Where (1) a creditor sought a determination that her state-court judgment against a Chapter 7 debtor was excepted from discharge, (2) the bankruptcy court entered default judgment for the creditor because of discovery abuse by the debtor and her counsel, and (3) the debtor then filed a Chapter 13 petition, the default judgment entered against the debtor in the Chapter 7 proceeding has preclusive effect, so the debtor is estopped from objecting to the creditor’s proof of claim on the same grounds raised previously.
Affirmed.
“Chapter 13 debtor-appellant Mary E. Buscone appeals from an order rejecting her objection to a proof of claim for a Massachusetts state-court judgment that Buscone owes to appellee Ann Tracy Botelho. Through an adversary proceeding in Buscone’s previous Chapter 7 bankruptcy, Botelho sought a determination that her judgment against Buscone was excepted from discharge under 11 U.S.C. §523(a)(2)(A) and (a)(4). Because of discovery abuse by Buscone and her counsel in that proceeding, the bankruptcy court entered default judgment for Botelho. Now in her second bankruptcy, this time under Chapter 13, Buscone objects to Botelho’s proof of claim for that debt on the same grounds raised previously and, alternatively, asserts that the interest rate and accrual date prescribed by Massachusetts state law should not apply to the Massachusetts state-court judgment. We affirm. …
“We review the application of issue preclusion de novo. …
“Buscone reiterates the same two arguments to us that she unsuccessfully advanced before the district court: (1) that her judicial-estoppel argument is not precluded by the bankruptcy court’s default judgment against her in the Chapter 7 proceeding; and (2) that any post-judgment interest on the state-court judgment debt should accrue at the federal (as opposed to state) rate from the date on which the bankruptcy court’s default judgment issued (as opposed to the date on which the state court’s default judgment did). … We reject each argument. …
“Buscone first challenges the bankruptcy court’s conclusion that she is precluded from raising the same affirmative defense to Botelho’s proof of claim that she asserted in her motion to dismiss Botelho’s adversary proceeding in the Chapter 7 bankruptcy. She notes that, in her first bankruptcy proceeding, the court never reached the merits of her defense, and therefore, she argues, it ‘has never been litigated.’
“Four elements must generally be satisfied to collaterally estop a party from relitigating a factual or legal issue in federal court: ‘(1) the issue sought to be precluded must be the same as that involved in the prior action; (2) the issue must have been actually litigated; (3) the issue must have been determined by a valid and binding final judgment; and (4) the determination of the issue must have been essential to the judgment.’ Grella v. Salem Five Cent Sav. Bank, 42 F.3d 26, 30 (1st Cir. 1994). The second, ‘actual-litigation’ element is usually unattainable when the prior action resulted in a default judgment, as a default does not require actual litigation of any of the issues raised. …
“We join numerous other circuits in applying an exception to this rule: where the default judgment was entered as a sanction for the estopped litigant’s misconduct, and that litigant had the opportunity to participate in the case before the default judgment’s entry, the default judgment has preclusive effect. … Indeed, this exception is already widely applied by our bankruptcy courts under federal and Massachusetts issue-preclusion law. …
“Here, the default judgment that the bankruptcy court entered against Buscone in the Chapter 7 proceeding is of precisely the kind contemplated by this exception. As we noted, this default judgment was the bankruptcy court’s last resort, rendered necessary by Buscone and Baker’s ‘failure to provide any creditable argument for not complying with the court’s first [discovery] order, repeated failures to respond to discovery requests, attempts to obfuscate issues before the court, and continued noncompliance despite the fact that the court had already imposed the lesser sanction of shifting fees.’… Such blatant recalcitrance throughout discovery easily satisfies the first element of this exception, the litigant’s misconduct. … As to the second element, the litigant’s opportunity to participate, there is no question that Buscone had such an opportunity in the Chapter 7 proceeding, as demonstrated by her and Baker’s filing of the motion to dismiss, challenging the bankruptcy court’s first round of sanctions, and providing ‘arguably sarcastic and evasive responses to interrogatories.’ … We accordingly agree that Buscone’s conduct warrants application of this exception to the actual-litigation requirement, and she is therefore estopped from reasserting the affirmative defense she raised in the Chapter 7 proceeding again in the present case. …
“In the alternative, Buscone argues that Botelho miscalculated the post-judgment interest accrued on the state-court judgment against her. Rather than apply the rate set by Massachusetts law as of the state-court judgment’s entry as dictated by Mass. Gen. Laws ch. 231, §§6B, 6C, 6H and ch. 235, §8, Buscone insists that the post-judgment interest on the debt must be calculated according to the federal rate under 28 U.S.C. §1961 and as of the bankruptcy court’s entry of default judgment in the Chapter 7 proceeding. This attempt to reduce the value of Botelho’s claim is unavailing.
“As we acknowledged in her last appeal, … we concur with the conclusion reached by other courts that interest accrues on a valid pre-petition judgment obtained in state court at the rate set by state law from the date of the judgment’s entry. … In this case, Botelho’s claim plainly arises from the judgment that she obtained against Buscone in Massachusetts state court. When Botelho subsequently brought the adversary proceeding in the Chapter 7 bankruptcy, the bankruptcy court ‘incorporated and gave effect to the state court judgment and the language regarding [the] interest rate,’ addressing only the preexisting judgment debt’s dischargeability. In so limiting its ruling, the Chapter 7 bankruptcy court did not displace the state-court judgment with one under federal law or otherwise impose a new money judgment on Buscone from which Botelho’s claim could be construed to arise. Thus, the post-judgment interest rate under Massachusetts state law continues to apply to the judgment debt, accruing as of the entry of the state-court judgment.”
In Re: Buscone, Mary E. (Lawyers Weekly No. 01-068-25) (10 pages) (Per curiam) Appealed from a decision by Kobick, J., in the U.S. District Court for the District of Massachusetts. David G. Baker on brief for the appellant debtor; Michael B. Feinman and Feinman Law Office on brief for appellee Ann Tracy Botelho (Docket No. 24-1766) (April 2, 2025).
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