Zohlman v. Zoldan, 98 Civ. 3592(WCC).

• Decision Date: 13 November 1998
• Docket Number: No. 98 Civ. 3592(WCC).,98 Civ. 3592(WCC).
• Citation: 226 BR 767
• Parties: Robert ZOHLMAN, Plaintiff-Appellant, v. Alex Mayard ZOLDAN, Defendant-Appellee.
• Court: U.S. District Court — Southern District of New York

226 B.R. 767 (1998)

Robert ZOHLMAN, Plaintiff-Appellant, v. Alex Mayard ZOLDAN, Defendant-Appellee.

No. 98 Civ. 3592(WCC).

United States District Court, S.D. New York.

November 13, 1998.

COPYRIGHT MATERIAL OMITTED

Hershman & Leicher, P.C. (Harold M. Hershman, Michael L. Steindam, of counsel), New York City, for Plaintiff-Appellant.

Law Offices of Jeffrey L. Sapir (Jeffrey L. Sapir, of counsel), White Plains, NY, for Defendant-Appellee.

OPINION AND ORDER

CONNER, Senior District Judge.

This bankruptcy appeal presents the following issues, under 11 U.S.C. § 523(a)(4) of the Bankruptcy Code: (1) whether obtaining a judgment in state court by the creditor against the debtor should have collaterally estopped the debtor from litigating certain issues in Bankruptcy Court; (2) whether a general partner stands in a fiduciary relationship with his/her limited partners, and; (3) what conduct constitutes defalcation for purposes of the Bankruptcy Code.

BACKGROUND

In May of 1981, Plaintiff-Appellant Robert Zohlman (hereafter "Creditor") and Defendant-Appellee Alex Mayard Zoldan (hereafter "Debtor") executed an Amended and Restated Certificate of Limited Partnership and an Amended and Restated Agreement of Limited Partnership of New City Associates (the "Partnership Agreement"), to acquire and renovate an existing office building located at 120 North Main Street, New City, New York (the "Office Building"). Debtor was the sole general partner of the partnership. Creditor had the largest investment of the six limited partners involved in the transaction.

Upon the renovation and sale of the Office Building, Creditor commenced an action in the Supreme Court of the State of New York, County of Westchester, against Debtor in the form of a special proceeding for an accounting, to which Debtor consented. Justice Harold L. Wood then appointed a Referee pursuant to N.Y.C.P.L.R. § 4311 to supervise the auditing and examination of the books and records of the partnership. The Referee's Report focused on fifteen specific items, lettered "A" through "O," which were disputed partnership expenses totaling $502,766. The Referee's Report was approved by Justice Wood, who, on October 13, 1992, entered judgment in the amount of $304,371.78 in favor of Creditor.¹ The table included below, drawn from the Referee's Report, sets forth the categories of items in dispute, the amounts claimed by Creditor, and the amounts awarded by the Referee.

                                                                   Claimed by      Awarded by
                Item               Description                      Zohlman         Referee
                A.      Management fees (those in excess of 4%)     $  8,537        $  8,537
                B.      Mortgage Fee                                  15,000          15,000
                C.      Commission on sale of building                75,000          75,000
                D.      Construction                                  92,897          92,897
                E.      Lease Commissions                             32,498               0
                F.      Outside labor                                136,603         104,399
                G.      Salaries                                      17,055          17,055
                H.      Payroll taxes                                  2,434               0
                I.      Building cleaning and maintenance             12,952          10,452
                J.      Maintenance fees                              27,188          27,188
                K.      Professional fees                              9,448           7,948
                L.      Miscellaneous                                  5,556           5,556
                M.      Repairs                                       29,946          29,946
                N.      Sundry                                         6,069           6,049
                O.      Improvements                                  31,583          21,158
                          Total not agreed                          $502,7662
                          Total claims allowed                                      $421,1853
                

On May 8, 1996 Debtor filed a petition under Chapter 7 in the Bankruptcy Court for the Southern District of New York. In response, Creditor then sought a determination that the state court judgment indebtedness was non-dischargeable under 11 U.S.C. § 523(a)(4). On April 6, 1998, Bankruptcy Judge Adlai S. Hardin, Jr. ruled that all but $75,000 of the judgment entered against Debtor was dischargeable. Zohlman v. Zoldan (In re Zoldan), 221 B.R. 79 (Bankr. S.D.N.Y.1998). This appeal, over which this District Court has jurisdiction pursuant to 28 U.S.C. § 158, followed.

For the reasons stated herein, the decision of the Bankruptcy Court is affirmed.

