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,
             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,
    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.
          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
         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
         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
          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
                                 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;
          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).
          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
    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.
             The general federal rule, however, is to the contrary.
          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.
          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
              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
          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
    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
             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
    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
          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
           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
    28 L. Ed. 2d 788
     (1971).          The order of the district court
    affirming the judgment of the bankruptcy court is

Document Info

DocketNumber: 94-4871

Filed Date: 8/31/1995

Precedential Status: Precedential

Modified Date: 12/21/2014

Authorities (25)

Societe Internationale Pour Participations Industrielles Et ... , 357 U.S. 197 ( 1958 )

Blonder-Tongue Laboratories, Inc. v. University of Ill. ... , 402 U.S. 313 ( 1971 )

Parklane Hosiery Co. v. Shore , 439 U.S. 322 ( 1979 )

Marrese v. American Academy of Orthopaedic Surgeons , 470 U.S. 373 ( 1985 )

Grogan v. Garner , 498 U.S. 279 ( 1991 )

overseas-motors-inc-a-michigan-corporation-v-import-motors-limited , 519 F.2d 119 ( 1975 )

in-the-matter-of-john-smith-mcmillan-john-s-mcmillan-john-mcmillan , 579 F.2d 289 ( 1978 )

Bankr. L. Rep. P 68,272 Gail Spilman v. Darryl M. Harley , 656 F.2d 224 ( 1981 )

In the Matter of Barbara Garfinkle, Bankrupt. Arthur Dooley,... , 672 F.2d 1340 ( 1982 )

In Re Peter Gottheiner, Bankrupt. United States of America ... , 703 F.2d 1136 ( 1983 )

In Re Kenneth Earl Latch, Helen Doris Latch, Debtors. Sunco ... , 820 F.2d 1163 ( 1987 )

Francine Klingman v. Melvin E. Levinson , 831 F.2d 1292 ( 1987 )

in-re-charles-g-raynor-sr-akadba-fdba-aaa-distributors-and-associates , 922 F.2d 1146 ( 1991 )

Bankr. L. Rep. P 73,972 in Re Barry Stephens Yanks, Debtor. ... , 931 F.2d 42 ( 1991 )

In Re Louis S. St. Laurent, Ii, Debtors. Louis S. St. ... , 991 F.2d 672 ( 1993 )

In Re James Cable Partners, L.P., Debtor. The City of ... , 27 F.3d 534 ( 1994 )

In Re Sammy G. Daily, Debtor. Federal Deposit Insurance ... , 47 F.3d 365 ( 1995 )

Watson Realty Corp. v. Quinn , 452 So. 2d 568 ( 1984 )

In Re Nourbakhsh , 162 B.R. 841 ( 1994 )

In Re James T. Wilson , 72 B.R. 956 ( 1987 )

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