decided: July 26, 1979.
GERALD J. ROSS, ALSO KNOWN AS JERRY ROSS, BANKRUPT; GERALD J. ROSS, APPELLANT
APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA (D.C. No. B-75-1525 in Bankruptcy)
Before Aldisert, Van Dusen and Gibbons, Circuit Judges.
Author: Van Dusen
Opinion OF THE COURT
This appeal challenges a district court decision which reversed a bankruptcy judge's order and granted summary judgment in favor of Metro-Goldwyn-Mayer, Inc. (MGM). The final district court order held that a debt of Gerald J. Ross to MGM was not dischargeable in bankruptcy, pursuant to § 17(a)(2) of the Bankruptcy Act, 11 U.S.C. § 35(a)(2), and that it would be improper to litigate this dischargeability issue since a prior decision of the United States Court of Appeals for the Second Circuit*fn1 involving the same parties was dispositive of that issue.*fn2 This court reverses the decision of the district court and remands, so that the bankruptcy court may review the entire record of the earlier action and determine, in light of principles of collateral estoppel,*fn3 Brown v. Felsen, 442 U.S. 127, 99 S. Ct. 2205, 60 L. Ed. 2d 767 (1979), and this opinion, whether the factual record supports the application of the doctrine of collateral estoppel to preclude litigation of this dischargeability question in the bankruptcy court.
The debt found not to be dischargeable by the district court arose out of contract litigation between the parties in the Southern District of New York. MGM brought suit in the United States District Court for the Southern District of New York to rescind its contract with Gerald and Arthur Ross ("Ross brothers").*fn4 The grounds for this suit included contentions that the Ross brothers had made misleading statements and omitted to disclose material facts in violation of § 10(b) of the Securities and Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder.*fn5 The Ross companies counterclaimed and brought suit against MGM for breach of contract and violation of the federal securities laws.*fn6
After a five-week trial in the Southern District of New York, the court concluded that MGM should have been aware of the 70,000 free records from the documents it reviewed. The court found that MGM had breached its agreement and awarded damages to the Ross brothers. See Metro-Goldwyn-Mayer, Inc. v. Ross, 363 F. Supp. 23 (S.D.N.Y.1973).
The United States Court of Appeals for the Second Circuit reversed and held that the Ross brothers had violated § 10(b) by failing to disclose the 70,000 records. An order on remand was entered directing the Ross brothers to return the MGM stock and pay MGM $303,832. as consequential damages (see 4/30/75 Southern District of New York order at 62a).
On August 6, 1975, Gerald Ross filed a voluntary petition in bankruptcy in the Eastern District of Pennsylvania. MGM claimed that the debt arising out of the New York suit was not dischargeable in bankruptcy under § 17(a)(2) of the Bankruptcy Act, 11 U.S.C. § 35(a)(2), which provides that liabilities for obtaining money or property by false pretenses or false representations are not dischargeable in bankruptcy. MGM sought summary judgment based on its contention that the prior judgment forecloses the relitigation of issues litigated in that proceeding and that the issue of obtaining property by false representations or pretenses was already decided in the § 10(b) suit.
The bankruptcy judge denied the motion and set the matter for trial.*fn7 The district court reversed the decision of the bankruptcy court. The district judge concluded that the standard for violation of § 10(b) and Rule 10b-5 in the Second Circuit at the time of the decision is the same as under § 17(a)(2) and that summary judgment was appropriate in this case as the parties are bound by the prior judgment, which is dispositive of the issue.
Contrary to the position of certain commentators,*fn8 Brown v. Felsen, supra at note 10,*fn9 decided after the July 1978 order subject to this appeal, indicates that the doctrine of collateral estoppel may be applicable to a dischargeability determination by the bankruptcy court. In order for the doctrine to bar relitigation of the dischargeability issue, the bankruptcy court would have to find that:
" . . . (1) the issue sought to be precluded must be the same as that involved in the prior action; (2) that issue must have been actually litigated; (3) it must have been determined by a valid and final judgment; and (4) the determination must have been essential to the prior judgment."
Haize v. Hanover Ins. Co., 536 F.2d 576, 579 (3d Cir. 1976). See also Matter of McMillan, 579 F.2d 289 (3d Cir. 1978).
A determination of whether the Haize standards are met should be made in the first instance by the bankruptcy judge after a careful review of the record of the prior case, a hearing at which the parties have the opportunity to offer evidence, and the making of findings of fact and conclusions of law. For the foregoing reasons, the decision of the district court will be reversed and the case remanded for further proceedings not inconsistent with this decision.*fn10