The opinion of the court was delivered by: Judge Nora Barry Fischer
(Appeal Related to: Bankruptcy Case No. 05-20640 and Adversary Proceeding No. 05-2506)
Pending before the Court is an appeal from an order issued by the United States Bankruptcy Court for the Western District of Pennsylvania ("Bankruptcy Court") and entered in Bankruptcy Case No. 05-20640, Adversary Proceeding No. 05-2506 (Docket No. 1). Pursuant to 28 U.S.C. § 158(a), Appellant Steven D. Ginsburg ("Appellant") filed the instant appeal after the Bankruptcy Court granted judgment in favor of David J. Birenbaum ("Appellee") and against Appellant. (Docket No. 29-5). On March 27, 2008, this Court issued a Memorandum Order ("March 27 Memorandum Order") denying the appeal for failure to file a transcript of a proceeding in the underlying bankruptcy action as required under the Federal Rules of Bankruptcy Procedure. (Docket No. 15).*fn1
The March 27 Memorandum Order has been vacated by the Court's Order of February 3, 2009, filed contemporaneously with this Memorandum Opinion. (Docket No. 30). Thus, the Court can now address the merits of this case.
The primary issues raised in this appeal are whether the Bankruptcy Court committed legal error by: 1) failing to collaterally estop Appellee from denying his alleged admissions of embezzlement and larceny in state court proceedings in Florida; and, 2) by concluding that the debt owed to Appellant was not excepted from discharge under 11 U.S.C. § 523(a)(4). For the reasons outlined herein, the Court finds that the Bankruptcy Court did not err in determining that collateral estoppel did not apply to the underlying action and that the debt was non-dischargeable under Section 523(a)(4). Accordingly, the Order of the Bankruptcy Court is affirmed.
II. FACTUAL AND PROCEDURAL BACKGROUND
The following undisputed facts are taken from the hearing held before the bankruptcy court (Docket No. 17-1), the submissions of the parties (Docket Nos. 4, 8), and the Bankruptcy Court's Opinion of July 6, 2006.
The Vertical Group, Inc. ("Vertical Group") was a closely-held Florida corporation, wherein Appellant and Appellee each held fifty percent of its outstanding shares. (Docket No. 4 at 4-5).
Appellee was a director of the Vertical Group as well as its president and treasurer. (Id. at 5). In March of 1997, Appellant extricated himself from the affairs of the business, leaving Appellee in sole control of the Vertical Group's day-to-day operations. (Docket No. 29-5 at 2). Subsequently, the business relationship between Appellant and Appellee deteriorated, which resulted in Appellant instituting a shareholder derivative action against Appellee on behalf of the Vertical Group in the Circuit Court for Miami-Dade County, Florida, on April 11, 2000 ("Complaint").*fn2 (Id. at 2-3.)
A. Florida State Court Proceedings
On September 26, 2000, Appellant and Appellee executed a settlement agreement ("Settlement Agreement"), which purported to resolve the state court case.*fn3 (Id. at 4; Docket No. 14-9).
Thereafter, Appellee defaulted on his obligations arising under the Settlement Agreement. (Docket No. 8 at 8). Appellee filed a Stipulation for Entry of Final Judgment Execution Withheld. (Docket No. 14-14) ("Stipulation").*fn4 In part, the Stipulation provided that the allegations in Appellant's Complaint "set forth sufficient facts to entitle [Appellant] to a final judgment which facts are true and shall have res judicata and collateral estoppel effect in any bankruptcy case or proceeding concerning the dischargeability of the debts and obligations ... and such debts shall be non-dischargeable and shall be excepted from discharge." (Docket No. 14-14 at ¶1). On January 29, 2001, the Florida Circuit Court held a hearing,*fn5 at which it granted Appellant's motion to enforce the settlement agreement and issued a final judgment ("Final Judgment") in favor of Appellant in the amount of $90,000.*fn6 (Docket No. 29-5 at 5). Appellee did not appeal the Florida Court's January 29, 2001 Order. Subsequently, on October 4, 2001, the Florida court issued an order, awarding Appellant attorney's fees and costs in the amount of $40,000. (Docket No. 14-13). Following the state court's order, Appellee filed a Motion to Vacate Final Judgment, for Rehearing and Motion to Stay Execution with the Florida Circuit Court. (Docket No. 14-15) ("Motion to Vacate"). On June 5, 2001, the Florida Circuit Court entered an order denying Appellee's Motion to Vacate based on Appellee's failure to comply with a prior court order compelling discovery. (Docket No. 14-17).
B. Bankruptcy Court Proceedings
On January 19, 2005, Appellee filed a voluntary chapter 7 petition with the Bankruptcy Court sitting in Pittsburgh, Pennsylvania. (Docket No. 29-5 at 5). The Appellee identified Ginsburg on the schedules as having an undisputed general, unsecured claim in the amount of $94,875. Id. Subsequently, Appellant commenced an adversary action against Appellee, seeking a determination that the $90,000 debt arising under the Final Judgment and the $40,000 debt arising from the order of October 4, 2001 are excepted from discharge by § 523(a)(4)*fn7 of the Bankruptcy Code. (Id. at 6).
An adversary hearing was held on March 8, 2006 regarding the matter. (See Transcript at Docket No. 17). The Bankruptcy Court entered an order and judgment in favor of Appellee on July 6, 2006. (Docket No. 29-5 at 21). Applying Florida law, the Bankruptcy Court concluded that Appellee was not collaterally estopped in the adversary proceeding from denying his alleged admissions of embezzlement and larceny in the state court proceedings because not all of the elements of collateral estoppel were met. (Id. at 6-12). The Bankruptcy Court further found that the debt owed to Appellant was not excepted from discharge by § 523(a)(4) of the Bankruptcy Code. (Id. at 12-20). The Court now turns to the specifics of the Bankruptcy Court's decision, particularly as to collateral estoppel and dischargeability.
C. Bankruptcy Court's Ruling on Collateral Estoppel
The Bankruptcy Court found that Appellee's stipulation regarding the dischargeability of his debt to Appellant was inconsequential because Appellee "cannot in advance of a bankruptcy filing contract away the right to have his or her debts discharged." (Docket No. 29-5 at 7)(citing Alsan Corp. v. DiPierro (In re DiPierro), 69 B.R. 279, 282 (Bankr. W.D. Pa. 1987)). The Bankruptcy Court determined that the Final Judgment "merely enforced the settlement between [Appellee] and [Appellant]." (Id. at 10). Turning to the elements of collateral estoppel, the Bankruptcy Court found that the Final Judgment did not satisfy the third and fifth prongs of collateral estoppel.*fn8 As to the third prong, i.e., the same parties or their privies to the prior litigation, the Court concluded that "the judgment and order resolved only matters concerning the settlement agreement between [Appellee] and [Appellant], which in turn had nothing to do with the causes of action [Appellant] had asserted in the complaint on behalf of the corporation." (Id. at 11). As to the fifth prong, i.e., whether the issue was critical and necessary to the prior determination, the Court ...