Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 86 C 3205 - Nicholas J. Bua, Judge.
Coffey, Ripple, and Manion, Circuit Judges.
In this appeal, we are asked to decide whether the appellee's judgment against the appellant is dischargeable in bankruptcy. The bankruptcy court held that the judgment was nondischargeable and the district court affirmed. For the reasons set forth below, we affirm the judgment of the district court.
In 1967, appellee Francine Klingman and appellant Melvin Levinson entered into a trust agreement. Mr. Levinson, an attorney, was named trustee. On March 11, 1970, Ms. Klingman filed suit against Mr. Levinson in the Circuit Court of Cook County alleging dissipation of the trust assets. The action was resolved by a consent judgment. Pursuant to that judgment, Mr. Levinson was to pay Ms. Klingman the amount of the original trust corpus, $37,550, plus interest and $10,000 in attorneys' fees. As part of the consent judgment, the parties stipulated:
4. That Defendant [Mr. Levinson], in disregard of his fiduciary duties and obligation as Trustee, has failed to retain and conserve the said trust corpus and income therefrom, but rather, in violation of and disregard of his fiduciary duties and obligations as Trustee, has, through his misappropriation and defalcation, allowed or caused the dissipation and loss of the said trust corpus and income therefrom.
6. That malice is the gist of this action, and that the Defendant has stipulated that it is his intention that the obligation to Plaintiff [Ms. Klingman] created by this Agreed Judgment Order not be dischargeable in any bankruptcy or similar proceeding, and that in any subsequent proceeding all of the allegations of the Complaint and findings of this Court may be taken as true and correct without further proof.
7. That the parties have stipulated and agreed that Plaintiff may recover from Defendant, in addition to any other amounts due, the expenses incurred by Plaintiff in maintaining this action, specifically including attorneys' fees, through the time of satisfaction of this judgment, which sum is found to be $10,000.00.
Agreed Judgment Order at 1-3; Appellant's Supp. App. at 4-7.
On April 22, 1982, Mr. Levinson filed a petition in bankruptcy. Ms. Klingman filed a response claiming that her judgment against Mr. Levinson pursuant to the consent agreement was nondischargeable under 11 U.S.C. § 523(a)(4) because it resulted from fraud or defalcation by Mr. Levinson while he acted in a fiduciary capacity. Mr. Levinson filed an answer and two counterclaims. The bankruptcy court dismissed Mr. Levinson's counterclaims on May 29, 1985.*fn1
On March 18, 1986, the bankruptcy court granted Ms. Klingman's motion for summary judgment. The court held that Mr. Levinson was barred form relitigating the issue of defalcation under the principle of collateral estoppel because he had stipulated to the finding that he had violated his fiduciary duties by defalcating the assets of the trust. The bankruptcy court further held that the $10,000 debt representing legal fees was also nondischargeable because the award was ancillary to the primary debt. In re Levinson, 58 Bankr. 831, slip opp. at 15-16 (N.D. Ill. 1986); Appellant's App. at 29-30. The district court affirmed the orders issued by the bankruptcy court based on the same reasoning that the principle ...