Zygulski v. Daugherty
| Decision Date | 25 March 1999 |
| Docket Number | No. 3:98 CV 0577 AS.,3:98 CV 0577 AS. |
| Citation | 236 BR 646 |
| Parties | Robert Eugene ZYGULSKI, Debtor-Appellant, v. Douglas DAUGHERTY, et al., Appellees. |
| Court | U.S. District Court — Northern District of Indiana |
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Joseph D. Bradley, South Bend, IN, for Robert Eugene Zygulski.
Robert J. Palmer, Sr., E. Spencer Walton, Jr., May Oberfell and Lorber, South Bend, IN, for appellees.
This cause is before the Court on an appeal and cross-appeal of the Bankruptcy Court's Order of Non-dischargeability pursuant to 11 U.S.C. § 523(a)(6).
Jurisdiction is premised on 28 U.S.C. § 158(a) as the underlying action is an appeal of a Bankruptcy Court's final order.
On November 28, 1995, Debtor-Appellant, Robert Eugene Zygulski, (Zygulski) filed his voluntary petition under Chapter 7 of the Bankruptcy Code. Appellees, Douglas Daugherty, et al. (Daugherty), challenged the dischargeability of certain debts pursuant to 11 U.S.C. § 523(a)(6) alleging that the debtor caused willful and malicious injury to the Appellees' property. The Bankruptcy Court conducted a four day trial and on March 3, 1998 found that $367,000.00 was excepted from discharge under 11 U.S.C. § 523(a)(6). The excepted amount was subsequently amended to reflect a total excepted amount of $260,000.00 plus appropriate pre-judgment interest.1
On August 17, 1998, Debtor-Appellant filed his Notice of Appeal. Appellees cross-appealed on August 27, 1998. Meanwhile, the debtor filed a request to convert his Chapter 7 petition to Chapter 13. On December 18, 1998 Appellees filed a Motion to Dismiss the appeal claiming it was moot due to the request for conversion. This Court denied said motion on January 25, 1999. The Court then granted both parties an extension of time until March 8, 1999 in which to file additional briefs and supporting documents. Having had an opportunity to thoroughly review all pertinent information relating to Zygulski's appeal of the non-dischargeability issue the Court now rules as follows.
This case arises from the consequences of a "pyramid" type scheme run by Debtor's wife, Kathleen Zygulski (Kathleen).2 Beginning in 1990, Kathleen apparently created fictitious Tax Deferred Annuity Accounts (TDA's) and Individual Retirement Accounts (IRA's) and then persuaded her family and friends to invest.3 She also persuaded her husband to invest in the scheme. She set up an elaborate bookkeeping system and convinced her investors that the accounts were earning money. Her fictitious records and statements caused Zygulski to think that he was a millionaire with the potential to become a multi-millionaire due to the "investments". As a result, Zygulski purchased a parcel of land in Montana and invested in a two million dollar retirement project in Colorado. Meanwhile, instead of actually investing the hundreds of thousands of dollars Kathleen received she was using the proceeds to finance the land development and to pay household bills. As bills mounted, Kathleen was somehow able to continue her scheme even though some investors were becoming worried and the land developers were demanding payment. Finally, on March 23, 1994, she suffered a breakdown of sorts and committed herself to Charter Hospital. Apparently, this is when Zygulski first learned that all of the IRAs and TDAs were fictitious.4 Upon discovering the truth, Zygulski offered the plaintiffs and other investors a lien on the Colorado property. He also allegedly warned the investors not to go to the police.5 For some reason, Zygulski was unable to reach agreement with the investors on the lien issue and ultimately sold the Colorado property, placing the net proceeds of $260,000.00 in an escrow account with his attorney. He also sold a smaller Colorado property for $81,500.00. What happened to this money is the basis of the Bankruptcy Court's judgment and this appeal. Apparently, Zygulski used the proceeds to pay for his wife's legal defense in her criminal trial, and to purchase a $275,000.00 vacation home in Michigan, a $130,000.00 condominium in Michigan and a $25,000.00 tractor. None of the proceeds went toward repayment of Kathleen's fraud.
