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Nature of Suit Code: 442
Nature of Suit: Civil Rights Employment
Cause of Action: 

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PUBLISH FILED ,~ Uni1m States Court of Ap;>cnw Tenth Circuit 

UNITED STATES COURT OF APPEALS SEP 2 4 1991 

ROBERT L. HOECKER 

IN RE: VERN 0 • LAING, 

Debtor. 

TENTH CIRCUIT 

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LAWRENCE A.G. JOHNSON; DON BRADSHAW, 

Plaintiffs-Appellants, 

v. 

VERN 0. LAING, 

Defendant-Appellee. 

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Clerk · 

No. 91-5031 

APPEAL FROM THE UNITED STATES DISTRICT COURT 

FOR THE NORTHERN DISTRICT OF OKLAHOMA 

(D.C. No. 89-C-504-C) 

Submitted on the briefs: 

Lawrence A.G. Johnson, Tulsa, Oklahoma, pro se and as attorney for 

Plaintiff-Appellant Don Bradshaw. 

Kenneth V. Todd, Tulsa, Oklahoma, for Defendant-Appellee. 

Before SEYMOUR, EBEL, Circuit Judges, and BABCOCK,** District 

Judge. 

**Honorable Lewis T. Babcock, District 

District Court for the District of 

designation. 

EBEL, Circuit Judge. 

Judge, United States 

Colorado, sitting by 

Appellate Case: 91-5031 Document: 01019291084 Date Filed: 09/24/1991 Page: 1 
This is an appea1 1 from a district court order affirming the 

decision of the bankruptcy court to allow, but reduce in amount, a 

claim against debtor Vern 0. Laing. The claim is based on an 

obligation previously reduced to judgment in a state (Oklahoma) 

court action brought against Laing by appellant Don Bradshaw, 

assignee of the note evidencing Laing's obligation. The 

overriding issue raised on this appeal is whether the lower courts 

erred in denying preclusive effect to the state court judgment by 

re-determining Laing's liability on the note--under primarily 

equitable, rather than legal, principles--and resolving 

appellants' claim2 accordingly. 

In 1983, Laing purchased an airplane with the proceeds of a 

$75,000 note given to the Bank of Oklahoma, which also acquired a 

security interest in the airplane. Shortly after the purchase, 

Laing and his then-attorney Johnson entered into a joint venture 

ownership agreement that granted Johnson a one-half interest in 

the airplane but, evidently in exchange for contemplated 

1 After exam1n1ng the briefs and appellate record, this panel 

has determined unanimously that oral argument would not materially 

assist the determination of this appeal. See Fed. R. App. P. 

34(a); lOth Cir. R. 34.1.9. The case is therefore ordered 

submitted without oral argument. 

2 Although the claim in dispute was asserted individually by 

appellant Bradshaw as (sole) judgment creditor on the note given 

by Laing, the lower courts treated the claim as jointly asserted 

by Bradshaw and appellant Johnson on the basis of their unity of 

interest and extensive mutual involvement in the subject matter. 

In the absence of any objection by the parties, we see no reason 

to deviate from this approach, which, in any event, does not 

affect our analysis of the issues presented for review. 

2 

Appellate Case: 91-5031 Document: 01019291084 Date Filed: 09/24/1991 Page: 2 
professional services by Johnson, held him harmless on Laing's 

obligation to the Bank of Oklahoma. 

Years later, Johnson filed suit in state court to dissolve 

the joint venture agreement. That suit concluded with a judgment 

giving Laing the option of: (1) paying Johnson $31,000 for his 

interest in the airplane; (2) accepting $31,000 from Johnson in 

exchange for Laing's interest in the airplane free and clear of 

all encumbrances; or (3) taking no action, in which case Johnson 

would be granted an in rem judgment against the airplane subject, 

of course, to the security interest held by the Bank of Oklahoma. 

The third course was taken, but just before Johnson acquired the 

airplane by foreclosure sale (affirmed by the state supreme 

court), Laing defaulted on his note to Bank of Oklahoma, which 

brought suit against Laing for recovery on the note and against 

Laing and Johnson to foreclose their interests in the airplane. 

About this time, Bradshaw, a friend of Johnson's, took an 

assignment of the Laing note and associated security interest held 

by Bank of Oklahoma in exchange for $58,846.89, which he obtained 

by giving Liberty Bank of Owasso, in turn, his note and a security 

interest in the airplane. Bank of Oklahoma then dismissed its 

suit and Bradshaw, represented by Johnson, brought his own action 

to collect on the Laing note, though Bradshaw did not also seek to 

foreclose on the airplane. Shortly thereafter, Johnson sold the 

airplane and loaned Bradshaw the money to pay off the note he had 

given Liberty Bank of Owasso. This accomplished, Bradshaw and the 

bank released their security interests in the airplane. 

