634 B.R. 673
Bankr. E.D. Pa.2021Background
- Plaintiff T. Levy Associates, Inc. (TLA) sued debtors Michael and Nina Kaplan after a District Court jury found the Kaplans liable for RICO (mail and wire fraud), conversion, breach of fiduciary duty (Michael), and tortious interference (Michael); District Court entered large money judgments and awarded attorneys’ fees.
- Debtors filed Chapter 7; TLA filed an adversary to except the District Court Judgments from discharge under 11 U.S.C. §§523(a)(2)(A), (a)(4), and (a)(6).
- On summary judgment the bankruptcy court gave preclusive effect to the RICO verdict for the elements of “actual” and “fraud” (§523(a)(2)(A)) and for willful/malicious conduct (§523(a)(6)) but held remaining elements (reliance for inducement‑based fraud; intent to injure under §523(a)(6)) required trial.
- At the nondischargeability trial the court relied primarily on the District Court transcript and limited live testimony; evidence showed Michael controlled TLA’s operations while the Kaplans diverted corporate funds, inventory, customers, and corporate resources to benefit Nina’s businesses.
- Court held: (1) amounts attributable to mail/wire fraud (RICO) and the awarded RICO fees are nondischargeable under §523(a)(2)(A) because the fraud was by concealment/omission (not inducement) so reliance was not required; (2) several judgment components (RICO, conversion, tortious interference, breach) are nondischargeable under §523(a)(6) as willful and malicious injuries; (3) §523(a)(4) fiduciary/embezzlement claim failed — no technical or express trust established and no entrustment for embezzlement.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the District Court RICO verdict establishes nondischargeable "actual fraud" under §523(a)(2)(A) and whether reliance is required | RICO mail/wire fraud verdict establishes actual fraud; Husky eliminates a reliance requirement for actual fraud | Reliance required if fraud is inducement‑based (misrepresentation); if so, reliance was not proved | Held: RICO fraud was fraud by concealment/omission (not inducement); reliance not required; RICO amounts and RICO fees nondischargeable under §523(a)(2)(A) |
| Whether TLA proved false pretenses under §523(a)(2)(A) | Kaplans deceptively presented Michael as loyal CEO while secretly plundering TLA, satisfying false pretenses | Denies that any implied misrepresentations to TLA/Mr. Levy induced TLA to act; conduct was concealed misappropriation | Held: False pretenses not established — the RICO theory was concealment not conduct intended to create a misleading transaction understanding |
| Whether judgments are nondischargeable under §523(a)(4) for fraud/defalcation in a fiduciary capacity or embezzlement | Michael, as officer, owed fiduciary duties to TLA; his misconduct equals defalcation or embezzlement under §523(a)(4) | No express or pre‑existing technical trust; no entrustment of TLA property supporting embezzlement | Held: §523(a)(4) claim fails — no express/technical trust under federal law and no entrustment for embezzlement |
| Whether the judgments (RICO, conversion, tortious interference, breach) are nondischargeable under §523(a)(6) (willful and malicious injury) | The Kaplans’ intentional diversion of funds, inventory, customers, and assets was done with intent or substantial certainty to injure TLA | Argues acts were motivated by personal/financial benefit but lack actual intent to injure or substantial certainty of injury | Held: Court finds intent or substantial certainty to injure for the RICO scheme, conversion, tortious interference, and breach; corresponding judgment amounts nondischargeable under §523(a)(6) |
Key Cases Cited
- Husky Int’l Elecs., Inc. v. Ritz, 136 S. Ct. 1581 (Sup. Ct. 2016) ("actual fraud" under §523(a)(2)(A) can include non‑misrepresentation frauds such as fraudulent conveyances)
- Field v. Mans, 516 U.S. 59 (Sup. Ct. 1995) (misrepresentation‑based frauds implicate reliance considerations)
- Kawaauhau v. Geiger, 523 U.S. 57 (Sup. Ct. 1998) (§523(a)(6) requires deliberate or intentional injury)
- Bullock v. BankChampaign, N.A., 569 U.S. 267 (Sup. Ct. 2013) (defalcation requires knowledge or gross recklessness)
- Brokerage Concepts, Inc. v. U.S. Healthcare, Inc., 140 F.3d 494 (3d Cir. 1998) (omissions can support mail/wire fraud)
- Grogan v. Garner, 498 U.S. 279 (Sup. Ct. 1991) (creditor bears preponderance burden in nondischargeability actions)
- In re Fugazy, 157 B.R. 761 (Bankr. S.D.N.Y. 1993) (RICO/mailing fraud judgment can support §523(a)(6) nondischargeability)