Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca7-14-02968/USCOURTS-ca7-14-02968-0/pdf.json

Nature of Suit Code: 150
Nature of Suit: Overpayments &amp; Enforcement of Judgments
Cause of Action: 

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In the 

United States Court of Appeals 

For the Seventh Circuit ____________________

No. 14‐2968

CHRIS E. CARHART,

Plaintiff‐Appellee,

v.

CARHART‐HALASKA INTERNATIONAL, LLC,

Defendant,

CHRISTOPHER G. HALASKA and HALASKA INTERNATIONAL,

  INC.,

Appellants.

____________________

Appeal from the United States District Court for the

Eastern District of Wisconsin.

No. 2:14‐mc‐00023‐JPS — J. P. Stadtmueller, Judge.

____________________

ARGUED APRIL 17, 2015 — DECIDED JUNE 8, 2015

____________________

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2 No. 14‐2968   

Before POSNER and WILLIAMS, Circuit Judges, and WOOD,

District Judge.

*

POSNER, Circuit Judge. Karl Marx famously remarked that

“all great world‐historic facts and personages appear ...

twice ...: the first time as tragedy [Napoleon I], the second

time as farce [the great Napoleon’s nephew, Napoleon III].”

William Gaddis reversed the sequence in his satirical law

novel A Frolic of His Own (1994). At the beginning of the

novel the protagonist, while standing in front of his car try‐

ing to hot‐wire it, accidentally causes the car to start. It

lurches forward, injuring him—so he sues himself for having

negligently injured himself. The case before us brings us face

to face with a form of self‐suing that brings in its train a va‐

riety of business and legal complexities.

Chris E. Carhart and Christopher G. Halaska, the respec‐

tive sole owners of Carhart, Inc. and Halaska International,

Inc., formed a Wisconsin limited liability company that they

named Carhart‐Halaska International, LLC (and that the

parties call CHI for short, as will we), owned 50‐50 by their

two corporations. We’ll treat Messrs. Carhart and Halaska

rather than their corporations as the co‐owners of CHI, be‐

cause both men have litigated the case in their own names as

well as in the names of their corporations, with each man

and corporation on the same side of the case seeking the

same relief, and thus Carhart, Inc. and Carhart constituting

one litigating unit and Halaska International, Inc. and

Halaska another.

CHI—the new company—supplied construction materi‐

als to builders and provided engineering services. We use

 

* Hon. Andrea R. Wood of the Northern District of Illinois, sitting by des‐

ignation.

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No. 14‐2968 3

the past tense because, as we’ll see, the company is defunct.

We don’t know the current status of the two component

corporations.

A Minnesota company called MRO Industrial Sales, LLC,

was a sales agent for CHI. In 2012 CHI terminated MRO,

which reacted by suing CHI in the federal district court in

Minnesota for breach of contract and related wrongs. Juris‐

diction was based on diversity of citizenship, for remember

that CHI is a citizen of Wisconsin. Within weeks after the

suit was filed, Carhart obtained an assignment of MRO’s

claim, for which he claims to have paid MRO $150,000. By

stepping into MRO’s shoes he became the plaintiff in a suit

against a company of which he was (through his wholly

owned corporation) a half owner.

Halaska forthwith sued Carhart—both on Halaska’s own

behalf and on behalf of CHI—in a Wisconsin state court. The

suit charged Carhart with having breached his fiduciary du‐

ties to CHI and Halaska by becoming the plaintiff (as a result

of MRO’s assignment to it) in the Minnesota suit and also by

writing checks on CHI bank accounts without Halaska’s ap‐

proval, depositing payments owed CHI into Carhart’s own

corporate account, entering into a contract on CHI’s behalf

without letting Halaska know that Carhart had a conflict of

interest relating to the transaction, and withholding account‐

ing and other financial information concerning CHI from

Halaska. Essentially the claim is that Carhart plundered the

company that he and Halaska co‐owned, the plundering

presumably consisting of his withdrawing his own invest‐

ment and siphoning off part or maybe all of Halaska’s in‐

vestment—the latter being a plausible though not compulso‐

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ry inference from the fact that CHI, as we’re about to see, is

now assetless.

