Shimp v. MacFarland

In re
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF WYOMING
RANCE MACFARLAND,
Debtor.
)
)
)
)
)
)
Case No. 	07-20522
Chapter 7
SUSANNE SHIMP, 	)
)
Plaintiff, 	)
)
v. 	) 	Adv. No. 	07-2059
)
RANCE MACFARLAND, 	)
)
Defendant. 	)
DECISION ON PLAINTIFF'S MOTION FOR
PARTIAL SUMMARY JUDGMENT
On April 18, 2008, the court held a hearing on the Motion for Partial Summary
Judgment filed by the Plaintiff, Susanne Shimp ("Shimp"). 	Shimp appeared through her
counsel, Stephen R. Winship and the Defendant Rance MacFarland, ('"MacFarland")
appeared through his counsel, Jody L. Chance.
Jurisdiction
The court has jurisdiction over this adversary proceeding pursuant to 28 U.S.C. §§
157 and 1334. This is a core proceeding within the definition of 28 U .S.c. § 157
(b)(2)(J). This motion is brought under Fed. R. Civ. P. 56, made applicable in adversary
proceedings by Fed. R. Bankr. P. 7056.
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Facts
This adversary stems from an action initially filed in the District Court, Garfield
County, Colorado ("'District Court"), Case Number 05-CV -252. The facts are long and
involved and must be set out here so this court can address the issue of collateral estoppel
as it applies to Shimp's motion for partial summary judgment.
Shimp invested $20,000 in Quality Builders, LLC (,"Quality Builders").
MacFarland was one of the four member-managers of Quality Builders. When Shimp's
investment was not returned, she filed a suit against Quality Builders and each member-
manager individually, including MacFarland. She alleged, as her causes of action: (1)
deceit based on fraud; (2) deceit based on concealment and non-disclosure; (3) negligent
misrepresentation causing harm in a business transaction; (4) civil theft; (5) breach of
fiduciary duty; (6) breach of contract; (7) unjust enrichment, and other claims that are not
relevant to the proceeding before this court.
MacFarland was served on August 16,2005 through Brad Stiles, another member-
manager of Quality Builders. MacFarland submitted a letter to the District Court on
September 19,2005 requesting an extension of time until October 15,2005 to file a
response, "on behalf of defendants, Quality Builders Limited, Rance MacFarland ... to
collectively work with counsel regarding the nature and extent of the claims."
Thereafter, MacFarland was served a: (I) Notice of Application for Default Judgment;
(2) Motion for Entry of Default Judgment; and, (3) Notice of Status Conference on three
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separate occasions, from September 23,2005 through December 12,2005. MacFarland
failed to answer, respond or participate at the status conference and later alleged that he
did not receive timely notice as the notices were sent to the wrong address. The District
Court entered ajudgment granting Shimp's Motion for Default Judgment and entered a
judgment in favor of Shimp and against MacFarland in the total amount of$97,188.65 as
a joint and several obligation with Quality Builders. The District Court specifically
addressed MacFarland's request for an extension in the Judgment, concluding that since
the time for the requested extension had passed and MacFarland had not responded in
any way to the formal court proceeding since his request for an extension, the issue was
moot. During this time. the parties were also involved in informal negotiations to resolve
the matter.
Subsequently on April 7. 2006, MacFarland retained an attorney, and filed a
Motion to Quash Service arguing that the original service of August 16, 2005 on Brad
Stiles for MacFarland was not proper service. The District Court entered its order on
July 25, 2006, denying the motion, holding that MacFarland was effectively served, had
filed a general pleading, (Le. the letter requesting an extension to respond dated
September 19, 2005,) and failed to object to service at that time, waiving his right to
object to service. Additionally, on February 22, 2007, the District Court entered its order
denying MacFarland's Motion to Set Aside Default Judgment and Motion to Stay
Execution and Enforcement of Judgment.
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MacFarland tiled for chapter 7 bankruptcy protection on August 24, 2007 listing
Shimp as a creditor with a non-priority unsecured debt in the amount of$77,000.00.
MacFarland initially filed as a pro se debtor. but subsequently retained counsel to
represent him in the bankruptcy. Shimp filed her adversary action on December 3,2007
objecting to discharge of the debt alleging false pretenses, false representation; actual
fraud, fraud as a fiduciary, embezzlement, larceny, and willful and malicious injury.
Shimp also filed a motion for a default judgment after MacFarland failed to answer or
respond to the adversary complaint. MacFarland responded and after a hearing, this
court set aside the entry of default, denied the motion for a default judgment and al10wed
the parties to proceed on the merits of the case. 	Shimp filed her Motion for Partial
Summary Judgment to which MacFarland responded.
