Commonwealth of Massachusetts v. Vincent Hale, 618 F.2d 143, 1st Cir. (1980)

618 F.
2d 143
6 Bankr.Ct.Dec. 177, Bankr. L. Rep. P 67,378
COMMONWEALTH OF MASSACHUSETTS, Plaintiff,

Appellant,
v.
Vincent HALE, Defendant, Appellee.
No. 79-1513.
United States Court of Appeals,

First Circuit.
Argued Jan. 11, 1980.
Decided March 18, 1980.
Robert D. Cohan, Asst. Atty. Gen., Consumer Protection Division, Public

Protection Bureau, Dept. of Atty. Gen., Boston, Mass., for plaintiff,
appellant.
Edward P. Holzberg, Salem, Mass., for defendant, appellee.
Before COFFIN, Chief Judge, CAMPBELL and BOWNES, Circuit
Judges.
LEVIN H. CAMPBELL, Circuit Judge.
On February 12, 1976, the Attorney General of Massachusetts, acting for the
Commonwealth, filed a complaint in state court against Vincent Hale (and two
corporations said to be under Hale's control) pursuant to the provisions of
Mass.G.L. c. 93A, the so-called State Consumer Protection Act. See Slaney v.
Westwood Auto, Inc., 366 Mass. 688, 322 N.E.2d 768 (1975) (describing the
operation of c. 93A). The complaint alleged that the defendants had engaged in
a variety of specified acts and practices proscribed by section 2 of the Act,
which provides that, "Unfair methods of competition and unfair or deceptive
acts or practices in the conduct of any trade or commerce are hereby declared
unlawful." Basically the complaint charged the defendants with making
deceptive and misleading representations to purchasers of their products and
with failure to perform contractual and statutory obligations.1 The complaint
indicated that the action had been commenced "on behalf of the individuals
who have suffered harm" as a result of the defendants' unlawful behavior, see
Mass.G.L. c. 93A, 4, and requested both injunctive relief and an award of
damages "sufficient to make whole all consumers injured by the defendants'
(conduct)." Hale neither answered the complaint nor appeared to challenge its
allegations. On August 4, 1976, state procedural and notice requirements
having been met, the state court entered a partial default judgment against the
three defendants on the issue of liability only.2 Injunctive relief was granted
with damages to be determined at a subsequent evidentiary hearing. Such a
hearing was held in late January 1977, the court receiving testimony and
affidavits of some 18 consumers. Hale again failed to appear. The court
assessed damages in an amount in excess of $20,000, and Hale was later
ordered to pay $50 per month towards satisfaction of that judgment.
2
On January 23, 1978, Hale filed a voluntary petition in bankruptcy listing the
Commonwealth as an unsecured creditor. The Commonwealth commenced an
action in the bankruptcy court under section 17 of the Bankruptcy Act, 11
U.S.C. 35, to have Hale's debt to it declared nondischargeable. It
subsequently moved for judgment on the record, contending that the issue of
nondischargeability could be determined solely by reference to the record of the
state court proceedings. Following oral argument on this question, the
bankruptcy judge denied the Commonwealth's motion, refusing to "accept the
state court default judgment and record as conclusive proof of the issues
relevant to dischargeability . . . ." The district court affirmed and this appeal
followed.3
The Commonwealth's main argument is that through the doctrine of collateral

estoppel the state court default judgment for violations of the Consumer
Protection Act provides sufficient basis for a finding of nondischargeability
under sections 17(a)(2) and 17(a)(8) of the Bankruptcy Act, 11 U.S.C. 35(a)
(2) and (8).4 It is far from settled, particularly in light of the 1970 Amendments
to the Bankruptcy Act which grant the bankruptcy courts exclusive jurisdiction
to find dischargeability, that "there is . . . room for the application of the
technical doctrine of collateral estoppel in determining the nondischargeability
of debts described in section 17(a)(2), (4), and (8) of the Bankruptcy Act." In re
Houtman, 568 F.2d 651, 653 (9th Cir. 1978). See Brown v. Felsen, 442 U.S.
127, 139 n.10, 99 S.Ct. 2205, 2213 n.10, 60 L.Ed.2d 767 (June 4, 1979).
Several courts and commentators have taken the position that collateral
estoppel has no role to play in the dischargeability determination. See In re
Houtman, supra; In re Pigge, 539 F.2d 369 (4th Cir. 1976); In re Blessing, 442
F.Supp. 68 (S.D.Ind.1977); 1A Collier on Bankruptcy, P 17.16(6) at 1650.11650.2. But see In re Ross, 602 F.2d 604 (3d Cir. 1979). There is the further
question here, moreover, whether, even assuming collateral estoppel is

