In re Carozza, Bankruptcy No. 891-83188-20. Adv. No. 891-8450-20.

CourtUnited States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — Eastern District of New York
Writing for the CourtROBERT JOHN HALL
Citation167 BR 331
Decision Date10 May 1994
Docket NumberBankruptcy No. 891-83188-20. Adv. No. 891-8450-20.
PartiesIn re Joseph J. CAROZZA, Debtor. Johannes Hendrick PAGE, Plaintiff, v. Joseph J. CAROZZA, Defendant.

167 B.R. 331 (1994)

In re Joseph J. CAROZZA, Debtor.
Johannes Hendrick PAGE, Plaintiff,
Joseph J. CAROZZA, Defendant.

Bankruptcy No. 891-83188-20. Adv. No. 891-8450-20.

United States Bankruptcy Court, E.D. New York, Westbury Division.

May 10, 1994.

Edward A. Christensen, Rivkin, Radler & Kremer, Uniondale, NY, and Macco, Hackeling & Stern, Huntington, NY, for plaintiff.

Isaac Blachor, Kroll & Blachor, Garden City, NY, for debtor/defendant.

Scott Y. Stuart and Stan Y. Yang, Office of the U.S. Trustee, Garden City, NY.

Marilyn A. Frier, Woodmere, NY, Chapter 7 Trustee.


ROBERT JOHN HALL, Bankruptcy Judge.


Before the Court1 are dispositive motions by both parties; Plaintiff has moved for summary judgment and Debtor has moved for dismissal of the Adversary Proceeding.

167 BR 332

Plaintiff commenced the within Adversary Proceeding by the filing of a complaint with the Court on November 14, 1991. Pursuant to the Adversary Proceeding, Plaintiff seeks judgment determining that certain debts for money and/or property owed by Debtor are non-dischargeable for having been incurred through false pretenses, false representations, or actual fraud. See 11 U.S.C. § 523(a)(2) (1994).


During the mid to late 1980s, Plaintiff and Debtor had a dispute concerning the sale of a yacht by Plaintiff to Debtor. The dispute resulted in litigation commenced by Plaintiff in 1991, and after two days of trial, the Circuit Court of Raleigh County, West Virginia (the "State Court" or the "West Virginia state court") rendered a written judicial opinion2 which set forth the following findings of fact.

During the years from 1972 through 1977, Plaintiff constructed a 90 foot yacht in Durban, South Africa. Plaintiff named the ship "Eyola". While sailing the Caribbean Sea in 1984, Plaintiff and Debtor met and subsequently discussed a sale of Eyola to Debtor. Through their original discussions they established a price of $400,000. The negotiations progressed, and the terms agreed to were a sale of Eyola to Debtor for Debtor's payment of $80,000 in cash, $20,000 worth of repairs to be made to Eyola by Plaintiff, and the transfer of 85,000 shares of stock of a newly formed Florida corporation, Omni Health Systems, Inc. ("Omni Health"). Debtor alleges that he never opined as to the value of the shares of the Omni Health stock, but the court found that Debtor represented the stock to be worth $300,000. (Page v. Carozza, Civ.Act. No. 87-C-967 (Cir.Ct., Raleigh Cty., W.Va.), decision dated April 22, 1991, at 12, 13 (Ashworth, J.))

At closing on August 20, 1984, Debtor expressed inability to pay the $80,000 cash in a lump sum. The parties then agreed for $55,000 to be tendered immediately and the $25,000 balance, as well as the 85,000 shares of Omni Health stock, to be tendered at a later time. Ownership of Eyola was transferred to Debtor.

Debtor later tendered certain sums which finally reduced the $25,000 owed to $17,000; this final $17,000 was never paid by Debtor. The 85,000 shares of Omni Health stock were also never transferred.

Debtor had ownership of Eyola transferred to two entities, then, after having it appraised for $375,000, he made a charitable contribution of it to Palm Beach Atlantic College. Debtor "took a charitable deduction based on a fair market value sale of $400,000". Id. at 10. Debtor's allowed deduction was $311,585.

The West Virginia state court also made the following conclusions of law.

Plaintiff effectively transferred ownership of Eyola to Debtor, who exercised ownership and control of it by titling it to two different corporations, changing its South African registry to British registry and charitably donating it to Palm Beach Atlantic College. Debtor failed to pay $17,000 of the agreed cash price and failed to transfer the 85,000 shares of Omni Health stock breaching his contract with Plaintiff.

The opinion also states:

The evidence is clear and convincing that had the 85,000 shares of Omni Health Systems, Inc. stock been transferred by Debtor to the Plaintiff as promised, it was not worth $300,000, either then or thereafter as represented by Debtor. This representation was material and false. It was intended to be relied upon and was acted upon by the Plaintiff to his damage to a full three-fourths of the agreed value of the yacht, Eyola, of $400,000.
. . . . .
The defendant, Joseph J. Carozza, Jr., is guilty of actionable fraud by his misrepresentation of the value of the Omni stock to the plaintiff.
167 BR 333
Page v. Carozza, Civ.Act. No. 87-C-967 (Cir. Ct., Raleigh Cty., W.Va.), decision dated April 22, 1991, at 12-13 (Ashworth, J.).

