Restructuring

Contributed by Jessica Diab

A recent decision from the Seventh Circuit in Adams v. Adams serves as a friendly reminder to debtors everywhere:  a bankruptcy filing is not an opportunity to re-litigate issues that have been finally decided by other courts. 
Background
A husband and wife that had been married for three years filed for a divorce.  In 2004, the Superior Court of Jasper County, Georgia granted a divorce decree and ordered the husband pay the wife $61,295 in alimony.  This amount was secured by a note and a security agreement that included rights in certain of the husband’s trucks and equipment.  The husband’s failure to pay the judgment led to a flurry of state court actions in multiple counties for breach of the security agreement and contempt of court.  In several of the state court actions, the husband filed an answer asserting that the payments had been made in full, the wife was attempting to perpetrate a fraud, and the agreements underlying the judgments had been procured under duress.  In each of the state court proceedings, the court entered orders against the husband.  He never exercised his right to appeal.  Instead, in 2011, the husband filed for protection under chapter 13 of the Bankruptcy Code.  His ex-wife filed a proof of claim for the balance of the alimony that she was owed pursuant to the state court judgments.  The husband, now debtor, objected to the wife’s claim arguing that the state courts had not properly credited him with certain payments and that the agreements underlying the judgments against him had been obtained under duress.  In response, the wife argued that the husband could not object to her proof of claim on these bases because these defenses had been fully and finally litigated in the Georgia state courts and therefore, any rehearing on the issue was barred by issue preclusion.
The bankruptcy court entertained the husband’s objection and denied the wife’s claim.  While the court mused that it could not be certain that the full amount had not been paid, it balked at awarding the husband’s wife’s claim to recover the outstanding amounts owed pursuant to the state court judgment because, according to the bankruptcy court, this certainly was “no $69,000 claim.”  The wife appealed to the district court, which affirmed the bankruptcy court’s decision and reasoned that the bankruptcy court had the power to inquire into the validity of the wife’s claim and was entitled to find that the wife had failed to prove her claim by a preponderance of the evidence. 
Unwilling to give up, the wife appealed to the Seventh Circuit.  Before the Seventh Circuit, the debtor husband argued that the state court decisions were silent with regard to his defenses and that their silence should preclude a finding that his defenses were barred by issue preclusion. 
The Seventh Circuit’s Analysis
The Seventh Circuit agreed with the wife, reversed the district court’s decision, and remanded the case to bankruptcy court.  In arriving at its decision, the Seventh Circuit applied Georgia law (issue preclusion is governed by state law).  In Georgia, the doctrine of issue preclusion–used interchangeably with collateral estoppel–“precludes the re-adjudication of an issue that has previously been litigated and adjudicated on the merits in another action between the same parties or their privies.”  The identity of the parties or their privies must be the same in both actions, but the claim itself does not need to be the same so long as the issue was decided in the previous action.  The Seventh Circuit noted that several state court judgments determined that the debtor owed his ex-wife certain payments.  The state courts’ silence as to the debtor’s defenses was irrelevant, because in Georgia, issue preclusion applies both when an issue is actually adjudicated and when an issue necessarily has to be decided in order for the judgment to be rendered.  By reaching the result they did, the state courts, sub silentio, had decided against the debtor in respect of his defenses.  As such, the doctrine of issue preclusion prevented the bankruptcy court from rehearing the debtor’s defenses and re-determining the validity of the wife’s claim against the debtor’s estate.  Finally, the Seventh Circuit noted that the husband had the opportunity to appeal the Georgia state court judgments but chose not to avail himself of that opportunity.  Instead, he filed for bankruptcy.  A bankruptcy, the court concluded, is not an appropriate substitute for a timely appeal. 
Conclusion
As the Adams decision shows, issue preclusion will bar a litigant from using the bankruptcy system to have claims or defenses reheard despite another courts’ final decision on an issue.  The bankruptcy court may be a safe haven to debtors in many ways, but it does not enable a former litigant turned debtor to “another bite at the apple” to challenge a judgment duly entered by a state court.