Barnett v. Stern

Decision Date01 August 1978
Citation909 F.2d 973
PartiesBankr. L. Rep. P 73,584, RICO Bus.Disp.Guide 7595 Ralph BARNETT, Philip Liss, and Louis Levit, Trustee of the Bankrupt Estate of Burton L. Stern, Plaintiffs-Appellants, v. Burton L. STERN, Individually and as Trustee of the Burton L. Stern Trust dated
CourtU.S. Court of Appeals — Seventh Circuit

Louis W. Levit, Sharon Riley, Chicago, Robert Frankenstein, Kozlicki, Widman & Goldberg, Chicago, Ill., for plaintiff-appellant.

Allan E. Levin, Patrick A. Barton, Donald L. Johnson, Chicago, Ill., for defendants-appellees.

Before WOOD, Jr., RIPPLE, and MANION, Circuit Judges.

RIPPLE, Circuit Judge.

Louis Levit, trustee of the bankruptcy estate of Burton L. Stern, appeals the judgment of the district court that his claim against Todd Stern is barred by res judicata. For the following reasons, we reverse the judgment of the district court against Levit and remand the case for further proceedings on his claim. We also hold that we lack jurisdiction over the appeals of Ralph Barnett and Philip Liss.

A. Factual History

Ralph Barnett and Philip Liss are creditors of Burton L. Stern (Burton). In 1965, Barnett sued Burton for $44,800 in Illinois state court. In 1966, Liss sued Burton for $15,000 in state court. In 1968, while Barnett and Liss' suits were still pending, Burton filed for bankruptcy. At the conclusion of these bankruptcy proceedings, Barnett and Liss filed objections to the discharge of their debts. These objections were sustained by the bankruptcy court and affirmed on appeal.

In 1978, Burton created the Burton L. Stern Trust (the B.L.S. Trust), which named Burton as trustee and his children as beneficiaries. Burton transferred nearly all of his assets into the trust in order to avoid the claims of his creditors and his wife, who sought to divorce him. Although Burton succeeded for a number of years in keeping the B.L.S. Trust funds out of the reach of creditors, he did not operate the trust for the benefit of his children. Instead, Burton used the money to satisfy his own personal loan obligations, living expenses, and recreational costs.

In January 1983, Barnett and Liss finally won judgments totalling approximately $100,000 in their state court suits against Burton. When they attempted to collect on their judgments, however, Burton claimed that he lacked the funds to pay them. 1 By 1985, however, a law firm that had done work for Burton obtained a state court judgment against him. Because one of the lawyers in the firm had assisted Burton in setting up the B.L.S. Trust, the firm knew that Burton's pleas of poverty were misrepresentations. In April 1985, on the firm's motion, the state court declared the B.L.S Trust a sham and ordered Burton to pay the firm with assets from the trust.

After Barnett and Liss found out about the B.L.S. Trust, they filed a lawsuit against Burton in federal district court. The suit alleged a violation of the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. Secs. 1961-68, based on Burton's alleged misrepresentations regarding his financial condition and his concealment of assets. Barnett and Liss sought treble damages for the alleged violation, and they also sought a preliminary injunction to preclude further depletion of B.L.S. Trust funds. On September 26, 1985, the district court adopted the magistrate's conclusions that the B.L.S. Trust was a sham, that Burton was continuing to deplete its assets, and that Barnett and Liss had demonstrated a reasonable likelihood of success on the merits. The district court thus granted the preliminary injunction.

During the pendency of these federal proceedings (in addition to other state proceedings), Burton again attempted to outmaneuver his creditors by setting up another trust. In March 1985, Burton's son Todd Stern (Todd) created the Nationwide Trust (N.W. Trust), which named Todd as trustee and Burton's other children as beneficiaries. Most of the remaining funds in the B.L.S. Trust eventually were transferred into the N.W. Trust. Although Todd was named as trustee of the N.W. Trust, Burton controlled the trust and used it for his own benefit. Todd even authorized a signature facsimile stamp for Burton's convenience in dealing with the trust funds.

On August 23, 1985, after most of the B.L.S. Trust funds had been transferred into the N.W. Trust, Burton filed another bankruptcy petition in federal bankruptcy court. Although Burton eventually amended his list of assets to include the B.L.S. Trust, he did not reveal the existence of the N.W. Trust. During the eighteen months following this second bankruptcy filing, Burton spent over $102,000 of N.W. Trust funds.