Halaska asked the Wisconsin state court to appoint a re‐

ceiver to wind up CHI (that is, arrange its affairs and having

done so dissolve it) because it was in imminent danger of

insolvency as a result of unpaid debts not limited to MRO’s

claim bought by Carhart, and of Carhart’s other acts of be‐

trayal of CHI. The receiver was appointed but shortly after‐

ward informed the district court in Minnesota that CHI was

insolvent and had no liquid assets out of which to pay a

lawyer to defend against the suit by Carhart (in succession to

MRO) in Minnesota. The receiver therefore consented to the

entry of a default judgment for $242,000 against CHI (the

amount sought by Carhart in that suit). The judgment yield‐

ed Carhart a potential profit of $92,000 ($242,000 – $150,000)

on his purchase of MRO’s claim. (We say “potential profit”

because its realization depended on CHI’s possessing at least

$242,000 worth of assets, which, as we’ll see, it did not.) Pre‐

sumably the difference between the two figures represented

potential (but again, not actual) compensation to Carhart for

having assumed the risk, originally borne by MRO, of losing

the suit against CHI that he had bought from MRO.

Which brings us at last to the present suit: a suit in feder‐

al district court in Wisconsin brought by Carhart against

CHI under Fed. R. Civ. P. 69(a)(1) to execute the $242,000 de‐

fault judgment that he had obtained as a result of the receiv‐

er’s inability to defend CHI against the Minnesota suit. CHI

was left with its suit (jointly with Halaska) against Carhart in

the Wisconsin state court, where that suit was, and as we’ll

see still is, pending. That suit was the company’s only re‐

maining asset, and Carhart filed the present case (the Wis‐

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No. 14‐2968 5

consin federal court suit to enforce its $242,000 judgment

against CHI) in order to obtain it. The district court executed

the judgment, ordering the seizure and sale of CHI’s lawsuit

in order to satisfy Carhart’s judgment (in part), the lawsuit

being as we said CHI’s only remaining asset. The lawsuit

was sold at public auction; Carhart, the only bidder, bought

it for $10,000. By doing so he extinguished all possibility that

CHI could obtain relief against him for his alleged plunder‐

ing of the company. At a total cost of $150,000 (for Carhart

got his $10,000 payment right back after the sale, since it was

the proceeds of the sale of the asset that Carhart executed his

judgement upon), he had insulated himself against potential

liability to CHI for allegedly plundering the company.

But this assumes that Wisconsin law allows a lawsuit to

be the kind of property that can be seized to pay a judgment.

Fed. R. Civ. P. 69(a)(1) authorizes a federal district court to

enforce a money judgment by writ of execution but (with

immaterial exceptions) only pursuant to the procedure au‐

thorized by the state in which the federal court is located,

and, as discussed below, it is unclear whether Wisconsin

considers a lawsuit to be property that can be seized to pay a

judgment. See Wis. Stat., ch. 815.

Carhart was ingenious! The question is whether his

scheming was legal. An anterior question is whether we

have jurisdiction to answer that question. The appellants are

Halaska and his wholly owned corporation (but which we

can, as we said earlier, ignore). But Halaska was not named

as a defendant in Carhart’s suit to execute the $242,000 Min‐

nesota judgment; only CHI was—and CHI is not appealing.

Halaska has a substantial financial stake in the proceeding,

given his half ownership (maybe whole ownership, given

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Carhart’s defection), and complete control, of CHI. With CHI

crumbling in the face of Carhart’s defection and his litigation

against CHI—and in fact in receivership—Halaska, as sole

remaining owner, is the company’s alter ego, trying to pick

up the pieces from the disaster that began with MRO’s suit

and what he contends is the plundering of his company by

his business partner. He belongs in this suit. And while he

was not a named party and did not move to intervene in the

district court until after he had filed a notice of appeal

(which the district court held was too late), he participated

fully in the proceeding, just as if he had intervened and be‐

come a party. The judge treated him as a party. He was thus

a de facto party.

But is there such a thing in federal law? A judge can say

to a person who has a substantial interest in a case but is not

a party “you belong in this case, so I want you to move to

intervene and I’ll grant your motion.” This may not be an

enforceable order, but it’s likely to be obeyed. That’s in effect

what happened in this case, minus the dialogue and the

formal motion. With CHI abandoned by Carhart and in re‐

ceivership, yet the receiver apparently helpless for lack of

financing (though he had filed an objection in the district

court, he did not file an appeal from the district court’s deci‐

sion), Halaska was Carhart’s only opponent. Halaska had a

legitimate interest in the case as the half and maybe sole

owner of CHI, and so the judge deemed him a party without

insisting on the formality of a motion to intervene.

