In re: : JOHN W. CATT , II. APPEAL OF : SHIRLEY and GERALD HASH .

In the
United States Court of Appeals
For the Seventh Circuit
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No. 03-1847
I N RE : J OHN W. C ATT , II.
A PPEAL OF : S HIRLEY and G ERALD H ASH .
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Appeal from the United States District Court for the
Southern District of Indiana, Indianapolis Division.
No. IP 02-0193 C—Richard L. Young, Judge.
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A RGUED J ANUARY 14, 2004—D ECIDED M AY 19, 2004
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Before F LAUM , Chief Judge, and P OSNER and D IANE P.
W OOD , Circuit Judges.
P OSNER , Circuit Judge. When John Catt, a builder, declared
bankruptcy, the Hashes, who had been joint venturers with
Catt and had obtained a fraud judgment against him in an
Indiana state court for almost half a million dollars, sought
a ruling from the bankruptcy judge that the judgment debt
to them was not dischargeable in bankruptcy. 11 U.S.C.
§ 523(a)(2)(A). The judge ruled, however, that the Hashes
could not use the doctrine of collateral estoppel to make the
state court’s finding of fraud binding in the bankruptcy
proceeding; they would have to prove fraud anew in that
proceeding to defeat discharge. They declined to do so,
standing on their claim of collateral estoppel, and so the

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2 No. 03-1847
bankruptcy judge ruled the debt dischargeable. The district
judge affirmed, and the Hashes appeal. 28 U.S.C. § 158(d);
Mellon Bank, N.A. v. Dick Corp., 351 F.3d 290, 292 (7th Cir.
2003).
Mrs. Hash had been Catt’s business manager. She and her
husband had made a deal with Catt’s building company
(which has declared bankruptcy separately and is not a
party to this case) to buy jointly a piece of land on which
Catt would build a house. The plan was that when the
house was sold, the Hashes and Catt would split the profits.
Construction was delayed, building costs soared, and the
parties had a falling out. Catt’s company sued the Hashes
for their share of the cost of the house and they counter-
claimed for fraud and also filed a third-party complaint
against Catt himself, whom they depict as the main perpe-
trator of the fraud, the company being merely his cat’s paw.
The alleged fraud, so far as can be gleaned from a very
sparse record, consisted of Catt’s having obtained the
Hashes’ consent to use the construction loan from the bank
to defray the exorbitant costs of construction that Catt had
incurred, without telling the Hashes that to use the proceeds
of the loan in this matter would just be to throw good
money after bad.
A hearing was held two and a half weeks before the trial
in the state court was scheduled to begin, to consider Catt’s
failure to cooperate in discovery. At the hearing Catt’s
lawyer indicated that Catt was planning to declare bank-
ruptcy and didn’t seem interested in continuing with the
litigation. Later the lawyer filed a motion to withdraw as
counsel on the ground that Catt wasn’t cooperating with
him. The judge granted the motion the day before the trial
was to begin. The next day the Hashes and their lawyer
appeared for the trial, but no Catt. The trial was short—no
more than an hour or two. It consisted of a handful of ques-

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No. 03-1847 3
tions asked the Hashes by their lawyer, and their answers.
At the conclusion of the trial the lawyer submitted bare-
bones findings and conclusions to the judge, who found
fraud and awarded the Hashes $487,045.12 in damages,
including $51,000 in punitive damages.
The effect of a judgment in subsequent litigation is de-
termined by the law of the jurisdiction that rendered the
judgment, 28 U.S.C. § 1738; Stephan v. Rocky Mountain
Chocolate Factory, Inc., 136 F.3d 1134, 1136 (7th Cir. 1998), in
this case Indiana, provided the judgment was rendered in
a proceeding that comported with due process of law.
Kremer v. Chemical Construction Corp., 456 U.S. 461, 480-81
(1982). One might suppose that findings made in default
proceedings would never be given collateral estoppel (issue
preclusion) effect because they are not based on a “full and
fair” hearing—a standard formulation of the criterion for
whether findings are entitled to such effect. E.g., Extra
Equipamentos e Exportação Ltda. v. Case Corp., 361 F.3d 359,
363 (7th Cir. 2004); Duferco Int’l Steel Trading v. T. Klaveness
Shipping A/S, 333 F.3d 383, 390-91 (2d Cir. 2003); Richardson
v. Navistar Int’l Transp. Corp., 231 F.3d 740, 743 (10th Cir.
2000). How could a hearing that is not “full and fair”
comport with due process? Yet a significant minority of
states, Indiana among them, allow findings made in default
proceedings to collaterally estop, provided that the de-
faulted party could have appeared and defended if he had
wanted to. Grantham Realty Corp. v. Bowers, 22 N.E.2d 832,
836 (Ind. 1939); Small v. Centocor, Inc., 731 N.E.2d 22, 28 (Ind.
App. 2000); Progressive Casualty Ins. Co. v. Morris, 603 N.E.2d
1380 (Ind. App. 1992); Kirby v. Second Bible Missionary
Church, Inc., 413 N.E.2d 330 (Ind. App. 1980); see also
Stephan v. Rocky Mountain Chocolate Factory, Inc., supra, 136
F.3d at 1136 (holding that a Colorado default judgment had
issue-preclusive effect in bankruptcy discharge proceed-
ings); In re Cantrell, 329 F.3d 1119 (9th Cir. 2003) (same,

