T. Levy Assocs., Inc. v. Kaplan (In re Kaplan)

• Citation: 608 B.R. 443
• Decision Date: 04 October 2019
• Docket Number: Case No. 17-15868 (JKF),Adversary No. 17-00363
• Parties: IN RE Michael KAPLAN and Nina Kaplan Debtors T. Levy Associates, Inc., Plaintiff v. Michael Kaplan Aand Nina Kaplan, Defendants
• Court: United States Bankruptcy Courts. Third Circuit. U.S. Bankruptcy Court — Eastern District of Pennsylvania

608 B.R. 443

IN RE Michael KAPLAN and Nina Kaplan Debtors

T. Levy Associates, Inc., Plaintiff

v.Michael Kaplan Aand Nina Kaplan, Defendants

Case No. 17-15868 (JKF)

Adversary No. 17-00363

United States Bankruptcy Court, E.D. Pennsylvania.

Signed October 4, 2019

Leslie Beth Baskin, Spector Gadon Rosen, Philadelphia, PA, for Plaintiff.

Paul J. Winterhalter, Offit Kurman, P.A., Philadelphia, PA, for Defendants.

OPINION

Jean K. FitzSimon, United States Bankruptcy Judge

Introduction

Before the Court is the Plaintiff's Motion for Summary Judgment. The Defendants have filed a Response in Opposition to it. For the reasons which follow, the Motion will be denied and granted in part.¹

Background

Before the Defendants commenced this bankruptcy case, they had been sued by the Plaintiff in the federal district court in Philadelphia. The case went to trial and the jury returned a verdict in favor of the Plaintiff. The Defendants next filed a joint Chapter 7 bankruptcy petition seeking to discharge the liability resulting from that verdict. That prompted the Plaintiff to file this adversary proceeding seeking to except its claim from discharge. The Defendants answered the complaint and the Plaintiff now moves for summary judgment.

Summary Judgment

Motions for summary judgment are governed by Rule 56 of the Federal Rules of Civil Procedure ("Fed.R.Civ.P."). Pursuant to Rule 56,² summary judgment should be granted when the "pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(a). In making this determination, the court must consider all the evidence presented, drawing all reasonable inferences therefrom in the light most favorable to the nonmoving party, and against the movant. See Roth v. Norfalco, LLC , 651 F.3d 367, 373–74 (3d Cir.2011). The moving party has the burden of demonstrating that no genuine issue of fact exists. Celotex Corp. v. Catrett , 477 U.S. 317, 323, 106 S.Ct. 2548, 2552, 91 L.Ed.2d 265 (1986).

Summary Judgment via Collateral Estoppel

Plaintiff would establish its right to summary relief by application of principles of preclusion. It maintains that the same proofs which supported the jury's verdicts likewise furnish the requisite evidentiary basis upon which this Court can base a finding of nondischargeability of Plaintiff's claims. Although summary judgment cannot be granted whenever material fact questions remain unresolved, summary judgment is often appropriate when a claim or defense at issue is based upon res judicata (claim preclusion from an earlier action) or collateral estoppel (issue preclusion from an earlier action). In re Kridlow , 233 B.R. 334, 342 (Bkrtcy.E.D.Pa.1999) ; see also 18 Moore's Federal Practice—Civil § 131.50[3] (Matthew Bender 3d ed.). "In such circumstances the court need only compare the claims in the original action, the result in the original action, and the claims presently before the court." Kridlow , supra , id. ; see also Grogan v. Garner , 498 U.S. 279, 284, 111 S.Ct. 654, 658, 112 L.Ed.2d 755 (1991) (holding that collateral estoppel applies in a non-dischargeability action)

Claims in the Original Action

The District Court action alleged violations of federal racketeering law and of the Pennsylvania common law of conversion, breach of fiduciary, duty tortious interference with contractual relations, and misappropriation of trade secrets. The jury entered a verdict in favor of Plaintiff and against the Debtors as follows:

?

See Verdict sheet attached to both the Motion and the Response.

Claims Presently Before this Court

The claims of non-dischargeability are based on three alternative grounds: first, that the claim is the result of the Debtors' fraud³ and, second, that it arose out of the Debtors' breach of their fiduciary duty to the Plaintiff or out of embezzlement,⁴ and third that the Plaintiff's injury in this matter resulted from willful and malicious conduct on the Debtors' part.⁵

Applicability of the Verdict To the § 523 Claim

The Plaintiff's position is that different parts of the jury verdict prove different nondischargeability provisions. The evidentiary effect of the RICO verdict, says Plaintiff, is two-fold: it establishes liability under both subsections (a)(2)(A) and (a)(6) of § 523. The conversion, breach of fiduciary duty, and tortious interference with contract verdicts furnish the evidentiary basis upon which this Court can find liability under subsection (a)(4). Mot., 9-21.

