In re Catt

• Decision Date: 19 May 2004
• Docket Number: No. 03-1847.,03-1847.
• Citation: 368 F.3d 789
• Parties: In re: John W. CATT, II. Appeal of: Shirley and Gerald Hash.
• Court: U.S. Court of Appeals — Seventh Circuit

368 F.3d 789

In re: John W. CATT, II Appeal of: Shirley and Gerald Hash.

No. 03-1847.

United States Court of Appeals, Seventh Circuit.

Argued January 14, 2004.

Decided May 19, 2004.

J. Bradley Schooley (argued), Hostetler & Kowalik, Indianapolis, IN, for Appellant.

Mark R. Galliher (argued), Hopper & Galliher, Indianapolis, IN, for Appellee.

Before FLAUM, Chief Judge, and POSNER and DIANE P. WOOD, Circuit Judges.

POSNER, Circuit Judge.

When John Catt, a builder, declared bankruptcy, the Hashes, who had been joint venturers with Catt and had obtained a fraud judgment against him in an Indiana state court for almost half a million dollars, sought a ruling from the bankruptcy judge that the judgment debt to them was not dischargeable in bankruptcy. 11 U.S.C. § 523(a)(2)(A). The judge ruled, however, that the Hashes could not use the doctrine of collateral estoppel to make the state court's finding of fraud binding in the bankruptcy proceeding; they would have to prove fraud anew in that proceeding to defeat discharge. They declined to do so, standing on their claim of collateral estoppel, and so the bankruptcy judge ruled the debt dischargeable. The district judge affirmed, and the Hashes appeal. 28 U.S.C. § 158(d); Mellon Bank, N.A. v. Dick Corp., 351 F.3d 290, 292 (7th Cir.2003).

Mrs. Hash had been Catt's business manager. She and her husband had made a deal with Catt's building company (which has declared bankruptcy separately and is not a party to this case) to buy jointly a piece of land on which Catt would build a house. The plan was that when the house was sold, the Hashes and Catt would split the profits. Construction was delayed, building costs soared, and the parties had a falling out. Catt's company sued the Hashes for their share of the cost of the house and they counterclaimed for fraud and also filed a third-party complaint against Catt himself, whom they depict as the main perpetrator of the fraud, the company being merely his cat's paw. The alleged fraud, so far as can be gleaned from a very sparse record, consisted of his having obtained the Hashes' consent to use the construction loan from the bank to defray the exorbitant costs of construction that Catt had incurred, without telling the Hashes that to use the proceeds of the loan in this matter would just be to throw good money after bad.

A hearing was held two and a half weeks before the trial in the state court was scheduled to begin, to consider Catt's failure to cooperate in discovery. At the hearing Catt's lawyer indicated that Catt was planning to declare bankruptcy and didn't seem interested in continuing with the litigation. Later the lawyer filed a motion to withdraw as counsel on the ground that Catt wasn't cooperating with him. The judge granted the motion the day before the trial was to begin. The next day the Hashes and their lawyer appeared for the trial, but no Catt. The trial was short — no more than an hour or two. It consisted of a handful of questions asked the Hashes by their lawyer, and their answers. At the conclusion of the trial the lawyer submitted bare-bones findings and conclusions to the judge, who found fraud and awarded the Hashes $487,045.12 in damages, including $51,000 in punitive damages.

