Stephan v. Rocky Mountain Chocolate Factory, Inc.

• Decision Date: 10 November 1997
• Docket Number: Nos. 96-4171,97-1798,s. 96-4171
• Citation: 129 F.3d 414
• Parties: Lawrence F. STEPHAN, a citizen of Illinois, and Patricia L. Stephan, a citizen of Illinois, Plaintiffs-Appellees, v. ROCKY MOUNTAIN CHOCOLATE FACTORY, INC., a Colorado corporation, Defendant-Appellant.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 414

129 F.3d 414

Lawrence F. STEPHAN, a citizen of Illinois, and Patricia L.

Stephan, a citizen of Illinois, Plaintiffs-Appellees, v. ROCKY MOUNTAIN CHOCOLATE FACTORY, INC., a Colorado

corporation, Defendant-Appellant.

Nos. 96-4171, 97-1798.

United States Court of Appeals, Seventh Circuit.

Argued Sept. 9, 1997.

Decided Nov. 10, 1997.

Mitchell Bryan (argued), Scott H. Reynolds, Levenfeld, Eisenberg, Janger, Glassberg & Samothy, Chicago, IL, for Plaintiffs-Appellees.

George N. Vurdelja, Jr. (argued), Vurdelja & Heaphy, Chicago, IL, for Defendant-Appellant.

Before CUDAHY, RIPPLE and KANNE, Circuit Judges.

CUDAHY, Circuit Judge.

The Colorado Supreme Court has not considered whether a default judgment gives rise to issue preclusion under Colorado law. This, however, is the threshold question in appellees Patricia and Lawrence Stephan's suit against appellant Rocky Mountain Chocolate Factory, Inc. (Rocky Mountain). The Stephans sued Rocky Mountain for a declaration that they have no financial exposure under a sublease, and the district court granted summary judgment sua sponte for the Stephans. In addition to the question of Colorado law, Rocky Mountain's appeal raises the issues of whether an Illinois circuit court's refusal to deny recognition to a default judgment has preclusive effect under Illinois law, and whether the district court's entry of summary judgment sua sponte was appropriate. But in the absence of guidance on whether a default judgment is issue-preclusive under Colorado law, we stay this appeal and certify a question to the Colorado Supreme Court.

I. Background

Rocky Mountain, a Colorado corporation, franchises retail confectionary stores. Lawrence and Patricia Stephan formed a company (Rocky Mountain-Illinois) to sell "sweet temptations" in Illinois. On August 16, 1991, Rocky Mountain granted the Illinois company a franchise for downtown Chicago. On the same day, Rocky Mountain leased premises for the Chicago store from Equity Property Management Corp. (Equity). Rocky Mountain then immediately executed a sublease with--and here is where the parties disagree--either Rocky Mountain-Illinois, or the combination of Rocky Mountain-Illinois and the Stephans. The sublease required that the sublessee perform all the terms of Rocky Mountain's lease with Equity.

Whatever its true identity, the sublessee failed to make certain rent payments to Equity. In April of 1995, Rocky Mountain paid Equity $28,145.38 to cover the sublessee's default. Rocky Mountain then sued Rocky Mountain-Illinois and Lawrence in the district court for the county of La Plata, Colorado. Both defendants failed to appear, and the district court entered a default judgment against them on August 14, 1995.

In October of 1995, Rocky Mountain registered the Colorado judgment in the Circuit Court of Cook County, Illinois. Lawrence filed a motion to deny registration to the judgment on the grounds that the Colorado court lacked personal jurisdiction over him and that Rocky Mountain had obtained the judgment by fraud. The circuit court denied Lawrence's motion, and no appeal was taken.

In July of 1996, Rocky Mountain-Illinois, the Stephans and Rocky Mountain entered into a settlement agreement. Rocky Mountain-Illinois and the Stephans paid Rocky Mountain $55,000, ¹ and Rocky Mountain released the judgments and judgment liens previously described and covenanted not to sue Patricia. But the settlement did not resolve all potential disputes between the parties. In a combined forcible entry and rent collection action against Rocky Mountain and Rocky Mountain-Illinois, Equity continued to pursue claims that were accruing under the lease. The settlement agreement expressly stated that it did not relate to or release any claims or defenses that might arise on account of Equity's lawsuit.

To prevent Rocky Mountain from pursuing them individually for any liability that might arise out of Equity's action, the Stephans sought, in federal district court, a declaration that they had no further financial exposure under the sublease. Rocky Mountain responded with a motion for dismissal or, alternatively, summary judgment. The district court judge dismissed the Stephans' complaint insofar as it pertained to Patricia; Rocky Mountain had conceded that it could have no further claims against her because it had covenanted not to sue, and hence there was no case or controversy that involved her. Stephan v. Rocky Mountain Chocolate Factory, Inc., 948 F.Supp. 765, 768 (N.D.Ill.1996). Judge Shadur also granted summary judgment sua sponte in favor of Lawrence, on the ground that he had no personal liability for performance of the sublease. Id. at 775. Later Rocky Mountain filed a motion seeking relief from the entry of adverse judgment pursuant to Federal Rule of Civil Procedure 60(b). Judge Shadur denied the motion. Rocky Mountain appealed both the grant of summary judgment and the denial of its Rule 60(b) motion to this court. We have jurisdiction pursuant to 28 U.S.C. § 1291.

