In re Shiver

• Decision Date: 05 November 2008
• Docket Number: Bankruptcy No. 07-11501 (MG).,Adversary No. 07-03070 (MG).
• Parties: In re Robert SHIVER, Debtor. Edward Wharton and, Janet Geismar, Plaintiffs, v. Robert Shiver, Defendant.
• Court: United States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — Southern District of New York

396 B.R. 110

In re Robert SHIVER, Debtor.

Edward Wharton and, Janet Geismar, Plaintiffs, v. Robert Shiver, Defendant.

Bankruptcy No. 07-11501 (MG).

Adversary No. 07-03070 (MG).

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

November 5, 2008.

Donald Pearce, Esq., by Donald Pearce, New York, NY, for the Plaintiff.

Shapiro & Croland, by John P. DiIorio, Hackensack, NJ, for the Defendant.

MEMORANDUM OPINION ON DEFENDANT'S MOTION TO DISMISS AND CROSS MOTIONS FOR SUMMARY JUDGMENT

MARTIN GLENN, Bankruptcy Judge.

This denial of discharge adversary proceeding brought by two judgment creditors, Edward Wharton and Janet Geismar (collectively "Plaintiffs"), against the chapter 7 debtor, Robert Shiver ("Shiver" or "Debtor" or "Defendant"), raises the issue of the preclusive effect of a $3,013,000 Florida state court default judgment for fraud against Shiver. Shiver moved to dismiss the adversary complaint, and after a hearing at which the Court deferred ruling on the motion to dismiss, the Plaintiffs and Shiver filed cross-motions for summary judgment. The Plaintiffs seek a judgment pursuant to Bankruptcy Code § 523(a)(2)(A)¹ declaring that the Florida state court default judgment for fraud ("Judgment") is not a dischargeable debt. Plaintiffs contend that the full faith and credit statute, 28 U.S.C. § 1738, requires that the Florida fraud Judgment be given preclusive effect on their Bankruptcy Code § 523(a)(2)(A) claim. The Debtor contends that the Judgment should not be given preclusive effect because it was entered by default without adequate notice or opportunity to defend. Plaintiffs contend that Florida law determines whether the Florida default judgment is entitled to preclusive effect and that Florida courts would give preclusive effect to the Judgment. Shiver contends that federal law rather than Florida law controls and that federal law would not give preclusive effect to the Judgment.

For the reasons explained below, the Court concludes that (i) under the full faith and credit statute, 28 U.S.C. § 1738, Florida law determines whether preclusive effect should be given to the Judgment, (ii) Florida law would give preclusive effect to the Judgment, and (iii) because the elements of the Bankruptcy Code § 523(a)(2)(A) denial of discharge fraud claim are identical to the elements of the Florida common law fraud claims upon which the Plaintiffs obtained the Judgment, the Judgment bars relitigation of the issues here, thereby entitling Plaintiffs to summary judgment denying Shiver a discharge of the $3,013,000 claim.

BACKGROUND

The following material facts are undisputed. In early 2003 the Plaintiffs began negotiations with Shiver to sell their fire and burglar alarm business, Hi-Rise Safety Systems, Inc. ("Hi-Rise") to Aerwav Integration Services, Inc. ("AIS"), a corporation controlled by Shiver. (ECF Doc. # 12 at Plaintiffs' Statement of Material Facts About Which There Is No Genuine Issue Pursuant to Local Rule 7056-1 (hereinafter "Plaintiffs' Rule 7056-1 Statement") ¶ 1; ECF Doc. # 14 at Defendant's Responding Statement of Undisputed Material Facts Pursuant to Local Rule 7056-1(c) and Statement of Additional Undisputed Material Facts In Support of Cross-Motion For Summary Judgment (hereinafter "Debtor's Rule 7056-1 Statement") ¶ 1.)² The sale ultimately closed in November 2003. (Id.) In 2005, the Plaintiffs commenced an action against Shiver in the Circuit Court of the Seventeenth Judicial Circuit in Broward County, Florida ("Circuit Court") for fraud in the inducement, fraud in the execution and breach of contract in connection with the sale of Hi-Rise to AIS. (Plaintiffs' Rule 7056-1 Statement ¶ 2; Debtor's Rule 7056-1 Statement ¶ 2.) On October 17, 2005, the Plaintiffs served Shiver with a revised amended complaint ("Revised Amended Complaint") in the Florida action. (Id. ¶¶ 3, 3.) The Revised Amended Complaint alleged that Shiver individually represented to them (a) that he had the expertise to operate a fire alarm and burglar alarm company, (b) that he had the systems in place to easily absorb the Hi-Rise accounts and to instantly maintain and service the Hi-Rise accounts, (c) that he would increase Hi-Rise's revenues and the revenues of other entities he purchased, making the stock granted to the Plaintiffs as part of the sale consideration valuable and securing their future payment, and (d) that he would be prudent in expenditures in order to maximize the ultimate future payment to Plaintiffs. (Id. ¶¶ 4, 4.) The Revised Amended Complaint alleged two fraud claims—fraud in the inducement and fraud in the execution. (Id.) The fraud in the inducement claim alleged that (i) Shiver made certain representations to the Plaintiffs enumerated in the Revised Amended Complaint; (ii) the Plaintiffs relied on these representations in making their decision to sell to Shiver and his companies;³ (iii) Shiver knew the statements were false at the time they were made; and (iv) Shiver's misrepresentations and further actions caused the Plaintiffs' loss. (Id. ¶ 5-6, 5-6.) The fraud in the execution claim alleged that (i) Shiver made certain representations to the Plaintiffs enumerated in the Revised Amended Complaint; (ii) the Plaintiffs relied on the representations in entering into the agreements; and (iii) the Plaintiffs have suffered losses as a result of the representations. (Id.) The complaint also included a claim for breach of contract that is not involved in this adversary proceeding.

