OPINION and ORDER Affirming Bankruptcy Court's Order Granting Plaintiff's Motion for Summary Judgment Signed by District Judge Gerald E. Rosen. (JOwe)
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF MICHIGAN
Case No. 12-11421
Hon. Gerald E. Rosen
Bankr. Case No. 11-41244
Hon. Marci B. McIvor
Adv. Proceeding No. 11-5347
OPINION AND ORDER AFFIRMING BANKRUPTCY COURT’S
ORDER GRANTING PLAINTIFF’S MOTION FOR SUMMARY JUDGMENT
At a session of said Court, held in
the U.S. Courthouse, Detroit, Michigan
March 29, 2013
PRESENT: Honorable Gerald E. Rosen
Chief Judge, United States District Court
In the present appeal, Debtor and Defendant/Appellant Joanne Farrar challenges
the Bankruptcy Court’s November 30, 2011 order granting Plaintiff/Appellee Elizabeth
Bean’s motion for summary judgment, as well as a February 10, 2012 opinion and
accompanying order in which the Bankruptcy Court denied Debtor’s motion for
reconsideration of the November 30, 2011 order. The sole issue presented on appeal is
whether the Bankruptcy Court properly ascertained and applied Arizona law in
determining that a judgment entered by an Arizona court was entitled to collateral
estoppel or issue-preclusive effect in the present adversary proceeding. For the reasons
stated below, the Court finds that the Bankruptcy Court’s ruling on this question should
be affirmed, largely on the grounds identified in the Bankruptcy Court’s February 10,
2012 opinion denying Debtor’s motion for reconsideration.
As the Bankruptcy Court recognized, and as the parties agree, most of the required
elements for the application of issue preclusion are satisfied here. In particular, the
parties to the prior Arizona litigation are the same as those involved in the present
proceeding, and the pertinent issue of fraud was decided by the Arizona court and was
essential to that court’s judgment. The only element in dispute is whether, as articulated
by the Arizona Supreme Court, “the party against whom the doctrine [of issue preclusion]
is to be invoked had a full opportunity to litigate the matter and actually did litigate it.”
Chaney Building Co. v. City of Tucson, 716 P.2d 28, 30 (Ariz. 1986).
As explained by the Bankruptcy Court, Debtor fully participated in the Arizona
suit over the course of nearly four years of litigation, but then failed to appear in court on
the scheduled trial date and instead, the very same day, filed for bankruptcy in the Eastern
District of Michigan. (See Bankr. Ct. 2/10/2012 Op. at 2 -3.) As a result, the Arizona
court entered Debtor’s default, took proofs from Plaintiff as to damages, and issued a
judgment finding that Debtor had committed fraud and awarding damages to Plaintiff of
just under $800,000. (Id. at 3.) It is evident, then, that Debtor had a full opportunity to
litigate the issue of fraud in the Arizona suit, but simply chose not to use this opportunity
by appearing on the scheduled trial date and putting on a defense against Plaintiff’s claim
of fraud. Nonetheless, Debtor maintains that Arizona law does not accord preclusive
effect to issues decided in a prior suit resolved by means of a default judgment, citing the
following passage in Chaney as support for this proposition:
When an issue is properly raised by the pleadings or otherwise, and
is submitted for determination, and is determined, the issue is actually
litigated. However, in the case of a judgment entered by confession,
consent or default, none of the issues is actually litigated.
Chaney, 716 P.2d at 30 (citations omitted).
This Court shares the view of the Bankruptcy Court that Debtor’s “reliance on
Chaney is misplaced.” (Bankr. Ct. 2/10/2012 Op. at 7.) Although Chaney speaks broadly
of judgments “entered by confession, consent or default,” the specific (and far narrower)
issue addressed in that case was whether a prior suit resolved through a stipulated
dismissal could preclude the relitigation of facts alleged but “never actually litigated” in
that suit. Chaney, 716 P.2d at 29-30. The court reasoned that a stipulated dismissal was
akin to a consent judgment, and found that a judgment of this sort could not give rise to
issue preclusion absent an agreement between the parties “manifesting such an intention.”
716 P.2d at 30. As observed by the Bankruptcy Court, this case “does not involve a
stipulated dismissal or consent judgment,” but instead addresses the preclusive effect of a
judgment entered following a party’s default “after four years of litigation.” (Bankr. Ct.
