State Court Default Judgment Estopped Debtors From Re-Litigating Dischargability

In Evans v. Ottimo, 469 F.3d 278 (2d Cir. Nov. 20, 2006), the debtors attempted to litigate whether their debts were nondischargeable under § 523(a) of the Bankruptcy Code. The debt involved a default judgment for Evans for $400,000 entered by a New York state court in which the court found that the debtors had committed fraud. The debtors never appealed that judgment, and commenced bankruptcy proceedings five years later.

Evans argued that the debtors were collaterally estopped from contesting that a judgment for damages due to fraud was nondischargeable, but the bankruptcy court disagreed because the judgment in issue was entered in default.

The district court reversed and the Second Circuit agreed, finding that collateral estoppel principles are applicable even in default judgment situations. The two key conditions for estoppel were satisfied here -- the issue was identical between proceedings, and the estopped party had a full and fair opportunity to litigate the issue in the prior action.