We conclude that Halaska was and remains a party. Cf.

SEC v. Enterprise Trust Co., 559 F.3d 649, 651–52 (7th Cir.

2009). “Appeals by those who participated as if parties are

frequently entertained despite a failure to achieve formal

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status as a party. Most of these appeals involve persons who

participate in trial court proceedings as if they had inter‐

vened, and who seem to have been treated on all sides as de

facto parties.” 15A Charles Alan Wright et al., Federal Practice

and Procedure § 3902.1 (2d ed., updated Apr. 2015). That’s

this case.

So we have jurisdiction, and come at last to the merits,

where the principal issue is the propriety of the judge’s hav‐

ing ordered the auctioning off of CHI’s lawsuit (CHI’s only

remaining asset) in order to provide partial satisfaction of

Carhart’s judgment. This is a separate question from wheth‐

er Wisconsin law allows a lawsuit to be property that can be

seized to pay a judgment. That question would become moot

if, whether or not the lawsuit is seizable property, the district

judge erred in thinking seizure the appropriate remedy in

this case. The alternative would have been to allow the law‐

suit against Carhart to proceed to judgment. CHI (which is

to say Halaska) might have been able to prove that Carhart’s

initial decision to buy MRO’s claim against CHI had initiat‐

ed a train of events likely to culminate, and in fact culminat‐

ing, in the company’s destruction. For all we know, a judge

or jury might have found merit in the suit and ordered Car‐

hart to pay damages to CHI greater than the $242,000 that

CHI owed him. In that event the company would have come

out of the protracted litigation ahead of the game, rather

than getting nothing from its legal struggle with Carhart ex‐

cept the $10,000 that he paid for the lawsuit at the public

auction—which CHI can’t keep, because it’s to be used to

satisfy a portion of the Minnesota judgment that Carhart ob‐

tained. It’s as if Carhart had pulled a $10,000 wad of bills out

of his left pants pocket and stuffed it into his right pants

pocket.

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It might be thought that if CHI’s lawsuit had had a posi‐

tive net expected value, someone at the auction would have

bid more than $10,000 for it. No one did, and this might sug‐

gest that the lawsuit had only negligible value. But maybe

not. Suits are difficult to value; that is doubtless why MRO

sold its claim against CHI to Carhart for what may have

been much less than it was worth ($150,000 versus $242,000,

though we don’t know on what the latter figure was based).

And Carhart as claimant had the best sense of the value of

CHI’s claim against him because he knew what he had done

that might make him liable for damages; what sense of that

would a bidder at a public auction have? If someone were to

place an undisclosed sum of money in an envelope and chal‐

lenge you to bid against them for it, you’d be a fool to accept

the challenge; for if you underbid you would get nothing

and if your bid happened to be the winning bid you would

certainly have overpaid, because your opponent would

know the true amount in the envelope. And so it would be

in this case. Better to let CHI litigate its claim and let the

state court decide what it was worth—which may have been

a lot more than Carhart’s successful $10,000 bid.

But this raises the question whether the district judge can

be faulted for having adopted an approach to valuation—the

public auction—that, as should have been foreseen, proved

to be enormously disadvantageous to CHI. When viewed as

a form of property (the property of CHI), a lawsuit is what is

called a “chose in action,” namely a form of intangible prop‐

erty as contrasted with a chunk of real estate, the classic ex‐

ample of tangible property. Long ago the Supreme Court of

Wisconsin suggested that a chose in action, including there‐

fore a legal claim, while it can be garnished cannot be sold to

satisfy a debt. Storm v. Cotzhausen, 38 Wis. 139, 143–44 (1875).

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But those were the days when the sale of a lawsuit was

forbidden by the common law doctrines of champerty and

maintenance, doctrines that have been abrogated or diluted

in many states, including Wisconsin. Wis. Stat. § 895.375

states that “no action, special proceeding, cross complaint or

counterclaim in any court shall be dismissed on the ground

that a party to the action is a party to a contract savoring of

champerty or maintenance unless the contract is the basis of

the claim pleaded.” Today “trolldom”—the seeking of finan‐

cial advantage by buying or otherwise obtaining a legal

claim (as distinct from filing a legal claim in order to seek

redress for injury)—thrives. The commonest example of a

law troll is the patent troll, who acquires by purchase or ap‐

plication to the Patent and Trademark Office a patent that he

uses not to protect an invention but to obtain a license fee

from, or legal judgment against, an alleged infringer. Car‐

hart was a troll of sorts in buying MRO’s legal claim in order

to extinguish CHI’s lawsuit against him. But the immediate

issue is his being allowed to bid on CHI’s suit against him

(and thus buy a second lawsuit). Even if (a question we

needn’t try to answer) a lawsuit is property that Wisconsin

law allows to be be seized to pay a debt, Carhart should not

have been allowed to buy CHI’s lawsuit to satisfy (in part)

