In granting a motion for summary judgment in part, a federal bankruptcy court in Missouri gave collateral estoppel effect to an arbitration award and held that, as a matter of law, the award was a nondischargeable debt under 11 U.S.C. §§ 523(a)(2)(A) and (a)(4).

In In re Rhodes, No. 05-51272, Adv. No. 08-4008, 2008 WL 4876765 (Bankr. W.D. Mo. Nov. 12, 2008), Zapiler and Ferris (Z & F) formed a law firm with Rhodes. However, the parties later dissolved the law firm under dissociation agreement containing an arbitration clause.

Rhodes subsequently filed for Chapter 7 bankruptcy, and Z & F moved for relief from the automatic bankruptcy stay to proceed with arbitration against Rhodes pursuant to the arbitration clause in the dissociation agreement. The Court granted the motion over Rhodes' objection.

Rhodes did not respond to any of the arbitration notices given to him, and did not appear at the arbitration. The arbitrator ruled in favor of Z & F, but not on all of their claims. The arbitrator awarded Z & F $138,139.72 in damages. Z & F then brought an action in court for a determination that their arbitration award was a nondischargeable debt based upon the application of collateral estoppel. Rhodes opposed, arguing that collateral estoppel did not apply.

First, the Court held that the arbitration award should be afforded collateral estoppel effect. The Court reasoned that the federal interest at stake – the discharge of a debtor's debts and the resulting fresh start – was significant, but it did "not rise to the level of interest requiring protection from the principles of collateral estoppel."

Next, under the second part of the four-part collateral estoppel test, Rhodes argued that the arbitration was not a "final adjudication on the merits" because it was a "default" judgment. The Court disagreed, holding that Rhodes waived any objection to the finality of the award when he signed the arbitration agreement and that Rhodes could not simply ignore the arbitration and claim innocent ignorance.

The Court had granted Z & F relief from the automatic bankruptcy stay over Rhodes's objection, and thus, Rhodes should have known that the Court intended to give the arbitration award full collateral estoppel effect: "There is no other logical reason for this Court to have granted relief to allow the arbitration to proceed."

Finally, the Court held that Rhodes had a full and fair opportunity to be heard because he had notice of the arbitration. Even if Rhodes did not possess the resources to hire an attorney to represent him at the arbitration, Rhodes himself was an attorney, and thus he could have represented himself. Consequently, the Court gave the arbitration award full collateral estoppel effect and held that the award was a nondischargeable debt.