Christopher Halaska, et al v. Carhart-Halaska International, et al
Filing
Filed opinion of the court by Judge Posner. The judgment of the district court is REVERSED and the case is REMANDED with instructions. Richard A. Posner, Circuit Judge; Ann Claire Williams, Circuit Judge and Andrea R. Wood, District Court Judge. [6668626-1] [6668626] [14-2968]
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In the
United States Court of Appeals
For the Seventh Circuit
____________________
No. 14‐2968
CHRIS E. CARHART,
Plaintiff‐Appellee,
v.
CARHART‐HALASKA INTERNATIONAL, LLC,
Defendant,
CHRISTOPHER G. HALASKA and HALASKA INTERNATIONAL,
INC.,
Appellants.
____________________
Appeal from the United States District Court for the
Eastern District of Wisconsin.
No. 2:14‐mc‐00023‐JPS — J. P. Stadtmueller, Judge.
____________________
ARGUED APRIL 17, 2015 — DECIDED JUNE 8, 2015
____________________
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Before POSNER and WILLIAMS, Circuit Judges, and WOOD,
District Judge.*
POSNER, Circuit Judge. Karl Marx famously remarked that
“all great world‐historic facts and personages appear …
twice …: the first time as tragedy [Napoleon I], the second
time as farce [the great Napoleon’s nephew, Napoleon III].”
William Gaddis reversed the sequence in his satirical law
novel A Frolic of His Own (1994). At the beginning of the
novel the protagonist, while standing in front of his car try‐
ing to hot‐wire it, accidentally causes the car to start. It
lurches forward, injuring him—so he sues himself for having
negligently injured himself. The case before us brings us face
to face with a form of self‐suing that brings in its train a va‐
riety of business and legal complexities.
Chris E. Carhart and Christopher G. Halaska, the respec‐
tive sole owners of Carhart, Inc. and Halaska International,
Inc., formed a Wisconsin limited liability company that they
named Carhart‐Halaska International, LLC (and that the
parties call CHI for short, as will we), owned 50‐50 by their
two corporations. We’ll treat Messrs. Carhart and Halaska
rather than their corporations as the co‐owners of CHI, be‐
cause both men have litigated the case in their own names as
well as in the names of their corporations, with each man
and corporation on the same side of the case seeking the
same relief, and thus Carhart, Inc. and Carhart constituting
one litigating unit and Halaska International, Inc. and
Halaska another.
CHI—the new company—supplied construction materi‐
als to builders and provided engineering services. We use
Hon. Andrea R. Wood of the Northern District of Illinois, sitting by des‐
ignation.
*
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the past tense because, as we’ll see, the company is defunct.
We don’t know the current status of the two component
corporations.
A Minnesota company called MRO Industrial Sales, LLC,
was a sales agent for CHI. In 2012 CHI terminated MRO,
which reacted by suing CHI in the federal district court in
Minnesota for breach of contract and related wrongs. Juris‐
diction was based on diversity of citizenship, for remember
that CHI is a citizen of Wisconsin. Within weeks after the
suit was filed, Carhart obtained an assignment of MRO’s
claim, for which he claims to have paid MRO $150,000. By
stepping into MRO’s shoes he became the plaintiff in a suit
against a company of which he was (through his wholly
owned corporation) a half owner.
Halaska forthwith sued Carhart—both on Halaska’s own
behalf and on behalf of CHI—in a Wisconsin state court. The
suit charged Carhart with having breached his fiduciary du‐
ties to CHI and Halaska by becoming the plaintiff (as a result
of MRO’s assignment to it) in the Minnesota suit and also by
writing checks on CHI bank accounts without Halaska’s ap‐
proval, depositing payments owed CHI into Carhart’s own
corporate account, entering into a contract on CHI’s behalf
without letting Halaska know that Carhart had a conflict of
interest relating to the transaction, and withholding account‐
ing and other financial information concerning CHI from
Halaska. Essentially the claim is that Carhart plundered the
company that he and Halaska co‐owned, the plundering
presumably consisting of his withdrawing his own invest‐
ment and siphoning off part or maybe all of Halaska’s in‐
vestment—the latter being a plausible though not compulso‐
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ry inference from the fact that CHI, as we’re about to see, is
now assetless.