3 

Appellate Case: 91-5031 Document: 01019291084 Date Filed: 09/24/1991 Page: 3 
At this point, only Bradshaw's action to collect on the Laing 

note remained to be resolved. Laing asserted counter- and 

third-party claims against Bradshaw and Johnson, however, 

alleging, among other things, conspiracy and breach of fiduciary 

duty in connection with the events through which Bradshaw acquired 

and sought to enforce Laing's obligation while releasing, for 

Johnson's benefit, his interest in the collateral securing that 

obligation. The state court granted summary judgment for Bradshaw 

against Laing on the note and for Bradshaw and Johnson on Laing's 

counter- and third-party claims. Laing did not appeal this 

disposition. 

Instead, Laing filed for bankruptcy, requiring Bradshaw to 

file a proof of claim based on the state court judgment. Laing 

objected, again asserting that the underlying, allegedly collusive 

conduct of Bradshaw and Johnson should preclude recovery on 

Laing's note. In its initial· memorandum decision, the bankruptcy 

court found "that the actions of Johnson and Bradshaw violate the 

fiduciary duty that Johnson owed Laing as his attorney and as his 

joint venturer, and, if allowed to stand, would unjustly enrich 

Johnson." Memorandum on Objection to Claim of Bradshaw/Johnson, 

filed June 16, 1989, at 2. It also found, however, "that both 

parties breached their fiduciary duty that they owed to the other" 

and that "Laing started the unethical conduct when . . . he 

intentionally and deliberately ceased making payments on the 

secured debt .... " Id. Consequently, the bankruptcy court 

simply looked past Bradshaw's legal claim and fashioned an 

equitable compromise to "put the parties back to where they were 

4 

Appellate Case: 91-5031 Document: 01019291084 Date Filed: 09/24/1991 Page: 4 
[before dissolution of the joint venture agreement]." Id. at 7. 

In brief, the bankruptcy court credited Laing with one-half of the 

proceeds from the sale of the airplane--in which Laing no longer 

held a legal interest--and applied that sum to reduce his 

indebtedness on the note held by Bradshaw, whose claim was then 

allowed in the resulting, reduced amount. Id. at 3-4, 7. 

On appeal to the district court, Bradshaw and Johnson argued 

that the state court judgment on the Laing note should have been 

accorded preclusive effect with respect to Laing's obligation, 

without any modification based on the bankruptcy court's 

perception of the equities involved. Relying on our decision in 

In re Wallace, 840 F.2d 762, 764-65 (lOth Cir. 1988), the district 

court agreed, in principle, that the doctrine of collateral 

estoppel may be invoked in bankruptcy proceedings, but also 

recognized that the existence of fraud may bar its application, 

citing Heiser v. Woodruff, 327 u.s. 726, 736 (1946). The district 

court concluded that a remand for specific findings on the issue 

of fraud was, therefore, appropriate: 

Therefore, unless fraud or collusion exists in the 

instant case, it is error for the Bankruptcy Court to 

disregard the doctrine of collateral estoppel. If fraud 

or collusion does exist, then the state court judgment 

need not be given res judicata effect, and the 

Bankruptcy Court decision will stand. At several times 

during the proceedings, the Bankruptcy Court alludes to 

the fact that fraud or collusion did exist in this case. 

However, the Bankruptcy Court made no specific factual 

finding as to either fraud or collusion. Such a finding 

is not clearly set forth in the decision of the court 

and this court, on appeal, cannot infer whether the 

Bankruptcy Court's decision was motivated by such 

finding. 

Accordingly, the case is remanded to the Bankruptcy 

Court so it may state specifically its findings and 

5 

Appellate Case: 91-5031 Document: 01019291084 Date Filed: 09/24/1991 Page: 5 
whether the downward adjustment to Bradshaw's proof of 

claim was motivated by the existence of fraud or 

collusion. 

District Court Order filed July 24, 1990, at 6 (footnote 

omitted and emphasis in original). 

On remand, the bankruptcy court found on the existing record 

"that Johnson's actions amount to fraud and collusion. Johnson 

breached his fiduciary duty as an attorney and joint venturer. 

His actions, fully described in the court's Memorandum on 

Objection to Claim of Bradshaw/Johnson ... and Pre-Hearing Order 

regarding Debtor's objection to Bradshaw's claim[,] ... were the 

equivalent of fraud and collusion." Supplemental Finding of Fact 

filed August 3, 1990, at 1. Thereafter, the district court 

summarily affirmed the bankruptcy court's decision on the basis of 

the lower court's fraud determination, which it held was not 

clearly erroneous. District Court Order filed February 19, 1991, 

at 1-2. 

