Sarasota CCM, Inc. v. Kuncman

Filing 10

MEMORANDUM AND ORDER - For the foregoing reasons, the Bankruptcy Court's decision is AFFIRMED in its entirety and Plaintiff's appeal is dismissed. The Clerk of the Court is respectfully directed to mail Debtor a copy of this Order and to mark this appeal closed. E.D. Bankr. Adv. Proc. No. 10-08306(RG). So Ordered by Judge Joanna Seybert on 1/23/12. C/ECF; C/M (Valle, Christine)

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF NEW YORK
---------------------------------X
SARASOTA CCM, INC.,

E.D. Bankr. Adv. Proc.
No. 10-08306(RG)

Appellant,
-againstCATHERINE KUNCMAN,

MEMORANDUM & ORDER
11-CV-2733 (JS)

Appellee.
---------------------------------X
APPEARANCES:
For Appellant:
John A. Craner, Esq.
60 East 42nd Street
47th Floor, P. O. Box 367
New York, NY 10165
For Appellee:

Raymond W. Verdi, Esq.
116 East Main Street, Suite C
Patchogue, NY 11772

SEYBERT, District Judge:
Plaintiff/Appellant Sarasota CCM, Inc. (“Plaintiff” or
“Sarasota”) appeals from an April 12, 2011 decision from the
Bankruptcy
sought

Court.

a

In

the

determination

Defendant/Appellee

bankruptcy

that

Catherine

a

debt

Kuncman

discharged in Debtor’s bankruptcy.

proceeding,
owed

(“Debtor”)

Plaintiff

to
should

it

by

not

be

The underlying debt stemmed

from a pre-petition judgment that Sarasota had obtained against
Debtor

in

Nassau

County

Supreme

Court.

The

issues

in

this

appeal are whether the Bankruptcy Court erred by not giving the
state

court

judgment

preclusive

effect

and

whether

the

Bankruptcy Court erred in its own determination that Sarasota
had not proven actual fraud under the Bankruptcy Code provision

governing exceptions to discharge ability.

For the following

reasons, the Bankruptcy Court Order is AFFIRMED in its entirety
and Sarasota’s appeal is DISMISSED.
BACKGROUND AND PROCEDURAL HISTORY
Debtor’s former husband defaulted on a debt owed to
Plaintiff, for which Plaintiff obtained a judgment against her
former

husband

(App’x 1).

in

the

amount

of

$96,042.36

in

August

2004.

Unable to recover from the ex-husband, Sarasota

brought an action against Debtor in Nassau County Supreme Court,
alleging
husband

that
had

during

the

fraudulently

course
conveyed

of
to

their
her

marriage
several

Debtor’s

assets

and

properties, and that Debtor should be held personally liable for
the

judgment

against

her

husband.

Specifically,

Sarasota

identified the transfer of shares in a corporation that owned
two Dunkin’ Donuts franchises. 1

(Id.)

In September of 2009, the Nassau County Supreme Court
awarded Sarasota summary judgment, and entered judgment against
Debtor equal to the amount owed by her ex-husband (the “Judgment
Debt”).

(App’x 11.)

Certain aspects of the state court’s order

are unclear, and in fact it is this ambiguity that is at the
heart of this appeal.

However, it is clear that the state court

1

In its decision, the state court also identified the transfer
of the deed to the marital home for no consideration to Ms.
Kuncman from her husband, which was not mentioned in the
complaint filed in the state court. Plaintiff’s appellate brief
filed in this Court identifies this transfer as well.
2

found that Debtor’s then-husband, as part of a scheme to defraud
his creditors, made fraudulent conveyances to Debtor, and that
Debtor participated in this scheme.

(App’x 14-16.)

After judgment was entered against her, Debtor filed
for

bankruptcy

discharged.

protection

seeking

to

have

the

Judgment

Debt

Plaintiff in turn filed an adversary proceeding

contending that the Judgment Debt was non-dischargeable under
Section
which

523(a)(2)(A)
excepts

from

of

the

Bankruptcy

discharge

any

Code

debt

(“Section

“obtained

pretenses, a false representation, or actual fraud.”

523”),

by

false

Plaintiff

then filed a motion for summary judgment, asserting that the
elements of fraud under New York law are the same as those under
the nondischargeability statute and that the state court made a
finding of fraud by the Debtor.
state

court

decision

should

Therefore, Sarasota argued, the
collaterally

estop

Debtor

from

excepting the Judgment Debt from discharge.
The

Bankruptcy

Court

denied

Plaintiff’s

motion,

concluding that the state court order did not make a finding of
actual fraud sufficient to meet the requirements of Section 523.
Specifically, the Bankruptcy Court found that the state court
had made no finding of fraudulent intent.

