In re Weinstein, Bankruptcy No. 892-83328-20. Adv. No. 892-8457.

• Decision Date: 12 October 1994
• Docket Number: Bankruptcy No. 892-83328-20. Adv. No. 892-8457.
• Citation: 173 BR 258
• Parties: In re Milton WEINSTEIN, Debtor. James F. FREER, as Guardian Ad Litem of Christina Kathleen Pafero, a Minor; Alan Marshall Jacobs, as Guardian Ad Litem of Nicole Jacobs, a Minor; Daniel Jacobs; Eric Stuart Linder; and Wachovia Bank of North Carolina, N.A., Successor Trustee for the Trusts Created Under Item Three of the Wills of Herbert Jacobs and Bella Lewan Jacobs, Plaintiffs, v. Milton WEINSTEIN, Defendant.
• Court: U.S. Bankruptcy Court — Eastern District of New York

173 B.R. 258 (1994)

In re Milton WEINSTEIN, Debtor.

James F. FREER, as Guardian Ad Litem of Christina Kathleen Pafero, a Minor; Alan Marshall Jacobs, as Guardian Ad Litem of Nicole Jacobs, a Minor; Daniel Jacobs; Eric Stuart Linder; and Wachovia Bank of North Carolina, N.A., Successor Trustee for the Trusts Created Under Item Three of the Wills of Herbert Jacobs and Bella Lewan Jacobs, Plaintiffs, v. Milton WEINSTEIN, Defendant.

Bankruptcy No. 892-83328-20. Adv. No. 892-8457.

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

October 12, 1994.

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I. Faison Hicks, Parker, Poe, Adams & Bernstein, Charlotte, NC, Perry M. Amsellem, James A. Janowitz, Pryor, Cashman, Sherman & Flynn, New York City, for plaintiffs.

Edward P. Frey, Joseph E. Macy, Speno Goldman Goldberg Steingart & Penn, P.C., Mineola, NY, for defendant/debtor.

Richard O'Connell, Chapter 7 Trustee, Yost & O'Connell, Whitestone, NY.

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

DECISION AND ORDER

ROBERT JOHN HALL, Bankruptcy Judge.

PRELIMINARY STATEMENT

Plaintiffs filed the within Adversary Proceeding seeking a determination that certain of Debtor's obligations are non-dischargeable for having been incurred through fraud or defalcation while Debtor was acting in a fiduciary capacity. Before the Court is Plaintiffs' motion for summary judgment ("Motion"); Debtor opposed the Motion and cross-moved for summary judgment in his favor.¹ The issues at bar are the collateral estoppel effect of prior litigation between the parties and the dischargeability of the debts deriving from the litigation, including Debtor's obligation to pay the judgment creditors' costs, expenses and attorneys' fees.

FINDINGS OF FACT AND RELEVANT BACKGROUND

The following background includes the Court's findings of uncontested facts, which derive in part from oral argument and papers filed with the Court, and in part from the holdings of prior courts.²

During the late 1970s, the parents of one of the Plaintiffs, Christina Kathleen Pafero, were convicted of certain serious felonies. Ms. Pafero thereafter began living in the home of her maternal grandparents, Herbert Jacobs and Bella Lewan Jacobs. Christina's mother was sentenced to two life terms in prison; her father was sentenced to death, and was executed by the State of Florida. In 1982, when Christina was eight, her grandparents were simultaneously killed in an airplane crash in New Orleans.

The wills of Herbert and Bella Lewan Jacobs each created a trust for the benefit of their children and grandchildren (the "Herbert Jacobs Trust" and the "Bella Lewan Jacobs Trust"; cumulatively, the "Trusts"). Debtor, who was an attorney at law but was in practice as a certified public accountant, was named trustee of the Trusts.

In 1986, one of the within Plaintiffs, James Freer, filed three petitions for relief in a North Carolina state court as Guardian-adlitem of Christina ("North Carolina Action").³ Through the North Carolina Action, Mr. Freer cumulatively sought to recover over $66,000 in commissions taken by Debtor as trustee, money damages, attorneys' fees and removal of Debtor as trustee of the Trusts. The grounds for removal of Debtor included allegations that he breached his fiduciary duties as trustee by taking excessive commissions and failing to provide trust beneficiary Christina Kathleen Pafero with certain discretionary payments.

The North Carolina Action culminated in a six day jury trial. The jury determined that Debtor, as trustee of the Trusts: abused his discretion and breached his fiduciary duties; made materially inadequate distributions; acted in his own interest and under an improper motive; paid himself commissions in excess of that allowed by law; breached his duty of loyalty; wasted assets of the Trusts by incurring tax penalties; and breached his fiduciary duty and duty of loyalty by paying his personal attorneys' fees with the Trusts' assets. Freer v. Weinstein, Index Nos. 86-SP-417, 86-SP-418 (Super.Ct., Mecklenburg Cty., N.C.), Judgment dated July 24, 1987 at 2-3 (Gray, J.). In furtherance of these jury findings, the North Carolina Superior Court ruled, upon "overwhelming" evidence, that Debtor: be removed as trustee of the Trusts; repay the $66,803.19 in commissions he received from the Trusts ($40,983.16 from the Herbert Jacobs Trust, $25,820.03 from the Bella Jacobs Trust); repay to each of the Trusts the $12,500 Debtor improperly removed for payment of his personal attorneys' fees incurred in the North Carolina Action; pay all tax penalties assessed to the Trusts; and pay all Plaintiffs' costs, expenses and reasonable attorneys' fees. Id. at 7-10. The North Carolina court additionally found that Debtor defended against Mr. Freer's petitions, "in bad faith and for his personal motives." Id. at 7. All liability was assessed against Debtor personally. Id. (citing N.C.Gen.Stat. §§ 6-31, 6-21). Debtor never satisfied any part of the North Carolina judgment.

