Balbirer v. Austin

• Decision Date: 09 June 1986
• Docket Number: No. 84-5881,84-5881
• Citation: 790 F.2d 1524
• Parties: Gerald BALBIRER, Norman Brainin, Plaintiffs-Appellants, v. Jack AUSTIN, Defendant-Appellee. B.J. APPAREL CORPORATION, Plaintiff-Appellant, v. Jack AUSTIN, Defendant-Appellee.
• Court: U.S. Court of Appeals — Eleventh Circuit

Page 1524

790 F.2d 1524

Gerald BALBIRER, Norman Brainin, Plaintiffs-Appellants, v. Jack AUSTIN, Defendant-Appellee.

B.J. APPAREL CORPORATION, Plaintiff-Appellant, v. Jack AUSTIN, Defendant-Appellee.

No. 84-5881.

United States Court of Appeals Eleventh Circuit.

June 9, 1986.

Steven Goldsmith and Lawrence S. Gordon, Miami, Fla., for plaintiffs-appellants.

Joseph S. Paglino, Miami, Fla., for defendant-appellee.

Appeal from the United States District Court for the Southern District of Florida.

Before HILL, Circuit Judge, HENDERSON ^* and BROWN ^**, Senior Circuit Judges.

HENDERSON, Senior Circuit Judge:

This bankruptcy appeal results from a lengthy dispute concerning the sale and subsequent operation of a Florida corporation. The United States Bankruptcy Court for the Southern District of Florida rejected a claim by the purchasers of this corporation that debts owed by the former owner were not dischargeable in bankruptcy. In so holding, the court held that the issue of the debtor's liability already had been determined in the debtor's favor by a prior Illinois state court judgment and that collateral estoppel precluded relitigation of this issue. The United States District Court for the Southern District of Florida affirmed the bankruptcy court and the purchasers appealed to this court. We hold that the bankruptcy court failed to make adequate inquiry into the issues actually resolved by the prior Illinois litigation and consequently reverse the judgment of the district court.

On November 10, 1978, the appellee, Jack Austin, and his wife sold fifty-two percent of the outstanding stock in Austin's Rack, Inc. (Austin's Rack) and several other Florida corporations to the appellant, B.J. Apparel Corp. (B.J. Apparel), an Illinois corporation controlled by the appellants Gerald Balbirer and Norman Brainin. The contract of sale contained a warranty by Austin that all financial reports reflected the actual financial condition of Austin's Rack. The parties also signed an employment agreement in which Austin was retained as an employee of Austin's Rack. The employment agreement authorized Austin's Rack to discharge Austin for cause or for six other specified grounds. The two reasons pertinent to this appeal are (1) Austin's "participation in any conduct which directly threatens serious injury to the reputation or welfare" of Austin's Rack and (2) Austin's breach of any provision of the contract of sale between Austin and B.J. Apparel.

This relationship began to deteriorate in 1979. B.J. Apparel determined that the financial reports provided by Austin on the day of sale overstated the net worth of Austin's Rack by approximately $100,000.00. That year Austin also allegedly made false accusations about the financial practices of B.J. Apparel and its principals to Opelika Manufacturing Corp. (Opelika), a primary creditor of B.J. Apparel. The appellants complain that these accusations damaged the previously amicable business relationship between Opelika and B.J. Apparel.

Austin's Rack terminated Austin's employment as a result of these events and filed suit against Austin in the Circuit Court of Cook County, Illinois on October 19, 1979. The suit charged Austin with breach of the employment contract by misrepresenting the net worth of Austin's Rack to B.J. Apparel and by making false accusations of financial misconduct by Austin's Rack and its principals. The parties engaged in no discovery in the Illinois case and the only issue actually litigated was personal jurisdiction.

On November 1, 1979, Austin filed suit against Austin's Rack in the Circuit Court of Dade County, Florida, seeking damages for breach of contract. The parties conducted full discovery and this case proceeded to trial in March of 1980. On April 8, 1980, the Florida court rendered judgment in favor of Austin. Austin's Rack appealed this judgment to the Florida District Court of Appeal on May 7, 1980.

On September 16, 1980, Austin's Rack stipulated to a dismissal of its Illinois litigation and on September 19, 1980, the Illinois court entered a judgment dismissing the action with prejudice. The appellants maintain that they only agreed to dismiss the lawsuit without prejudice and that they intended to pursue their claims against Austin in the Florida courts. Both Balbirer and Brainin produced affidavits that they did not intend to abandon their cause of action and that their Illinois counsel erred in stipulating to a dismissal with prejudice. No effort was made to modify the Illinois judgment.