Conclusions of Law
The issue before the Court is whether Shimp is entitled to summary judgment in a
dischargeability action on the basis of collateral estoppel because she obtained a default
judgment in a Colorado state court on the same issue. Summary judgment is appropriate
when there is no disputed issue of material fact, and the moving party is entitled to
judgment as a matter of law. l The United States Supreme Court held that collateral
estoppel principles apply in bankruptcy cases and can be used in nondischargeability
IHardy v. s.F. Phospates Ltd. Co., 185 F.3d 1076, 1079 (loth Cir. 1999).
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actions to prevent re-litigation of issues already decided.2 Where the issue previously
litigated was litigated under state law, a bankruptcy court will apply the law of collateral
estoppel of the relevant state. 3 The full faith and credit principles of28 U.S.C. § 1738
require the bankruptcy court to give effect to the state court judgment. 4
This Court must apply Colorado law in determining whether or not collateral
estoppel applies. "When federal courts are called upon to interpret state law, they must
look to rulings of the highest state court, and if no such ruling exists, must endeavor to
predict how the high court would rule."s The Colorado Supreme Court has not yet
specifically determined the collateral estoppel effect accorded to a prior default
judgment.
The Colorado Supreme Court has set out the elements of collateral estoppel that
need to be met as a bar to re-litigation of an issue as follows: (1) the issue precluded is
identical to an issue actually litigated and necessarily adjudicated in the prior proceeding;
(2) the party against whom estoppel was sought was a party to or was in privity with a
party to the prior proceeding; (3) there was a final judgment on the merits of the prior
proceeding; and, (4) the party against whom the doctrine is asserted has a full and fair
2Grogan v. Garner, 498 U.S. 279 (1991).
3 Hagen v. McNalle. 62 F.3d 619 (4 th Cir. 1995).
4Migrav. Warren CitySch. Dist. Bd. OjEduc.,465 U.S. 75 (1984).
sLovell v. State Farm Mutual Automobile, 466 F.3d 893 (10 th Cir. 2006).
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opportunity to litigate the issues in the prior proceeding.6 The burden of establishing
these elements rests with the party seeking preclusion. 7
The facts of Bebo were that at the administrative agency level, the petitioner's
malpractice action was dismissed because of a failure to comply with the statute of
limitations. The appeals court, which was the district court, affirmed. The Colorado
Supreme Court reversed concluding that the appeals court did not properly apply the
doctrine of collateral estoppel.
The Colorado Supreme Court concluded in Bebo 8 that an inquiry into whether a
party received a full and fair opportunity to litigate an issue must look to whether the
initial proceeding was so inadequate or so narrow in focus as to deprive an individual of
his or her due process right in applying the doctrine of collateral estoppel to bar re-
litigation of that issue. The court concluded that the two proceedings presented
substantially different issues and that the plaintiff was not provided a full and fair
opportunity to litigate the issue of negligence in a debarment action. Collateral estoppel
could not apply.
It is undisputed by Shimp and MacFarland that the party against whom estoppel
was sought was a party to ... the prior proceeding. MacFarland was a defendant in the
6Bebo Construction Co. v. Mattox & O'Brien, P.e. et ai, 990 P.2d 78,84 (Colo.
1999).
7Id at 85.
8Id at 87.
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District Court case. It is also undisputed that there was a tinal judgment on the merits of
the prior proceeding. The District Court entered its default judgment and further denied
a subsequent attempt by MacFarland to set aside that judgment. Two of the four
requirements of collateral estoppel were met.
The next element required to be met, whether the issue precluded is identical to an
issue actually litigated and necessarily adjudicated in the prior proceeding, was
controverted between the parties. For an issue to be actually litigated, the parties must
have raised the issue in the prior action. 9 Also, the issue must be raised by a party
through an appropriate pleading or tried with the consent of the parties, it must be
submitted to the prior tribunal for determination and it must be determined by that
tribunaL 10 Additionally, collateral estoppel applies only to issues that were necessarily
adjudicated in the previous action. I I An issue is necessarily adjudicated when a
determination of that issue was necessary to the judgment. 12
Did MacFarland have a full and fair opportunity to litigate the issue in a prior
proceeding? The factors to consider when determining whether an individual received a
full and fair opportunity to litigate include: (1) whether the remedies and procedures of
9Bebo, (citing Michaelson v. Michaelson, 884 P.2d 695, 701 (Colo. 1994)).
l°Bebo at 86.
"Michaelson at 700.
12Michaelson at 700.
