Brown v. Felsen

PETITIONER:Brown
RESPONDENT:Felsen
LOCATION:US Department of State

DOCKET NO.: 78-58
DECIDED BY: Burger Court (1975-1981)
LOWER COURT: United States Court of Appeals for the Tenth Circuit

CITATION: 442 US 127 (1979)
ARGUED: Feb 21, 1979
DECIDED: Jun 04, 1979

ADVOCATES:
Alex Stephen Keller – for respondent
Craig A. Christensen – for petitioner

Facts of the case

Question

Audio Transcription for Oral Argument – February 21, 1979 in Brown v. Felsen

Warren E. Burger:

We’ll hear arguments next Brown against Felsen.

Mr. Christensen, I think you may proceed whenever you’re ready.

Craig A. Christensen:

Mr. Chief Justice and may it please the Court.

This is a suit filed by the petitioner in the bankruptcy court seeking a determination that a debt owed him the respondent and evidenced by a Decree Bankruptcy State Court Judgment was not dischargeable base upon Section 17a (2) and 17a (4) of the Bankruptcy Act.

The bankruptcy court grant summary judgment for the respondent determining the debt to be dischargeable and that order was affirmed by the District Court for the District of Colorado and by the Court of Appeals for the Tenth Circuit.

This Court granted certiorari.

The facts upon which that summary judgment was entered are as follows.

In June 1975, Jefferson Bank and Trust Company began an action against the respondent, Mr. Felsen, his company, Le Mans Motors and the petitioner, Garvin Brown.

The bank’s claim against the respondent was premised upon a promissory note he had executed.

The bank’s claim against Mr. Brown, the petitioner, was premised upon a guarantee of that note he had executed in favor of the bank.

Mr. Brown filed a cross-claim against Mr. Felsen based upon indemnity.

No claims of fraud were pled in the state court action by Mr. Brown against the respondent.

Shortly after the respondent’s deposition, the parties all stipulated to judgment.

Mr. Brown stipulated the entry of judgment in favor of the bank and against him.

The respondent stipulated to the entry of judgment in a like amount in favor of Mr. Brown and against the respondent.

The state court entered judgment based upon that stipulation.

No evidentiary record was made.

Thereafter, the respondent filed his petition in bankruptcy and Mr. Brown commenced an adversary proceeding to have it determined that the debt owed him by the respondent was not dischargeable.

Mr. Felsen moved for summary judgment contending that despite the obligation of the bankruptcy court to determine dischargeability since no fraud had been pled in the state court action, the bankruptcy court could not go beyond that record.

It been res judicata and the debt would have to be termed dischargeable in the absence of that fraud finding.

Harry A. Blackmun:

Did he file the claim?

Craig A. Christensen:

In the state court, Your Honor?

Harry A. Blackmun:

No, in the bankruptcy court?

Craig A. Christensen:

Mr. Brown, I don’t believe that he had filed a claim.

Byron R. White:

Would he have too?

Craig A. Christensen:

No, I don’t believe he have to by virtue of the adversary proceeding because the court is bound there to enter judgment.

The claim would only go into his rights to distribution from the state —

Byron R. White:

I see.

Craig A. Christensen:

— that was eventual rights to collect it.

William H. Rehnquist:

Well, if the bankrupt list him as a debtor, he’s going to be included anyway?

Craig A. Christensen:

Thus, well, he wouldn’t be included in the distribution, Mr. Justice.

William H. Rehnquist:

Is that right?

Craig A. Christensen:

He would not share in the distribution from the estate.

Same with the secured credit he may ought not to file a claim for the deficiency but it doesn’t relate to his rights between he and the debtor with regard to the security and I’m talking from recollection.

I’m not sure perhaps the claim was filed in this matter.

Byron R. White:

And what’s the jurisdiction of the court?

Craig A. Christensen:

The bankruptcy court?

Section 17c provides that the creditor who wants to seek a determination of nondischargeability must file and that filing wasn’t made on a timely basis.

Byron R. White:

Well, the — you say you’re suggesting that however that he doesn’t have to — have been determine to be a creditor by filing a claim?

Craig A. Christensen:

No.

Not — you would have to share in distributions from the estate but not to retain a nondischargeable claim to be collected from post bankruptcy assets.

In any event, if that were important I’d want to supplement the record.

I just don’t recall whether a claim was filed that believe it was.

I’m not sure.

Byron R. White:

Well, it’s just — I just — I was asking this what the jurisdiction —

Craig A. Christensen:

Yes, it comes up but I think under 17c under U.S.C. under 1254 for review of the bankruptcy determinations.

I submit to the Court that the decision of the Tenth Circuit ought to be vacated and petitioner allowed to proceed on this complaint.

I submit that for three reasons.

