Opinion
Case No. 09-16787 Adversary No. 10-1001
02-10-2012
In re: Darrell J. Hess Mary C. Hess Debtor, John T. O'Brien Plaintiff, v. Darrell J. Hess Defendant.
This document has been electronically entered in the records of the United States Bankruptcy Court for the Southern District of Ohio.
IT IS SO ORDERED.
_________________________
Burton Perlman
United States Bankruptcy Judge
Judge Burton Perlman
DECISION AND ORDER DENYING MOTION FOR JUDGMENT ON THE PLEADINGS
This adversary proceeding arises in the chapter 13 bankruptcy case filed by Debtors. Debtors originally filed this case under chapter 7 of the Bankruptcy Code. By agreement, the case was converted to chapter 13. On August 10, 2010, the fourth amended chapter 13 plan of Debtors was confirmed.
In the present adversary proceeding, Plaintiff John T. O'Brien seeks relief against Debtor Darrel J. Hess alone (hereinafter "Defendant"). In the proceeding before this Court, Count I of the Complaint contains extensive factual allegations which Plaintiff says support his claim for judgment for non-dischargeability under § 523(a)(2)(A). Count II is based on § 523(a)(4), reciting the facts of Count I and alleging further facts to support Plaintiff's claim that Defendant engaged in fraud or defalcation while acting in a fiduciary capacity, as well as embezzlement. Count III seeks attorney's fees and costs. Defendant filed an Answer to the Complaint, denying the allegations upon which Plaintiff relies to make out his cause of action, but denying for lack of knowledge sufficient to form a belief about the truth of the allegations regarding the state court litigation to which Plaintiff has referred.
In Count I, Plaintiff refers to a judgment in the amount of $145,765.78, which was entered on January 28, 2008 in favor of Plaintiff and against Defendant and others in the Circuit Court of DuPage County, Illinois. The complaint therein contained claims for breach of contract, breach of fiduciary duty, fraud, intentional interference with contracts, promissory estoppel, unjust enrichment, and seeking an equitable accounting. Defendant filed no answer, and a default judgment was entered against him.
On August 31, 2011, Plaintiff filed a Motion for Judgment on the Pleadings to which are attached numerous exhibits. Defendant filed a Memorandum in Opposition to the motion, and Plaintiff filed a Reply. It is Plaintiff's Motion for Judgment on the Pleadings that is now before the Court. Plaintiff's motion is based on his contention that the state court judgment should be given collateral estoppel effect, because in it were decided the questions of fact which would support Plaintiff's claim of non-discharageability. Defendant's opposition raises a question about the validity of the Illinois state court judgment by reason of a lack of personal jurisdiction over Defendant. In addition, Defendant contends that the state court judgment may not be accorded collateral estoppel effect in this Court.
DISCUSSION
I. Judgment on the Pleadings.
Before the Court is a motion by Plaintiff for judgment on the pleadings. Authority for it is to be found at F.R.C.P. 12(c) Motion for Judgment on the Pleadings. "After the pleadings are closed—but early enough not to delay trial—a party may move for judgment on the pleadings." This provision is incorporated into bankruptcy practice at F.R.B.P. 7012(b). In ruling on the motion, the Court may consider any of the pleadings, including the Complaint, the Answer and any written instruments attached to them. F.R.C.P. 10(c); Commercial Money Center, Inc.v. Illinois Union Ins. Co., 508 F.3d 327, 335 (6th Cir. 2007). The Court can only grant the motion if, after taking all allegations made by the nonmoving party as true, it finds that there is still no issue of material fact left unresolved and that the moving party is entitled to judgment as a matter of law. Id. at 336. II. Collateral Estoppel.
Applicable Illinois law as to collateral estoppel is the following:
Under Illinois law collateral estoppel applies when: (1) the issue decided in the prior adjudication is identical with the one presented in the pending suit; (2) the party against whom collateral estoppel is asserted was a party or in privity with a party therein; (3) there was a final judgment on the merits; and (4) the party against whom collateral estoppel is asserted hadCaton v. Trudeau (In re Caton), 157 F.3d 1026, 1028 (5th Cir. 1998)
a full and fair opportunity to litigate the issue in the prior suit.