The effect of a judgment in subsequent litigation is determined by the law of the jurisdiction that rendered the judgment, 28 U.S.C. § 1738; Stephan v. Rocky Mountain Chocolate Factory, Inc., 136 F.3d 1134, 1136 (7th Cir.1998), in this case Indiana, provided the judgment was rendered in a proceeding that comported with due process of law. Kremer v. Chemical Construction Corp., 456 U.S. 461, 480-81, 102 S.Ct. 1883, 72 L.Ed.2d 262 (1982). One might suppose that findings made in default proceedings would never be given collateral estoppel (issue preclusion) effect because they are not based on a "full and fair" hearing — a standard formulation of the criterion for whether findings are entitled to such effect. E.g., Extra Equipamentos E Exportacao Ltda, v. Case Corp., 361 F.3d 359, 363 (7th Cir.2004); Duferco Int'l Steel Trading v. T. Klaveness Shipping A/S, 333 F.3d 383, 390-91 (2d Cir.2003); Richardson v. Navistar Int'l Transp. Corp., 231 F.3d 740, 743 (10th Cir.2000). How could a hearing that is not "full and fair" comport with due process? Yet a significant minority of states, Indiana among them, allow findings made in default proceedings to collaterally estop, provided that the defaulted party could have appeared and defended if he had wanted to. Grantham Realty Corp. v. Bowers, 215 Ind. 672, 22 N.E.2d 832, 836 (1939); Small v. Centocor, Inc., 731 N.E.2d 22, 28 (Ind.App.2000); Progressive Casualty Ins. Co. v. Morris, 603 N.E.2d 1380 (Ind.App.1992); Kirby v. Second Bible Missionary Church, Inc., 413 N.E.2d 330 (Ind.App.1980); see also Stephan v. Rocky Mountain Chocolate Factory, Inc., supra, 136 F.3d at 1136 (holding that a Colorado default judgment had issue-preclusive effect in bankruptcy discharge proceedings); In re Cantrell, 329 F.3d 1119 (9th Cir.2003) (same, California default judgment); In re Caton, 157 F.3d 1026, 1028-29 (5th Cir.1998) (same, Illinois default judgment). For in such a case the party has in effect forfeited his right to a full and fair hearing.

Do these states have a deviant understanding of collateral estoppel, or, worse, are they violating due process? The answer to both questions is no.

Surprisingly, there is no uniform agreement on the criteria for giving findings collateral estoppel effect. The Supreme Court has said that they are entitled to such effect as long as there was an opportunity for a full and fair hearing, e.g., Parklane Hosiery Co. v. Shore, 439 U.S. 322, 332-33, 99 S.Ct. 645, 58 L.Ed.2d 552 (1979), which suggests that findings made in a default proceeding might well have such effect. But the Court has also suggested the contrary by ruling that an issue must be "actually litigated" for the resolution of it to collaterally estop. Arizona v. California, 530 U.S. 392, 414, 120 S.Ct. 2304, 147 L.Ed.2d 374 (2000); see also Restatement (Second) of Judgments § 27, comment e, p. 257 (1982); 18A Charles Alan Wright, Arthur R. Miller & Edward H. Cooper, Federal Practice & Procedure § 4416 (2d ed.1988). Arizona v. California involved findings made in a consent proceeding rather than in a default proceeding; but in holding that such findings do not collaterally estop unless the parties to the consent decree had indicated that they intended them to do so, the Court quoted with approval the passage in the Restatement, cited above, that says that findings made in default proceedings are not to be given collateral estoppel effect either. An old Supreme Court decision, Cromwell v. County of Sac, 94 U.S. 351, 356-57, 24 L.Ed. 195 (1876), actually says that findings in a default proceeding are not entitled to such effect.

To add further confusion, an issue could be "actually litigated" in a hearing that, maybe because of stringent limitations on the admissibility of evidence, was not full and fair. Standefer v. United States, 447 U.S. 10, 22-23, 100 S.Ct. 1999, 64 L.Ed.2d 689 (1980). This possibility makes the "actually litigated" requirement puzzling, yet many federal cases require, for collateral estoppel to attach, that an issue both be actually litigated and in a hearing that was full and fair. National Satellite Sports, Inc. v. Eliadis, Inc., 253 F.3d 900, 908 (6th Cir.2001); Popp Telcom v. American Sharecom, Inc., 210 F.3d 928, 939-40 (8th Cir.2000); Boguslavsky v. Kaplan, 159 F.3d 715, 720 (2d Cir.1998). It is generally believed, therefore, that the federal rule is that default judgments are not entitled to collateral estoppel effect. Avi Rocklin & Kelly Lambert, "Taking a Default Judgment to the Bankruptcy...