Ellis v. Bd. Of Jewish Educ.

722 F.Supp.2d 1006

Bernard M. ELLIS, Appellant-Defendant,

v.BOARD OF JEWISH EDUCATION, Appellee-Plaintiff.

No. 10 C 1370.

United States District Court, N.D. Illinois,Eastern Division.

July 9, 2010.

Ariel Weissberg, Weissberg & Associates, Chicago, IL, for Appellant-Defendant.

Michael Frederik Derksen, Richard J. Pearl, Theodore Michaelson Becker, Morgan, Lewis & Bockius LLP, Chicago, IL, for Appellee-Plaintiff.

MEMORANDUM OPINION AND ORDER

RUBEN CASTILLO, District Judge.

This case is before the Court on direct appeal from the United States Bankruptcy Court for the Northern District of Illinois (“Bankruptcy Court”) pursuant to 28 U.S.C. § 158(a). On April 14, 2009, Bernard M. Ellis (“Ellis”) filed a voluntary petition under Chapter 7 for bankruptcy relief. (R. 2, Record on Appeal, Ex. 4 at 140.) In July 2009, the Board of Jewish Education (“BJE”) initiated an adversary proceeding seeking a determination of non-dischargeability under 11 U.S.C. § 523. ( Id. at 142.) The BJE subsequently moved for summary judgment on its adversary complaint. (R. 2, Record on Appeal at 46.) On January 14, 2010, the Bankruptcy Court granted the BJE's motion. (R. 2, Record on Appeal, Ex. 4 at 162-63.) Ellis is now appealing the Bankruptcy Court's ruling. (R. 2, Record on Appeal at 2.) For the reasons stated below, the ruling of the Bankruptcy Court is affirmed.

RELEVANT BACKGROUND

In or about 1989, Selma Krahn (“Krahn”) retained Ellis to prepare her will. (R. 2, Record on Appeal at 33.) After Ellis prepared this document, Krahn passed away. ( Id. at 3.) Krahn's will named Ellis as the executor of the will; it also provided that the BJE would receive the remainder of Krahn's estate (“Krahn Estate”). ( Id.)

The BJE subsequently filed a lawsuit against Ellis in the Circuit Court of Cook County (“Circuit Court”). ( See R. 2, Record on Appeal, Ex. 1 at 6.) In its complaint, the BJE set forth seven counts alleging legal malpractice, breach of fiduciary duty, conversion, and unjust enrichment. ( Id. at 5-6.) After a bench trial, the Circuit Court entered a judgment order (“Judgment Order”) on June 13, 2007 in which it ruled in the BJE's favor on the following counts: (1) Count I for legal malpractice; (2) Count II for negligent breach of fiduciary duty as attorney for the Krahn Estate; (3) Count III for intentional breach of fiduciary duty as attorney for the Krahn Estate; (4) Count IV for negligent breach of fiduciary duty as executor of the Krahn Estate; (5) Count V for intentional breach of fiduciary duty as executor of the Krahn Estate; (6) Count VI for conversion; and (7) Count VII for unjust enrichment. ( Id. at 10-11.) Based on its conclusions with regard to legal liability, the Circuit Court awarded $966,600.28 in compensatory and $2 million in punitive damages. ( Id. at 11.) The Circuit Court also granted the BJE leave to file its petition for attorneys' fees and costs, and retained jurisdiction to consider and rule upon it. ( Id.)

Ellis subsequently appealed the Judgment Order pursuant to Illinois Supreme Court Rules 301 and 303. ¹ (R. 2, Record on Appeal, Ex. 4 at 118-19.) The Appellate Court of Illinois for the First District (“Appellate Court”) dismissed the appeal as untimely. (R. 2, Record on Appeal, Ex. 1 at 15-16.)

In the fall of 2008, the BJE initiated proceedings to discover assets to be used to satisfy the Judgment Order. ( See R. 2, Record on Appeal, Ex. 1 at 19-20.) Ellis subsequently moved to quash the citation to discover assets. (R. 2, Record on Appeal, Ex. 4 at 121.) In his motion, Ellis argued that because the BJE had not presented a detailed petition for attorney's fees, the issue of fees was unresolved. ( Id.) As a result, Ellis concluded that “[b]y reason of the pending issued with respect to attorney's fees, the [Judgment Order] is not a final order disposing of all the issues in the case.” ( Id.) On November 5, 2008, Ellis' motion to quash was denied “for the reasons stated in court.” ( Id. at 128.)

