state suit when determining whether a debt previously reduced to judgment is dischargeable under § 17 of the Bankruptcy Act, 11 U. S. C. § 35.

I

Petitioner G. Garvin Brown III was a guarantor for respondent Mark Paul Felsen and Felsen's car dealership, Le Mans Motors, Inc. Petitioner's guarantee secured a bank loan that financed the dealership's trading in Lotus, Ferrari, and Lamborghini automobiles. In 1975, the lender brought a collection suit against petitioner, respondent, and Le Mans in Colorado state court. Petitioner filed an answer to the bank's complaint, and a cross-claim against respondent and Le Mans. The answer and the cross-claim, by incorporating the answer, alleged that respondent and Le Mans induced petitioner to sign the guarantee "by misrepresentations and non-disclosures of material facts." App. 35. The suit was settled by a stipulation. It provided that the bank should recover jointly and severally against all three defendants, and that petitioner should have judgment against respondent and Le Mans. Neither the stipulation nor the resulting judgment indicated the cause of action on which respondent's liability to petitioner was based. Because the case was settled, respondent's sworn deposition was never made part of the court record.

A short time later, respondent filed a petition for voluntary bankruptcy and sought to have his debt to petitioner discharged. Through discharge, the Bankruptcy Act provides "a new opportunity in life and a clear field for future effort, unhampered by the pressure and discouragement of preexisting debt," Local Loan Co. v. Hunt, 292 U. S. 234, 244 (1934). By seeking discharge, however, respondent placed the rectitude of his prior dealings squarely in issue, for, as the Court has noted, the Act limits that opportunity to the "honest but unfortunate debtor." Ibid. Section 14 of the Act, 11 U. S. C. § 32, specifies that a debtor may not obtain

a discharge if he has committed certain crimes or offenses. Section 17a, the focus of this case, provides that certain types of debts are not affected by a discharge. These include, under § 17a (2), "liabilities for obtaining money or property by false pretenses or false representations . . . or for willful and malicious conversion of the property of another" and, under § 17a (4), debts that "were created by his fraud, embezzlement, misappropriation, or defalcation while acting as an officer or in any fiduciary capacity."

" 1

In the bankruptcy court, petitioner sought to establish that respondent's debt to petitioner was not dischargeable. Petitioner alleged that the guarantee debt was the product of respondent's fraud, deceit, and malicious conversion and so came within §§ 17a (2) and 17a (4). Petitioner contended that respondent had prepared false title certificates, sold automobiles out of trust, and applied the proceeds to private purposes. Respondent answered and moved for summary judgment. Respondent said that the prior state-court proceeding did not result in a finding of fraud, and contended that res judicata barred relitigation of the nature of respondent's debt to petitioner, even though the application of § 17 had not been in issue in the prior proceeding.

Before 1970, such res judicata claims were seldom heard in federal court. Traditionally, the bankruptcy court determined whether the debtor merited a discharge under § 14, but left the dischargeability under § 17 of a particular debt to the court in which the creditor sued, after bankruptcy, to enforce his prior judgment. Typically, that court was a state court. In 1970, however, Congress altered § 17 to require creditors to apply to the bankruptcy court for adjudication

1 In 1978, Congress repealed the Bankruptcy Act, effective October 1, 1979. See Bankruptcy Reform Act of 1978, Pub. L. 95–598, § 401 (a), 92 Stat. 2682. A case commenced under the Bankruptcy Act continues to be governed by it. § 403 (a), 92 Stat. 2683. Discharge provisions substantially similar to § 17 of the Bankruptcy Act appear in § 523 of the new law. 11 U. S. C. App. § 523 (1976 ed., Supp. II).

of certain dischargeability questions, including those arising under §§ 17a (2) and 17a (4). In In re Nicholas, 510 F. 2d 160, cert. denied, 421 U. S. 1012 (1975), the United States Court of Appeals for the Tenth Circuit, confronting for the first time the res judicata question presented here, resolved it by holding that, in determining the dischargeability of a claim previously reduced to judgment, the District Court had properly limited its review to the record and judgment in the prior state-court proceeding. The Court of Appeals found that its decision accorded with the majority rule among state courts previously considering the question.

3

The bankruptcy court here, bound by Nicholas, somewhat reluctantly 3 confined its consideration to the judgment, pleadings, exhibits, and stipulation which were in the state-court record. It declined to hear other evidence, and it refused to consider respondent's deposition that had never been made part of that record. The court concluded that, because neither the judgment nor the record showed that petitioner's allegation of misrepresentation was the basis for the judgment on the cross-claim against respondent, the liability had not been shown to be within §§ 17a (2) and 17a (4). The court granted summary judgment for respondent and held that the debt was dischargeable. App. 44–48.