We begin our analysis with In re Wallace, which recognized 

that notwithstanding federal policy considerations barring the use 

of res judicata to preempt bankruptcy court dischargeability 

determinations altogether, see Brown v. Felsen, 442 U.S. 127, 

138-39 and n.10 (1979); In re Shuler, 722 F.2d 1253, 1257-58 and 

n.10 (5th Cir.), cert. denied, 469 u.s. 817 (1984), the more 

narrow doctrine of collateral estoppel remains available in 

bankruptcy "if (1) the issue to be precluded is the same as that 

involved in the prior state action, (2) the issue was actually 

litigated by the parties in the prior action, and (3) the state 

court's determination of the issue was necessary to the resulting 

6 

Appellate Case: 91-5031 Document: 01019291084 Date Filed: 09/24/1991 Page: 6 
final and valid judgment." In re Wallace, 840 F.2d at 765. The 

district court expressly noted the absence of any dispute over the 

satisfaction of these three conditions, see District Court Order 

filed July 24, 1990, at 5 n.5, and the parties have not taken 

issue with that assessment. 

Instead, the crux of this case concerns the lower court's 

application of an established federal exception to collateral 

estoppel that is operative in bankruptcy when the prior ruling is 

defective "because of want of jurisdiction of the court which 

rendered it ... or because it was procured !:2Y fraud of a party." 

Heiser, 327 U.S. at 736 (emphasis added); see Browning v. Navarro, 

887 F.2d 553, 562-63 (5th Cir. 1989); Kelleran v. Andriievic, 825 

F.2d 692, 694 (2d Cir. 1987), cert. denied, 484 U.S. 1007 (1988). 

Bradshaw and Johnson contend that the lower courts erred by 

interpreting the underscored phrase too broadly, and that, 

properly construed, the phrase does not encompass the kind of 

fraud alleged and found below. 3 We review the lower courts' 

determination regarding the preclusive effect of the prior 

judgment de novo. See May v. Parker-Abbott Transfer & Storage, 

Inc., 899 F.2d 1007, 1009 (lOth Cir. 1990). 

Confronted with the issue in a similar situation, the Fifth 

Circuit noted that "Heiser does not define 'judgment procured by 

fraud.'" Browning v. Navarro, 826 F.2d 335, 342 (5th Cir. 1987). 

However, the court did "find some direction from review of cases 

3 In light of our disposition, we need not, and therefore do 

not, express an opinion regarding the correctness of this finding. 

For purposes of our analysis, we shall assume, arguendo, the fact 

of fraud and direct our attention to the nature of the fraud 

involved. 

7 

Appellate Case: 91-5031 Document: 01019291084 Date Filed: 09/24/1991 Page: 7 
which, in other contexts, have utilized the courts' equitable 

power to set aside a judgment on the ground of fraud." Id. at 

343. Primarily on the basis of its review of United States v. 

Throckmorton, 98 U.S. 61, 65-66, 68 (1878)(alleged use of perjured 

testimony insufficient to warrant vacatur of former judgment; such 

relief justified only for fraud extrinsic or collateral to issues 

tried and not for fraud that was in issue in former suit), and 

Hazel-Atlas Glass Co. v. Hartford-Empire Co., 322 U.S. 238, 245-46 

(1944)(relief from judgment granted where Court found "a 

deliberately planned and carefully executed scheme to defraud not 

only the Patent Office but the Circuit Court of Appeals"), the 

Browning court concluded that to justify the bankruptcy court's 

departure from a prior judgment obtained against the debtor, the 

trustee 

must demonstrate that the judgment was obtained as the 

result of a scheme or collusion that is designed to 

influence corruptly the proceedings, or to inhibit the 

ability of an adverse party to fully present his case or 

defense, and which has the effect of foreclosing to him 

the opportunity to have a fair and complete trial .... To set aside the judgment, the court must be convinced 

that the trial was rendered so fundamentally unfair by 

the scheme or collusion, that the court lacks confidence 

that the judgment is soundly based on law and fact. 

Browning, 826 F.2d at 345. The cited passage is consistent with 

this court's view, originally expressed outside the bankruptcy 

context, that "fraud in the procurement of a judgment" sufficient 

to warrant relief therefrom is properly identified with "fraud on 

the court, " i . e . , 

fraud which is directed to the judicial machinery itself 

and is not fraud between the parties . . . . It is thus 

fraud where the court or a member is corrupted or 

influenced or influence is attempted or where the judge 

8 

Appellate Case: 91-5031 Document: 01019291084 Date Filed: 09/24/1991 Page: 8 
has not performed his judicial function - thus where the 

impartial functions of the court have been directly 

corrupted. 

