Collateral Estoppel Applied to “Death Penalty” Default Judgment

Posted by NCBRC - July 10, 2018

Where the family court litigation was resolved in favor of the debtor’s ex-husband after the court struck the debtor’s pleadings in a sanctions order, the elements of collateral estoppel applied to preclude the debtor from challenging the state court orders in her subsequent chapter 7 bankruptcy case. Dahlin v. Dahlin, No. 16-36169, Adv. Proc. No. 17-3425 (Bankr. S.D. Tex. May 15, 2018).

In their divorce, Kathryn Dahlin retained their home and agreed to make mortgage payments, while the mortgage stayed in Mark Dahlin’s name. Ms. Dahlin signed a deed of trust to “secure assumption” in which she agreed to give Mr. Dahlin the right to foreclose in the event she failed to make mortgage payments. Mr. Dahlin later initiated proceedings to have custody of the couple’s children transferred to him. At trial on that proceeding, the court issued a “sanctions order” striking all of Ms. Dahlin’s affirmative pleadings. In a subsequent order the court awarded custody to Mr. Dahlin with Ms. Dahlin ordered to pay domestic support.

Ms. Dahlin filed her first bankruptcy petition and Mr. Dahlin filed secured claims based on missed mortgage payments and unpaid medical bills for their children. The bankruptcy court dismissed her case, but before closing, the court issued an order awarding Mr. Dahlin $13,185.00 in attorney’s fees related to the deed of trust.

Ms. Dahlin filed a second bankruptcy. Mr. Dahlin filed secured claims for mortgage payments, domestic support, and the attorney’s fees he was awarded in the previous bankruptcy. Ms. Dahlin initiated an adversary proceeding challenging Mr. Dahlin’s claims. Mr. Dahlin countered that her arguments were precluded under the doctrine of res judicata.

The court began with the question of whether the state family court sanctions order striking Ms. Dahlin’s pleadings constituted litigation such that she could be collaterally estopped from challenging that order and the subsequent domestic support order in her bankruptcy proceeding.

The court found that, under Fifth Circuit precedent, the unique nature of the “death penalty” sanction satisfies the requirement of full litigation where the sanctioned party presented her defenses and was only denied the opportunity to fully litigate them because of her own sanctionable conduct. The bankruptcy court noted that because it could not address the procedural validity of the state court order, the proper avenue for challenging it would have been direct appeal after the state case was dismissed and the order became final.

Furthermore, although the family court did not make findings of fact, that litigation included Mr. Dahlin’s claims for medical expenses for the children and Ms. Dahlin did not challenge the factual underpinnings of those claims. The bankruptcy court thus granted summary judgment to Mr. Dahlin on the domestic support claims.

With respect to the mortgage lien, Mr. Dahlin argued that it was also encompassed under the court’s domestic support order even though that court did not specifically address it in the order. He maintained that Ms. Dahlin raised the issue of the mortgage obligation in the state court proceeding and the state court’s final order denied her any relief not specifically granted. The bankruptcy court disagreed. Because the family court did not address the mortgage issue at all, the bankruptcy court found its ultimate order insufficient to trigger application of res judicata and denied Mr. Dahlin’s motion for summary judgment on that claim.

Mr. Dahlin also challenged certain claims Ms. Dahlin asserted against him in her adversary complaint as precluded due to her failure to list them as contingent, unliquidated claims in her bankruptcy petition. The court found that while Ms. Dahlin hinted at claims against Mr. Dahlin in her schedules, she failed to satisfy the pleading requirements of section 521(a) by not specifying the nature of her claims. Therefore, she was precluded from raising the claims in her adversary proceeding and Mr. Dahlin was entitled to summary judgment.

The court turned to Mr. Dahlin’s claim for the attorney fee award he obtained in Ms. Dahlin’s prior, dismissed bankruptcy case. The court found that the previous bankruptcy court based its award of attorney’s fees on the terms of the parties’ secure assumption agreement and on evidence presented by Mr. Dahlin’s attorney as to the reasonableness of his fees and their connection to the agreement. However, because the order for attorney’s fees was part of a bankruptcy case that was later dismissed, the finding of full and fair litigation of the issue did not resolve the application of collateral estoppel. Rather, the court found that “once her case was dismissed, the Court must reset the parties to the ‘status quo ante’ and estoppel cannot carry Mr. Dahlin’s earlier award of attorney’s fees forward into Ms. Dahlin’s second bankruptcy case.”

Dahlin Bankr SD Tex May 2018


Post a Comment

You must be logged in to post a comment.