Lenchner v. Korn (In re Korn)

• Decision Date: 14 April 2017
• Docket Number: Case No. 14–41173,Adv. Pro. No. 14–4408
• Citation: 567 B.R. 280
• Parties: IN RE: Sheldon M. KORN, Debtor. Lawrence C. Lenchner, et. al., Plaintiffs, v. Sheldon M. Korn, Defendant.
• Court: U.S. Bankruptcy Court — Eastern District of Michigan

567 B.R. 280

IN RE: Sheldon M. KORN, Debtor.Lawrence C. Lenchner, et. al., Plaintiffs,

v.Sheldon M. Korn, Defendant.

Case No. 14–41173

Adv. Pro. No. 14–4408

United States Bankruptcy Court, E.D. Michigan, Southern Division.

Signed April 14, 2017

Charles D. Bullock, Elliot G. Crowder, Stevenson & Bullock, P.L.C., Southfield, Michigan, Attorneys for Plaintiffs.

Debra Beth Pevos, Howard S. Sher, Jacob & Weingarten, P.C., Southfield, Michigan, Attorneys for Defendant.

OPINION REGARDING PLAINTIFFS' MOTION FOR SUMMARY JUDGMENT

Thomas J. Tucker, United States Bankruptcy Judge

This adversary proceeding is before the Court on Plaintiffs' motion for summary judgment (Docket # 27, the "Motion"),¹ seeking summary judgment on Counts IV through VIII of Plaintiffs' complaint.² These counts seek a determination that a debt of over $1.9 million to Plaintiffs, arising out of a state court judgment, is nondischargeable in Defendant's bankruptcy case under 11 U.S.C. §§ 523(a)(2)(A) (Counts IV (false pretenses), V (false representation), and VI (actual fraud)); 523(a)(4) (Count VII); and 523(a)(6) (Count VIII). Plaintiffs argue that they are entitled to judgment on these counts based on the doctrine of collateral estoppel.

The Court concludes that Plaintiffs are not entitled to summary judgment in any respect, on any count of their complaint. Plaintiffs' Motion will be denied in its entirety.

I. Facts

Plaintiff Lawrence Lenchner ("Lenchner") is the brother-in-law of Defendant Sheldon Korn ("Sheldon"). Prepetition, Lenchner was involved in the development and sale of real estate with some limited liability companies Lenchner had formed (the "Lenchner Entities"). Lenchner and the Lenchner Entities had a business relationship with Sheldon; Sheldon's wife, Gale Korn; and Sheldon's two daughters, Shauna Korn and Ashley Korn (collectively, the "Korns"); and the Korn Family Limited Partnership ("KFLP").³ The business relationship ended on a sour note in December 2002, when Lenchner ceased his association with the Korns.

A. The state court litigation

1. The complaint and counterclaim

The Korns and KFLP responded to the collapse of the business relationship by filing a complaint against Lenchner and the Lenchner Entities in the Circuit Court for the County of Charlevoix, Michigan, on January 15, 2003 (Case No. 03–1723–19–CB, the "State Court Lawsuit").⁴ The state court proceedings were extensive and lengthy, and the collateral estoppel issues discussed in this opinion require the Court to describe the state court proceedings in detail.

The complaint by the Kerns and KFLP in the State Court Lawsuit included the following counts:

• Count I—"Money Owing For Advances"

• Count III [sic]—"Conversion"

• Count IV—"Liability Under [Mich. Comp. Laws §] 600.2919a"

• Count V—"Misrepresentation (Fraudulent Or Innocent)"

• Count VI—"Silent Fraud"

• Count VII—"Bad Faith Promises"

• Count VIII—"Breach Of Fiduciary Duty"

• Count IX—"Tortious Interference"

• Count X—"Discharge/Termination In Violation of Public Policy, Or Alternatively, Violation of The Whistle–Blowers' Protection Act"

• Count XI—"Civil Conspiracy"

• Count XII—"Breach of Contract"

• Count XIII—"Promissory Estoppel"

• Count XIV—(not titled but alleging in relevant part, that "[a]s an alternative and/or in addition to Plaintiffs' right to recover under the foregoing Counts, Plaintiffs Sheldon and Gale Korn may be equitably entitled to own 50% of Business or of each Defendant, except for Defendant Lenchner."⁵

Lenchner and the Lenchner Entities responded to the state court complaint against them, in part, by filing counterclaims against the Korns and KFLP, alleging:

• Count I—"Conversion"

• Count II—"Civil Conspiracy to Commit Conversion"

• Count III—"Breach of Fiduciary Duty"

• Count IV—"Civil Conspiracy to Commit Breach of Fiduciary Duty"

• Count V—"Fraud"

• Count VI—"Silent Fraud"

• Count VII—"Innocent Misrepresentation"

• Count VIII—"Conspiracy to Commit Fraud, Silent Fraud and Innocent Misrepresentation"

• Count IX—"Promissory Estoppel"

• Count X—"Unjust Enrichment"