(App’x 112).

Rather,

the state court’s decision rested on New York Debtor Creditor
Law Section 273 (“DCL 273”).

(Id.)

Under this statute, any

conveyance that renders the transferor insolvent, or is made by
3

a

person

who

fraudulent

is

already

conveyance

insolvent,
if

the

expressly

without

does

evidence

not

of

transferor

to

be

a

receives

no
DCL

require

intent

considered

N.Y. DEBT. & CRED. LAW § 273.

consideration for the transfer.
273

is

any

the

evidence

fraud

is

of

intent,

id.;

constructive--not

actual.
In contrast, Bankruptcy Code Section 523 only applies
if there is actual fraud.
that

without

Judgment
116.)

further

Debt

could

Therefore, the Bankruptcy Court held

evidence

not

be

of

the

excepted

required

from

intent

discharge.

the

(App’x

Sarasota never provided any such evidence, and relied

instead on the state court order and the pleadings, motions, and
exhibits
After

a

adversary
evidence

it

submitted

trial,

the

to

support

state

Bankruptcy

proceeding,
to

the

a

court.

Court

ruling

that

finding

of

(App’x

dismissed

there

actual

was

116-17.)

Sarasota’s
insufficient

fraud.

(App’x

113.)

This appeal followed.
DISCUSSION
There

are

two

issues

on

appeal:

first,

Sarasota

challenges the Bankruptcy Court’s interpretation of the state
court

order

and

the

corresponding

decision

not

to

give

it

preclusive effect; second, Sarasota argues that the Bankruptcy
Court

erred

in

its

own

determination

should be excepted from discharge.
4

that

the

Judgment

Debt

I. Standard of Review
The Court has appellate jurisdiction pursuant to 28
U.S.C.

§

158.

The

Court

reviews

the

Bankruptcy

Court’s

findings of fact under a “clearly erroneous” standard, and its
legal conclusions de novo.

FED. R. BANK. P. 8013; In re U.S.

Lines, Inc., 318 F.3d 432, 435-36 (2d Cir. 2003).

A court’s

“interpretation of the text of a court order or judgment is
considered a conclusion of law subject to de novo review.”

U.S.

v. Spallone, 399 F.3d 415, 423 (2d Cir. 2005).
II. Analysis
The

Bankruptcy

Court

Order

is

affirmed

in

its

entirety.
A. Collateral Estoppel
It is well-settled that collateral estoppel applies to
a Section 523 discharge exception proceeding.

Grogan v. Garner,

498 U.S. 279, 284, 111 S. Ct. 654, 112 L. Ed. 2d 755 (1991);
Evans

v.

Ottimo,

469

F.3d

278,

281

(2d

DeTrano, 326 F.3d 319, 322 (2d Cir. 2003).
preclusive

effect

of

a

state

court

Cir.

2006);

In

re

In determining the

judgment

in

a

subsequent

federal lawsuit, federal courts are guided by the full faith and
credit statue, 2 which directs courts to refer to the preclusion
law of the State in which judgment was rendered.

Marrese v. Am.

Acad. of Orthopaedic Surgeons, 470 U.S. 373, 380, 105 S. Ct.
2

28 U.S.C. § 173.
5

1327, 84 L. Ed. 2d 274 (1985); Evans, 469 F.3d at 281.

Under

New York law, collateral estoppel bars relitigation of an issue
when (1) the “identical issue necessarily was decided in the
prior

action”

relitigating

and

the

(2)

issue

the
had

“party
a

full

to
and

be
fair

litigate the issue in the prior action.”
281.

precluded

from

opportunity

to

Evans, 469 F.3d at

Collateral estoppel effect will “only be given to matters

actually litigated and determined.”

Id. at 282 (quoting Kaufman

v. Eli Lilly and Co., 65 N.Y.2d 449, 456, 482 N.E.2d 63 (1985)).
If

there

is

a

reasonable

doubt

whether

the

earlier

state

proceeding determined a particular issue, that doubt should be
resolved against using the state decision as an estoppel.

In re

Cohen, 92 B.R. 54, 70-71 (Bankr. S.D.N.Y. 1988).
In this case, although the state court determined that
Debtor was liable to Plaintiff, the question remained whether
the state court resolved the actual fraud issue.

