Court Opinion

ID: 8907146
Source: CourtListenerOpinion
Date Created: 2022-11-27 01:58:39.919117+00
Date Added: 2024-06-11T17:08:17.465623
License: Public Domain

GIBBONS, Circuit Judge,
concurring.
I agree that the order of the district court must be affirmed. In all cases covered by 28 U.S.C. § 1738, federal courts must give state court judgments the same full faith and credit they have in the state of origin. In this case, the collateral estoppel effect of the Ocean County District Court judgment is determined by the law of New Jersey. In Texas Co. v. Di Gaetano, 71 N.J.Super. 413, 432, 177 A.2d 273, 283 (1962), the Superior Court of New Jersey, Appellate Division, stated the effect to be given a prior default judgment:
it is to be noted that judgment here was entered by default, and while such a judgment is conclusive as an adjudication between the parties of whatever is essential to support the judgment, it is conclu*294sive only as to such matters or issuable facts as were properly averred in the complaint. Girard Trust Co. v. McGeorge, 128 N.J.Eq. 91, 101, 15 A.2d 206 (Ch. 1940). A judgment by default does not estop a defendant as to matters which he might have affirmatively pleaded. Phillips v. Phillips, 118 N.J.Eq. 189, 192, 178 A. 265 (Ch. 1935), reversed on other grounds, 119 N.J.Eq. 462,183 A. 220 (E. & A. 1936), and affirmed in part, 119 N.J.Eq. 497, 183 A. 222 (E. & A. 1936).
As the majority correctly observes, Freedom Finance did not adequately plead in the state court complaint all the elements required to avoid discharge by section 17a of the Bankruptcy Act, 11 U.S.C. § 35. Under New Jersey law the McMillans are, therefore, entitled to a fresh determination of dischargeability by the bankruptcy court.
But I find no reason to rest our decision on New Jersey law. Even if state law on the preclusive effect of the judgment were to the contrary (which it is not), I would vote to affirm the order of the district court in this case. Section 1738 is not without exceptions. Federal habeas corpus is one illustration of the proposition. See Townsend v. Sain, 372 U.S. 293, 83 S.Ct. 745, 9 L.Ed.2d 770 (1963); Fay v. Noia, 372 U.S. 391, 83 S.Ct. 822, 9 L.Ed.2d 837 (1963). In my opinion, this is another.
In 1970 Congress amended the Bankruptcy Act in order to eliminate certain abuses by finance companies. Under the unamended Act the bankruptcy court had determined whether to grant a discharge, but state courts had been able later to determine whether any given claim had survived discharge because it was founded on a materially false statement intended to deceive. The 1970 amendments were designed to make the bankruptcy court the sole forum for the determination of the dischargeability of a certain type of debt:
[a] type of debt held by a finance company against a nonbusiness bankrupt which, through tactics often found abusive of the bankruptcy discharge, survives the discharge in a subsequent suit which the bankrupt failed to defend, for one reason or another.
1A Collier on Bankruptcy ¶ 17.15, at 1628.2 n.45c (14th ed. 1973). See also H.R.Rep. No. 91-1502, 91st Cong. 2d Sess. (1970), reprinted in [1970] U.S.Code Cong. & Ad.News, p. 4156.
The issue in this case is whether a finance company holding the same type, of debt can evade the congressional intent by securing a state court judgment against a delinquent borrower in anticipation of his bankruptcy. I think that the answer should be no, and that we should admit an exception to the federal duty to recognize state court judgments imposed by § 1738. When Congress expressly identifies an abuse, when it has the constitutional power to correct it, and when as here it exercises that power, then the courts should give the congressional act its full effect. While I agree with the majority’s analysis as far as it goes, I would prefer to rest the affirmance on this more fundamental reason.