Source: https://supreme.justia.com/cases/federal/us/498/279/case.html
Timestamp: 2016-10-24 10:42:07
Document Index: 432680576

Matched Legal Cases: ['§ 523', '§ 523', '§ 523', '§ 27', '§ 28', '§ 3731', '§ 1833', '§ 1003', '§ 1320', '§ 17', '§ 727', '§ 523', '§ 523', '§ 523', '§ 523', '§ 523']

Grogan v. Garner (full text) :: 498 U.S. 279 (1991) :: Justia U.S. Supreme Court Center Log In
U.S. Supreme CourtGrogan v. Garner, 498 U.S. 279 (1991)Grogan v. GarnerNo. 89-1149Argued Oct. 29, 1990Decided Jan. 15, 1991498 U.S. 279CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR
Section 523(a) of the Bankruptcy Code provides that a discharge in bankruptcy shall not discharge an individual debtor from certain kinds of obligations, including those for money Page 498 U. S. 281 obtained by "actual fraud." [Footnote 1] The question in this case is whether the statute requires a defrauded creditor to prove his claim by clear and convincing evidence in order to preserve it from discharge.
The Court of Appeals for the Eighth Circuit reduced the damages award, but affirmed the fraud judgment as modified. Grogan v. Garner, 806 F.2d 829 (1986). Petitioners then filed a complaint in the bankruptcy proceeding requesting a determination that their claim based on the fraud judgment should be exempted from discharge pursuant to § 523. App. 3-4. In support of their complaint, they introduced portions of the record in the fraud case. The Bankruptcy Court found that all of the elements required to establish actual fraud under § 523 had been proved, and that the doctrine of collateral estoppel required a holding that the debt was therefore not dischargeable. In re Garner, 73 B.R. 26 (WD Mo.1987). Page 498 U. S. 282
The Court of Appeals, however, reversed. In re Garner, 881 F.2d 579 (CA8 1989). It recognized that the "Bankruptcy Code is silent as to the burden of proof necessary to establish an exception to discharge under section 523(a), including the exception for fraud," id. at 581, but concluded that two factors supported the imposition of a "clear and convincing" standard, at least in fraud cases. First, the court stated that the higher standard had generally been applied in both common law fraud litigation and in resolving dischargeability Page 498 U. S. 283 issues before § 523(a) was enacted, and reasoned that it was unlikely that Congress had intended silently to change settled law. [Footnote 5] Second, the court opined that the general "fresh start" policy that undergirds the Bankruptcy Code militated in favor of a broad construction favorable to the debtor. [Footnote 6]
At the outset, we distinguish between the standard of proof that a creditor must satisfy in order to establish a valid claim against a bankrupt estate and the standard that a creditor who has established a valid claim must still satisfy in order to avoid dischargeability. The validity of a creditor's claim is determined by rules of state law. See Vanston Bondholders Protective Comm. v. Green, 329 U. S. 156, 329 U. S. 161 Page 498 U. S. 284 (1946). [Footnote 9] Since 1970, however, the issue of nondischargeability has been a matter of federal law governed by the terms of the Bankruptcy Code. See Brown v. Felsen, 442 U. S. 127, 442 U. S. 129-130, 442 U. S. 136 (1979). [Footnote 10]
This distinction is the wellspring from which cases of this kind flow. In this case, a creditor who reduced his fraud claim to a valid and final judgment in a jurisdiction that requires proof of fraud by a preponderance of the evidence seeks to minimize additional litigation by invoking collateral estoppel. If the preponderance standard also governs the question of nondischargeability, a bankruptcy court could properly give collateral estoppel effect to those elements of the claim that are identical to the elements required for discharge and which were actually litigated and determined in the prior action. See Restatement (Second) of Judgments § 27 (1982). [Footnote 11] If, however, the clear-and-convincing standard applies Page 498 U. S. 285 to nondischargeability, the prior judgment could not be given collateral estoppel effect. § 28(4). A creditor who successfully obtained a fraud judgment in a jurisdiction that requires proof of fraud by clear and convincing evidence would, however, be indifferent to the burden of proof regarding nondischargeability, because he could invoke collateral estoppel in any event. [Footnote 12]
