By Ryan C. Wood
Hello, my fellow human beings. Filing bankruptcy is a relief from not manageable debts and obtaining a fresh start. A second bite of the apple? Regardless, bankruptcy is a vital part of our economy and bankruptcy is the law. But what if a creditor already has a state court judgment when the bankruptcy filers seek relief under the Bankruptcy Code? A recent Ninth Circuit Bankruptcy Appellate Court addressed this issue regarding a state court judgment entered with allegations of fraud. A bankruptcy court cannot disrupt the findings of the state court in the judgment giving the bankruptcy filer an appeal more or less or circumvent state law procedure to vacate a judgment in the state court that entered the judgment.
Now. It is possible to vacate a default judgment entered in a state court many, many years after the default judgment was entered. You must prove that you never ever received notice of the lawsuit. A proof of service of how you were allegedly served will be filed with the state court under penalty of perjury. Obtain a copy of the proof of service and it will say the date, time and location of where and how you were allegedly personally served. Then it is a matter of proving the service was not possible. You moved from that address two months prior and have new lease agreement and proof of payment of the new lease and utilities. Evidence that provides no doubt the alleged manner of service never could have happened. It is an uphill climb, but possible and successful under the right facts.
The final judgment is “valid until it is set aside,” and can form the basis for issue preclusion under state law. See Am. Contractors Indem. Co., 33 Cal. 4th at 661; see also Schultz v. Harney, 27 Cal. App. 4th 1611, 1618 (1994) (“It is established beyond all reasonable dispute that a final judgment or order, even if erroneous or clearly contrary to a statute, is res judicata if the court had jurisdiction in the fundamental sense, that is, jurisdiction over the subject matter and the parties.” (citations omitted)).
Bankruptcy Courts Cannot Ignore State Court Judgments Findings of Fact and Law
One of key features of bankruptcy is reorganizing and eliminating debts; normally breaches of contract. In some cases other issues such as fraud are alleged in state court lawsuits prior to the bankruptcy case being filed. Bankruptcy lawyers must be wary of language in state court judgments and the consequences on the bankruptcy case and discharge of debts. In a recent Ninth Circuit Bankruptcy Appellate Panel case the issue of a pre-bankruptcy judgment for fraud could not be ignored or changed by the Bankruptcy Court pursuant to the Rooker-Feldman Doctrine. In re Jamshid Daryanabar BAP No. NC-24-1207-GTB Published June 20, 2025.
Rooker-Feldman Doctrine
The Rooker-Feldman doctrine dictates federal district courts do not have jurisdiction to hear arguments again in federal court already decided by sister-jurisdiction state courts from state court judgments. See Carmona v. Carmona, 603 F.3d 1041, 1050 (9th Cir. 2010). The Rooker-Feldman Doctrine bars suits in federal courts by the same parties the lost in state-court but are now complaining of injuries caused by state-court judgments rendered before the district court proceedings commenced and inviting district court review and rejection of those judgments. See Exxon Mobil Corp. v. Saudi Basic Indus. Corp., 544 U.S. 280, 284 (2005)
In Daryanabard, the issues was the language of the state court judgment entered against the debtor, Daryanabard, for fraud. The Bankruptcy Code provides for certain debts to be determined not dischargeable if the debt was incurred due to verbal or written fraud of the debtor. See Section 523(a)(2) of the Bankruptcy Code. Creditors must file an adversary lawsuit and sue the debtor under Section 523(a)(2) to prove the debt was incurred due to fraud. Bankruptcy attorneys must read the state court judgment language to determine if all of the elements of Section 523(a)(2) were already entered in the state court judgment for fraud. It depends upon the wording and clear language regarding the intent to prove fraud.
In this particular case the state court judgment in fact, according to the Bankruptcy Court, had the requisite language for fraud that was enough to preclude the creditor from having to prove again, and deprive the debtor an opportunity to defend again, the allegation of fraud now that the bankruptcy case is filed. The state court judgment creditor need only file the adversary proceeding in bankruptcy court, then file a motion for summary judgment based upon the findings of facts and law of the state court. It is referred to as issue preclusion. Issue preclusion is available in Bankruptcy Court for issues actually litigated and necessarily decided by the state-court judgment.
Problems arise when it is difficult to determine how a state court judgment language matches up with elements of code sections providing how debts are deemed not discharged. Another common argument in Bankruptcy Court is arguing a debt was incurred due to the willful and malicious actions of the debtor. A state court judgment may provide findings of facts that a defendant was willful in their actions or choices; both an intentional act and an intended harm, an intentional act that leads to harm is not enough. What about language regarding maliciousness? For actions to be malicious, they must be intentional, wrongful, and most importantly without justification or excuse.
Bankruptcy Courts do not always find the state court judgment language is enough for issue preclusion to apply and the case continues with new evidence as to what as not part of the state court judgment.
The most common pre-bankruptcy judgments are breach of contracts that do not involve any allegations of fraud or wrongdoing other that nonpayment. Payment is not made breaching the agreement. These types of judgments, if not secured by collateral, are discharged all the time when filing for bankruptcy protection. Breaches of contract are what bankruptcy filers are discharging and the resulting debts.
Breach of fiduciary duty is another argument made by creditors in bankruptcy cases to have a debt or claim ruled not dischargeable. First a fiduciary duty between the parties must be established and then the breach of that duty and resulting damages. An adversary lawsuit must be filed as well.
So my fellow human beings. If the creditor attorney in state courts is crafty, and generally the one that drafts the language of the state court judgment, language in the state court judgment may be not changed and upheld when seeking relief under the Bankruptcy Code. The Rooker-Feldman Doctrine is real, and more and more courts are holding state court findings of facts and law cannot be changed in the Bankruptcy Court providing a second bite of the apple. Issue preclusion will be argued and won if the state court judgment language is clear on the issue and actually litigated in the state court.
Bankruptcy attorneys must read the state court judgments carefully and advise clients accordingly regarding the treatment of that claim or debt.
Side Issue
What if the state court judgment was issued during the 90-day period prior to the filing of the bankruptcy case? The preferential transfer period? If a judgment is entered within the 90-days and it attaches to the property of the debtor securing the judgment, it is deemed a preference pursuant to Section 547 of the Bankruptcy Code. The attachment of the judgment to property is undone and the judgment is no longer secured. But the judgment itself is still binding as to the findings of facts and law in the judgment. While no longer having a secured claim in the bankruptcy case, that does not change the ability to use the judgment for issue preclusion purposes and have a debt or claim deemed not discharged due to fraud, breach of fiduciary duty, willful and malicious debts and others.
