Palisades Tickets, Inc. v. Daffner (In re Daffner)

• Decision Date: 13 January 2020
• Docket Number: Adv. Pro. No. 18-08143-reg,Case No. 8-18-75747-reg
• Citation: 612 B.R. 630
• Parties: IN RE: Gerald N. DAFFNER, Debtor. Palisades Tickets, Inc., Plaintiff v. Gerald N. Daffner, Defendant.
• Court: U.S. Bankruptcy Court — Eastern District of New York

612 B.R. 630

IN RE: Gerald N. DAFFNER, Debtor.Palisades Tickets, Inc., Plaintiff

v.Gerald N. Daffner, Defendant.

Case No. 8-18-75747-reg

Adv. Pro. No. 18-08143-reg

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

Filed January 13, 2020

Owen Wincig, Wincig & Wincig, Esq., New York, NY, for Plaintiff.

Roy J. Lester, Garden City, NY, for Defendant.

Decision After Trial

Robert E. Grossman, United States Bankruptcy Judge

Before the Court is an adversary proceeding commenced by Palisades Tickets, Inc. (the "Plaintiff") seeking a judgment awarding $238,518.07 in damages for actual and constructive fraud under the New York Debtor and Creditor Law (the "DCL") §§ 270 - 281. The Plaintiff also asks the Court to find that the Plaintiff's claim of $238,518.07 against Gerald N. Daffner (the "Debtor" or the "Defendant") is non-dischargeable under §§ 523(a)(4) and (6) of the Bankruptcy Code (the "Code"). The Defendant is an attorney licensed to practice in New York who represented Michael Petrillo, Helane Karon David, and their businesses, Trinity Tickets Tours Travel Ltd, Triple Crown Entertainment LLC, Mainline Consultants Ltd, and Event Corporation (the "Judgment Debtors") in a state court action by the Plaintiff against the aforementioned individuals and entities which resulted in the entry of a judgment. The Defendant did not represent the Judgment Debtors in the litigation but was retained by them with regard to post-judgment matters. The Plaintiff alleges that the Defendant participated with his clients in a scheme to prevent the Plaintiff from collecting from the Judgment Debtors the money owed to the Plaintiff. The Defendant acknowledges that he received money from his clients from bank accounts they closed. He also acknowledges that he deposited the funds he received into his IOLA account. The Defendant admits that at the direction of his client, he disbursed funds to them, to third parties and to himself from the IOLA. The Defendant maintains that at all times he was acting in accordance with his clients' instructions and in a manner consistent with his prior practice with Helane Karon David and Michael Petrillo.

The Plaintiff's standing to bring the non-dischargeability claims in this action is predicated on its status as a creditor of the Defendant. The Plaintiff does not allege that the Defendant breached a contract with the Plaintiff or committed a tortious act with respect to the Plaintiff. In fact, the Plaintiff fails to allege any direct relationship with the Defendant that caused the Plaintiff to incur damages. The Plaintiff argues that its standing as a creditor arises due to the Defendant's violation of a state statute. According to the Plaintiff, the Defendant was a transferee of fraudulent conveyances from his clients, the Judgment Debtors, in violation of sections 270 - 281 of the DCL. Under the Plaintiff's analysis, the fact that the Defendant received the transfers and deposited the funds into his IOLA while acting as counsel to the Judgment Debtors is irrelevant. However, the record before the Court establishes that the Defendant acted at all times as an attorney on behalf of his clients, which is pivotal in determining whether the Defendant violated the relevant DCL sections relied upon by the Plaintiff. The bulk of the transfers made by the Judgment Debtors remained in the Defendant's IOLA, and were subsequently transferred to third parties or back to the Judgment Debtors at the express direction of the Judgment Debtors. Under applicable New York case law, an attorney who accepts funds from a client but does not exercise dominion and control over those funds is not a transferee for the purposes of the DCL. Because there is no evidence to support a finding that the Defendant had control over the disposition of these funds in the IOLA, the Defendant was not a statutory transferee of any fraudulent transfers under New York law. With respect to the portion of funds the Defendant did receive from the IOLA as payment for his legal services and as reimbursement for making transfers from his personal account by mistake, the Plaintiff has failed to establish on a prima facie basis that these transfers are recoverable as either intentional or constructive fraudulent conveyances under the DCL.

Even if the Court were to determine that the Plaintiff is a creditor of the Defendant, the liability resulting from such a finding against the Defendant would be dischargeable, as the Plaintiff has failed to establish a prima facie case with respect to sections 523(a)(4) and (a)(6). Courts narrowly construe non-dischargeability claims, as the consequences to the debtor are severe. As for § 523(a)(4), the Plaintiff has failed to plead or prove its case. The Plaintiff does not allege that the Defendant acted as its fiduciary at any point. The record at trial is equally deficient regarding the elements of § 523(a)(4) with respect to larceny and embezzlement, as there is no evidence that the Defendant stole or misappropriated any funds.

