Hebl v. Windeshausen, 590 B.R. 871

Background

Hebl and Windeshausen co-owned Whiskey Dicks; Hebl invested significant funds and they split profits 50/50, but Windeshausen handled most back-office accounting and drew extra funds for joint living expenses.
Hebl sued in state court (conversion and breach of contract); arbitrators awarded Hebl $310,000 and the state circuit court confirmed the award.
Windeshausen filed Chapter 7; Hebl brought an adversary proceeding seeking nondischargeability under 11 U.S.C. § 523(a)(2)(A) and (a)(4).
Bankruptcy court: rejected contractual clause making arbitration award nondischargeable; found arbitration award lacked factual findings to show fraud; held evidentiary hearing was needed.
After the hearing, bankruptcy court found no fiduciary relationship, no embezzlement/larceny (no requisite fraudulent intent), and that Hebl failed to prove what portion of the $310,000, if any, was nondischargeable.
District court AFFIRMED the bankruptcy court: issue preclusion did not apply, factual findings were not clearly erroneous, and law was correctly applied.

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether state arbitration/judgment is issue-preclusive on intent/fraud	Arbitration award established conversion (and thus fraud/intent) so bankruptcy court should be precluded	Arbitration contained no findings allocating liability or finding fraud; preclusion inappropriate	No preclusion: award lacked findings showing elements of §523 exceptions and conversion under Wisconsin law does not equate to fraud
Whether the arbitration/judgment established amount of nondischargeable debt	$310,000 award should be treated as nondischargeable amount	Even if $310,000 is owed, Hebl failed to prove how much (if any) arose from nondischargeable fraud/embezzlement	Hebl failed to prove amount of any nondischargeable debt; bankruptcy court properly required proof by preponderance
Whether bankruptcy court improperly considered evidence not presented in arbitration	Evidence at bankruptcy repeated matters from arbitration; relitigation barred	Intent was not litigated or decided in arbitration, so bankruptcy court could hear evidence	Bankruptcy court permissibly considered additional evidence because intent/fraud were not adjudicated previously
Whether Windeshausen acted with requisite intent for §523(a)(2)/(4) nondischargeability	Hebl argued draws and transfers evidenced fraudulent intent/embezzlement	Windeshausen contended draws were lawful, used for joint expenses, and Hebl knew/acquiesced; no fiduciary relationship found	Finding of no fraudulent intent upheld: factual credibility determinations not clearly erroneous; no fiduciary relationship; embezzlement/larceny not proved

Key Cases Cited

Burse v. Gottlieb, [citation="621 F. App'x 852"] (7th Cir.) (fraud nondischargeability elements)
Ojeda v. Goldberg, 599 F.3d 712 (7th Cir.) (elements of fraud for §523(a)(2)(A))
Grogan v. Garner, 498 U.S. 279 (U.S.) (creditor bears preponderance burden in §523 proceedings)
In re Weber, 892 F.2d 534 (7th Cir.) (difference between embezzlement and larceny; intent requirement)
In re Pawlinski, 170 B.R. 380 (Bankr. N.D. Ill.) (§523(a)(4) covers fiduciary defalcation and embezzlement/larceny)
First Weber Group, Inc. v. Horsfall, 738 F.3d 767 (7th Cir.) (standards for collateral estoppel)
Reeves v. Davis, 638 F.3d 549 (7th Cir.) (issue preclusion and clear-error standard for intent findings)
In re Berman, 629 F.3d 761 (7th Cir.) (when fiduciary relationship may support nondischargeability)
In re Jahrling, 816 F.3d 921 (7th Cir.) (defalcation standard vs. fraud)
Dexia Credit Local v. Rogan, 629 F.3d 612 (7th Cir.) (deference to trial court when two reasonable views of evidence exist)