Number one, the 1970 Amendment to Section 17 of the Bankruptcy Act plays exclusive jurisdiction over Section (a) (2) and (a) (4) Determinations in the bankruptcy court.

So that reliance for this determination on the wording of a judgment issued by a prior Court without this jurisdiction is a misplaced reliance.

Second, the Bankruptcy Act is a federal statute.

It requires a uniform nationwide interpretation with respect to this fresh start provisions.

And it ought not to have the fresh start for dischargeability provisions dependent upon the various standards —

Harry A. Blackmun:

Well, what if the issue had been raised in the state litigation.

There have been allegations of fraud under Colorado and actually Colorado law, and there had been some determinations that way.

I suppose you take the same position that fraud is a federal concept would have to be re-litigated.

Craig A. Christensen:

That’s correct.

I would say that collateral estoppel, I’d say two things.

First of all, dischargeability —

Byron R. White:

Except on facts?

Byron R. White:

You’d say just facts?

Craig A. Christensen:

That’s right.

To the extent 80 facts had been actually litigated by the parties and actually determined those facts would be binding.

The bankruptcy court would consider those facts with any other facts that the parties would which to put before the Court and weigh the facts against the federal standard which is made applicable by 17a (2) —

Byron R. White:

It would be any such a thing as res judicata in that?

Craig A. Christensen:

Well, there would be no res judicata because the claims aren’t the same.

State fraud is not the same as the grounds for dischargeability in the —

Byron R. White:

That’s fundamental to your case up here?

Craig A. Christensen:

That’s correct, Your Honor.

William H. Rehnquist:

Well, we don’t have to decide here any possible instances on which a bankruptcy court might in pursuing this authority given out of 70 amendments, treat factual adjudication in state court is binding on it?

Craig A. Christensen:

That I don’t believe you have to reach that point.

Well, I might be instructive.

This is a case in which no evidentiary record was made.

Byron R. White:

Except — except your exertion the way you made it, it is broad enough to cover those situations?

Craig A. Christensen:

That’s correct.

The third reason that I have for asking this Court to vacate the Tenth Circuit rule is that that rule established by the Tenth Circuit will discourage settlements and it will force unnecessary litigation on already crowded courts?

So that a creditor might preserve his federal rights under Section 17 of the Bankruptcy Act from laws from the failure to assert a prior state court remedy reviving in another form, the very abuse that Congress meant to cure by passing the 1970 amendments.

Previously, the two step process worked in reversed in which a debtor might seek the protection of bankruptcy court and be granted as discharged.

A creditor could then go to state court and seek to obtain a finding of nondischargeability.

The discharged being in the nature of affirmative defense, a default judgment might have been entered against the debtor.

He relying under mistaken assumption that his discharged was automatic and need not to be pled.

Congress pointed out in the legislative history which is cited to the Court in our brief that it wished to instead, plays exclusive jurisdiction in the bankruptcy court.

Now presumably, the creditor may go to the state courts before the bankruptcy proceeding and seek a judgment necessarily in under the Tenth Circuit Rule that will include findings of fraud.

Presumably, if those findings are entered, the converse of the Tenth Circuit rule will be true and it will binding upon the bankrupt.

As I say, reviving in but the converse, the very abuse which Congress meant to cure.

I listen with interest as Mr. Justice Stevens announce the ruling in a bankruptcy court this case morning.

I’ve not read that opinion obviously but I understood Mr. Justice Stevens to state that the Court’s reasoning was at the application of state law on that particular case was going to be mandated because there was no applicable federal standard for the matter and that it was more properly the function of the state courts to determine rights in that particular instance.

It seems to me that that the same reasoning applied to this case would require the vacation of the Tenth Circuit Rule.

There are specific applicable federal standards in this case.

They are contained in Section 17a of the Bankruptcy Act as to which debts are dischargeable and which are not more importantly with respect to the second reason.

Craig A. Christensen:

Here Congress in Section 17c of the Bankruptcy Act which remains fundamentally unchanged in the new Act to take effect this October plays exclusive jurisdiction for two kinds at least.

Section 17a (2) and 17a (4) claims were dischargeability determination in the bankruptcy court removing that jurisdiction from the state courts.

It seems to me that creditors ought not to be encouraged to go into the state courts prior to a bankruptcy seeking default judgment base upon fraud.

Nor should state courts be forced to try issues which are not necessary to the rendition of judgments on commercial paper in order that a creditor may preserve his rights to later raise the federal right for a determination of dischargeability.

William H. Rehnquist:

I presume that the holder of a promissory note against a solvent signor of it has no particular interest in getting a judgment based on fraud, if he can simply get a judgment on the note?

Craig A. Christensen:

Absolutely true, Your Honor.

Absolutely true.

Especially, if the fraud to be maintained is a false financial statement that perhaps only materializes later but even if known at the time.

The remedy to be afforded by the state court is going to be identical.