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4 No. 03-1847
California default judgment); In re Canton, 157 F.3d 1026,
1028-29 (5th Cir. 1998) (same, Illinois default judgment). For
in such a case the party has in effect forfeited his right to a
full and fair hearing.
Do these states have a deviant understanding of collateral
estoppel, or, worse, are they violating due process? The
answer to both questions is no.
Surprisingly, there is no uniform agreement on the criteria
for giving findings collateral estoppel effect. The Supreme
Court has said that they are entitled to such effect as long as
there was an opportunity for a full and fair hearing, e.g.,
Parklane Hosiery Co. v. Shore, 439 U.S. 322, 332-33 (1979),
which suggests that findings made in a default proceeding
might well have such effect. But the Court has also sug-
gested the contrary by ruling that an issue must be “actually
litigated” for the resolution of it to collaterally estop. Arizona
v. California, 530 U.S. 392, 414 (2000); see also Restatement
(Second) of Judgments § 27, comment e, p. 257 (1982); 18A
Charles Alan Wright, Arthur R. Miller & Edward H.
Cooper, Federal Practice & Procedure § 4416 (2d ed. 1988).
Arizona v. California involved findings made in a consent
proceeding rather than in a default proceeding; but in
holding that such findings do not collaterally estop unless
the parties to the consent decree had indicated that they
intended them to do so, the Court quoted with approval the
passage in the Restatement, cited above, that says that
findings made in default proceedings are not to be given
collateral estoppel effect either. An old Supreme Court
decision, Cromwell v. County of Sac, 94 U.S. 351, 356-57
(1876), actually says that findings in a default proceeding
are not entitled to such effect.
To add further confusion, an issue could be “actually
litigated” in a hearing that, maybe because of stringent
limitations on the admissibility of evidence, was not full and

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No. 03-1847 5
fair. Standefer v. United States, 447 U.S. 10, 22-23 (1980). This
possibility makes the “actually litigated” requirement
puzzling, yet many federal cases require, for collateral
estoppel to attach, that an issue both be actually litigated
and in a hearing that was full and fair. National Satellite
Sports, Inc. v. Eliadis, Inc., 253 F.3d 900, 908 (6th Cir. 2001);
Popp Telcom v. American Sharecom, Inc., 210 F.3d 928, 939-40
(8th Cir. 2000); Boguslavsky v. Kaplan, 159 F.3d 715, 720 (2d
Cir. 1998). It is generally believed, therefore, that the federal
rule is that default judgments are not entitled to collateral
estoppel effect. Avi Rocklin & Kelly Lambert, “Taking a
Default Judgment to the Bankruptcy Court,” Colo. Lawyer,
Oct. 1998, p. 69.
But the “federal rule” is necessarily a rule about federal
judgments. All that is important in this case, given that the
criteria for precluding relitigation of findings or a judgment
are established by the jurisdiction that renders the judg-
ment, is that due process does not require in every case
either a hearing or that a particular issue be “actually
litigated”; it requires that the party sought to be precluded
have had an opportunity for a hearing. E.g., Richards v.
Jefferson County, 517 U.S. 793, 797 n. 4 (1996); United States v.
James Daniel Good Real Property, 510 U.S. 43, 48 (1993).
Catt had that. He says his lawyer didn’t tell him he was
withdrawing from the case, but even if that is true it
does not relieve Catt from the consequences of his no-show
default. He knew about the suit, of course; he knew that
a trial was scheduled; he had no reasonable ground for
thinking that the trial would not be held merely because his
lawyer was quitting; and he could have sought a continu-
ance to enable him to hire another lawyer. It is apparent
that, as his lawyer thought, Catt was determined to bypass
the state court litigation in the hope that any judgment

