Making an Erie guess about how the Florida Supreme Court would rule on collateral estoppel, the Eleventh Circuit held that a general default judgment won’t make a debt nondischargeable under Section 523(a)(2)(A) if the complaint plead alternative claims not requiring knowledge of fraud.
In brief, the debtor had promised the creditor a 15% annual return on investments of $1 million or more. In a complaint in state court, the creditor alleged that the debtor used the investments for his personal benefit.
The complaint raised claims including fraudulent misrepresentation, negligent misrepresentation, breach of fiduciary duty, and investment fraud in violation of state law. Ultimately, the state court struck the debtor’s answer as a sanction for misbehavior in the litigation.
The state court entered a general default judgment not specifying the basis for the $1.8 million monetary award.
The debtor filed a chapter 7 petition. The creditor responded with a pro se adversary proceeding seeking a declaration that the judgment was nondischargeable under Section 523(a)(2)(A) as a debt having been obtained by “false pretenses, a false representation, or actual fraud.”
After a bench trial, the bankruptcy court applied collateral estoppel to rule that the debt would not be discharged. The district court affirmed.
In his July 14 opinion, Circuit Judge Adalberto Jordan explained that Florida courts interchangeably use the terms “collateral estoppel,” “issue preclusion” and “judgment by estoppel.” The fundamental elements are the same as elsewhere: The parties and the issue must be identical, the issue must be fully litigated, and the issue must be determined in a final decision.
Judge Jordan began his analysis from the perspective that the creditor must “show intentional misconduct” by the debtor. Some but not all Florida courts also require that the issue be “critical and necessary.”
However, Judge Jordan said the appeals court was not required to decide “this thorny question of Florida law” unless the issues “are indeed identical.” Here too, he said that Florida law does not give great detail to the standard for measuring the identity of issues.
As precedent, Judge Jordan quoted an intermediate Florida appellate court for the idea that “collateral estoppel does not apply when the prior judgment is based on a general verdict which makes it impossible to tell which theory or claim the jury accepted.” In the case on appeal, he said there were “a number of claims” that “could potentially satisfy the requirements of Section 523(a)(2)(A).”
Judge Jordan therefore assumed without deciding that a general default judgment can invoke collateral estoppel in Florida. But here, he said, the claims that might result in nondischargeability also “contained alternative factual allegations that did not do so.”
While Florida law has not settled the issue, Judge Jordan cited the Restatement of Judgments to predict “that Florida courts would not afford preclusive effect to a general default judgment that does not specify its grounds.”
Applying the principle to the case at hand, Judge Jordan said that each of the alternative and inconsistent factual grounds for a claim must justify nondischargeability. “And if one of those alternative factual grounds is insufficient to meet the elements of fraud under the Bankruptcy Code, the issues cannot be deemed identical,” he said. He cited the Second Circuit in support of his conclusion.
Judge Jordan turned to the allegations of each claim in the complaint that could result in nondischargeability.
In Florida, fraudulent misrepresentation can be shown without scienter, such as by showing what someone “ought to have known.” Because the complaint alleged what the debtor knew or should have known, the claim did not support nondischargeability via collateral estoppel.
Similarly, negligent misrepresentation does not require knowledge that the misrepresentation was false. The complaint alleged what the debtor should have known. Even if taken as true, it “does not have collateral estoppel effect,” Judge Jordan said.
In Florida, investment fraud does not require scienter, and intent to defraud is not a necessary element of the claim. Judge Jordan concluded “that the default judgment on this claim does not have collateral estoppel effect under Florida law in a § 523(a)(2)(A) proceeding.”
With regard to the claim for conspiracy to defraud, Judge Jordan said the claim fell short because it was unclear from the complaint “whether the unnamed ‘overt acts’ included false pretenses, false representations, or actual fraud.”
For the claims that might have proven nondischargeability, Judge Jordan summed up by saying that the alternative factual allegations did not satisfy the requirements of Section 523(a)(2)(A). He reversed and remanded for further proceedings, putting the creditor to the task of satisfying the section “without the benefit of collateral estoppel.”
Making an Erie guess about how the Florida Supreme Court would rule on collateral estoppel, the Eleventh Circuit held that a general default judgment won’t make a debt nondischargeable under Section 523(a)(2)(A) if the complaint plead alternative claims not requiring knowledge of fraud.
In brief, the debtor had promised the creditor a 15% annual return on investments of $1 million or more. In a complaint in state court, the creditor alleged that the debtor used the investments for his personal benefit.
The complaint raised claims including fraudulent misrepresentation, negligent misrepresentation, breach of fiduciary duty, and investment fraud in violation of state law. Ultimately, the state court struck the debtor’s answer as a sanction for misbehavior in the litigation.