Bush v Balfour Beatty Bahamas, Ltd. ( 1995 )

United States Court of Appeals,
Eleventh Circuit.
No. 94-4871.
In re Freddie Maxton BUSH, Debtor.
Freddie Maxton BUSH, Plaintiff-Appellant,
v.
BALFOUR BEATTY BAHAMAS, LIMITED, Defendant-Appellee.
Aug. 31, 1995.
Appeal from the United States District Court for the Southern
District of Florida. (No. 92-8645-CIV-KMM), K. Michael Moore,
Judge.
Before EDMONDSON, Circuit Judge, HILL, Senior Circuit Judge, and
MILLS*, District Judge.
HILL, Senior Circuit Judge:
In this appeal we are asked to decide whether the appellee's
judgment against the appellant is dischargeable in bankruptcy. The
bankruptcy court held that the judgment was nondischargeable and
the district court affirmed. For the reasons set forth below, we
affirm the order of the district court.
I. BACKGROUND
In November of 1989, Balfour Beatty Bahamas, Ltd. ("Balfour
Beatty") filed a five count Complaint in the United States District
Court for the Southern District of Florida styled Balfour Beatty
Bahamas, Ltd. v. Boca Raton Millwork, Inc. and Fred M. Bush ("prior
action").1 The five count Complaint contained only one count
*
Honorable Richard Mills, U.S. District Judge for the
Central District of Illinois, sitting by designation.
1
Boca Raton Millwork, Inc. is a closely held corporation
owned by Bush.
against Bush, stating a claim for fraud. In December of 1989, Bush
filed an Answer and Counterclaim placing the fraud allegations in
issue.
The parties commenced discovery, exchanging requests for
documents and trial exhibits. This continued for several months,
but problems arose. Bush's counsel had such difficulty contacting
Bush that the district court allowed him to withdraw from the case,
granting Bush's motion to proceed pro se. The district court
ordered all future pleadings be mailed directly to Bush at his home
address.
Subsequently, Bush failed to produce trial exhibits despite
repeated requests by Balfour Beatty. He also failed to appear for
a properly noticed deposition, after Balfour Beatty had sent him
three reminder letters enclosing a copy of Federal Rule of Civil
Procedure 37(d) outlining the possible consequences of failure to
appear. Bush never produced the requested documents, nor appeared
for his deposition.
In August of 1990, Balfour Beatty filed a motion for sanctions
pursuant to Rule 37(d), Fed.R.Civ.P. Bush responded, claiming he
had been out of state during the relevant time periods. Affidavits
presented to the district court established that Bush received
actual notice of his deposition more than ten days prior to the
scheduled date, and that he was not in town on that date.
In November of 1990, the district court conducted a pre-trial
conference. Bush failed to appear. During the conference, the
court heard oral argument on Balfour Beatty's motion for sanctions.
Finding that Bush's conduct warranted the imposition of sanctions,
the district court entered a Pre-Trial Order granting Balfour
Beatty a judgment by default on the grounds stated in its
Complaint.2 Bush filed no objections to the default, nor to the
proposed final judgment which was served on him. The Final
Judgment was entered on January 29, 1991.
On November 7, 1991, Bush filed a voluntary Chapter 7
bankruptcy petition. In the dischargeability proceeding, Balfour
Beatty timely filed an adversary complaint to determine
dischargeability of its judgment debt against Bush. Balfour Beatty
filed a motion for summary judgment, asserting that the default
judgment in the prior action conclusively established the elements
necessary for the bankruptcy court to hold the debt
non-dischargeable under Bankruptcy Code § 523(a)(2)(A) as a debt
for money obtained by fraud.
Bush argued that no preclusive effect should be accorded the
prior judgment because the issue of fraud had not been actually
litigated in the prior action. Bush asserted that he was entitled
to deny the fraud, and that Balfour Beatty must put on its proof.
The bankruptcy court disagreed, and granted Balfour Beatty's motion
for summary judgment holding that Bush was estopped by the default
judgment to deny the fraud alleged in Balfour Beatty's complaint.
The bankruptcy court then entered a final judgment holding the debt
nondischargeable. On review, the district court affirmed the
2
The district court also entered a default against Boca
Raton Millwork, Inc. on its counterclaim against Balfour Beatty
and deferred entry of a default against the corporation on
Balfour Beatty's Complaint pending a lift of the automatic stay
in effect as a result of the corporations's filing for
bankruptcy.
judgment.
II. DISCUSSION
The only issue on appeal is whether, in a bankruptcy discharge
exception proceeding, a default judgment based upon allegations of
fraud may be used to establish conclusively the elements of fraud
and prevent discharge of the judgment debt.3 This is an issue of
first impression in this Circuit.
We review the decision of the bankruptcy court independently.