The court held that Plaintiff was entitled to rely upon Debtor's representations as to the value of the Omni Health stock, due to Debtor's relationship and connection as a whole with the company. This right to rely was justifiable, even without independent investigation by Plaintiff. Furthermore, the evidence indicated that Plaintiff would not have been able to uncover the true value of the stock or the falsity of Debtor's representations even had he made an independent investigation.

The court further wrote: "The defendant, Joseph J. Carozza, Jr., is guilty of actionable fraud by his misrepresentation of the value of the Omni stock to the plaintiff." Id. at 13.

Finally, the court held that by his nonperformance, Debtor was unjustly enriched and his own actions made restitution impossible. Plaintiff was awarded damages of $317,000, consisting of the $17,000 not paid and the $300,000 worth of Omni Health stock never transferred, plus interest from August 21, 1984.

An order dated April 29, 1991 was signed in connection with Judge Ashworth's opinion, which provides that the court found in favor of Plaintiff on counts of common law fraud, breach of contract, and counts brought under securities laws, blue sky laws, and the Uniform Commercial Code. Id.

Approximately three months later, on July 24, 1991, Debtor filed a voluntary petition for bankruptcy relief under chapter 7 of title 11, United States Code ("Bankruptcy Code"). As stated, on November 14, 1991, Plaintiff commenced the within Adversary Proceeding, seeking to have the debt arising from the West Virginia state court order determined non-dischargeable.


The parties' arguments for and in opposition to summary judgment focus upon the collateral estoppel effect which should be afforded to the judicial opinion of the West Virginia state court.

Pursuant to the doctrine of collateral estoppel, issues which have been determined by one court may not be subsequently relitigated in another court where certain factors are present:

Under collateral estoppel, once an issue is actually and necessarily determined by a court of competent jurisdiction, that determination is conclusive in subsequent suits based on a different cause of action involving a party to the prior litigation.

Montana v. United States, 440 U.S. 147, 153, 99 S.Ct. 970, 973, 59 L.Ed.2d 210 (1979) (citing Parklane Hosiery Co. v. Shore, 439 U.S. 322, 326 n. 5, 99 S.Ct. 645, 649 n. 5, 58 L.Ed.2d 552 (1979); RESTATEMENT 2d JUDG. § 68; Scott, Collateral Estoppel by Judgment, 56 HARV.L.REV., 1, 2-3 (1942)). See, e.g., Winters v. Lavine, 574 F.2d 46, 66 (2d Cir.1978); see also Arndt v. Hanna (In re Hanna), 163 B.R. 918, 924 (Bankr.E.D.N.Y. 1994) ("Collateral estoppel is applicable in bankruptcy dischargeability proceedings.") (quoting Grogan v. Garner, 498 U.S. 279, 284-85 n. 11, 111 S.Ct. 654, 658 n. 11, 112 L.Ed.2d 755 (1991)). The Montana language has become a four-part test which may be applied to the issue in question to discern whether its prior determination will collaterally estop a party from again litigating it:

(1) The issue sought to be precluded must be the same as that involved in the prior action;
(2) That issue must have been actually litigated;
(3) It must have been determined by a valid and final judgment; and
(4) The determination must have been essential to the prior judgment.

Hanna, 163 B.R. at 925 (citing e.g., Moreno v. Schwartz (In re Schwartz), 36 B.R. 355, 357 (Bankr.E.D.N.Y.1984); First Nat'l Bk. v. Overmyer (In re Overmyer), 52 B.R. 111, 115 (Bankr.S.D.N.Y.1985) (quoting In re Ross, 602 F.2d 604, 608 (3d Cir.1979))).

Plaintiff argues that under section 523(a)(2) of the Bankruptcy Code, Debtor's obligation to Plaintiff should be determined to be non-dischargeable because it derives

167 BR 334
from fraud. 11 U.S.C. § 523(a)(2)(A) (1994).3 Plaintiff further contends that all issues necessary for a determination that the debt is non-dischargeable were determined by the West Virginia state court and may not be again litigated in this Court under the doctrine of collateral estoppel

Debtor opposes summary judgment on two grounds.

Debtor's first argument is that prong one of the collateral estoppel test is not satisfied. Debtor contends that the State Court findings that Debtor committed "common law fraud" and "actionable fraud" should have no collateral estoppel effect in this action for dischargeability. Debtor asserts that the terms "common law fraud" and "actionable fraud" do not require proof of the same elements and are therefore not identical to the meaning of "actual fraud", as the latter term is used in section 523(a)(2) of the Bankruptcy Code. See 11 U.S.C. § 523(a)(2) (1994). Of course, for collateral estoppel to apply, the issue must be the same in both proceedings. We look at this argument first.

Debtor states, without citation to authority, that "'Actionable fraud' in West Virginia includes `actual fraud' and `constructive fraud', the two being distinguished principally on the ground of intent." (Debtor's Memorandum of Law at 7.) Debtor correctly acknowledges that the State Court's finding of actionable fraud could not have implicitly meant constructive fraud. (Id.) Constructive fraud requires a finding of a breach of...

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