Sartin v. Macik
| Citation | 535 F.3d 284 |
| Decision Date | 28 July 2008 |
| Docket Number | No. 07-1464.,07-1464. |
| Parties | Robert P. SARTIN, Sr.; Robert P. Sartin, Jr.; Marie M. McGinness Sartin; Ted Griffin; G. Donald Layno; John Michael Wilson; Ronald Frahm; Sharon Frahm; Doug Cline; Edward L. Sartin; Edward A. Sartin; Christopher T. Sartin; Sartin Services, Incorporated; Richard Sartin, Plaintiffs-Appellees, v. John D. MACIK, Defendant-Appellant. |
| Court | United States Courts of Appeals. United States Court of Appeals (4th Circuit) |
Bradley Eli Pearce, Katten, Muchin & Rosenman, LLP, Charlotte, North Carolina, for Appellant. Benjamin D. Overby, Vernon, Vernon, Wooten, Brown, Andrews & Garrett, PA, Burlington, North Carolina, for Appellees.
ON BRIEF:
E. Lawson Brown, Jr., Vernon, Vernon, Wooten, Brown, Andrews & Garrett, PA, Burlington, North Carolina, for Appellees.
Before WILLIAMS, Chief Judge, and MICHAEL and MOTZ, Circuit Judges.
Reversed and remanded by published opinion. Judge MOTZ wrote the opinion, in which Judge MICHAEL joined. Chief Judge WILLIAMS wrote a dissenting opinion.
In this case, we confront a question of North Carolina law that the state courts have yet to address. We must determine whether a state default judgment, entered as a penalty for a party's failure to comply with a North Carolina court's discovery order, has collateral estoppel effect in subsequent litigation in bankruptcy court. The bankruptcy court, in a decision upheld by the district court, found that the North Carolina courts would give collateral estoppel effect to the default judgment. For the reasons that follow, we disagree and therefore reverse the judgment of the district court and remand for further proceedings.
John D. Macik, John Adalio, James Coffin, and Negotiation Plus Sports Management, Ltd., together founded TeamDriver.com, Inc., an internet-based business intended to become "the multi-media connection between motorsports celebrities, drivers, teams and the racing fan." They hoped that the TeamDriver.com website would grow to accommodate on-line photo galleries, chat areas, a racing retail store, an on-line auction house, and eventually live video and audio feeds providing behind-the-scenes access to races, including "helmet/hat cams" and "wide-angle tool box cams." They also intended to establish an on-line auction site in partnership with eBay that would allow racing teams to "liquidate their used and damaged racing parts and one-of-a-kind team items" to eagerly awaiting racing fans. In an effort to generate investment in TeamDriver.com, Macik and the others circulated documents to potential investors describing their plans for developing the site, the proposed structure of the organization, and profit and loss projections based on itemized predictions of revenue, operating expenses, and set-up expenses.
On the basis of these proposals, Macik and the others successfully solicited a total of $213,200 from a number of investors, including the appellees in this case, Robert P. Sartin, Sr., Robert P. Sartin, Jr., Marie M. McGinness Sartin, Ted Griffin, G. Donald Layno, John Michael Wilson, Ronald Frahm, Sharon Frahm, Doug Cline, Edward L. Sartin, Edward A. Sartin, Christopher T. Sartin, Sartin Services, Inc., and Richard Sartin (collectively, "the Sartins"). The Sartins lost their investment, however, when the business failed shortly after TeamDriver.com's inception.
Alleging that Macik used the funds invested in TeamDriver.com for personal purposes, the Sartins brought an action against Macik in state court in Guilford County, North Carolina. The Sartins alleged breach of fiduciary duty, constructive fraud, fraud, negligence and gross negligence, breach of contract, misappropriation and conversion of funds, misrepresentation, and unfair and deceptive trade practices. Although Macik answered the Sartins' complaint, he failed to respond to interrogatories and requests for production of documents, despite the state court's order compelling discovery. When Macik then did not appear for a hearing, the state court found that he had willfully failed to comply with the discovery order and that this failure entitled the Sartins to judgment by default. On March 4, 2004, the court struck Macik's answer and awarded the Sartins $213,200 in actual damages, which the court then trebled to $639,600 under the state's unfair and deceptive trade practices statute, and costs and attorneys fees. The Sartins attempted to execute the judgment against Macik but were unsuccessful.
