In re Levinson

• Decision Date: 18 March 1986
• Docket Number: Adv. No. 82 A 2297.,Bankruptcy No. 82 B 5309
• Citation: 58 BR 831
• Parties: In re Melvin E. LEVINSON, Debtor. Francine KLINGMAN, Plaintiff, v. Melvin E. LEVINSON, Defendant.
• Court: U.S. Bankruptcy Court — Northern District of Illinois

58 B.R. 831 (1986)

In re Melvin E. LEVINSON, Debtor Francine KLINGMAN, Plaintiff, v. Melvin E. LEVINSON, Defendant.

Bankruptcy No. 82 B 5309, Adv. No. 82 A 2297.

United States Bankruptcy Court, N.D. Illinois, E.D.

March 18, 1986.

Lionel Brazen, Manuel Rosenstein, Chicago, Ill., for plaintiff Klingman.

Lawrence Fisher, Jennifer Platt of Friedman & Koven, Chicago, Ill., for debtor Levinson.

ROBERT E. GINSBERG, Bankruptcy Judge.

The plaintiff has filed a summary judgment motion in connection with an adversary complaint seeking to have her debt found to be nondischargeable under 11 U.S.C. § 523(a)(4). The plaintiff claims that the debt owed her, which is embodied in an agreed state court order, is nondischargeable because it is based on fraud or defalcation by the debtor while he acted in a fiduciary capacity. She also seeks to have the attorneys' fees awarded in the state court proceedings and postpetition interest found to be nondischargeable. The Court finds that there is no genuine issue of material fact and therefore grants her motion for summary judgment.

I. FACTS

On July 19, 1967, the plaintiff and debtor entered into a trust agreement naming the debtor as trustee. The plaintiff turned over assets valued at $37,550 to the debtor as trustee. The Trust Agreement in paragraph B of Article IV empowered the debtor to invest the trust res to earn income for the beneficiary.

In August 1967, the debtor purchased a fractional share of certain oil and gas leases ("leases"). The plaintiff asserts that the debtor misappropriated trust assets by purchasing these leases in his own name with trust assets. The debtor, however, denies this allegation and contends that this investment was made within his discretion as trustee under the trust agreement, and that the property was properly escrowed. Further, the debtor claims that the trust income was appropriately expended to insure oil production and to earn tax-free income. If there were nothing further in this record, there would be issues of material fact and the instant motion would have to be denied.

However, there is something more in this record. The question of whether the debtor acted properly as trustee in these transactions led to the filing of a lawsuit in the Illinois state courts long before this bankruptcy case was ever filed. That action in turn led to a stipulation under which the plaintiff and the debtor (who is an attorney) entered into an agreed order on April 11, 1975 in the Circuit Court of Cook County, Chancery Division. The agreed order was as follows:

FRANCINE KLINGMAN, Plaintiff,

v.

MELVIN E. LEVINSON, Defendant.

No. 70 CH 1039

IN THE CIRCUIT COURT OF COOK COUNTY, ILLINOIS

COUNTY DEPARTMENT, CHANCERY DIVISION

AGREED JUDGMENT ORDER

This cause having come to be heard by agreement of Plaintiff, FRANCINE KLINGMAN, ("Plaintiff") and Defendant MELVIN E. LEVINSON ("Defendant"), due notice having been given and the Court being fully advised in the premises:

THE COURT HEREBY FINDS:

1. That this Court has jurisdiction of the subject matter of this action, and had jurisdiction over the persons of the said parties hereto.

2. That Plaintiff and Defendant have stipulated that the Answer and Counter-claim heretofore filed on behalf of Defendant be withdrawn, and that each and all of the allegations of the Complaint be taken as confessed as against the Defendant.

3. That Plaintiff and Defendant have stipulated that on July 19, 1967, Plaintiff established a trust wherein Defendant was named Trustee, and pursuant thereto, delivered to Defendant as Trustee, assets having a value on such date of $37,550.

4. That Defendant, in disregard of his fiduciary duties and obligations as Trustee, has failed to retain and conserve the said trust corpus and income therefrom, but rather, in violation of and disregard of his fiduciary duties and obligations as Trustee, has, through his misappropriation and defalcation, allowed or caused the dissipation and loss of the said trust corpus and income therefrom.

