Chadwick Creech v. Wilfred C. Viruet

• Court: Court of Appeals for the Eleventh Circuit
• Decided: August 7, 2019
• Docket: 18-12584
• Status: Unpublished

Opinion

Case: 18-12584 Date Filed: 08/07/2019 Page: 1 of 11

[DO NOT PUBLISH]

IN THE UNITED STATES COURT OF APPEALS

FOR THE ELEVENTH CIRCUIT

No. 18-12584 Non-Argument Calendar

D.C. Docket Nos. 6:17-cv-01847-RBD; 6:13-bkc-04253-CCJ

In re: CHADWICK CREECH, YUWEN CREECH, Debtor.

_________________________________________________________

CHADWICK CREECH, YUWEN CREECH, Plaintiffs–Appellants,

versus

WILFRED C. VIRUET, CYNTHIA M. VIRUET, Defendants–Appellees.

Appeal from the United States District Court for the Middle District of Florida

(August 7, 2019) Case: 18-12584 Date Filed: 08/07/2019 Page: 2 of 11

Before TJOFLAT, CARNES, and JORDAN, Circuit Judges.

PER CURIAM:

This case presents two questions. First, whether a default judgment entered

as a discovery sanction in Illinois state court meets the requirements of issue

preclusion under Illinois law. Second, whether a debt resulting from that default

judgment is non-dischargeable in bankruptcy pursuant to 11 U.S.C. § 523(a)(19).

We hold that issue preclusion applies, and the debt is non-dischargeable.

I.

Illinois residents Wilfred and Cynthia Viruet invested in Streamone, LLC, a

company owned by Florida residents Chadwick and Yuwen Creech. When the

Viruets were unable to recover their investment, they brought a suit in Illinois state

court against the Creeches. Among other things, the Viruets alleged that the

Creeches sold them unregistered securities without a license and made material

misrepresentations about the investment, violating Illinois and Florida securities

laws. They also alleged that this conduct amounted to common law fraud.

The Creeches answered the complaint, asserted affirmative defenses, and

filed and responded to motions. But they refused to respond to interrogatories or to

produce relevant documents despite the Court’s orders to do so. Eventually, the

Court sanctioned the Creeches by entering a default judgment against them for

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$981,010.63 plus $547 in costs. The Creeches appealed, but an Illinois appellate

court later dismissed the appeal for want of prosecution.

Subsequently, the Securities Department of the Illinois Secretary of State

brought an administrative action against the Creeches and their companies:

Streamone, LLC and Streamone FS, LLC. The Secretary accused the Creeches of

violating Illinois securities laws based on the same conduct complained of in the

state suit: making material misrepresentations to the Viruets while selling

unregistered securities in Streamone without a license. After a contested three-day

hearing, the Secretary entered an order, including findings of fact and conclusions

of law, that prohibited the Creeches and the Streamone companies from selling

securities in Illinois, and fined Chadwick Creech and the Streamone companies

$10,000 each.

After the default judgment but before the administrative order, the Creeches

filed for bankruptcy. The Viruets intervened, asking the Bankruptcy Court to find

that the debt owed to them from the state court judgment was not dischargeable.

They argued that 11 U.S.C. § 523(a)(19) protected their debt from discharge, and

that the Creeches were precluded from relitigating the debt because of the default

judgment and the administrative order.1 The Creeches maintain that neither the

1 The Illinois Secretary of State entered the administrative order after the Creeches’ filed for bankruptcy but before the bankruptcy court ruled on discharge. 3 Case: 18-12584 Date Filed: 08/07/2019 Page: 4 of 11

state court judgment nor the administrative order meets the requirements for issue

preclusion. The Creeches want to prove they are not liable for the alleged conduct

and thus that the purported debt is invalid. The Bankruptcy Court ruled that the

Creeches were precluded from challenging the debt, and that the debt was non-

dischargeable. The District Court affirmed, and so do we.

II.

On appeals from bankruptcy court, “we review the bankruptcy court’s

factual findings for clear error, and its legal conclusions de novo.” In re Lunsford,

848 F.3d 963, 966 (11th Cir. 2017) (quotation omitted).

A.

We address the Creeches’ arguments about issue preclusion first. It is now

well-settled that issue preclusion applies to bankruptcy proceedings. See Grogan

v. Garner, 498 U.S. 279, 284 n.11, 111 S. Ct. 654, 658 n.11 (1991). When asked

to determine the preclusive effect of a judgment, we “refer to the preclusion law of

the State in which judgment was rendered.” Marrese v. Am. Acad. of Orthopaedic

Surgeons, 470 U.S. 373, 380, 105 S. Ct. 1327, 1332 (1985); see also 28 U.S.C.

