California Court Discusses Issue Preclusion in Bankruptcy Cases
Typically, when people file for bankruptcy, the majority of the debts they owe will be discharged, subject to certain exceptions. In some instances, though, a party that is owed money from the debtor will file an adversary action arguing that a debt should not be discharged because it was incurred via fraudulent means. In a recent case, a California bankruptcy court analyzed whether a default judgment for fraud is sufficient to demonstrate that a debt should not be discharged as a matter of law. If you live in California and are overcome by debt, you may be able to seek relief under the bankruptcy code and should speak to a trusted California bankruptcy attorney as soon as possible.
Factual History
It is reported that the creditors made a set of loans to a company that was owned by the debtors. The company ultimately ran into financial trouble and was unable to make payments on the loans. The debtors then offered to transfer their inventory to the creditors as partial payment for the money owed and proposed a coordinated settlement. The creditors accepted the inventory but later determined it was worth over thirty thousand less than the debtors represented. Negotiations on the proposed settlement fell through, and the creditors filed a lawsuit against the debtors, alleging multiple claims, including fraud.
Allegedly, the debtors failed to file an answer, and a default judgment was entered against them. The debtors then filed a petition for bankruptcy, after which the creditors filed an adversary complaint, arguing that the default judgment should not be discharged. They filed a motion for summary judgment as well, arguing that the court was precluded from allowing the debtors to re-litigate the issue of whether they engaged in fraud. The court granted the motion, and the debtors appealed. Continue reading