5. Without limiting the generality of the foregoing, it is specifically stipulated by the parties and found by the Court:

a. That Defendant has failed to obtain, preserve and present to Plaintiff records of transactions involving the said trust corpus and income therefrom;

b. That Defendant has failed to file and present a full, accurate, and detailed accounting of all trust income, expenses and assets to Plaintiff or to the Court;

c. That Defendant has failed to deliver to Levy and Erens, as Escrowee, any property, as heretofore ordered on January 7, 1975 so to do;

d. That in or about August, 1967, Defendant expended approximately $36,000 of Trust assets to purchase a certain fractional share "Oil Payment" in and to certain oil and gas leases . . . and took title thereto in Defendant\'s own name individually, and not in the name of the Trust, or his name as Trustee thereof;

e. That Defendant has expended the said Trust corpus and income therefrom in an improper manner and in improper investments;

6. That malice is the gist of this action, and that the Defendant has stipulated that it is his intention that the obligation to Plaintiff created by this Agreed Judgment Order not be dischargeable in any bankruptcy or similar proceeding, and that in any subsequent proceeding all of the allegations of the Complaint and findings of this Court may be taken as true and correct without further proof.

7. That the parties have stipulated and agreed that Plaintiff may recover from Defendant, in addition to any other amounts due, the expenses incurred by Plaintiff in maintaining this action, specifically including attorneys\' fees, through the time of satisfaction of this judgment, which sum is found to be $10,000.00.

IT IS THEREFORE ORDERED:

1. The Answer and Counterclaim heretofore filed on behalf of Defendant MELVIN E. LEVINSON is hereby withdrawn, and all the allegations of the Complaint are hereby taken as confessed as against Defendant.

2. Judgment is hereby entered in favor of Plaintiff and against Defendant in the following amount:

a. $37,550.00 plus

b. Interest thereon at the rate of 5% per annum from July 17, 1967 to the date hereof, which interest is in the total amount of $14,550.00 plus

c. $10,000.00 pursuant to Paragraph 7 of the Court\'s findings herein.

3. The Court finds and orders that there is no just reason for delaying enforcement of this Judgment.

ENTER Walter P. Dahl Judge

Dated: April 11, 1975

The plaintiff's summary judgment motion focuses on this state court order in light of the debtor's subsequent Chapter 7 filing on April 22, 1982. In support of her summary judgment motion, the plaintiff asserts that the state court order has a binding effect on the parties to this proceeding under principles of res judicata and collateral estoppel. She contends that all disputes between the parties were resolved by that order, and no genuine issues of material fact remain. As she sees it, the parties' stipulations incorporated in the state court order set forth sufficient facts to show that the debtor's misappropriation or defalcation caused the trust assets to be dissipated. The plaintiff alleges that at a minimum, the debtor's failure to maintain records of transactions involving the trust res and income and his failure to maintain a detailed accounting of all trust income, expenses, and assets amount to defalcation under § 523(a)(4).¹

The debtor argues that res judicata and collateral estoppel do not prevent this Court from making its own determination of the debt's dischargeability. He further claims that there is no evidence to support the facts set forth in the state court Agreed Judgment Order. Lastly, the debtor alleges that he had authority to purchase the leases, and that the purchase was properly entered into as part of a joint investment with the property placed in escrow.

II. RES JUDICATA AND COLLATERAL ESTOPPEL

The Supreme Court in Brown v. Felsen, 442 U.S. 127, 99 S.Ct. 2205, 60 L.Ed.2d 767 (1979) made it clear that res judicata² does not prevent a bankruptcy court from going behind a state court judgment to determine whether a debt is nondischargeable under § 17 of the prior Bankruptcy Act. Courts have universally applied Brown's rationale to questions of dischargeability proceedings under § 523 of the Bankruptcy Code. See, e.g., In re Johnson, 691 F.2d 249 (6th Cir.1982); Carey Lumber Co. v. Bell, 615 F.2d 370 (5th Cir.1980); In re Goodman, 25 B.R. 932 (Bankr.N.D.Ill.1982); In re Spector, 22 B.R. 226 (Bankr.N.D.N.Y.1982); In re Dohm, 19 B.R. 132 (Bankr.N.D.Ill.1981); Matter of Supple, 14 B.R. 898 (Bankr.D. Conn.1981). In Brown, the Court reasoned that Congress intended the bankruptcy court alone to resolve dischargeability issues, and that by limiting the application of res judicata, the bankruptcy court would be able to weigh all evidence and accurately determine whether the debtor did in fact commit deceit, fraud, or malicious conversion. 442 U.S. at 138, 99 S.Ct. at 2212. Thus, the bankruptcy court in determining the dischargeability of a debt is not bound by the legal and factual determinations made by a state court in cases in which the state court did not determine all the elements necessary to a finding of nondischargeability.

Brown, however, left unresolved the related issue of the applicability of collateral estoppel.³ In a footnote, the Court indicated that collateral estoppel should be applied if the state court's factual findings were based on standards identical to those used by the bankruptcy court in its dischargeability determination.

This case concerns res judicata only, and not the narrower principle of collateral estoppel. Whereas res judicata forecloses all that which might have been litigated previously, collateral estoppel treats as final only those questions actually and necessarily decided in a prior suit. citations omitted If, in the course of adjudicating a state-law question, a state court should

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