Pappas v. Gucciardo (In re Gucciardo)

• Decision Date: 20 November 2017
• Docket Number: Case No. 1–14–42483–cec,Adv. Proc. No. 1–15–01049–cec
• Parties: IN RE: Jennifer A. GUCCIARDO aka Jennifer Dilandro, Debtor. George Pappas and Proactive Dealer Services, Inc., Plaintiffs, v. Jennifer A. Gucciardo, Defendant.
• Court: United States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — Eastern District of New York

577 B.R. 23

IN RE: Jennifer A. GUCCIARDO aka Jennifer Dilandro, Debtor.

George Pappas and Proactive Dealer Services, Inc., Plaintiffs,

v.Jennifer A. Gucciardo, Defendant.

Case No. 1–14–42483–cec

Adv. Proc. No. 1–15–01049–cec

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

Signed November 20, 2017

Entered November 21, 2017

Jeffery Herzberg, Esq., Zinker & Herzberg, LLP, 300 Rabro Drive, Suite 114, Hauppauge, New York 11788, Attorney for Plaintiffs

Christi M. Gelo, Esq., The Law Office of Christi M. Gelo, P.C., 135–24 Hillside Avenue, Richmond Hill, New York 11418, Attorney for Defendant

DECISION AFTER TRIAL

CARLA E. CRAIG, Chief United States Bankruptcy Judge

This matter comes before the Court following a trial in this adversary proceeding, in which Plaintiffs, George Pappas and Proactive Dealer Services, Inc. (the "Plaintiffs") seek a determination that the debt created by a state court judgment issued in their favor against the debtor, Jennifer A. Gucciardo (the "Debtor"), is non-dischargeable under §§ 523(a)(4) and 523(a)(6).¹

For the reasons set forth below, the Plaintiffs are not entitled to a judgment of non-dischargeability.

JURISDICTION

This Court has jurisdiction of this adversary proceeding pursuant to 28 U.S.C. § 1334(b) and the Eastern District of New York standing order dated August 28, 1996, as amended by order dated December 5, 2012. This matter is a core proceeding under 28 U.S.C. § 157(b)(2)(I) and Federal Rule of Bankruptcy Procedure 7001(6). This decision constitutes the Court's findings of fact and conclusions of law to the extent required by the Federal Rule of Bankruptcy Procedure 7052.

BACKGROUND

The following facts are undisputed.

The Debtor filed a petition for relief under Chapter 7 of the Bankruptcy Code on May 16, 2014 (the "Chapter 7 case"). (Case No. 14–42483–CEC, ECF No. 1).² The Debtor had previously filed a petition for relief under Chapter 13 of the Bankruptcy Code on March 29, 2012, (the "Chapter 13 case"). (Case No. 12–42227–CEC, ECF. No. 1.) The Chapter 13 case was dismissed on November 30, 2012. (Case No. 12–42227–CEC, ECF No. 82.)

The Debtor was the sole shareholder, president, and director of Keystone Equity Group d/b/a Keystone Auto Sales ("Keystone"). (Pls.' Proposed Joint Pre–Trial Order (hereinafter "Pls. JPTO") ¶ 5d, ECF No. 22; Def.'s Proposed Joint Pre–Trial Order (hereinafter "Def. JPTO") ¶ 5d, ECF No. 23.) Keystone operated as a car wholesaler in the State of New York based on a license issued in the State of New Jersey in 2005. (Pls. JPTO ¶ 5m, ECF No. 22; Def. JPTO ¶ 5n, ECF No. 23.) The Debtor's husband, Thomas Gucciardo ("Thomas"), operated the business (Pls.' Ex. 1, at 1), while the Debtor was Keystone's bookkeeper. Id. Thomas was convicted for violations of the federal securities laws prior to the formation of Keystone (Pls. JPTO ¶ 5g, ECF No. 22; Def. JPTO ¶ 5g, ECF No. 23), and for motor vehicle theft in 2011. (Pls. JPTO ¶ 5j, ECF No. 22; Def. JPTO ¶ 5k, ECF No. 23.)

George Pappas ("Pappas") is the president of Proactive Dealer Services ("Proactive"), a business which provides loans to car wholesalers like Keystone, for the purchase of vehicles. (Pls. JPTO ¶ 5h, 5n, ECF No. 22; Def. JPTO, ¶¶ 5i, 5o, ECF No. 23.) In Keystone's arrangement with Proactive, Proactive loaned money to Keystone to buy cars, and upon sale of each car, Keystone was required to repay the amount borrowed from Proactive to purchase the car. (Pls. JPTO ¶ 5o, ECF No. 22; Def. JPTO ¶ 5p, ECF No. 23.)

For approximately five years, Keystone was "fairly current" in repayment of its obligations to Proactive. (Pls. JPTO ¶ 5p, ECF No. 22; Def. JPTO ¶ 5q, ECF No. 23.) Starting in or about November of 2009, however, Keystone's loan repayment checks to Proactive were dishonored with notations of either "stopped payment" or "returned for insufficient funds". (Pls. JPTO ¶ 5q, ECF No. 22; Def. JPTO ¶ 5r, ECF No. 23.) During this period, Keystone asked for and received additional loans from Proactive to purchase additional vehicles. Id. Notwithstanding these advances and the subsequent liquidation of the Keystone vehicle fleet, Keystone did not thereafter repay Proactive for any vehicles purchased with Proactive funds. Id. In November, 2009, Thomas caused $50,000 to be wrongfully withdrawn from Proactive's bank account and transferred to Keystone's bank account. (Pls. JPTO ¶ 5i, ECF No. 22; Def. JPTO ¶ 5j, ECF No. 23.)

