Bush, In re

• Decision Date: 31 August 1995
• Docket Number: No. 94-4871,94-4871
• Citation: 62 F.3d 1319
• Parties: , 27 Bankr.Ct.Dec. 978, Bankr. L. Rep. P 76,649 In re Freddie Maxton BUSH, Debtor. Freddie Maxton BUSH, Plaintiff-Appellant, v. BALFOUR BEATTY BAHAMAS, LIMITED, Defendant-Appellee.
• Court: U.S. Court of Appeals — Eleventh Circuit

Page 1319

62 F.3d 1319

64 USLW 2192, 27 Bankr.Ct.Dec. 978, Bankr.

L. Rep. P 76,649

In re Freddie Maxton BUSH, Debtor Freddie Maxton BUSH, Plaintiff-Appellant, v. BALFOUR BEATTY BAHAMAS, LIMITED, Defendant-Appellee.

No. 94-4871.

United States Court of Appeals Eleventh Circuit.

Aug. 31, 1995.

Frederic J. DiSpigna, Boca Raton, FL, for appellant.

James E. Moye, Nathan E. Minear, Moye, O'Brien, O'Rourke, Hogan & Pickert, Orlando, FL, for appellee.

Appeal from the United States District Court for the Southern District of Florida.

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 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 Sec. 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 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. Sec. 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. 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 Sec. 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). 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. ⁶ 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 Sec. 27 cmt. e (1982). See also Restatement of Judgments Sec. 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, 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....