Both the United States District Court for the District of Colorado, id., at 49, and the United States Court of Appeals for the Tenth Circuit affirmed. In an unpublished opinion, the Court of Appeals followed Nicholas, applied res judicata, and said that the prior consent decree was conclusive as to the nature of respondent's liability. The court noted that neither the stipulation nor the judgment mentioned fraud, and the

2 See Pub. L. 91-467, §§ 5-7, 84 Stat. 992; H. R. Rep. No. 91-1502 (1970); S. Rep. No. 91-1173 (1970).

3 The court observed that, in its experience, the Nicholas rule had "created more difficulties and more problems than it has solved." Tr. in No. 76 B 56 (Colo., Dec. 14, 1976), p. 13.

court said that petitioner had not even met the state requirement that fraud be pleaded with specificity. See Colo. Rule Civ. Proc. 9 (b). The court agreed that respondent's debt was dischargeable. App. 50-56.

Since Nicholas was decided, every other Court of Appeals that has considered the question has rejected res judicata and held that extrinsic evidence may be admitted in order to determine accurately the dischargeability under § 17 of a debt previously reduced to judgment in state court. We granted certiorari to resolve this conflict. 439 U. S. 925 (1978).

II

Res judicata ensures the finality of decisions. Under res judicata, "a final judgment on the merits bars further claims by parties or their privies based on the same cause of action." Montana v. United States, 440 U. S. 147, 153 (1979). Res judicata prevents litigation of all grounds for, or defenses to, recovery that were previously available to the parties, regardless of whether they were asserted or determined in the prior proceeding. Chicot County Drainage Dist. v. Baxter State Bank, 308 U. S. 371, 378 (1940); 1B J. Moore, Federal Practice ¶ 0.405 [1] (2d ed. 1974). Res judicata thus encourages reliance on judicial decisions, bars vexatious litigation, and frees the courts to resolve other disputes.

Bankruptcy often breeds litigation, and respondent contends that the policy of repose which underlies res judicata

4 See In re Wright, 584 F. 2d 83, 84 (CA5 1978); In re McMillan, 579 F. 2d 289, 293, and n. 6 (CA3 1978); In re Houtman, 568 F. 2d 651, 653-654 (CA9 1978); In re Pigge, 539 F. 2d 369, 371-372 (CA4 1976).

Two Circuits held that extrinsic evidence was admissible under pre1970 law. See Martin v. Rosenbaum, 329 F. 2d 817, 820 (CA9 1964); In re Johnson, 323 F. 2d 574 (CA3 1963). But cf. Chernick v. United States, 492 F. 2d 1349, 1351, and n. 4 (CA7 1974) (bound by prior postbankruptcy judgment). This Court, in dictum, indicated that extrinsic evidence could be admitted in a proceeding under the 1867 Bankruptcy Act. Strang v. Bradner, 114 U. S. 555, 560–561 (1885).

has particular force here. Respondent argues that petitioner chose not to press the question of fraud in the state-court proceeding even though an adjudication of fraud would have entitled petitioner to extraordinary remedies such as exemplary damages and body execution." Respondent says that because petitioner did not obtain a stipulation concerning fraud in the prior state-court proceeding, he is now barred from litigating matters that could have been concluded in the consent judgment. See United States v. Armour & Co., 402 U. S. 673, 681-682 (1971). Applying res judicata in bankruptcy court, it is argued, prevents a creditor from raising as an afterthought claims so insubstantial that they had previously been overlooked. In respondent's view, res judicata stops harassment and promotes the orderly processes of justice by encouraging the consolidation of the entire dispute between debtor and creditor into one prior proceeding.

Because res judicata may govern grounds and defenses not previously litigated, however, it blockades unexplored paths that may lead to truth. For the sake of repose, res judicata shields the fraud and the cheat as well as the honest person. It therefore is to be invoked only after careful inquiry. Petitioner contends, and we agree, that here careful inquiry reveals that neither the interests served by res judicata, the process of orderly adjudication in state courts, nor the policies of the Bankruptcy Act would be well served by foreclosing petitioner from submitting additional evidence to prove his

case.

A

Respondent's res judicata claim is unlike those customarily entertained by the courts. For example, this case is readily distinguishable from Chicot County Drainage Dist. v. Baxter

5 In Colorado, body execution is a statutory remedy which, under certain circumstances, permits a creditor to have a tortious judgment debtor imprisoned at the creditor's expense. See Hershey v. People, 91 Colo. 113, 12 P. 2d 345 (1932); Colo. Rev. Stat. § 13-59-103 (1973).