1 The parcel was part of a larger tract that Universal Savings held after having foreclosed on it. United States Court of Appeals,

Fifth Circuit.

No. 93-2523.

RECOVEREDGE L.P., Plaintiff-Appellee,

v.

Gary D. PENTECOST, et al., Defendants,

David G. Carpenter, Defendant-Appellant.

Feb. 17, 1995.

Appeal from the United States District Court for the Southern District of Texas.

Before REYNALDO G. GARZA, WIENER, and EMILIO M. GARZA, Circuit Judges.

EMILIO M. GARZA, Circuit Judge:

David G. Carpenter appeals the district court's judgment and order determining that a breach

of contract judgment against him is nondischargeable under section 523(a)(2)(A) of the Bankruptcy

Code, 11 U.S.C. § 523(a)(2)(A) (1988). We REVERSE and REMAND.

I

In the early 1980's, Dr. David Carpenter, a practicing family physician, became involved as

an investor in a real estate development project. Carpenter invested in the project at the behest of

his brot her-in-law, Gary Pentecost, a real estate developer and mortgage investor. Together with

Pentecost's business associate, J.B. Westmoreland, Pentecost and Carpenter formed Houston Storage,

Inc., ("Houston Storage") to purchase a warehouse. Houston Storage's articles of incorporation

listed Carpenter as President and Director, and Gary Pentecost as Vice President, Secretary, and

Treasurer. Pentecost, Westmoreland, and Carpenter each held one-third of Houston Storage's shares.

H o ust o n Storage later purchased a 3.77-acre parcel of land from Universal Savings

Association ("Universal Savings"). 1 Universal Savings financed most of the purchase price, accepting

a t en-percent down payment and a $1.6 million promissory note. In exchange, Houston Storage

agreed to sell pieces of the property ("pad sites") and apply the proceeds first to expenses connected2 The "loans-to-one-borrower" limitation in effect at the time of the Houston Storage

transaction limited the amount of money a savings and loan institution could lend to a single

borrower in proportion to the institution's withdrawable accounts and net worth. 12 C.F.R. §

563.9-3 (1985) (current version at 12 C.F.R. § 563.93 (1994)). According to the RTC, Universal

Savings' loans to Pentecost were at or close to this limit.

3 The complaint named Pentecost and Westmoreland as defendants in connection with all six

transactions. with the sale and interest on the note, and then to the prin cipal due on the note. On behalf of

Houston Storage, Carpenter executed the closing documents for the sale, including the promissory

note. Carpenter also signed a personal guarantee on the note. In his capacity as secretary, Pentecost

acknowledged the documents on Houston Storage's behalf. Pentecost also made the required down

payment.

The transaction was ostensibly designed to enable Houston Storage to sell the pad sites for

commercial development. In fact, the transaction was driven at least in part by ulterior motives.

According to the Resolution Trust Corporati on ("RTC"), which later sued Pentecost, Carpenter, and

Westmoreland, the transact io n was primarily designed to remove a nonperforming asset, the real

estate, from Universal Savings' books and replace it with what appeared to be a good loan to Houston

Storage. The scheme was structured t hrough Houston Storage, the RTC alleged, in order to

circumvent "loans-to-one-borrower" regulations, which would have prohibited Universal Savings

from lending the money directly to Pentecost. 2 Finally, although Houston Storage agreed to use the

proceeds from the pad sit e sales t o pay down the promissory note, some of the proceeds were

diverted, with the cooperati on of Universal Savings officers, to pay down other, unrelated loans that

Pentecost had at Universal Savings.

In May of 1988, after it had been placed under the supervision of the Texas Savings and Loan

Department, Universal Savings sued numerous individuals and business organizations in connection

with six allegedly fraudulent transactions. The Houston Storage transaction was one of the six, and

the complaint named Carpenter as a defendant in connection with that transaction. 3

Two years later, after Universal Savings had filed its Third Amended Complaint, the RTC,

as conservator for Universal Savings, was substituted as the plaint iff in Universal Savings' suit against4 The Texas Savings and Loan Department had placed Universal Savings in conservatorship in

1988, and the RTC became Universal Savings' conservator pursuant to the Financial Institutions

Reform, Recovery, and Enforcement Act of 1989, 12 U.S.C. § 1441a(b)(6) (Supp.1994). Later

in the course of the litigation, the "RTC as Receiver for Universal Federal Savings Association"

was substituted as plaintiff.

5 Several months before trial, the district court entered a default judgment against

Westmoreland as a sanction for his "willful failure to participate in the discovery process."

Pentecost remained a defendant on multiple counts in connection with all six transactions.

6 Carpenter objected to the RTC's motion in part on the grounds that no bankruptcy court

proceeding yet existed for the district court to withdraw. According to Carpenter, the RTC had

not yet filed a proof of claim in the Carpenter bankruptcy case, and the Carpenters therefore could

not have objected to it. Section 157(d) of the Bankruptcy Code provides, in relevant part: "The

district court may withdraw, in whole or in part, any case or proceeding referred under this

section ... for cause shown." 11 U.S.C. § 157(d) (1988). The district court was unclear whether

to withdraw the whole bankruptcy case or simply the RTC's "claim:"

To the extent I am required to remove the entire matter, I have done that. To the

extent I only need under Section (d) to remove this particular claim, I have done

that. So what I have done, orally I have removed the entire proceeding. I have

removed this particular claim, RTC versus Carpenter from that. Retained that

claim and remanded the balance of the Carpenters' bankruptcy proceeding back to

the bankruptcy court.