It’s going to be the same amount unless you want to establish the situation where you force the creditor to seek punitive damages or some other extraordinary judicial remedy because of the fraud.

I — I think that perhaps some clemency if you will on the part of the creditor that is of raising only the issues that are necessary to his judgment on the commercial paper.

It would be the more expedient, the more orderly course of action.

I do not think that it ought to be made mandatory that a creditor assert a state right at one point in the proceedings when he does not even know that there may or will be a bankruptcy.

In order to preserve a federal right at a later stage by analogy, one might suggest that had Mr. Brown in this case receive stock from Mr. Felsen.

That’s consideration for his executing the guarantee, would he have equally been compelled to raise questions of fraud in the delivery of the or obtaining of the stock for the guarantee in the state court in order to preserve his remedies under the securities acts for those claims upon which exclusive jurisdiction is given to the federal district courts.

William H. Rehnquist:

Would you think that Tenth Circuit would come out the same as there been no state court litigation?

I read their opinion as holding more the idea that — what — anything that was litigated or might have been litigated in the state court is binding on the bankruptcy court.

Not that you have to go to state court to litigate?

Craig A. Christensen:

No.

I think had there been no state Court litigation.

There had been no judgment for the state, the bankruptcy court to refer to.

I would agree they’re talking in terms of what had been litigated.

However, it’s interesting that in the two Tenth Circuit cases both Reilly and this case, there was no litigation if you will.

One is a default judgment.

One is a stipulated judgment.

The respondents suggest that perhaps the petition in this case could have asked the respondent to stipulate as to its nondischargeability.

However, I don’t think that’s a remedy available to a creditor.

William H. Rehnquist:

Some of the most successful litigators specialized in default judge?

Craig A. Christensen:

That is correct.

I understand that.

Craig A. Christensen:

But I do not believe that in either of the case of a default judgment or stipulated judgment that there had been any issues litigated between the parties which bear on a federal right under Section 17.

They certainly established whether or not a debt is due on owing from one party to another.

I don’t think they established the federal character of that debt.

For those reasons and for the reason cited in our brief, the petitioner would ask at this Court vacate the judgment of the Court of Appeals for the Tenth Circuit and allow the petitioner to proceed upon his complaint in the bankruptcy case.

Warren E. Burger:

Very well.

Mr. Stephen.

Alex Stephen Keller:

Mr. Chief Justice, may it please the Court.

On behalf of the respondent, we suggest that the Tenth Circuit decision is supported both by good law and by common sense.

The counsel suggests that the determination of dischargeability in the bankruptcy court is exclusive.

I don’t find the word exclusive in the statute that has been cited.

It’s simply says that the bankruptcy court shall determine dischargeability and we don’t quarrel with that.

And that is in the 1970 Amendment to the Act.

But when petitioner says that there is a distinct difference between proving fraud in a state court and proving fraud in the bankruptcy court are disagree with the petition the definition of fraud under Colorado law which we’ve cited in Morrison versus Goodspeed element four on intent is the same as fraud in the federal system.

And to say that the Colorado law on fraud is substantially different from the state law isn’t the fact.

It’s the distinction without any real difference.

If the state court in Colorado when I suspect most states?

Finds a misrepresentation intentionally made and so on and finds fraud to test substantially the same is what the Bankruptcy Act says is nondischargeable.

Byron R. White:

Well, I take it that did you understand counsel to say that he thought the intended the federal law the dischargeability provisions was to make sure that the fraud which barred dischargeability was the same countrywide?

Would be the same countrywide, did you?

Alex Stephen Keller:

No, sir.

I understood counsel to say that in our case, the Colorado law is —

Byron R. White:

That is that different?

That understood him to say that the standard, it would be a federal standard applicable countrywide?

Alex Stephen Keller:

I understood counsel to say that I can’t really argue against that.

Byron R. White:

You can’t?

Alex Stephen Keller:

No.

I — I think —

Byron R. White:

Well, you don’t suggest that Colorado law fraud is the same as the law of fraud in every state, do you?

Alex Stephen Keller:

No, I don’t.

I say it is as stringent as the law in the bankruptcy court.

Alex Stephen Keller:

I’m not familiar with the common law of the other 49 states and therefore I can’t tell you whether all of the elements required in Colorado are to in all of this —

Byron R. White:

And why do you — why do you agree so readily that it has to be that — that Bankruptcy Act contemplates a national standard of fraud rather than picking up the fraud standard from the state in which the bankruptcy court is sitting or picking up the fraud standard of any state — of the — of any state law which might govern the country — or the transaction?

Alex Stephen Keller:

The reason I say that and I could —

Byron R. White:

The — Mr. Justice — that’s the case that Mr. Justice Stevens announce this morning seem to think that the state law wouldn’t govern it and it might the state law might be different in every state.