In re St. Laurent, 991 F.2d 672, 675 (11th Cir.1993). The
bankruptcy court's findings of fact are subject to a clearly
erroneous standard of review. Fed.R.Bank.P. § 8013. See also In
re Garfinkle, 672 F.2d 1340, 1344 (11th Cir.1982). Its conclusions
of law are reviewed de novo. In re James Cable Partners, L.P., 27
F.3d 534, 536 (11th Cir.1994).
Collateral estoppel prohibits the relitigation of issues that
have been adjudicated in a prior action. The principles of
collateral estoppel apply in discharge exception proceedings in
bankruptcy court. Grogan v. Garner, 498 U.S. 279, 285 n. 11, 111
S. Ct. 654, 658 n. 11, 112 L. Ed. 2d 755 (1991); In re Latch, 820
F.2d 1163 (11th Cir.1987).
In order for a party to be estopped from relitigating an
issue regarding the dischargeability of a debt, a bankruptcy court
must find the following four elements present:
1. The issue in the prior action and the issue in the bankruptcy
court are identical;
2. The bankruptcy issue was actually litigated in the prior action;
3
11 U.S.C. § 523(a)(2)(A) precludes the discharge of a debt
for money obtained by fraud.
3. The determination of the issue in the prior action was a
critical and necessary part of the judgment in that
litigation; and
4. The burden of persuasion in the discharge proceeding must not be
significantly heavier than the burden of persuasion in the
initial action.
In re Yanks, 931 F.2d 42, 43 n. 1 (11th Cir.1991) (citing
Restatement (Second) of Judgments § 28(4) (1982)).
In the instant case, the bankruptcy court found that elements
one and three were clearly present.4 We agree. In finding the
issue of fraud was actually litigated in the prior action, the
bankruptcy court relied on a decision from the Eastern District of
Michigan. That court held:
Collateral estoppel applies only to those issues which were
"actually" or "fully" litigated in the prior action. However,
this rule does not refer to the quality or quantity of
argument or evidence addressed to an issue. It requires only
two things: first, that the issue has been effectively raised
in the prior action, either in the pleadings or through
development of the evidence and argument at trial or on
motion; and second, that the losing party have had "a fair
opportunity procedurally, substantively and evidentially" to
contest the issue. The general rule therefore is that subject
to these restrictions default judgments do constitute res
judicata for purposes of both claim preclusion and issue
preclusion (collateral estoppel).
Overseas Motors, Inc. v. Import Motors Ltd., 375 F. Supp. 499, 516
(E.D.Mich.1974), aff'd 519 F.2d 119 (6th Cir.), cert. denied, 423
U.S. 987, 96 S. Ct. 395, 46 L. Ed. 2d 304 (1975) (citations omitted).
4
The bankruptcy court did not address the fourth element,
that the burden of persuasion in the discharge proceeding not be
significantly heavier than that in the initial action. The
burden of proof in an action for fraud in a federal district
court applying Florida law is a preponderance, or greater weight
of the evidence. Watson Realty Corp. v. Quinn, 452 So. 2d 568
(Fla.1984). The burden of persuasion in the bankruptcy action to
prove fraud under § 523 is a preponderance of the evidence. See
Grogan, 498 U.S. at 279, 111 S.Ct. at 655-56. This element is
met.
Finding that Bush had ample opportunity to contest the fraud
allegations in the prior action, the bankruptcy court gave
preclusive effect to the default judgment.
Although Overseas Motors did not involve a bankruptcy
discharge proceeding,5 the Michigan district court did give
preclusive effect to a default judgment, observing that "a party
cannot be permitted to avoid the law merely by avoiding the
courts." 375 F. Supp. at 545.
6
The general federal rule, however, is to the contrary.
5
The default judgment was entered against Overseas Motors
for refusal to participate in a contractually required
arbitration. Overseas Motors, in which the default was given
preclusive effect, was a subsequent antitrust action in the
Michigan district court.
6
Where the prior default judgment was rendered in state
court, a different analysis may be required. In a recent
opinion, the Bankruptcy Appellate Panel ("BAP") of the Ninth
Circuit Court of Appeals held that 28 U.S.C. § 1738 and the
Supreme Court's decision in Marrese v. American Academy of
Orthopedic Surgeons, 470 U.S. 373, 105 S. Ct. 1327, 84 L. Ed. 2d 274
(1985) require a bankruptcy court to apply Florida law to
determine the preclusive effect of a Florida default judgment in
a dischargeability proceeding. In re Nourbakhsh, 162 B.R. 841
(Bankr. 9th Cir.1994). The BAP reasoned that Section 1738
requires a bankruptcy court to apply the full faith and credit
doctrine to dischargeability issues such as fraud; and the
Supreme Court held in Marrese that this statute "directs a
federal court to refer to the preclusion law of the State in
which judgment was rendered" (quoting Marrese 470 U.S. at 380,
105 S.Ct. at 1332). Finding that in Florida "a default judgment
conclusively establishes between the parties ... the truth of all
material allegations contained in the complaint in the first
action and every fact necessary to uphold the default judgment
...," (citing Perez v. Rodriguez, 349 So. 2d 826, 827
(Fla.Dist.Ct.App.1977)), the BAP found that "a Florida State
Court would hold that the entry of a default judgment is
tantamount to a dispute that has been "actually litigated.' "
Nourbakhsh, 162 B.R. at 844. Under Marrese, the BAP held that a
bankruptcy court must give preclusive effect to a Florida default
judgment.
