Ardizzone v. Scialdone (In re Scialdone)Ardizzone v. Scialdone (In re Scialdone)
MEMORANDUM DECISION DENYING DISCHARGEABILITY OF A DEBT UNDER § 523(a)(2)(A)
Plaintiffs allege that the Debtor deceived them into investing in a business in exchange for the corporation paying him a “finder’s fee.” They sought to have the Court find the Debtor personal liable for their full investment and that the debt be declared non-dischargeable under § 523(a)(2)(A). Because the Court finds that the Defendants did not justifiably rely on the Debtor’s misrepresentations, the Court grants judgment in favor of the Defendant.
Jurisdiction
This Court has subject matter jurisdiction pursuant to 28 U.S.C. § 1334(a), 28 U.S.C. § 157(a) and the Standing Order of Refеrence signed by Chief Judge Loretta A. Preska dated January 31, 2012. This is a “core proceeding” under 28 U.S.C. § 157(b)(2)(I) (determinations as to the dischargeability of particular debts).
Background
Debtor filed for chapter 7 on April 30, 2012. The Debtor received his discharge on August 9, 2012. This adversary proceeding was filed against the Debtor on July 11, 2012 seeking a judgment from this Court determining that the money they invested in a company on Defendant’s advice is non-dischargeable pursuant to § 523(a)(2)(A) and (B).
The Plaintiffs, Simon Posen (“Posen”) and Stephen Ardizzone (“Ardizzone”), worked with the Defendant, John Scial-done (“Debtor” or “Defendant”) at the New York Mercantile Exchange from the .late 1990s until 2008 when the Debtor ceased working there. See Jan. 9, 2015
In thе beginning of 2007, the Debtor’s brother, Scott Scialdone ran into a childhood friend, Susan Mocerino (“Mocerino”). See Jan. 8, 2015 Trial Tr. 215:25. She told him she ran a telecommunications business called MJ Communications Ltd. (“MJ Communications”). Id. at 218-222. He and his brother became involved in the business and subsequently solicited investments from the Plaintiffs. See Jan. 9, 2015 Trial Tr. 32:5-38:6. Plaintiffs invested a total of $2.5 million with Mocerino or MJ Communications.
Sometime after investing in MJ Communications, the Plaintiffs learned that Debt- or had received money from Mocerino. See Jan. 7, 2015 Trial Tr. 220:9. This made them uncomfortable with the investment and they demanded a refund from her. Id. at 222:14-24. Ardizzone then sued the Debtor and a number of others seeking a return of his investment. Jan. 8, 2015 Trial Tr. 46:7-21. That action was stayed as to the Debtor by this bankruptcy filing. Id. at 46:25.
Prior to trial, the parties stipulated to the following facts in the joint pre-trial order.
On February 6, 2007, Posen invested $600,000 with Susan Mocerino (“Moceri-no”). See Joint PTO ¶ 1, ECF No. 27 (stipulated fact). On March 2, 2007, Posen invested an additional $400,000 with Mo-сerino. Id. ¶ 2. On April 19, 2007, Ardiz-zone invested $1.5 million with Mocerino. Id. ¶ 3. In April 2007, after Ardizzone’s investment with Mocerino, Posen received $500,000.00 from Mocerino. Id. ¶ 7.
On February 12, 2007, Debtor and/or his agents or assigns, including Oracle Trading Corp.
On or about July 19, 2007, the Debtor, thrоugh Oracle, invested $465,000.00 into Crossfire Telecommunications LLC (a/k/a Crossfire Technologies LLC) (“Crossfire”). Id. ¶ 9.
Prior to trial, the Court held a hearing and dismissed all causes of action and all defendants except for the Plaintiffs’ first cause of action against the Debtor — declaring the debt non-dischargeable under § 523(a)(2)(A). See Jan. 6, 2015 Hr’g Tr. (explaining why all other defendants and causes of action were dismissed).
