The United States Bankruptcy Court for the Central District of California recently held that a debtor was precluded from contesting the dischargeability of a judgment obtained by a title insurer for an underlying fraud claim. See Stewart Title Guar. Co. v. Park (In re Park), 2021 Bankr. LEXIS 3539 (Bankr. C.D. Cal. Dec. 29, 2021).  In 2013, the title company’s predecessor-in-interest obtained a default judgment in the amount of $278,052.60 against the debtor.  The judgment arose from a 2011 real estate investment in which the debtor arranged for the predecessor to give a loan in exchange for a deed of trust on a property.  When the owners of the property filed an action claiming their signatures were forged, the predecessor filed cross-claims against the debtor for fraud, among other claims.  The debtor defaulted and the predecessor obtained the default judgment.  In 2020, the debtor filed a bankruptcy petition, and the title company filed a dischargeability action 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 discharge an individual debtor from any debt for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor’s or an insider's financial condition.”  Likewise, Section 523(a)(6) “excepts from discharge debts arising from a debtor’s ‘willful and malicious’ injury to another person or to the property of another.”  The title company then moved for summary judgment.

The Court granted the motion, holding that the doctrine of issue preclusion bars the debtor from contesting the dischargeability of the debt here.  First, the Court found that the state court’s default judgment for fraud addressed identical claims to those under Sections 523(a)(2) and (a)(6).  Second, it held that the debtor was served in that action and therefore had “actual knowledge of the existence of the litigation,” regardless of whether he answered or appeared.  The Court also found that the issues were necessarily decided and were final and on the merits for the aforementioned reasons, which meets the third and fourth elements of issue preclusion.  Finally, there was no dispute that the party against whom preclusion was sought here (the debtor) is the same as the party in the state court action.  Accordingly, the Court granted the title company’s summary judgment motion.

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com, Desiree McDonald at dmcdonald@riker.com, or Kevin Hakansson at khakansson@riker.com.