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6 No. 03-1847
rendered against him in that suit would be wiped out by a
discharge in his anticipated bankruptcy.
Thus, had there been no “trial” at all but merely the entry
of a default judgment on motion by the Hashes when Catt
failed to appear at the trial, the state court’s finding of
fraud, being an essential predicate of the judgment, would,
under Indiana law and consistent with due process (and
therefore binding on the bankruptcy court), have had the
same collateral estoppel effect as if the finding had been
made after a full adversary proceeding. So the fact that the
“trial” which was actually held in the Indiana state court
was a travesty of a trial, lacking as it did an adversary
dimension or for that matter the kind of active judicial
participation that characterizes the inquisitorial systems of
the Continental European judiciaries—the fact that it was no
better, really, than a default proceeding—cannot bail Catt
out. In re Bursack, 65 F.3d 51, 54-55 (6th Cir. 1995). In general
and in the present setting, the greater includes the lesser. If,
as we have just held, a default judgment is entitled to
preclusive effect, so must a judgment based on proceedings
as abbreviated as this one—proceedings that were the
functional equivalent of default proceedings— provided
that the loser had a fair chance, which he booted, for a full
and fair hearing.
We of course do not embrace a rule that would require
giving preclusive effect to findings in every type of case that
flunks the “full and fair hearing” test. If, whether by
allowing himself to be defaulted or otherwise, a party has
forfeited his right to such a hearing, he cannot complain; but
if there is no waiver or forfeiture, then of course he can
complain. Nor are we impressed by the suggestion in 18A
Wright, Miller & Cooper, supra, § 4442, pp. 243-46, that even
in jurisdictions that do not give collateral estoppel effect to
findings made in default proceedings, findings made in one-

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No. 03-1847 7
sided trials, as in this case, should be given that effect. All
that such a rule would do would be to encourage plaintiffs
to put on evidence in no-show cases, rather than simply
moving then and there for the entry of a default judgment.
Anyway we are not in such a jurisdiction.
We do not criticize the Hashes for proceeding as they did.
There are two stages in a default proceeding: the estab-
lishment of the default, and the actual entry of a default
judgment. Once the default is established, and thus liability,
the plaintiff still must establish his entitlement to the relief
he seeks. That required the Hashes, because they were not
suing for a sum certain (such as the face amount of a
promissory note), to introduce evidence on the damages
caused them by Catt’s fraud, as well as on any grounds they
might have for also obtaining an award of punitive dam-
ages. Ind. Tr. Pro. R. 55(B); Stewart v. Hicks, 395 N.E.2d 308,
312 (Ind. App. 1979); cf. Fed. R. Civ. P. 55(b)(2); Lowe v.
McGraw-Hill Cos., Inc., 361 F.3d 335, 339-40 (7th Cir. 2004);
Credit Lyonnais Securities (USA), Inc. v. Alcantara, 183 F.3d
151, 154-55 (2d Cir. 1999). “Even when a default judgment
is warranted based on a party’s failure to defend, the
allegations in the complaint with respect to the amount of
the damages are not deemed true. The district court must
instead conduct an inquiry in order to ascertain the amount
of damages with reasonable certainty.” Id. at 155 (citations
omitted). The inquiry here was perfunctory. But all that the
Hashes want to use the judgment for is the underlying
finding of fraud, and under Indiana law they could have
used it for that purpose even if there had been no hearing in
the state court at all. The finding thus bound the bankruptcy
judge.
R EVERSED .

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8 No. 03-1847
A true Copy:
Teste:
_____________________________
Clerk of the United States Court of
Appeals for the Seventh Circuit
USCA-02-C-0072—5-19-04

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