• Count XI—"Constructive Trust."⁶

The basic facts alleged by Lenchner and the Lenchner Entities in support of their counterclaims were that the Korns, individually and through KFLP, engaged in a common scheme to defraud Lenchner and the Lenchner Entities, under which the Korns and KFLP (1) misrepresented to Lenchner and the Lenchner Entities that they were spending money Sheldon withdrewfrom the bank accounts of the Lenchner Entities for business purposes only, when in fact they were draining such accounts for personal use; and (2) failed to disclose to Lenchner and the Lenchner Entities that they intended to loot, and were looting, the Lenchner Entities.⁷ Lenchner and the Lenchner Entities alleged further that they "reasonably relied upon the misrepresentations and fraudulent omissions made to them by Sheldon Korn" due to the family relationship between Lenchner and the Korns, and that Lenchner and the Lenchner Entities suffered damages as a result of the fraudulent scheme.⁸ Lenchner and the Lenchner Entities alleged that under their fraudulent scheme, the Korns and KFLP "drain[ed] over $700,000 from [the bank] accounts [of some of the Lenchner Entities] for personal use."⁹

2. The trial of the State Court Lawsuit

The state court conducted a 13–day jury trial in the State Court Lawsuit. Before jury deliberation began, both the Korns and KFLP on the one hand, and Lenchner and the Lenchner Entities on the other hand, dismissed their civil conspiracy claims against each other.

a. The jury instructions

After all of the evidence and arguments in the State Court Lawsuit were completed, the state court gave, in relevant part, the following instructions to the jury regarding the counterclaims of Lenchner and the Lenchner Entities.

I. Fraud and Misrepresentation

The state court's jury instruction regarding fraud was, in relevant part, the following:

To establish fraud, plaintiffs and counter-plaintiffs have the burden of proving each of the following elements by clear and convincing evidence:

A. The defendant or counter-defendant made a representation of a material fact.

B. The representation was false when it was made.

C. The defendant or counter-defendant knew the representation was false when it was made or that it was made recklessly, that is, without knowing whether it was true.

D. The defendant or counter-defendant made the representation with the intent that the plaintiff or counter-plaintiff would rely on it.

E. The plaintiff or counter-plaintiff did rely on the representation, and;

F. That the plaintiff or counter-plaintiff was damaged as a result of its reliance.¹⁰

ii. Silent fraud

The jury instruction regarding silent fraud was, in relevant part, as follows:

Each plaintiff and counter-plaintiff claims that a defendant or counter-defendant defrauded that plaintiff or counter-plaintiff by failing to disclose material facts. To establish this, each plaintiff and counter-plaintiff has the burden of proving each of the following evidence (sic) by clear and convincing evidence:

A. That the defendant or counter-defendant failed to disclose a material fact.

B. The defendant or counter-defendant had actual knowledge of the fact.

C. The defendant's or counter-defendant's failure to disclose the fact caused the plaintiff or counter-plaintiffs to have a false impression.

D. When the defendant or counter-defendant failed to disclose the fact, that defendant or counter-defendant knew the failure would create a false impression.

E. When the defendant or counter-defendant failed to disclose the fact, that defendant or counter-defendant intended that the plaintiff or counter-plaintiff rely on the resulting false impression.

F. That the plaintiff or counter-plaintiff relied on the false impression, and;

G. That the plaintiff or counter-plaintiff was damaged as a result of such reliance.¹¹

With respect to the reliance element of both fraud and silent fraud, the state court instructed:

Reliance. When I use the word relied, I mean the plaintiff or counter-plaintiff would not have entered into the agreement or continued the agreement if defendant or counter-defendant had not made the representation or promises, even if the representation or promises was not the only reason for the plaintiff or counter-plaintiff's action.¹²

iii. Unjust enrichment

The jury instruction for unjust enrichment was, in relevant part, as follows:

To establish a claim of unjust enrichment, the counter-plaintiffs must prove:

1. Receipt of a benefit by the counter-defendants from the counter-plaintiffs, and;

2. An inequity to the counter-plaintiffs resulting because of the retention of the benefit by the counter-defendants.

When ... unjust enrichment exists, the law operates to imply a contract in order to prevent the unjust enrichment. However, if you find that an actual express contract was entered into by the parties covering the same subject matter, you may not allow the counter-plaintiffs to recover under the theory of unjust enrichment.¹³

iv. Breach of fiduciary duty

The jury instruction regarding breach of fiduciary duty was as follows:

The plaintiffs and counter-plaintiffs have alleged that each has breached their fiduciary relationship with the other. Plaintiffs and counter-plaintiffs have the burden to prove:

1. The existence of a fiduciary relationship.

2. Defendant or counter-defendant's breach.

3. Plaintiff or counter-plaintiffs were damaged as a result of defendant or counter-defendant's breach.

Your verdict will be for the plaintiffs or counter-plaintiffs if you find that each of these elements has been proved. If you find for the plaintiffs, you must determine the amount of actual damages resulting from the defendants ['] or counter-defendants['], breach of their fiduciary duties that will place plaintiffs or counter-plaintiffs in the economic position that they would have enjoyed but for the breach. Your verdict will be for the defendants or counter-defendants if you find that the plaintiffs or counter-plaintiffs have failed

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