8th Circuit: State-level default stands in federal court

Listen to this article

The 8th U.S. Circuit Court of Appeals recently held that a woman who failed to participate in a state court lawsuit filed against her to collect debt was bound by the default when she later filed a lawsuit against the debt collector in federal court. Citing old Minnesota precedent, the three-judge panel held in an opinion filed March 21 that state court default judgments can bind parties in later federal lawsuits.

Diana Delgado took out credit on a department store credit card but did not pay back the balance. Midland Credit Management Inc. bought Delgado’s debt and subsequently sued Delgado in Minnesota state court to collect the debt. Because Delgado did not respond to the summons or participate in the matter, the court administrator granted Midland’s request to enter a default judgment.

Delgado alleged that Midland violated the Fair Debt Collection Practices Act in multiple instances. Delgado claimed that Midland tried to collect the debt but did not own it. However, Delgado did not seek reconsideration or appeal the default judgment in state court. Instead, she filed her own lawsuit against Midland in U.S. District Court for the District of Minnesota.

U.S. District Court Judge Eric C. Tostrud dismissed Delgado’s case. He held that, in the state-court action, the question of who owned the debt was resolved, as Midland had to prove how it had acquired the debt. The court gave the default judgment issue-preclusive effect.

Delgado’s attorney argued that it would be unfair to apply collateral estoppel in Delgado’s case. “This is not a second-attempt plaintiff. This is not a case like most of the collateral estoppel cases where the plaintiff makes an argument, loses, and tries to make another case,” argued Darren Schwiebert, a partner at Briol & Benson in Minneapolis. “Ms. Delgado was the defendant in the first case, and had no understanding, reasonably, that obtaining a default judgment against her would forfeit her federal protection under the [Fair Debt Collection Practices Act].”

But Judge David Stras, writing for the 8th Circuit panel, maintained that Delgado would have to be content with her choice not to respond.

“Delgado, even as a pro se litigant, knew exactly what she needed to do in the state-court action,” Stras wrote. “Pro se litigants must follow the rules like everyone else.”

“Nothing suggests that Delgado had inadequate notice of the prior proceeding or that anything kept her from mounting a full defense to Midland’s claim of ownership,” Stras wrote. “And given that Midland was trying to collect on the same credit-card debt that she is suing over today, she had every incentive and opportunity to contest it before. In these circumstances, she is ‘bound by’ her decision to ‘sit silent’ rather than ‘present evidence’ in state court.”

The panel also considered the nature of default judgments.

Patrick Newman, shareholder and commercial litigator at Bassford Remele, who represented Midland Credit Management, argued that the Minnesota Supreme Court has spoken uniformly on the use of a default judgment for more than 100 years.

“A default judgment has the legal consequence of being confessed by the defaulting party as to all material facts alleged in the complaint, and it is treated as though it had actually been litigated and the result is a jury verdict for the plaintiff, the non-defaulting party,” argued Newman.

The panel found that default judgments lie between purely procedural dispositions for failure to join an indispensable party or provide adequate notice and failure to state a claim. It concluded that evaluating what evidence establishes is “a merits determination comparable to what happens at summary judgment.” Citing the 1935 Minnesota Supreme Court case Herreid v. Deaver, the panel found that default judgments are final determinations and are conclusive upon parties in later cases even if the defendant did not participate in the proceedings. “As old as Herreid is, we are still ‘bound by’ it,” Stras wrote.

Additionally, the panel pointed out that Delgado could have moved to vacate the default judgment or appealed it, but did not have the option to collaterally attack it in federal court.

“There is no relitigating it now,” Stras wrote.