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[DO NOT PUBLISH]
IN THE UNITED STATES COURT OF APPEALS
FOR THE ELEVENTH CIRCUIT
No. 18-12584
Non-Argument Calendar
D.C. Docket Nos. 6:17-cv-01847-RBD; 6:13-bkc-04253-CCJ
In re: CHADWICK CREECH,
YUWEN CREECH,
Debtor.
_________________________________________________________
CHADWICK CREECH,
YUWEN CREECH,
Plaintiffs–Appellants,
versus
WILFRED C. VIRUET,
CYNTHIA M. VIRUET,
Defendants–Appellees.
Appeal from the United States District Court
for the Middle District of Florida
(August 7, 2019)
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Before TJOFLAT, CARNES, and JORDAN, Circuit Judges.
PER CURIAM:
This case presents two questions. First, whether a default judgment entered
as a discovery sanction in Illinois state court meets the requirements of issue
preclusion under Illinois law. Second, whether a debt resulting from that default
judgment is non-dischargeable in bankruptcy pursuant to
11 U.S.C. § 523(a)(19).
We hold that issue preclusion applies, and the debt is non-dischargeable.
I.
Illinois residents Wilfred and Cynthia Viruet invested in Streamone, LLC, a
company owned by Florida residents Chadwick and Yuwen Creech. When the
Viruets were unable to recover their investment, they brought a suit in Illinois state
court against the Creeches. Among other things, the Viruets alleged that the
Creeches sold them unregistered securities without a license and made material
misrepresentations about the investment, violating Illinois and Florida securities
laws. They also alleged that this conduct amounted to common law fraud.
The Creeches answered the complaint, asserted affirmative defenses, and
filed and responded to motions. But they refused to respond to interrogatories or to
produce relevant documents despite the Court’s orders to do so. Eventually, the
Court sanctioned the Creeches by entering a default judgment against them for
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$981,010.63 plus $547 in costs. The Creeches appealed, but an Illinois appellate
court later dismissed the appeal for want of prosecution.
Subsequently, the Securities Department of the Illinois Secretary of State
brought an administrative action against the Creeches and their companies:
Streamone, LLC and Streamone FS, LLC. The Secretary accused the Creeches of
violating Illinois securities laws based on the same conduct complained of in the
state suit: making material misrepresentations to the Viruets while selling
unregistered securities in Streamone without a license. After a contested three-day
hearing, the Secretary entered an order, including findings of fact and conclusions
of law, that prohibited the Creeches and the Streamone companies from selling
securities in Illinois, and fined Chadwick Creech and the Streamone companies
$10,000 each.
After the default judgment but before the administrative order, the Creeches
filed for bankruptcy. The Viruets intervened, asking the Bankruptcy Court to find
that the debt owed to them from the state court judgment was not dischargeable.
They argued that
11 U.S.C. § 523(a)(19) protected their debt from discharge, and
that the Creeches were precluded from relitigating the debt because of the default
judgment and the administrative order.1 The Creeches maintain that neither the
1
The Illinois Secretary of State entered the administrative order after the Creeches’ filed for
bankruptcy but before the bankruptcy court ruled on discharge.
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state court judgment nor the administrative order meets the requirements for issue
preclusion. The Creeches want to prove they are not liable for the alleged conduct
and thus that the purported debt is invalid. The Bankruptcy Court ruled that the
Creeches were precluded from challenging the debt, and that the debt was non-
dischargeable. The District Court affirmed, and so do we.
II.
On appeals from bankruptcy court, “we review the bankruptcy court’s
factual findings for clear error, and its legal conclusions de novo.” In re Lunsford,
848 F.3d 963, 966 (11th Cir. 2017) (quotation omitted).
A.
We address the Creeches’ arguments about issue preclusion first. It is now
well-settled that issue preclusion applies to bankruptcy proceedings. See Grogan
v. Garner,
498 U.S. 279, 284 n.11,
111 S. Ct. 654, 658 n.11 (1991). When asked
to determine the preclusive effect of a judgment, we “refer to the preclusion law of
the State in which judgment was rendered.” Marrese v. Am. Acad. of Orthopaedic
Surgeons,
470 U.S. 373, 380,
105 S. Ct. 1327, 1332 (1985); see also
28 U.S.C.
§ 1738 (2018). Thus, we look to Illinois law on issue preclusion. 2
2
The Viruets direct us to one of our precedents on bankruptcy discharges, which held
that issue preclusion applied to default judgments that were actually litigated:
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 action to judgment . . . a district
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Under Illinois law, the “minimum threshold requirements” for issue
preclusion are that the issue in the prior proceeding must have been (1) identical to
the present one, (2) actually litigated, (3) necessarily decided in a final judgment
on the merits, and (4) asserted against the same party or one in privity. See Nowak
v. St. Rita High Sch.,
757 N.E.2d 471, 477–78 (Ill. 2001). The Creeches argue that
neither the state court judgment nor the administrative order meets these
requirements.
