UNITED STATES BANKRUPTCY COURT

EASTERN DISTRICT OF KENTUCKY

COVINGTON DIVISION

IN RE:

PAVILION HEALTH CARE CENTER

OF COVINGTON, INC.

DEBTOR CASE NO. 89-00367

CH. 11

OPINION AND ORDER

This matter is before the Court on the debtor's objections to certain claims, Claim Number 32 filed by NKC Enterprises, Inc., d/b/a NKC Management, and Claim Number 47 filed by the City of Covington. Alliant Enterprises, Inc. ("Alliant"), formerly known as NKC Enterprises, Inc., has filed a Response to Debtor's Objection to Claim. The City of Covington has not filed any response.

Claim Number 32 is in the amount of $127,264.22 and is based on a judgment rendered on July 8, 1988, in Jefferson Circuit Court in Civil Action No. 88-CI-90061, NKC Enterprises, Inc. d/b/a NKC Management v. Pavilion Health Care Center of Covington, Inc. Claim Number 47 is in the amount of $98,407.27 and is based on a judgment entered on February 27, 1989, in Kenton Circuit Court in Civil Action No. 88-CI-556, City of Covington v. Pavillion Health Care Center, Inc. Both of the judgments were default judgments.

The debtor has argued that Claim Number 32 should be disallowed in full because the claim was based on Medicare and Medicaid reimbursements which were disallowed by the Kentucky Cabinet for Human Resources, Division for Medicaid Reimbursements, thereby necessitating a setoff against the claim of NKC Enterprises, Inc., now Alliant. Alliant has responded that any claim that the debtor may have had for setoff would have been an affirmative defense under Civil Rule 8 and should have been raised in the Jefferson Circuit Court proceeding. Alliant maintains that the debtor's failure to do so constitutes res judicata in this proceeding.

The debtor has replied that res judicata does not apply in this instance because a default judgment does not constitute a judgment on the merits and therefore does not dispose of the issues raised by the claim and the objection to it. In addition, the debtor maintains that res judicata does not apply when the law or the facts have changed prior to the subsequent suit. The debtor characterizes the ruling by the Cabinet for Human Resources disallowing Medicare and Medicaid reimbursements as such a change.

The issue confronting this Court is whether the default judgments entered in favor of NKC and the City of Covington have a preclusive effect in the instant proceeding. This issue was before the court in Kelleran v. Andrijevic, 825 F.2d 692 (2nd Cir. 1987). Therein the court, citing Allen v. McCurry, 449 U.S. 90, 101 S.Ct. 411, 66 L.Ed.2d 308 (1980), pointed out that " 'Congress has specifically required all federal courts to give preclusive effect to state-court judgments whenever the courts of the State from which the judgments emerged would do so....'" Bankruptcy courts are included in this mandate; therefore the bankruptcy court in Kelleran was "bound to give preclusive effect to the default judgment obtained in the state court ... to the same extent as would a New York court." At 694.

This Court is similarly bound. Kentucky courts give preclusive effect to default judgments. In Davis v. Tuggle's Adminstrator, 178 S.W.2d 979, the court held that the fact that no defense was offered in a prior suit did not affect the conclusiveness of a judgment in subsequent litigation between the same parties over the same subject matter, since the rule as to conclusiveness of judgments applies to a judgment by default. The Davis court cited Kimbrough v. Harbett, 60 S.W. 836, wherein the court held that a judgment by default for the sale of land to satisfy an execution precluded the defendant from thereafter setting up a homestead exemption in the land, the matter being res judicata.

The debtor having defaulted in the state court actions, it may not contest the liability issues in this Court unless an exception exists to prevent operation of the judgment's preclusive effect. As the Kelleran court pointed out, "[b]ankruptcy courts may look beyond a state court default judgment where the judgment was procured by collusion or fraud, ... or where the rendering court lacked jurisdiction" (cites omitted). At 694. The debtor has not plead any of these elements, and there is nothing in the record to suggest that they apply here.

As concerns the debtor's "new facts" argument, this Court agrees with Alliant that the debtor knew that Medicare and Medicaid advances were subject to review and that they could be disallowed. There are no "new facts" here such as to obviate the preclusive effect of the default judgment obtained by NKC. In consideration of all of the foregoing, therefore, it is the opinion of this Court that the debtor's objections to Claim Number 32 and Claim Number 47 should be, and they hereby are, OVERRULED.

Dated:

By the Court -

_______________________________

Judge

Copies to:

Laura Day Carruthers, Esq.

Joan Lloyd Cooper, Esq.

Charles P. Wagner, Esq.

U.S. Trustee

mpavil.opi