Discussion
At trial and in the post-trial memorandum, Plaintiffs argue that Debtor used his existing relationship with the Plaintiffs tо convince them to invest in a business venture that Debtor knew to be non-existent
Section 523(a)(2)(A) states: “A discharge under section 727 ... of this title does not discharge an individual debt- or from any debt ... for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by ... false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor’s or an insider’s financial condition.” 11 ■ U.S.C. § 523(a)(2)(A). Most courts have held that it is not necessary that the property actually be gained for the direct benefit of the debtor. Even an indirect benefit to the debtor may constitute “obtaining property” within the meaning of section 523(a)(2)(A). False pretenses, false representation, and actual fraud are three independent causes of action — each requiring proof of the different elements. DRCK, LLC v. Chong (In re Chong),
To have a debt determined to be non-dischargeable for fraud under the Bankruptcy Code, the five elements that must be established are: (1) the debtor must make an express or implied false representation; (2) the representation must be made with knowledge that it was false at the time it was made; (3) the false reрresentation must be made with the intent to deceive; (4) the creditor must have [justifiably]
Express or implied representation
In order to satisfy the first and second elements, that the Debtor made an express or implied false representation, Plaintiffs must show that the representation “encompass[es] statements that falsely purport to depict current or past facts.” Kuper v. Spar (In re Spar),
Here, Plaintiffs argue that the Debtor made three misrepresentations: 1) that he invested a million dollars in MJ Communications; 2) that he presented the Plaintiffs with a false tax return; and 3) that he presented the. Plaintiffs with an advertising brochure of the company that contained false information. Post-Trial Br. 76-77. Plaintiffs had the burden of proving the Defendant made these misrepresentations by a preponderance of the evidence. As to the first misrepresentation, it is clear that the Defendant did make an express or implied representation that he invested money in MJ Communiсations when he did not. See Jan. 9, 2015 Trial Tr. 163:17-164:10 (testimony of John Scialdone stating that he told Steven Ar-dizzone he invested with Mocerino). While Plaintiffs’ contend that they were told the Debtor invested $1 million, the Debtor admitted to telling Mr. Ardizzone that he “gave” Mocerino $200,000 in MJ Communications when in fact he never invested any money in the company. Id.-, see also 191:22-192:24. Defendant argues that the $200,000 payment was a loan. Id.
Even if the Court were to accept the Defendant’s testimony as true, the fact that Defendant told Mr. Ardizzone that he “gave” money to Mocerino is an implied misrepresentation that he knew to be false at the time it was made. Thus, the first and second elements are satisfied as to this representation.
As to the tax return, Plaintiffs and Defendants stories vary. The Plaintiffs testified that Debtor showed Ardizzone and Posen the tax return to convince them to invest in MJ Communications. See Jan. 8, 2015 Trial Tr. 21:17-22:9 (Ardizzone recounts seeing the tax return); Jan. 7, 2015 Trial Tr. 215:14-216:5 (Posen recounting seeing the tax return). Each Plaintiff states that he exprеssed concerns over the numbers contained therein and that the Defendant provided an explanation, which they accepted. See Jan. 8, 2015 Trial Tr. 23:11-16 (Ardizzone testifying that he discovered the inaccuracy); Jan. 7, 2015 Trial Tr. 237:12-238:13 (Posen testifying that he discussed the inaccuracies with the Debt- or). Defendant testified that Ardizzone called the Defendant to his office where a heated conversation took place regarding
None of the witnesses gave particularly credible testimony regarding this tax return and ultimately, it is one’s word against another. See Jan. 7, 2015 Trial Tr. 31:25 (Susan testifying that John Scialdone prepared the false tax return); 234:12-14 (Posen testifying that he did not know who prepared the tax return); Jan. 8, 2015 Trial Tr. 244:22-245:15 (Scott Scialdone testifying that John told Ardizzone of the discrepancies on the tax return); see also Jan. 9, 2015 Trial Tr. 72:17-22 (John Scial-done testifying that Ardizzone told him the tax return was false). However, considering all the еvidence together, Plaintiffs’ testimony was more credible. The Court finds that the Defendant showed the document to the Plaintiffs with knowledge that the information contained within was false.
As to the brochure, the Plaintiffs did not provide sufficient evidence at trial to demonstrate that the Defendant knew it contained false information at the time he showed it to them. It appears that Mar-cello prepared the brochures without assistance from the Debtor. See Jan. 7, 2015 Trial Tr. 36:9-13.
