UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF KENTUCKY
JAMES B. HELM
DEBTOR CASE NO. 90-00328
UAW LOCAL 1797 - COUNTY OF
TULARE EMPLOYEE BENEFIT
FUND, a voluntary trust,
INTERNATIONAL UNION, UNITED
AGRICULTURAL IMPLEMENT WORKERS
OF AMERICA, LOCAL UNION NO. 1797 PLAINTIFFS
VS. ADV. NO. 90-0256
JAMES HELM DEFENDANT
This matter is before the Court on the plaintiffs' Motion for Summary Judgment pursuant to Federal Rule of Civil Procedure 56(c). The plaintiffs allege that there is no genuine issue of material fact outstanding. The defendant has filed his Memorandum in opposition to the Motion for Summary Judgment. This Court has jurisdiction of this matter pursuant to 28 U.S.C.'1334(b); it is a core proceeding pursuant to 28 U.S.C. '157(b)(2)(G) and (I).
The plaintiffs initiated this proceeding by the filing of a Complaint on August 6, 1990, alleging non-dischargeability pursuant to 11 U.S.C.'523(a)(2), (4), and (6). Incorporated by reference was the plaintiffs' Complaint and Minute Order of the Superior Court of California, County of Orange, entering a default judgment against the defendant and others on June 11, 1990, each defendant having stipulated to the striking of the answer on his behalf and to the entry of default against him. That Minute Order rendered the defendant jointly and severally liable to the plaintiffs in the amount of $1,582,219.63. The defendant filed his Answer on September 19, 1990. The plaintiffs filed their Motion for Summary Judgment on January 4, 1991; the defendant's response was filed on February 8, 1991.
With the entry of the state court default judgment against the defendant, this Court is faced with the question of whether or not res judicata (claim preclusion) or collateral estoppel (issue preclusion) apply herein. Since this matter involves a dischargeability question which is solely the province of the federal bankruptcy court, res judicata does not apply. Brown v. Felsen, 442 U.S. 127, 99 S.Ct. 2205, 60 L.Ed.2d 767 (1979). Collateral estoppel may be employed in cases involving dischargeability questions if the precise issue was raised in the prior proceeding, if it was actually litigated, and if its determination was necessary to the outcome in state court. Spilman v. Harley, 656 F.2d 224 (6th Cir. 1981). See also In re Stiles, 118 B.R. 81 (Bkrtcy.W.D.Tenn. 1990); In re Harper, 117 B.R. 306 (Bkrtcy.N.D.Ohio 1990); Matter of Dine, 116 B.R. 101 (Bkrtcy.S.D.Ohio 1990). In the case at bar, the precise issues now before this Court were not actually litigated in the California state court proceeding, and this Court may not, therefore, employ the doctrine of collateral estoppel precluding the parties from relitigating any issue herein.
The plaintiffs maintain that whether or not res judicata or collateral estoppel apply, they must prevail on their Motion for Summary Judgment because the defendant has admitted all the elements necessary to prove non-dischargeability pursuant to 11 U.S.C.'523(a)(2)(4) and (6) by stipulating to the striking of his answer. The default judgment entered by the Superior Court of California for the County of Orange states, "Each defendant has stipulated to the striking of the answer on their behalf and to the entry of default against them."
The cases cited by the plaintiffs generally support the proposition that default upon failure to answer is a binding admission of those material facts necessary to support the claim that may be used for that purpose in the same or subsequent cases. As stated by the court in Bohn v. Watson, 278 P.2d 454, "The rule is well settled that where a judgment has been entered upon a default, the essential allegations of the complaint upon which the judgment was entered are competent evidence in another proceeding as judicial admissions." At 460. The court in Williams v. Union Carbide Corp., 790 F.2d 552 (6th Cir. 1986), addressed the issue of an attorney's acts or statements as prior admissions, and stated:
It is the general rule that 'statements made by an attorney concerning a matter within his employment may be admissible against the party retaining the attorney.' An opening statement made by an attorney is admissible in a later lawsuit against his client. An administrative claim filed by an attorney may also be an admission of his client. Pleadings in a prior case may be used as evidentiary admissions.
At 555-556. Citations omitted.
The Williams court also pointed out that in the case before it, the attorney in question was fully authorized to act and speak for his client, the plaintiff in that case. At 556. In Bohn, however, the appellant therein also argued that she had not understood the import of the entry of default judgment which she agreed to on the advice of her attorney. This argument was to no avail.
The defendant has raised the issue of whether the attorney then representing him was authorized to act and speak for him. He maintains that his stipulation was executed and entered without his knowledge, authorization, or understanding. (Affidavit of James B. Helm, nos. 13-15). While the possibility exists that the defendant did not specifically authorize a stipulation striking his answer, he did not, on the other hand, do anything to defend himself against the allegations in the Complaint.
The defendant claims that he was not even served with process in the California state court action, but that the attorney for his company answered the Complaint therein on his behalf. (Helm affidavit, no. 10). The default judgment in the state court action recites, however, that the defendants therein were "each regularly served with process." The defendant maintains that he has "valid and meritorious defenses to all allegations of wrong doing" (Helm affidavit, no. 15), but he never offered them in the state court action. The defendant appears to have depended on the filing of his bankruptcy petition, filed one day after the entry of default judgment, to at least forestall the effects of his having failed to defend himself in the state court action.
In conclusion, therefore, it is the opinion of this Court that the defendant's having stipulated to the striking of his answer in the state court action with the resulting entry of default judgment constitutes a judicial admission of the essential allegations of the plaintiffs' Complaint therein. He has therefore admitted the elements necessary to establish non-dischargeability pursuant to 11 U.S.C.'523(a)(2)(4) and (6). There exists no genuine issue as to any material fact and the plaintiffs are entitled to judgment as a matter of law. The plaintiffs' Motion for Summary Judgment should be SUSTAINED.
By the Court -
John Christopher Sanders, Esq.
David S. Hoskins, Esq.