In re Tobman

• Citation: 107 BR 20
• Decision Date: 03 November 1989
• Docket Number: No. 89 Civ. 3749 (JMW).,89 Civ. 3749 (JMW).
• Parties: In re Irwin A. TOBMAN, Debtor. Morton A. BENDER, Plaintiff-Appellee, v. Irwin TOBMAN, Defendant-Appellant.
• Court: U.S. District Court — Southern District of New York

107 B.R. 20 (1989)

In re Irwin A. TOBMAN, Debtor.

Morton A. BENDER, Plaintiff-Appellee, v. Irwin TOBMAN, Defendant-Appellant.

No. 89 Civ. 3749 (JMW).

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

November 3, 1989.

Sheldon Hirshon, Proskauer Rose Goetz & Mendelsohn, New York City, for plaintiff-appellee.

Donald J. Tobias, Law Offices of Donald J. Tobias, New York City, for defendant-appellant.

WALKER, District Judge:

Debtor Irwin Tobman ("Tobman"), defendant-appellant brings this action pursuant to 28 U.S.C. § 158, to appeal an order and judgment of the United States Bankruptcy Court, Southern District of New York (Lifland, J.), dated April 6, 1989¹, granting Morton A. Bender ("Bender"), plaintiff-appellee, summary judgment on the issue of the nondischargeability of certain of Tobman's debts to Bender pursuant to 11 U.S.C. § 523(a)(2)(A). Bender argues that the Bankruptcy Judge properly applied the doctrine of collateral estoppel in granting summary judgment, and seeks sanctions pursuant to Fed.R.Civ.P. 11 and 28 U.S.C. § 1927 against Tobman and his counsel. Tobman also seeks sanctions against Bender and his counsel.

I. BACKGROUND

The following summary of pertinent facts is derived from the opinion of Bankruptcy Judge Burton Lifland. On October 16, 1981, Bender filed a multi-count complaint in the United States District Court for the District of Columbia against Tobman and others, asserting claims against Tobman for fraudulent inducement, willful conversion, breach of contract, securities fraud, and breach of fiduciary duty ("District Court Action"). The complaint alleged that Bender gave Tobman $125,000 for the purpose of purchasing a 25% interest in Tobman's company, Universal Housing Systems of America, Inc. ("Universal"), and $162,500 in loans to Universal. It is undisputed that Bender never received the stock which was ultimately registered in Tobman's name. The complaint further alleged that Tobman converted $110,000 which Bender gave Tobman for the purpose of making a loan to Universal. To the extent that Bender's money was used as loans for Universal, the complaint alleged that these loans were recorded in the name of Tobman.

Most relevant to this appeal, the complaint asserted that Tobman fraudulently induced Bender to advance him $125,000 to purchase stock for Bender in Universal, $110,000 as a loan to Universal, and $52,000 as a further loan to Universal. Bender claims that in order to induce him to give Tobman these sums, Tobman misrepresented to him:

1. the financial condition and business prospects of Universal, and Extrudyne, another of Tobman's business ventures;

2. the capital contributions and loans that had been made to one of the corporations by Tobman to a third party;

3. Tobman's own financial condition and ability to make further loans to the corporations;

4. how Bender's funds were going to be applied; and

5. that the loans would be fully secured.

The complaint also alleged that Tobman violated section 10(b) of the Securities and Exchange Act and Rule 10b-5 promulgated thereunder by making these misrepresentations in connection with the purchase of the Universal stock.

The District Court Action was fully tried before a jury. At the close of the evidence, Judge Oliver Gasch instructed the jury in pertinent part:

One who fraudulently makes a false representation of fact for the purpose inducing another to act or refrain from acting in reliance thereon in a business transaction is liable to the other for the harm caused to him by his justifiable reliance on that misrepresentation. Bender has asserted that he was fraudulently induced by Tobman to advance funds for Tobman and Universal Housing. He claims that Tobman misrepresented to him the financial condition and business prospects of Universal Housing and Extrudyne, that Tobman misrepresented the capital contributions and loans that had been made to Universal by Tobman and Cantor, that Tobman misrepresented his own financial condition and ability to make further loans to the corporations, that Tobman misrepresented how Bender\'s funds were going to be applied and that Tobman misrepresented that Bender\'s loans would be fully secured. (emphasis added).

Bender alleges that as a result of these misrepresentations, he made payments aggregating $235,000 to Tobman and $52,500 to Universal Housing . . . In order to establish a claim for fraudulent misrepresentation, Bender must prove each of the following essential elements of this claim by clear and convincing evidence: One, a false representation of material fact made by Tobman; Two, knowledge or belief on the part of Tobman that the representation was false; Three, an intention by Tobman to induce Bender to act or refrain from acting in reliance on the misrepresentation; Four, reliance by Bender on the misrepresentation for investing funds in Universal Housing and becoming involved in Acro; Five, damages resulting from Bender\'s reliance on the misrepresentation. (emphasis added).