For the state court judgment, the Creeches maintain that the issue—whether
they violated securities laws and defrauded the Viruets—was neither actually
litigated nor decided in a final judgment on the merits. They contest whether an
issue can ever be actually litigated or decided in a final judgment when the action
ends in a default judgment.
Illinois law is clear that a default judgment is considered a final judgment on
the merits of “the ultimate claim or demand presented in the complaint.” See
Hous. Auth. for La Salle Cty. v. Y.M.C.A. of Ottawa,
461 N.E.2d 959, 963 (Ill.
1984). The ultimate claim presented in the Viruets’ complaint was violations of
Illinois and Florida securities laws. The default judgment, then, is final on that.
court [may] apply the doctrine of collateral estoppel to prevent further litigation of
the issues resolved by the default judgment in the prior action.
In re Bush,
62 F.3d 1319, 1325 (11th Cir. 1995). But Bush was applying federal common law.
Id. at 1323 & n.6. Because we must apply Illinois law on preclusion, Bush is inapposite.
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Illinois law is less clear on whether an issue can be actually litigated in an
action ending in a default judgment. It is important to distinguish between
different types of default judgments. In Illinois, the typical default judgment is
entered when a defendant fails to appear or answer. 735 Ill. Comp. Stat. 5/2-1301.
But Illinois also allows its courts to enter a default judgment as a sanction for
violating a discovery order. Ill. Sup. Ct. R. 219(c)(v). Necessarily, a default
judgment entered as a discovery sanction would only come about when the
litigation has progressed into the discovery phase. And a case that has progressed
into the discovery phase may well involve issues that were actually litigated. In
other words, as it relates to whether an issue was actually litigated, not all default
judgments are created equal.
The Illinois Supreme Court has never decided whether issue preclusion
applies to default judgments. The closest it came was in dicta noting that “[s]ome
courts have held that default judgments have limited preclusive effects under the
doctrine of collateral estoppel.” Y.M.C.A. of Ottawa,
461 N.E.2d at 963. An
Illinois appellate court found that “collateral estoppel does not apply here because
the agency issue was not actually litigated prior to the entry of the default
judgment.” S & S Auto. v. Checker Taxi Co.,
520 N.E.2d 929, 930 (Ill. App. Ct.
1988). But Checker Taxi dealt with a typical default judgment, not one entered as
a discovery sanction. In that case, the plaintiff and defendant had both been co-
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defendants in a previous case.
Id. One of the co-defendants did not appear in the
previous case, and neither bothered to answer the complaint.
Id. In those
circumstances, the court rightly determined that the issue of whether one of the co-
defendants was the agent of the other had not been actually litigated in the previous
case.
Id. at 931. The court did not say that issue preclusion could never apply to a
default judgment.
The Creeches point to other courts’ holdings that issue preclusion does not
apply to default judgments under Illinois law. See In re Nikitas,
326 B.R. 127, 131
(Bankr. N.D. Ill. 2005) (“Although Illinois law on the subject is neither well-
developed nor clear, it appears Illinois subscribes to the majority view that a
default judgment cannot form the basis for collateral estoppel.”); see also In re
Binns,
328 B.R. 126, 129–30 (B.A.P. 8th Cir. 2005) (holding same); Raab Sales,
Inc. v. Domino Amjet, Inc.,
530 F. Supp. 2d 1192, 1197–98 (D. Kan. 2008) (same);
In re Jacobs,
448 B.R. 453, 469–70 (Bankr. N.D. Ill. 2011) (same). But all of
these cases address a typical default judgment, where the defendant fails to appear
or answer the complaint. None of these cases address a default judgment entered
as a discovery sanction after the case has been substantially litigated. (Also, none
of these cases are from Illinois courts, so their interpretation of Illinois law is not
binding.) We thus find no rule of Illinois law saying that a default judgment can
never receive preclusive effect, even one entered after substantial litigation.
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Nor do we think Illinois would adopt such a rule. The relevant question is
not the title of the order but whether the issue was actually litigated. On this
question, there is a difference between a default judgment entered when the
defendant fails to appear or answer the complaint, and one entered after the
defendant appeared, answered the complaint, asserted affirmative defenses, and
filed and answered motions. We do not believe that Illinois would decide that, in
the latter situation, the issue could never be actually litigated. To decide so would
allow parties to substantially litigate a claim, realize the case was not going their
way, refuse to participate in the case any further, draw a default judgment, and then
escape the preclusive effect of that judgment because it was entered by default.