II. Discussion

Described in general terms, issue preclusion--or, as it was formerly called, collateral estoppel-limits the litigation of issues that have been decided in a previous action. As a necessary predicate to a possible grant of summary judgment, Judge Shadur had to determine whether the Colorado default judgment collaterally estopped Lawrence from litigating his financial exposure under the sublease. As Judge Shadur noted, Rocky Mountain's complaint in the Colorado action alleged that Lawrence was personally liable under the sublease. Id. at 772 n. 6; Colo. Compl. p 6. If issue preclusion applied to issues subsumed under the default judgment, then Judge Shadur would have been prevented from making an independent determination about Lawrence's financial exposure; Lawrence would have been precluded from litigating that issue. In the absence of controlling precedent from the Colorado Supreme Court, Judge Shadur concluded that the default judgment rendered against Lawrence did not give rise to issue preclusion. 948 F.Supp. at 771-74.

In diversity jurisdiction, a federal court must attempt to resolve issues in the same manner as would the highest court of the state that provides the applicable law. See Todd v. Societe BIC, 9 F.3d 1216, 1221 (7th Cir.1993) (en banc) (plurality opinion). Because Colorado rendered the default judgment, its law governs whether the judgment has issue-preclusive effect. See 28 U.S.C. § 1738 (full faith and credit statute); Marrese v. American Academy of Orthopaedic Surgeons, 470 U.S. 373, 380, 105 S.Ct. 1327, 1331, 84 L.Ed.2d 274 (1985). Without clear guidance from the Colorado Supreme Court, we must use our best judgment to determine how that court would construe its own law. See Valerio v. Home Ins. Co., 80 F.3d 226, 228 (7th Cir.1996). In so doing, we may consider the decisions of the lower Colorado courts and the courts of other jurisdictions, as well as other persuasive authorities.

In 1984, the Colorado Court of Appeals (an intermediate appellate court) twice addressed the issue-preclusive effect of a default judgment. These cases involved plaintiffs who had defaulted in earlier actions. See Ortega v. Board of County Comm'rs, 683 P.2d 819 (Colo.Ct.App.1984); Aspen Plaza Co. v. Garcia, 691 P.2d 763 (Colo.Ct.App.1984). In both instances, the court found that the default judgment resulted in collateral estoppel. But for reasons noted below, we are hesitant to rely solely on Ortega and Aspen in determining how the Colorado Supreme Court would rule if confronted with the facts we have before us.

The facts in Ortega differ markedly from those in Rocky Mountain's appeal. Thus, in an earlier lawsuit, certain individuals sought to quiet title to a tract of land, and asked that the county treasurer be restrained from issuing Ortega a deed to the disputed property. The court eventually entered a default judgment in favor of the plaintiffs. See Ortega, 683 P.2d at 820. Ortega later brought suit claiming ownership of the property and requesting the treasurer to issue him a deed. The court of appeals held that collateral estoppel barred Ortega's suit:

[A default judgment] "precludes the relitigation ... of issues which were actually litigated in the first action...." Therefore, where ... a default judgment has been entered against a party who later seeks to litigate an issue disposed of in the prior litigation, the subsequent action is barred.

Id. at 821 (quoting Quality Sheet Metal Co. v. Woods, 2 Haw.App. 160, 627 P.2d 1128, 1130 (1981)). In comparison with Lawrence, however, Ortega had a significant level of involvement in the earlier lawsuit against him. The trial court had ordered Ortega to appear and show cause why the county treasurer should not be preliminarily enjoined from issuing a deed to Ortega. The trial court also later considered and denied Ortega's motion to dismiss the complaint. Id. Despite the fact that Ortega eventually defaulted, his degree of participation in the initial lawsuit was far more extensive than that of Lawrence, who failed even to appear in the Colorado court. Given this apparently important factual distinction, it is not clear whether Ortega is dispositive.

To some extent, the facts in Aspen more closely resemble those in this appeal. In Aspen, a party bringing a counterclaim had defaulted in an earlier action after having failed to appear. Again the court of appeals announced that in principle a default judgment gave rise to a collateral estoppel. Aspen, 691 P.2d at 764. However, the court found that the issues subsumed in the first action differed from those in the second action. Thus, the default judgment could not have issue-preclusive effect. Id. at 765. Given this result, the court of appeals had no occasion to consider the appropriateness of collateral estoppel where the defaulting party has...