Lewis v. Russo (In re Russo)
| Decision Date | 04 January 2019 |
| Docket Number | Case No.: 15-24843 (SLM),Adv. Pro. No.: 16-01214 (SLM) |
| Parties | In re: MICHELANGELO O. RUSSO Debtor. TIMOTHY LEWIS, CYNTHIA WEBB, PATRICIA MURPHY, AND ROBERT HALTER Plaintiffs, v. MICHELANGELO O. RUSSO, Defendant. |
| Court | U.S. Bankruptcy Court — District of New Jersey |
NOT FOR PUBLICATION
Scott A. Zuber, Esq.
Michael R. Caruso, Esq.
CHIESA SHAHINIAN & GIANTOMASI PC
One Boland Drive
Counsel for Timothy Lewis, Cynthia Webb, Patricia Murphy, and Robert Halter
Alfredo Ramos, Jr., Esq.
TEMPIO & RAMOS, LLC
102 Belmont Avenue, 1st Floor
Garfield, New Jersey 07026
Counsel for Michelangelo O. Russo
This adversary proceeding challenges debtor Michelangelo Russo's ("Debtor") right to discharge a Final Judgment By Default entered pre-petition in the New Jersey Superior Court (the "Judgment")1 in favor of plaintiffs Timothy Lewis ("Mr. Lewis"), Cynthia Webb ("Ms. Webb"), Patricia Murphy ("Ms. Murphy"), and Robert Halter ("Mr. Halter") (collectively "Plaintiffs" and, with Debtor, the "Parties"). Besides being Debtor's creditors, Plaintiffs are former co-members with Debtor and investors in an LLC managed by Debtor. Plaintiffs seek to except the Judgment from discharge pursuant to section 523 of title 11 of the United States Code ("Bankruptcy Code") on the basis of: (a) false pretenses, false representation or actual fraud; (b) reasonable reliance on a materially false document produced with the intent to deceive regarding Debtor's financial condition; (c) fraud or defalcation by Debtor while acting in a fiduciary capacity; (d) embezzlement; (e) larceny; and (f) willful and malicious injury.2
Presently before the Court is Plaintiffs' Motion for Summary Judgment ("Motion").3 Plaintiffs argue summary judgment is warranted because Debtor is collaterally estopped from relitigating factual issues in this adversary proceeding that are identical to factual issues decided in favor of Plaintiffs by the Honorable John L. Langan, Jr. of the Superior Court of New Jersey, Bergen County (the "State Court") in the pre-petition state court action ("State Court Action") in which the Judgment was entered. In the alternative, Plaintiffs argue the undisputed facts support a finding of non-dischargeability on all six statutory bases. In opposition, Debtor asserts that, as a matter of New Jersey law, collateral estoppel does not apply because Plaintiffs obtained the Judgment by default. Therefore, the Judgment is not the result of actual litigation amongst the Parties. In the alternative, Debtor asserts that multiple disputed facts exist, barring an award of summary judgment and requiring a trial on the merits.
The Court reviewed the pleadings submitted and held oral argument. The following constitutes the Court's findings of fact and conclusions of law as required by Federal Rule of Bankruptcy Procedure 7052.
The Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334 and the Standing Order of Reference from the United States District Court for the District of New Jersey dated July 23, 1984 and amended September 18, 2012. This matter constitutes a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(I) and (J) because Plaintiffs object to Debtor's discharge and seek a determination that the Judgment is not dischargeable. Venue is proper under 28 U.S.C. §§ 1408(1) and 1409(a).