Another panel of this court has stated that the
collateral estoppel law of the state rendering the judgment
Ordinarily a default judgment will not support the application of
collateral estoppel because "[i]n the case of a judgment entered by
confession, consent, or default, none of the issues is actually
litigated." Restatement (Second) of Judgments § 27 cmt. e (1982).
See also Restatement of Judgments § 68 cmt. d, e (1942). The
circuits which have considered the issue in the context of
bankruptcy discharge exception proceedings have adhered to this
view. See e.g., Spilman v. Harley, 656 F.2d 224, 228 (6th
Cir.1981) ("If the important issues were not actually litigated in
the prior proceeding, as is the case with a default judgment, then
collateral estoppel does not bar relitigation in the bankruptcy
court.") (emphasis added); In re: Raynor, 922 F.2d 1146, 1150
(4th Cir.1991), In re Gottheiner, 703 F.2d 1136, 1140 (9th
Cir.1983); In re McMillan, 579 F.2d 289, 292 (3d Cir.1978).
The underlying rationale of these decisions is that "a party
may decide that the amount at stake does not justify the expense
and vexation of putting up a fight. The defaulting party will
certainly lose that lawsuit, but the default judgment is not given
collateral estoppel effect." In re Gottheiner, 703 F.2d at 1140
(citations omitted).
There is authority to the contrary. A number of bankruptcy
courts have given preclusive effect in a dischargeability
proceeding to a prior default judgment. See e.g., In re Seifert,
must be applied in a dischargeability proceeding. See In re
St. Laurent, 991 F.2d 672, 675-76 (11th Cir.1993). Because
we consider the preclusive effect of a prior federal court
default judgment in the instant case, we do not reach the
issue of whether Marrese requires that a Florida default
judgment be accorded preclusive effect in a bankruptcy
discharge proceeding.
130 B.R. 607, 609 (Bankr.M.D.Fla.1991); In re Austin, 93 B.R. 723
(Bankr.D.Colo.1988); In re Wilson, 72 B.R. 956, 959
(Bankr.M.D.Fla.1987); In re Eadie, 51 B.R. 890
(Bankr.E.D.Mich.1985). These courts have reasoned that:
Debtor/defendant was given the full opportunity to defend
himself in the [prior] action and he chose not to do so.
Debtor/defendant could have reasonably foreseen the
consequences of not defending an action based in part on
fraud. It would be undeserved to give debtor/defendant a
second bite at the apple when he knowingly chose not to defend
himself in the first instance.
In re Wilson, 72 B.R. at 959 (emphasis added).
We also are reluctant to allow this debtor a second bite at
the apple. Bush actively participated in the prior action over an
extended period of time. Subsequently, he engaged in dilatory and
deliberately obstructive conduct, and a default judgment, based
upon fraud, was entered as a sanction against him. He now
attempts, in this bankruptcy proceeding, to avoid Section 523 by
denying the fraud. Such abuse of the judicial process must not be
rewarded by a blind application of the general rule denying
collateral estoppel effect to a default judgment.
On facts very similar to the instant case, the Court of
Appeals for the Ninth Circuit recently affirmed use of a default
judgment entered as a sanction to estop a debtor from denying the
fraud in bankruptcy court. In re Daily, 47 F.3d 365, 368-69 (9th
Cir.1995). Characterizing the prior default judgment as not
"ordinary," the Ninth Circuit noted that:
Daily did not simply decide the burden of litigation
outweighed the advantages of opposing the [plaintiff's] claim
and fail to appear. He actively participated in the
litigation, albeit obstructively, for two years before
judgment was entered against him. A party who deliberately
precludes resolution of factual issues through normal
adjudicative procedures may be bound, in subsequent, related
proceedings involving the same parties and issues, by a prior
judicial determination reached without completion of the usual
process of adjudication. In such a case the "actual
litigation" requirement may be satisfied by substantial
participation in an adversary contest in which the party is
afforded a reasonable opportunity to defend himself on the
merits but chooses not to do so.
Id. at 368 (emphasis added).7
Like Daily, Bush did not simply give up at the outset. He
actively participated in the adversary process for almost a year.