The Bankruptcy

Court was required to determine “whether fraud was placed in
issue and actually determined in state court, and whether the
elements

of

fraud

under

New

York

law

are

identical

elements of fraud under” Bankruptcy Code Section 523(a).
469 F.3d at 282.

to

the

Evans,

The elements of actual fraud in New York

include a false representation of material fact, knowledge by
the party who made the representation that it was false when
made, justifiable reliance by plaintiff, and resulting injury.
6

Id. at 283 (citing Channel Master Corp. v. Aluminum Ltd. Sales,
4 N.Y.2d 403, 406-07, 176 N.Y.S.2d 259, 151 N.E.2d 833 (1958)).
The Second Circuit has observed that the elements of a claim of
actual fraud under Section 523 are similar to the elements under
New

York

law:

“The

elements

of

actual

fraud

under

[the]

Bankruptcy Code incorporate the general common law of torts and
likewise include a false representation, scienter, reliance, and
harm.”

Id. at 283 (citing Rest. (Second) of Torts § 525 and

Field v. Mans, 516 U.S. 59, 70 n.9, 116 S. Ct. 437, L. Ed. 2d
351 (1995)).

The discharge exception under Section 523 requires

conduct

“moral

of

turpitude

or

intentional

wrong;

mere

negligence, poor business judgment or fraud implied in law . . .
is insufficient.”
1999).

In re Gonzalez, 241 B.R. 67, 71 (S.D.N.Y.

Accordingly, the Second Circuit has held that a finding

by a New York State court of intentional fraud by a debtor is
preclusive as to a claim of actual fraud under Section 523,
provided that the issue was actually litigated and determined in
the prior litigation.

Evans, 469 F.3d at 282-283.

In this case, Plaintiff argues that the state court
made a finding of intentional fraud.
extensively

from

language

in

the

Plaintiff’s brief quotes
state

Plaintiff maintains supports its argument:

court

order

that

The order describes

the action as seeking relief “on the ground that [Debtor], in
order

to

aid

her

husband

.

.
7

.

defrauded

his

creditors,

including plaintiff,” and that Plaintiff alleged “that [Debtor]
should be held personally liable for the debts of [her husband]
because

she

engaged

in

a

concerted

effort

to

defraud

the

creditors . . . by unlawfully diverting or permitting him to
hide

his

income

creditors.”
triable

and

The

issue

of

his

order

assets
held

fact

away

that

regarding

from

“Debtor
the

the

reach

fails

to

allegedly

of

his

raise

a

fraudulent

conveyance[s] . . . by her failure to produce evidence relative
to

the

husband.

consideration

for

the

conveyance[s]”

to

her

by

her

The state court also found that “[Debtor] allowed her

husband to divert the corporate assets . . . and participated in
the fraudulent scheme.”

(App. Br. 12-14).

The state court decision was not unambiguous judicial
determination of intentional fraud under New York law.

Although

there is some ambiguity, the Court agrees with the Bankruptcy
Court that the state court order is best read as finding that
Debtor’s participation in her husband’s fraudulent scheme was
constructive--not actual--fraud.
that

Debtor’s

husband

The state court concluded

“transferred

the

[assets]

without

fair

consideration, thereby making him insolvent to his creditors.”
Moreover, the state court summarized its holdings as follows:
“the

plaintiff

established

its

prima

facie

entitlement

to

summary judgment by demonstrating that the subject propert[ies]
. . . were transferred without fair consideration.”
8

(App’x 16.)

These statements suggest that the state court thought Debtor
violated DCL § 273, which deems property transfers made without
consideration as fraudulent even without any showing of actual
intent to defraud.

(App’x 14)

Plaintiff’s
court

decision

that

brief

highlights

admittedly

state court’s rationale.

create

portions
some

of

the

ambiguity

state
in

the

However, collateral estoppel under New

York law requires clarity; to be precluded an issue must have
been “necessarily decided,” In re Halperin, 215 B.R. 321, 335
(Bankr.

E.D.N.Y.

1997)

(internal

quotations

actually determined, Evans, 469 F.3d, at 282.

omitted),

and

Because doubts

about what was actually decided in the earlier proceeding should
generally
effect,

be

Cohen,

resolved
92

B.R.

against
at

giving

70-71,

the

a

decision

Court

preclusion

agrees

with

the

Bankruptcy Court that the state court decision should not have
estopped Debtor from having the Judgment Debt discharged.
Sarasota argues that DCL 273 could not have been the
basis of the state court order for two reasons.

First, it

argues that it did not raise DCL 273 in its complaint.

Second,

it maintains that DCL 273 deals with conveyances and, in this
case, Debtor made no conveyances at all.

(App. Br. 15.)

The

fact that Plaintiff did not cite DCL 273 in its state court
complaint does not necessarily mean that it could not have been
the basis of the state court’s decision, and it does not change
9

the

language

in

the

state

heavily on that statute.

court

order

that

appears

to

rely

With respect to conveyances, DCL 273

can be the basis for personal liability against a transferee,
not just a transferor.

