In re Lopez

In re: JAVIER LOPEZ, Debtor.

No. 21-10836-j13

United States Bankruptcy Court, D. New Mexico

April 19, 2022

R Trey Arvizu, III Attorney for Debtor R. Trey Arvizu III-Attorney

E.P Bud Kirk Attorney for Henrietta Lopez

MEMORANDUM OPINION AND ORDER DETERMINING PRECLUSIVE EFFECT OF STATE COURT DEFAULT JUDGMENT

ROBERT H. JACOBVITZ, UNITED STATES BANKRUPTCY JUDGE

Debtor's former spouse, Henrietta Lopez, filed two claims against the bankruptcy estate based on a state court divorce decree obtained pre-petition against the Debtor by default (the "Default Judgment"):^[1] 1) Claim No. 1-3, asserting a priority claim for child support in the amount of $7, 548.60 and 2) Claim No. 13-2, asserting a secured claim in the amount of $227, 514.90.^[2] Debtor objected to both claims. (Doc 71).^[3] Debtor and Ms. Lopez contest whether and to what extent the Default Judgment has issue and/or claim preclusive effect with respect to Ms. Lopez's claims. The Court set a briefing schedule requesting the parties to brief the following issues:

Whether the [Default Judgment] has preclusive effect (claim preclusion, issue preclusion, or both) as to the total amount of Ms. Lopez's claim, the amounts of the components of her claim, and the character of her claim (e.g., child support, alimony, or property division.).

Doc. 68.

Ms Lopez contends that the Default Judgment should be given preclusive effect as to both the nature of the claims as domestic support obligations under 11 U.S.C. § 523(a)(5)^[4] and as to the total amount of the claims. Debtor disagrees, pointing out that issue preclusion generally does not apply to judgments obtained by default, and arguing that claim preclusion does not apply because the nature and amount of the claims for bankruptcy purposes is not the same cause of action or the same subject matter as the claims determined by the Default Judgment.

Issue Preclusion vs. Claim Preclusion

A bankruptcy court may, under appropriate circumstances, apply the doctrines of both claim preclusion and issue preclusion to bar subsequent litigation in bankruptcy court of claims and issues determined in a prior final state court judgment.^[5] Under the Full Faith and Credit statute, 28 U.S.C. § 1738, "a federal court must give to a state-court judgment the same preclusive effect as would have been given that judgment under the law of the State in which the judgment was rendered." Migra v. Warren City Sch. Dist. Bd. of Educ., 465 U.S. 75, 81 (1984). The Default Judgment was entered by a New Mexico state district court. Thus, the Court will apply New Mexico preclusion law.

Under New Mexico law, claim preclusion requires satisfaction of the following elements:

(1) . . . a final judgment in an earlier action, (2) the earlier judgment was on the merits, (3) the parties in the two suits are the same, and (4) the cause of action is the same in both suits.

Potter v. Pierce, 2015-NMSC-002, ¶ 10, 342 P.3d 54, 57 (citation omitted).^[6] Issue preclusion under New Mexico law requires the following:

first, the parties in the second suit must be the same or in privity with the parties in the first suit; second, the causes of action must be different; third, the issue or fact must have been actually litigated in the first case; and fourth, the issue must have been necessarily determined in that case.

Blea v. Sandoval, 1988-NMCA-036, ¶ 18, 107 N.M. 554, 559, 761 P.2d 432, 437 (citation omitted).^[7]

If the party asserting issue preclusion establishes these four elements, the burden shifts to the opposing party to demonstrate that he or she was not afforded a fair opportunity to litigate the issue in the earlier proceeding.^[8]

A major difference between claim preclusion and issue preclusion is that under claim preclusion, a final judgment will bar subsequent litigation of not only the claims actually asserted in the first action, but also all claims arising out of the same transaction or occurrence that could have been asserted even if they were not, whereas issue preclusion only bars re-litigation of issues and facts actually litigated, but applies even if the subsequent action involves a different claim.^[9] Thus, a state court final judgment, including a judgment obtained by default, can have claim preclusive effect because claim preclusion does not have an actual litigation requirement.^[10]

However, it is well-settled that claim preclusion does not apply to non-dischargeability claims asserted in bankruptcy cases because non-dischargeability claims can only be asserted in connection with a bankruptcy case; consequently, the "same claim" requirement for application of claim preclusion cannot be satisfied. Brown v. Felsen, 442 U.S. 127, 138 (1979) (whether a debt is excepted from discharge is a matter within the exclusive jurisdiction of the bankruptcy court and could not have been raised in the state court action; thus, claim preclusion does not apply to bar subsequent litigation of a dischargeability claim).^[11] The Default Judgment is not entitled to claim preclusive effect as to the nature of the claims, but has claim preclusive effect to establish the total amount of the claims