Alex Stephen Keller:

Well, I couldn’t — of course it would be entirely in error.

But the way I read the —

Byron R. White:

I’m sure you could buy that?

Alex Stephen Keller:

Oh, yes.

Very readily Mr. Justice White but the Bankruptcy Act does in fact going to some more detail about what is fraud.

Then it does with the respect to who gets the rent on is between the trustee and so on.

Byron R. White:

So you think that the perhaps the Bankruptcy Law did contemplate in national standard of fraud with respect to dischargeability?

Alex Stephen Keller:

I think it contemplates a national standard in the light of good common sense.

I don’t think it talks about nitpicking slight differences.

I frankly don’t know the law of fraud of every state.

Counsel says that to reach a contrary result to petitioner’s position that is to sustain the Tenth Circuit means that the courts in the states are going to be overly crowded with creditors unnecessarily trying to plead and prove fraud when they shouldn’t have to.

But the crowd in this Court’s —

Warren E. Burger:

And often don’t need you to get their judgment?

Alex Stephen Keller:

Right.

And that — I think there’s one petitioner’s argument.

But the state courts are crowded as are the federal courts.

And in the case of a creditor who has a bonafide fraud claim.

I don’t mean an afterthought like this one.

I mean, a bonafide fraud claim which he urges throughout and pleads it which anything do here.

That kind of a creditor has many ways to protect himself.

Petitioner suggests that I said in my brief that we can stipulate the non-dischargeability ups against the law.

That isn’t what I said in my brief.

What I said in the brief was that the creditor can seek a stipulation that the question of fraud preserved maybe raised in the bankruptcy Court.

He’s not waiving those claims.

He can do all sorts of things but the first thing he has to do is plead it which he didn’t do in the state court.

Lewis F. Powell, Jr.:

I thought the cross complaint here did refer to misrepresentation?

Alex Stephen Keller:

No, Your Honor.

Lewis F. Powell, Jr.:

It did not?

Alex Stephen Keller:

No, sir.

There was an affirmative defense.

An affirmative defense not a cross-claim.

In which Mr. Brown said, that there were misrepresentation by other defendants in the plural.

Lewis F. Powell, Jr.:

Oh, you did not include — you did not charge Mr. Felsen with misrepresentation?

Alex Stephen Keller:

No, sir.

No cross-claim against Mr. Felsen did he urge fraud and counsel for petitioner just a few minutes ago conceded that.

Warren E. Burger:

Well, I thought it’s just as Mr. Justice Powell did that’s in the answer?

There was just a statement that he was induced the sign such a guarantee by representations in non-disclosures of material facts by other defendants.

Alex Stephen Keller:

It’s not —

Lewis F. Powell, Jr.:

You just stated —

Alex Stephen Keller:

I believe it’s an affirmative —

Lewis F. Powell, Jr.:

That he filed of the appendix?

Alex Stephen Keller:

What?

Byron R. White:

That it says the other defendants that only two other defendants of the case?

Lewis F. Powell, Jr.:

That’s right.

Alex Stephen Keller:

That’s correct.

And I — I see on page 35 an affirmative defense.

I don’t see an allegation of fraud in any cross-claim.

And the Tenth Circuit in the case at bar in its opinion found that there was a casual reference to fraud in the answer.

And it does not meet out rules of civil procedure.

It does not meet Morrison versus Goodspeed and was disregarded by the Tenth Circuit.

That wasn’t the affirmative defense.

Harry A. Blackmun:

But Mr. Keller is it not true that pleading fraud would not have done the guarantor any good in the state court action.

Either I guess the guarantor is only solvent party in the state court proceeding?

Alex Stephen Keller:

As it — as in the action by the banks against the guarantor would have availed him nothing?

Harry A. Blackmun:

I see.

Alex Stephen Keller:

In the guarantor’s cross-claim against Mark Felsen.

Alex Stephen Keller:

Had he chosen in his cross-claim to plead fraud which he didn’t do, on page 36 on that appendix number 5, had he chosen to do that then the bankrupt — if when it came time to try stipulate to a judgment had really three choices: (a) he could stipulate that he was guilty of fraud.

Harry A. Blackmun:

Which is unlikely?

Alex Stephen Keller:

Unlikely.

(b) He could stipulate on a guarantee that he was liable on the guarantee which what he did.

Or (c) he could stipulate for judgment against himself on the guarantee.

But the creditor at that point have properly pleaded could well have insisted on a clause.

That fraud is not waived.

It is asserted for convenience.

It is not inserted in the stipulation or adjustment but none of the creditor’s rights on fraud are waived.

William H. Rehnquist:

Mr. Keller, all of the cross-claim by Brown against Felsen appears at page 38 of the appendix?

Alex Stephen Keller:

Yes, sir.

William H. Rehnquist:

And there as I read it.