Jury Instructions, Ex. D-33 at 20-22. The Jury found for Bender. Ex. D-15. The Special Verdict form stated in pertinent part:

1. Tobman fraudulently induced Bender to transmit $125,000 to him for the purposes of purchasing stock in Universal. (See Verdict Form, Ex. D-15 at 1(a)).

2. Tobman fraudulently induced Bender to make a $110,000 loan to Universal in May, 1978. (See Ex D-15 at 1(b)).

3. Tobman fraudulently induced Bender to make a loan of $52,500 to Universal in October, 1978. (See Ex. D-15 at 1(c)).

4. Jury awards Bender punitive damages against Tobman in the amount of $100,000. (See ex. D-15 at 6(b)).

In accordance with the jury's decision, the District Court entered judgments of $387,500 plus $5,742 in costs for Bender, and later added $38,784 in accrued pre-judgment interest on Bender's $52,500 loan to Tobman.

On April 7, 1987, Bender initiated involuntary bankruptcy proceedings against Tobman. On April 4, 1988, Bender filed a complaint in the Bankruptcy Court seeking an order pursuant to Bankruptcy Code ("Code") §§ 523(a)(2)(A), 523(a)(2)(B), 523(a)(4), and 523(a)(6), barring the discharge of Tobman's judgment debts to Bender. Bender moved for summary judgment based on collateral estoppel, which Bender asserted precluded Tobman from relitigating the facts that were tried in the District Court Action. Bender maintained that the findings of the jury were sufficient to make Tobman's debts arising from the verdict nondischargeable, and thus, no genuine issues of material fact remained for the court to determine regarding nondischargeability of the judgment debts.

The Bankruptcy Court agreed and granted summary judgment for Bender finding that Tobman's debts were nondischargeable "pursuant to § 523(a)(2)(A) based upon the jury's findings against Tobman on the issue of fraudulent inducement." In re Tobman, 96 B.R. 429, 432 n. 3 (Bkrtcy.S.D. N.Y.1989).² Section 523(a)(2)(A) provides in relevant part:

(a) A discharge under section 727 . . . of this title does not discharge an individual debtor from any debt —

* * * * * *

(2) for obtaining money, property, services, or an extension, renewal, or refinance of credit, by —

A) false pretenses, a false representation or actual fraud, other than a statement respecting the debtor\'s or an insider\'s financial condition . . .

The party objecting to the dischargeability of a debt carries the burden of proving all of the elements of § 523. 3 Collier, Bankruptcy ¶ 523.09 at 523-49. The Court finds that Bender has failed to meet his burden.

II. DISCUSSION

This court reviews de novo the bankruptcy court's grant of summary judgment. See In re Sierra Steel, Inc., 96 B.R. 271, 273 (9th Cir. BAP 1989); In re Marvin Properties, Inc., 854 F.2d 1183, 1185 (9th Cir.1988); see also Lerch v. Federal Land Bank, 94 B.R. 998, 1001 (N.D.Ill.1989) (district court is free to make independent examination and to substitute its judgment for that of the bankruptcy court on issues of law or mixed issues of law and fact).

In this case, Bender relies on the collateral estoppel effect of the Jury Verdict in the District Court Action in his motion for summary judgment. Therefore, as the bankruptcy court stated in its opinion, "Bender has the burden of introducing a record sufficient to reveal the controlling facts and pinpoint the exact issues litigated in the prior action." Tobman, 96 B.R. at 434 (quoting Hernandez v. City of Los Angeles, 624 F.2d 935, 937 (9th Cir.1980).

The doctrine of collateral estoppel, or issue preclusion, precludes a party from relitigating an issue that was "raised, litigated, and actually decided by a judgment in a prior proceeding, regardless of whether the two suits are based on the same cause of action." Balderman v. U.S. Veterans Admin., 870 F.2d 57, 62 (2d Cir. 1989). In Gelb v. Royal Globe Insurance Co., 798 F.2d 38, 44 (2d Cir.1986), cert. denied, 480 U.S. 948, 107 S.Ct. 1608, 94 L.Ed.2d 794 (1987), the Second Circuit succinctly summarized the four conditions that must be satisfied to invoke collateral estoppel:

(1) the issues in both proceedings must be identical, (2) the issue in the prior proceeding must have been actually litigated and actually decided, (3) there must have been a full and fair opportunity for litigation in the prior proceeding, and (4) the issue previously litigated must have been necessary to support a valid and final judgment on the merits.

It is well established that although the bankruptcy court must ultimately determine whether a debt is dischargeable pursuant to § 523 of the Bankruptcy Code ("Code"), "the doctrine of collateral estoppel may be invoked to bar relitigation of the factual issues underlying the determination of dischargeability." Tobman, 96 B.R. at 435 (quoting inter alia Carey Lumber Co. v. Bell, 615 F.2d 370, 377-78 (5th Cir.1980). Thus, if the decision in the prior action determined factual issues using standards identical to those of § 523, then collateral estoppel would preclude the...