§ 1738 (2018). Thus, we look to Illinois law on issue preclusion. 2

2 The Viruets direct us to one of our precedents on bankruptcy discharges, which held that issue preclusion applied to default judgments that were actually litigated:

Where a party has substantially participated in an action in which he had a full and fair opportunity to defend on the merits, but subsequently chooses not to do so, and even attempts to frustrate the effort to bring the action to judgment . . . a district 4 Case: 18-12584 Date Filed: 08/07/2019 Page: 5 of 11

Under Illinois law, the “minimum threshold requirements” for issue

preclusion are that the issue in the prior proceeding must have been (1) identical to

the present one, (2) actually litigated, (3) necessarily decided in a final judgment

on the merits, and (4) asserted against the same party or one in privity. See Nowak

v. St. Rita High Sch., 757 N.E.2d 471, 477–78 (Ill. 2001). The Creeches argue that

neither the state court judgment nor the administrative order meets these

requirements.

For the state court judgment, the Creeches maintain that the issue—whether

they violated securities laws and defrauded the Viruets—was neither actually

litigated nor decided in a final judgment on the merits. They contest whether an

issue can ever be actually litigated or decided in a final judgment when the action

ends in a default judgment.

Illinois law is clear that a default judgment is considered a final judgment on

the merits of “the ultimate claim or demand presented in the complaint.” See

Hous. Auth. for La Salle Cty. v. Y.M.C.A. of Ottawa, 461 N.E.2d 959, 963 (Ill.

1984). The ultimate claim presented in the Viruets’ complaint was violations of

Illinois and Florida securities laws. The default judgment, then, is final on that.

court [may] apply the doctrine of collateral estoppel to prevent further litigation of the issues resolved by the default judgment in the prior action.

In re Bush, 62 F.3d 1319, 1325 (11th Cir. 1995). But Bush was applying federal common law. Id. at 1323 & n.6. Because we must apply Illinois law on preclusion, Bush is inapposite. 5 Case: 18-12584 Date Filed: 08/07/2019 Page: 6 of 11

Illinois law is less clear on whether an issue can be actually litigated in an

action ending in a default judgment. It is important to distinguish between

different types of default judgments. In Illinois, the typical default judgment is

entered when a defendant fails to appear or answer. 735 Ill. Comp. Stat. 5/2-1301.

But Illinois also allows its courts to enter a default judgment as a sanction for

violating a discovery order. Ill. Sup. Ct. R. 219(c)(v). Necessarily, a default

judgment entered as a discovery sanction would only come about when the

litigation has progressed into the discovery phase. And a case that has progressed

into the discovery phase may well involve issues that were actually litigated. In

other words, as it relates to whether an issue was actually litigated, not all default

judgments are created equal.

The Illinois Supreme Court has never decided whether issue preclusion

applies to default judgments. The closest it came was in dicta noting that “[s]ome

courts have held that default judgments have limited preclusive effects under the

doctrine of collateral estoppel.” Y.M.C.A. of Ottawa, 461 N.E.2d at 963. An

Illinois appellate court found that “collateral estoppel does not apply here because

the agency issue was not actually litigated prior to the entry of the default

judgment.” S & S Auto. v. Checker Taxi Co., 520 N.E.2d 929, 930 (Ill. App. Ct.

1988). But Checker Taxi dealt with a typical default judgment, not one entered as

a discovery sanction. In that case, the plaintiff and defendant had both been co-

6 Case: 18-12584 Date Filed: 08/07/2019 Page: 7 of 11

defendants in a previous case. Id. One of the co-defendants did not appear in the

previous case, and neither bothered to answer the complaint. Id. In those

circumstances, the court rightly determined that the issue of whether one of the co-

defendants was the agent of the other had not been actually litigated in the previous

case. Id. at 931. The court did not say that issue preclusion could never apply to a

default judgment.

The Creeches point to other courts’ holdings that issue preclusion does not

apply to default judgments under Illinois law. See In re Nikitas, 326 B.R. 127, 131

(Bankr. N.D. Ill. 2005) (“Although Illinois law on the subject is neither well-

developed nor clear, it appears Illinois subscribes to the majority view that a

default judgment cannot form the basis for collateral estoppel.”); see also In re

Binns, 328 B.R. 126, 129–30 (B.A.P. 8th Cir. 2005) (holding same); Raab Sales,

Inc. v. Domino Amjet, Inc., 530 F. Supp. 2d 1192, 1197–98 (D. Kan. 2008) (same);

In re Jacobs, 448 B.R. 453, 469–70 (Bankr. N.D. Ill. 2011) (same). But all of

these cases address a typical default judgment, where the defendant fails to appear

or answer the complaint. None of these cases address a default judgment entered

as a discovery sanction after the case has been substantially litigated. (Also, none

of these cases are from Illinois courts, so their interpretation of Illinois law is not

binding.) We thus find no rule of Illinois law saying that a default judgment can

never receive preclusive effect, even one entered after substantial litigation.

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Nor do we think Illinois would adopt such a rule. The relevant question is

not the title of the order but whether the issue was actually litigated. On this

question, there is a difference between a default judgment entered when the

defendant fails to appear or answer the complaint, and one entered after the

defendant appeared, answered the complaint, asserted affirmative defenses, and

filed and answered motions. We do not believe that Illinois would decide that, in

the latter situation, the issue could never be actually litigated. To decide so would

allow parties to substantially litigate a claim, realize the case was not going their

way, refuse to participate in the case any further, draw a default judgment, and then

escape the preclusive effect of that judgment because it was entered by default.

