In re Krautheimer

• Decision Date: 17 November 1999
• Docket Number: Bankruptcy No. 94-B-20027 (JJC). Adversary No. 94-5039A (JCC).
• Parties: In re Fred KRAUTHEIMER, Debtor. Philip D. Rupert, Jr., Plaintiff v. Fred Krautheimer, Defendant.
• Court: United States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — Southern District of New York

241 B.R. 330 (1999)

In re Fred KRAUTHEIMER, Debtor Philip D. Rupert, Jr., Plaintiff v. Fred Krautheimer, Defendant.

Bankruptcy No. 94-B-20027 (JJC). Adversary No. 94-5039A (JCC).

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

November 17, 1999.

COPYRIGHT MATERIAL OMITTED

O'Keeffe & Lindgren, By Richard J. O'Keeffe, White Plains, NY, for Plaintiff.

Fred Krautheimer, Tarrytown, NY, Pro Se.

DECISION AND ORDER

JOHN J. CONNELLY, Bankruptcy Judge.

In this adversary proceeding, the plaintiff, Philip D. Rupert, Jr. ("plaintiff" or "Rupert"), seeks a determination that the $889,238.50 debt owed by the Debtor, Fred Krautheimer ("Krautheimer" or the "Debtor"), is excepted from discharge pursuant to 11 U.S.C. § 523(a)(6). The debt arose from Plaintiff's state court judgment against the Debtor for tortious interference with contract. The Plaintiff had an employment contract with the Debtor's company until the Debtor terminated him. Rupert subsequently commenced an action against the Debtor in state court. The jury determined that the termination was not for cause and awarded the Plaintiff damages.

Previously, in this Court, the Plaintiff moved for and was denied summary judgment on the complaint. In its decision, In re Krautheimer, 210 B.R. 37 (Bankr. S.D.N.Y.1997), the Court determined that the Plaintiff's state court judgment ("State Court Judgment") was not entitled to collateral estoppel effect on the issue of dischargeability. One important reason for denying the State Court Judgment collateral estoppel effect was that the jury instructions were ambiguous. The Court determined that the instructions were tailored in such a manner which precluded even a finding of implied malice by the Debtor; however, as this Court noted, such evidence could be adduced at trial. Krautheimer, 210 B.R. at 48. Thus, the Court must now determine whether the injury caused by the Debtor rises to the level of "willful and malicious" so as to preclude discharge¹ under 523(a)(6).

The parties have agreed to submit this matter to the Court based upon the record created in the state court proceeding, in lieu of a trial before this Court. Thus, this Court did not have the benefit of hearing live testimony, assessing the credibility, and observing the demeanor of the plaintiff, the defendant, and any other witnesses and thus, bases its decision on the trial transcript from New York Supreme Court, Monroe County, Index No. 91-09564 ("TR.") as well as various documents, including the employment contract and the termination letter to Rupert. That notwithstanding, the Plaintiff must still show by a preponderance of evidence that Section 523(a)(6) prevents this debt from being discharged.

Background

The following is the background of the events leading up to the complaint before the Court.

In 1982, Krautheimer, a dentist and resident of Tarrytown, New York, began to sell medical and dental insurance in the lower Hudson Valley for R.W. Michael's Agency, Inc. (the "Corporation"), a small insurance company with its headquarters in Orchard Park, New York, outside of Buffalo. In 1988, the owner of the business indicated that he wished to sell the Corporation.

Without understanding the financial condition of the Corporation, Krautheimer agreed to buy the Corporation in partnership with Robert Lohnes ("Lohnes"). At the time, Lohnes was the Senior Vice President of the Corporation and a man whom Krautheimer greatly trusted and relied upon. (TR. at 371-73, 378). In December 1988, in order to purchase the Corporation, Krautheimer and Lohnes each paid $100,000 and they jointly signed a promissory note for $1.6 million. (TR. at 379).

Prior to this partnership agreement, Lohnes had been an employee of the Corporation for twenty-five years; during that time, Lohnes had successfully climbed his way up the proverbial corporate ladder. (TR. at 44). In contrast, Krautheimer, admittedly, had no experience in the insurance business other than sales. (TR. at 642). His primary function became "professional relations" and his secondary function became sales. (TR. at 374, 381). Thus, the day-to-day operations of the Corporation were left to Lohnes. (TR. at 374).

In late 1989, Lohnes became terminally ill. As a result, Krautheimer was forced to search for a new partner in the business. (TR. at 383-90).