Carpenter does not appeal the district court's withdrawal of the RTC's "prospective"

claim. Carpenter. 4 The RTC then filed a Fourth Amended Complaint, the last one filed before trial. In the

complaint, the RTC named Carpenter in the following four counts: civil conspiracy, common law

fraud, unjust enrichment, and breach of contract. All of the RTC's claims against Carpenter related

solely to the Houston Storage transaction. 5

Then, just be fo re trial was scheduled to begin, Carpenter and his wife filed for relief under

Chapter 7 of the Bankruptcy Code, 11 U.S.C. §§ 701-766 (1988). The RTC pro mptly filed an

emergency motion in the district court to withdraw the reference of the RTC's prospective bankruptcy

claim, lift the automatic stay, and consolidate its bankruptcy claim with its civil case against

Carpenter. 6 The district court granted the motion and denied Carpenter's emergency motion to

reconsider. The consolidated case then proceeded to trial.

At trial, Carpenter testified that he had participated in the Houston Storage transaction only

as an investor, understanding the purpose of the project to be the purchase and sale of commercial

real estate. He further testified that Pentecost handled t he books, wrote the checks, and was7 Section 523(a)(2) provides that debts for money obtained by "false pretenses, a false

representation, or actual fraud" are not dischargeable in bankruptcy. 11 U.S.C. § 523(a)(2)(A)

(1988).

8 Although the judgment is not explicit in this regard, the record reveals that Carpenter's

liability stems from the court's directed verdict on the RTC's breach of contract claim against him.

Pentecost's and Houston Storage's liability, on the other hand, is based on the jury's verdict on the generally responsible for making interest and principal payments on the promissory note. Carpenter

denied having any knowledge that proceeds from the pad sales were used to pay down some of

Pentecost's other loans from Universal Savings. He did, however, concede that he had failed to pay

the promissory note.

At the close of the evidence, the RTC filed a "Supplement to Plaint iff's Complaint (Complaint

to Determine Dischargeability of Debt)" alleging that Carpenter's debt on the promissory note was

nondischargeable under section 523(a)(2) of the Bankruptcy Code, 11 U.S.C. § 523(a)(2) (1988). 7

As factual allegations supporting nondischargeability, the RTC simply incorporated the allegations

contained in its Fourth Amended Complaint.

The RTC then submitted only the conspiracy to defraud count to the jury, apparently deciding

to abandon its common law fraud and unjust enrichment claims against Carpenter. During trial, the

court had directed a verdict against Carpenter on the RTC's breach of contract claim for nonpayment

of the promissory note.

The jury ultimately rendered a special verdi ct finding that all of the Houston Storage

transaction defendants except Carpenter had engaged in a conspiracy to defraud the RTC as receiver

for Universal Savings. Consistent with this finding, t he jury awarded punitive damages against

Pentecost and Houston Storage but none against Carpenter. After the jury rendered its verdict, the

RTC successfully moved the court to accept the jury's verdict. At no time either during or after trial

did the RTC file a motion for judgment as a matter of law on its conspiracy claim against Carpenter.

To the contrary , the RTC moved for entry of final judgment pursuant to Rule 54(b) of the Federal

Rules of Civil Procedure, which the court entered. The court held Carpenter jointly and severally

liable with Pentecost, Westmoreland, and Houston Storage for actual damages of approximately $1.6

millio n, pre- and postjudgment interest, $110,000 in attorneys' fees, and costs. 8 The RTC did notRTC's conspiracy to defraud claim. Westmoreland's liability is based on his default judgment.

appeal the jury's verdict on its conspiracy claim against Carpenter, and Carpenter did not appeal the

court's directed verdict on the RTC's breach of contract claim.

A full year after the civil conspiracy trial, the RTC requested, and the district court ordered,

briefing on the dischargeability issue. Carpenter argued that his debt to the RTC was dischargeable

because the jury found that he had not committed fraud and because the RTC had not proven by a

preponderance of the evidence the elements of nondischargeability under 11 U.S.C. § 523(a)(2)(A).

The RTC argued in response that the court was not bound by the jury's verdict in part because "the

evidence showed as a matter of law that Carpenter engaged in the conspiracy." The RTC also argued

that it did not need to prove all of the traditional ele ment s o f no ndischargeability under §

523(a)(2)(A).

In its Order on Dischargeability, the district court held t hat Carpenter's debt was

nondischargeable under § 523(a)(2)(A). Although the court recognized that the jury did not find that

Carpenter conspired to defraud Universal Savings, it explained:

[T]he Court must disregard the jury's finding on this point because the evidence establishes

and logic dictates that Houston Storage, Inc. could not be a conspirator except through the

conduct of

Carpenter.... Moreover, the question of whether Carpenter participated in a

conspiracy is not controlling.

Section 523(a)(2)(A) of the Ba nkruptcy Code (Ti tl e 11), requi res the Court to

determine the individual conduct of Carpenter. The inquiry is whether Carpenter incurred a

debt by false pretenses, representation or fraud. This Court finds that he did and the record

is sufficiently ample on this point.

Based on this ruling, the court entered a final judgment of nondischargeability.

Carpenter appeals the court's final judgme nt o f nondischargeability on two alternative

grounds. First, he contends that the jury's verdict in his favor precluded the court from determining

whether his debt on the note was nondischargeable under § 523(a)(2)( A). In the alternative,

Carpenter argues that even if the nondischargeability issue was not precluded, the record co nt ains

insufficient evidence to support the court's ruling.

After Carpenter perfected his appeal to this cou rt , RecoverEdge Limited Partnership

("RecoverEdge") acquired the RTC's claim against Carpenter, and we granted the RTC's motion to9 Carpenter requested the following: "Transcript of all questioning of RTC witnesses by

Michael Carr [counsel for Pentecost]; Transcript of all testimony of witnesses either on direct or

cross by Michael Carr; and Any testimony involving the Houston Storage Inc. transactions."

