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Kelley v. Ahern

United States District Court, W.D. Wisconsin

November 23, 2015

JANE C. KELLEY and RICHARD HILL, Plaintiffs-Appellees,
ROY E. AHERN, Defendant-Appellant

For Roy E. Ahern, Appellant: Mart W Swenson, LEAD ATTORNEY, Laman & Sweson Law Offices, Eau Claire, WI.

For Jane C. Kelley, Richard Hill, Appellees: Michele M. McKinnon, LEAD ATTORNEY, Conway, Olejniczak & Jerry, S.C., Green Bay, WI.


BARBARA B. CRABB, District Judge.

In this bankruptcy appeal from an adversary proceeding, Roy Ahern challenges the bankruptcy court's determination that he cannot discharge a state court judgment for " fraudulently obtaining title to property," in violation of Wis. Stat. § 943.20(1)(d). Although Ahern acknowledges that 11 U.S.C. § 523(a)(2)(A) prohibits a debtor from obtaining a discharge for a debt incurred because of the debtor's fraudulent conduct, he argues that the bankruptcy court erred in giving preclusive effect to the state court's default judgment against him for fraud in the sale of a floating dock system.

Ahern's briefs are not easy to follow, but the primary question he raises on appeal relates to the circumstances under which a default judgment may serve as the basis for applying issue preclusion. Although Wisconsin courts have provided only limited guidance on that question, I agree with the bankruptcy court that issue preclusion should apply in the circumstances of this case. In particular, Ahern knew about the state court lawsuit and participated in the proceedings for almost three years, but he chose not to attend the trial without a legitimate excuse. When a party has a full and fair opportunity to litigate an issue to completion, but makes a tactical decision to avoid a trial, he should not be allowed to avoid the consequences of his decision.


Under 11 U.S.C. § 523(a)(2)(A), a debtor may not discharge " any debt . . . for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by . . . false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor's or an insider's financial condition." In this case, the bankruptcy court applied § 523(a)(2)(A) to a 2014 judgment from the Circuit Court for Door County, Wisconsin, for violating Wis. Stat. § 943.20(1)(d), which prohibits a party from " [o]btain[ing] title to property of another person by intentionally deceiving the person with a false representation which is known to be false, made with intent to defraud, and which does defraud the person to whom it is made."

Although Ahern says that exceptions to discharge such as § 523(a)(2)(A) must be construed narrowly, e.g., In re Chambers, 348 F.3d 650, 654 (7th Cir. 2003), he does not explain how that canon of construction applies to this case. He does not deny that a judgment under § 943.20(1)(d) is nondischargeable under § 523(a)(2)(A), so it makes no difference whether § 523(a)(2)(A) is construed broadly or narrowly. Grogan v. Garner, 498 U.S. 279, 290, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991) (§ 523(a)(2)(A) applies to " all fraud claims creditors have successfully reduced to judgment" ). Rather, the question on appeal is whether the bankruptcy court should have given preclusive effect to the state court judgment rather than making its own findings of fact on whether Ahern made a false representation to Jane Kelley and Richard Hill.

The parties agree that Wisconsin law governs this question, 28 U.S.C. § 1738; Stephan v. Rocky Mountain Chocolate Factory, 136 F.3d 1134, 1136 (7th Cir. 1998), and they agree on the general standard for applying issue preclusion (also called " collateral estoppel" ) under Wisconsin law. Generally, the first questions are whether the issue was " actually litigated and determined by a valid and final judgment" and whether " the determination is essential to the judgment." First Weber Group, Inc. v. Horsfall, 738 F.3d 767, 772-73 (7th Cir. 2013) (quoting Hlavinka v. Blunt, Ellis & Loewi, Inc., 174 Wis.2d 381, 497 N.W.2d 756, 762 (Ct.App. 1993)). The other question is whether it is " fundamentally fair" to apply issue preclusion. Id. Several factors may inform that determination, including (1) whether the party could have obtained review of the judgment; (2) whether there have been changes in the law since the first action; (3) whether the claims in the two cases are " distinct" ; (4) whether there were significant differences in the quality or extensiveness of the proceedings; (5) whether the burdens of proof are different in the two cases; and (6) whether the party had an adequate opportunity and incentive to obtain a full and fair adjudication in the initial action. Michelle T. by Sumpter v. Crozier, 173 Wis.2d 681, 689, 495 N.W.2d 327, 330-31 (1993).

Applying this test is more complicated in this case because of the circumstances under which Kelley and Hill obtained their judgment. Initially, Ahern denied Kelley's and Hill's allegation that Ahern induced them to purchase a floating dock system by intentionally deceiving them about the quality and compatibility of the parts. Although Ahern litigated the case for almost three years, he did not appear at the trial. After taking evidence from Kelley and Hill, the state court entered a default judgment in their favor in the amount of nearly $210,000. Dkt. #13, exh. F.

Neither the parties nor the bankruptcy court cites a case from the Wisconsin Supreme Court addressing the extent to which a default judgment is entitled to preclusive effect. Under those circumstances, federal courts look to the rulings of the intermediate appellate court for guidance. Pisciotta v. Old National Bancorp, 499 F.3d 629, 635 (7th Cir. 2007) .

Heggy v. Grutzner, 156 Wis.2d 186, 456 N.W.2d 845 (Ct.App. 1990), appears to be the only case in which a Wisconsin appellate court considered in depth whether and to what extent issue preclusion could apply to a default judgment. In Heggy, 156 Wis.2d at 193-94, 456 N.W.2d at 848-49, the court acknowledged the general rule from Restatement (Second) of Judgments § 27 comment e, at 257 (1980), that issue preclusion does not apply to default judgments because the issues underlying such judgments are not " actually litigated." However, the court also cited a caveat in the Restatement: " [E]ven if [an issue] was not litigated, the party's reasons for not litigating in the prior action may be such that preclusion would be appropriate." Id. See also Deminsky v. Arlington Plastics Machines, 2001 WI App 287, ¶ 40, 249 Wis.2d 441, 472-73, 638 N.W.2d 331, 346-47 (" '[P]olicy concern[s]' underlying the 'default judgment exception to the issue preclusion rule' might not always be present, and thus, there may be circumstances in which a party could or should be precluded from litigating an issue, notwithstanding the fact that the issue had been previously determined by default." ).

In Heggy, 156 Wis.2d at 193-94, 456 N.W.2d at 848-49, the court concluded that it would be appropriate to apply issue preclusion in that case because " [n]o policy concern favoring the default judgment exception to the issue preclusion rule" applied. Id. In particular, the court noted that the party had actual notice of the previous action, but he tried to evade service rather than participate. Id.

Under the approach of the Wisconsin Court of Appeals, the question whether a default judgment may be entitled to preclusive effect seems to overlap the question whether applying issue preclusion comports with " fundamental fairness." For example, in Heggy, 156 Wis.2d at 193-94, 456 N.W.2d at 848-49, the court suggested that it would hesitate to apply issue preclusion to a default judgment if the party chose not to contest a claim because " [t]he action . . . involve[d] so small an amount that litigation of the issue . . . cost more than the value of the lawsuit" or because " the forum [was] an inconvenient one in which to produce the necessary evidence or in which to litigate at all." This reasoning is similar to one of the factors that may underlie a fundamental fairness analysis. Michelle T., 173 Wis.2d at 689, 495 N.W.2d at 330-31 (courts may consider whether party has " inadequate opportunity or incentive to obtain a full and fair adjudication in the initial action" ). It is also consistent with the ...

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