Collateral Estoppel. In a state court action, a default judgment was entered against two individuals, the Ottimos, and the companies they controlled. At the close of the inquest, the state court found that the individuals had committed fraud. Five years after the entry of judgment, the Ottimos filed for bankruptcy. The plaintiff in the state court action brought an adversary proceeding, contending that his judgment against the Ottimos was non-dischargeable because it was based on fraud. He moved for summary judgment, claiming that the issue could not be relitigated because of collateral estoppel.

The Bankrupty Court denied the motion, holding that collateral estoppel could not be applied in instances where the prior judgment was obtained by default. The plaintiff appealed to the District Court.

The District Court reversed, holding that the issue of fraud need not have been actually litigated. The Ottimos nned only to have been afforded the opportunity to litigate the issue. They had been afforded the opportunity. The Ottimos appealed.

The Second Circuit noted that under a bankruptcy court is bound by a liability determination in a default judgment unless an exception (judgmetn procured by collusion or fraud, lack of jurisdiction) exists. No such exception was applicable in this case.

The Court then determined that the issue in the two cases, i.e., the fraud, was identical, and that fraud had been proven to a higher burden in the state court than would be required to show nondischareability in a bankruptcy court. It held that collateral estoppel was applicable and affirmed the decision of the District Court.

The decision in Evan v. Ottimo can be found here.