Michigan is a state where a consent judgment cannot be used to establish collateral estoppel, also known as issue preclusion.
Bankruptcy Judge Marci B. McIvor of Detroit was nonetheless able to grant summary judgment in favor of a judgment creditor declaring that a consent judgment was nondischargeable for actual fraud under Section 523(a)(2).
How was that possible? Answer: Judge McIvor relied on more than the consent judgment to establish the requisites for collateral estoppel and res judicata.
The debtor pleaded no contest to criminal charges of embezzlement and fraud for stealing $350,000 from her mother. She was given probation and required to make restitution to her mother.
The mother sued her daughter in state court, alleging fraud and embezzlement. Represented by counsel, the daughter did not respond to requests to admit a dozen facts. Among them, the request asked the daughter to admit that she embezzled from her mother and that she opened and used credit cards in her mother’s name without her mother’s permission.
Perhaps hoping to avoid invocation of collateral estoppel in later discharge litigation, the daughter agreed to entry of a consent judgment for $350,000. The judgment stated that it was based on “claims” of fraud and embezzlement.
The daughter filed a chapter 13 petition. The mother responded with a complaint and motion for summary judgment to declare the judgment nondischargeable for “actual fraud.”
Under the Full Faith and Credit Clause of the U.S. Constitution, federal courts employ rules on collateral estoppel and res judicata from the state where the judgment was entered. As a general rule, Judge McIvor said that consent judgments are not given collateral estoppel effect in Michigan, because the issues in settled cases are not “actually litigated.”
That wasn’t the end of the story, however.
In her March 1 opinion, Judge McIvor recited the consequences in Michigan for failing to contest a notice to admit. She said that the debtor’s failure to contest the notice to admit in the civil case resulted in “admissions as to facts which establish grounds for judgment based on fraud.”
To push all the buttons required for collateral estoppel, Judge McIvor said that failure to contest the notice to admit satisfied the “actually litigated” requirement.
If that were not enough, Judge McIvor also held that res judicata precluded the daughter asserting “all defenses” that “might have been presented,” because consent judgments are generally “claim preclusive” in Michigan.
To invoke res judicata, Judge McIvor studied the state court record to determine “whether facts necessary to prove the nondischargeability cause of action were established in the state court case.”
Since the daughter did not contest the notice to admit, Judge McIvor said that the mother “could have obtained summary disposition on the issue of fraud because there were no questions of material fact.” That being the case, the proceedings in state court also enabled the motion to prevail on summary judgment using res judicata.
Michigan is a state where a consent judgment cannot be used to establish collateral estoppel, also known as issue preclusion.