In In re Snyder (2d Cir. Sept. 12, 2019), the U.S. Court of Appeals for the Second Circuit addressed an issue of first impression and joined the Third, Ninth, Tenth and Eleventh circuit courts in recognizing an exception to the rule that a default judgment has no preclusive effect in nondischargeability proceedings: where a default judgment arises from a party's own sanctionable conduct, that party will be deemed to have had a full and fair opportunity to litigate the issues, and the judgment may be afforded preclusive effect in such proceedings.

Background

Before filing a voluntary Chapter 11 petition for bankruptcy protection in 2015, Stuart and Doreen Snyder entered into an oral agreement in 2005 with Stuart's sister and brother-in-law, Nancy and Joseph Murphy, that provided for the Snyders and the Murphys to become "silent partners" in connection with a construction project to build three luxury residential homes in New Jersey, and for the Snyders to repay the Murphys' initial investment of $100,000 in full, plus a return of 20%. In 2006, the Snyders and the Murphys similarly entered into a second oral agreement that provided for the Snyders and the Murphys to be partners in connection with a construction project to build a luxury residential home in Connecticut, and for the Snyders to repay the Murphys' investment of $275,000 in full, plus a return of 20%. Unfortunately, and unbeknownst to the Murphys, the money that they invested for the Connecticut project was used by the Snyders for other purposes.

In 2010, after the Snyders had failed to repay the Murphys in connection with either project, the Murphys filed a complaint against the Snyders and various related corporate entities in the U.S. District Court for the Eastern District of New York. The complaint included claims for breach of contract, conversion, unjust enrichment, fraudulent inducement and breach of fiduciary duty. During the course of the ensuing litigation, the Snyders continually disregarded their discovery obligations together with any number of court orders.

After the Snyders failed to respond to the Murphys' first set of interrogatories and document requests, the court granted the Murphys' first motion to compel and awarded the Murphys attorneys' fees and costs.  Subsequently, upon receiving the Snyders' "woefully deficient" discovery responses, the Murphys filed a second motion to compel, which the court granted with an additional sanctions award and a warning to the Snyders that their "obstreperous conduct" could result in the entry of default judgment. Upon the Snyders' further failure to comply, the court entered an order striking the Snyders' answer to the complaint, awarding sanctions and entering default judgment.