Nature of the Claims

Ms Lopez asserts that Claim No. 1-3 and Claim No. 13-2 each constitute a claim for a domestic support obligation ("DSO") under § 523(a)(5) entitled to priority under § 507(a)(1)(A). Ms. Lopez's claims are based on the Default Judgment, which awarded judgment in favor of Ms. Lopez in the following amounts:

Judgment . . . for the sum of $7, 442.00 for child support arrearages which judgment shall bear interest at the rate of 4.00% per annum from the date of entry of the judgment; and

Judgment . . . in the total sum of $215, 272.02 for reimbursement of her sole and separate property contributions to the Burke Road home, attorney's fees and taxes, and equalization of the allocation of assets and liabilities.^[12]

Default Judgment, ¶¶ G and M.^[13]

Mr. Lopez contends that the Default Judgment cannot have claim preclusive effect as to the nature or amount of the claim because whether such claims are DSOs is not the same claim as the claim asserted in the dissolution of marriage proceeding before the state court. This Court agrees that the Default Judgment is not entitled to claim preclusive effect as to the nature of the claims; however, the Default Judgment preclusively fixes the amount of the claims.

The Bankruptcy Code defines DSO as:

a debt that accrues before, on, or after the date of the order for relief in a case under this title . . . that is

(A) owed or recoverable by-(i) a spouse, former spouse, or child of the debtor . . .

(B) in the nature of alimony, maintenance or support . . . of such spouse, former spouse, or child of the debtor . . ., without regard to whether such debt is expressly so designated;

(C) established . . . on, or after the date of the order for relief in a case under this title, by reason of applicable provisions of-

(i) a separation agreement, divorce decree, or property settlement agreement;

(ii) an order of a court of record; or

(iii) a determination made in accordance with applicable nonbankruptcy law by a governmental unit; and

(D) not assigned to a nongovernmental entity . . . .

§ 101(14A) (emphasis added).^[14]

Thus, based on the statutory definition of DSO, the Court must look beyond the labels attributed to the obligation by the state court to determine whether the obligation is, in fact, "in the nature of . . . support" and constitutes a DSO. Consistent with the statute, Tenth Circuit law requires the Court to conduct "a dual inquiry into both the parties'[ ] intent and the substance of the obligation" to determine whether an obligation is in the nature of support.^[15] Sampson v. Sampson (In re Sampson), 997 F.2d 717, 723 (10th Cir. 1993). "[T]he crucial issue is whether the obligation imposed by the divorce court has the purpose and effect of providing support . . . ." Id. (quoting 2 Homer H. Clark, Jr., The Law of Domestic Relations in the United States, § 17.7 at 305 (2d ed. 1987) (emphasis added by Sampson).

Granted, state courts enjoy concurrent jurisdiction to determine whether an obligation is a DSO under § 523(a)(5), ^[16] and state law "may provide guidance on the issue of support." In re Busch, 369 B.R. 614, 622 (10th Cir. BAP 2007). Even so, "[t]he bankruptcy court has the responsibility to make its own determination of the character of the obligation from the facts at hand, [and] not rely on the denomination of the obligation in the divorce decree." Busch, 369 B.R. at 622 (citations omitted). Whether a claim is "in the nature of support" is ultimately a question of federal bankruptcy law, not state law. Yeates v. Yeates (In re Yeates), 807 F.2d 874, 877 (10th Cir. 1986) ("[T]he legislative history indicates that '[w]hat constitutes alimony, maintenance, or support, will be determined under the bankruptcy laws, not State law.'" (quoting H.R. Rep. No. 595, 95th Cong., 2^d Sess. 364, reprinted in 1978 U.S. Code. Cong. & Ad. News 5963, 6320; S. Rep. 989, 95th Cong. 2d Sess. 79, reprinted in 1978 U.S. Code Cong. & Ad. News, 5787, 5865)); see also In re Goin, 808 F.2d 1391, 1392 (10th Cir. 1987) ("Generally, the determination of whether an obligation arising out of a divorce settlement is support is a matter of federal law, not state law.") (citation omitted). Factors relevant to the determination of whether an obligation is in the nature of support include "the relative financial circumstances of the parties at the time of the divorce," Sampson, 997 F.2d at 726, and "a spouse's need for support at the time of the divorce . . . ." Id. at n. 7.

The Default Judgment clearly designates the award of $7, 442.00 as "child support arrearages" and includes a worksheet attachment that determines...