10 Furthermore, we note that the record on appeal is in fact over-inclusive; it includes many

pages of trial transcript concerning the five other transactions at issue in this case, evidence that

the court ruled inadmissible as to Carpenter. In addition, the record includes all of the pleadings,

only a small fraction of which relate to Carpenter or the Houston Storage transaction. substitute RecoverEdge as appellee.

II

Before reaching the merits of Carpenter's appeal, we must address RecoverEdge's request

that we dismiss the appeal based on Carpenter's failure to comply with Rule 10 of the Federal Rules

of Appellate Procedure. Rule 10(b)(2) requires that an appellant who "intends to urge on appeal that

a finding or conclusion is unsupported by the evidence

... include in the record a transcript of all

evidence relevant to such finding or conclusion. " Rule 10(b)(3) then requires that if an appellant

elects not to include the entire transcript, he shall file a statement of the issues he intends to present

on appeal and serve a copy on the appellee. "The failure of an appellant to provide a transcript is a

proper ground for dismissal of t he appeal." R ichardson v. Henry, 902 F.2d 414, 416 (5th Cir.)

(dismissing appeal based on sufficiency of the evidence because appellant failed to include a

transcript), cert. denied, 498 U.S. 901, 111 S.Ct. 260, 112 L.Ed.2d 218 (1990). However, such a

dismissal is within our discretion. Bozé v. Branstetter, 912 F.2d 801, 803 (5th Cir.1990).

In t h is case, Carpenter included only those portions of the trial transcript relating to the

Houston Storage transaction, 9 but he failed to file and serve the statement of issues required by Rule

10(b)(3). The only t est imo ny missing from the record is testimony concerning the five other

transactions at issue in the conspiracy case, transactions which were irrelevant to Carpenter's case in

the district court and irrelevant to any possible issues in his appeal. We note that the district court

specifically instructed the jury that "only the evidence admitted in the Houston Storage transaction

should be considered by you in determining whether Carpenter participated in any conspiracy." 10

RecoverEdge argues that the record is "necessarily incomplete" but does not point to any

specific trial testimony missing from the record that could be relevant to Carpenter's app eal. In11 See also Terrell v. DeConna, 877 F.2d 1267, 1270 (5th Cir.1989) ("[W]hen a federal court

renders a decision in a diversity case, the decision's preclusive effect is measured by federal

principles of preclusion."); Avondale Shipyards, Inc. v. Insured Lloyd's, 786 F.2d 1265, 1269 n.

4 (5th Cir.1986) ("We apply federal law to the question of the res judicata or collateral estoppel

effect of prior federal court proceedings, regardless of the basis of federal jurisdiction in either the

prior or the present action."); Johnson v. United States, 576 F.2d 606, 612 (5th Cir.1978)

(holding that federal rules of res judicata and collateral estoppel determine preclusive effect of

prior federal FTCA judgments, even though liability is based on state law), cert. denied, 451 U.S.

1018, 101 S.Ct. 3007, 60 L.Ed.2d 389 (1981). addition, our decision in this case does not require t hat we reach Carpenter's sufficiency of the

evidence argument. S ee infra part III.G. Consequently, we hold that Carpenter's failure to file and

serve a st at ement of issues under Rule 10(b)(3) was harmless, and we decline to exercise our

discretion to dismiss the appeal. S ee Bozé, 912 F.2d at 803 (declining to dismiss appeal although

appellant failed to include transcript of district court proceedings).

III

A

Carpenter argues th at t he district court erroneously failed to give the jury's verdict in the

conspira cy

action preclusive effect when it determined that Carpenter's debt is nondischargeable under

§ 523(a)(2)(A). We review the district court's conclusions of law de novo and its findings of fact for

clear error. Allison v. Roberts (In re Allison), 960 F.2d 481, 483 (5th Cir.1992).

According to the doctrine of collateral esto ppel, or issue preclusion, "when an issue of

ultimate fac t has o nce been determined by a valid and final judgment, that issue cannot again be

litigated between the same parties in any future lawsuit." Ashe v. Sw enson, 397 U.S. 436, 443, 90

S.Ct. 1189, 1194, 25 L.Ed.2d 469 ( 1970); see Restatement (Second) of Judgments § 27 (1982)

("When an issue of fact or law is actually litigated and determined by a valid and final judgment, and

the determination is essential to the judgment, the determination is conclusive in a subsequent action

between the parties, whether on the same or a different claim."), cited in Grogan v. Garner, 498 U.S.

279, 284, 111 S.Ct. 654, 658, 112 L.Ed.2d 755 (1991). Although the court 's judgment in the

conspiracy case was based on state law, federal law determines the judgment's preclusive effect. S ee

Agrilectric Power Partners, Ltd. v. General Elec. Co., 20 F.3d 663, 664 (5th Cir.1994) (holding, in

a res judicata case, that "[f]ederal law determines the preclusive effect of a prior federal judgment"). 1112 In some cases we have recognized a fourth requirement that there be "no special

circumstance that would render preclusion inappropriate or unfair." United States v. Shanbaum,

10 F.3d 305, 311 (5th Cir.1994); see, e.g., id.; Universal Am. Barge Corp. v. J-Chem, Inc., 946

F.2d 1131, 1136 (5th Cir.1991); see also 18 Charles A. Wright, Arthur R. Miller & Edward H.

Cooper, Federal Practice and Procedure § 4426, at 264-65 (1981) ("A final limitation on issue

preclusion may be found in occasional statements that it "should not be exercised in such a

manner as to work an injustice.' Such general statements should be approached with great

caution." (footnote omitted) (quoting Title v. I.N.S., 322 F.2d 21, 24 (9th Cir.1963))). Because

RecoverEdge has not alleged such a special circumstance in this case, and because we have not

independently identified one, we do not address whether such a fourth requirement of fairness

would apply.

