Court Opinion

ID: 70349
Source: CourtListenerOpinion
Date Created: 2010-04-26 07:00:33+00
Date Added: 2024-06-11T08:59:01.523008
License: Public Domain

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.