Debtor then appealed to the North Carolina Court of Appeals for relief from the judgment. The judgment was affirmed in a reported decision rendered in 1988. Freer v. Weinstein (In re Wills of Jacobs), 91 N.C.App. 138, 370 S.E.2d 860 (N.C.Ct.App. 1988). In late 1988, the North Carolina Supreme Court denied Debtor's petition for discretionary review. Id., 323 N.C. 476, 373 S.E.2d 863 (1988).

The state trial court subsequently conducted hearings regarding Debtor's payment of his adversaries' costs, expenses and attorneys' fees, and on Mr. Freer's motion to find Debtor in contempt of certain orders. In June of 1989, the North Carolina Superior Court ordered Debtor to pay $268,334.64 to plaintiffs, representing their reasonable costs, attorneys' fees and expenses. Freer v. Weinstein, Index Nos. 86-SP-417, 86-SP-418 (Sup. Ct. Mecklenburg Cty., N.C.), Order dated June 7, 1989, at 3-4 (Gray, J.). Debtor, along with certain of his adversaries, appealed from this order. Freer v. Weinstein, Index Nos. 86-CVS-3913, 86-SP-417, 86-SP-418 (Sup. Ct. Mecklenburg Cty., N.C.), Order dated December 31, 1990, at 2 (Gray, J.). In July of 1989, the state court rendered an order finding Debtor in contempt. Id. Debtor appealed from this contempt order. Id. While the two orders were on appeal, Debtor petitioned to and was denied Discretionary Review by the North Carolina Supreme Court. Id. The North Carolina Court of Appeals then affirmed both of the orders that were on appeal. Id. Debtor petitioned for Discretionary Review of these decisions, and was again denied. Id. Additional costs were subsequently assessed against Debtor for his continued litigation and awarded to the plaintiffs in the amounts of $13,271.36, $26,351.12 and $7,100.82. Freer v. Weinstein, Index Nos. 86-CVS-3913, 86-SP-417, 86-SP-418 (Sup. Ct. Mecklenburg Cty., N.C.), Orders dated December 31, 1990, January 5, 1991 and January 18, 1991 (Gray, J.).

The aggregate sum imposed against Debtor pursuant to all litigation in North Carolina was $406,861.13. This total was comprised of $91,803.19 to be returned to the Trusts for reimbursement of funds improperly withdrawn, and $315,057.94 to be "taxed as costs" to Debtor to reimburse plaintiffs for their reasonable costs, expenses and attorneys' fees.⁴

To obtain collection, the plaintiffs then pursued Debtor to New York. In 1992, plaintiffs domesticated all North Carolina Action judgments against Debtor in the Supreme Court of New York, in both New York and Nassau Counties. See Freer v. Weinstein, Index Nos. 01137/89 (N.Y. Sup. Ct., N.Y. Cty.); id., Index Nos. 9970/92, 9971/92, 9972/92, 9973/92 (N.Y. Sup. Ct., Nass. Cty.). Pursuant to a related action in New York, the New York Supreme Court issued a restraining order against Debtor prohibiting him from transferring any property in which he had an interest ("Restraining Notice").⁵ More litigation ensued. The New York Supreme Court then found that Debtor "refused, failed and willfully neglected to obey the Restraining Notice, and that the conduct of Debtor was calculated to and actually did impede and prejudice the rights and remedies of the plaintiffs." Freer v. Weinstein, Index No. 5750/89 (N.Y. Sup. Ct., Nass. Cty.), Final Order of Contempt, dated March 23, 1992, at 3 (Roncallo, J.). This decision was itself a Final Order of Contempt against Debtor ("Contempt Order"). Once again, Debtor was ordered to pay all his adversaries' costs and attorneys' fees. Id. For his failure to comply with the Contempt Order, Debtor was later arrested and incarcerated.

On May 12, 1992, the New York Supreme Court awarded the plaintiffs another order: (i) voiding Debtor's prior transfer of real property⁶ to his wife, Ann Weinstein; (ii) restraining Debtor, both pending the proceeding and permanently, from conveying or otherwise disposing of any real property; (iii) granting the plaintiffs reasonable attorneys' fees pursuant to section 276-a of the New York Debtor and Creditor Law, and additional costs and allowances pursuant to rules 8303(a)2 and (a)6(b) of the New York Civil Practice Law and Rules. Wachovia Nat'l Bank & Trust Co., N.A. v. Weinstein, Index No. 6975/92 (N.Y. Sup. Ct., Nass. Cty.), memorandum dated May 12, 1992, at 1 (Roncallo, J.). The amount of attorneys' fees awarded by the New York Supreme Court was never reduced to a sum certain. The attorneys representing Plaintiffs in the within Adversary Proceeding have filed affidavits in which they attest that the fees amount to $134,823.16.⁷

On June 12, 1992, shortly after Debtor's incarceration for violation of the Contempt Order, Debtor filed a voluntary petition for bankruptcy relief under chapter 7 of title 11, United States Code ("Bankruptcy Code" or "Code"). Debtor's appeals from certain (or all) of the New York court decisions were stayed by his bankruptcy filing. 11 U.S.C. § 362(a) (199...