Mass. Bankruptcy Law Update: State Court Fraud Verdict can be used to prove Fraud in Bankruptcy Court

Bankruptcy – Fraud – Collateral estoppel

Published: 7:43 am Fri, May 17, 2013
By Tom Egan

Where a creditor has charged a debtor with fraud under 11 U.S.C. §523(a)(2)(A), the debtor is collaterally estopped from relitigating the fraud issue based on a state court jury verdict.

“The issue presented by the Motion for Summary Judgment is whether the Plaintiff is entitled to summary judgment because the Debtor is collaterally estopped from contesting his liability under §523(a)(2)(A) based upon a state trial court jury verdict for fraud entered against the Debtor in favor of the Plaintiff. …

“The parties’ present dispute centers on whether the issue decided by the jury in the Superior Court case is identical to the issue presented in the adversary proceeding under §523(a)(2)(A). That is, whether the elements of fraud under Massachusetts law, as found by the jury based on the jury instructions, and fraud under §523(a)(2)(A) are identical. If the two standards are sufficiently identical, then the Debtor is collaterally estopped from litigating the merits of an exception to discharge under §523(a)(2)(A).

“Specifically, under §523(a)(2)(A), a plaintiff must prove actual fraud, not simply fraud implied by law. …

“Although the Superior Court summarized the elements of fraud under Massachusetts law in the jury instructions by referencing five elements, and the First Circuit in McCrory [v. Spigel, 260 F.3d 27 (1st Cir. 2001) and Palmacci [v. Umpierrez, 121 F.3d 781 (1st Cir. 1997)] referenced six elements under §523(a)(2)(A), the standards align. Notably, the First Circuit inCummings [v. HPG, Int’l, Inc., 244 F.3d 16 (1st Cir. 2001)] condensed the number of elements to three. This Court concludes that the actual number of elements used is not dispositive and finds that the jury instructions delivered by the Superior Court satisfy the requirements for an exception to discharge under §523(a)(2)(A). …

“… [T]he jury instructions and the jury verdict comport with the requirements for an exception to discharge under §523(a)(2)(A), and collateral estoppel applies to preclude relitigation of the Plaintiff’s claim. Given the preclusive effect of the judgment, there can be no genuine dispute as to any material fact on the issue of whether fraud was committed that led to a nondischargeable debt under §523(a)(2)(A). Accordingly, the Plaintiff is entitled to judgment as a matter of law. …

“Upon consideration of the foregoing, the Court shall enter an order granting the Plaintiff’s Motion for Summary Judgment with respect to Count I of her Complaint.”

In Re: Spagnuolo, Robert E., Jr. (Lawyers Weekly No. 04-039-13) (26 pages) (Feeney, J.) (USBC) (Chapter 7 Case No. 11-10844-JNF; Adv. P. No. 11-1290) (May 15, 2013).