Sixth Circuit Holds State Court Judgment on Debt Previously Discharged in Bankruptcy Void Ab Initio

In In re Hamilton, 540 F.3d 367 (6th Cir. 2008), the Sixth Circuit Court of Appeals ruled that a state court judgment that is entered on a debt after the debt has been already discharged in bankruptcy is void ab initio.

Under the facts of the case, the debtor owed a debt to his ex-wife that the bankruptcy court ruled dischargeable. The bankruptcy court then subsequently discharged all of the debtor’s dischargeable debts, declaring in the order that “any judgment heretofore or hereafter obtained in any court other than this court is null and void as a determination of personal liability of the debtor with respect to . . . debts determined by this court to be discharged.” After the bankruptcy court discharged all of the debtor’s dischargeable debts, the debtor’s ex-wife filed a third-party indemnification complaint against the debtor in Kentucky state court as a result of being sued on the debt. The debtor filed a pro se answer to the indemnification claim, but did not defend on the ground that the debt had been discharged in bankruptcy. The state court found the ex-wife liable on the debt and ordered the debtor to indemnify her for any amounts she paid. The Kentucky Court of Appeals affirmed the judgment, rejecting the debtor’s argument that his bankruptcy discharge precluded the indemnification claim brought by his ex-wife. According to the court, the discharge in bankruptcy was an affirmative defense that had been waived by the debtor when he didn’t affirmatively plead it in the trial court.

In response to the ruling of the Kentucky Court of Appeals, the debtor filed an adversary complaint in bankruptcy court. In his complaint, the debtor sought to enjoin his ex-wife from enforcing the judgment lien against him. The bankruptcy court applied the Rooker-Feldman doctrine, a doctrine that prevents those who do not prevail in state court from bringing suits in federal court for the review and rejection of the state court ruling, to dismiss the debtor’s complaint. On appeal of the bankruptcy court’s decision, the district court reversed, holding that the state court judgment was a modification of the bankruptcy court’s discharge order and was thus barred by Section 524(a) of the Bankruptcy Code, which provides that a discharge “operates as an injunction against the commencement or continuation of an action, the employment of process, or an act, to collect, recover or offset any [discharged] debt as a personal liability of the debtor, whether or not discharge of such debt is waived.” On appeal, the Sixth Circuit ruled that when a state court judgment modifies a bankruptcy court’s discharge order by incorrectly applying the discharge order, the state court judgment is void ab initio and the Rooker-Feldman doctrine will not apply. Thus, the Sixth Circuit remanded the case to the district court so the district court could in turn remand the case to the bankruptcy court to determine whether the debt was discharged. If the debt was discharged, then the state court judgment was a modification of the discharge order and was void ab initio. If the debt was not discharged, then the state court judgment was not a modification of the discharge order and the Rooker-Feldman doctrine would bar federal court jurisdiction of the case.

Posted by: LeAnders L. Jones

Categories: Bankruptcy & Banking Law, Kentucky