Debtor estopped from challenging dischargeability

Virginia Lawyers Weekly//March 4, 2021

Debtor estopped from challenging dischargeability

Virginia Lawyers Weekly//March 4, 2021

Where the debtor was found guilty of fraud in a Montana state court, and the elements for fraud under Montana law mirror the elements for fraud in this dischargeability proceeding, the Montana judgment debt is excepted from discharge.


Laron D. Shannon III is a debtor in this court. At the time he filed the Chapter 7 petition, Mr. Shannon was embroiled in litigation with Donald Kaltschmidt in the state court. Right away, Mr. Kaltschmidt moved to dismiss Mr. Shannon’s Chapter 7 case as a “bad faith filing,” or in the alternative grant relief from stay to permit the state court litigation to conclude. The court granted Mr. Kaltschmidt’s motion for relief from stay to the extent necessary to allow the state court action to proceed to judgment.

After the state court action concluded and a judgment was entered in Mr. Kaltschmidt’s favor, Mr. Kaltschmidt filed his complaint in this adversary proceeding. The complaint sought a judgment declaring Mr. Shannon’s debt to Mr. Kaltschmidt nondischargeable. According to Mr. Kaltschmidt, the state court decided all issues material to determining the dischargeability of the judgment. 

Mr. Shannon does not contest that the state court found him liable to Mr. Kaltschmidt for fraud, negligent representation, constructive fraud and breach of fiduciary duty. He contends, however, that the jury verdict did not specify which facts gave rise to its findings and as such he is not estopped from contesting the dischargeability of the debt.


Mr. Shannon says he was not afforded the opportunity during the state court trial to obtain a full and fair adjudication of the issues. The Montana Supreme Court says he was.

Mr. Shannon was not represented by counsel during the trial. He was not present for much of the trial. According to the trial transcript, the judge presiding over the state court trial noted that he had already accommodated several of Mr. Shannon’s requests to delay the trial and informed Mr. Shannon that when trial began, it would not be delayed any further. 

Nevertheless, Mr. Shannon faced a medical emergency on the first day of trial and was absent for the remainder of the multiday trial. The state court judge noted in the record his reasons for allowing the trial to continue in Mr. Shannon’s absence and in the absence of anyone to represent Mr. Shannon. The Montana Supreme Court reviewed the record and concluded that proceeding without Mr. Shannon was neither an abuse of discretion nor any violation of law.

Mr. Shannon did not put forward anything in his pleadings nor in his argument at the hearing sufficient to satisfy his burden of establishing the absence of a full and fair opportunity to litigate under relevant Montana law. For all of these reasons, this court finds that Mr. Shannon was afforded the opportunity to obtain a full and fair adjudication of the issues in the state court action.

The parties agree that Mr. Shannon a party to the Montana state court action and that a final judgment on the merits issued in the Montana state court action. They contest, however, whether the issues before the court are identical to those decided by the Montana state court.

The court concludes the elements required for finding fraud under Montana law mirror the elements for finding fraud in the context of this dischargeability proceeding. Mr. Shannon insists that because the jury verdict form failed to identify specific facts on which the jury relied in rendering the verdict, it is impossible to determine that Mr. Shannon obtained money, property, services or an extension, renewal or refinancing of credit by fraud, constructive fraud and/or breach of fiduciary duty. The court disagrees. 

Given the detailed factual record in the trial transcript and the detailed instructions provided to the jury, the state court record is sufficient for this court to identify which facts the jury relied upon when concluding the facts supported a verdict for fraud, and likewise supported a verdict for punitive damages. All of this means that the Mr. Kaltschmidt is entitled to judgement as a matter of law that the Montana judgment debt is excepted from discharge.

Plaintiff’s motion for summary judgment granted.

Kaltschmidt v. Shannon, No. 20-06025, Feb. 4, 2021. WDVA Bankr. at Lynchburg (Connelly). VLW No. 020-4-022. 14 pp.

VLW 020-4-022

Virginia Lawyers Weekly


Verdicts & Settlements

See All Verdicts & Settlements


Read More


How Is My Site?

View Results

Loading ... Loading ...