Sartin v. MacIk , 535 F.3d 284 ( 2008 )

Reversed and remanded by published opinion. Judge MOTZ wrote the opinion, in which Judge MICHAEL joined. Chief Judge WILLIAMS wrote a dissenting opinion.

OPINION

DIANA GRIBBON MOTZ, Circuit Judge:

In this case, we confront a question of North Carolina law that the state courts have yet to address. We must determine whether a state default judgment, entered as a penalty for a party’s failure to comply with a North Carolina court’s discovery order, has collateral estoppel effect in subsequent litigation in bankruptcy court. The bankruptcy court, in a decision upheld by the district court, found that the North Carolina courts would give collateral estop-pel effect to the default judgment. For the reasons that follow, we disagree and therefore reverse the judgment of the district court and remand for further proceedings.

I.

John D. Macik, John Adalio, James Coffin, and Negotiation Plus Sports Management, Ltd., together founded TeamDri-ver.com, Inc., an internet-based business intended to become “the multi-media connection between motorsports celebrities, drivers, teams and the racing fan.” They hoped that the TeamDriver.com website would grow to accommodate on-line photo galleries, chat areas, a racing retail store, an on-line auction house, and eventually live video and audio feeds providing behind-the-scenes access to races, including “helmet/hat cams” and “wide-angle tool box cams.” They also intended to establish an on-line auction site in partnership with eBay that would allow racing teams to “liquidate their used and damaged racing parts and one-of-a-kind team items” to eagerly awaiting racing fans. In an effort to generate investment in TeamDri-ver.com, Macik and the others circulated documents to potential investors describing their plans for developing the site, the proposed structure of the organization, and profit and loss projections based on itemized predictions of revenue, operating expenses, and set-up expenses.

On the basis of these proposals, Macik and the others successfully solicited a total of $213,200 from a number of investors, including the appellees in this case, Robert P. Sartin, Sr., Robert P. Sartin, Jr., Marie M. McGinness Sartin, Ted Griffin, G. Donald Layno, John Michael Wilson, Ronald Frahm, Sharon Frahm, Doug Cline, Edward L. Sartin, Edward A. Sartin, Christopher T. Sartin, Sartin Services, Inc., and Richard Sartin (collectively, “the Sartins”). The Sartins lost their investment, however, when the business failed shortly after TeamDriver.com’s inception.

Alleging that Macik used the funds invested in TeamDriver.com for personal purposes, the Sartins brought an action against Macik in state court in Guilford County, North Carolina. The Sartins alleged breach of fiduciary duty, constructive fraud, fraud, negligence and gross negligence, breach of contract, misappropriation and conversion of funds, misrepresentation, and unfair and deceptive trade practices. Although Macik answered the Sartins’ complaint, he failed to respond to interrogatories and requests for production of documents, despite the state court’s order compelling discovery. When Macik then did not appear for a hearing, the state court found that he had willfully failed to comply with the discovery order and that this failure entitled the Sartins to judgment by default. On March 4, 2004, the court struck Macik’s answer and awarded the Sartins $213,200 in actual damages, which the court then trebled to $639,600 under the state’s unfair and deceptive trade practices statute, and costs and attorneys fees. The Sartins attempted to execute the judgment against Macik but were unsuccessful.

In June 2005, Macik and his wife, Paula C. Macik, filed a voluntary Chapter 7 bankruptcy petition. The Sartins brought an adversary proceeding in that bankruptcy action, seeking to have the state court judgment against Macik declared nondis-chargeable in bankruptcy pursuant to 11 U.S.C. § 523(a) (2000). That section of the Bankruptcy Code provides that a discharge in bankruptcy does not extend to certain kinds of debts, including those “for money ... obtained by ... false pretenses, a false representation, or actual fraud,” “for fraud ... while acting in a fiduciary capacity,” and “for willful and malicious injury by the debtor to ... the property of another.” Id. § 523(a)(2), (4), (6).

The bankruptcy court found, and the district court agreed, that the state court default judgment for the Sartins against Macik had collateral estoppel effect, barring Macik from arguing in the bankruptcy court that § 523(a)(2), (4), and (6) did not apply to his debt to the Sartins. The bankruptcy court thus held that the debt arising from the state court judgment was nondischargeable, and the district court affirmed that decision.¹ “We review the judgment of a district court sitting in review of a bankruptcy court de novo, applying the same standards of review that were applied in the district court.” Three Sisters Partners, L.L.C. v. Harden (In re Shangra-La, Inc.), 167 F.3d 843, 847 (4th Cir.1999).

II.