Halaska asked the Wisconsin state court to appoint a re‐
ceiver to wind up CHI (that is, arrange its affairs and having
done so dissolve it) because it was in imminent danger of
insolvency as a result of unpaid debts not limited to MRO’s
claim bought by Carhart, and of Carhart’s other acts of be‐
trayal of CHI. The receiver was appointed but shortly after‐
ward informed the district court in Minnesota that CHI was
insolvent and had no liquid assets out of which to pay a
lawyer to defend against the suit by Carhart (in succession to
MRO) in Minnesota. The receiver therefore consented to the
entry of a default judgment for $242,000 against CHI (the
amount sought by Carhart in that suit). The judgment yield‐
ed Carhart a potential profit of $92,000 ($242,000 – $150,000)
on his purchase of MRO’s claim. (We say “potential profit”
because its realization depended on CHI’s possessing at least
$242,000 worth of assets, which, as we’ll see, it did not.) Pre‐
sumably the difference between the two figures represented
potential (but again, not actual) compensation to Carhart for
having assumed the risk, originally borne by MRO, of losing
the suit against CHI that he had bought from MRO.
Which brings us at last to the present suit: a suit in feder‐
al district court in Wisconsin brought by Carhart against
CHI under Fed. R. Civ. P. 69(a)(1) to execute the $242,000 de‐
fault judgment that he had obtained as a result of the receiv‐
er’s inability to defend CHI against the Minnesota suit. CHI
was left with its suit (jointly with Halaska) against Carhart in
the Wisconsin state court, where that suit was, and as we’ll
see still is, pending. That suit was the company’s only re‐
maining asset, and Carhart filed the present case (the Wis‐
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consin federal court suit to enforce its $242,000 judgment
against CHI) in order to obtain it. The district court executed
the judgment, ordering the seizure and sale of CHI’s lawsuit
in order to satisfy Carhart’s judgment (in part), the lawsuit
being as we said CHI’s only remaining asset. The lawsuit
was sold at public auction; Carhart, the only bidder, bought
it for $10,000. By doing so he extinguished all possibility that
CHI could obtain relief against him for his alleged plunder‐
ing of the company. At a total cost of $150,000 (for Carhart
got his $10,000 payment right back after the sale, since it was
the proceeds of the sale of the asset that Carhart executed his
judgement upon), he had insulated himself against potential
liability to CHI for allegedly plundering the company.
But this assumes that Wisconsin law allows a lawsuit to
be the kind of property that can be seized to pay a judgment.
Fed. R. Civ. P. 69(a)(1) authorizes a federal district court to
enforce a money judgment by writ of execution but (with
immaterial exceptions) only pursuant to the procedure au‐
thorized by the state in which the federal court is located,
and, as discussed below, it is unclear whether Wisconsin
considers a lawsuit to be property that can be seized to pay a
judgment. See Wis. Stat., ch. 815.
Carhart was ingenious! The question is whether his
scheming was legal. An anterior question is whether we
have jurisdiction to answer that question. The appellants are
Halaska and his wholly owned corporation (but which we
can, as we said earlier, ignore). But Halaska was not named
as a defendant in Carhart’s suit to execute the $242,000 Min‐
nesota judgment; only CHI was—and CHI is not appealing.
Halaska has a substantial financial stake in the proceeding,
given his half ownership (maybe whole ownership, given
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Carhart’s defection), and complete control, of CHI. With CHI
crumbling in the face of Carhart’s defection and his litigation
against CHI—and in fact in receivership—Halaska, as sole
remaining owner, is the company’s alter ego, trying to pick
up the pieces from the disaster that began with MRO’s suit
and what he contends is the plundering of his company by
his business partner. He belongs in this suit. And while he
was not a named party and did not move to intervene in the
district court until after he had filed a notice of appeal
(which the district court held was too late), he participated
fully in the proceeding, just as if he had intervened and be‐
come a party. The judge treated him as a party. He was thus
a de facto party.
But is there such a thing in federal law? A judge can say
to a person who has a substantial interest in a case but is not
a party “you belong in this case, so I want you to move to
intervene and I’ll grant your motion.” This may not be an
enforceable order, but it’s likely to be obeyed. That’s in effect
what happened in this case, minus the dialogue and the
formal motion. With CHI abandoned by Carhart and in re‐
ceivership, yet the receiver apparently helpless for lack of
financing (though he had filed an objection in the district
court, he did not file an appeal from the district court’s deci‐
sion), Halaska was Carhart’s only opponent. Halaska had a
legitimate interest in the case as the half and maybe sole
owner of CHI, and so the judge deemed him a party without
insisting on the formality of a motion to intervene.