There is no mention of a liability based on fraud?

Alex Stephen Keller:

Not a hint.

John Paul Stevens:

If there had been would your case be significantly different?

Assuming the judgment made no reference to fraud.

Which — which controls a complaint or the judgment?

Alex Stephen Keller:

I believe the judgment controls —

John Paul Stevens:

So if there — if there had been an allegation of fraud and no mention of it in the consent judgment, your argument would be the same, I take it?

Alex Stephen Keller:

It would be weaker but it would be essentially the same.

John Paul Stevens:

Right.

William H. Rehnquist:

Then what the Tenth Circuit is saying in effect is that, if Brown did not affirmatively cross-claim against Felsen in the state court base on fraud, the bankruptcy court cannot exercise its power under the 70 amendments to decide independently or de novo or whatever you want to call it whether or not that particular debt was obtained by fraud.

Alex Stephen Keller:

That’s correct, Your Honor.

The Tenth Circuit I think relied on the difference between a consent judgment and a judgment by default on the one hand.

And I believe they referred the U.S. versus Armour which Justice Marshall and I quoted it in my brief talked at length about a consent judgment and if the waiver to litigate the issue.

William H. Rehnquist:

Well what issue?

That the issue was never raised?

Alex Stephen Keller:

The issue of fraud.

William H. Rehnquist:

Yes, the issue will — typically, the creditor going against the debtor or guarantor going against the personal be guaranteed if he feels the person be guaranteed is solvent, just wants a judgment.

He doesn’t care whether its base on contract or fraud or something else and the fact that he fails to urge the ground of fraud would not ordinary be thought of it as a waiver in some subsequent proceeding?

Alex Stephen Keller:

When he stipulates in a judicial sense and enters into a consent judgment base entirely on contract and indemnity, entirely on that.

He has waived his right to —

William H. Rehnquist:

That’s on — that’s only if you can say, it’s a classical res judicata is applicable and that anything that was litigated or might have been litigated as foreclose, isn’t that true?

Alex Stephen Keller:

That is certainly one of the situations.

I think this is a classic case of res judicata.

William H. Rehnquist:

Well, that’s a rather stringent standard to apply in view of the 70 amendments, the Bankruptcy Act, don’t you think?

Alex Stephen Keller:

Well the 70 Amendments, do they really change the substantive law or do they simply change the procedure.

Now Riley versus Nicolas, Justice McWilliams of the Tenth Circuit said that the 70 amendments clean out the procedural aspects but don’t really change the substantive law of bankruptcy.

That’s what the Tenth Circuit has said in the case some five, six years ago.

In the sense it has probably too.

Interestingly enough even in the 1970 amendments, nothing is said by Congress as to what happens when the state court proceedings are finished because there are four situations in which one can find himself.

Situation one is when this — there no state proceeding has ever been commenced.

There of course the creditor has a clean shot to litigate the fraud questions.

The second situation is where there is a state courts case pending at the time the petition and bankruptcy is filed.

Now, the statute deals with that in Section (c) (4), the Congress specifically said that when a state court case is pending and the complaint is filed on nondischargeability for fraud.

The proceedings are state.

The Congress specifically spoke to that.

Interestingly enough, when it comes to the situation such as we have were the state court proceedings have been concluded in their entirely.

Here’s the word, in the Bankruptcy Act and the Congress is not dealt with the questions.

It is a wide open issue.

But what happens when a state Court proceeding has been concluded that’s one of the issues in this case.

If the creditor has properly pleaded fraud, we have one set of circumstances.

If he never raised it we have another.

William H. Rehnquist:

In a state court proceeding?

Alex Stephen Keller:

Yes, sir.

When the creditor and this is the essence I think of the Tenth Circuit’s position.

When the creditor has never hinted fraud in his cross-claim or in his compliant and it has said nothing about it and permits the case to go on and off.

And finally agrees to a consent judgment which under Armour and Company case is identical to a litigated case has he then waived his right to ever litigate fraud.

Is he barred by res judicata?

That’s the question.

John Paul Stevens:

Why should there be a waiver?

That’s really no purpose in alleging fraud in that case and how is the debtor been prejudiced by his failure to do so.

I just don’t understand why he should take the travel to inject into this necessary issue into that lawsuit?

Alex Stephen Keller:

There are many reasons to raise fraud in the state court proceeding.

John Paul Stevens:

You mentioned punitive damages.

For example, I take you start with the proposition that this person is pretty nearly insolvent anyway.

Yes, but judgment proof debtor here.

Alex Stephen Keller:

In our case, it’s so happens that — but let’s take the case —

John Paul Stevens:

So that’s almost by hypothesis.

We’re dealing people with people who go though bankruptcy?

Alex Stephen Keller:

Well, they take bankruptcy after —

John Paul Stevens:

Right.

