Summary of a Recent
Judicial
Development in
Bankruptcy
Collateral Estoppel Prevents a Debtor Who Previously Pled Guilty
to Larceny from Contesting the Nondischargeability of Debt
Walt McCarterNational AgLaw Center Research Associate
Summary of Decision
In Baillie Lumber Co. v. Stith (In re Stith Farms), Case No. 07-62318, 2008 Bankr. LEXIS 961 (Bankr. N.D.N.Y. Mar. 27, 2008), the United States Bankruptcy Court for the Northern District of New York held that a debtor was collaterally estopped from contesting the nondischargeability of his debt due to his prior guilty plea.
Background
Baillie Lumber Co. had previously won a judgment against one the debtors, Alan Stith, and Stith had pled guilty to a charge of third degree grand larceny in relation to that action. Id. at *8-9. Baillie then sued the remaining debtors and Stith Farms, and the parties reached a settlement wherein the debtors agreed to assume liability for the debt owed to Baillie in the event that Alan Stith defaulted on it. Id. at *9. Debtors filed their Chapter 12 petition in October 2006 and consolidated their cases with their farming operation Stith Farms' Chapter 12 case shortly thereafter. Id. at *2. Baillie brought suit against all of the debtors, seeking a determination of nondischargeability of a debt pursuant to 11 U.S.C. §§ 523(a)(4) and (6). Id. at *3.
Arguments
Baillie argued that the debtors were collectively collaterally estopped from contesting the nondischargeability of their debts because of Alan Stith's guilty plea. Id. at *10-11.
The debtors, not including Alan Stith, argued that they were not collaterally estopped from contesting the issue because they had not pled guilty to anything. Id. at *14-15.
Analysis and Holdings
Under the Bankruptcy Code, 11 U.S.C. § 523(a)(4) excepts from discharge any debt "for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny." Id. at *11. The court first held the complaint filed against Stith Farms must be dismissed, because § 523(a) is not applicable to corporate or partnership debtors. Id. The court then observed the rule regarding collateral estoppel: "a criminal conviction, whether by jury verdict or guilty plea, constitutes estoppel in favor of the [plaintiff] in a subsequent civil proceeding as to those matters determined by the judgment in the criminal case." Id. at *12. Based on Alan Stith's plea of guilty to the charge of third degree grand larceny, the court concluded that Baillie was entitled to summary judgment on the issue of nondischargeability because Stith was collaterally estopped from presenting any evidence to the contrary. Id. at *14. The court held that the other individual debtors were not estopped from arguing the dischargeability of the debts, however, because they had not pled guilty to fraud or defalcation while acting in a fiduciary capacity, or embezzlement or larceny. Id. at *14-15. They had only agreed to be liable for any amount of Stith's judgment that he did not pay. Id. at *14. Therefore the court granted summary judgment as to the nondischargeability to Alan Stith's debt, but found there were genuine issues of fact for trial regarding the other individual debtors. Id. at *17.
The case was decided on March 27, 2008.