Bulloch v. United States, 763 F.2d 1115, 1121 (lOth Cir. 1985)(en 

bane). 

In the present case, the conduct of Johnson relied upon by 

the bankruptcy court for its finding of fraud was not, under any 

reasonable interpretation, directed at the state court that 

rendered judgment for Bradshaw on the Laing note. On the 

contrary, the cited conduct related to the events that made up the 

subject matter of the state court action and indeed formed the 

basis of Laing's counter- and third-party claims against Bradshaw 

and Johnson. If fraud was involved at all, it was clearly not of 

the sort required under Bulloch and Browning to justify vacatur of 

the judgment obtained. Furthermore, since Laing's underlying 

allegations of breach of fiduciary duty and collusion were 

litigated in the state court action, they cannot serve now as the 

basis for collateral attack of the very judgment rendered in favor 

of Bradshaw and Johnson thereon. See Browning, 826 F.2d at 343 

(Court in Throckmorton made clear that judgment could not be set 

aside for ground "'which was actually presented and considered in 

the judgment assailed,'" quoting Throckmorton, 98 U.S. at 66); cf. 

Heiser, 327 u.s. at 736, 740 (collateral attack on judgment on 

grounds of fraud cannot be sustained when those grounds themselves 

have been rejected by the court in which judgment was rendered). 

Obviously, if judgments resolving disputes involving fraud were 

treated, for preclusion purposes, as judgments procured gy the 

very conduct they address, no truly final judgment in fraud 

9 

Appellate Case: 91-5031 Document: 01019291084 Date Filed: 09/24/1991 Page: 9 
litigation would be possible. We accordingly adhere to the 

restrictive formulation of "fraud on the court" in assessing 

Laing's invocation of the Heiser fraud exception to collateral 

estoppel, which we hold inapplicable to the circumstances of this 

case. 

Having reaffirmed, as a matter of federal law, that 

collateral estoppel is generally available in bankruptcy, and 

having also determined that the Heiser fraud exception thereto is 

not applicable to this case, our final task is to decide, in 

accord with our duty to render full faith and credit to state 

court judgments, see 28 u.s.c. S 1738, whether the Oklahoma courts 

would give preclusive effect to the judgment obtained by Bradshaw 

on the Laing note. See Browning, 887 F.2d at 562-63 (when a state 

court judgment is challenged in bankruptcy, it must be determined, 

first, whether there are federal grounds for setting aside the 

judgment and, if not, whether the judgment would be subject to 

collateral attack under state law); Kelleran, 825 F.2d at 694 

(same two inquiries, federal and state, though order in analysis 

reversed). See generally Bolling v. City & County of Denver ex 

rel. McNichols, 790 F.2d 67, 68 (lOth Cir. 1986)(federal courts 

are required by section 1738 to "'give to a state-court judgment 

the same preclusive effect as would be given that judgment under 

the law of the state in which the judgment was rendered'" (quoting 

Migra v. Warren City School Dist. Bd. of Educ., 465 U.S. 75, 81 

(1984))). 

In Oklahoma, once a matter has passed to final judgment in a 

court of competent jurisdiction, it may not be reopened or 

10 

Appellate Case: 91-5031 Document: 01019291084 Date Filed: 09/24/1991 Page: 10 
subsequently considered absent fraud or collusion. 

Grand River Darn Auth., 554 P.2d 5, 7 (Okla. 1976). 

Application of 

More directly 

to the point, "that fraud which will justify a court of equity in 

vacating a judgment, must be fraud extraneous to the issues 

presented and adjudication in the case in which judgment was 

rendered." Chisholm v. Stephenson, 363 P.2d 229, 233 (Okla. 

196l)(emphasis added). In light of what we have already said in 

connection with the federal fraud exception to collateral estoppel 

in bankruptcy, it is clear that the substantially similar rule 

prevailing in Oklahoma would not permit the lower courts' 

divergence from the judgment entered in Bradshaw's action on the 

Laing note. 

Accordingly, we hold that the claim against Laing should have 

been allowed in accordance with the terms of the state court 

judgment previously rendered thereon. The contrary judgment of 

the United States District Court for the Northern District of 

Oklahoma is REVERSED, and the cause is REMANDED with directions to 

remand to the bankruptcy court for proceedings consistent with 

this opinion. 

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