He was represented by counsel. He answered the complaint. He
filed a counterclaim. He filed discovery requests. After
undertaking to represent himself, he began to refuse to cooperate
in discovery. He refused to produce documents despite repeated
requests. He refused to appear at his properly noticed deposition.
He did respond to Beatty Balfour Beatty's Motion for Sanctions
claiming he was out of state on the scheduled day. At the district
court's properly noticed pre-trial conference, Bush failed to
appear. As in Daily, the default judgment for fraud against Bush
was entered pursuant to Rule 37 as a sanction for deliberate
refusal to participate in discovery. In upholding the bankruptcy
7
Interestingly, the Ninth Circuit found support for this
result in its prior decision in In re Gottheiner, 703 F.2d 1136
(9th Cir.1983), which is often cited, as did we above, for the
proposition that collateral estoppel may not rest on a default
judgment. In that case, however, the Ninth Circuit did approve
use of a default judgment to estop a debtor from denying a debt
in the dischargeability proceeding. The court found that the
issues were "actually litigated" because the debtor in the
previous action "did not simply give up from the outset. For
sixteen months he actively participated in litigation.... That
after many months of discovery Gottheiner decided his case was no
longer worth the effort does not alter the fact that he had his
day in court." Id. at 1140. Finding such circumstances "quite
different" from an uncontested default, the Ninth Circuit held
that the application of collateral estoppel was not an abuse of
discretion.
court's award of preclusive effect to this judgment, the district
court said:
It would be fundamentally unfair to force Balfour Beatty to
spend time and money preparing the same discovery simply
because Bush has determined that he now wishes to defend the
allegations of fraud and avoid his judgment debt in bankruptcy
court.
We find Daily persuasive. Where a party has substantially
participated in an action in which he had a full and fair
opportunity to defend on the merits, but subsequently chooses not
to do so, and even attempts to frustrate the effort to bring the
8
action to judgment, it is not an abuse of discretion for a
district court to apply the doctrine of collateral estoppel to
prevent further litigation of the issues resolved by the default
judgment in the prior action. Bush had ample warning from the
prior court and could reasonably have foreseen the conclusive
effect of his actions. In such a case, collateral estoppel may
apply to bar relitigation of the issues resolved by the default
judgment. See Klingman v. Levinson, 831 F.2d 1292, 1296 (7th
Cir.1987) (quoting 1B. J. Moore, J. Lucas & T. Currier, Moore's
Federal Practice ¶ 0.444[1], at 794 (2d ed. 1984) ("Justice, then,
is probably better served if ... collateral estoppel does not apply
8
We note that whether to allow issue preclusion is within
the sound discretion of the trial court. Parklane Hosiery
Company, Inc. v. Shore, 439 U.S. 322, 331, 99 S. Ct. 645, 651-52,
58 L. Ed. 2d 552 (1979). The presence of mitigating factors in
another case might cause a court to exercise discretion to deny
preclusion to a default judgment even if the doctrine's formal
elements are otherwise met. In some cases, the amount of money
at stake or the inconvenience of the forum might disincline a
defendant to offer a defense. In the case of such an "ordinary"
default, a subsequent court might decline to allow preclusion.
In this case, however, the amount of money was substantial, the
forum was convenient and Bush did, in fact, participate in the
litigation long after the issue was joined.
to ... default judgments ... unless it can be said that the parties
could reasonably have foreseen the conclusive effect of their
actions.") (emphasis added). As the Ninth Circuit observed in
Daily:
Without denying Daily his day in court, application of the
doctrine served its central purposes of "protect[ing] [the
prevailing party] from the expense and vexation attending
multiple lawsuits, conserv[ing] judicial resources, and
foster[ing] reliance on judicial action by minimizing the
possibility of inconsistent decisions." By contrast, denying
preclusive effect to the [prior] judgment on the ground that
the issues relevant to discharge were not fully tried in that
proceeding would permit Daily to delay substantially and
perhaps ultimately avoid payment of the debt by deliberate
abuse of the judicial process.
Id. at 368 (alteration in original) (citation omitted). Just as
due process is not offended by the entry of a default judgment
against a party for failure to cooperate with discovery, Societe
Internationale Pour Participations Industrielles et Commerciales,
S.A. v. Rogers, 357 U.S. 197, 209-10, 78 S. Ct. 1087, 1094, 2
L. Ed. 2d 1255 (1958), neither is due process offended if a debtor is
held to the consequences of that judgment in a subsequent
bankruptcy discharge proceeding. See Blonder-Tongue Lab. Inc. v.
University of Illinois Found., 402 U.S. 313, 328-29, 91 S. Ct. 1434,
1442-43, 28 L. Ed. 2d 788 (1971). The order of the district court
affirming the judgment of the bankruptcy court is
AFFIRMED.