While in the Caton case, supra, the Fifth Circuit reached a conclusion that a default judgment in Illinois could be given collateral estoppel effect, this Court has reached a contrary conclusion.
The Supreme Court of Illinois has not had occasion to decide the question presented, but a review of the following authorities leads this Court to conclude that the Supreme Court of Illinois would hold that an Illinois default judgment should not be accorded collateral estoppel effect. An appellate level Illinois decision discussing the collateral estoppel doctrine, S & S Automotive v. Checker Taxi Co., 166 Ill.App.3d 6, 520 N.E.2d 929 (Ill.App. 1 Dist., 1988), supports the conclusion we reach. Therein, the plaintiff brought a declaratory judgment action against the defendant taxi company (its insured), and two other parties. Id. at 579. The defendant appeared, but did not answer. Id. The default judgment action found that the defendant did not have coverage under its insurance policy and that a certain taxi driver was not an agent of the defendant. In a later action against the defendant taxi cab company, the two other defendants from the prior action, now plaintiffs, alleged that the taxi driver was an agent of the defendant; therefore, they alleged, defendant should be liable for the agent's negligence under respondeat superior. Id. In the trial court, the defendant successfully asserted the doctrine of collateral estoppel to prevent the relitigation of the agency issue in the trial court, and the plaintiffs appealed. Id.,
On appeal, the court concluded that "the issue of whether the cab driver was an agent of Checker was not actually litigated. . . . [T]he party asserting the preclusion bears the heavy burden of showing with clarity and certainty that the identical issue was decided." Id. at 580. This language suggests that a default judgment will not satisfy the requirement that an issue be actually litigated for collateral estoppel to apply.
In both In re Nikitas, 326 B.R. 127 (Bankr. N.D. III. 2005) and In re Binns, 328 B.R. 126 (B.A.P. 8th Cir. 2005), the courts conducted the proper inquiry: determining what effect the Supreme Court of Illinois would give to the underlying Illinois judgment. See Bay Area Factors v. Calvert (In re Calvert), 105 F.3d 315, 317 (6th Cir. 1997) (quoting Marrese v. Am. Acad. Of Orthopaedic Surgeons, 470 U.S. 373, 375, 105 S.Ct. 1327, 1329, 84 L. Ed.2d 274 (1985)).
The court in Nikitas concluded that "Illinois courts' repeated statement that an issue must have been 'actually litigated' to be preclusive" leads to the result that "default judgments have no collateral estoppel effect" in Illinois. In re Nikitas, 326 B.R. at 133. The court in Nikitas further noted that the proposition as to the collateral estoppel effect of default judgments from In re Paternity of Rogers III, 297 III.App.3d 750, 697 N.E.2d 1193 (III. App. 2 Dist., 1998) is dicta, as that case actually turned on the application of res judicata. Id. at 132. For additional Illinois authority to the same effect, see In re Jacobs, 448 B.R. 453, 469 (Bankr. N.D. III. 2011); In re Reyes, 2008 WL 2020501, *2 (Bankr. C.D. III. 2008); In re Dealey, 2006 WL 211944, *2 (Bank. C.D. Ill. 2006).
The Eighth Circuit BAP, in In re Binns, supra, provided a particularly thoughtful analysis. Therein, the plaintiff had obtained a default judgment against the debtors in an Illinois state court lawsuit on counts of fraud in the sale of their business. In re Binns, 328 B.R. at 128. Debtors had been properly served, but did not appear or defend. Id. Debtors did not appeal or contest the default judgment. Id. When debtors eventually filed bankruptcy, the plaintiff filed a dischargeability complaint regarding his default judgment in the state court suit. Id. The bankruptcy court applied collateral estoppel, and the debtors appealed.
