Brown v. Felsen

G. Garvin Brown III (plaintiff) was the guarantor on a bank loan for Mark Felsen (defendant) and his car dealership, Le Mans Motors, Inc. In 1975, the bank brought a collection suit against Brown, Felsen, and Le Mans. Brown filed a cross-claim against Felsen and LeMans, alleging that he was induced to become the guarantor on the loan based on fraud and misrepresentations made by Felsen. The parties settled, stipulating the bank would have a judgment against all three defendants, meaning that all three defendants were found to owe the bank the money sought in the collection suit, and that Felsen and Le Mans were liable to Brown for his part of the judgment. Because the case settled, Felsen’s deposition never became part of the record. Shortly after the suit settled, Felsen filed for bankruptcy under the Bankruptcy Act and attempted to have the debt discharged. In bankruptcy court, Brown alleged that Felsen’s debt to him could not be discharged, because it was accrued through misrepresentations and fraud in violation of § 17a of the Bankruptcy Act. Felsen argued that res judicata barred the relitigation of the nature of Felsen’s debt to Brown. The bankruptcy court considered the record of the proceeding and concluded that the debt was dischargeable. The district court and court of appeals affirmed, and the United States Supreme Court granted certiorari.