- Case Type:
- Case Status:
- Affirmed in part and Reversed in part
- 18‐1578‐bk (2nd Circuit, Sep 12,2019) Not Published
- A default judgment issued as a sanction has preclusive effect for purposes of determining dischargeability of a debt, but where a single judgment involves two underlying debts, the court must analyze the preclusive effect of the judgment as to each of the underlying debts separately. The Second Circuit Court of Appeals found that one debt was nondischargeable under 523(a)(4), but that there were triable issues of fact regarding the nondischargeability of the other debt under 523(a)(4) and (a)(6).
- Procedural context:
- Creditors sought declaration that certain debts were nondischargeable. To support their claims, the creditors relied on a previous judgment issued by the United States District Court for the Eastern District of New York (the “Eastern District Judgment”). The bankruptcy court and district court treated the Eastern District judgment as preclusive and ruled that the debts were nondischargeable.
- The debtors operated a home building business. The creditors, close friends of debtors, invested $100,000 in one building project with a promise of repayment and a 20% return, and $275,000 in another building project, again with the promise of repayment and a 20% return. Four years later, after receiving no repayments, the creditors sued the debtors and various related entities. Although an answer was filed, none of the defendants responded to discovery requests. After an order granting a motion to compel, defendants responded to the discovery requests. However, the magistrate judge deemed the responses "woefully deficient" and declared “defendants’ conduct to be willful, cavalier, and sanctionable.” Defendants still failed to provide adequate responses. After numerous further failures by defendants to respond to discovery or appear at depositions and a court conference, a certificate of default was issued. The creditors moved to strike defendants' answer and for entry of a default motion as sanctions under Fed. R. Civ. P. 37. The Court ultimately entered a default judgment on creditors' breach of contract claim. The Court determined that the e conversion, fraudulent inducement, and breach of fiduciary duty claims were “duplicative” of the breach of contract claim, and that other claims were barred due to the existence of a valid contract. The District Court entered judgment awarding damages for both underlying debts. Debtors then filed for bankruptcy protection and this litigation ensued. Creditors moved for summary in reliance on the judgment entered by the District Court. The bankruptcy court granted the motion with respect to the defalcation, embezzlement, and willful and malicious injury claims brought pursuant to Sections 523(a)(4) and (a)(6), but denied the motion with respect to the false pretenses or actual fraud claim brought pursuant to Section 523(a)(2)(A). The District Court affirmed.
- POOLER, CHIN, Circuit Judges, and VITALIANO, District Judge
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