If a debtor consents to judgment in state court, does the judgment creditor have an unbeatable claim, or can the trustee object?
Chief Bankruptcy Judge Cynthia A. Norton of Kansas City, Mo., ruled that the judgment creditor cannot ride to victory automatically on the back of Rooker-Feldman, res judicata or collateral estoppel.
A husband and wife owned a business that went bust, leaving the landlord with a claim against the business. Although the couple had not guaranteed the lease, the landlord sued them personally in state court, contending they were liable for business debt on a veil piercing theory.
Before the case went to trial in state court, the couple filed bankruptcy, but they later waived their discharges. The waiver of discharge vacated the automatic stay, so the couple consented to the entry of a $150,000 judgment against them personally in state court. The landlord-judgment creditor then filed a $150,000 claim in the couple’s “asset” bankruptcy, to which the chapter 7 trustee objected.
The landlord-judgment creditor contended that the $150,000 judgment was binding, but Judge Norton knocked down every theory in her Feb. 10 opinion.
The first theory to bite the dust was Rooker-Feldman. Named for two Supreme Court decisions, the Rooker-Feldman doctrine means that federal courts lack subject matter jurisdiction to review judgments by state courts. Judge Norton characterized the doctrine to mean that someone cannot appeal a state judgment in federal court.
Rooker-Feldman did not apply, Judge Norton said, because the trustee was not a party to the suit in state court.
Next on the chopping block was collateral estoppel, or issue preclusion.
In Missouri, issue preclusion is invoked only when the judgment is on the merits, but default judgments do not count. More to the point, Missouri case law says that a consent judgment is not on the merits, thus not allowing the invocation of collateral estoppel.
The third leg on the stool, res judicata or claim preclusion, fared no better.
For res judicata to apply, the parties must be identical or in privity. In Missouri, courts hold that a bankruptcy trustee, owing a duty to the estate, is in privity with neither the debtor nor creditors. Consequently, claim preclusion did not result in automatic allowance of the judgment creditor’s claim.
Judge Norton’s conclusion makes sense as a matter of policy. Were it otherwise, a debtor in an “asset” case with nondischargeable debt would consent to judgment in state court to increase the distribution by the bankrupt estate and decrease his or her personal liability.
Judge Norton was careful to point out that the claim filed by the judgment creditor was worthy of prima facie validity. The judge warned the trustee that she bore the burden at the claim objection hearing of producing evidence to show that the claim should be disallowed in whole or in part. If the trustee got that far, the burden would shift back to the creditor to prove the veil piercing claim.