Carhart v. Carhart-Halaska International, LLC
788 F.3d 687
7th Cir.2015Background
- CHI, a 50-50 Wisconsin LLC owned by Carhart and Halaska (through their corporations), supplied construction materials and provided engineering services; it became insolvent and went into receivership.
- MRO sued CHI in Minnesota for breach of contract in 2012; Carhart purchased MRO’s claim for $150,000 and became plaintiff in that suit against CHI (a company he co-owned).
- With CHI insolvent and the receiver unable to defend, the receiver consented to a default judgment in Minnesota for $242,000 in favor of Carhart.
- Carhart then filed in federal court in Wisconsin under Fed. R. Civ. P. 69(a)(1) to execute the Minnesota judgment and caused CHI’s sole remaining asset—its Wisconsin-state claim against Carhart—to be seized and sold at auction.
- Carhart was the only bidder and bought CHI’s lawsuit for $10,000 (which effectively insulated him from CHI’s pending state-court suit alleging fiduciary breaches); Halaska (CHI’s other owner) challenged the execution sale and appealed.
Issues
| Issue | Plaintiff's Argument (Carhart) | Defendant's Argument (Halaska/CHI) | Held |
|---|---|---|---|
| Whether Halaska may be treated as a party despite not formally intervening | Not directly argued; Carhart proceeded against CHI only | Halaska participated as de facto party and thus may appeal | Court: Halaska was a de facto party and has standing to appeal |
| Whether a lawsuit (chose in action) may be seized and sold under Wisconsin execution procedure | Execution under Fed. R. Civ. P. 69(a)(1) follows state law; sale was authorized | Sale of a lawsuit is inappropriate here; its seizure and sale should not have been used to defeat CHI’s claim | Court avoided definitively resolving general seizability but ruled seizure and sale were improper in this case |
| Whether auctioning CHI’s only remaining asset to Carhart (who bought MRO’s claim) was infirm because of valuation problems and conflict | Sale was a lawful execution remedy; public auction provided market valuation | Auction was inherently unfair: Carhart had asymmetric knowledge and conflict; auction result (low bid) shocked conscience; sale favored alleged wrongdoer creditor | Court: Sale should be rescinded as unfair and likely undervalued the claim; district court erred |
| Whether Carhart’s claim should be subordinated or otherwise disadvantaged because he allegedly plundered CHI | Carhart had valid judgment; priority of execution appropriate | Carhart’s alleged misconduct could justify equitable subordination or other remedies; letting him buy the claim put him ahead of other creditors | Court: Sale improperly advantaged Carhart; equitable concerns warrant rescission and leave subordination/priority for state court to decide |
Key Cases Cited
- SEC v. Enterprise Tr. Co., 559 F.3d 649 (7th Cir. 2009) (recognizing appeals by persons treated as de facto parties)
- In re Kreisler, 546 F.3d 863 (7th Cir. 2008) (equitable subordination doctrine for creditor misconduct)
- Wilson v. Craite, 60 Wis.2d 350 (Wis. 1973) (execution sale may be set aside where price shocks the conscience)
- Storm v. Cotzhausen, 38 Wis. 139 (Wis. 1875) (historical view that choses in action could not be sold on execution)