We do note, however, that although some recent decisions list the fairness

requirement as a general requirement for the application of issue preclusion, the

requirement originated as a limitation on offensive collateral estoppel. See Shanbaum, 10

F.3d at 311 (citing Universal Am. Barge, 946 F.2d at 1136 (citing Parklane Hosiery, 439

U.S. at 326-32, 99 S.Ct. at 649 (1979) (delineating requirements for offensive collateral

estoppel))). Offensive collateral estoppel arises when a plaintiff seeks to estop a defendant

from relitigating issues that the defendant previously litigated and lost against another

plaintiff. Parklane Hosiery, 439 U.S. at 329, 99 S.Ct. at 650. This case involves

traditional, or mutual estoppel because the relevant parties in the conspiracy case were the

same as the parties in the dischargeability proceeding. See id. at 326-27, 99 S.Ct. at 649

(explaining mutuality requirement for traditional collateral estoppel).

13 The court's "Judgment Pursuant to Fed.R.Civ.P. Rule 54(b)" does not expressly state that

Carpenter is not liable for conspiracy to defraud the RTC. However, the court entered the

judgment "on all claims other than those at issue in the bankruptcy of [the Carpenters] [i.e. the

nondischargeability proceeding]." Consequently, because the judgment provided for no damages

against Carpenter for fraud, the Rule 54(b) judgment effectively amounts to a take nothing

judgment on the RTC's conspiracy claim against Carpenter, and the jury's verdict finding

Carpenter not liable for civil conspiracy to defraud the RTC was necessary to that judgment. Collateral estoppel depends on three elements: (1) the issue at stake must be identical to the

one involved in the prior action; (2) the issue must have been actually litigated in the prior action;

and (3) the determination of the issue in the prior action m ust have been a necessary part of the

judgment in that earlier action. S heerin v. Davis (In re Davis), 3 F.3d 113, 114 (5th Cir.1993); s ee

also Parklane Hosiery Co. v. Shore, 439 U.S. 322, 326 & n. 5, 99 S.Ct. 645, 649 & n. 5, 58 L.Ed.2d

552 (1979). 12 There is no question that the issue of whether Carpenter conspired with others to

defraud Universal Savings was actually litigated in the first proceeding and necessary to the court's

final judgment entered on the jury's verdict. 13 Therefore, the crucial issue in this case is whether the

issues are identical. S ee Brister v. A.W.I., Inc.

, 946 F.2d 350, 354 (5th Cir.1991) ("An important

aspect of determining whether a previously litigated matter has collateral estoppel effect is the identity

of the matter with the issue currently before the court.").14 For example, we held in Brister that a jury's finding of no negligence in a Jones Act case did

not preclude the district court from determining whether the employer had privity or knowledge

of the dangerous condition in a subsequent limitation proceeding. 946 F.2d at 354-55. We

reasoned that while "numerous potential avenues of inquiry ... can determine privity or knowledge

in a limitation proceeding, the Jones Act negligence inquiry focuses only on whether the employer

knew or should have known of the defect at the time of the accident." Id. at 357. Co llateral estoppel will apply in a second proceeding that involves separate claims if the

claims involve the same issue, Midwest Mechanical Contractors, Inc. v. Commonw ealth Constr. Co.,

801 F.2d 748, 751 (5th Cir.1986), and the subject matter of the suits may be different as long as the

requirements for collateral estoppel are met. U nited States v. Shanbaum, 10 F.3d 305, 311 (5th

Cir.1994). As one treatise points out, however, "[c]ourts have readily perceived that for purposes

of preclusion, "[i]ssues are not identical if the second action involves application of a different legal

standard, even though the factual setting of both suits be the same.' " 18 Wright, Miller & Cooper,

Federal Practice and Procedure § 4417, at 165 (f ootnote omitte d) (quoting P eterson v. Clark

Leasing Corp., 451 F.2d 1291, 1292 (9th Cir.1971)). S ee also Brister, 946 F.2d at 354 n. 1 (5th

Cir.1991) (explaining that "[n]ot only the facts, but also the legal standard used to assess them, must

be identical"). 14

B

To define the issue that was actually litigated in the first proceeding, we look to the jury's

special verdict. S ee 18 Wright, Miller & Cooper, Federal Practice and Procedure § 4420, at 184

(explaining that special verdicts can clarify what juries actually decided). The verdict form submitted

to the jury demonstrates that the issue in the first case was whether Carpenter "engaged in a civil

conspiracy with [named and u nnamed defendants] to defraud [the RTC as receiver for Universal

Savings] in connection with [the Ho uston Storage transaction]." The jury received the following

instruction on the definition of civil conspiracy:

You are instructed that the elements of a conspiracy are:

(1) two or more persons; (2) an object to be accomplished; (3) a meeting of the minds on

the object or course of action; (4) one or more unlawful overt acts; and (5) damages as the

proximate result.

You are further instructed that to find a defendant liable for "conspiracy to defraud',

it must be shown that the particular defendant charged agreed with one or more of the other15 The jury instructions further explained that:

[P]articipation in a civil conspiracy may be established by proof showing concert of

action or other facts or circumstances from which the reasonable and natural

inference arises that the acts were committed in furtherance of the common design,

intention or purpose of the conspiracy. Further, it is not required that each and

every act of a conspirator be shown to have been in concert with others or that it

be established by direct proof that all the conspirators conspired at a given time

prior to each transaction. Therefore, it is not necessary to prove that each of the

conspirators were present at each act or transaction that forms the basis of the civil

conspiracy. In determining whether a defendant participated in the conspiracy, you

should consider the actions and declarations of all of the alleged conspirators,

including persons who are no longer named defendants in the case.

