In re Barrett, Slip Copy, 2009 WL 2448153 (Bankr. S.D.Fla. Aug 06, 2009)
The ultimate ace in the hole for any debtor is bankruptcy. But the bankruptcy card isn’t full proof. Last year a Florida bankruptcy judge ruled that a probate judge’s money judgment against a former personal representative was NOT dischargeable under Bankruptcy Code Section 523(a)(4) because the state court judgment was the product of the PR’s “fraud or defalcation while acting in a fiduciary capacity.” [click here] In the linked-to case above another bankruptcy judge came to the same conclusion with respect to a probate judge’s money judgment against a former trustee.
In both cases the winning side at the probate-court level was able to win its Bankruptcy Code Section 523(a)(4) argument without going through a new trial by relying on  its state court judgment and  the doctrine of collateral estoppel. How? The bankruptcy judge concluded the state court judgment was based on the trustee’s “fraud or defalcation while acting in a fiduciary capacity,” so there was no need to re-litigate that issue in the bankruptcy proceeding.
Lesson learned? Anticipate the Bankruptcy Filing
If you’re representing the party suing a trustee, you’ll want to make sure your money judgment has the kind of findings you’ll need to win a Section 523(a)(4) challenge on collateral estoppel grounds. Just as importantly, if you’re representing a trustee who’s on the losing side of a probate judge’s money judgment, if there are legitimate grounds to do so, you want to make sure that money judgment can’t inadvertently be used against your client in a bankruptcy proceeding. Either way, these cases demonstrate why keeping an eye on the bankruptcy issues is a good idea even in probate litigation.
For those looking for more detail, here’s how the estoppel issue was framed in the linked-to case above:
[C]ollateral estoppel clearly applies in discharge proceedings. Grogan v. Garner, 498 U.S. 279, 284 n. 11, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991). When determining whether collateral estoppel applies to a state court judgment, as with res judicata, state law applies. St. Laurent v. Ambrose (In re St. Laurent), 991 F.2d 672, 673-76 (11th Cir.1993). However, “[w]hile collateral estoppel may bar a bankruptcy court from relitigating factual issues previously decided in state court, the ultimate issue of dischargeability is a legal question to be addressed by the bankruptcy court in the exercise of its jurisdiction.” Hartnett v. Mustelier (In re Hartnett), 330 B.R. 823, 829 (Bankr.S.D.Fla.2005).
“In Florida, the doctrine of collateral estoppel bars relitigation of the same issues between the same parties in connection with a different cause of action.” Topps v. State, 865 So.2d 1253, 1255 (Fla.2004).
Collateral estoppel is a judicial doctrine which in general terms prevents identical parties from relitigating the same issues that have already been decided. The essential elements of the doctrine are that the parties and issues be identical, and that the particular matter be fully litigated and determined in a contest which results in a final decision of a court of competent jurisdiction.
Dep’t of Health & Rehabilitative Serv. v. B.J.M., 656 So.2d 906, 910 (Fla.1995) (citations omitted). See also Dadeland Depot, Inc., v. St. Paul Fire & Marine Ins. Co., 945 So.2d 1216 (Fla.2006).
In the context of an action brought pursuant 11 U.S.C. § 523(a), “[a] bankruptcy court could properly give collateral estoppel effect to those elements of the claim that are identical to the elements required for discharge and which were actually litigated in the prior action.” Grogan v. Garner, 498 U.S. at 284, 111 S.Ct. 654.
The Trust Plaintiffs seek a determination that the Probate Judgment is non-dischargeable pursuant to 11 U.S.C. § 523(a)(4), and because the Probate Judgment gives rise to a claim for recoupment. Section 523(a)(4) provides that a debtor cannot discharge a debt, “for fraud or defalcation while acting in a fiduciary capacity.” Thus, in order to determine whether the parties are collaterally estopped from relitigating the issues posed herein, I must determine whether each of the elements of collateral estoppel have been met with respect to whether the Debtor: (a) committed fraud or defalcation while acting in a fiduciary capacity, which acts gave rise to a debt; or (b) whether the State Court Judgments gave rise to a right of recoupment and are therefore non-dischargeable.
Finally, to really get your arms around how the collateral estoppel doctrine works in this context, you need a contrasting example: a case involving a state-court judgment against a fiduciary that did NOT collaterally estop the fiduciary from discharging his judgment debt in bankruptcy; for that read a recent short article entitled High Court Takes Pass on Circuit Split Over Defalcation Case by Rudolph J. Di Massa, Jr. and Adrian C. Maholchic of Duane Morris discussing the U.S. 2nd Circuit’s decision in Denton v. Hyman, (In re Hyman) [click here].