Indo-Med Commodities, Inc. v. Wisell (In re Wisell)

• Decision Date: 16 August 2011
• Docket Number: Bankruptcy No. 810–78537–reg.,Adversary No. 811–08163–reg.
• Citation: 494 B.R. 23
• Parties: In re John Thomas WISELL, Debtor. Indo–Med Commodities, Inc., Plaintiff, v. John Thomas WISELL, Defendant.
• Court: U.S. Bankruptcy Court — Eastern District of New York

494 B.R. 23

In re John Thomas WISELL, Debtor.Indo–Med Commodities, Inc., Plaintiff,

v.John Thomas WISELL, Defendant.

Bankruptcy No. 810–78537–reg.

Adversary No. 811–08163–reg.

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

Aug. 16, 2011.

Benjamin S. Kaplan, John M. Brickman, Ackerman, Levine, Cullen, et al., Great Neck, NY, for Plaintiff.

Marc A. Pergament, Weinberg Gross & Pergament LLP, Garden City, NY, for Defendant.

MEMORANDUM DECISION

ROBERT E. GROSSMAN, Bankruptcy Judge.

Before the Court is a motion for summary judgment (“Motion”) by the Plaintiff, Indo–Mediterranean Commodities, Ltd. (“IMUK” or the “Plaintiff”), seeking the entry of judgment that the debt owed to it by the Debtor-defendant, John Thomas Wisell (the “Debtor”) is non-dischargeable under 11 U.S.C. §§ 523(a)(2)(A), (a)(4) and (a)(6). The Plaintiff argues that by giving as it must full force and effect to the findings of the Supreme Court of the State of New York (“the State Court”) in support of a pre-petition judgment (“Judgment”) in the amount of $2,927,697.01, and applying the doctrines of res judicata and collateral estoppel, this Court has sufficient basis to grant the Motion. The Motion is unopposed.

This case requires a determination of how a bankruptcy court applies the doctrine of collateral estoppel and/or res judicata in an action seeking to deny a debtor a discharge pursuant to Section 523(a) of the Bankruptcy Code. The Court does not question that it is bound by the doctrine of res judicata, or claim preclusion, from looking beyond the Judgment which establishesthat there is a debt owed by the Debtor to the Plaintiff in the amount of $2,927,697.01. However, while res judicata is applicable in establishing the existence of the debt the Court should not look to res judicata as the basis to determine a cause of action which arises exclusively under the Bankruptcy Code such as an action pursuant to Section 523(a).

In order for a plaintiff to utilize the findings of a non-bankruptcy court in support of a Section 523(a) cause of action, the bankruptcy court must determine the applicability of collateral estoppel. Whether it is at the conclusion of trial or on a summary judgment determination, in order to enter a Section 523(a) judgment against a debtor the Court must find that all of the necessary elements of Section 523(a) have been proven by a preponderance of the evidence. Grogan v. Garner, 498 U.S. 279, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991). When relying on collateral estoppel and a pre-bankruptcy judgment against the debtor as a basis for Section 523 relief, the bankruptcy court must be able to point to clear and unequivocal factual and/or legal findings in the pre-petition judgment which would satisfy the requisite elements of Section 523(a). As this Court has previously stated in this context, it “will not string together sentences ... so as to cobble together a finding” under Section 523(a). Sarasota CCM, Inc. v. Kuncman (In re Kuncman), No. 8–10–08306–reg, 2011 WL 1376780, at *6 (Bankr.E.D.N.Y. Apr. 12, 2011).

In this case the Debtor has offered no objection to the relief sought in the Motion. Pursuant to Federal Rule of Civil Procedure 56(e), the Debtor's failure to oppose the Motion allows the Court to consider the findings of the State Court in support of the Judgment to be undisputed. Therefore collateral estoppel is applicable and the Court will recognize the findings of the State Court. However, the doctrine of collateral estoppel cannot be employed by the Plaintiff in a manner so as to limit the obligation of this Court to undertake an independent analysis of whether those findings are sufficient to support the granting of the requested relief under Section 523(a) in the context of a summary judgment motion.

After giving collateral estoppel effect to the findings of the State Court in support of the pre-petition Judgment and having applied those findings to the causes of action alleged under Section 523(a), the Court finds that judgment should enter in favor of the Plaintiff, but only in part. The findings by the State Court were insufficient to establish that the Debtor acted with the fraudulent intent required to satisfy certain parts of Section 523(a). However, the Court will enter judgment of non-dischargeability in favor of the Plaintiff for false pretenses under Section 523(a)(2)(A), defalcation while acting in a fiduciary capacity under Sections 523(a)(4), and willful and malicious conduct under Section 523(a)(6).

