Sanction-Based Default Judgment Preclusion and State-Law Post-Judgment Interest in Bankruptcy Claims

Introduction

In Buscone v. Botelho, 61 F.4th 10 (1st Cir. 2025), the First Circuit confronted two recurring disputes in bankruptcy practice: (1) whether a debtor may relitigate an affirmative defense rejected on default judgment in a prior Chapter 7 adversary proceeding where that judgment was entered as a sanction for discovery misconduct; and (2) whether post-judgment interest on a pre-petition state-court judgment in bankruptcy should be calculated at the federal rate under 28 U.S.C. § 1961 from the date of the bankruptcy‐court default or at the rate and accrual date prescribed by state law. Appellant Mary E. Buscone, a Chapter 13 debtor, sought to defeat Ann Tracy Botelho’s proof of claim for a nondischargeable Massachusetts state-court judgment by re-asserting the same defenses she previously raised (and lost by default) in her Chapter 7 case, and by pressing for a federal rather than state interest rate. On April 2, 2025, a three-judge panel (Per Curiam) affirmed the district court’s order overruling Buscone’s objection to Botelho’s claim and applying Massachusetts’s interest formula.

Summary of the Judgment

The First Circuit affirmed the district court’s affirmance of the bankruptcy court in two respects:

Issue Preclusion: The court held that a default judgment entered as a discovery sanction has preclusive effect under the “sanction-driven default” exception to the “actual litigation” requirement of issue preclusion. Because Buscone and her counsel repeatedly flouted discovery orders in the Chapter 7 adversary proceeding, the court deemed her defense to Botelho’s nondischargeability complaint precluded in the subsequent Chapter 13 context.
Post-Judgment Interest: The court reaffirmed that a valid pre-petition state-court money judgment gives rise to a bankruptcy claim accruing interest at the state-law rate from the date of entry, rather than at the federal rate under 28 U.S.C. § 1961 from the filing of a later bankruptcy-court default.

Analysis

Precedents Cited

The panel’s discussion of issue preclusion draws upon:

Restatement (Second) of Judgments § 27(c) & cmt. e: default judgments generally do not give rise to collaterally estopped issues because they are not “actually litigated.”
In re Snyder, 939 F.3d 92, 100–01 (2d Cir. 2019): recognition of an exception where a default was imposed as a sanction for misconduct.
In re Docteroff, 133 F.3d 210, 215 (3d Cir. 1997): similar application of sanction-driven estoppel.
In re Corey, 583 F.3d 1249, 1252–53 (10th Cir. 2009); In re Bush, 62 F.3d 1319, 1324–25 (11th Cir. 1995): further circuit recognition of the doctrine.
First Circuit and Massachusetts decisions applying the same rule in bankruptcy: In re Tacason, 537 B.R. 41, 51–54 (B.A.P. 1st Cir. 2015); In re Pomeroy, 353 B.R. 371, 377 (Bankr. D. Mass. 2006); and others.

Legal Reasoning

The court applied a four-factor test for issue preclusion under Grella v. Salem Five Cent Sav. Bank, 42 F.3d 26, 30 (1st Cir. 1994): (1) identity of issues, (2) actual litigation, (3) final judgment, and (4) essentiality. It acknowledged that a conventional default judgment fails the “actual litigation” element, but adopted a well-recognized exception: when the prior default is a sanction for the party’s own egregious discovery misconduct and the party had an opportunity to defend, the prior judgment will preclude relitigation. The sanction-driven exception vindicates the court’s authority to impose discovery orders and avoids rewarding obstructive tactics.

On interest, the panel reaffirmed that a pre-petition state-court money judgment, when “incorporated and given effect” by a bankruptcy court in closing a dischargeability adversary, remains a state-law judgment for interest purposes. Nothing in § 523 or § 502 displaces state statutes prescribing the rate and commencement date of post-judgment interest on state judgments. The panel rejected Buscone’s argument that § 1961 applies by equating the Chapter 7 default with the issuance of a federal judgment.

Impact

This decision has several practical effects:

Enforcement of Discovery Orders: Debtors and their counsel in bankruptcy adversaries will face preclusive consequences for willful non-compliance with discovery, even if the prior default was entered solely as a sanction.
Finality of State Judgments: Creditors holding nondischargeable state-court judgments may reliably invoke the full range of state post-judgment interest statutes, enhancing predictability in proof-of-claim calculations.
Uniformity Across Circuits: By aligning with other circuits on the sanction-driven default exception, the First Circuit reduces forum shopping and clarifies standards for collateral estoppel in federal courts.

Complex Concepts Simplified

Issue Preclusion (Collateral Estoppel): prevents relitigation of an issue already decided if (1) it’s the same issue, (2) it was litigated, (3) there was a final judgment, and (4) the issue was essential to that judgment.
Default Judgment: a court decision entered against a party who fails to respond or abide by procedural rules; normally not “litigated.”
Discovery Sanction Default Exception: when the court imposes a default judgment as a penalty for a party’s misconduct in discovery, that default can preclude relitigation because the party had a fair chance to defend but chose obstruction.
Post-Judgment Interest: additional sums accruing on a money judgment; state law typically governs the rate and start date for state-court judgments, while 28 U.S.C. § 1961 governs federal judgments.

Conclusion

Buscone v. Botelho establishes two critical precedents for bankruptcy practice. First, it confirms that default judgments imposed as discovery sanctions carry full issue-preclusive effect, closing a loophole that would otherwise permit debtors to avoid consequences of obstructionist tactics. Second, it clarifies that state-court money judgments retain their state-law post-judgment interest regimes when enforced in bankruptcy—even after a nondischargeability determination—ensuring creditors receive the benefit of statutory interest accrual prescribed by state legislatures. Together, these holdings reinforce the twin principles of procedural integrity and respect for state-law judgments in the federal bankruptcy system.