During the Bankruptcy trial the appellees alleged that Zygulski willfully and maliciously injured them by dissipating funds rightfully theirs and by thwarting their attempts at recovery. The Bankruptcy Court agreed with the investors and originally held that $367,000.00 was excepted from discharge under 11 U.S.C. § 523(a)(6). This amount was later amended to reflect a total excepted amount of $260,000.00 plus appropriate pre-judgment interest. Zygulski appeals claiming that the Bankruptcy Court erred in imposing a constructive trust on the Colorado property. He further claims that the Bankruptcy Court erred in finding that he caused a "willful and malicious" injury. Finally, Zygulski claims that because he was not personally guilty of fraud and did not hold a confidential or fiduciary relationship to the investors the court also erred in excepting the amount from discharge.6 Daugherty cross-appeals alleging that the decision to except the amount was correct but that the court's reduction of the total from $367,000.00 to $260,000.00 was erroneous.7
In reviewing a Bankruptcy court decision, this Court acts as an appeals court and applies the same standards of review as govern appellate review in other cases. Sagamore Park Centre Assoc. Ltd. Partnership v. Sagamore Park Properties, 200 B.R. 332 (N.D.Ind.1996). Accordingly, this Court reviews the Bankruptcy court's legal determinations de novo and reviews the Bankruptcy court's factual findings using a "clearly erroneous" standard. Leibowitz v. Parkway Bank & Trust Co., 210 B.R. 298 (N.D.Ill.1997), aff'd by In re Image Worldwide, Ltd., 139 F.3d 574 (7th Cir.1998); Divane v. A & C Elec. Co., Inc., 193 B.R. 856 (N.D.Ill.1996), appeal dismissed, 105 F.3d 660 (7th Cir.1996); Matter of Tolona Pizza Prods. Corp., 3 F.3d 1029, 1033 (7th Cir.1993); Calder v. Camp Grove State Bank, 892 F.2d 629, 631 (7th Cir.1990). The Bankruptcy court's conclusions on mixed questions of law and fact and/or on questions pertaining to the application of facts to the law are reviewed de novo. In re Ebbler Furniture and Appliances, Inc., 804 F.2d 87, 88 (7th Cir.1986); Williams v. C.I.R., 1 F.3d 502, 505 (7th Cir.1993), reh'g denied; United States v. Levy, 955 F.2d 1098, 1103 n. 5 (7th Cir.), cert. denied, 506 U.S. 833, 113 S.Ct. 102, 121 L.Ed.2d 62 (1992).
De novo review requires the district court to make an independent examination of the Bankruptcy court's judgment without giving deference to that court's analysis or conclusions. Smoker v. Hill & Assoc., Inc., 204 B.R. 966 (N.D.Ind.1997); see also, Moody v. Amoco Oil Co., 734 F.2d 1200, 1210 (7th Cir.), cert. denied, 469 U.S. 982, 105 S.Ct. 386, 83 L.Ed.2d 321 (1984); In re Sheridan, 57 F.3d 627, 633 (7th Cir.1995); Meyer v. Rigdon, 36 F.3d 1375, 1378 (7th Cir.1994); Matter of Newman, 903 F.2d 1150, 1152 (7th Cir.1990); Calder, 892 F.2d 629, 631. Accordingly, this Court now considers the merits of this appeal.
Zygulski advances two arguments to support his position that the Bankruptcy Court erred in excepting any debts from discharge. The first argument concerns the imposition of a constructive trust. This is an issue of law that this Court reviews de novo. Zygulski's second argument and the main issue on appeal is that the Bankruptcy Court erred in finding that his debt was not dischargeable under 11 U.S.C. § 523(a)(6). This is ultimately an issue of fact and is subject to a "clearly erroneous" standard of review. See Matter of Thirtyacre, 36 F.3d 697, 700 (7th Cir.1994).
A constructive trust arises in cases where the transaction involved is tainted by fraud, actual or constructive. In such cases, in order to prevent the wrongdoer from reaping a benefit from his fraud, a court of equity will construct a trust such as equity and good conscience requires in order to do justice to the parties affected by the fraudulent transaction. . . . It is the fraud or undue influence connected with the original transaction which justifies the court in constructing a trust and holding the wrongdoer responsible as a trustee maleficio. Westphal v. Heckman, 185 Ind. 88, 113 N.E. 299, 302 (1916); Hicks v. State of Indiana, 635 N.E.2d 1151, 1155 (Ind.Ct.App.1994). Indiana law describes a constructive trust as "a fiction of equity, devised for the purpose of making equitable remedies available against one who through fraud or other wrongful means acquires the property of another." Hunter v. Hunter, 152 Ind.App. 365, 283 N.E.2d 775, 779 (1972) (citing Brown v. Brown, 235 Ind. 563, 135 N.E.2d 614 (1956)). Nor does the transformation of property from one form to another deprive a beneficiary of the right to the trust property. That rule has been unchanged for at least 99 years. Mervis Indus. v. Sams, 866 F.Supp. 1143 (N.D.Ind.1994). It was set out in Winstandley v. Second Nat'l Bank, 13 Ind. App. 544, 41 N.E. 956 (1895); quoted verbatim in Ross v. Thompson, 128 Ind.App. 89, 146 N.E.2d 259 (1957), and quoted verbatim again in Fall v. Miller, 462 N.E.2d 1059 (Ind.Ct.App.1984). The equity rule is that trust property may be followed by the beneficiary so long as its identity can be ascertained. Mervis, 866 F.Supp. 1143, 1147-48. Accordingly, a "constructive trust" is a remedy for unjust enrichment, not a real trust and should be imposed only in limited circumstances. In re Nova Tool & Engineering, Inc., 228 B.R. 678 (Bankr.N.D.Ind.1998); Scholes v. Ames, 850 F.Supp. 707 (N.D.Ill.1994), aff'd 56 F.3d 750 (7th Cir.1995); Criss v. Bitzegaio, 420 N.E.2d 1221 (Ind.1981); Chosnek v. Rolley, 688 N.E.2d 202 (Ind.Ct.App. 1997). The existence of grounds for imposition of a constructive trust does not lead...
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