair's discharge under 11 U.S.C. § 523(a)(6). Adair raised an "unclean hands" defense, but "[t]he bankruptcy court declined to consider this defense, because it found the issue precluded by the Louisiana judgment." The bankruptcy court held a bench trial and found "Adair willfully and maliciously injured Stutsman . . . and denied dischargeability of the Louisiana judgment." Adair appealed this decision to the U.S. District Court for the Middle District of Louisiana, which affirmed. Adair then took a timely second appeal to the Fifth Circuit.

Judge(s):

Higginbotham, Willett, and Ho

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