2/10/2012 Op. at 7.) Thus, “Chaney does not control in the instant case,” (id.), and its
broad statement regarding the absence of litigated issues “in the case of a judgment
entered by confession, consent or default,” Chaney, 716 P.2d at 30, is mere dicta.
This reading of Chaney has been confirmed in a more recent decision of the
Arizona Court of Appeals. In Roberts v. City of Phoenix, 235 P.3d 265, 275 (Ariz. Ct.
App. 2010), a default judgment was entered against the defendant city as a sanction for its
discovery violations, and the court considered whether this default judgment could be
treated as a decision on the merits that would warrant an award of attorney fees under 42
U.S.C. § 1988. The city cited Chaney as establishing that the default judgment entered
against it could not be deemed a decision on the merits, but the court disagreed:
Chaney involved the stipulated dismissal of a party in a contract
dispute and whether such a dismissal could be given collateral estoppel
effect to bar future litigation. The Chaney court held that future litigation
could not be barred because judgments entered by stipulation, i.e., consent
judgments, involve issues that have never been litigated and thus were not
decided on the merits. But the case before us does not involve a stipulated
dismissal or consent judgment. Instead, the default judgment here was
entered as a sanction for discovery violations that were repeatedly before
the trial court and addressed throughout the proceedings. Thus, Chaney
does not control here.
Roberts, 235 P.3d at 275. This interpretation of Chaney by an intermediate appellate
court “serve[s] as a datum for ascertaining state law which is not to be disregarded by a
federal court unless it is convinced by other persuasive data that the highest court of the
state would decide otherwise.” Ziebart International Corp. v. CNA Insurance Cos., 78
F.3d 245, 250-51 (6th Cir. 1996) (internal quotation marks and citations omitted). Debtor
has not provided the requisite “persuasive data” that the Arizona Supreme Court would
reject this reading of Chaney and instead view this decision as broadly denying preclusive
effect to any suit resolved through a default judgment.
Accordingly, this Court agrees with the Bankruptcy Court that the Arizona case
law identified by Debtor does not prevent the Arizona court’s finding of fraud from being
given preclusive effect in the adversary proceeding brought by Plaintiff against Debtor.
The Court further agrees with the Bankruptcy Court that in the absence of Arizona case
law directly on point, it is appropriate to “look to federal law for guidance.” (Bankr. Ct.
2/10/2012 Op. at 10.) Because the Bankruptcy Court ably surveyed this law, (see id. at
10-12), this Court sees no need to repeat this analysis. Rather, it suffices to note that
since the Bankruptcy Court issued its opinion, the Bankruptcy Appellate Panel for the
Ninth Circuit has again addressed the Arizona law governing issue preclusion, including
the Chaney decision, and has determined that the “actually litigated” element of issue
preclusion as articulated in Chaney is satisfied so long as the party against whom the
doctrine is invoked participates “to some substantial degree” in the prior litigation. Child
v. Foxboro Ranch Estates, LLC (In re Child), 486 B.R. 168 173 (B.A.P. 9th Cir. 2013).
Here, there is no doubt that Debtor fully and actively participated in the entire pre-trial
phase of the Arizona litigation, spanning nearly four years, and that this participation
ceased only on the date scheduled for trial. Thus, as Debtor concedes, her participation in
this litigation “was very significant,” (Debtor’s Br. on Appeal at 7), and the Bankruptcy
Court did not err in determining that this substantial degree of participation satisfies the
“actually litigated” prong of Chaney’s standard for the application of issue preclusion.
For these reasons,
NOW, THEREFORE, IT IS HEREBY ORDERED that the Bankruptcy Court’s
November 30, 2011 order granting Plaintiff’s motion for summary judgment and its
February 10, 2012 order and accompanying opinion denying Debtor’s motion for
reconsideration are AFFIRMED in all respects.
s/Gerald E. Rosen
Chief Judge, United States District Court
Dated: March 29, 2013
I hereby certify that a copy of the foregoing document was served upon the parties and/or
counsel of record on March 29, 2013, by electronic and/or ordinary mail.
Case Manager, (313) 234-5135
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