State Court "Penalty" Default Judgment Entitled to Preclusive Effect

In Anderson v. Fisher (In re Anderson), No. 14-08007, 2014 Bankr. LEXIS 3908 (B.A.P. 6th Cir. Sept. 15, 2014), the Sixth Circuit Bankruptcy Appellate Panel upheld a Tennessee bankruptcy court's decision entitling a state court "penalty" default judgment to preclusive effect. The decision stemmed from a Tennessee state court order granting a default judgment as a penalty against the debtors for repeated refusals to comply with court orders regarding discovery. After the debtors filed for chapter 7 relief, the prevailing party in state court sought a non-dischargeability determination of the state court judgment, arguing, through a motion for summary judgment, that the state court order was entitled to preclusive effect under the doctrine of collateral estoppel. The Sixth Circuit Bankruptcy Appellate Panel, in upholding the bankruptcy court's decision, first noted that whether to give preclusive effect to a state court default judgment depends on state law. Tennessee state courts have not addressed whether a penalty default judgment is entitled to preclusive effect. However, "true" default judgments are given preclusive effect by Tennessee state courts. Furthermore, the panel held, the amount of participation in the state court case by the debtors was similar to an earlier Sixth Circuit case in which a Tennessee default judgment was given preclusive effect. Thus, the panel reasoned that---if presented with the issue---a Tennessee state court would likely give a penalty default judgment preclusive effect.