Alex Stephen Keller:

— the conclusion of the state court and that’s I’ve said that —

John Paul Stevens:

That they were totally solvent and could pay the debt hundred cents on a dollar, why even then?

Why litigate fraud if he can sign a note and say I owe the money?

Why would you take to travel to raise fraud if you could get money more quickly by settling this way?

Alex Stephen Keller:

There are at least under Colorado law some additional benefits by being able to prove fraud.

Exemplary and punitive damages are certainly one of them.

But the execution is authorized under Colorado law and that’s another as admittedly rarely used but if — it is one of the remedies you have in a fraud case.

John Paul Stevens:

That’s very helpful when one of your debtors is corporation though?

Alex Stephen Keller:

No.

John Paul Stevens:

No.

Byron R. White:

Mr. Keller.

May we come back to whether or not there was any reference to fraud in the cross-claim?

Would you take a look at page 38 of appendix?

That is a cross-claim, isn’t it?

John Paul Stevens:

Yes, sir.

Byron R. White:

And you said I understood it that there’s not a word in that with respect to the misrepresentation.

What — what about the first summons under the word preliminary?

Hereby incorporates by reference his previous answer as it fully set forth herein?

Alex Stephen Keller:

Well, that was the previous answer and I’m not sure —

Byron R. White:

Now the previous answers on page 34 as I understand it and on page 35 in paragraph 3 under affirmative defenses as the Chief Justice read to you.

It seems to him and to me that that suggest that misrepresentation was charged with respect with all of the defendants?

John Paul Stevens:

And also paragraph 5 on page 36.

Warren E. Burger:

As paragraph 5 is the one I read to you before.

Alex Stephen Keller:

Yes, and thats the one I’m referring to and that is included in the affirmative defense which uses loose language, misrepresentation and non-disclosure of material facts which is incorporated by reference in the preliminary sense on page 38.

But in the Tenth Circuit opinion and in our brief, we refer to the Colorado rules of civil procedure and the case of Morrison versus Goodspeed which specifically set forth how you plead fraud.

And the allegation — this is in our judgment nothing.

Harry A. Blackmun:

Right.

You’re position now is that although it’s mentioned in the cross complaint, it is improperly pled?

Is that —

Alex Stephen Keller:

Well I would say, yes.

It’s mentioned —

Harry A. Blackmun:

It’s incorporated by reference whatever he said in the —

Alex Stephen Keller:

Yes.

Harry A. Blackmun:

— in the answer.

But he says not properly plead.

Alex Stephen Keller:

But to say that paragraph 5 on page 36 is an allegation of fraud.

I don’t construed —

Harry A. Blackmun:

Paragraphs 3 and 5.

Alex Stephen Keller:

Yes, I don’t construed that way.

He says just the unfair and unconscionable and overreaching.

To say that that’s a pleading of fraud is going a long way is the Tenth Circuit applying the law of Colorado and its own rejected that argument.

Warren E. Burger:

Well how more do you need to say to in a pleading, in a pleading to make out of fraud claim than to say that this was done by misrepresentation and non-disclosure of material facts?

Alex Stephen Keller:

Under —

Warren E. Burger:

What rules of Colorado —

Alex Stephen Keller:

It’s Rule 9 (b) of the Colorado rules of civil procedures —

Warren E. Burger:

Is it in here anywhere?

Alex Stephen Keller:

Yes, sir.

Some page 5 of our brief about the two-thirds the way down.

Alex Stephen Keller:

It says, “Shall be stated with particularity.”

And then we have the case of Morrison versus Goodspeed which is a Colorado case which sets out what you have to plead.

In the Tenth Circuit, I believe Judge Barrett wrote the opinion applied those rules in reaching its decision.

So we say that in our case and the case at bar, the question of fraud is an afterthought, coming after the completion of all prior proceedings, the state courts had already acted.

The creditor did not perfect his rights and all state court proceedings and civilly wants — the creditor wants a second bite in an apple which never existed because there was no fraud properly urge in the state proceeding.

Warren E. Burger:

Mr. Christensen.

Craig A. Christensen:

Very briefly Your Honor.

Mr. Chief Justice and may it please the Court.

First, Mr. Keller suggest that the word “exclusive with respect to the subject matter jurisdiction of the bankruptcy court under Section 17 does not appear in the statute.

That is true but I would cite to the Court Section 17c (2) which is mandatory to a creditor.

It says the creditor who contends that his debt is not discharge under clause 2 4 or 8 of subdivision (a) and we’re dealing here only with Sections 2 and 4 must file an application for determination of dischargeability within the time fixed by the Court.

Then it goes on subsection 3 in requires that court to hold a hearing upon notice and to determine dischargeability.

Really don’t think that there’s much dispute that the exclusive jurisdiction for the determination of this type of dischargeability lies is in the bankruptcy court.