On the definition of "fraud," the court instructed the jury that "[f]or an act to constitute

fraud, it must be proved that the Defendant made a misrepresentation or omission

knowingly and intentionally, not as a result of mistake or accident; that is, that the

Defendant either knew of the falsity of the misrepresentation or the false effect of the

omission, or that he made the misrepresentation or omission recklessly without any

knowledge of its truth as a positive assertion." conspirators on the claimed illegal object of the conspiracy and intended to have it brought

about. 15

The jury found that all of the named defendants ex cept for Dr. Carpenter "engaged in a civil

conspiracy" to defraud the RTC as receiver for Universal Savings in connection with the Houston

Storage transaction. When asked whether it found by a preponderance of the evidence that Carpenter

engaged in the conspiracy, the jury answered, "No."

C

The issue in the second proceeding was whether the RTC's breach of contract judgment was

nondischargeable under § 523(a)(2)(A). Section 523(a)(2)(A) excepts from the discharge provisions

of the Bankruptcy Code "any debt

... for money, property

, services, or an extension, renewal, or

refinancing of credit, to the extent obta ined by ... false pretenses, a false representation, or actual

fraud, other than a statement respecting the debtor's or an insider's financial condition." The creditor

must prove by a preponderance of the evidence that the debt is nondischargeable. G rogan v. Garner,

498 U.S. 279, 286, 111 S.Ct. 654, 659, 112 L.Ed.2d 755 (1991). As a general matt er, §

523(a)(2)(A) "contemplates frauds involving "moral turpitude or intentional wrong; fraud implied

in law which may exist without imputation of bad faith or immorali t y, is insufficient.' " A llison v.

Roberts (In re Allison), 960 F.2d 481, 483 (5th Cir.1992) (footnote omitted) (quoting 3 Collier on16 Congress added "actual fraud" to the fraud exception to discharge when it enacted the

Bankruptcy

Act of 1978, Pub.L. No. 95-598, § 523(a)(2)(A), 92 Stat. 2549, 2590 (1978).

Section 17a(2) of the former Bankruptcy Act of 1898 provided in relevant part: "A discharge in

bankruptcy shall release a bankrupt from all of his provable debts, whether allowable in full or in

part, except such as ... are liabilities for obtaining money or property by false pretenses or false

representations...." 11 U.S.C. § 35(a)(2) (repealed 1978). The commentary in Collier on

Bankruptcy suggests that the addition of "actual fraud" simply clarifies the limited scope of the

fraud exception:

The addition of the words "or actual fraud" probably makes no change in the law

as it existed prior to enactment of the [Bankruptcy Act of 1978] because false

pretenses and representations were construed to mean acts involving moral

turpitude or intentional wrong....

In any event, section 523(a)(2)(A) was intended to codify case law as

expressed in Neal v. Clark [, 95 U.S. 704, 24 L.Ed. 586 (1877),] which interpreted

"fraud" to mean actual or positive fraud rather than fraud implied by law.

3 Collier on Bankruptcy ¶ 523.08[5], at 523-58 (footnotes om itted). Bankruptcy ¶ 523.08[4], at 523-50 (Lawrence P. King et al. eds., 15th ed. 1989)); s ee also First

Nat'l Bank v. Martin (In re Martin), 963 F.2d 809, 813 (5th Cir.1992) ("Debts falling within section

523(a)(2)(A) are debts obtained by frauds invo lving moral turpitude or intentional wrong, and any

misrepresentations must be knowingly and fraudulently made.").

When defi ning t he elements of nondischargeability under § 523(a)(2)(A), we have

distinguished between actual fraud on the one hand, and false pretenses and representations on the

other. S ee Bank of La. v. Bercier (In re Bercier), 934 F.2d 689, 692 (5 th Cir.1991); s ee also 3

Collier on Bankruptcy ¶ 523.08[4] & [5] (discussing in separat e sect io ns "false pretenses or false

representations" and "actu a l fraud"). 16 In order for a debtor's representation to be a "false

representation or false pretense" under § 523(a) (2), it "must have been: (1) [a] knowing and

fraudulent falsehood[ ], (2) describing past or current facts, (3) that [was] relied upon by the other

party." I n re Allison, 960 F.2d at 483; s ee also In re Bercier, 934 F.2d at 692 ("[T]o be a false

representation or false pretense under § 523(a)(2), the "false represent at io ns and false pretenses

[must] encompass statements that falsely purport to depict current or past facts. ' " (quoting Keeling

v. Roeder (In re Roeder), 61 B.R. 179, 181 (Bankr.W.D.Ky.1986))).

"Actual fraud, by definition, consists of any deceit, artifice, trick or design involving direct

and active operati on of the mind, used to circumvent and cheat another—som e thing said, done or17 Some courts require the creditor to have reasonably relied on the representations, but the

Fifth Circuit does not. See In re Allison, 960 F.2d at 484-85 & n. 3 (citing cases).

18 Other circuits have applied a uniform standard resembling our "actual fraud" standard to all

debts falling under § 523(a)(2)(A). See, e.g., Britton v. Price (In re Britton), 950 F.2d 602, 604

(9th Cir.1991) ("The Ninth Circuit has employed a five-part test for determining when a debt in

nondischargeable under section 523(a)(2)(A)."); Caspers v. Van Horne (In re Van Horne), 823

F.2d 1285, 1287 (8th Cir.1987) ("To succeed in a section 523(a)(2)(A) claim, the creditor must

prove the following [five] elements: ...."), abrogated on other grounds by Grogan v. Garner, 498

U.S. 279, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991); see also In re Maurice, 21 F.3d 767, 774 (7th