his judgment against CHI. For as we said, CHI’s suit was

enveloped in too much uncertainty for potential bidders to

be able to value and thus bid intelligently on it (see Kristo‐

pher Wood, Comment: “Short Circuiting the Justice System:

How Defendants Are Misusing Writs of Execution,” 39 Pep‐

perdine Law Review 747, 787–88 (2012)), especially because

Carhart was as a practical matter on both sides of the trans‐

action. If there was a “smoking gun” piece of evidence prov‐

ing Carhart’s misdeeds that would come out in discovery,

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Carhart would already know of its existence, but what

would an outsider know about CHI and its financial difficul‐

ties, or about Carhart and his (or his corporation’s) contrac‐

tual or statutory duties to CHI? Nor could an outsider (a po‐

tential bidder at the auction of CHI’s lawsuit) use discovery

to try to find out.

Neither do we know the exact value of the lawsuit. But

we know the floor. Carhart says he paid MRO more than

$150,000 for its claim (it seems that he paid for MRO’s attor‐

neys’ fees as well, but no amount is stated). He must have

thought CHI’s only asset—its lawsuit against him—worth

more than that. Yet Carhart paid only $10,000 for CHI’s as‐

sets at the auction, and that almost certainly was too low.

Wisconsin allows an execution sale to be set aside when “the

price bid is so low as to shock the conscience of the court.”

Wilson v. Craite, 210 N.W.2d 700, 702 (Wis. 1973), citing An‐

thony Grignano Co. v. Gooch, 47 N.W.2d 895, 897 (Wis. 1951),

and Collins v. Smith, 44 N.W. 510, 512 (Wis. 1890). In both cit‐

ed cases the Supreme Court of Wisconsin stated that the bid

prices would be so low as to shock the conscience if they

were proved as alleged to be 45 percent and 24 percent of the

value of the properties. In the present case (in which the

property was a lawsuit) the bid price may have been less

than 7 percent of a minimum reasonable estimate of the

property’s value, if that minimum reasonable estimate

would have been $150,000.

So the district judge should have allowed CHI’s Wiscon‐

sin state court’s lawsuit to proceed—and for the further rea‐

son that by auctioning off the lawsuit the judge placed ahead

of CHI’s other creditors the creditor—Carhart—who had al‐

legedly destroyed the LLC for his own financial gain. That

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made his claim vulnerable to equitable subordination, which

allows a claim’s priority to be reduced if “the claimant is

guilty of misconduct that injures other creditors or confers

an unfair advantage on the claimant.” In re Kreisler, 546 F.3d

863, 866 (7th Cir. 2008); see also In re Mader’s Store for Men,

Inc., 254 N.W.2d 171, 184 (Wis. 1977) (“there may be claims

which are genuine, in the sense that they are neither sham

nor unlawful or otherwise subject to complete disallowance,

but which arise under circumstances such that it would be

inequitable to permit them to participate in distribution of

the estate on an equal basis with other general claims”). Re‐

ducing a claim’s priority may be appropriate when the claim

holder, a member of an LLC (such as Carhart, whose corpo‐

ration, the formal member, was his puppet) commits “a will‐

ful failure to deal fairly with the limited liability company or

its members in connection with a matter in which the mem‐

ber or manager has a material conflict of interest.” Wis. Stat.

§ 183.0402. It will be for the Wisconsin state court to decide

whether Carhart’s claim should be equitably subordinated.

Although the sale of CHI’s lawsuit to Carhart has taken

place, Carhart was not a purchaser in good faith, and so the

sale did not moot CHI’s challenge to the sale. As no valid

interest would be impaired by rescinding the sale, we order

the district court to rescind it, thus enabling CHI to prose‐

cute its suit against Carhart in the Wisconsin state court,

where the suit will again be pending once the sale of the suit

to Carhart is rescinded. The judgment of the district court is

therefore reversed and the case remanded with instructions.

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