generally applicable in section 17 discharge proceedings, the doctrine may be
invoked where the prior judgment was entered by default. See In re McMillan,
579 F.2d 289, 292 (3d Cir. 1978) ("(B)ecause the bankrupts did not 'actually
litigate' the (state court) case, not even facts which were necessary to that
(default) judgment can collaterally estop them from litigating the same issues in
the bankruptcy case"). See also In re Mallory, Nos. B78-1521A; B78-1522A,
slip op. (N.D.Ga. Nov. 20, 1979); 1B Moore's Federal Practice, P 0.444(2) at
4005 and 1979-80 Cumulative Supp. at 204. But see United States v.
McQuatters, 370 F.Supp. 1286 (W.D.Tex.1973) (pre-1970 amendments).
4
While the above questions are intriguing and might be critical in another case,
they need not be answered here. Even assuming arguendo that ordinary
concepts of collateral estoppel would be applicable in a bankruptcy
dischargeability action where the state court judgment underlying the disputed
debt has been entered by default, the Commonwealth would not be entitled to
bypass a further hearing given the instant facts. Application of the doctrine of
collateral estoppel could at most prevent Hale from relitigating in the
dischargeability proceeding those matters "necessary" or "essential" to support
the earlier entered default judgment. See 1B Moore's Federal Practice, P
0.444(2) at 4005; Sandler v. Silk, 292 Mass. 493, 500, 198 N.E. 749, 751-52
(1935); Watts v. Watts, 160 Mass. 464, 36 N.E. 479 (1894). Comparing the
elements essential to establishing both a Chapter 93A, 2 Consumer Protection
Act violation and a section 17(a)(2) or (8) finding of nondischargeability, we
believe that the minimum misconduct required to make out a Chapter 93A
claim falls short of that needed to support a section 17 nondischargeability
determination.
Chapter 93A, entitled "Regulation of Business Practices in Consumer

Protection," has been described by the Massachusetts Supreme Judicial Court as
a "statute of broad impact" creating "new substantive rights and provid(ing)
new procedural devices for the enforcement of those rights." Slaney v.
Westwood Auto, Inc., supra, 322 N.E.2d at 772. See Commonwealth v.
DeCotis, 366 Mass. 234, 316 N.E.2d 748, 755 n.8 (1974). The substantive heart
of the statutory scheme, section 2, makes unlawful, inter alia, "unfair or
deceptive acts or practices in the conduct of any trade or commerce . . . ." The
Massachusetts courts have made it clear that "the definition of an actionable
'unfair or deceptive act or practice' goes far beyond the scope of the common
law action for fraud or deceit." 5 Slaney, supra, 322 N.E.2d at 779. Of critical
importance to the present controversy is the fact that under Chapter 93A it is
unnecessary for a prevailing plaintiff to establish that the defendant knew his
allegedly deceptive representations were false; similarly, a Chapter 93A
plaintiff need not prove his actual reliance upon defendant's representations.
Slaney, supra, 322 N.E.2d at 779.
6
The standards for nondischargeability under sections 17(a)(2) and (8) of the
Bankruptcy Act are narrower. Under section 17(a)(2), which makes
nondischargeable, inter alia, a debt based upon a liability for obtaining money
or property by false pretenses or false representations, "(i)t must . . .
affirmatively appear that (the) representations were knowingly and fraudulently
made, and that they were relied upon by the other party." 1A Collier on
Bankruptcy P 17.16 at 1635-36. In addition, a fraudulent intent to deceive is
generally required. In re Houtman, 568 F.2d 651, 655 (9th Cir. 1978) (debtor,
among other things, must have made the representations at the time knowing
they were false, with the intention and purpose of deceiving the creditor);
Wright v. Lubinko, 515 F.2d 260 (9th Cir. 1975). Likewise, to secure a finding
of nondischargeability under section 17(a)(8) for willful and malicious injuries
to the person or property of another the requisite knowledge and intent must be
proven. See 1A Collier on Bankruptcy P 17.17 at 1652-53; Den Haerynck v.
Thompson, 228 F.2d 72, 74 (10th Cir. 1955). Cf. In re Nance, 556 F.2d 602,
610-11 (1st Cir. 1977).
Thus, it would be possible for a state court to find a violation of chapter 93A,
2 for behavior which lacks the characteristics of misconduct necessary to
support a section 17(a)(2) or (8) finding of nondischargeability. Given this, and
the further fact that the complaint underlying the state default judgment lacked
any allegation of the existence of the knowledge and intent required under
section 17, we believe the entry of that judgment could in no event bind the
bankruptcy court on the issue of nondischargeability.
Notions of collateral estoppel aside, the Commonwealth argues alternatively,

"there is a preponderance of evidence on record sufficient to establish
nondischargeability." In support of this argument the Commonwealth cites to
various passages gleaned from the consumer affidavits introduced at the state
court hearing on the issue of damages. We see no error, however, in the lower
court's refusal, without its own evidentiary hearing, to base a section 17
determination of nondischargeability entirely on these affidavits previously
introduced at a hearing in the state court. The affidavits were received by the
state court solely to establish monetary damages, rather than for the matters for
which they are now cited.
We are not unsympathetic to the Commonwealth's concern that the Bankruptcy

