First Weber Grp., Inc. v. Horsfall

• Decision Date: 22 January 2014
• Docket Number: No. 13–1026.,13–1026.
• Citation: 738 F.3d 767
• Parties: FIRST WEBER GROUP, INC., Plaintiff–Appellant, v. Jonathan HORSFALL, Defendant–Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

738 F.3d 767

FIRST WEBER GROUP, INC., Plaintiff–Appellant,

v.Jonathan HORSFALL, Defendant–Appellee.

No. 13–1026.

United States Court of Appeals,Seventh Circuit.

Argued Sept. 12, 2013.

Decided Dec. 20, 2013.

Rehearing Denied Jan. 22, 2014.

Kim I. Moermond, Attorney, First Weber Group, Madison, WI, for Plaintiff–Appellant.

Joel Winnig, Attorney, Madison, WI, for Defendant–Appellee.

Before WOOD, Chief Judge, and MANION and TINDER, Circuit Judges.

WOOD, Chief Judge.

When Jonathan Horsfall collected a commission on a real estate transaction, he opened up a can of worms. His former brokerage firm, First Weber Group, Inc., contends, with the support of a state-court judgment in its favor, that in so doing Horsfall breached legal, contractual, and ethical obligations recognized by Wisconsin law. Horsfall filed for bankruptcy two months after the state court's decision. In the bankruptcy court, First Weber filed an adversary proceeding in which it contended that Horsfall's judgment debt was excepted from discharge as a debt arising from a “willful and malicious injury.” See 11 U.S.C. § 523(a)(6). The bankruptcy and district courts rejected this argument and ruled in Horsfall's favor. We affirm.

I

From May 2001 to August 31, 2002, Horsfall worked as a real estate agent for First Weber. During Horsfall's tenure, First Weber executed a form Exclusive Right to Sell contract with one Robert Call, who was trying to sell property at 118 Overlook Terrace in Marshall, Wisconsin (the Call property). The contract gave First Weber exclusive rights to list and collect commissions for sale of the Call property during the listing period, as well as the exclusive right to collect commissions from sales to a defined set of “protected buyers” for one year after the listing period expired. Horsfall was the listing agent for the Call property.

In early August 2002, the Acosta family made an offer on the Call property. Although the deal was not completed, the offer established the Acostas as “protected buyers” according to the terms of the listing contract. Call's contract with First Weber ended on August 28, 2002, but under the protected-buyer clause, First Weber continued to have the exclusive right to collect a commission if the Call property was sold to the Acostas. This right expired one year after the end of the listing period.

Horsfall left First Weber at the end of August 2002 to establish his own brokerage, Picket Fence Realty. In October of that year, the Acostas contacted Horsfall about finding a new home. Without involving First Weber, Horsfall resuscitated the transaction with Call. On October 8, 2002, the Acostas and Call executed a sales contract for the Call property, using a form furnished by Picket Fence. The transaction closed on October 28, 2002, well within the period protected by First Weber's exclusivity rights. Picket Fence received a $6,000 commission at the closing. This was inconsistent with Horsfall's status as First Weber's agent under the Exclusive Right to Sell contract; it also violated various rules governing Wisconsin real estate practice. The closing documents were conspicuously silent about any interest of First Weber.

Six years later, First Weber sued both Horsfall and Call in Wisconsin state court. Call assigned his interest in the suit to First Weber, which dismissed him from the action (undoubtedly because Call's debts had been discharged in bankruptcy during the intervening years). Against Horsfall, First Weber asserted claims for breach of contract, tortious interference, and unjust enrichment. The state court granted summary judgment in favor of First Weber on all claims. In delivering its opinion, the court stated that Horsfall had “converted” funds owed to First Weber, but it did not elaborate on that comment. On January 28, 2010, the court entered a judgment against Horsfall in the amount of $10,978.91.

Horsfall filed for Chapter 7 bankruptcy on April 5, 2010, listing First Weber as a creditor. First Weber responded with a claim that its judgment debt was non-dischargeable under 11 U.S.C. § 523(a)(6), which excepts from discharge debts stemming from “willful and malicious injury” caused by the debtor. First Weber urged that the state court judgment conclusively established, by way of issue preclusion, all of the elements necessary to satisfy § 523(a)(6). The bankruptcy court denied summary judgment and set the case for trial.

