Debtor Can't Profit From Skipping Fraud Trial

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By Stephanie Cumings

Nov. 25 — A debtor can't use the “tactical decision” to skip his trial as a way of discharging a debt in bankruptcy for acquiring funds by fraud.

Courts sometimes don't hold a default judgment against a debtor in bankruptcy, but in this case the debtor had fought the case in state court for three years before inexplicably skipping the trial. Judge Barbara B. Crabb agreed with the bankruptcy court that the debtor in this case already had a fair shot to fight the fraud allegations.

Sale of Faulty Goods

Roy Ahern was accused of selling a faulty “floating dock system” by lying to the buyers about the quality and compatibility of the parts. He fought the accusations in state court for nearly three years, representing himself through most of the litigation. But when he failed to attend the trial without explanation, the court entered a default judgment against him in the amount of $210,000.

After Ahern filed for bankruptcy, he argued he shouldn't be prevented from discharging the judgment. Section 523(a)(2)(A) of the Bankruptcy Code precludes debtors from discharging debts that were acquired by fraud.

Ahern argued that the bankruptcy court shouldn't give preclusive effect to the state court's judgment in his fraud case because it was a default. The bankruptcy court disagreed, and relied on the state court's fraud finding in holding that Ahern shouldn't be allowed to discharge the judgment.

‘Fundamentally Fair'?

Under Wisconsin law, a court is precluded from relitigating the same issue in another case if certain requirements are met. One of those requirements is whether or not applying issue preclusion would be “fundamentally fair.”

The district court said several factors are considered in determining if it is “fundamentally fair,” including: “(1) whether the party could have obtained a 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.”

The district court said that as a “general rule,” “issue preclusion does not apply to default judgments because the issues underlying such judgments are not ‘actually litigated.'” But there can be exceptions.

‘Perverse Incentive.'

As the court noted, in Heggy v. Grutzner, 456 N.W.2d 845 (Wis. Ct. App. 1990), the Wisconsin Court of Appeals gave preclusive effect to a default judgment when the party involved had tried to evade service even though he was in fact aware of the case.

“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,'” the district court said.

“In this case, it is undisputed that Ahern declined to attend the trial even though he was aware that the state court action was proceeding and that a trial was scheduled,” the court said. “He does not allege that he believed the trial would be cancelled or that he was excused from attending the trial because he planned to file a bankruptcy petition in the near future.”

The court said it would create a “perverse incentive” to allow litigants to avoid issue preclusion by skipping their own trials. It also noted that the plaintiffs in the state court case had expended time and resources fighting Ahern, and not applying issue preclusion would encourage a “similar waste of judicial resources in future cases.”

‘Disingenuous Argument.'

The court also rejected Ahern's claim that his absence at trial was somehow the result of no longer being able to afford a lawyer. The court noted that Ahern had been participating in the litigation pro se for almost two years before the trial and therefore found this argument “disingenuous.” The court added that not having a lawyer isn't a sufficient excuse regardless.

“If acting pro se immunized a litigant from issue preclusion, pro se litigants could raise the same issue over and over again in case after case without consequence,” the court said.

The court also didn't care that the state court didn't provide any findings of fact in reaching its judgment. The court said that Ahern appeared to be arguing that findings of fact should be a prerequisite to issue preclusion in cases involving defaults as added insurance that the issue was actually litigated.

The court rejected this argument, noting that there was “no doubt in this case that the state court found that Ahern made a false representation.”

Ahern was represented by Mart W. Swenson of Laman & Sweson Law Offices, Eau Claire, Wis.

The buyers were represented by Michele M. McKinnon of Conway, Olejniczak & Jerry, S.C., Green Bay, Wis.

To contact the reporter on this story: Stephanie Cumings in Washington at sacree@bna.com

To contact the editor responsible for this story: Jay Horowitz at jhorowitz@bna.com

Full text at: http://www.bloomberglaw.com/public/document/JANE_C_KELLEY_and_RICHARD_HILL_Plaintiffs_Appellees_v_ROY_E_AHERN