Reliance Ins Co v. Pancake ( 1997 )

REVISED
United States Court of Appeals,
Fifth Circuit.
No. 96-10798
Summary Calendar.
In the Matter of Kenneth L. PANCAKE, Debtor.
Kenneth L. PANCAKE, Appellee,
v.
RELIANCE INSURANCE COMPANY, Appellant.
March 12, 1997.
Appeal from the United States District Court for the Northern
District of Texas.
Before POLITZ, Chief Judge, and DAVIS and DENNIS, Circuit Judges.
POLITZ, Chief Judge:
Reliance Insurance Company appeals the district court's order
reversing and remanding these proceedings to the bankruptcy court
for a determination whether the debt of Kenneth Pancake to Reliance
is nondischargeable. For the reasons assigned we affirm.
Background
Pancake, a loan officer at Sunbelt Savings Association, stands
accused by Reliance of loaning money to borrowers that he knew to
be uncreditworthy in exchange for kickbacks. Reliance, a surety
for Sunbelt, sued Pancake in Texas state court seeking to recover
the losses it sustained as a result of Pancake's alleged fraud.
Pancake filed an answer which the court struck because Pancake
failed to comply with discovery orders. Pancake did not appear at
1
trial and the court entered a default judgment in the amount of
$455,703.31.
Pancake subsequently filed for bankruptcy. Reliance sought a
ruling from the bankruptcy court that Pancake's debt was
nondischargeable because it was based on the state court judgment
against Pancake in the fraud suit. 1 The bankruptcy court granted
summary judgment for Reliance; however, on appeal the district
court reversed, holding that the state court default judgment was
not entitled to preclusive effect. The district court then
remanded for further proceedings to determine whether Pancake's
debt was nondischargeable. Reliance timely appealed to this court.
Analysis
Reliance contends that the district court erred in failing to
give preclusive effect to the state court judgment. At the outset
we note that claim preclusion or res judicata is inapplicable in
bankruptcy nondischargeability proceedings.2 Issue preclusion or
collateral estoppel, however, may be applied in such matters.3
Because the judgment against Pancake was entered in Texas
state court we apply the Texas law of issue preclusion.4 Under
Texas law a party is collaterally estopped from raising an issue
when: (1) the facts sought to be litigated in the second case were
1
See 11 U.S.C. §§ 523(a)(2), 523(a)(4), 523(a)(11).
2
Brown v. Felsen, 442 U.S. 127, 99 S. Ct. 2205, 60 L. Ed. 2d 767
(1979); In re King, 103 F.3d 17 (5th Cir.1997).
3
Grogan v. Garner, 498 U.S. 279, 111 S. Ct. 654, 112 L. Ed. 2d
755 (1991); King.
4
In re Gober, 100 F.3d 1195 (5th Cir.1996).
2
fully and fairly litigated in the first; (2) those facts were
essential to the prior judgment; and (3) the parties were cast as
adversaries in the first case.5 The parties agree that elements
(2) and (3) were met herein; therefore, the only relevant inquiry
is whether the fraud was fully and fairly litigated in state court.
We have held under Texas law that where the court enters a
default judgment after conducting a hearing or trial at which the
plaintiff meets his evidentiary burden, the issues raised therein
are considered fully and fairly litigated for collateral estoppel
purposes.6 In the case at bar, however, we agree with the district
court that the record before us fails to demonstrate that the state
court conducted a hearing in which Reliance met its burden of
proving that Pancake defrauded Sunbelt. The only indication that
the state court held a hearing comes from the final judgment, in
which the court states that it heard "the evidence and arguments of
counsel." That statement alone does not establish that Pancake
received a full and fair adjudication on the issue of fraud. We
therefore conclude and hold that the state court judgment does not
have preclusive effect.
We note that in a post-answer default judgment, i.e., where
the defendant files an answer but fails to appear at trial, the
court may not enter judgment based solely upon the pleadings; the
plaintiff must present evidence sufficient to satisfy the
5
In re Garner, 56 F.3d 677 (5th Cir.1995) (citing Bonniwell v.
Beech Aircraft Corp., 663 S.W.2d 816 (Tex.1984)).
6
Id.
3
traditional evidentiary burden.7 In the case at bar the court
entered judgment after striking Pancake's answer, thus creating a
situation similar to that where no answer is filed, i.e., a
no-answer default judgment.8 In that context the defendant is
deemed to admit the plaintiff's pleadings and, thus, judgment may
be entered based upon those pleadings.9 For purposes of collateral
estoppel, however, the critical inquiry is not directed at the
nature of the default judgment but, rather, one must focus on
whether an issue was fully and fairly litigated. Thus, even though
Pancake's answer was struck, if Reliance can produce record
evidence demonstrating that the state court conducted a hearing in
which Reliance was put to its evidentiary burden, collateral
estoppel may be found to be appropriate. All of that remains to be
determined and we express no opinion thereon.
The judgment appealed is AFFIRMED.
7
Stoner v. Thompson, 578 S.W.2d 679 (Tex.1979).
8
See Gober at 1204 ("Under Texas law, once the court strikes
the defendant's answer as a discovery sanction, the defendant is
placed in the same legal position as if he had filed no answer at
all."); Fears v. Mechanical & Indus. Technicians, 654 S.W.2d 524,
529 (Tex.App.1983, writ ref'd n.r.e.) ("The final judgment in this
case was essentially in the posture of a no-answer default made so
by the court's striking of defendant's answer.").
9
Garner; Stoner.
4