Memorandum of Decision Re: Res Judicata

IN THE UNITED STATES BANKRUPTCY COURT FOR THE NORTHERN DISTRICT OF CALIFORNIA
In re PERRY and ALLISON ECTON,                                       No. 93-12418      Debtors. ___________________________/ RUPPENTHAL & ASSOCIATES, INC.,      Plaintiff,    v.                                                                                   A.P. No. 94-1050 PERRY and ALLISON ECTON,      Defendants. ______________________________/
Memorandum of Decision
     Just a few days before debtors and defendants Perry and Allison Ecton filed their Chapter 7 petition, and while they were clearly in financial distress, the state court entered a default judgment against Perry in a pending lawsuit. The judgment recited a finding that Perry "mismanaged and converted" plaintiff Ruppenthal & Associate's $100,000.00 capital contribution to a partnership in which Perry was the general partner. Ruppenthal now seeks summary judgment on grounds that the default judgment precludes this court from adjudicating the case on its merits.      The court has no problem finding that it is precluded from hearing the case where there has been a full trial on the merits in state court. See In re Bugna, 33 F.3d 1054 (9th Cir.1994). However, it chafes at the idea that a default judgment in state court precludes a trial on the merits in bankruptcy court. State court litigants lose by default for too many reasons having nothing to do with wrongful conduct, including simple inability to afford to respond or to comply with discovery requests.      In Brown v. Felson, 442 U.S. 127 (1978), the Supreme Court clearly set forth the rule that the results of state court litigation did not necessarily preclude deciding dischargeability actions on their merits in bankruptcy court. The court found that it was unfair to both sides to make them conduct a state court case with an eye to possible later bankruptcy proceedings. Financially strapped defendants should not have to spend scant resources defending fraud allegations when they admit to owing the debt contractually; plaintiffs should not be afraid to accept a stipulated judgment because there is no confession of fraud.      In Grogan v. Garner, 498 U.S. 279 (1991), the court did not intend to abrogate Brown v. Felson. It merely held that the standard of proof in a discharge case (and by analogy, a dischargeability case) is the preponderance of the evidence, so that fully adjudicated state court findings could not be disregarded as being subject to a lesser standard.      Unfortunately, the Appellate Panel in In re Nourbakhsh, 162 B.R. 841 (9th Cir.BAP 1994), in a 2-1 decision, held that default findings precluded litigation on the merits where state collateral estoppel law gives preclusive effect to default judgments. This court believes that the dissent is correct and the majority opinion wrong in that case. The decision sorely tests this court's devotion to stare decisis and the belief that appellate panel decisions are binding. See In re Muskin, Inc., 151 B.R. 252 (Bkrtcy.N.D.Cal.1993).      In prior cases, the court has choked down its strong disagreement with Nourbakhsh and followed it because it had no valid basis for distinguishing it. See, e.g., In re Vierra, -- B.R. -- (Bkrtcy.N.D.Cal.1994). However, it declines to follow Nourbakhsh in this case because the state court's findings are not sufficient. Unlike Nourbakhsh, where the court made detailed findings after an extensive hearing, the state court in this case did not hold an extensive hearing and made only scant findings. The findings made by the state court are insufficient to establish a nondischargeable debt. The mere fact that the parties were partners does not, in itself, result in a nondischargeable debt for breach of the partnership agreement or mismanagement. In re Short, 818 F.2d 693, 695 (9th Cir.1987). The finding of conversion is insufficient because it does not go into specific detail as to the nature of the conversion; not every technical conversion results in a nondischargeable debt. Davis v. Aetna Acceptance Co., 293 U.S. 328, 332 (1934).      For the foregoing reasons, the motion for summary judgment will be denied. Counsel for either side may submit an appropriate form of order.
Dated: October 25, 1994                                                                               _______________________                                                                                                                       Alan Jaroslovsky                                                                                                                        U.S. Bankruptcy