Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca10-86-01539/USCOURTS-ca10-86-01539-0/pdf.json

Parties Involved:
Mark Klemens
Appellee
William Wallace
Appellant

Document Text:

In Re: . WILLIAM 

Debtor, 

MARK KLEMENS, 

PUBLISH 

UNITED STATES COURT OF APPEALS 

FOR THE TENTH CIRCUIT 

WALLACE, ) 

) 

) 

) 

) 

) 

Plaintiff-Appellee, ) 

) 

v. ) No. 

) 

WILLIAM WALLACE, ) 

) 

Defendant-Appellant. ) 

FILED 

Unit.ed St.ates Court of Appeals 

Tenth Circuit 

FEB 2 91988 

ROBER'r L. HOECKER 

Clerk 

86-1539 

APPEAL FROM THE UNITED STATES DISTRICT COURT 

FOR THE DISTRICT OF NEW MEXICO 

(D.c. No. civ-as~1osa HB) 

Submitted on the briefs: 

Anthony F. Avallone and Glenn B. Neumeyer of Law Systems of Las 

Cruces, P.A., Las Cruces, New Mexico, for Defendant-Appellant. 

Tim Chelpaty, Alamogordo, New Mexico, for Plaintiff-Appellee. 

Before McKAY, ANDERSON, and TACHA, Circuit Judges. 

McKAY, Circuit Judge. 

Appellate Case: 86-1539 Document: 010110017386 Date Filed: 02/29/1988 Page: 1 
After examining 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}; 10th Cir. R. 34.l.8(c). The cause is therefore ordered 

submitted without oral argument. 

I. 

On June 19, 1984, Mark Klemens filed a complaint in a New 

Mexico state court against William Wallace for fraud and conversion. In the complaint, Klemens alleged that Wallace fraudulently 

obtained monies from Klemens and that Wallace intentionally, 

willfully, and maliciously converted monies that Klemens gave to 

Wallace to purchase stereo equipment. Klemens sought judgment for 

$7,106.68 and for punitive damages. Record, vol. 2, at 9-12. 

On November 9, 1984, after a nonjury trial on the merits, the 

state court entered its judgment against Wallace. The judgment 

stated in part: "That the defendant [Wallace] embezzled funds 

lawfully entrusted to him in the amount of $7,106.68. The action 

on part of the Defendant was intentional." The state court awarded Klemens both compensatory and punitive damages. Record, vol. 

2, at 2-3. 

Wallace subsequently filed bankruptcy in the United States 

Bankruptcy Court for the District of New Mexico. Klemens then 

instituted an adversary proceeding in the bankruptcy court, seeking a judicial determination that Wallace's debt to Klemens under 

Appellate Case: 86-1539 Document: 010110017386 Date Filed: 02/29/1988 Page: 2 
the state-court judgment was nondischargeable under 11 u.s.c. 

§ 523(a)(4) (1982). Record, vol. 2, at 1. Section 523(a)(4) 

( emphasis added) provides that an ·individual debtor is not discharged from any debt "for fraud or defalcation while acting in a 

fiduciary capacity, embezzlement, or larceny." 

Klemens filed a motion for summary judgment claiming that the 

state court's determination that Wallace embezzled funds from 

Klemens precluded relitigation on the issue of whether the debt 

owing to Klemens was a debt for embezzlement, rendering the debt 

nondischargeable under section 523(a)(4). Record, vol. 2, at 6. 

On July 19, 1985, the bankruptcy court granted Klemens' motion. 

In its memorandum opinion, the bankruptcy court stated that 

[the state court] clearly addressed the issue of embezzlement. Embezzlement would entail the same findings of 

fact to arrive at the legal conclusion in both State 

Court proceeding as in the Bankruptcy Court. This Court 

does not feel that it should look behind the State Court 

judgment entered against the defendant since that case 

was a final decision on the merits, with the same cause 

of action, with identical parties. 

Record, vol. 2, at 18. 

Wallace appealed the bankruptcy court's summary judgment to 

the United States District Court for the District of New Mexico. 

After reviewing the bankruptcy court's memorandum opinion, the 

parties' memoranda, the legal authorities germane to the issue, 

and the record submitted on appeal, the district court agreed with 

the bankruptcy court's analysis and affirmed the summary judgment. 

According to the district court, the state-court judgment 

reflected that the embezzlement issue was actually litigated by 

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the parties and necessarily decided. The district court concluded 

that the state court's adjudication of embezzlement was binding on 

the bank~uptcy court in determining whether Wallace's debt to 

Klemens was a debt for embezzlement. Record, vol. 1, doc. 5. 