There is no reason to believe that Illinois would invite such gamesmanship.

Here, the Creeches and the Viruets actually litigated in Illinois state court

whether the Creeches violated securities laws and defrauded the Viruets by selling

unregistered securities without a license and making material misrepresentations.

The Viruets alleged as much in their complaint. The docket from the Illinois state

court shows that the Creeches answered the complaint, they filed affirmative

defenses, and they submitted exhibits and affidavits. They also filed motions,

including a motion to dismiss and a motion for summary judgment. For part of the

proceedings, they were represented by counsel. But, after a year of litigation, the

Creeches refused to comply with the Court’s discovery orders, and the Court

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entered a default judgment as a discovery sanction. In its order, the Court

specifically found that the discovery was relevant to the Viruets’ claims that the

Creeches committed fraud and violated Illinois and Florida securities laws. Based

on this activity, we find that the issue was actually litigated, and the default

judgment qualifies for issue preclusion under Illinois law.

Because the Creeches are precluded from challenging their liability for the

debt by the state court judgment, we do not reach the question of whether the

Creeches would also be precluded by the administrative order.

B.

Next, we examine whether the Bankruptcy Court was correct in ruling that

the debt is non-dischargeable pursuant to 11 U.S.C. § 523(a)(19). Normally, a

person in bankruptcy can get a “fresh start” by discharging his or her debts. See

Grogan, 498 U.S. at 286, 111 S. Ct. at 659. But a fresh start is available only to

the “honest but unfortunate debtor.” Id. at 287, 111 S. Ct. at 659 (quotation

omitted). Accordingly, Congress has specified certain debts that cannot be

discharged in 11 U.S.C. § 523(a). One of these exceptions is for debts resulting

from court judgments or administrative orders for violating securities laws. See

§ 523(a)(19).

The statute reads as follows:

(a) A [bankruptcy] discharge . . . does not discharge an individual debtor from any debt— 9 Case: 18-12584 Date Filed: 08/07/2019 Page: 10 of 11

...

(19) that—

(A) is for—

(i) the violation of any of the Federal [or] State securities laws, or any regulation or order issued under such Federal or State securities laws; or

(ii) common law fraud, deceit, or manipulation in connection with the purchase or sale of any security; and

(B) results, before, on, or after the date on which the petition was filed, from—

(i) any judgment, order, consent order, or decree entered in any Federal or State judicial or administrative proceeding;

(ii) any settlement agreement entered into by the debtor; or

(iii) any court or administrative order for any damages, fine penalty, citation, restitutionary payment, disgorgement payment, attorney fee, cost, or other payment owed by the debtor.

§ 523(a)(19). Essentially, the statute has two requirements: first, the debt must be

for the violation of securities laws or a fraud in connection with the purchase or

sale of a security; second, the debt must be memorialized in a judicial or

administrative order or settlement agreement. Id.; see also In re Minardi, 536 B.R.

171, 192 (Bankr. E.D. Tex. 2015); In re Pujdak, 462 B.R. 560, 575 (Bankr. D.S.C.

2011); In re Jafari, 401 B.R. 494, 496 (Bankr. D. Colo. 2009). If these two

requirements are met, the debt is not dischargeable.

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The first requirement asks whether the debt was for the violation of

securities laws. To answer this question, we look behind “the default judgment to

the text of the complaint to determine whether the findings required for non-

dischargeability were sufficiently plead to have been necessarily decided . . . .” In

re Tills, 419 B.R. 444, 456 (Bankr. S.D. Cal. 2009). The Viruets’ complaint

specifically alleged violations of Illinois and Florida securities laws, as well as

common law fraud, all for selling unregistered securities and for selling securities

without a license. Consequently, the default judgment was necessarily for the

violation of securities laws.

The second requirement is also satisfied: the Creeches’ debt is memorialized

in a judgment from a judicial proceeding—specifically, the default judgment from

the Illinois state court. After all, a default judgment is no less a judgment for being

entered in default. Thus, both requirements are met, and the debt is not

dischargeable. 3

AFFIRMED.

3 The Viruets ask us to follow several other courts in finding that § 523(a)(19) preempts issue preclusion law. See, e.g., Tripodi v. Welch, 810 F.3d 761, 767 (10th Cir. 2016); In re Boccarsi, 578 B.R. 800, 811 (Bankr. N.D. Ill. 2017); In re Minardi, 536 B.R. 171, 192 (Bankr. E.D. Tex. 2015); In re Friedman, 531 B.R. 741, 746 (Bankr. N.D. Ill. 2015); In re Pudjak, 462 B.R. 560, 578 (Bankr. D.S.C. 2011). Because we resolve the case on other grounds, we decline to reach this question. 11