The Plaintiff also failed to establish the elements of § 523(a)(6). A plaintiff must prove that the debt it seeks to exempt from discharge arose from the Defendant's willful and malicious conduct. The record at trial does not reflect that in receiving and disbursing the Judgment Debtors' funds on their behalf, the Defendant intended to cause injury to the Plaintiff, specifically to thwart the Plaintiff from satisfying its judgment against the Judgment Debtors. The Defendant, as an attorney, was obligated to abide by the Judgment Debtors' decisions concerning his representation and to distribute funds that the Defendant held on behalf of the Judgment Debtors as they directed. The Plaintiff urges the Court to find that the Defendant's conduct was not motivated by his duties to his clients and was instead deliberately designed to hurt the Plaintiff. The Plaintiff's failure to obtain testimony from any of the Judgment Debtors leaves the Court with no avenue to verify whether the purported scheme to injure the Plaintiff ever existed. The Plaintiff's failure to establish the existence of the scheme precludes a finding that the Defendant acted in pursuit of the alleged scheme's objective. The record before the Court establishes that the Defendant acted as an attorney in compliance with his clients' wishes, and therefore there is no evidentiary basis to support a finding that the Defendant acted wrongfully and without just cause as required pursuant to section 523(a)(6). For these reasons, and as more fully set forth below, the complaint shall be dismissed in its entirety.

Procedural History

The Defendant filed a petition for relief under Chapter 7 of the Bankruptcy Code on August 24, 2018 (the "Petition Date") as a no-asset case. The Plaintiff filed a proof of claim in the amount of $238,518.07 on October 12, 2018. The Defendant received a discharge under 11 U.S.C. § 727 on November 28, 2018. The Chapter 7 Trustee filed a report of no distribution on January 28, 2019.

The Plaintiff filed this adversary complaint on October 25, 2018 alleging that the Defendant's debt to the Plaintiff is non-dischargeable under 11 U.S.C. §§ 523(a)(4) and (6) and seeking to recover transfers made for actual and constructive fraud under New York Debtor and Creditor Law §§ 270 - 281 in the amount of $238,518.07 (the "Complaint").¹ The Defendant filed an answer on November 21, 2018. The parties filed a Joint Pre-Trial Memorandum containing twenty-seven exhibits on October 7, 2019, and a trial was held on October 15, 2019. The Defendant testified as a witness. None of the Judgment Debtors appeared as witnesses. At the conclusion of the trial, the matter was marked submitted.

Facts²

The Debtor is an attorney who was admitted to practice law in 1960. He represented the Judgment Debtors in connection with a state court lawsuit filed by the Plaintiff. The Defendant did not represent the Judgment Debtors during the course of the lawsuit itself but did so in the subsequent challenge to the judgment entered against them and in connection with the Plaintiff's attempts to satisfy the judgment.

The State Court Action

The Plaintiff commenced an action against the Judgment Debtors for breach of a joint venture agreement, breach of contract, and an accounting with respect to the sale of show tickets on December 11, 2006 in the Supreme Court, State of New York, County of New York under Index Number 604228/06 (the "State Court Action").³ Attorney Henry Gonzalez represented the Judgment Debtors at that time. The Judgment Debtors, through Mr. Gonzalez, agreed to pay $300,000 in installment payments in settlement of the State Court Action in a stipulation filed on February 8, 2007. In the event of a default, the Judgment Debtors stipulated to entry of a judgment in the amount of $450,000 with interest from September 15, 2006. The Judgment Debtors defaulted on the stipulation in March 2007. Judgment was subsequently entered in favor of the Plaintiff on May 17, 2007 in the sum of $448,644.45 (the "Judgment"). The Plaintiff served restraining notices and subpoenas to take deposition on Michael Petrillo and Helane Karon David on June 5, 2007.

The Judgment Debtors retained the Defendant as their counsel on June 25, 2007. The Defendant testified that there was no written retainer agreement. On July 10, 2007, a Sheriff's Notice of Levy and Sale was issued to the Judgment Debtors for $481,910.67. The Defendant appeared in the State Court Action on July 18, 2007 to move to vacate the Judgment. The motion to vacate was settled on August 9, 2007 by a so ordered stipulation and deferral agreement, filed August 16, 2007, where immediate collection of the Judgment was deferred, and the Judgment Debtors agreed to pay the Plaintiff $350,000 with interest from March 1, 2007 in installment payments ranging from $10,000 to $30,000 (the "So Ordered Stipulation and Deferral Agreement"). The Judgment Debtors paid the installments required by the So Ordered Stipulation...