## Facts

- Mark Paul Felsen operated an automobile dealership, and G. Garvin Brown III guaranteed a bank loan made to Felsen and the dealership.
- The bank sued Brown, Felsen, and the dealership in Colorado state court to collect the unpaid loan.
- Brown filed a cross-claim alleging Felsen had induced the guaranty through misrepresentations and nondisclosure of material facts.
- The parties settled, stipulating to (1) a joint and several judgment for the bank against all defendants and (2) a judgment for Brown against Felsen and the dealership for amounts Brown paid on the bank’s judgment.
- The stipulation and resulting state-court judgment did not specify whether Felsen’s liability to Brown was based on fraud, contract, or another theory.
- Felsen later filed for bankruptcy under the Bankruptcy Act.
- Brown filed an adversary complaint alleging the debt to him was nondischargeable under § 17a(2) and § 17a(4) because it arose from fraud, deceit, and malicious conversion.
- Felsen argued claim preclusion (res judicata) barred Brown from introducing evidence of fraud beyond the state-court judgment and record.

## Issues

1. Whether res judicata confines the bankruptcy court to the prior state-court judgment and record when determining dischargeability under § 17 of the Bankruptcy Act.
2. Whether a creditor may introduce evidence outside the prior state-court record to prove a debt reduced to judgment is nondischargeable for fraud or willful and malicious conversion when those issues were not litigated in state court.

## Decision

- The Supreme Court unanimously reversed.
- The Court held the bankruptcy court is not confined to the state-court judgment and record in determining dischargeability under § 17.
- Res judicata did not bar Brown from offering additional evidence in bankruptcy court to show the debt fell within an exception to discharge.
- The case was remanded for further proceedings allowing Brown to attempt to prove nondischargeability.

## Legal Principles

- A prior state-court judgment establishing the existence and amount of a debt does not, by claim preclusion alone, fix the debt’s character for federal dischargeability purposes when the debtor later raises bankruptcy discharge as a new defense.
- Congress assigned bankruptcy courts independent authority to determine whether a debt falls within statutory exceptions to discharge under § 17 of the Bankruptcy Act.
- Applying res judicata to force creditors to litigate federal nondischargeability theories in ordinary state collection suits would improperly shift dischargeability determinations away from bankruptcy courts and risk discharging debts obtained by fraud.
- The decision concerns claim preclusion; it does not treat unlitigated fraud allegations in a settled state case as issues “actually litigated and necessarily decided” for issue preclusion purposes.

## Conclusion

The Court held that, notwithstanding a prior general state-court judgment entered after settlement, the bankruptcy court may consider evidence beyond the earlier record to decide whether the debt is excepted from discharge for fraud or willful and malicious conversion under the Bankruptcy Act.


Brown v. Felsen, 442 U.S. 127 (1979)