In re Hanna

• Citation: 163 BR 918
• Decision Date: 14 February 1994
• Docket Number: Bankruptcy No. 191-18284-260. Adv. No. 192-1204-260.
• Parties: In re Steven HANNA, Debtor. Joan ARNDT, Plaintiff, v. Steven HANNA, Defendant.
• Court: United States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — Eastern District of New York

163 B.R. 918 (1994)

In re Steven HANNA, Debtor.

Joan ARNDT, Plaintiff, v. Steven HANNA, Defendant.

Bankruptcy No. 191-18284-260. Adv. No. 192-1204-260.

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

February 14, 1994.

Victor Mevorah, P.C. by Victor Mevorah, Garden City, NY, for plaintiff.

Scott M. Zucker (Andrew B. Schultz, of counsel), Great Neck, NY, for debtor/defendant.

DECISION ON PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT

CONRAD B. DUBERSTEIN, Chief Judge.

Joan Arndt, (the "Plaintiff"), brought an adversary proceeding against Steven Hanna, (the "Debtor"), a Chapter 7 debtor, seeking a determination that an arbitration award ("Award") against him rendered in the amount of $85,540.25 and confirmed by the Supreme Court of the State of New York, was nondischargeable under section 523(a)(2) of the Bankruptcy Code (the "Code"). The instant matter comes before this Court on the Plaintiff's motion for summary judgment pursuant to Rule 56 of the Federal Rules of Civil Procedure ("Fed.R.Civ.P."), which is made applicable to bankruptcy proceedings pursuant to Rule 7056 of the Federal Rules of Bankruptcy Procedure ("Fed.R.Bankr. P."). The Plaintiff claims that the Award was predicated on the Debtor's violations of section 10(b) of the Securities Exchange Act of 1934 (the "Act") and constituted common law fraud, and thus, under the doctrine of res judicata it is nondischargeable pursuant to section 523(a)(2) of the Code. Alternatively, Plaintiff maintains that under the doctrine of collateral estoppel, the Debtor should be barred from relitigating the issues of fraud and damages. In opposition to Plaintiff's motion, the Debtor points to the Award and contends that there is no factual or legal basis for this Court to find as a matter of law that the issue of fraud was necessary to the arbitrators' decision because although presented with multiple causes of action, the Award itself is devoid of any factual findings and thus could have been based on any one or more theories of liability as set forth in the complaint submitted to arbitration. For the reasons hereinafter set forth, the Plaintiff's motion is denied.

FACTS

In June of 1988, while the Debtor was employed with the brokerage firm of J.T. Moran & Company Inc. ("Moran"), the Plaintiff entered into a margin agreement authorizing the Debtor to effect securities transactions on the Plaintiff's behalf and subject to her approval. Subsequently, in October of 1988, Plaintiff entered into an options agreement with Wall Street Clearing Co. as clearing broker for Moran, which enabled the Plaintiff to also participate in options trading. The margin agreement and the options agreement (collectively referred to as Plaintiff's "Account Agreement") each contained an arbitration clause providing that any controversy arising out of or relating to the Account Agreement would be submitted to arbitration.

Plaintiff alleges that the Debtor began executing trades in the Plaintiff's account without first obtaining her consent as required under the Account Agreement. The Plaintiff further alleges that the Debtor's excessive and unauthorized trading resulted in substantial monetary losses to her account.

In July of 1989, the Plaintiff commenced an action against both the Debtor and Moran. Pursuant to the Account Agreement, the complaint was submitted to arbitration and was heard by a three member arbitration panel of the National Association of Securities Dealers ("NASD"). The complaint alleged a laundry list of instances where the Debtor either executed trades in the Plaintiff's account without her prior authorization or failed to effect transactions as she had instructed. It contained eight separate claims for relief each seeking damages in the amount of $85,040.25 representing $65,868.82 for Plaintiff's losses, $16,804.41 for commissions paid, and $2,367.02 for margin interest. Additionally Plaintiff sought interest, costs, disbursements, attorney's fees, and such other relief as the panel deemed just and proper. The first two claims were asserted against both the Debtor and Moran alleging that the conduct set forth in the complaint violated section 10(b) of the Act,¹ the rules and regulations promulgated thereunder, and constituted common law fraud. Plaintiff's third claim for relief, alleging breach of contract, was asserted against Moran only. Plaintiff's fourth claim for relief was based upon the alleged negligence and recklessness of both Moran and the Debtor. Although this claim is captioned in the complaint as being asserted "Against J.T. Moran,"² a careful reading of paragraphs 38 through 44 of the complaint reveals that these allegations were in fact asserted against both the Debtor and Moran.³ Plaintiff's fifth, sixth, and eighth claims for relief were asserted against Moran only and are not relevant to the instant matter. The seventh claim for relief alleging violations of section III of the NASD Rules of Fair Practice, was captioned like the fifth claim as "Against J.T. Moran," but similarly, was also asserted against the Debtor.