Act should not "be used as a shield by dishonest merchants to avoid liability for
unfair and deceptive practices . . . ." Nor are we favorably impressed by Hale's
consistent failure, despite fair notice, to appear at the prior state court
proceedings. Nonetheless, in the circumstances of this case, considering the
character of the underlying state statutory action and the nature of the
Commonwealth's complaint, the district court's affirmance of the bankruptcy
judge's denial of the motion for judgment on the record was correctly entered.
10
Affirmed. Costs for appellee.
The defendants were engaged in the home improvement business. The

complaint, following a summary of the factual allegations, states, in relevant
part,
"CAUSES OF ACTION
17
The defendants and each of them have engaged in the following unfair or
deceptive acts or practices which are declared to be unlawful by G.L., Chapter
93A, Section 2:
a. Making representations in the sale or offering for sale which have the
capacity, tendency or effect of misleading or deceiving purchasers or
prospective purchasers with respect to material aspects of the product or service
being offered . . . .
b. Representing that the purchaser's or prospective purchaser's house would be
used as a model home for demonstration or advertising purposes and that such
purchaser would be paid a rebate for any sale made in the vicinity of his house
where earning the rebate was contingent upon the occurrence of an event
subsequent to the time the purchaser entered into the agreement . . . .
c. Interfering with a purchaser's contractual and statutory . . . right to cancel his
agreement . . . .
d. Failing to fulfill or perform promises or obligations arising under a guarantee
....
e. Failing to fulfill or perform promises or obligations arising under a contract .
...
f. Representing that the purchaser or prospective purchaser has been specially
selected to receive a bargain, discount or other advantage when such, in fact,
was not true . . . ."
Hale's subsequent motion to vacate the default judgment was denied
Neither party has addressed the question whether the denial of the
Commonwealth's motion for judgment on the record is an appealable
interlocutory order. Interlocutory orders in a "proceeding in bankruptcy" are
appealable unless they are "trivial," while such orders in a "controversy arising
in a proceeding in bankruptcy" are nonappealable. See In re Lloyd, Carr & Co.,
614 F.2d 17 (1st Cir. 1980); Good Hope Refineries, Inc. v. Brashear, 588 F.2d
846 (1st Cir. 1978). Whether an interlocutory order was entered in a
"proceeding" or in a "controversy" is often a murky question, as is the
companion issue of triviality. See Lloyd, Carr, supra, at 19
The Fifth Circuit has held that an application for a determination of
dischargeability is a "proceeding," but has also ruled that denial of a creditor's
motion to dismiss the dischargeability action for lack of jurisdiction is without
"definitive operative finality" and is therefore nonappealable. In re Durensky,
519 F.2d 1024 (1975). We see no reason to address the close issue of
appealability herein. Our view of the merits compels affirmance, see infra ;
thus, however, we would come out on appealability, the Commonwealth could
obtain no relief and our views on the merits may provide useful guidance in
recurring situations of this character. Cf. Manning v. Trustees of Tufts College,
613 F.2d 1202, 1202 (1st Cir. 1980).
Sections 17(a)(2) and (8) provide,

"Debts Not Affected by a Discharge. (a) A discharge in bankruptcy shall
release a bankrupt from all of his provable debts, whether allowable in full or in
part, except such as . . . (2) are liabilities for obtaining money or property by
false pretenses or false representations, or for obtaining money or property on
credit or obtaining an extension or renewal of credit in reliance upon a
materially false statement in writing respecting his financial condition made or
published or caused to be made or published in any manner whatsoever with
intent to deceive, or for willful and malicious conversion of the property of
another; . . . or (8) are liabilities for willful and malicious injuries to the person
or property of another . . . ."
Chapter 93A 2 provides the following guide to interpretation,

"(b) It is the intent of the legislature that in construing paragraph (a) of this
section in actions brought under sections four, nine and eleven, the courts will
be guided by the interpretations given by the Federal Trade Commission and
the Federal Courts to section 5(a)(1) of the Federal Trade Commission Act (15
U.S.C. 45(a)(1)), as from time to time amended.
(c) The attorney general may make rules and regulations interpreting the
provisions of subsection 2(a) of this chapter. Such rules and regulations shall
not be inconsistent with the rules, regulations and decisions of the Federal
Trade Commission and the Federal Courts interpreting the provisions of 15
U.S.C. 45(a)(1) (The Federal Trade Commission Act), as from time to time
amended.

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618 F.

COMMONWEALTH OF MASSACHUSETTS, Plaintiff,

United States Court of Appeals,

Robert D. Cohan, Asst. Atty. Gen., Consumer Protection Division, Public

The Commonwealth's main argument is that through the doctrine of collateral

question here, moreover, whether, even assuming collateral estoppel is

Chapter 93A, entitled "Regulation of Business Practices in Consumer

Notions of collateral estoppel aside, the Commonwealth argues alternatively,

We are not unsympathetic to the Commonwealth's concern that the Bankruptcy

Affirmed. Costs for appellee.

The defendants were engaged in the home improvement business. The

Hale's subsequent motion to vacate the default judgment was denied

Sections 17(a)(2) and (8) provide,

Chapter 93A 2 provides the following guide to interpretation,

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