Federal courts must give the same preclusive effect to a state court judgment as the forum that rendered the judgment would have given it. See Allen v. McCurry, 449 U.S. 90, 96, 101 S.Ct. 411, 66 L.Ed.2d 308 (1980); Pahlavi v. Ansari (In re Ansari), 113 F.3d 17, 19 (4th Cir.1997). Therefore, to determine the preclusive effect of the state default judgment against Macik, we must apply North Carolina law.

-Preclusion doctrine encompasses two strands: res judicata and collateral estoppel. Res judicata, or claim preclusion, bars the relitigation of any claims that were or could have been raised in a prior proceeding between the same parties. See Thomas M. McInnis & Assocs., Inc. v. Hall, 318 N.C. 421, 349 S.E.2d 552, 556-57 (1986). Neither party contends that the case at hand involves res judicata.

Rather, the preclusion doctrine relevant to the present case is collateral estoppel, or issue preclusion, which bars the relitigation of specific issues that were actually determined in a prior action. See id.² In order to assert collateral estoppel under North Carolina law, a party must show that the issue in question was identical to an issue actually litigated and necessary to the judgment, that the prior action resulted in a final judgment on the merits, and that the present parties are the same as, or in privity with, the parties to the earlier action. See id. at 557. North Carolina courts have abandoned the final requirement of “mutuality of estoppel” for the defensive use of collateral estoppel, so long as the party seeking to reopen the issue “had a full and fair opportunity to litigate” the matter in the previous action. See id. at 560.

As to the first requirement — that the issue in question was identical to an issue actually litigated and necessary to the judgment — the Supreme Court of North Carolina has held that parties must satisfy four additional criteria:

(1) the issues must be the same as those involved in the prior action, (2) the issues must have been raised and actually litigated in the prior action, (3) the issues must have been material and relevant to the disposition of the prior action, and (4) the determination of the issues in the prior action must have been necessary and essential to the resulting judgment.

State v. Summers, 351 N.C. 620, 528 S.E.2d 17, 20 (2000) (emphasis added) (citing King v. Grindstaff, 284 N.C. 348, 200 S.E.2d 799, 806 (1973)).

This case presents the question of whether a North Carolina court would hold that issues resolved in a default judgment have been “actually litigated” for purposes of that judgment and so carry collateral estoppel effect in subsequent litigation. As the parties acknowledge, the Supreme Court of North Carolina has never resolved, or directly addressed, this question.

The Supreme Court of North Carolina has, however, clearly stated on several occasions that it follows “traditional” formulations of res judicata and collateral estop-pel. See Whitacre P’ship v. Biosignia, Inc., 358 N.C. 1, 591 S.E.2d 870, 880 (2004) (stating that “North Carolina recognizes both doctrines as traditionally formulated”); Hall, 349 S.E.2d at 557 (“North Carolina currently recognizes both doctrines in their traditional guise.”). Indeed, as recently as 2004, the Supreme Court of North Carolina explicitly noted that the only respect in which it has chosen to depart from the traditional rules of collateral estoppel is to “abandon! ] the strict ‘mutuality of estoppel’ requirement for defensive uses of collateral estoppel.” Whitacre P’ship, 591 S.E.2d at 880.³

Moreover, the Supreme Court of North Carolina has relied upon section 27 of the Restatement when defining “collateral es-toppel as [that doctrine was] traditionally applied.” See Hall, 349 S.E.2d at 557. Section 27 provides that “[w]hen an issue of fact or law is actually litigated and determined by a valid and final judgment, and the determination is essential to the judgment, the determination is conclusive in a subsequent action between the parties, whether on the same or a different claim.” Restatement (Second) of Judgments § 27 (1982). The comments to section 27 explain, however, that “[i]n the ease of a judgment entered by confession, consent, or default, none of the issues is actually litigated. Therefore, the rule of this Section does not apply with respect to any issue in a subsequent action.” Restatement (Second) of Judgments § 27 cmt. e (1982) (emphasis added). Notably, the Restatement’s approach with respect to collateral estoppel differs from the traditional rule it articulates for res judicata because a default judgment involving the same claim does have preclusive effect in a subsequent action. See Restatement (Second) of Judgments § 17 cmt. d (1982).

Thus, under the Restatement, default judgments do not possess collateral estop-pel effect, even though they do possess res judicata effect. Other authoritative sources confirm that the Restatement accurately describes the traditional rule that default judgments have no collateral estop-pel effect, while acknowledging that some courts have created exceptions to this traditional rule. See 18 James Wm. Moore et al., Moore’s Federal Practice § 132.03[2][k] (3d ed.2008); 50 C.J.S. Judgments § 797 (2008); 18A Charles Alan Wright, Arthur R. Miller, & Edward H. Cooper, Federal Practice and Procedure § 4440 (2d ed.2002); 47 Am.Jur.2d Judgments § 542 (2008).