Wallace now appeals from the district court's affirmance of 

the bankruptcy court's summary judgment. The issue before this 

court is whether the state court's judgment that Wallace intentionally embezzled funds entrusted to him was binding.on the bankruptcy court and barred relitigation in the dischargeability 

action on the issue of whether the debt owing to Klemens was a 

debt for embezzlement, rendering the debt nondischargeable under 

section 523(a)(4). 

II. 

In Brown v. Felsen, 442 U.S. 127 (1979), the United Staies 

Supreme Court held that a bankruptcy court is not barred by res 

judicata from determining, independent of a state-court judgment 

against the debtor, the nature of a debt to determine its dischargeability. · However, the Supreme Court noted: 

This case concerns res judicata only, and not the 

narrower principle of collateral estoppel. Whereas res 

judicata forecloses all that which might have been litigated previously, collateral estoppel treats as final 

only those questions actually and necessarily decided in 

a prior suit. [Citations omitted.] If, in the course 

of adjudicating a state-law question, a state court 

should determine factual issues using standards identical to those of§ 17 [of the former Bankruptcy Act; similar to section 523 of the present Bankruptcy Code], 

then collateral estoppel, in the absence of countervailing statutory policy, would bar relitigation of those 

issues in the bankruptcy court. 

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Appellate Case: 86-1539 Document: 010110017386 Date Filed: 02/29/1988 Page: 4 
Id. at 139 n.10. Since Brown, the doctrine of collateral estoppel 

has been recognized in cases involving a bankruptcy court's examination of the dischargeability of a debt. See,~, Harold V. 

Simpson and Co. v. Shuler (In re Shuler), 722 F.2d 1253, 1255 (5th 

Cir.}, cert. denied, 469 U.S. 817 (1984}; Spilman v. Harley, 656 

F.2d 224, 227 (6th Cir. 1981}; cf. Lombard v. Axtens (In re 

Lombard), 739 F.2d 499, 502 (10th Cir. 1984} (dicta indicating 

that collateral estoppel may be invoked in dischargeability 

actions under section 17a(2} of former Bankruptcy Act, 11 u.s.c. 

§ 35(a}(2} (1976}, where bankruptcy court had exclusive jurisdiction to determine dischargeability; question left unanswered since 

collateral estoppel requirements not satisfied); Goss v. Goss, 722 

F.2d 599 (10th Cir. 1983} (collateral estoppel recognized in dis-

. chargeability actions under section 17a(7) of former Bankruptcy 

Act, 11 U.S.C. § 35(a)(7} (1976), where state courts and bankruptcy courts had concurrent jurisdiction to determine dischargeability). 

Although the bankruptcy court in a dischargeability action 

under section 523(a) ultimately determines whether or not a debt 

is dischargeable, we believe that the doctrine of collateral 

estoppel may be invoked to bar relitigation of the factual issues 

underlying the determination of dischargeability,* as .the Supreme 

* The issue of whether collateral estoppel may be invoked in a 

dischargeability action under section 523(a} was not before this 

court in First National Bank v. Franklin (In re Franklin}, 726 

F.2d 606 (10th Cir. 1984). In Franklin the bankruptcy court 

applied collateral estoppel, based on a state-court record and 

judgment, in determining whether a debt was dischargeable. The 

district court reversed, holding that the bankruptcy court was not 

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Court noted in Brown. We find no countervailing statutory policy 

which would prevent application of the doctrine. Consequently, 

collateral estoppel is binding on the bankruptcy court and precludes relitigation of factual issues 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 final and valid judgment. Shuler, 722 

F.2d at 1256; Goss, 722 F.2d at 604; Spilman, 656 F.2d at 228; see 

also Lombard, 739 F.2d at 502. 

In this case, the issues sought to be precluded from relitigation in the bankruptcy court were the issues establishing 

whether or not Wallace's debt to Klemens was a debt for embezzlement. As noted above, a debt for embezzlement is nondischargeable 

under section 523(a)(4). For purposes of establishing nondischargeability under section 523(a)(4), embezzlement is defined 

bound by collateral estoppel. According to the district court, 

although the bankruptcy court could refer to the state-court 

record and judgment, the bankruptcy court was required to make 

independent findings as to the nature of the debt in determining 

whether the debt was dischargeable. The case was remanded to the 

bankruptcy court; the district court's decision requiring an 

independent determination by the bankruptcy court was not appealed 

to this court. On remand, the bankruptcy court made its own 

findings, which conformed to the state court's judgment, and again 

concluded that the debt was nondischargeable. The debtor appealed 

the bankruptcy court's findings. The issue before this court was 

simply whether the bankruptcy court's independent findings were 

clearly erroneous. Consequently, this court did not comment on or 

determine whether the district court was correct in not applying 

collateral estoppel under the circumstances of the case or in 

requiring the bankruptcy court to make an independent 

determination. Nor did this court discuss whether collateral 

estoppel could be invoked in dischargeability actions. 