On April 7, 1981, the Florida District Court of Appeal reversed the judgment of the trial court and ordered judgment entered in favor of Austin's Rack. The appellate court found that Austin had misrepresented the value of Austin's Rack to B.J. Apparel and that this misrepresentation justified the termination of Austin's employment. Austin's Rack, Inc. v. Austin, 396 So.2d 1161 (Fla.3d Dist.Ct.App.), cert. denied, 402 So.2d 607 (Fla.1981).

Austin filed a voluntary petition for bankruptcy in the United States Bankruptcy Court for the Southern District of Florida on June 14, 1982. B.J. Apparel and its principals filed separate adversary complaints against Austin, seeking a determination that certain debts owed by Austin to them were nondischargeable in bankruptcy. B.J. Apparel contended that damages arising from Austin's misrepresentation of the value of Austin's Rack were not dischargeable under the provisions of 11 U.S.C. Sec. 523(a)(2) and that any damages occurring because of Austin's slanderous statements to Opelika were not dischargeable pursuant to 11 U.S.C. Sec. 523(a)(6). The company also sought leave to foreclose a mortgage it held on land owned by Austin. Balbirer's and Brainin's complaint contained a similar slander charge. The bankruptcy court consolidated these adversary proceedings for trial.

B.J. Apparel moved for partial summary judgment alleging the preclusive effect of the judgment from the Florida District Court of Appeal. On the date of trial in the bankruptcy court, Austin asserted the affirmative defense of collateral estoppel based on the dismissal of the Illinois lawsuit. After considering Brainin's testimony, the record of the Florida litigation, and the Illinois order of dismissal, the bankruptcy court held that the appellants were estopped by the Illinois judgment from pursuing their claims of relief against Austin. The court refused to accord preclusive effect to the Florida judgment because it was not in "irreconcilable conflict" with the Illinois judgment and the Illinois judgment purported to resolve all disputes between the parties. The United States District Court for the Southern District of Florida affirmed the bankruptcy court's judgment and the appellants filed this appeal.

In this case, we are confronted with the difficult task of applying the rules of collateral estoppel from two seemingly contradictory judgments. We note at the outset that application of collateral estoppel in a particular case is a matter of trial court discretion, Deweese v. Town of Palm Beach, 688 F.2d 731, 733-34 (11th Cir.1982), but that this court exercises plenary review over the rules governing collateral estoppel.

The basic test for collateral estoppel or issue preclusion was recently articulated by this court in In re Held, 734 F.2d 628, 629 (11th Cir.1984):

The doctrine of collateral estoppel bars relitigation of an issue if three requirements are met:

(1) that the issue at stake be identical to the one involved in the prior litigation;

(2) that the issue have been actually litigated in the prior litigation; and

(3) that the determination of the issue in the prior litigation have been a critical and necessary part of the judgment in that earlier action.

We must first apply this test to each state judgment and then address any conflict between them. ¹

The Illinois judgment was a consent decree dismissing the action with prejudice. A litigant can be collaterally estopped from pursuing an issue by a consent decree if the parties intended the decree to resolve that issue. Courts have recognized, however, that parties often enter into consent judgments for reasons other than a disposition of the issues in the case. In that event, the second and third requirements articulated in In re Held are not satisfied and the consent judgment does not settle the issues for future litigation.

The seminal case in this issue is United States v. International Building Co., 345 U.S. 502, 73 S.Ct. 807, 97 L.Ed. 1182 (1953). In that case, a taxpayer claimed that a prior consent decree stipulating that he owed no tax deficiency for three tax years barred the Internal Revenue Service from litigating a similar deficiency claim for subsequent tax years. The Supreme Court rejected this argument because the issue of the tax liability had not been litigated and determined on the merits in the consent decree. The Court concluded:

Perhaps the settlement was made for a different reason, for some exigency arising out of the bankruptcy proceeding. As the case reaches us, we are unable to tell whether the agreement of the parties was based on the merits or on some collateral consideration. Certainly the [consent] judgments entered are res judicata of the tax claims for the years 1933, 1938 and 1939, whether or not the basis of the agreements on which they rest reached the merits. But unless we can say that they were an adjudication of the merits, the doctrine of estoppel by judgment would serve an unjust cause: it would become a device by which a decision not shown to be on the merits would forever foreclose inquiry into the merits.

345 U.S. at 505-06, ...