In sum, the Supreme Court of North Carolina has indicated both that it follows the traditional rule for collateral estoppel and that it views the Restatement as presenting this rule. Thus, as we have previously noted in dicta, North Carolina courts have continued to adhere to the traditional view “that a default judgment cannot be used for collateral estoppel purposes.” Ansari, 113 F.3d at 22 (internal quotation marks and alterations omitted). As a federal court applying North Carolina law, we accordingly hold that under that state’s law, the default judgment against Macik is not entitled to collateral estoppel effect in the subsequent bankruptcy proceeding.

III.

In holding to the contrary, the bankruptcy court and the district court relied on inapplicable precedent and conflated two of the requirements for collateral es-toppel.

The bankruptcy court noted our dicta in Ansari, but citing Cassell v. United States, 348 F.Supp.2d 602, 605 (M.D.N.C.2004), it concluded that North Carolina law had evolved to accord collateral estoppel effect to default judgments. In Cassell a district court sitting in North Carolina did give a default judgment collateral estoppel effect, but in that case the court applied federal preclusion law, not North Carolina law. The bankruptcy court also relied on two other cases in which courts applied federal preclusion law, Bush v. Balfour Beatty Bahamas, Ltd. (In re Bush), 62 F.3d 1319, 1323 & n. 6 (11th Cir.1995), and FDIC v. Daily (In re Daily), 47 F.3d 365, 368 (9th Cir.1995), and a third case in which the court looked to Texas, rather than North Carolina, preclusion law, Gober v. Terra + Corp. (In re Gober), 100 F.3d 1195, 1201-02, 1204-06 (5th Cir.1996).

In reviewing the bankruptcy court’s decision, the district court similarly relied on inapplicable precedent. The court found it persuasive that North Carolina courts had given preclusive effect to default judgments in Holly Farm Foods, Inc. v. Kuykendall, 114 N.C.App. 412, 442 S.E.2d 94, 97-98 (1994), and Naddeo v. Allstate Insurance Co., 139 N.C.App. 311, 533 S.E.2d 501, 505-07 (2000). Both cases, however, merely held a default judgment to be res judicata in a subsequent proceeding, which of course simply conforms to the traditional rule set forth in the Restatement that default judgments do possess preclusive effect for res judicata purposes.⁴ See Restatement (Second) of Judgments § 17 cmt. d (1982). Neither Holly Farm nor Naddeo holds that an issue decided via a default judgment has been actually litigated or is entitled to preclusive effect for collateral estoppel purposes.

The district court also reasoned, and the Sartins argue on appeal, that the default judgment should be given collateral estoppel effect because Macik had a “full and fair opportunity to litigate” the issue before the state court. This argument mistakenly conflates two separate requirements for collateral estoppel. Like other states, North Carolina has adopted the rule that a previous judgment has collateral estoppel effect only when, first, the specific issue was actually litigated in the prior action, see e.g., Hall, 349 S.E.2d at 557, and, second, the party seeking to re-litigate previously enjoyed a “full and fair opportunity to litigate” the issue, even if that party chose not to do so, see id. at 559-60; Miller Bldg. Corp. v. NBBJ N.C., Inc., 129 N.C.App. 97, 497 S.E.2d 433, 435 (1998) (citing Hall, 349 S.E.2d at 557, 560).

Although the two requirements initially sound similar, the “actual litigation” requirement concerns the issues at stake, while the “opportunity to litigate” requirement concerns the parties affected. The latter requirement emerged in response to the modern trend relaxing strict mutuality. Whereas, formerly, the parties in both the previous and present suits had to be identical to, or in privity with, one another for collateral estoppel to apply, see Hall, 349 S.E.2d at 557, now individuals not party to the initial suit may assert issue preclusion in some circumstances. See id. at 559-60 (applying the “opportunity to litigate” requirement to the defensive use of collateral estoppel); see also. Rymer v. Estate of Sorrells, 127 N.C.App. 266, 488 S.E.2d 838, 840 (1997) (extending the “opportunity to litigate” requirement to the offensive use of collateral estoppel); Restatement (Second) of Judgments §§ 27, 29 (1982) (setting forth in section 27 the requirement that an issue be “actually litigated” for collateral estoppel to apply and explaining in section 29 that collateral estoppel may apply in suits involving individuals not party to the original suit “unless” the party seeking to relitigate “lacked full and fair opportunity to litigate the issue in the first action”). In the present case, no one disputes that the parties are identical in both actions; the only issue is whether the default judgment satisfies the separate “actual litigation” requirement for issues.