There is no reason to believe that Illinois would invite such gamesmanship.
Here, the Creeches and the Viruets actually litigated in Illinois state court
whether the Creeches violated securities laws and defrauded the Viruets by selling
unregistered securities without a license and making material misrepresentations.
The Viruets alleged as much in their complaint. The docket from the Illinois state
court shows that the Creeches answered the complaint, they filed affirmative
defenses, and they submitted exhibits and affidavits. They also filed motions,
including a motion to dismiss and a motion for summary judgment. For part of the
proceedings, they were represented by counsel. But, after a year of litigation, the
Creeches refused to comply with the Court’s discovery orders, and the Court
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entered a default judgment as a discovery sanction. In its order, the Court
specifically found that the discovery was relevant to the Viruets’ claims that the
Creeches committed fraud and violated Illinois and Florida securities laws. Based
on this activity, we find that the issue was actually litigated, and the default
judgment qualifies for issue preclusion under Illinois law.
Because the Creeches are precluded from challenging their liability for the
debt by the state court judgment, we do not reach the question of whether the
Creeches would also be precluded by the administrative order.
B.
Next, we examine whether the Bankruptcy Court was correct in ruling that
the debt is non-dischargeable pursuant to
11 U.S.C. § 523(a)(19). Normally, a
person in bankruptcy can get a “fresh start” by discharging his or her debts. See
Grogan,
498 U.S. at 286,
111 S. Ct. at 659. But a fresh start is available only to
the “honest but unfortunate debtor.”
Id. at 287,
111 S. Ct. at 659 (quotation
omitted). Accordingly, Congress has specified certain debts that cannot be
discharged in
11 U.S.C. § 523(a). One of these exceptions is for debts resulting
from court judgments or administrative orders for violating securities laws. See
§ 523(a)(19).
The statute reads as follows:
(a) A [bankruptcy] discharge . . . does not discharge an individual debtor
from any debt—
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...
(19) that—
(A) is for—
(i) the violation of any of the Federal [or] State securities laws, or any
regulation or order issued under such Federal or State securities laws;
or
(ii) common law fraud, deceit, or manipulation in connection with the
purchase or sale of any security; and
(B) results, before, on, or after the date on which the petition was filed,
from—
(i) any judgment, order, consent order, or decree entered in any
Federal or State judicial or administrative proceeding;
(ii) any settlement agreement entered into by the debtor; or
(iii) any court or administrative order for any damages, fine penalty,
citation, restitutionary payment, disgorgement payment, attorney fee,
cost, or other payment owed by the debtor.
§ 523(a)(19). Essentially, the statute has two requirements: first, the debt must be
for the violation of securities laws or a fraud in connection with the purchase or
sale of a security; second, the debt must be memorialized in a judicial or
administrative order or settlement agreement. Id.; see also In re Minardi,
536 B.R.
171, 192 (Bankr. E.D. Tex. 2015); In re Pujdak,
462 B.R. 560, 575 (Bankr. D.S.C.
2011); In re Jafari,
401 B.R. 494, 496 (Bankr. D. Colo. 2009). If these two
requirements are met, the debt is not dischargeable.
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The first requirement asks whether the debt was for the violation of
securities laws. To answer this question, we look behind “the default judgment to
the text of the complaint to determine whether the findings required for non-
dischargeability were sufficiently plead to have been necessarily decided . . . .” In
re Tills,
419 B.R. 444, 456 (Bankr. S.D. Cal. 2009). The Viruets’ complaint
specifically alleged violations of Illinois and Florida securities laws, as well as
common law fraud, all for selling unregistered securities and for selling securities
without a license. Consequently, the default judgment was necessarily for the
violation of securities laws.
The second requirement is also satisfied: the Creeches’ debt is memorialized
in a judgment from a judicial proceeding—specifically, the default judgment from
the Illinois state court. After all, a default judgment is no less a judgment for being
entered in default. Thus, both requirements are met, and the debt is not
dischargeable. 3
AFFIRMED.
3
The Viruets ask us to follow several other courts in finding that § 523(a)(19) preempts issue
preclusion law. See, e.g., Tripodi v. Welch,
810 F.3d 761, 767 (10th Cir. 2016); In re Boccarsi,
578 B.R. 800, 811 (Bankr. N.D. Ill. 2017); In re Minardi,
536 B.R. 171, 192 (Bankr. E.D. Tex.
2015); In re Friedman,
531 B.R. 741, 746 (Bankr. N.D. Ill. 2015); In re Pudjak,
462 B.R. 560,
578 (Bankr. D.S.C. 2011). Because we resolve the case on other grounds, we decline to reach
this question.
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