Cir.1994) ("Under 11 U.S.C. § 523(a)(2)(A), [the creditor] was required to prove (a) the debtor

obtained [money] through representations either knowingly false or made with such reckless

disregard for the truth as to constitute willful misrepresentation; (2) the debtor possessed an

actual intent to defraud; and (3) [the creditor] actually and reasonably relied on the false

representation."). omitted with the design of perpetrating what is known to be a cheat or decepti on." 3 C ollier on

Bankruptcy ¶ 523.08[5], at 523-57 to 523-58 (f ootnote omitted). In order to prove

nondischargeability under an "actual fraud" theory, the objecting creditor must prove that: "(1) the

debtor made representations; (2) at the time they were made the debtor knew they were false; (3)

the debtor made the representations with the intention and purpose to deceive the creditor; (4) that

the creditor relied [ 17 ] on such r epresent at ions; and (5) that the creditor sustained losses as a

proximate result of the representations." I n re Roeder, 61 B.R. at 181, quoted in In re Bercier, 934

F.2d at 692. 18

D

Viewe d in the abstract, the elements of nondischargeability under § 523(a)(2)(A) are

sufficiently distinct from the elements of civil conspiracy to defraud to suggest that a jury verdict in

a conspiracy to defraud case would not ordinarily preclude a determination of nondischa rgeability

under § 523(a)(2 )(A). We therefore agree with RecoverEdge that the traditional elements of

nondischargeability under § 523(a)(2)(A) are not identi cal t o t he elements of a civil conspiracy to

defraud. However, we do not compare the issues in the abstract, and in this case, the specific nature

of the RTC's nondischargeability claim against Carpenter has made what would otherwise be distinct

issues identical.

In its Brief Regarding Dischargeability, the RTC did not arg ue t he t raditional elements of19 In fact, the RTC did not even allege the basic elements of nondischargeability under §

523(a)(2)(A) in its "Complaint to Determine Dischargeability of Debt." Instead, the RTC

realleged and incorporated by reference the allegations of its Fourth Amended Complaint in the

conspiracy action, explaining that "the details of the fraudulent scheme by which the Debtor

obtained money or credit from the Plaintiff are set forth in the Plaintiff's Fourth Amended

Complaint."

We note that the RTC would not have been barred under the doctrine of res

judicata, or claim preclusion, from asserting additional grounds supporting

nondischargeability based on fraud. See Brow n v. Felsen, 442 U.S. 127, 138-39, 99 S.Ct.

2205, 2213, 60 L.Ed.2d 767 (1979).

20 To support this theory of nondischargeability, the RTC cited the only apparent authority for

it: MacDonald v. Buck (In re Buck), 75 B.R. 417, 420-21 (Bankr.N.D.Cal.1987). As we hold

that the RTC's reliance on this theory was foreclosed by the jury's earlier factual determination

that Carpenter did not conspire to defraud the RTC, we express no opinion as to its merits or

applicability to the facts of this case. nondischargeability set out in our opinion in Bercier. 19 Instead, the RTC proceeded on an alternative

theory best summarized by RecoverEdge in its brief on appeal: "The RTC's theory as to the particular

transaction at issue here was that [Carpenter] knowingly participated with Mr. Pentecost and others,

including certain officers of the savings and loan, in a sham transaction." 20 The record supports this

theory, RecoverEdge argues, because t he "RTC alleged and proved that [Carpenter] and others

engaged in a conspiracy to

... defraud the RTC and the b ank examiners by setting up a sham

transaction. The evidence was sufficient to show that [Carpenter] had knowledge of the purpose of

the conspiracy and actively participated in it."

I n other words, the RTC argued that Carpenter's debt is nondischargeable und er §

523(a)(2)(A) because he participated in a conspiracy to defraud the RTC. That issue, however, is

precisely the issue decided by the jury in the RTC's conspiracy case against Carpenter. The question

put to the jury in the conspiracy case was: "Do you find from a preponderance of the evidence that

[Carpenter, Pentecost, and Houston Storage] engaged in a civil conspiracy with [named and unnamed

defendants] to defraud [the RTC as Receiver for Universal Savings] in connection with [the Houston

Storage transaction]?" The RTC then sought to put what amounts to the same question before the

district court in the dischargeability proceeding: Do you find, by a preponderance of the evidence,

that Dr. Carpenter participated in a scheme to defraud the RTC as receiver for Universal Savings?

However, as the Supreme Court explained in Ashe v. Sw enson, "when an issue of ultimate fact hasonce been determined by a valid and final judgment, that issue cannot again be litigated between the

same parties in any future lawsuit." Ashe v. Sw enson, 397 U.S. 436, 443, 90 S.Ct. 1189, 1194, 25

L.Ed.2d 469 (1970).

Because the issues of ultimate fact in the two proceedings are identical, we hold that the RTC

was precluded from asserting its "participation in a fraudulent scheme" theory of nondischargeability

under § 523(a)(2)(A), and the district court was bound by the jury's verdict in Carpenter's favor on

the factual issue underlying the RTC's theory.

We do not hold that a finding of nonliabilit y for civil conspiracy to defra ud necessarily

precludes litigation of nondischargeability under § 523(a)(2)(A). Rather, we hold that where, as here,

the factual issue that forms the basis for the creditor's theory of nondischargeability has been actually

litigated in a prior proceeding, neither the creditor nor the debtor may relitigate those grounds. S ee

Sheerin v. Davis (In re Davis), 3 F.3d 113, 115-16 (5th Cir.1993) (holding that jury verdict in prior

state court fraud action, including finding that debtor willfully breached fiduciary duty, had preclusive

effect on court's determination of nondischargeability based on defalcation while acting in a fiduciary

capacity under § 523(a)(4)); Lacy v. Dorsey (In re Lacy), 947 F.2d 1276, 1277-78 (5th Cir.1991)

(holding that judgment i n prior state court proceeding against debtor, in which court found that

debtor made false representations, had preclusive ef fect on court's determination of

nondischargeability under § 523(a)(2)(A) based on false representations).

