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It is well established that although an issue was fully litigated and a finding on the issue was made in the prior litigation, the prior judgment will not foreclose reconsideration of the same issue if that issue was not necessary to the rendering of the prior judgment, and hence was incidental, collateral, or immaterial to that judgment.
In 1963, Evelyn Halpern’s husband, Joseph, owned most of the shares of the Vaughn Corporation which was engaged in the construction business. Evelyn and her son, David, owned a minimal number of shares in the company. Vaughn borrowed a substantial amount of money from the Chase Manhattan Bank, secured by Joseph, Evelyn and David as guarantors in their individual capacities. Vaughn then suffered financial difficulties. Thereafter, Vaughn deteriorated rapidly and finally lost its current construction contract. In order to arrange the liabilities inter se so that Joseph and Evelyn were primarily liable to Chase as guarantors on the Vaughn loan and David only secondarily liable, and in order to indemnify David for any possible liability he might incur as a guarantor, Joseph and Evelyn assigned to David a mortgage and bond. The assignment was never perfected. Vaughn having become insolvent, Evelyn, Joseph, and David became individually liable to Chase as guarantors. In 1964, Chase filed petitions of bankruptcy against Joseph and Evelyn, alleging that in assigning the mortgage and bond to David, Joseph and Evelyn conveyed, transferred, concealed, or removed valuable property with intent to hinder, delay and defraud their creditors, and transferred valuable property while insolvent to creditors with the intent to prefer such creditors over others of the same class. The trial judge declared each spouse bankrupt, finding that the assignment to David of the mortgage and bond was an act of bankruptcy. The matter was then referred to the referee in bankruptcy. Evelyn filed a motion to be discharged from bankruptcy. Appellee Schwartz qualified as trustee and opposed Evelyn’s discharge on the ground there was no defense to his specification of objection to the discharge based on her transfer of the mortgage and bond. Appellee argued that the issue of actual intent to hinder, delay or defraud creditors had been resolved in the bankruptcy adjudication and was res judicata. Summary judgment was granted to appellee. Evelyn challenged the decision.
Did the judgment on the bankruptcy adjudication have collateral estoppel effect in the subsequent proceeding, i.e., proceeding on objection to discharge?
The appellate court reversed the grant of summary judgment to appellee. The court held that no collateral estoppel effect could be given to the bankruptcy adjudication, because it rested on three independent, alternative grounds and could not be deemed conclusive as to facts found to establish only one separate ground (which involved a finding of actual intent).