Brown v. Felse

442 U.S. 127 (1979)

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Nature of the Case

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Facts

Brown III was a guarantor for respondent Mark Paul Felsen and Felsen's car dealership, Le Mans Motors, Inc. The guarantee secured a bank loan that financed the dealership's trading in Lotus, Ferrari, and Lamborghini automobiles. In 1975, the lender brought a collection suit against petitioner, respondent, and Le Mans in Colorado state court. Petitioner filed an answer to the bank's complaint and a cross-claim against respondent and Le Mans. The answer and the cross-claim, by incorporating the answer, alleged that respondent and Le Mans induced petitioner to sign the guarantee 'by misrepresentations and non-disclosures of material facts.' The suit was settled by a stipulation. It provided that the bank should recover jointly and severally against all three defendants, and that petitioner should have judgment against respondent and Le Mans. Neither the stipulation nor the resulting judgment indicated the cause of action on which respondent's liability to petitioner was based. Because the case was settled, respondent's sworn deposition was never made part of the court record. Respondent filed a petition for voluntary bankruptcy and sought to have his debt to petitioner discharged. The Bankruptcy Act limits its scope to the 'honest but unfortunate debtor.' A debtor may not obtain a discharge if he has committed certain crimes or offenses. Petitioner sought to establish that respondent's debt to petitioner was not dischargeable. Petitioner alleged that the guaranteed debt was the product of respondent's fraud, deceit, and malicious conversion and so came within 17a (2) and 17a (4). Petitioner contended that respondent had prepared false title certificates, sold automobiles out of trust, and applied the proceeds to private purposes. Respondent answered and moved for summary judgment. Respondent said that the prior state-court proceeding did not result in a finding of fraud, and contended that res judicata barred relitigation of the nature of respondent's debt to petitioner, even though the application of 17 had not been in issue in the prior proceeding. The Tenth Circuit, confronting for the first time the res judicata question presented here, resolved it by holding that, in determining the dischargeability of a claim previously reduced to judgment, the District Court had properly limited its review to the record and judgment in the prior state-court proceeding. The Court of Appeals found that its decision accorded with the majority rule among state courts previously considering the question. The bankruptcy court herein confined its consideration to the judgment, pleadings, exhibits, and stipulation which were in the state-court record. It declined to hear other evidence, and it refused to consider respondent's deposition that had never been made part of that record. The court granted summary judgment for respondent and held that the debt was dischargeable. The United States District Court for the District of Colorado and the United States Court of Appeals for the Tenth Circuit affirmed. Every other Court of Appeals that has considered this question has rejected res judicata and held that extrinsic evidence may be admitted in order to determine accurately the dischargeability under 17 of a debt previously reduced to judgment in state court.