Nothing in Hall or subsequent North Carolina cases indicates that the requirement that parties be afforded an “opportunity to litigate” has replaced the requirement that issues must have been “actually litigated” in the prior proceeding.⁵ Rather, since Hall, both the Supreme Court of North Carolina and lower state courts have continued to articulate and apply the “actual litigation” requirement when resolving questions regarding collateral es-toppel. See, e.g., Beckwith v. Llewellyn, 326 N.C. 569, 391 S.E.2d 189, 191 (1990); Bluebird Corp. v. Aubin, 657 S.E.2d 55, 61-62 (N.C.Ct.App.2008); Gregory v. Penland, 179 N.C.App. 505, 634 S.E.2d 625, 631-32 (2006).

We recognize that good policy reasons would seem to support a holding that gives collateral estoppel effect to at least some default judgments. Judgments like the present one, which result from the deliberate abuse of the judicial process, seem to merit preclusive effect. Were we deciding this case as a matter of federal common law, such considerations might well be dis-positive. But however wise such a rule may be, we may not apply it in this case absent some indication from the North Carolina courts that they would also adopt this approach. And we have no such indication here.⁶

rv.

For the foregoing reasons, we reverse the judgment of the district court and remand to the district court with instructions to remand to the bankruptcy court for further proceedings consistent with this opinion. Of course, on remand, the bankruptcy court may independently determine — if so asked by the Sartins — that the Macik’s debt is nondischargeable under 11 U.S.C. § 523(a). The court may not, however, rely on the asserted collateral estoppel effect of the state default judgment to reach this conclusion.

REVERSED AND REMANDED

1 . In the alternative, the bankruptcy court held that Macik’s debt to the Sartins was nondis-chargeable because “the Rooker-Feldman doctrine” barred Macik from asserting defenses that were "elements of the underlying state law claims.” But as the Supreme Court made clear in Exxon Mobil Corp. v. Saudi Basic Industries Corp., 544 U.S. 280, 284, 125 S.Ct. 1517, 161 L.Ed.2d 454 (2005), the Rook-er-Feldman doctrine only bars collateral attacks on state court judgments; it does not supplant the normal rules of preclusion. Ma-cik does not seek to have the default judgment on his state law claims overturned, so the Rooker-Feldman doctrine does not apply. Instead the rules of preclusion govern whether a litigant may, in a bankruptcy proceeding, revisit an issue previously addressed in a state court action. Id. at 291-93, 125 S.Ct. 1517; see also Davani v. Va. Dep't. of Transp., 434 F.3d 712, 718-19 (4th Cir.2006).

2 . Many federal courts and the Restatement (Second) of Judgments “prefer[] to substitute the terms 'claim preclusion' (rather than res judicata) and ‘issue preclusion' (rather than collateral estoppel).” Hall, 349 S.E.2d at 556 n. 1. Because North Carolina courts generally use the traditional terms "res judicata” and "collateral estoppel,” we use those terms throughout this opinion, even when referring to the Restatement’s analysis.

3 . As the Supreme Court noted in Blonder-Tongue Laboratories, Inc. v. University of Illinois Foundation, 402 U.S. 313, 320-27, 91 S.Ct. 1434, 28 L.Ed.2d 788 (1971), the mutuality requirement has been under attack since at least 1936. By the time the Court issued Blonder-Tongue in 1971, many state and federal courts had already "rejected the mutuality requirement,” especially for the defensive assertion of collateral estoppel. See id. at 324, 91 S.Ct. 1434. In 1986, North Carolina joined "[t]he modern trend” by "abandon[ing] the requirement of mutuality” for defensive uses of collateral estoppel. See Hall, 349 S.E.2d at 559-60; Whitacre P'ship, 591 S.E.2d at 880.

4 . Naddeo also found that certain issues became the law of the case while others were waived. See 533 S.E.2d at 507. Although the defendant in Naddeo raised both res judicata and collateral estoppel as defenses, the court based its holding on res judicata and law of the case. See id. at 506-07.

5 . In fact, Hall itself illustrates the continued relevance of both requirements. In Hall, the Supreme Court of North Carolina first found that the “actual litigation” requirement had been met, but that the mutuality of estoppel requirement was unsatisfied. 349 S.E.2d at 557-58. The court then declined to require mutuality between the parties because the party against whom collateral estoppel was asserted had enjoyed a full and fair opportunity to litigate in the initial forum. Id. at 560.

6 . A certification process would greatly facilitate the resolution of unresolved questions of state law like the present one by ensuring the correct legal outcome, aiding in judicial economy, and manifesting proper respect for federalism. See e.g., Lehman Bros. v. Schein, 416 U.S. 386, 391, 94 S.Ct. 1741, 40 L.Ed.2d 215 (1974); Clay v. Sun Ins. Office Ltd., 363 U.S. 207, 212, 80 S.Ct. 1222, 4 L.Ed.2d 1170 (1960). Unfortunately, the State of North Carolina has not yet adopted such a process.