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under federal common law as "the fraudulent appropriation of property by a person to whom such property has been entrusted or into 

whose hands it has lawfully come." Great American Insurance Co. 

v. Graziano (In re Graziano), 35 Bankr. 589, 594 (Bankr. E.D.N.Y. 

1983) (quoting Gribble v. Carlton (In re Carlton), 26 Bankr. 202, 

205 (Bankr. M.D. Tenn. 1982)); ~ also American Family Insurance 

Group v. Gumieny (In re Gumieny), 8 Bankr. 602, 605 (Bankr. E.D. 

Wis. 1981). The definition of embezzlement in New Mexico is the 

same. See State v. Peke, 70 N.M. 108, 115, 371 P.2d 226, 231, 

cert. denied, 371 U.S. 924 (1962); State v. Seefeldt, 54 N.M. 24, 

26, 212 P.2d 1053, 1054 (1949); see also Rainbo Baking Co. v. 

Apodaca, 88 N.M. 501, 542 P.2d 1191 (Ct. App.) (tort action for 

embezzlement), cert. denied, 89 N.M. 6, 546 P.2d 71 (1975). 

We believe that the bankruptcy court was correct in discerning from the state-court judgment that the state court, in finding 

that Wallace intentionally "embezzled funds lawfully entrusted to 

him," necessarily addressed issues and made factual adjudications 

which establish that Wallace's debt fell within the purview of a 

"debt for embezzlement" under section 523(a)(4). Although Klemens 

did not actually use the term "embezzlement" in his complaint, the 

complaint in essence alleges that Wallace fraudulently obtained 

monies from Klemens, that Klemens gave.monies to Wallace for the 

purpose of purchasing stereo equipment, and that Wallace inten~ 

tionally, willfully, and maliciously converted the monies. Consequently, the issues necessary to establish embezzlement under section 523(a)(4)--fraudulent appropriation, property of another, and 

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entrustment or lawful acquisition--were essentially raised in 

Klemens' complaint and involved in the prior action. Because the 

issues were the same, Wallace had every incentive to litigate the 

issues in the state-court proceeding. 

The state-court judgment, which recites that the parties were 

given a full trial on the merits, reflects that the issues necessarily addressed to establish that Wallace embezzled funds 

entrusted to him were ~ctually litigated by the parties. Wallace 

cannot complain that he was denied a full and fair opportunity to 

present his case or litigate the relevant ~ssues. 

The state-court judgment also reflects that the court's 

determination of the issues necessary to establish embezzlement 

was essential to and, in fact, resulted in the final judgment of 

the case. Specifically, the judgment makes it clear that the 

court found the pertinent issues in favor of Klemens and awarded 

Klemens all compensatory damages prayed for in the complaint and 

punitive damages as a result of the court's finding that Wallace 

intentionally embezzled Klemens' monies. Wallace cannot now contest the finality of the judgment or attempt in this court to collaterally attack the findings made by the state court after a 

trial on the merits. See United States Life Title Insurance Co. 

v. Dohm (In re Dohm), 19 Bankr. 134, 138 (N.D. Ill. 1982); cf. 

Goss, 722 F.2d at 605 (defendant had right to appeal in state 

courts; collateral estoppel consequences of a final, unappealed 

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judgment on the merits are not altered by fact that judgment may 

have been wrong). 

We conclude, therefore, that the requirements of collateral 

estoppel have been met. The bankruptcy court was correct in discerning from the state-court judgment and from Klemens' complaint 

that the same factual issues before the bankruptcy court in the 

dischargeability action were presented and actually litigated by 

the parties in the prior state action and necessarily decided by 

the state court in arriving at its judgment. Consequently, the 

bankruptcy court was correct in according collateral estoppel 

effect to the state-court finding and judgment of embezzlement in 

determining that Wallace's debt to Klemens was nondischargeable 

. under section 523(a)(4). 

Accordingly, the district court's affirmance of the bankruptcy court's summary judgment is AFFIRMED. 

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