The panel disagreed with the bankruptcy court and concluded that default judgments do not have collateral estoppel effect under Illinois law. Id. at 130. The plaintiff had been relying on Rogers, supra, which the panel dismissed as follows: "(1) comes from a lower Illinois court, (2) is dicta, and (3) is inapplicable because this case involves an offensive use of collateral estoppel." Id. at 130 n.15. Furthermore, the Binns court gave considerable attention to the Supreme Court of Illinois' decision in Housing Authority v. Young Men's Christian Ass'n, 101 Ill.2d 246, 78 III.Dec. 125, 461 N.E.2d 959 (III. 1984), saying:
In Housing Authority for LaSalle County v. Young Men's Christian Association of Ottawa, the Illinois Supreme Court noted without further comment that several courts had determined that "default judgments have limited preclusive effects under the doctrine of collateral estoppel." (Despite the use of the word "limited," all of the cases cited by the YMCA court hold that collateral estoppel does not apply at all to default judgments.) The YMCA court appears to have made that comment only to emphasize a distinction between collateral estoppel and res judicata—a doctrine that the YMCA court observed "always" follows from default judgments—but we find the statement to be persuasive evidence of the Illinois Supreme Court's position on the collateral estoppel/default judgment issue, especially considering that it would be highly unlikely that the court would recite these cases and a law review article arguing for the abolition of collateral estoppel for default judgments if there was Illinois Supreme Court precedent to the contrary.Id. at 129-30 (internal footnotes omitted) (emphasis added).
Cases upon which Plaintiff relies are distinguishable. In Rogers, supra, the petitioner had brought suit to establish that he was not liable for child support. 697 N.E.2d at 1195. There had been an earlier judgment dissolving the petitioner's marriage. Id. In the judgment dissolving the marriage, the petitioner did not appear, and the court had held him liable for child support. Id. Based on this prior judgment, the lower court applied collateral estoppel to the divorce decree and held petitioner liable for child support. Id. at 1196. The petitioner appealed the decision, arguing that "his paternity was not fully adjudicated on the merits." Id. The decision below was affirmed. Id. But the court in Rogers decided the issue of paternity on res judicata grounds, though it did in dictum also note that collateral estoppel barred the petitioner from relitigating the parentage issue. Id. at 1198.
The two cases cited by the court in Rogers in support of its dictum on collateral estoppel, however, provide little support for a conclusion that collateral estoppel can be applied to a default judgment in Illinois. In Herriford v. Boyles, 193 Ill.App.3d 947, 550 N.E.2d 654 (Ill.App. 3 Dist., 1990), the court considered the application of collateral estoppel to an arbitration award, not to a default judgment, as was the case in Rogers. In Coronet Ins. Co. v. Booker, 158 Ill.App.3d 466, 511 N.E.2d 793 (Ill. App. 1 Dist., 1987), there is very little discussion of the collateral estoppel issue as it relates to the case at bar. This case also turned on an arbitration issue and largely glossed over the collateral estoppel effect of the default judgment.
Given the limited relevance of the Rogers court's cited authority, its express statement that the default judgment at issue therein contained "findings," while the default judgment in the present case does not, and for the reasons given by the courts in In re Nikitas and In re Binns, the Court does not find the Rogers case to be dispositive of the issue presented.
For the foregoing reasons, the Court holds that the Illinois judgment herein is not entitled to preclusive effect under Illinois' doctrine of collateral estoppel. III. Personal Jurisdiction.
In Illinois, personal jurisdiction is acquired: "either by the party's making a general appearance or by service of process as statutorily directed." In re Marriage of Verdung, 126 III.2d 542, 547, 535 N.E.2d 818, 820 (III. 1989); see also Keener v. City of Herrin, 235 III.2d 338, 349, 919 N.E.2d 913, 919 (III. 2009).
A. Service of Process.
The requirements regarding service of process in Illinois are detailed in Illinois' Code of Civil Procedure ("ILCS"). At 735 ILCS 5/2-208, the statute outlines how service on persons outside Illinois must be made:
(a) Personal service of summons may be made upon any party outside the State. If upon a citizen or resident of this State or upon a person who has submitted to the jurisdiction of the courts of this State, it shall have the force and effect of personal service of summons within this State; otherwise it shall have the force and effect of service by publication.There must be strict compliance with this section in order to obtain personal jurisdiction over an out-of-state defendant, which requires "the signature of the one who purportedly completed the out-of-state service." In re Marriage of Lewis, 213 Ill.App.3d 1044, 1046, 572 N.E.2d 1246, 1247 (Ill. App. 5 Dist., 1991) (internal citations omitted).