The 2008 and 2009 income tax returns for Keystone reflected "loans to stockholders/affiliates" and "loans to shareholders", respectively, in the amount of $213,898 for the year 2008 and in the amount of $274,480 for the year 2009. (Pls. JPTO ¶ 5e, ECF No. 22; Def. JPTO ¶ 5e, ECF No. 23.) The Plaintiffs claim that the Debtor has not repaid these loans. (Tr. at 30–31.)³ The Debtor claims that at no point did she receive these monies, and that she believed that these documents indicated money was loaned to Keystone, not loaned by Keystone to her. (Tr. at 31.)

Proactive commenced an action against TD Bank to recover the $50,000 taken from its bank account by Thomas in the Supreme Court of the State of New York, County of Queens ("State Court"). (Pls.' Ex. 1, at 2.) TD Bank settled Proactive's claim for the unauthorized withdrawal of funds by a confidential agreement. (Pls. JPTO ¶ 5i, ECF No. 22; Def. JPTO ¶ 5j, ECF No. 23.) However, the Plaintiffs allege that this amount has not been repaid by Keystone. (Pls. JPTO ¶ 5q, ECF No. 22; Def. JPTO ¶ 5r, ECF No. 23.)

The Plaintiffs commenced a separate action against the Debtor, Thomas, and Keystone to recover the amounts owed by Proactive to Keystone, in the amount of $177,192, in State Court on April 13, 2011. (Pls.' Ex. 1, at 2.) On February 6, 2012, the State Court awarded summary judgment to the Plaintiffs against the Debtor, finding her liable for the debts owed by Keystone to the Plaintiffs and directing entry of judgment against her. Six days later, the State Court judgment (the "State Court Judgment"), in the amount of $213,169.23, was entered against the Debtor in State Court. (Pls.' Ex. 1 and 2.)

In its decision awarding summary judgment (the "State Court Decision"), the State Court determined that the corporate veil should be pierced to hold the Debtor liable for Keystone's debts to the Plaintiffs. The State Court found that:

[P]laintiffs submitted proof that defendant [Jennifer Gucciardo] was the only owner of Keystone and that she exercised complete dominion and control over the company. Indicia of domination such as (1) inadequate capitalization of the corporation, (2) the use of corporate funds for personal rather than corporate purposes, and (3) transactions with the corporation that did not occur at arms [sic] length...may be inferred from the record. The plaintiffs also submitted proof that defendant [Jennifer Gucciardo], the sole owner of Keystone, was ultimately responsible alone for the wrong of the corporation's failure to pay the debts owed to Proactive...The plaintiffs' proof also permits the inference that defendant [Jennifer Gucciardo] used Keystone to make fraudulent conveyances to herself (see, e.g., Debtor and Creditor Law § 274 ) such as mortgage payments and purported "loans", a circumstance which warrants the piercing of the corporate veil.

(Pls.' Ex. 1, at 4 (citations omitted).) The State Court also found that the Debtor's claim that her husband, Thomas, "dominated Keystone and committed the wrongs against plaintiffs", was insufficient to raise a triable issue of fact with respect to domination or wrongdoing. "[A]s the sole owner of Keystone, she ultimately had control of the business and ultimately had responsibility for the manner in which she permitted the corporation to be used." Id.

On April 22, 2015 Pappas filed a complaint commencing this adversary proceeding. (Compl., ECF No. 1.) On July 22, 2016, an amended complaint was filed which added Proactive as a plaintiff. (Pls.' Am. Compl., ECF No. 17.) The Plaintiffs allege that the Debtor's debt is non-dischargeable pursuant to § 523(a)(4) because the Debtor engaged in fraud or defalcation while acting in a fiduciary capacity (Pls.' Am. Compl. ¶ 35, ECF No. 17); that the State Court's decision to pierce the corporate veil should be given collateral estoppel effect with respect to the elements of non-dischargeability asserted in this adversary proceeding (Pls.' Post Trial Mem., at 4); and that the Debtor's debt is also non-dischargeable pursuant to § 523(a)(6) because Keystone's delivery of checks that were dishonored, the unauthorized withdrawal of $50,000 from Proactive's bank account, and the Debtor's failure to repay Keystone monies (including loans from Keystone, and money used for personal expenses) "constitute ‘willful and malicious injuries' " to the Plaintiffs. (Pls.’ Am. Compl. ¶ 37–42, ECF No. 17.) A trial was held on March 2, 2017.

DISCUSSION

A. Collateral Estoppel

The Plaintiffs assert that, under the doctrine of collateral estoppel, the findings of fact and conclusions of law in the State Court Decision should be given preclusive effect on the issue of non-dischargeability in this proceeding. Collateral estoppel prevents "parties or their privies from relitigating in a subsequent action, an issue of fact or law that was fully and fairly litigated in a prior proceeding." Marvel Characters v. Simon, 310 F.3d 280, 288 (2d Cir. 2002) (citing Boguslavsky v. Kaplan, 159 F.3d 715, 719–20 (2d Cir. 1998) ). This doctrine applies in bankruptcy proceedings, including those arising under § 523(a). "In establishing a cause of action under [§ 523(a)(4) ], a [plaintiff-]creditor may invoke the principles of collateral estoppel or issue preclusion." Indo–Med Commodities, Inc. v. Wisell (In re Wisell), 494 B.R. 23, 34 (Bankr. E.D.N.Y. 2011). See also Kelleran v. Andrijevic, 825 F.2d 692, 695 (2d Cir.1987) ("[b]ankruptcy proceedings may not be used to re-litigate issues already resolved in a court of competent jurisdiction"); Grogan v. Garner, 498 U.S. 279, 284 n.11, 111 S.Ct. 654...