E

In addition to arguing that the issues are not identical, RecoverEdge argues that collateral

estoppel does not apply to the district court's nondischargeability determination in this case because

(1) the first proceeding was legal in nature, while the bankruptcy proceeding was equitable, and (2)

the first proceeding involved a question of state law, while the second involved a question of federal

bankruptcy law. The RTC cites no authority for these limitations on the application of collateral

estoppel, and both are unfounded. By the RTC's reasoning, state court fraud judgments for damages

would never have collateral estoppel effect in bankruptcy court dis chargeability proceedings.

However, the Supreme Court explicitly held in Grogan v. Garner that "collateral estoppel principles21 See, e.g., In re Davis, 3 F.3d at 116 (holding that resolution of issue underlying state-court

fraud judgment precluded relitigation of same issue in nondischargeability proceeding); Nelson v.

Tsamasfyros (In re Tsamasfyros), 940 F.2d 605, 607 (10th Cir.1991) (holding that state-court

breach of fiduciary duty judgment precluded re-litigation of same issue in dischargeability

proceeding); Halpern v. First Ga. Bank (In re Halpern), 810 F.2d 1061, 1064 (11th Cir.1987)

(holding that state-court consent judgment containing findings of fraud precluded relitigation of

same issue in dischargeability proceeding); see also In re Lacy, 947 F.2d at 1277 (holding that

state-court order of rescission based on finding of misrepresentation held to preclude relitigation

of fraud issue in dischargeability proceeding).

These decisions in the bankruptcy context are consistent with general collateral

estoppel principles, according to which an issue litigated in a legal action can be precluded

in a subsequent equitable action, and vice versa. See Lytle v. Household Mfg., Inc., 494

U.S. 545, 556 n. 4, 110 S.Ct. 1331, 1338 n. 4, 108 L.Ed.2d 504 (1990) (noting that if

certain claims had not been dismissed, jury's determination would have had preclusive

effect when court considered equitable claims); Parklane Hosiery, 439 U.S. at 334-37, 99

S.Ct. at 653-55 (holding that equitable determination can have collateral estoppel effect in

subsequent legal action); Davenport v. DeRobertis, 844 F.2d 1310, 1313-14 (7th Cir.)

(holding that jury's finding was binding on court considering claim for equitable relief),

cert. denied, 488 U.S. 908, 109 S.Ct. 260, 102 L.Ed.2d 248 (1988). Similarly, judgments

based on state law can have full preclusive effect in subsequent proceedings involving

federal law. See 18 Wright, Miller & Cooper, Federal Practice and Procedure § 4417, at

167-69 (explaining that state-court judgments can have collateral estoppel effect in federal

court provided the issues are identical). do indeed apply in discharge exception proceedings pursuant to § 523(a)." G rogan v. Garner, 498

U.S. 279, 284 n. 11, 111 S.Ct. 654, 658 n. 11, 112 L.Ed.2d 755 (1991). The fraud judgment in

Grogan was both legal in nature and based on state law. S ee Henson v. Garner (In re Garner), 881

F.2d 579, 580-81 (8th Cir.1989), rev'd sub nom. Grogan v. Garner, 498 U.S. 279, 111 S.Ct. 654,

112 L.Ed.2d 755 (1991). Indeed, it is well settled that state judgments for damages and/or equitable

relief based on fraud and related ca uses of action can have collateral estoppel effect in subsequent

bankruptcy proceedings to determine dischargeability under § 523(a). 21

At oral argument, RecoverEdge also argued that collateral estoppel does not apply to this

case because there was no final judgment in the conspiracy case. This argument is legally and

factually inaccurate. RecoverEdge's predecessor, the RTC, successfully moved the court to accept

the jury's verdict and later to enter final judgment pursuant to Rule 54(b) of the Federal Rules of Civil

Procedure. Furthermore, a final judgment is not a prerequisite for issue preclusion when a jury has

rendered a conclusive verdict. See Restatement (Second) of Judgments § 13 (1982) ("The rules of

res judicata are applicable only when a final judgment is rendered. However, for purposes of issue22 It is undisputed that the RTC did not move for judgment as a matter of law under Rule 50(a)

of the Federal Rules of Civil Procedure. In fact, the RTC moved for entry of judgment on the

jury's verdict and did not appeal the final judgment. preclusion,

... "final j udgment' includes any prior adjudication of an issue in another action that is

determined to be sufficiently firm to be accorded conclusive effect."); s ee also id. § 13 cmt. g, illus.

3 (illustrating that jury verdict rendered before entry of final judgment is conclusive for purposes of

issue preclusion); s ee also Davenport v. DeRobertis, 844 F.2d 1310, 1313-14 (7th Cir.), c ert.

denied, 488 U.S. 908, 109 S.Ct. 260, 102 L.Ed.2d 248 (1988) (noting that the "jury's verdict would

bind the judge under the doctrine of collateral estoppel (thus demonstrating that the doctrine does

not require a final judgment in the conventional sense).").