We conclude that Halaska was and remains a party. Cf.
SEC v. Enterprise Trust Co., 559 F.3d 649, 651–52 (7th Cir.
2009). “Appeals by those who participated as if parties are
frequently entertained despite a failure to achieve formal
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status as a party. Most of these appeals involve persons who
participate in trial court proceedings as if they had inter‐
vened, and who seem to have been treated on all sides as de
facto parties.” 15A Charles Alan Wright et al., Federal Practice
and Procedure § 3902.1 (2d ed., updated Apr. 2015). That’s
this case.
So we have jurisdiction, and come at last to the merits,
where the principal issue is the propriety of the judge’s hav‐
ing ordered the auctioning off of CHI’s lawsuit (CHI’s only
remaining asset) in order to provide partial satisfaction of
Carhart’s judgment. This is a separate question from wheth‐
er Wisconsin law allows a lawsuit to be property that can be
seized to pay a judgment. That question would become moot
if, whether or not the lawsuit is seizable property, the district
judge erred in thinking seizure the appropriate remedy in
this case. The alternative would have been to allow the law‐
suit against Carhart to proceed to judgment. CHI (which is
to say Halaska) might have been able to prove that Carhart’s
initial decision to buy MRO’s claim against CHI had initiat‐
ed a train of events likely to culminate, and in fact culminat‐
ing, in the company’s destruction. For all we know, a judge
or jury might have found merit in the suit and ordered Car‐
hart to pay damages to CHI greater than the $242,000 that
CHI owed him. In that event the company would have come
out of the protracted litigation ahead of the game, rather
than getting nothing from its legal struggle with Carhart ex‐
cept the $10,000 that he paid for the lawsuit at the public
auction—which CHI can’t keep, because it’s to be used to
satisfy a portion of the Minnesota judgment that Carhart ob‐
tained. It’s as if Carhart had pulled a $10,000 wad of bills out
of his left pants pocket and stuffed it into his right pants
pocket.
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It might be thought that if CHI’s lawsuit had had a posi‐
tive net expected value, someone at the auction would have
bid more than $10,000 for it. No one did, and this might sug‐
gest that the lawsuit had only negligible value. But maybe
not. Suits are difficult to value; that is doubtless why MRO
sold its claim against CHI to Carhart for what may have
been much less than it was worth ($150,000 versus $242,000,
though we don’t know on what the latter figure was based).
And Carhart as claimant had the best sense of the value of
CHI’s claim against him because he knew what he had done
that might make him liable for damages; what sense of that
would a bidder at a public auction have? If someone were to
place an undisclosed sum of money in an envelope and chal‐
lenge you to bid against them for it, you’d be a fool to accept
the challenge; for if you underbid you would get nothing
and if your bid happened to be the winning bid you would
certainly have overpaid, because your opponent would
know the true amount in the envelope. And so it would be
in this case. Better to let CHI litigate its claim and let the
state court decide what it was worth—which may have been
a lot more than Carhart’s successful $10,000 bid.
But this raises the question whether the district judge can
be faulted for having adopted an approach to valuation—the
public auction—that, as should have been foreseen, proved
to be enormously disadvantageous to CHI. When viewed as
a form of property (the property of CHI), a lawsuit is what is
called a “chose in action,” namely a form of intangible prop‐
erty as contrasted with a chunk of real estate, the classic ex‐
ample of tangible property. Long ago the Supreme Court of
Wisconsin suggested that a chose in action, including there‐
fore a legal claim, while it can be garnished cannot be sold to
satisfy a debt. Storm v. Cotzhausen, 38 Wis. 139, 143–44 (1875).