On April 14, 2009, Ellis filed a voluntary petition under Chapter 7 for bankruptcy relief. ( Id. at 140.) In July 2009, the BJE initiated an adversary proceeding seeking a determination of non-dischargeability under 11 U.S.C. § 523 (“Section 523”). ( Id. at 142.) On October 14, 2009, the BJE moved for summary judgment and asked the Bankruptcy Court “for a declaration ... that the entirety of the debt owed to [the BJE] by [Ellis] is non-dischargeable in the underlying bankruptcy case.” (R. 2, Record on Appeal, at 48-50.) In its motion, the BJE, relying on the doctrine of collateral estoppel, argued that the debt Ellis owed to it was not dischargeable because “the uncontestable facts, as [previously adjudicated], establish that several provisions of the Bankruptcy Code mandate summary judgment” in their favor. ( Id. at 49.) The BJE invoked three distinct portions of the Bankruptcy Code in support of their argument. First, relying upon Section 523(a)(2)(A), the BJE contended that the debt cannot be discharged because it “arose out of Ellis' false pretenses, false representations, and actual fraud.” ( See R. 2, Record on Appeal, at 49.) Next, the BJE claimed that Section 523(a)(4)-which prevents discharge for debts “for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny”-also bars Ellis from discharging the debt. ( See id.) Citing Section 523(a)(6), the BJE finally maintained that because the debt arose out of a “willful and malicious injury” by Ellis to the property of another, it was entitled to summary judgment. ( See id.)

Ellis responded to the BJE's motion on November 17, 2009. (R. 2, Record on Appeal, Ex. 3 at 29.) In relevant part, Ellis argued that the BJE could not rely upon the findings in the Judgment Order to prevent him from “disputing the allegations directed against him” in the adversary proceeding. ( Id.) Such a reliance, he maintained, would be inappropriate because all of the requirements of the doctrine of collateral estoppel-namely, a final judgment on the merits-were not satisfied by the Judgment Order. ( Id. at 25-26.) As with his motion to quash, Ellis argued that because the Circuit Court retained jurisdiction and granted the BJE leave to file a petition for attorney fees and costs, its Judgment Order was not final. ( Id. at 26.)

On January 14, 2010, the Bankruptcy Court granted the BJE's motion for summary judgment. (R. 2, Record on Appeal, Ex. 4.) In its oral ruling, the Bankruptcy Court first found that the Judgment Order is indeed a final order. ( Id. at 152.) Responding to Ellis' argument, the Bankruptcy Court noted that the “judgment order is not rendered non-final merely because the court retained jurisdiction to rule on an attorney's fee petition if the BJE chose to file one ... All issues in controversy were decided.” ( Id.) After deciding the issue of finality and finding that collateral estoppel barred Ellis from relitigating issues decided by the Circuit Court, the Bankruptcy Court then proceeded to determine whether the Circuit Court's findings satisfied Section 523's non-dischargeability requirements. ( Id. 154-63.) The Bankruptcy Court concluded that because the requirements of Section 523(a)(4) and (a)(6) were satisfied by the Circuit Court's findings, “the debts owed to the BJE by Bernard Ellis are therefore nondischargeable in bankruptcy.” ( Id. at 162.)

Ellis appealed the Bankruptcy Court's entry of summary judgment on January 22, 2010. (R. 2, Record on Appeal, at 2.) As the basis for his appeal, Ellis argues that the Bankruptcy Court erred in finding that he was estopped from litigating issues that were decided by the Circuit Court. (R. 14, Ellis Br. at 2.) The Bankruptcy Court was mistaken in finding that collateral estoppel applied, he maintains, because “the Judgment Order was not a final order under Illinois law, and thus, not an ‘adjudication’ under the second prong of the four step test for the doctrine of ‘collateral estoppel.’ ” ² ( Id. at 2-3.) In seeking an affirmance of the Bankruptcy Court's decision, the BJE asserts that the Judgment Order is indeed final and thus properly served as the basis for precluding the relitigation of issues decided by the Circuit Court. (R. 15, BJE Br. at 3.)

LEGAL STANDARD

A district court sits as an appellate court in reviewing a bankruptcy court's rulings. See 28 U.S.C. § 158(a)(1). A bankruptcy court's factual findings are reviewed for clear error, and its legal conclusions are reviewed de novo. In re Dollie's Playhouse, Inc., 481 F.3d 998, 1000 (7th Cir.2007). When the proceeding under consideration was decided on summary judgment, a district court's review is de novo. See Frierdich v. Mottaz, 294 F.3d 864, 867 (7th Cir.2002).

Summary judgment is appropriate “if the pleadings, the discovery and disclosure materials on file, and any affidavits show that there is no genuine issue as to any material fact and that the movant is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(c). A court construes all facts and reasonable inferences in the light most favorable to the nonmoving party. Turner v. The Saloon, Ltd., 595 F.3d 679, 683 (7th Cir.2010).

ANALYSIS

The doctrine of collateral estoppel, which is also known as issue preclusion, “bars relitigation of an issue already decided in a prior case.” In re A.W., 231 Ill.2d 92, 324 Ill.Dec. 530, 896 N.E.2d 316, 321 (2008) (quoting People v. Tenner, 206 Ill.2d 381, 276 Ill.Dec. 343, 794 N.E.2d 238, 247 (2002)). Collateral estoppel principles apply in discharge exception proceedings under Section 523(a). Grogan v. Garner, 498 U.S. 279, 284 n. 11, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991). The preclusive effect of a state court judgment in a federal case is determined by the state law where the judgment was rendered. See 28 U.S.C. § 1738; Marrese v. Am. Acad. of Orthopaedic Surgeons, 470 U.S. 373, 380, 105 S.Ct. 1327, 84 L.Ed.2d 274 (1985) (“[28 U.S.C. § 1738] directs a federal court to refer to the preclusion law of the State in...