In May 1986, the bankruptcy court appointed Louis Levit as the Chapter 7 Trustee of Burton's bankruptcy estate. Levit then initiated an adversary proceeding in the bankruptcy court against the N.W. Trust. Levit alleged that the N.W. Trust was merely the alter ego of Burton and sought to have the bankruptcy court declare all of the trust assets property of the bankruptcy estate. On December 16, 1986, after receiving evidence and hearing argument on the matter, the bankruptcy court entered judgment for Levit and ordered Levit as trustee to assume control of all N.W. Trust assets.

Upon the filing of Burton's second bankruptcy petition in August 1985, Barnett and Liss' claims became subject to the automatic stay provided in 11 U.S.C. Sec. 362(a). Thus, while Levit was pursuing his adversary proceeding, Barnett and Liss as creditors were required to seek relief from the automatic stay before proceeding with their federal suit. The bankruptcy court granted Barnett and Liss relief from the stay on June 24, 1986. The court authorized Barnett and Liss to proceed with their federal suit alleging RICO and fraud, but specified that they were to proceed with the case " 'only for the purpose of establishing the amount of their claim against Burton L. Stern,' " and that " '[a]ny recovery arising out of the RICO/fraud case shall be the property of the estate to the extent said recovery is collected from assets and proceeds of assets which may be claimed as property of the estate.' " Barnett v. Stern, 93 B.R. 962, 966 (N.D.Ill.1988) (quoting In re Burton L. Stern, Debtor, 85 B 10870 (June 24, 1986)). Several months later, the bankruptcy court authorized Levit to join as a plaintiff in Barnett and Liss' suit in order to protect the estate's interest.

The plaintiffs' complaint, as finally amended, consisted of five counts. Counts I through IV were brought by Barnett and Liss, and Count V was brought by Levit. 2 Count I alleged that Burton had violated RICO through his scheme to use the B.L.S Trust to conceal assets from his creditors. Count II alleged that these same facts constituted common law fraud under Illinois law. Count III, which named both Burton and Todd as defendants, alleged RICO violations based on the operation of the N.W. Trust. Count IV realleged the facts in Count III and contended that these acts constituted common law fraud under Illinois law. Count V, which Levit alone pressed against Todd in his individual capacity, 3 alleged a violation of RICO based on the use of the N.W. Trust to conceal assets and the depletion of N.W. Trust funds following Burton's August 1985 bankruptcy filing. The case proceeded as a bench trial before the district court in September 1987.

B. District Court Opinion

In a lengthy memorandum opinion, the district court rendered its judgment in the case. Barnett v. Stern, 93 B.R. 962 (N.D.Ill.1988). Before reaching the merits of the case, the district court disposed of several threshold issues. First, it concluded that Levit, as trustee of the bankruptcy estate, rather than Barnett and Liss, as individual creditors, had standing to bring the RICO and fraud claims under Counts I through IV, but it held that these claims would not be dismissed because the bankruptcy court effectively had designated Barnett and Liss as representatives of the estate for purposes of these claims. Thus, any recovery obtained by Barnett and Liss on these claims would belong to the bankruptcy estate.

Second, the district court addressed Todd's contention that Levit's RICO claim against him (Count V) was barred by res judicata as a result of the previous bankruptcy adversary proceeding in which Levit sought to have the N.W. Trust funds declared property of the estate. Noting that federal rules of res judicata applied, the district court stated the three prerequisites to the application of res judicata: " '(1) an identity of the parties or their privies; (2) an identity of the causes of action; [and] (3) a final judgment on the merits.' " 93 B.R. at 973 (quoting Matter of Energy Coop., Inc., 814 F.2d 1226, 1230 (7th Cir.), cert. denied, 484 U.S. 928, 108 S.Ct. 294, 98 L.Ed.2d 254 (1987)). The court concluded that all three requirements had been met. First, it found that Todd, although not named as a defendant in the adversary proceeding, had been given an opportunity to litigate in that proceeding in both his individual and representative capacity. The court also noted that Levit, by arguing that the bankruptcy court's findings in the adversary proceeding should be given collateral estoppel effect against Todd, effectively had waived any argument that Todd was not a party to the adversary proceeding. Second, the court concluded that both claims arose out of the same fraudulent transaction. Third, the court noted that Levit did not dispute that the bankruptcy court's ruling on the adversary proceeding was a final judgment on the merits. Id.

The court then turned to the merits of Counts I through IV. With regard to the RICO claims (Counts I and III), the court concluded that, even though the facts established ...

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