Plaintiffs' financial advisors, Hiro Wakatsuki ("Mr. Wakatsuki"), and his partner, Brad Katz ("Mr. Katz"), of Premier Wealth Advisors, an investment firm (collectively, the "Financial Advisors"), introduced the Plaintiffs to Debtor in early 2012.5 The Parties discussed Plaintiffs' potential investment in a real estate project referred to as the "Littleton" (the "Littleton Project")—a proposed mixed-use commercial and residential building to be built on Central Avenue in Newark, New Jersey (the "Littleton Property").6 As part of these discussions, Debtor provided Plaintiffs with an executive summary that contained architectural illustrations of the proposed development.7 Mr. Lewis and Mr. Wakatsuki also made on-site visits to the Littleton Property to evaluate Debtor's proposal.8
At some point during their discussions and prior to Plaintiffs' decision to lend, Plaintiffs were presented with a document entitled "Schedule C - Real Estate Owned" (the "Property Schedule").9 The Property Schedule lists 36 parcels of real property located in Jersey City, New Jersey (the "Whiton Properties") owned by Whiton Street Associates, LLC ("Whiton"). Debtor owns 100% of Whiton.10
The Property Schedule was created to assist those involved in the Littleton Project to determine "the properties which [Debtor] owned at the time, the date purchased, the amount, the market value, the current debt and the mortgage[s] [on]" them.11 The Property Schedule demonstrated the total equity of the Whiton Properties exceeded $5,800,000.12 However, the Property Schedule failed to disclose known penalties, interest, and tax debt on the Whiton Properties.13 The Property Schedule also failed to disclose that some of the Whiton Properties were facing foreclosure and Debtor was, at that time, actively involved in workout negotiations with Whiton's lenders.14
The Financial Advisors presented the Property Schedule to Plaintiffs. The facts are less clear as to who—Debtor or the Financial Advisors—prepared the Property Schedule. Mr. Lewis testified he understood Debtor created the Property Schedule.15 Debtor testified the Property Schedule was a "working document" between him and Mr. Wakatsuki.16 However, Debtor acknowledged the Property Schedule was based, at least in part, on information he provided.17 To the extent that its underlying information was not provided by him, Debtor believed the Financial Advisors gathered it from the public record.18 Debtor asserts the Financial Advisors were aware of the pending foreclosures, tax liens, and workout negotiations.19 Debtor asserts that his understanding was the Financial Advisors disclosed these facts to Plaintiffs.20 Debtor could notrecall whether he was present when these disclosures were made.21 Irrespective, Debtor acknowledged that he did not directly disclose these facts to Plaintiffs because no one explicitly asked him.22 Debtor further agreed the Property Schedule was "not accurate" because it failed to disclose the known liabilities and financial situation of the Whiton Properties.23
Mr. Lewis explained Plaintiffs believed that if they invested in the Littleton Project, they would at a minimum, recover the face value of their loan plus interest because if a default occurred, Debtor (as guarantor) possessed valuable assets available to satisfy their claims.24 Debtor never made any express oral statement to Plaintiffs about his net worth.25 The only financial information Plaintiffs reviewed related to Debtor was the information on the Property Schedule.26 Ultimately, all the Whiton Properties were foreclosed upon in 2013 and 2014.27
At some time during or after the Parties' discussions, Plaintiffs decided to invest in the Littleton Project. Debtor presented Plaintiffs with a participation letter, operating agreement, and proposed form of promissory note. Plaintiffs accepted and signed where necessary, as did Debtor.
To facilitate development, operation, and management of the Littleton Project, the Parties jointly created Littleton Associates, LLC (the "Company"). On February 23, 2012, the Parties (each as a "Member") entered into an operating agreement (the "Operating Agreement") for the Company.28 As set forth in the Operating Agreement, the Company was formed in accordance with the New Jersey Limited Liability Company Act. The Operating Agreement explicitly provided that all Members had a duty of undivided loyalty to the Company in all matters affecting the Company's interests.
The Operating Agreement sets forth Plaintiffs' membership and voting interests. The Operating Agreement indicates that: (i) Mr. Lewis held a ten percent (10%) membership and voting interest; (ii) Ms. Webb held a five percent (5%) membership and voting interest; and (iii) Ms. Murphy and Mr. Halter held a shared five percent (5%) membership and voting interest. PWA Real Estate LLC ("PWA"), an affiliate of the Financial Advisors, held another five percent (5%) membership and voting interest. The Operating Agreement is blank as to the amount of Debtor's membership and voting interests. However, no one disputes Debtor's membership interest in the Company was 47.5%, and the remaining 27.5% belonged to two other individuals, Pasquale Nocito and Dwight Walker (although their names are not contained anywhere in the Operating Agreement).29
The Operating Agreement provides that Members serve the company on a part-time, non-exclusive basis, without a salary. Members can seek reasonable reimbursement of expenses. However, any employment of a Member by the Company requires entry into a written employment agreement with the Company, with "reasonable compensation as determined by the Members."30 The Operating Agreement contained a specific provision in regard to the Debtor. It provides as follows:
Michelangelo Russo is hereby appointed the Member Manager of the Company. The Member Manager shall have duties in the day to day operations of the Company. The Member Manager has the power to perform all things in the normal course of business and for the usual operation of the Company without prior approval of the other Members. The Member Manager shall not be compensated for his services as Member Manager, but may be reasonably compensated as determined by the Members under a written employment agreement.31
Debtor never entered into a separate written employment agreement with the Company.
The Operating Agreement also authorized the entry...
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