After hearing the evidence at trial, the bankruptcy court concluded that Horsfall never harbored animosity toward First Weber and that he believed that his obligations to First Weber had ended as of August 28, 2002, when the agency agreement and Call's listing contract expired. The court was less charitable to Call: it did not credit his story that he thought his obligations to First Weber ended with the expiration of the listing agreement. The court excluded some evidence offered by First Weber, including proffered expert testimony by an attorney (Rick Staff), information about Horsfall's membership in a realtors' association and multiple listing service, and impeachment evidence indicating that Horsfall had made misstatements in court submissions. Ultimately, the bankruptcy court held that First Weber “did not demonstrate that the cause of [its] claim was an injury ... much less that it was willful or malicious.” The district court affirmed, and this appeal followed.

II

First Weber makes three arguments on appeal: first, it asserts that the bankruptcy and district courts erred in refusing to find issue preclusion based on the state court judgment; second, it contends that it was entitled to summary judgment on its claim that the debt arose from a willful and malicious injury; and third, it urges that the bankruptcy court abused its discretion in excluding some of First Weber's evidence. Horsfall views this entire appeal as frivolous and worthy of sanctions. First Weber retorts that Horsfall's frivolousness argument is itself frivolous. We begin with issue preclusion, because that is the centerpiece of First Weber's position.

A. Issue Preclusion

A state court judgment is entitled to the same preclusive effect in federal court as that judgment would have in state court. Allen v. McCurry, 449 U.S. 90, 96, 101 S.Ct. 411, 66 L.Ed.2d 308 (1980); see 28 U.S.C. § 1738. This rule applies with equal force to bankruptcy cases. Klingman v. Levinson, 831 F.2d 1292, 1295 (7th Cir.1987). We review determinations of the preclusive effect of state law de novo. In re Davis, 638 F.3d 549, 553 (7th Cir.2011) (bankruptcy appeal); Donald v. Polk Cnty., 836 F.2d 376, 382–83 (7th Cir.1988) (applying Wisconsin law).

Under Wisconsin law, “[c]ollateral estoppel, or issue preclusion, is a doctrinedesigned to limit the relitigation of issues that have been contested in a previous action between the same or different parties.” Michelle T. by Sumpter v. Crozier, 173 Wis.2d 681, 495 N.W.2d 327, 329 (1993). Wisconsin courts apply the following general rule: “When an issue of fact or law is actually litigated and determined by a valid and final judgment, and the determination is essential to the judgment, the determination is conclusive in a subsequent action between the parties, whether on the same or a different claim.” Hlavinka v. Blunt, Ellis & Loewi, Inc., 174 Wis.2d 381, 497 N.W.2d 756, 762 (Wis.Ct.App.1993) (quoting Restatement (Second) of Judgments § 27 (1980)).

In Wisconsin (as in most states), the question whether issue preclusion applies depends on two criteria. The first (the “actually litigated step”) requires that “the question of fact or law that is sought to be precluded actually must have been litigated in a previous action and [have been] necessary to the judgment.” Mrozek v. Intra Fin. Corp., 281 Wis.2d 448, 699 N.W.2d 54, 61 (2005). The second (the “fundamental fairness step”) requires the court to “determine whether it is fundamentally fair to employ issue preclusion given the circumstances of the particular case at hand.” Id. Relevant factors for the latter inquiry include the availability of review of the first judgment, differences in the quality or extensiveness of the proceedings, shifts in the burden of persuasion, and the adequacy of the loser's incentive to obtain a full and fair adjudication of the issue. Id. at 61–62. The fundamental fairness step eschews formalistic requirements in favor of “a looser, equities-based interpretation of the doctrine.” Michelle T., 495 N.W.2d at 330.

In order to know what was “actually litigated,” we must take a closer look at what the state court decided. The parties agree that First Weber's complaint in state court put forth only three theories of recovery: breach of contract, tortious interference, and unjust enrichment. Notably, the pleadings did not raise a claim for conversion, but First Weber's motion for summary judgment included that theory as a fourth basis for recovery. There are hints that the state court was aware that conversion was at issue: it did not undertake a detailed analysis of a conversion claim, but the transcript reflects that the court twice said that Horsfall “converted” money belonging to First Weber. Although this is a thin reed, we will assume for present purposes that the state court did make a finding of liability on a conversion claim.

This is important for First Weber's position in the bankruptcy case because, of the four theories it raised in the state court, only the intentional torts of interference and conversion could plausibly constitute willful and malicious injury. In order to find liability on the tortious interference claim, the state court had to find: (1) First Weber had a contract with a third party; (2) Horsfall interfered with that contract; (3) Horsfall's interference was intentional; (4) the interference caused First Weber damages; and (5) Horsfall was not justified or privileged to interfere. See Briesemeister v. Lehner, 295 Wis.2d 429, 720 N.W.2d 531, 542 (Wis.Ct.App.2006)....