In June 2005, Macik and his wife, Paula C. Macik, filed a voluntary Chapter 7 bankruptcy petition. The Sartins brought an adversary proceeding in that bankruptcy action, seeking to have the state court judgment against Macik declared nondischargeable in bankruptcy pursuant to 11 U.S.C. § 523(a) (2000). That section of the Bankruptcy Code provides that a discharge in bankruptcy does not extend to certain kinds of debts, including those "for money ... obtained by ... false pretenses, a false representation, or actual fraud," "for fraud ... while acting in a fiduciary capacity," and "for willful and malicious injury by the debtor to ... the property of another." Id. § 523(a)(2), (4), (6).
The bankruptcy court found, and the district court agreed, that the state court default judgment for the Sartins against Macik had collateral estoppel effect, barring Macik from arguing in the bankruptcy court that § 523(a)(2), (4), and (6) did not apply to his debt to the Sartins. The bankruptcy court thus held that the debt arising from the state court judgment was nondischargeable, and the district court affirmed that decision.1 "We review the judgment of a district court sitting in review of a bankruptcy court de novo, applying the same standards of review that were applied in the district court." Three Sisters Partners, L.L.C. v. Harden (In re Shangra-La, Inc.), 167 F.3d 843, 847 (4th Cir.1999).
Federal courts must give the same preclusive effect to a state court judgment as the forum that rendered the judgment would have given it. See Allen v. McCurry, 449 U.S. 90, 96, 101 S.Ct. 411, 66 L.Ed.2d 308 (1980); Pahlavi v. Ansari (In re Ansari), 113 F.3d 17, 19 (4th Cir.1997). Therefore, to determine the preclusive effect of the state default judgment against Macik, we must apply North Carolina law.
Preclusion doctrine encompasses two strands: res judicata and collateral estoppel. Res judicata, or claim preclusion, bars the relitigation of any claims that were or could have been raised in a prior proceeding between the same parties. See Thomas M. McInnis & Assocs., Inc. v. Hall, 318 N.C. 421, 349 S.E.2d 552, 556-57 (1986). Neither party contends that the case at hand involves res judicata.
Rather, the preclusion doctrine relevant to the present case is collateral estoppel, or issue preclusion, which bars the relitigation of specific issues that were actually determined in a prior action. See id.2 In order to assert collateral estoppel under North Carolina law, a party must show that the issue in question was identical to an issue actually litigated and necessary to the judgment, that the prior action resulted in a final judgment on the merits, and that the present parties are the same as, or in privity with, the parties to the earlier action. See id. at 557. North Carolina courts have abandoned the final requirement of "mutuality of estoppel" for the defensive use of collateral estoppel, so long as the party seeking to reopen the issue "had a full and fair opportunity to litigate" the matter in the previous action. See id. at 560.
As to the first requirement — that the issue in question was identical to an issue actually litigated and necessary to the judgment — the Supreme Court of North Carolina has held that parties must satisfy four additional criteria:
(1) the issues must be the same as those involved in the prior action, (2) the issues must have been raised and actually litigated in the prior action, (3) the issues must have been material and relevant to the disposition of the prior action, and (4) the determination of the issues in the prior action must have been necessary and essential to the resulting judgment.
State v. Summers, 351 N.C. 620, 528 S.E.2d 17, 20 (2000) (emphasis added) (citing King v. Grindstaff, 284 N.C. 348, 200 S.E.2d 799, 806 (1973)).
This case presents the question of whether a North Carolina court would hold that issues resolved in a default judgment have been "actually litigated" for purposes of that judgment and so carry collateral estoppel effect in subsequent litigation. As the parties acknowledge, the Supreme Court of North Carolina has never resolved, or directly addressed, this question.
The Supreme Court of North Carolina has, however, clearly stated on several occasions that it follows "traditional" formulations of res judicata and collateral estoppel. See Whitacre P'ship v. Biosignia, Inc., 358 N.C. 1, 591 S.E.2d 870, 880 (2004) (); Hall, 349 S.E.2d at 557 (). Indeed, as recently as 2004, the Supreme Court of North Carolina explicitly noted that the only respect in which it has chosen to depart from the traditional rules of collateral estoppel is to "abandon[ ] the strict `mutuality of estoppel' requirement for defensive uses of collateral estoppel." Whitacre P'ship, 591 S.E.2d at 880.3
Moreover, the Supreme Court of North Carolina has relied upon section 27 of the Restatement when defining "collateral estoppel as [that doctrine was] traditionally applied." See Hall, 349 S.E.2d at 557. Section 27 provides that "[w]hen 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." Restatem...
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