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But those were the days when the sale of a lawsuit was
forbidden by the common law doctrines of champerty and
maintenance, doctrines that have been abrogated or diluted
in many states, including Wisconsin. Wis. Stat. § 895.375
states that “no action, special proceeding, cross complaint or
counterclaim in any court shall be dismissed on the ground
that a party to the action is a party to a contract savoring of
champerty or maintenance unless the contract is the basis of
the claim pleaded.” Today “trolldom”—the seeking of finan‐
cial advantage by buying or otherwise obtaining a legal
claim (as distinct from filing a legal claim in order to seek
redress for injury)—thrives. The commonest example of a
law troll is the patent troll, who acquires by purchase or ap‐
plication to the Patent and Trademark Office a patent that he
uses not to protect an invention but to obtain a license fee
from, or legal judgment against, an alleged infringer. Car‐
hart was a troll of sorts in buying MRO’s legal claim in order
to extinguish CHI’s lawsuit against him. But the immediate
issue is his being allowed to bid on CHI’s suit against him
(and thus buy a second lawsuit). Even if (a question we
needn’t try to answer) a lawsuit is property that Wisconsin
law allows to be be seized to pay a debt, Carhart should not
have been allowed to buy CHI’s lawsuit to satisfy (in part)
his judgment against CHI. For as we said, CHI’s suit was
enveloped in too much uncertainty for potential bidders to
be able to value and thus bid intelligently on it (see Kristo‐
pher Wood, Comment: “Short Circuiting the Justice System:
How Defendants Are Misusing Writs of Execution,” 39 Pep‐
perdine Law Review 747, 787–88 (2012)), especially because
Carhart was as a practical matter on both sides of the trans‐
action. If there was a “smoking gun” piece of evidence prov‐
ing Carhart’s misdeeds that would come out in discovery,
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Carhart would already know of its existence, but what
would an outsider know about CHI and its financial difficul‐
ties, or about Carhart and his (or his corporation’s) contrac‐
tual or statutory duties to CHI? Nor could an outsider (a po‐
tential bidder at the auction of CHI’s lawsuit) use discovery
to try to find out.
Neither do we know the exact value of the lawsuit. But
we know the floor. Carhart says he paid MRO more than
$150,000 for its claim (it seems that he paid for MRO’s attor‐
neys’ fees as well, but no amount is stated). He must have
thought CHI’s only asset—its lawsuit against him—worth
more than that. Yet Carhart paid only $10,000 for CHI’s as‐
sets at the auction, and that almost certainly was too low.
Wisconsin allows an execution sale to be set aside when “the
price bid is so low as to shock the conscience of the court.”
Wilson v. Craite, 210 N.W.2d 700, 702 (Wis. 1973), citing An‐
thony Grignano Co. v. Gooch, 47 N.W.2d 895, 897 (Wis. 1951),
and Collins v. Smith, 44 N.W. 510, 512 (Wis. 1890). In both cit‐
ed cases the Supreme Court of Wisconsin stated that the bid
prices would be so low as to shock the conscience if they
were proved as alleged to be 45 percent and 24 percent of the
value of the properties. In the present case (in which the
property was a lawsuit) the bid price may have been less
than 7 percent of a minimum reasonable estimate of the
property’s value, if that minimum reasonable estimate
would have been $150,000.
So the district judge should have allowed CHI’s Wiscon‐
sin state court’s lawsuit to proceed—and for the further rea‐
son that by auctioning off the lawsuit the judge placed ahead
of CHI’s other creditors the creditor—Carhart—who had al‐
legedly destroyed the LLC for his own financial gain. That
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made his claim vulnerable to equitable subordination, which
allows a claim’s priority to be reduced if “the claimant is
guilty of misconduct that injures other creditors or confers
an unfair advantage on the claimant.” In re Kreisler, 546 F.3d
863, 866 (7th Cir. 2008); see also In re Mader’s Store for Men,
Inc., 254 N.W.2d 171, 184 (Wis. 1977) (“there may be claims
which are genuine, in the sense that they are neither sham
nor unlawful or otherwise subject to complete disallowance,
but which arise under circumstances such that it would be
inequitable to permit them to participate in distribution of
the estate on an equal basis with other general claims”). Re‐
ducing a claim’s priority may be appropriate when the claim
holder, a member of an LLC (such as Carhart, whose corpo‐
ration, the formal member, was his puppet) commits “a will‐
ful failure to deal fairly with the limited liability company or
its members in connection with a matter in which the mem‐
ber or manager has a material conflict of interest.” Wis. Stat.
§ 183.0402. It will be for the Wisconsin state court to decide
whether Carhart’s claim should be equitably subordinated.
Although the sale of CHI’s lawsuit to Carhart has taken
place, Carhart was not a purchaser in good faith, and so the
sale did not moot CHI’s challenge to the sale. As no valid
interest would be impaired by rescinding the sale, we order
the district court to rescind it, thus enabling CHI to prose‐
cute its suit against Carhart in the Wisconsin state court,
where the suit will again be pending once the sale of the suit
to Carhart is rescinded. The judgment of the district court is
therefore reversed and the case remanded with instructions.
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