In sum, if nondischargeability must be proved only by a preponderance of the evidence, all creditors who have secured fraud judgments, the elements of which are the same as those of the fraud discharge exception, will be exempt from discharge under collateral estoppel principles. If, however, nondischargeability must be proved by clear and convincing evidence, creditors who secured fraud judgments based only on the preponderance standard would not be assured of qualifying for the fraud discharge exception. Page 498 U. S. 286
We are unpersuaded by the argument that the clear-and-convincing standard is required to effectuate the "fresh start" policy of the Bankruptcy Code. This Court has certainly acknowledged that a central purpose of the Code is to provide a procedure by which certain insolvent debtors can reorder their affairs, make peace with their creditors, and enjoy "a new opportunity in life with a clear field for future effort, unhampered by the pressure and discouragement of preexisting debt." Local Loan Co. v. Hunt, 292 U. S. 234, 292 U. S. 244 (1934). But in the same breath that we have invoked this "fresh start" policy, we have been careful to explain that the Act Page 498 U. S. 287 limits the opportunity for a completely unencumbered new beginning to the "honest but unfortunate debtor." Ibid.
The statutory provisions governing nondischargeability reflect a congressional decision to exclude from the general policy of discharge certain categories of debts -- such as child support, alimony, and certain unpaid educational loans and taxes, as well as liabilities for fraud. Congress evidently concluded that the creditors' interest in recovering full payment of debts in these categories outweighed the debtors' interest in a complete fresh start. We think it unlikely that Congress, in fashioning the standard of proof that governs the applicability of these provisions, would have favored the interest in giving perpetrators of fraud a fresh start over the interest in protecting victims of fraud. Requiring the creditor to establish by a preponderance Page 498 U. S. 288 of the evidence that his claim is not dischargeable reflects a fair balance between these conflicting interests.
Unlike a large number, and perhaps the majority, of the States, Congress has chosen the preponderance standard when it has created substantive causes of action for fraud. See, e.g., 31 U.S.C. § 3731(c) (False Claims Act); 12 U.S.C.A. § 1833a(e) (civil penalties for fraud involving financial institutions); 42 CFR § 1003.114(a) (1989) (Medicare and Medicaid fraud under 42 U.S.C. § 1320a-7a); Herman & MacLean v. Huddleston, 459 U.S. at 459 U. S. 388-390 (civil enforcement of the antifraud provisions of Page 498 U. S. 289 the securities laws); Steadman v. SEC, 450 U. S. 91, 450 U. S. 96 (1981) (administrative proceedings concerning violation of antifraud provisions of the securities laws); SEC v. C.M. Joiner Leasing Corp., 320 U. S. 344, 320 U. S. 355 (1943) (§ 17(a) of the Securities Act of 1933); First National Monetary Corp. v. Weinberger, 819 F.2d 1334, 1341-1342 (CA6 1987) (civil fraud provisions of the Commodity Exchange Act). Cf. Sedima, S.P.R.L. v. Imrex Co., 473 U. S. 479, 473 U. S. 491 (1985) (suggesting that the preponderance standard applies to civil actions under the Racketeer Influenced and Corrupt Organizations Act). Most notably, Congress chose the preponderance standard to govern determinations under 11 U.S.C. § 727(a)(4), which denies a debtor the right to discharge altogether if the debtor has committed a fraud on the bankruptcy court. See H.R.Rep. No. 95-595, p. 384 (1977), U.S.Code Cong. & Admin.News 1978, pp. 5787, 6340 ("The fourth ground for denial of discharge is the commission of a bankruptcy crime, though the standard of proof is preponderance of the evidence"); S.Rep. No. 95-989, p. 98 (1978), U.S.Code Cong. & Admin.News 1978, p. 5884 (same). [Footnote 16]