See, e.g., Cadle Co. v. Newhouse, 74

Fed. App’x 152, 153 (2d Cir. 2003) (recognizing liability of a
transferee of a constructively fraudulent conveyance) (quoting
RTC

Mortg.

Trust

1995-S/N1

v.

Sopher,

171

F.

Supp.

2d

192

(S.D.N.Y. 2001)).
B. Section 523(a)(2)(A)
Having determined that the Bankruptcy Court correctly
refused to give the state court decision preclusion effect, the
Court turns now to the Bankruptcy Court’s own determination that
Plaintiff

failed

to

show

excepted from discharge.
on

the

evidence

it

that

the

Judgment

Debt

should

be

As discussed already, Plaintiff relied

submitted

in

support

of

its

state

court

summary judgment motion but did not develop new evidence at the
evidentiary hearing before the Bankruptcy Court.
To sustain a prima facie case under Section 523, a
creditor

must

establish

that

(1)

the

debtor

made

a

false

representation, 3 (2) that the debtor knew was false, (3) the

3

The bankruptcy court requested the parties brief the question
of whether or not the requirement of a misrepresentation can be
met where the debtor made no misrepresentations directly to the
plaintiff/creditor. Plaintiff’s brief claims that Debtor did
make direct misrepresentations to Sarasota, and that this
question
was
unnecessary.
Because
this
Court,
like
the
10

debtor made the representation with the intent to deceive the
creditor, and (4) the creditor justifiably relied on, and was
damaged by, the false representation. In re Gonzalez, 241 B.R.
67, 71-72 (Bankr. S.D.N.Y. 1999); In re Owens, 2005 WL 387258,
at *1-2 (Bankr. S.D.N.Y. Feb. 17, 2005).
burden

of

evidence.

proving

these

elements

by

The creditor bears the
a

preponderance

of

the

Grogan, 498 U.S. at 286.
The Bankruptcy Court found that the evidence at the

evidentiary hearing, which included the evidence that Plaintiff
relied on in support of its state court summary judgment motion
and

Debtor’s

testimony,

was

insufficient

to

establish

that

Debtor “acted to deceive or defraud” Plaintiff (App’x 124), and
Plaintiff

does

not

make

a

serious

effort

to

challenge

the

Bankruptcy Court’s own interpretation of the evidence (including
Debtor’s credibility, which Plaintiff did not attack (App’x 113,
124)).

Rather, Plaintiff argues that the state court’s factual

findings

lead

to

the

“inescapable”

intentionally defrauded Plaintiff.

conclusion

that

(App. Br. 16.)

Debtor

Plaintiff

relies on In re Robert Freidlander, 170 B.R. 472, 478 (Bank. D.
Mass.

1994).

Bankruptcy

Court

There,

in

applied

a

nondischargeability

collateral

estoppel

even

action,

the

though

the

state court order failed to indicate whether or not there was a

bankruptcy court before it, finds that this appeal can
decided on the issue of intent, it need not reach this issue.
11

be

finding of intent to deceive.

In that case, the state court had

found that the debtor misrepresented its intention to perform
under the contract, and the bankruptcy judge concluded that a
misrepresentation

of

that

nature

without intent to deceive.
not

necessarily

testified

that

did

not

have

been

made

Here, however, Debtor’s conduct does

incorporate
she

could

intent

not

have

to

such

deceive,

and

Debtor

intent.

Even

where

circumstances support an inference of fraudulent intent, that
“inference will be negated where the debtor comes forward with
some

evidence

plaintiff.”
(Bankr.

that

[s]he

did

not

intend

to

deceive

the

Kuper v. Spar (In re Spar), 176 B.R. 321, 328

S.D.N.Y.

1994).

Debtor

offered

such

evidence

by

testifying that she never intended to deceive anyone (Hrg. Tr.
22); was required by Dunkin’ Donuts to hold the shares of her
husband’s franchises (id. 39); and believed the transfer of the
marital home was a gift from her husband (App’x 47).

Plaintiff

presented no evidence contradicting this testimony and did not
challenge Debtor’s credibility, and the Bankruptcy Court did not
err in finding that Plaintiff did not meet its burden of showing
that the Judgment Debt should be excepted from discharge.
CONCLUSION
For

the

foregoing

reasons,

the

Bankruptcy

Court’s

decision is AFFIRMED in its entirety and Plaintiff’s appeal is

12

dismissed.

The Clerk of the Court is respectfully directed to

mail Debtor a copy of this Order and to mark this appeal closed.
SO ORDERED.

/s/ Joanna Seybert______
Joanna Seybert, U.S.D.J.
Dated:

January 23, 2012
Central Islip, New York

13