Facts

In February 2000, the Debtor, John T. Wisell, Sr., filed a complaint in the State Court against Indo–Mediterranean Commodities, Ltd. (“IMUK” or “Plaintiff”), Philmanex Inc. and Shabbir Abidali (“Abidali”), individually and in his capacity as sole director of IMUK. In the complaint, the Debtor alleged that from 1986 through 1995, he was a New York based sales representative for the Plaintiff, IMUK, and was paid commissions in connection with his sales. In 1995, IMUK proposed to the Debtor a profit sharing arrangement. According to the Debtor, he did not accept that arrangement. In the complaint, the Debtor sought damages in an amount totaling $605,000 for the defendants' failure to pay the Debtor for his services from 1995 through 1998, failure to repay advances the Debtor made on the IMUK's behalf, and diversion of profits from IMUK to Philmanex. IMUK and the other defendants in that action filed counterclaims alleging that the Debtor was a fiduciary of IMUK's wholly owned subsidiary, Indo–Med USA (“IMUSA”), and that the Debtor breached that fiduciary duty. The counterclaims also asserted claims against the Debtor for tortious interference with contract, diversion of corporate opportunity, breach of contract, misappropriation of IMUK trademarks and logo, violation of the Lanham Act (15 U.S.C. §§ 1051 et seq.) and New York General Business law §§ 133 and 360–1.

After a lengthy trial of the matter, on May 2, 2006, the State Court issued a 50–page decision setting forth detailed findings of fact and conclusions of law. Consistent with the decision a judgment was entered against the Debtor in favor of IMUK, the Plaintiff herein, in the amount of $2,927,697.01. The findings of fact and conclusions of law of the State Court decision (“Decision”) and a subsequent decision on a motion for reconsideration (“Second Decision”), are summarized below.

IMUK is a corporation formed under the laws of the United Kingdom. IMUSA is a wholly-owned subsidiary of IMUK, and was doing business in the United States as a food broker during the time period in question. Prior to 1995, the Debtor was working as an independent broker for IMUSA. In August 1995, IMUSA entered into an oral joint venture agreement with the Debtor and the Debtor's corporation, Scala Wisell Co., Inc. (“Scala Wisell”) pursuant to which agreement the Debtor would be the president of IMUSA. He would receive no salary from IMUSA but would receive a one-third share of all profits and bear a one-third responsibility for all losses. IMUK would share the other two-thirds of profits and losses. The Debtor was responsible for developing the business of IMUSA and selling its products but he was to have no direct contact with suppliers and no involvement with shipping.

According to the State Court's recitation of the facts, it appears that the joint venture agreement was honored more in the breach than in the observance. There were constant disagreements about the extent of the Debtor's authority to make deals and use IMUSA moneys. Despite the terms of the joint venture agreement, the Debtor directly contacted suppliers and made unauthorized purchases from suppliers that IMUK believed were over market value. The Debtor told IMUK that he needed access to money to make sales and was given a bank account with a $5,000 cap, which he often exceeded. Nonetheless, the joint venture agreement and its accompanying fiduciary duties were valid and in force beginning in late 1995 or early 1996.

Unbeknownst to IMUK or IMUSA, in July 1998, the Debtor incorporated an entity called Indo–Med North America (“IMNA”). The Debtor transferred the inventory of IMUSA to IMNA as of January 1999 and did business as IMNA without the knowledge or consent of IMUK. The Debtor concealed the creation of IMNA from IMUK and continued to use IMUSA stationery when conducting IMNA business. The Debtor diverted money from IMUSA to Scala Wisell for “undocumented expenses, modifications and renovations at the Scala Wisell facility.” The Debtor promoted IMNA at food conventions and meetings with suppliers at the expense of IMUSA. The Debtor also changed the name on the corporate credit card from IMUSA to IMNA. He used new IMNA letterhead with the IMUSA/IMUK logo, slogan and contact information, and attempted to trademark the Indo–Med logo in January 2000 “falsely stating that it first had been used in 1999.” Furthermore, the Debtor authorized the use of IMUK and/or IMUSA funds for salaries paid to his family and for personal expenses (such as baby clothing, toys, and family travel) while failing to keep proper financial records. Despite the Debtor's actions, at a meeting with IMUK's principal, Abidali, in January 1999, the Debtor failed to disclose to IMUK that he had formed a new, competing, company.

The Debtor concealed IMNA from IMUK, until July 1999. When the Debtor ran out of IMUSA letterhead, he began sending all correspondence with IMUK on Scala Wisell letterhead. It was not until July 1999, when one of IMUSA's employees submitted his “resignation from Indomed North America” that officers of IMUK were made aware of the Debtor's actions. It appears that the relationship among the parties ceased at that point, but that point is clear from the decision. The Debtor filed suit against the Plaintiff in February 2000.

The State Court made a number of findings regarding the Debtor's liability to IMUK. First, the State Court found that the Debtor owed a fiduciary duty to IMUSA as...