In re Weiss
| Decision Date | 23 June 1999 |
| Docket Number | Bankruptcy No. 98-B-40935 (JHG). Adversary No. 98-9131A. |
| Citation | 235 BR 349 |
| Parties | In re Howard J. WEISS, Debtor. Charles Nissan, Leo Abramovich, Herbert Schneider, Menachem Darwish, and Ammon Gillad, Plaintiffs, v. Howard J. Weiss, Defendant. |
| Court | U.S. Bankruptcy Court — Southern District of New York |
COPYRIGHT MATERIAL OMITTED
Forchelli, Schwartz, Mineo, Carlino & Cohn, LLP, Mineola, New York, by Matthew G. Roseman, for plaintiffs.
Charles R. Cuneo, Bayside, New York, for defendant.
DECISION AFTER TRIAL
Charles Nissan, Leo Abramovich, Herbert Schneider, Menachem Darwish and Ammon Gillad (the "Plaintiffs") brought this adversary proceeding against Howard J. Weiss (the "Debtor"), pursuant to § 523(a)(2)(A) and (a)(4) of the United States Bankruptcy Code (the "Code") in order to contest the dischargeability of a Texas judgment debt on the grounds that the debt resulted from the Debtor's fraud and a breach of his fiduciary duties.1 The Debtor defended on the grounds that the question of whether or not the Debtor had committed fraud was not fully and fairly litigated in the Texas action and therefore was not entitled to full faith and credit in this Court. For the reasons set forth below, the Plaintiffs' prayer for relief is GRANTED in part and DENIED in part.
In 1991, the Plaintiffs and two other entities commenced an action in the District Court of Harris County, Texas, 333rd Judicial District (the "Texas Action"), against the Debtor and Dov Avni Kaminetzky.2 In the Texas Action, Plaintiffs alleged fraud, negligent misrepresentation, constructive fraud, DTPA,3 conversion, contribution, breach of contract, conspiracy, a shareholders' claim, damages and rescission, and asked for attorneys' fees.
For more than five years the parties engaged in extensive pre-trial litigation. During this time depositions were taken, documents exchanged, and motions made. Twice, the Debtor unsuccessfully attempted to remove this action to the United States District Court in Texas.
On November 4, 1996, the Texas Action was called for trial. The Court asked the parties if they were ready to proceed. Plaintiffs answered in the affirmative. The Debtor and Kaminetzky indicated that they were not ready to proceed and unsuccessfully moved for a continuance. Then the Court and the Debtor's attorney, Mr. Whalen, had the following exchange:
(T. 59-60)4
Thereafter, Judge Henry Dalehite issued a "Final Judgment" (the "Texas Judgment") on November 25, 1996. The Texas Judgment provides that the Debtor confessed and agreed to judgment in favor of the Plaintiffs in the sum of $325,000 plus interest for actual damages and $79,000 in attorneys fees.
Judge Dalehite also issued, roughly contemporaneously with the issuance of the Texas Judgment, "Findings of Fact and Conclusions of Law" dated January 23, 1997. In the Findings of Fact and Conclusions of Law, Judge Dalehite made specific findings of fact regarding the allegations of the Plaintiffs in the Texas Action and drew legal conclusions based upon those findings. He found and concluded:
Findings of Fact and Conclusions of Law at 2-10. Debtor did not appeal and his time to do so has long ago run.
The Plaintiffs then brought an action in the New York State Supreme Court to enforce the Texas Judgment pursuant to the Full Faith and Credit Clause of Article IV, Section 1 of the United States Constitution. That action, which was contested by the Debtor, was decided in the Plaintiffs' favor on June 20, 1997.5
On February 11, 1998, Debtor filed a voluntary petition pursuant to chapter 7 of the Code in this Court. Plaintiffs then commenced this adversary proceeding pursuant to § 523(a)(2)(A) and 523(a)(4) of the Code to contest the dischargeability of the debt owed to the Plaintiffs pursuant to the Texas Judgment.
Each side put on one witness. Dr. Menachem Darwish, one of the Plaintiffs, testified first. He testified that he first became acquainted with the Debtor in 1988 or 1989 when the Debtor was soliciting investors for a car wash in Texas. Darwish testified that he, along with several others, invested in the car wash. Thereafter, he found that the car wash was poorly run and he began to suspect that profits from the car wash were being siphoned-off. He retained an attorney in Texas and began to investigate the finances of the car wash. He found that the purchase price of the car wash was less than he had been told when he made his initial investment. In addition, he testified that he was a personal guarantor of the bank loan that was used to finance the purchase of the car wash and that he, along with the other investors, was required to pay the bank $10,000 each for monies owed the bank by the car wash. He then testified that in 1991 he and the other Plaintiffs brought the Texas Action, which was premised on several theories of recovery, including fraud.
The other witness was the Debtor. He testified that he told the investors that the full amount of money being paid was for the purchase of the car wash and for certain improvements to the facility. Specifically, he testified that the purchase price for the car wash itself was $600,000 and that $135,000 was earmarked for improvements creating a total purchase price of $735,000. In support of his contention that the Plaintiffs were fully aware of the intended use of the $735,000, Debtor offered a document entitled "Earnest Money Contract" into evidence. This document laid out the total purchase price and a breakdown of how the money was going to be used. The "Earnest Money Contract," however, was only signed by the Debtor and Kaminetzky and not by any of the Plaintiffs. Furthermore, the Debtor could produce no other document to substantiate his contention that the Plaintiffs were aware of the finances of the car wash investment.
The testimony was not dispositive of the issues before me.
The plaintiffs have the burden of proof. See Grogan v. Garner, 498 U.S. 279, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991) (). They have not met that burden by in court testimony before me. The Plaintiffs' case, therefore, succeeds or fails solely on the preclusive effect of the Texas Judgment.
I must address the nature of the Texas Judgment and its preclusive effect, if any, under Texas law. Next, I must determine whether the entry of a confessed judgment in a Texas state court proceeding, in which several causes of action were alleged, including fraud, precludes the Debtor from presenting any evidence in a subsequent Bankruptcy Court action determining the dischargeability of the judgment debt. Thereafter, I can make an ultimate determination as to whether the debts at issue are dischargeable.
As a general rule, the final judgments of state courts must be given full faith and credit by Bankruptcy Courts. The Full Faith and Credit Act, which controls the effect of...
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