The case proceeded to be litigated in the state court. Plaintiffs' emergency motion for the appointment of a receiver was successfully opposed by Shiver through his then-attorney, Gerald B. Wald, Esq. of Murai, Wald, Biondi, Moreno & Brochin, P.A. (Id. ¶¶ 7, 7.) After the receiver motion was denied but prior to the filing of an answer, Shiver's attorney filed a motion to dismiss the Revised Amended Complaint alleging the complaint failed to state a cause of action under Florida law. (Id. ¶ 7, 7.) Before the motion to dismiss was decided, however, Shiver's attorney was permitted by the court to withdraw as counsel because of non-payment of his fees. (Id. ¶¶ 8, 8.)

After Shiver's counsel withdrew, the Florida court denied Shiver's motion to dismiss and ordered that he file an answer within ten days.⁴ (Id. ¶¶ 9, 9.) Shiver did not file an answer and, on February 27, 2006, a default judgment was entered against him on liability. (ECF Doc. # 5.) On October 19, 2006, a jury trial was held on damages. Shiver was not in attendance. (Id. at Exh. F.) On October 25, 2006, the Florida Circuit Court entered final judgment finding Shiver liable for fraud in the inducement and fraud in the execution with damages in favor of Plaintiffs and against Shiver in the amount of $3,013,000.00.⁵ (ECF Doc. # 5 at Exh. A.)

Shiver admits that he became aware of the Florida Judgment no later than March 2007, approximately three months before he filed his bankruptcy petition. (Plaintiffs' Rule 7056-1 Statement, ¶ 14; Debtor's Rule 7056-1 Statement, ¶ 14.) He did not seek relief from the Judgment from a Florida state court before filing his bankruptcy petition. Id. On May 10, 2007, Shiver filed a voluntarily petition for chapter 7 relief. On September 20, 2007, Debtor moved to lift the automatic stay to permit him to move to vacate the Judgment in the Florida court. (Case No. 07-11501, ECF # 29.) The Plaintiffs opposed the motion. (Case No. 07-11501, ECF ## 36, 37, 38, 39.) After additional pleadings were filed by the Debtor and Plaintiffs, on October 25, 2007, the Court granted the motion to lift the automatic stay and required that Shiver commence Florida state court proceedings to vacate the Judgment on or before November 30 2007, which he did. (Case No. 07-11501, ECF # 44.) The parties engaged in discovery in Florida. On May 2, 2008, after an evidentiary hearing, the Florida Circuit Court denied the Debtor's motion to vacate the Judgment. (ECF Doc. # 7 at Exh. 5.)

On October 26, 2007, Plaintiffs filed their adversary proceeding seeking a declaration that the fraud Judgment against Shiver was nondischargeable under 11 U.S.C. § 523(a)(2)(A). The adversary complaint pleads the elements of a § 523(a)(2) claim, including both actual and justifiable reliance, and provides the background giving rise to the Florida litigation and Judgment.

The Debtor filed a motion to dismiss the adversary proceeding pursuant to FED. R.CIV.P. 12(b)(6), made applicable in adversary proceedings by FED. R. BANKR.P. 7012, for failure to state a claim upon which relief can be granted, and pursuant to FED.R.CIV.P. 9(b), made applicable in adversary proceedings by FED. R. BANKR.P. 7009, for failure to plead fraud with particularity. During argument of the motion to dismiss, Debtor's counsel agreed that if the Florida default judgment is entitled to preclusive effect in this case, the adversary complaint adequately pleads a cause of action to deny the discharge.⁶ Consequently, the Court concluded that the most efficient way to proceed was for the parties to make cross motions for summary judgment. They did so pursuant to FED. R.CIV.P. 56, made applicable in bankruptcy proceeding pursuant to FED. R. BANKR.P. 7056, and on September 10, 2008, the Court heard argument on those motions. Because the Court grants the Plaintiffs' motion for summary judgment, determining that Plaintiffs are entitled to judgment declaring that Shiver's debt is not dischargeable, and denies Debtor's cross motion for summary judgment, the Debtor's motion to dismiss is denied as moot.

DISCUSSION

A. Standards Governing a Summary Judgment Motion

A party is entitled to summary judgment if the record demonstrates that "there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." FED.R.CIV.P. 56. Summary judgment may be granted only if there exists no genuine issue of material fact that would permit a reasonable jury to find for the nonmoving party....