Byron R. White:

Maybe — maybe so that the he had to go to the court but the question is what are the ingredients of that decision —

Craig A. Christensen:

That — that is correct Mr. Justice White.

Byron R. White:

And you seem to concede yourself that if the whole case turn on the fact that had been determining against the creditor in the state proceeding.

There wouldn’t be much to the exclusive jurisdiction of the bankruptcy court?

Craig A. Christensen:

If the issue had been determined against the debtor?

Byron R. White:

If — if it had been determined against the creditor.

If the fact, if there’s a crucial fact —

Craig A. Christensen:

Yes.

Byron R. White:

— determined against the creditor whose claiming nondischargeability.

There wouldn’t be much of the proceeding in the bankruptcy court, would there?

Craig A. Christensen:

No.

I think there would be collateral estoppel if it’s a matter of fact that it was determined —

Byron R. White:

And did you know eventhough — eventhough it was exercising exclusive jurisdiction.

Craig A. Christensen:

That’s correct.

And that the — in the exercise of that jurisdiction, the facts that had been previously determined and litigation would be —

Byron R. White:

Well, counsel it is just suggesting that that’s the case here.

And that — that if you want to have the bankruptcy court exercise — that you can get to bankruptcy court to exercise this exclusive jurisdiction hereto, it’s just happens to be bound by the state court.

Craig A. Christensen:

I understand that contention.

I would disagree with that contention for two reasons.

Number one, I don’t believe that those issues ever were raised or litigated in the state courts.

So to those facts whoever found his not contending the facts were found adverse to my client?

He is contending my client waived its right to ever have those facts determined.

That’s really the issue before the court.

Whether my client waived the federal right by failing to pursue a state right and I believe that the best analogy I can suggests to the Court is had Mr. Brown received stock and the same pleadings would have filed in the state court, would he have waive all of his rights to any securities law violations for which exclusive jurisdiction is placed in the federal district courts?

Byron R. White:

What if the — what if the creditors sues in the state court for fraud?

Craig A. Christensen:

And if it’s actually litigated —

Byron R. White:

Well —

Craig A. Christensen:

— I think those facts are binding.

If it’s by default judgment —

Byron R. White:

Yes, but let me suggest to you.

What if he gets a judgment for fraud?

It depends on the nature of that judgment.

Alright.

So and — and can he file on as a claim?

Craig A. Christensen:

Yes.

The Ninth Circuit has dealt with that and —

Byron R. White:

Then what if he said — and what if there’s no asset?

What if there’s no assets and then he wants the determination of nondischargeability?

Craig A. Christensen:

Well, the —

Byron R. White:

Would the bankruptcy court re-determine the legal question of fraud?

Craig A. Christensen:

I think that the — if it actually been litigated.

It would re-determine to the extend that the facts found —

Byron R. White:

The law — the law questions —

Craig A. Christensen:

— don’t reach the standards of Section 17.

Byron R. White:

So you say it works both ways?

Craig A. Christensen:

Yes.

Byron R. White:

What place?

Byron R. White:

I mean the legal — the issue of fraud would never bind the bankruptcy court even if the creditor had gotten in judgment for fraud in the state court?

Craig A. Christensen:

Not the legal test.

That’s correct.

The facts found if there were — if the facts were found that a material misrepresentation is made.

Byron R. White:

Yes, right.

Craig A. Christensen:

That fact would be binding but the state court determination of fraud under its states standards of pleading requirements would not bind the federal court’s determination of federal law for dischargeability.

Byron R. White:

I have — has it been and there been a lot of cases on this?

Craig A. Christensen:

I believe that there had been five since the 1970 —

Byron R. White:

And that —

Craig A. Christensen:

— amendments that have reach the circuits.

Byron R. White:

And the what’s the — is there some general view about whether there’s a national standards and —

Craig A. Christensen:

I believe that three — four of the five circuits to reach the question have allowed the bankruptcy court to consider it the matter again with extrinsic evidence.

Byron R. White:

What about the standard —

Craig A. Christensen:

The standard applied —

Byron R. White:

Is it a national standard?

Craig A. Christensen:

I don’t know that either courts have ever addressed that question.

They always talk in terms of the federal act and but they never states specifically whether that federal act is being interpreted in the light of states standards or not Mr. Justice White.

The closest indication would come out of the Ninth Circuit, the Hultman case.

There fraud was actually litigated and determined to exist and the debtor went into bankruptcy court.

The creditor presented that case and the Ninth Circuit said, no, that maybe prima facie but it’s not going to be the standard of exclusive.

We’re going to let the debtor raise additional evidence?

Byron R. White:

That’s — that’s close to this —

Craig A. Christensen:

I think it’s suppose —

Byron R. White:

As close to the example I gave.

Craig A. Christensen:

Yes.