DISCUSSION

I. Standard of Review

On appeal, a bankruptcy court's conclusions of law are reviewed de novo. FED. R.BANKR. 8013; Federal Deposit Ins. Corp. v. Hirsch (In re Colonial Realty Co.), 980 F.2d 125, 130 (2d Cir.1992); Peters v. Hennenhoeffer (In re Peters), 133 B.R. 291, 294 (S.D.N.Y.1991), aff'd, 964 F.2d 166 (2d Cir. 1992) (per curiam). However, Federal Rule of Bankruptcy 8013 provides that, "Findings of fact shall not be set aside unless clearly erroneous, and due regard shall be given to the opportunity of the bankruptcy court to judge the credibility of witnesses." See also Gulf States Exploration Co. v. Manville Forest Products Corp. (In re Manville Forest Prods. Corp.), 896 F.2d 1384, 1388 (2d Cir. 1990); Shugrue v. Air Line Pilots Ass'n Int'l (In re Ionosphere Clubs, Inc.), 922 F.2d 984, 988 (2d Cir.1990); BT/SAP Pool C Associates v. Coltex Loop Central Three Partners, 203 B.R. 527 (S.D.N.Y.1996), aff'd sub nom., In re Coltex Loop Central Three Partners, 138 F.3d 39 (2d Cir.1998).

II. Burden of Proof

In order to prevail on a claim of nondischargeability under § 523(a)(4), the Supreme Court has held that the burden is on the party claiming non-dischargeability. The appropriate level of proof is the "preponderance of the evidence" standard. Grogan v. Garner, 498 U.S. 279, 285, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991); Community Mutual Savings Bank v. Landrin (In re Landrin), 173 B.R. 307, 310 (Bankr.S.D.N.Y.1994).

III. General Principles for Discharge in Bankruptcy Determinations

The courts have repeatedly stressed that the 523(a) exceptions to discharge must be strictly construed in favor of the debtor in order to comport with the "fresh start" policy underlying the Bankruptcy Code. Gleason v. Thaw, 236 U.S. 558, 35 S.Ct. 287, 59 L.Ed. 717 (1915); Household Finance Corp. v. Danns (In re Danns), 558 F.2d 114, 116 (2d Cir.1977); Nat'l Union Fire Ins. Co. of Pittsburgh, Pa. v. Bonnanzio (In re Bonnanzio), 91 F.3d 296, 300 (2d Cir.1996).

IV. Collateral Estoppel

The Creditor's first claim on this appeal is that the Bankruptcy Court erred by not finding collateral estoppel based upon the assessment of a surcharge against Debtor in state court.⁴ Creditor claims that the accounting, and the subsequent assessment of a surcharge in state court, constituted a finding of both the existence of a fiduciary relationship between the parties and of defalcation under § 523(a)(4), thus estopping Debtor from re-litigating these issues. This contention is without merit.

It is well settled that for collateral estoppel to apply, the issue sought to be precluded must be identical to an issue necessarily decided in the prior action.⁵Long Island Lighting Co. v. Imo Industries, Inc., 6 F.3d 876, 885 (2d Cir.1993); In re Landrin, 173 B.R. at 312 n. 5. Moreover, the party invoking collateral estoppel has the burden of identifying the precise issues litigated in the prior action and establishing a record sufficient to reveal the controlling facts. In re Landrin, 173 B.R. at 312 n. 5.

Creditor has failed in his attempt to provide such a record, primarily because there is nothing in the Referee's Report nor in the state court decision to indicate that the question of "fiduciary capacity" or "defalcation," as interpreted under the Bankruptcy Code, was previously decided. As we shall see in the following sections, the definitions of "fiduciary" and "defalcation" for purposes of § 523(a)(4) are highly specialized determinations, and their meaning is narrowly confined to the bankruptcy context. The Referee's Report, upon which the state court decision relies, gives little explanation for disallowing certain expenses. When an explanation is given, the primary reason offered for disallowance of a partnership expense is simply improper documentation or verification by Debtor. The state court judgment also provides little assistance in assessing the basis for the surcharge, since it merely affirms the Referee's Report without comment. Such scant findings make it impossible to say that the existence of both a fiduciary relationship and of defalcation were "specifically decided" by the state court. Nate B. & Francis Spingold Foundation, Inc. v. Halperin (In re Halperin), 215 B.R. 321, 336 (Bankr.E.D.N.Y.1997); Citibank v. Hyland (In re Hyland), 213 B.R. 631, 633 (Bankr.W.D.N.Y.1997) (if the prior decision amounts to a "mere recitation of result, with no specific statement of findings," collateral estoppel should not apply). This is especially true since any reasonable doubt as to what was previously decided by a prior judgment should be resolved by deciding against using it as estoppel. Revelle Motors, Inc. v. Spector (In re Spector), 22 B.R. 226 (Bankr.N.D.N.Y.1982); BANKR.EVID. MANUAL § 30 (West 1997).

V. The Meaning of "Fiduciary"

§ 523(a)(4) provides that:

(a) a discharge under section 727. . . . does not discharge an individual debtor from any debt —

(4) for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny.

11 U.S.C.A. § 523(a)(4) (West 1993). Creditor alleges only that Debtor has committed a "defalcation" for purposes of this section, and thus analysis of the requirements for fraud, larceny, or embezzlement is unnecessary for this decision. Our discussion of this appeal will therefore turn on two questions; first, whether the Debtor stood in a fiduciary relationship to the Creditor for purposes of § 523(a)(...