Moran filed for voluntary protection under Chapter 11 of the Code in 1990 and consequently Plaintiff's efforts to enforce her claims against Moran were automatically stayed by section 362 of the Code. Thus, the arbitration proceeded only as against the Debtor.

Beginning November 20, 1990, and continuing through February 27, 1991, the arbitration panel held three full days of hearings. During the course of these hearings, the Plaintiff testified as to her allegations of the Debtor's excessive and unauthorized trading activity. In support of these allegations, Plaintiff offered into evidence her account statements and transcripts of a taped telephone conversation between herself and the Debtor during which the Debtor admitted trading without authorization on several occasions.⁴ The arbitrators also heard the testimony of Mr. Gregory Adamo, the Debtor's supervisor.⁵ The Debtor was present during the hearings and was subjected to examination.⁶ A transcript of the Debtor's testimony was submitted to this Court. It reveals that when asked about specific transactions in the Plaintiff's account, the Debtor in large part denied effecting trades without the Plaintiff's authorization. However, during the examination the Debtor's testimony was inconsistent. Although he initially recalled executing one transaction without authorization, he later recalled two, then no more than two, and finally two or three at most.⁷ Summations were given and both parties submitted post-hearing memorandums of law.

On August 1, 1991, the arbitration panel released the Award in favor of the Plaintiff against the Debtor for $85,040.25, the exact amount sought in the complaint. Plaintiff's claim for attorney's fees and interest was denied. However, the Debtor was assessed various fees and forum costs and was instructed to satisfy the assessment by reimbursing to Plaintiff $500.00 she had previously deposited with the NASD and remitting the balance to the NASD. Thus, pursuant to the Award, the total amount due the Plaintiff is $85,540.25. The Debtor did not contest the Award.

In September of 1991, Plaintiff petitioned the Supreme Court of New York for judgment confirming the Award and directing that judgment be entered thereon. Such relief was granted on January 15, 1992. However, in the interim, on December 11, 1991, the Debtor filed a petition for relief under Chapter 7 of the Code and sought to have the Award discharged in bankruptcy.

On March 27, 1992, Plaintiff commenced the instant adversary proceeding seeking a determination that the Award is nondischargeable pursuant to section 523(a)(2) of the Code, which provides in pertinent part that "a discharge . . . does not discharge an individual debtor from any debt . . . for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by — false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor's or an insider's financial condition." 11 U.S.C. § 523(a)(2)(A).

The instant matter comes before this Court on the Plaintiff's motion for summary judgment, which Plaintiff contends is warranted because of the absence of any genuine issue of material fact. In support of this contention Plaintiff claims that the Award was predicated on the Debtor's violations of section 10(b) of the Act and constituted common law fraud, and because by its own terms was decided "in full and final resolution of the issues submitted for determination,"⁸ under the doctrine of res judicata it is nondischargeable pursuant to section 523(a)(2) of the Code. Alternatively, Plaintiff maintains that under the doctrine of collateral estoppel, Debtor is now barred from relitigating the issues of fraud and damages in the bankruptcy court.

Although the Award itself does not specify which cause of action gave rise to the relief granted and contains no findings of fact, the Plaintiff maintains that the issue of Debtor's fraud was fully and properly litigated and actually determined. Specifically, Plaintiff directs this Court's attention to the section entitled "Case Summary" which provides as follows:

Claimant, Joan Arndt, alleges that Respondent, Steven Hanna, made the following trades without authorization: 1500 Audiovox Corp., Cla; 1500 Cadnetix Corp.; 2500 UTS Intel Corp; 5000 Software Service of America. Claimant further alleges that Respondent negligently handled her account and failed to effect sale of 25 Midway Air call options. Claimant contends that Respondent\'s conduct amounted to a violation of Section 10(b) of the Exchange Act and the rules and regulations promulgated thereunder and constituted common law fraud. Claimant asserted claims against Respondent\'s employer, J.T. Moran, which subsequently filed for bankruptcy protection. Thus, Claimant chose to proceed against Hanna only.

Exhibit F to Plaintiff's Notice of Motion (NASD Arbitration Award...