The RTC argued below that the court could disregard the judgment in the earlier proceeding

because the jury's verdict was erroneous as a matter of law. 22 The district court held that it "must

disregard the jury's finding on this point because t he evidence establishes and logic dictates that

Houston Storage, Inc. could not be a conspirator except through the conduct of Carpenter." It is well

settled, however, that even arguably erroneous judgments have preclusive effect if the requirements

for collateral estoppel are satisfied. S ee, e.g., I.R.S. v. Teal (In re Teal), 16 F.3d 619, 622 n. 6 (5th

Cir.1994) (federal court "must give res judicata effect to a prior judgment even if it would be voidable

on appeal because of legal error"); D isabled Am. Veterans v. Commissioner, 942 F.2d 309, 316 (6th

Cir.1991) ("It requires more than mere belief that a case was wrongly decided to avoid the application

of the collateral estoppel doctrine."); C utler v. Hayes, 818 F.2d 879, 888 (D.C.Cir.1987) ("A valid

jurisdictional judgment has preclusive effect, we note, even if erroneous."); G oss v. Goss, 722 F.2d

599, 605 (10th Cir.1983) ("[T]he res judicata or collateral estoppel "consequences of a final,

unappealed judgment on the merits [are not] altered by the fact th at the judgment may have been

wrong.' " (quoting F

ederated Dep't Stores v. Moitie, 452 U.S. 394, 398, 101 S.Ct. 2424, 2428, 69

L.Ed.2d 103 (1981))). Consequently, the district court's view of the accuracy of the jury's verdict

was irrelevant to the question of the verdict's preclusive effect.

F

RecoverEdge argues in the alternative that even if its "participation in a fraudulent scheme"23 We note that counsel for RecoverEdge retreated from this theory somewhat at oral

argument, stating that she did not want to rely solely on the imputation argument. theory fails, as we hold it does under the collateral estoppel doctrine, the fraud of Pentecost and

Westmoreland may be imputed to Carpenter: "[T]he false statements of Pent ecost and

Westmoreland, made on behalf of the corporati on, are attributable to Carpenter, the President,

Director and a shareholder of the corporation." We do not decide whether this theory is supported

by the record or whether it, too, would be precluded by the jury's verdict in Carpenter's favor because

RecoverEdge cites no direct authority for such a rule, and we see no need to adopt it in this case. 23

The two cases RecoverEdge cites in purported support of its argument are inapposite to this

case. In L aborers Clean-up Contract Admin. Tr ust Fund v. Kay (In re Kay), 60 B.R. 174

(Bankr.C.D.Cal.1986), the bankruptcy court held a debt nondischargeable under § 523(a)(2)(A). The

debtor, along with two codefendants, had been held jointly and sev erally liable for "submission of

knowingly false state ment s" o n behalf of a corporation, and the bankruptcy court found that the

debtor himself knowingly made false representations. Id. at 175-76. Although the court also held

that the false statements of the debtor's two codefendants were attributable to him for purposes of

the nondischargeability proceeding, it noted that this holding hinged on a finding that the debtor and

his codefendants were alter egos of the corporation. Id. at 177; see also Industrie Aeronautiche e

Meccaniche Rinaldo Piaggio S.p.A. v. Kasler (In re Kasler), 611 F.2d 308, 309-310 n. 3 (9th

Cir.1979) (explaining that debtor who was alter ego of corporati on could b e "non-dischargeably

liable" for willful and malicious conduct of corporation's employees and of his "co-alter-ego"), cited

in In re Kay, 60 B.R. at 177. In this case, there has been no finding or allegation that Carpenter was

the al ter ego of Houston Storage.

The court in K

ay also held that the codefendants' joint and several liabilit y for the fr aud

warranted charging the debtor with the statements of his codefendants, explaining that " "executive

officers [are not] responsible for the neglect of duty, negligence, or misconduct of each other in their

official relations, without proof of joint partici pati on.' " I

n re Kay, 60 B.R. at 177 (quoting 18B

Am.Jur.2d Corporations §§ 1719, 1720 (1985)). In this case, Carpenter was not found jointly and24 We therefore do not reach Carpenter's argument that the district court's findings underlying

its nondischargeability determination were clearly erroneous. severally liable for fraud, and any argument that he p art icipat ed in a scheme to defraud would be

precluded by the jury's verdict in Carpenter's favor. See supra part III.D.

RecoverEdge also cit es as indirect authority for its argument our decision in L uce v. First

Equip. Leasing Corp. (In re Luce), 960 F.2d 1277 (5th Cir.1992). In that case, we held that a

partner's fraud could be imputed to an innocent partner to make the innocent partner's debt

nondischargeable under § 523(a)(2)(A). I d. at 1282. L uce is consistent with the general rule that "[a]

debtor who has made no false representation may, nevertheless, be bound by the fraud of an agent

acting within the scope of the debtor's authority." 3 C ollier on Bankruptcy, ¶ 523.08[4] at 523-57.

That rule, like our decisi o n in L uce, has no bearing on this case because RecoverEdge does not

contend that Pentecost and Westmoreland acted as Carpenter's agents.

RecoverEdge's imputation argument is supported neither by the cases it cites nor by existing

case law on nondischargeability. It is also inconsistent with the general principle that § 523(a)(2)(A)

"contemplates frauds invo lving "moral turpitude or intentional wrong; fraud implied in law which

may exist without imputation of bad faith or immoralit y, is insufficient.' " I n re Allison, 960 F.2d 481,

483 (5th Cir.1992) (declining to apply ag e ncy fraud theory to hold wife's debt nondischargeable

where there was no evidence that wife was aware of fraud) (f ootnote omitted) (quoting 3 Collier on

Bankruptcy ¶ 523.08[4], at 523-50).

G

In sum, we hold that because the issue of whether Carpenter participated in a fraudulent

scheme was previously litigated in the conspiracy case against Carpenter, the RTC was barred from

relitigating the issue in support of its nondischargeability claim. In addition, we reject as a matter of

law RecoverEdge's argument that the fraud of Westmoreland and Pent e cost can be imputed to

Carpenter for purposes of § 523(a)(2)(A). Consequent ly, because these were the RTC's only

arguments in support of nondischargeability, we hold that Carpenter's breach of contract judgment

is dischargeable. 24IV

For the foregoing reasons, we REVERSE and REMAND to the district court to discharge

Carpenter's breach of contract judgment.