Debtors' Position

Debtors dispute that any such finding may be made. All that is before the Court, they say, are verdict sheets which confirm liability for specified causes of action. Beyond that, they go on, the record is devoid of how the jury reached its conclusions regarding liability. Resp. 3, 6-7.

Standard for Collateral Estoppel

And it is this question of what the jury had to have found in order to render its verdict that implicates one of the elements of collateral estoppel: identity of issues. See National Railroad Passenger Corp. v. Pennsylvania Pub. Util. Comm'n , 288 F.3d 519, 525 (3d Cir.2002) (listing the following four factors for issue preclusion as: (1) the issue sought to be precluded is the same as that involved in the prior action ; (2) the issue was actually litigated; (3) there was a valid and final judgment; and (4) the determination was essential to the prior judgment) (emphasis added).⁶ That requires an analysis of the elements of the causes of action in the instant complaint against those raised in the District Court action.

Non-Dischargeable Fraud and RICO

Count I of this complaint seeks to except the Plaintiff's claim from discharge based on 11 U.S.C. § 523(a)(2)(A) (excepting from discharge debts arising from "false pretenses, a false representation, or actual fraud"). In specific, its Motion refines the culpable conduct down to "actual fraud." See Mot., pp. 10-14. Plaintiff maintains that the finding of RICO liability in the District Court precludes the Debtors from challenging liability for actual fraud in this forum. For that to be so, however, the same issue before the Court here (actual fraud) must have been before the jury in the District Court action (RICO). To determine if those issues align, the Court must compare the elements of the two causes of action.

What Constitutes Actual Fraud

The Bankruptcy Code does not define the term "actual fraud." In Husky Intern. Electronics v. Ritz ,⁷ the United States Supreme Court expounded on what constitutes "actual fraud" under § 523(a)(2)(A). The High Court explained that the term "has two parts: actual and fraud." 136 S.Ct. at 1586. "Actual" denotes any fraud that "involves moral turpitude or intentional wrong.' " Id. quoting Neal v. Clark , 95 U.S. 704, 709, 24 L.Ed. 586, (1878). It concluded that "anything that counts as "fraud" and is done with wrongful intent is ‘actual fraud.’ " Id.

Since the Husky decision, the Third Circuit has not had a case involving a claim of "actual fraud" under of § 523(a)(2)(A). However, a decision from the Bankruptcy Court for the Middle District of Pennsylvania explains that

[t]o establish actual fraud under § 523(a)(2)(A), a creditor must prove that 1) the debtor engaged in actual fraud; 2) the debtor obtained money, property, services or credit by engaging in actual fraud; and 3) the debt arose from the actual fraud. Hatfield v. Thompson (In re Thompson) , 555 B.R. 1, 10 (B.A.P. 10th Cir. [BAP] 2016). Stated differently, a creditor must prove that a debtor took some action in furtherance of his wrongful intent , that the fraudulent action enabled him to obtain money, property, services or credit, and that the debt arose in the context of the fraudulent scheme.

In re Sheaffer , 2017 WL 377941, at *4 (Bankr. M.D. Pa. Jan. 25, 2017) (emphasis added). This takes the Court to the next issue to be determined: what was the culpable act that supported the jury's RICO verdict which would likewise constitute the requisite fraudulent conduct for a finding of "actual fraud" for nondischargeability purposes.

Mail/Wire Fraud Predicate Acts under RICO

The RICO verdict was based on mail and wire fraud. See 18 U.S.C. § 1961(1)(B). For mail or wire fraud to be found, "[a] scheme or artifice to defraud need not be fraudulent on its face but must involve some sort of fraudulent misrepresentations or omissions reasonably calculated to deceive persons of ordinary prudence and comprehension." Brokerage Concepts, Inc. v. U.S. Healthcare, Inc. , 140 F.3d 494, 528 (3d Cir.1998) (quoting Kehr Packages, Inc. v. Fidelcor, Inc. , 926 F.2d 1406, 1415 (3d Cir.1991) ). Consistent with that controlling authority, the District Judge instructed the jury as follows:

The racketeering activities that are alleged here by T. Levy Associates are acts that violate the federal, that's the United States, mail and wire fraud statutes. I have to explain to you these statutes so you understand whether T. Levy proved to you that the Defendants violated them as a predicate acts.

First, the mail fraud statute as a predicate offense. To prove mail fraud, T. Levy Associates must show the following: that the Defendants willfully and knowingly participated in a sc[heme] to defraud T. Levy Associates. Second, they did so with an intent to defraud , and third, they used the U.S. mail for the purpose of executing the scheme to defraud.

The second one, predicate act, remember, the first one is mail fraud. The second is wire fraud. To show wire fraud, as its other predicate act., T. Levy associates must show to you by a preponderance of the evidence that the Defendants willfully and knowingly participated in a scheme to defraud T. Levy Associate, they did so with an intent to defraud , and, third, that they made interstate phone calls or used electronic communications for the purpose of executing their scheme for planning to defraud.

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