At the suggestion of Lohnes, in early 1990, Krautheimer went to Commercial Life Insurance Company ("Commercial Life") to discuss finding a new person to run the company. (TR. at 389). It is important to understand that Commercial Life and the Corporation worked together to sell insurance. The Corporation generated a large portion of its revenue by receiving commissions from the Commercial Life policies it sold. The commissions were based upon variable percentage arrangements for insurance policies sold with Commercial Life as the insurer. As a result, the Corporation's fate was to some extent tied to that of Commercial Life. Accordingly, the decision to include Commercial Life in the process of finding Lohnes' successor was designed to provide assurance that the Corporation would be properly managed in the future.²

One of the candidates offered by Commercial Life representatives as a possible replacement for Lohnes was the Plaintiff, Rupert. (TR. at 52, 391). Neil Brown ("Brown"), a Commercial Life employee at the time, (TR. at 58-60), brought Krautheimer and Rupert together. (TR. at 394). It was Brown's intention to be included in the new venture. (TR. at 54-60, 390-406).

Initially, Rupert was not interested in being involved with the Corporation. (TR. at 53). The Corporation had financial difficulties due to an imbalance in its "loss ratios." (TR. at 46, 49). A witness for the Plaintiff, Brown, defined a loss ratio as the percentage of claims to premiums written. (TR. at 47). As Brown stated

in simple terms, . . . if its a 300 percent loss ratio, for instance, it goes the same for every dollar you take in you got to pay three dollars out. Theloss ratio at the Corporation started to escalate rapidly . . . they started really going badly sic, and that was very much of a concern for Commercial Life.

(TR. at 47-48).

Brown testified that he was interested in joining the Corporation because it had potential for growth and profit. (TR. at 60). Brown stated, "I knew that some of the corrective measures that were in place hadn't been started yet, and there was sic lots of other things we could do, and with Rupert's background, I just thought this was going to be a great thing." (TR. at 60). After several meetings with Krautheimer and at the urging of Brown, Rupert agreed to accept a position as President of the Corporation.

In June 1990, Lohnes died. Following Lohnes' death, Krautheimer was left as the sole guarantor of the $1.6 million note. (TR. at 392, 410).

Shortly thereafter, in July of 1990, the Corporation and Rupert executed an employment contract ("Employment Agreement"). Under the terms of the Employment Agreement, Rupert was to receive $75,000/year plus 33.3% of the profits for eight years.

Rupert was employed by the Corporation from August, 1990 to June, 1991. On June 10, 1991, Krautheimer and the Corporation terminated Rupert.³ (TR. at 248). One week later, Rupert commenced an action against the Corporation, Krautheimer, and two other Defendants in New York Supreme Court, Monroe County.

This decision focuses on Rupert's employment with the Corporation and the circumstances surrounding his termination in June of 1991. The Court must determine whether Krautheimer's acts created a nondischargeable debt as described in Bankruptcy Code Section 523(a)(6). For the reasons set forth below, the Court has concluded that Section 523(a)(6) cannot preclude discharge of the debt because Krautheimer's course of conduct was not willful and malicious.

State Court Jury Verdict and Judgment.

Two causes of action were submitted to the jury: first, Rupert's claim against the Corporation for breach of contract and second, Rupert's claim against Krautheimer for tortious interference with contract. (TR. at 705).

On October 27, 1993, the jury entered a verdict for Rupert and against the Corporation and Krautheimer. The jury specifically found that: (1) the Corporation breached the Employment Agreement, (2) Krautheimer unduly interfered with the Employment Agreement by inducing the Corporation (R.W. Michaels Agency, Inc.) to breach the Employment Agreement, and (3) awarded $725,000 in unspecified "damages," plus interest and costs, for a total of $889,238.⁴

The judge instructed the jurors to evaluate the claim for breach of contract by the Corporation separately from the claim for tortious interference with contract by Krautheimer. Specifically, the court instructed the jury to consider the Corporation and Krautheimer as "distinct." (TR. at 706). As this Court stated in Krautheimer, "The finding of breach of contract by the Corporation has no bearing, in itself, on whether Krautheimer committed a `willful and malicious injury' upon Rupert. And, of course, breach of contract is not a basis for non-dischargeability against Krautheimer in section 523(a)(6) actions." Krautheimer, 210 B.R. at 53 (citing In re Kressner, 206 B.R. 303 (Bankr.S.D.N.Y. 1997)). The breach of contract cause of action resulted in judgment against the Corporation, not Krautheimer. Thus, the breach of contract finding by the jury is not relevant to the Court's determination of whether Section 523(a)(6) applies to the $889,238 debt.

This Court must only consider the tortious interference with the contract claim. The jury instructions on this claim were ambiguous and as a result two problems arose in interpreting the jury verdict. First, as discussed at length in the Krautheimer opinion, the court's instructions did not require the jury to find Krautheimer acted maliciously to impose liability. Krautheimer, 210 B.R. at 54. Second, the elements of tortious interference with contract were not properly...