Moreover, as we explained in Part I, supra, Congress amended the Bankruptcy Act in 1970 to make nondischargeability a question of federal law independent of the issue of the validity of the underlying claim. Even before 1970, many courts imposed the preponderance burden on creditors invoking the fraud discharge exception. See, e.g., Sweet v. Ritter Finance Co., 263 F.Supp. 540, 543 (WD Va.1967); Nickel Plate Cloverleaf Federal Credit Union v. White, 120 Ill.App.2d 91, 93-94, 256 N.E.2d 119, 120-121 (1970); Gonzales v. Aetna Finance Co., 86 Nev. 271, 275, 468 P.2d 15, 18 (1970); Beneficial Finance Co. of Manchester v. Machie, 6 Conn.Cir. 37, 41, 263 A.2d 707, 710 (1969); Budget Finance Plan v. Haner, 92 Idaho 56, 59, 436 P.2d 722, 725 Page 498 U. S. 290 (1968); Atlas Credit Corp. v. Miller, 216 So.2d 100, 101 (La.Ct.App.1968); Household Finance Corp. v. Altenberg, 5 Ohio St.2d 190, 193, 214 N.E.2d 667, 669 (1966); MAC Finance Plan of Nashua, Inc. v. Stone, 106 N.H. 517, 521-522, 214 A.2d 878, 882 (1965). And, following the 1970 amendments, but prior to the enactment of § 523 in 1978, the courts continued to be nearly evenly split over the appropriate standard of proof. Compare, e.g., Fierman v. Lazarus, 361 F.Supp. 477, 480 (ED Pa.1973); In re Scott, 1 BCD 581, 583 (Bkrtcy.Ct. WD Mich.1975) with Brown v. Buchanan, 419 F.Supp. 199, 203 (ED Va.1975); In re Arden, 75 B.R. 707, 710 (Bkrtcy.Ct.R.I.1975). Thus, it would not be reasonable to conclude that in enacting § 523 Congress silently endorsed a background rule that clear-and-convincing evidence is required to establish exemption from discharge.
A final consideration supporting our conclusion that the preponderance standard is the proper one is that, as we explained in 498 U. S. supra, application of that standard will permit exception from discharge of all fraud claims creditors have successfully reduced to judgment. This result accords with the historical development of the discharge exceptions. As we explained in Brown v. Felsen, the 1898 Bankruptcy Act provided that "judgments" sounding in fraud were exempt from discharge. 30 Stat. 550. In the 1903 revisions, Congress substituted the term "liabilities" for "judgments." 32 Stat. 798. This alteration was intended to broaden the coverage of the fraud exceptions. See Brown v. Felsen, 442 U.S. at 442 U. S. 138. Absent a clear indication from Congress of a change in policy, it would be inconsistent with this earlier expression of congressional intent to construe the exceptions to allow some debtors facing fraud judgments to have those judgments discharged. Page 498 U. S. 291
"* * * *" "(2) for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by -- "
We therefore do not consider the question whether § 523(a)(2)(A) excepts from discharge that part of a judgment in excess of the actual value of money or property received by a debtor by virtue of fraud. See In re Rubin, 875 F.2d 755, 758, n. 1 (CA9 1989). Arguably, fraud judgments in cases in which the defendant did not obtain money, property, or services from the plaintiffs and those judgments that include punitive damages awards are more appropriately governed by § 523(a)(6). See 11 U.S.C. § 523(a)(6) (excepting from discharge debts "for willful and malicious injury by the debtor to another entity or to the property of another entity"); In re Rubin, 875 F.2d at 758, n. 1.
In re Garner, 881 F.2d at 582.
This indifference would not be shared, however, by a creditor who either did not try, or tried unsuccessfully, to prove fraud in a jurisdiction requiring clear and convincing evidence, but who nonetheless established a valid claim by proving, for example, a breach of contract involving the same transaction. See, e.g., In re Black, 787 F.2d 503 (CA10 1986); In re Rubin, 875 F.2d at 758, n. 1.