Klingman v. Levinson
| Decision Date | 28 October 1986 |
| Docket Number | 82 B 5309 and 82 A 2297.,No. 86 C 3205,86 C 3205 |
| Citation | 66 BR 548 |
| Parties | Francine KLINGMAN, Plaintiff, v. Melvin E. LEVINSON, Defendant. |
| Court | U.S. District Court — Northern District of Illinois |
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Lionel I. Brazen, Manuel Rosenstein, Chicago, Ill., for plaintiff.
Melvin E. Levinson, Wilmette, Ill., for defendant.
This order concerns defendant's appeal from an adverse ruling in the United States Bankruptcy Court, Northern District of Illinois, Eastern Division, 58 B.R. 831, pursuant to 28 U.S.C. § 158(a). For the reasons stated herein, the judgment of the Bankruptcy Court is affirmed.
Plaintiff, Francine Klingman ("Klingman") and defendant, Melvin E. Levinson ("Levinson") entered into a trust agreement on July 19, 1967 in which Levinson, an attorney, was named trustee. Pursuant to the trust agreement, Klingman delivered to Levinson certain assets having a value of $37,550 which Levinson was to invest to earn income for the benefit of Klingman. Dispute arose over an apparent dissipation of the trust assets, and Klingman filed suit against Levinson in the Circuit Court of Cook County on March 11, 1970. The action was resolved by an agreement among the parties to certain stipulations and findings embodied in a consent judgment pursuant to which Levinson was to refund the $37,550 plus interest and pay $10,000 in attorneys' fees to Klingman. According to the stipulations in the April 11, 1975 consent judgment, the parties agreed:
On April 22, 1982, Levinson filed a Petition in Bankruptcy. Klingman responded on June 22, 1982, by instituting an Adversary Proceeding claiming her debt-judgment was not nondischargeable in bankruptcy because it was based on fraud on defalcation by Levinson while he acted in a fiduciary capacity. 11 U.S.C. § 523(a)(4). Levinson filed an answer to Klingman's claim and asserted two counterclaims.
On May 29, 1985, U.S. Bankruptcy Judge Thomas James entered an order dismissing Levinson's counterclaims. The case was then transferred to U.S. Bankruptcy Judge Robert Ginsberg and on March 18, 1986, he granted Klingman's motion for summary judgment on the issue of nondischargeability. Judge Ginsberg ruled that the judgment-debt could not be discharged in bankruptcy because it was resulted from fiduciary fraud or defalcation. Citing the text of the April 11, 1975 consent judgment, Judge Ginsberg noted that Levinson had stipulated to the express finding that he violated his fiduciary duties by misappropriating and defalcating the assets of the trust. As such, the judge ruled that Levinson was barred from relitigating the issue of fiduciary fraud or defalcation under principles of collateral estoppel and held the debt-judgment nondischargeable under 11 U.S.C. § 523(a)(4). Judge Ginsberg went on to hold that the portion of the debt-judgment attributable to $10,000 in legal fees was also nondischargeable on the grounds that the award was ancillary to the primary debt and thus took on the status of the primary debt for purposes of determining nondischargeability. Levinson filed notice to appeal Judge Ginsberg's March 18, 1986 ruling within the ten-day period prescribed in Bankruptcy Rules 8001 and 8002. Levinson, however, seeks reversal of both the order granting summary judgment to Klingman and the order dismissing his two counterclaims.1
Levinson argues that Judge Ginsberg erred in granting Klingman's motion for summary judgment on collateral estoppel grounds. Levinson asserts that under the teaching of Brown v. Felsen, 442 U.S. 127, 99 S.Ct. 2205, 60 L.Ed.2d 767 (1979), a bankruptcy judge deciding an issue of nondischargeability must conduct an independent hearing to determine whether the disputed debt was the product of the debtor's fraud, misappropriation, or defalcation while acting in a fiduciary capacity. Because the bankruptcy judge precluded Levinson from offering evidence to contradict the stipulations and findings agreed upon in the consent judgment, he contends the principles of Brown were violated and the order must be reversed for a proper hearing on the issue of fraud and defalcation.
In Brown, the Supreme Court addressed the issue of whether res judicata precluded a creditor from proving the underlying nature of a debt arising from a consent judgment in a subsequent bankruptcy proceeding. The creditor in Brown brought a collection suit in state court against the debtor to recover amounts due under a loan guarantee agreement. Id. at 128, 99 S.Ct. at 2207. The suit was subsequently settled and a consent judgment was entered in accord with the parties' stipulations. Id. Neither the parties' stipulations nor the resulting judgment indicated the legal basis upon which the debtor's liability was based. Id. The debtor then filed a petition for voluntary bankruptcy and the creditor objected claiming the debt-judgment was nondischargeable under 11 U.S.C. § 523. Id. The debtor responded arguing res judicata barred the creditor from relitigating the issue of whether the debt was the product of some fraud or defalcation since the creditor had an opportunity to include such a finding in the parties' settlement stipulations and consent judgment. Id. at 129, 137, 99 S.Ct. at 2208, 2212.
Responding to the debtor's argument, the Court reasoned that the creditor was not asserting a new basis for recovery or attacking the validity of the prior judgment, but rather attempting to meet the debtor's new defense of bankruptcy. Id. at 133, 99 S.Ct. at 2210. The Court further noted that the statutory policy in favor of resolving dischargeability questions in bankruptcy court would be undercut by limiting the bankruptcy court's inquiry to only those facts contained in the state court's record when the parties had little incentive to litigate issues of fraud or malice. Id. at 135. In ruling that res judicata did not preclude the creditor from offering evidence that the debt-judgment was the product of debtor's fraud and defalcation, the Court expressly left open the issue of whether collateral estoppel could operate to preclude relitigation of 11 U.S.C. § 523 issues. The Court stated:
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 determine factual issues using standards identical to those of § 523, then collateral estoppel, in the absence of countervailing statutory policy, would bar relitigation of those issues in bankruptcy court.
Id. at 139 n. 10, 99 S.Ct. at 2213 n. 10.
Applying Brown to the case at hand does not, as Levinson asserts, require an automatic reversal of the summary judgment order as Judge Ginsberg based his ruling on principles of collateral estoppel. Thus, the issue this Court must determine is whether collateral estoppel precludes Levinson from asserting the debt-judgment was not the product of fraud or defalcation. Four showings are necessary for the invocation of collateral estoppel: (1) the issue to be concluded must be identical to that involved in the prior action; (2) the issue must have been actually litigated in the prior action; (3) resolution of the issue must have been essential to final judgment in the prior action; and (4) the party against whom estoppel is invoked was fully represented in the prior action. Ray v. Indiana & Michigan Elec. Co., 758 F.2d 1148, 1150 (7th Cir.1985).
Addressing the first factor, the state court specifically concluded Levinson caused the loss of the trust assets by fraud or defalcation while acting as a fiduciary. Under 11 U.S.C. 523(a)(4), three elements must be shown to determine whether a debt is nondischargeable: (1) an express trust existed, (2) the debt was caused by fraud or defalcation, and (3) the debtor acted as a fiduciary to the creditor at the time the debt was created. Since the stipulations and findings embodied in the state court consent judgment addressed each of these elements, the issues to be determined in the bankruptcy proceeding were identical to those involved in the prior action.
Collateral estoppel may be...
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