(b) The service of summons shall be made in like manner as service within this State, by any person over 18 years of age not a party to the action. No order of court is required. An affidavit of the server shall be filed stating the time, manner and place of service. The court may consider the affidavit, or any other competent proofs, in determining whether service has been properly made.
(c) No default shall be entered until the expiration of at least 30 days after service. A default judgment entered on such service may be set aside only on a showing which would be timely and sufficient to set aside a default judgment entered on personal service within this State.
Because subsection (b) states that the service upon persons outside Illinois should be made "in like manner as service within [Illinois]," it is necessary to look to the rule for service on individuals. Individuals in Illinois are to be served as follows:
(a) Except as otherwise expressly provided, service of summons upon an individual defendant shall be made (1) by leaving a copy of the summons with the defendant personally, (2) by leaving a copy at the defendant's usual place of abode, with some person of the family or a person residing there, of the age of 13 years or upwards, and informing that person of the contents of the summons, provided the officer or other person making service shall also send a copy of the summons in a sealed envelope with postage fully prepaid, addressed to the defendant at his or her usual place of abode . . . .735 ILCS 5/2-203.
(b) The officer, in his or her certificate or in a record filed and maintained in the Sheriff's office, or other person making service, in his or her affidavit or in a record filed and maintained in his or her employer's office, shall (1) identify as to sex, race, and approximate age the defendant or other person with whom the summons was left and (2) state the place where (whenever possible in terms of an exact street address) and the date and time of the day when the summons was left with the defendant or other person.
In Exhibit 5 to his Motion of Judgment on the Pleadings (doc. 32), Plaintiff has included the Notice of Filing of the Original Affidavit of Proof of Service for Defendants including Darrell Hess. This Notice was filed on July 18, 2007. Page seven of the Notice indicates that copies of the summons and of the complaint were left at Defendant's usual place of abode with his wife, Mary Hess, and is signed by the process server. The final judgment order in the case was later filed on January 28, 2008. Thus, the requirement for service of process has been here met.
B. Requirement of 735 ILCS 5/2-208(a)
735 ILCS 5/2-208(a) states that service made outside Illinois "upon a person who has submitted to the jurisdiction of the courts of this State" shall have the effect of personal service of summons within the state. Otherwise, the service shall have the effect of service by publication. This distinction is critical because of the following holding from the Illinois Supreme Court: "There is no doubt that where a defendant is a nonresident of the State, and the proceeding is in personam, publication will not give a court original jurisdiction over the person of the defendant . . . ." Bank of Edwardsville v. Raffaelle, 381 Ill. 486, 488, 45 N.E.2d 651, 652-53 (Ill. 1942) (emphasis added).
The following ILCS section, 2-209, details acts "submitting to jurisdiction," otherwise referred to as Illinois' Long-Arm statute. Plaintiff argues in its reply memorandum that Defendant's actions, leading to the state court action, fall under 2-209(a)(1) (the transaction of any business in Illinois), (a)(2) (the commission of a tortious act in Illinois), and (a)(11) (the breach of any fiduciary duty in Illinois). See doc. 40 at p. 5.
Plaintiff contends that, "by virtue of the entry of the default Final Judgment Order against Hess, the well-plead [sic] facts in O'Brien's Verified Complaint were deemed admitted by Hess, and he cannot now be heard to take issue with the court's exercise of personal jurisdiction of him in entering the judgment." See id. In addition, Plaintiff argues that his Motion for Judgment on the Pleadings examines only the pleadings, and that Defendant did not address the personal jurisdiction issue in his Answer to Plaintiff's adversary complaint in this case. Thus, Plaintiff contends that the question of personal jurisdiction was settled by the state court default judgment. Because this Court holds that that judgment is not entitled to collateral estoppel effect, Plaintiff's contention is without merit. IV. Conclusion.
On the basis of the above discussion, this Court holds that the Supreme Court of Illinois would not give collateral estoppel effect to Plaintiff's default judgment. Accordingly, because there are factual issues that are not precluded from being examined in this proceeding, Plaintiff is not entitled to judgment as a matter of law. This Court therefore holds that Plaintiff's Motion for Judgment on the Pleadings must be denied.
So Ordered.
Copies to:
Default List
Charles M. Meyer
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Antonio DeBlasio
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