California Bankruptcy Court Says Debtor Barred From Challenging State Court Fraud Judgment Void

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The United States Bankruptcy Court for the Central District of California recently ruled that a debtor cannot challenge the discharge of a judgment obtained by a title insurer for an underlying fraud claim. To see Title guarantor of Stewart. Co. v. Park (In re Park), 2021 Banker. LEXIS 3539 (Bankr. CD Cal. 29 Dec. 2021). In 2013, the legal predecessor of the title company obtained a default judgment in the amount of $278,052.60 against the debtor. The judgment stemmed from a 2011 real estate investment in which the debtor arranged for the predecessor to make a loan in exchange for a deed of trust over property. When the owners of the building brought an action alleging that their signatures were forged, the predecessor filed counterclaims against the debtor for fraud, among other things. The debtor defaulted and the predecessor obtained judgment by default. In 2020, the debtor filed for bankruptcy and the title company filed an action for release under Sections 523(a)(2) and (a)(6) of the Bankruptcy Code. Under Section 523(a)(2), “[a] discharge under section 727 . . . of this title does not release an individual debtor from an indebtedness of money, goods, services or extension, renewal or refinancing of credit, insofar as it has been obtained by false pretences, misrepresentation or actual fraud, other than a statement concerning the financial condition of the debtor or an insider. Similarly, Section 523(a)(6) “excludes from discharge debts resulting from ‘willful and malicious’ injury by a debtor to another person or to another’s property.” The title company then sought summary judgment.

The Court granted the request, considering that the doctrine of the prohibition of issue prohibits the debtor from contesting here the exigibility of the debt. First, the Court found that the state court’s default judgment for fraud involved claims identical to those covered by Sections 523(a)(2) and (a)(6). Second, it held that the debtor had been served in this action and therefore had “actual knowledge of the existence of the dispute”, whether he responded or appeared. The Court also found that the issues were necessarily decided and were final and substantive for the above reasons, which satisfies the third and fourth elements of the issue exclusion. Finally, it is undisputed that the party against whom foreclosure is sought here (the debtor) is the same as the party in the state lawsuit. Accordingly, the Court granted the title company’s motion for summary judgment.

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