That the closest to give question —

Byron R. White:

What about —

Craig A. Christensen:

— that I can think of?

Byron R. White:

What about – what about you said four of the five.

What about the fifth?

Craig A. Christensen:

The fifth is the Tenth Circuit.

That’s this case.

Byron R. White:

Oh, I see.

Craig A. Christensen:

So it is contrary.

Warren E. Burger:

You haven’t specifically back up to this Rule 9 (b)?

How do you think that enters into the case?

Craig A. Christensen:

The Colorado rule of procedure.

I think two observations are necessary there Mr. Chief Justice.

First of all, I must concede to this Court that the cross-claim itself does not ask for any relief base specifically on fraud and it does not asked for the extraordinary type of remedy of punitive damages are body execution that might be available for fraud, so where the case turning solely on whether fraud had been plead in accordance with that rule.

I’m not certain that absolutely has been.

I believe it has.

It talks in terms of misrepresentation and identifies the misrepresenting parties.

It states that the facts from material and I think the implication although not stated is that there was reliance or the guarantee would have been executed.

But the second more important thing is I don’t think that federal rights ought the turn on the various 50 standards in the states for fraud and their pleading requirements.

I don’t think that the —

Warren E. Burger:

Why?

Why not?

Craig A. Christensen:

Because I think the fresh start provisions are probably the most essential ingredient to bankrupt.

If he doesn’t obtain the first start, there’s little or no benefit for him to seek to protection of the act and to make those first start provisions turn upon where he has his residence at the time of the filing of the —

Byron R. White:

Oh, it did before 1970, didn’t it?

Craig A. Christensen:

Absolutely.

William H. Rehnquist:

Well and certainly, you concede if a issue of fraud had been fully litigated that there would be a collateral estoppel of thing?

Craig A. Christensen:

Would be bind in fact —

Byron R. White:

Only — only the facts?

Craig A. Christensen:

That was correct.

Because I — as I understand the collateral estoppel will only go to facts found.

Res judicata goes to the identicality of the legal issues in —

Byron R. White:

You would think — you would say the state decision could have they — could have concluded there was fraud under state law and the federal court could decide.

There wasn’t any fraud or that there was regardless of what the state court concluded on the facts?

Craig A. Christensen:

That’s correct because the legal standards may be different.

William H. Rehnquist:

But it would have to be on the basis of a different legal standard not on the over turning of the factual determination?

Craig A. Christensen:

I think that’s correct.

That if the facts have been litigated, I believe the parties have to live with them but to the extent that the legal standards are different.

The bankruptcy court has a federal obligation to apply its own standards.

Obviously Mr. Justice White, it does beg the question to assume that those will be national standards instead of states standards.

That is one of the questions this Court must decide.

But I would argue that the better rule is to allow the parties to be bound by the facts and to allow the bankruptcy court to make this separate legal determination.

Otherwise you force the creditors in every single case to plead and prove or otherwise dispose of fraud just to preserve a federal right for those few cases in which bankruptcy actually happens.

And for that reason, I’d ask that this Court vacate the Tenth Circuit judgment and allow the petitioner to proceed.

Byron R. White:

You don’t — I take it you don’t — you think there’s anything specific in the legislative history of that?

Craig A. Christensen:

It is cited in the brief, Mr. Justice White, the legislative history.

Byron R. White:

Yes.

But is there something specific that reads right on it or not?

Craig A. Christensen:

I’m sorry?

I didn’t hear your question.

Byron R. White:

Is there something that reads right on it out of the legislative history?

Craig A. Christensen:

I think that in the brief at page 7.

Byron R. White:

Page 7 then —

Craig A. Christensen:

It talks — it talks about exclusive jurisdiction at the very top where we cite the Senate House reports.

Byron R. White:

That — that doesn’t get you very far along the line, is it?

Craig A. Christensen:

With respect to the federal as oppose to state standard, no.

There’s nothing in the legislative history that makes that definitive statement as it does about exclusive jurisdiction.

Byron R. White:

Or it doesn’t help you one way or another with respect to collateral estoppel?

Craig A. Christensen:

Well, I think it does because I think not a collateral estoppel but a res judicata, I don’t believe that that is finding if the first court had not subject matter jurisdiction and if Congress intended and did in fact as they state put an exclusive subject matter jurisdiction in the bankruptcy court.

I don’t think res judicata would apply.

The Colorado courts and we’ve cited these cases in our brief have specifically said they lack subject matter jurisdiction to determine dischargeability issues.

William H. Rehnquist:

That’s a post-bankruptcy determination.

Craig A. Christensen:

That’s correct.

I think it would be applicable in the pre-bankruptcy if you pled your case in terms of a federal dischargeability instead of a state remedy for which they have jurisdiction.

Thank you.

Warren E. Burger:

Thank you gentlemen.

The case is submitted.