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the first proceeding are substantially different from the proceeding in which collateral
estoppel is asserted; (2) whether the party in privity with the party against whom
collateral estoppel is sought had sufficient incentive to litigate vigorously; and, (3) the
extent to which the issues are identical. 13
Interestingly enough, two cases have come before the United States District Court
for the District of Colorado, i.e .. Ellefson v. Riggle!.! and Janowiak v. Stewartl5 • The
factual circumstances of Riggle and Janowiak are amazingly similar to the case before
this court.
In Riggle. the court case was the result of a home building contract dispute. The
Appellees filed a suit against Riggle alleging, fraud. misrepresentation, conversion and
breach of contract and other claims. The Appellees filed a motion for summary judgment
to which Riggle did not respond. The Court entered a judgment on behalf of the
Appellees. Riggle filed for bankruptcy protection and Appellees filed an adversary
asserting that the amount of the default judgment was not dischargeable16 •
The Stewart case involved another home building contract that ended in dispute.
'3Bebo at 25 (citing Bennett College v. United Bank o/Denver, Nat 'I Ass 'n, 799
P.2d 364,369 (Colo. 1990).
14Elletson v. Riggle, (In re Riggle), Civil Case No. 06-CV-02373-LTB, 2007 U.S.
Dist. LEXIS 59033, (Colo. Aug. 10,2007).
15Janowiak v. Stewart (In re Stewart), Civil Action No. 06-CV-I0140-WYD, 2007
U.S. Dist. LEXIS 64788, (Colo. August 31, 2007).
16 Riggle at 2.
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•
The plaintiffs initiated an action in the state district court. Stewart never answered the
complaint and the plaintiffs moved for a default judgment. The court granted the motion
and entered a default judgment finding that Stewart was properly served, had failed to
respond and awarded the plaintiffs damages and interest. Stewart filed for Bankruptcy
protection, the plaintiffs filed an adversary action objecting to discharge arguing that the
issue of nondischargeability was already litigated in the state district court case. The
Bankruptcy Court concluded that the doctrine of collateral estoppel applied. The
Colorado District Court reversed finding that the Bankruptcy Court erred in granting the
motion for summary judgment and finding that collateral estoppel applied to the issue of
dischargeability of the state district court debt. The Court concluded that the case is
clearly a case where the state district court did not render findings based on actual
evidence or where the parties engaged in any meaningful assessment of the facts.
In all three cases, the issue of whether the debtor had committed the acts alleged
were not actually litigated in the underlying cases. Judgments were entered in all cases
before the state court had an opportunity to consider the merits of the issues. In the
present case, the record does not show that the court developed findings of fact to
support conclusions that deceit based on fraud; deceit based on concealment and non-
disclosure; negligent misrepresentation causing harm in a business transaction; civil
theft; breach of fiduciary duty; breach of contract; or unjust enrichment were
committed. The district court entered its judgment after MacFarland had initially
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generally responded and then failed to answer the complaint.
Shimp argues and relies on Ortega. which is a pre Bebo case and did not use the
elements for collateral estoppel established in Bebo. 	In Ortega, a default judgment was
entered against a plaintiff in a quiet title action. The plaintiff, subsequently filed an
action alleging ownership of the tax certificate and requested that the court order the
treasurer to issue a deed and requested damages. The trial court granted defendant's
motion for summary judgment and dismissed the action, holding that the plaintiffs
action was barred by coiJateral estoppel. The court found that the plaintiff had a full and
fair opportunity to litigate the issue in the prior adjudication. 17 The Court in Riggle,
relied on the McMahon 'S18 analysis of Ortega, in that although Ortega used the term
"collateral estoppel." its language and reasoning demonstrate that the court actually
applied res judicata to the prior default judgment. Ortega further omitted any
consideration of whether the issues were actually litigated. '9 Ms. Shimp's reliance on
Ortega is misplaced.
Accordingly, this Court finds that the doctrine of collateral estoppel does not
apply to bar re-litigation of the actions alleged by the Plaintiff in her objection to the
dischargeability action. 	Additionally, summary judgment is not appropriate when
171d at 82l.
'Sln re McMahon, 356 B.R. 286 (Bankr. N.D. GA. 2006).
19 Riggle at 11.
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there is a disputed issue of material fact. 	Upon the Court's review of the materials
presented, no evidence was found to support the allegations other than the default
judgment that did not establish findings of fact that this court could rely upon.
THEREFORE, IT IS ORDERED that the Plaintiffs Motion for Partial Summary
Judgment is denied.
DATED this L 	day of May, 2008.
Service to:
Stephen Winship
Jody Chance
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By the Court
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