Opinion
No. 78 B 1207
April 3, 1979
Debts Not Affected by a Discharge — False Pretenses — State Court Determination — Collateral Estoppel
Invoking the doctrine of collateral estoppel, a bankruptcy court barred a bankrupt from relitigating a state court determination that an indebtedness owed by the bankrupt resulted from fraud since the elements necessary to have a debt declared non-dischargeable under Section 17a(2) of the Bankruptcy Act were virtually identical to the elements making out the state cause of action for fraud and deceit.
The creditor alleged that it shipped machine tools to the bankrupt in reliance upon false representations and that it suffered damages by reason of the bankrupt's non-payment. The creditor obtained a judgment in state court. Before the bankruptcy court, the creditor argued that, since the bankrupt is barred from relitigating the question of whether the indebtedness resulted from fraud, the court should determine the debt to be non-dischargeable under Section 17a(2) of the Bankruptcy Act.
The court noted that the five elements to be proven by a party seeking to have a debt declared non-dischargeable under Section 17a(2) are virtually identical to those elements making out the state cause of action for fraud and deceit, to wit: that the debtor (1) made the representations; (2) that at the time he knew they were false; (3) that he intended to deceive the creditor; (4) that the creditor relied on the representations; and (5) that the creditor sustained damage as a proximate result of the representations.
The court also examined the pleadings, evidence and charge in the state court action and, after examination, was convinced that the jury rationally found facts adequate to hold for the creditor on its fraud and deceit action. Applying the doctrine of collateral estoppel, the court then held that the bankrupt's liability to the creditor was not dischargeable. Thus, the court granted the creditor's motion for summary judgment. See Sec. 17a(2) [§ 523(a)(2)] at ¶ 9228.