Intent to deceive
As to the third element, that the false representation was made with the intent to deceive, Plaintiffs must show that the Debtor acted with actual intent or was reckless in disregarding the truth of a representation. See Danvers Savs. Bank v. Alexander (In re Alexander),
Here, it is clear that the Defendant recklessly disregarded the truth of his representation and knew or should have known that telling Plaintiffs that he “gave” money to Mocerino would induce them to invest. See Jan. 7, 2015 Trial Tr. 102:23-25 (Mocerino testifying); 255:1-4 (Posen testifying); Jan. 8, 2015 Trial Tr. 16:10-14, 21:2-8 (Ardizzone testifying that the Scial-dones said they invested $1 million); Jan. 9, 2015 Trail Tr. 192:18-24 (John Scialdone testifying: “I explained why I gave her the money. I said she was floating her route, so I was basically helping her float the route .... we didn’t discuss that invest-
Justifiable reliance
As to the fourth element, it is important to note that the standard is “justifiable” reliance as opposed to “reasonable” reliance. The appropriate inquiry is not whether a reasonable person would have relied on the debtor’s false statements; it is not objective. Instead, the question is whether the named creditor’s reliance was “justifiable;” it is a subjective standard. See Chong,
Debtor argues in his post-trial brief that “[i]t is well established that where sophisticated businessmen engaged in major transactions enjoy access to critical information but fail to take advantage of that access, New York courts are particularly disinclined to entertain claims of justifiable reliance.” See Terra Sec. ASA Konkursbo v. Citigroup, Inc.,
Under Field, a plaintiff need not perform his own investigation of the facts underlying the representation in order to have justifiably relied on it but he also may not blindly rely on a misrepresentation if a cursory investigation would have uncovered the truth. Field,
Ardizzone testified that in February of 2007, the Debtor showed him a document that was purported to be the most recent tax return for MJ Communications. See Jan. 8, 2015 Trial Tr. 21:24-23:23. At that meeting, the parties discussed that some of the numbers were “transposed” and that the accountant made a manual mistake. See id. 23:11-16 (“MR. WEXELBAUM: Did you have any discussion about the numbers on lines 29C and 30 not being in the correct order? MR. ARDIZZONE: Yes. You know, I explained that they were transposed and it just looked like a manual mistake, but I did understand what the numbers would be.”). It is important to note that Ardiz-zone does not state that the Debtor told him there was a mistake in the document.
Ardizzone was aware of this tax return prior to investing in MJ Communications. Until the point of seeing the errors contained in the tax return, Ardizzone was entitled under § 523(a)(2)(A) to rely on the representations made by the Debtor. However, once he became aware of the inaccuracies contained within the document, he could no longer blindly rely on the Debtor’s representations. After that •point, he had a duty to investigate whether the tax return accurately reflected the profits and losses of MJ Communications. Had he asked for the final version of this return or prior years returns, he would have surely discovered that MJ Communications did not make anywhere near the numbers contained in the fraudulent return. Having failed to undertake this investigation, he cannot now say that his reliance on the Debtor’s representations was justified.
Posen also testified that he saw that the numbers of the tax return were not accurate. See Jan. 7, 2015 Trial Tr. 237:12— 238:13 (“MR. GIOFFRE: ... Did you happen to notice that although the $53 million is in that spot where it’s not supposed to be, as counsel had just indiсated? MR. POSEN: Yes. MR. GIOFFRE: And did that give you rise to this particular document, when it was provided to you, that it might not be accurate? MR. PO-SEN: It was my understanding, that this was a draft.... MR. GIOFFRE: A draft, okay. And whose understanding is that, or how did you come to that understanding? MR. POSEN: I discussed it with John. MR. GIOFFRE: And what did John say? MR. POSEN: He gave me a very good explanation. I can’t tell you word for word what he said, but he made me feel comfortable, that it was — he’d given the explanation. MR. GIOFFRE: Can you recall any words of what he said, with the explanation? MR. POSEN: Not off of the tоp of my head.”). Posen did not see the tax return prior to making his initial investment of $600,000 but did see it prior to making his investment of $400,000. Id. at 212:3-6 (“MR. WEXELBAUM: Were you ever shown a tax return prior to your making your initial investment in Susan Mocerino’s company? MR. POSEN: No.”); 215:14-20 (“MR. WEXELBAUM: Now, after you made the initial investment of $600,000 in Susan Mocerino’s company, were you shown a tax return for that company? MR. POSEN: Yes. MR. WEXELBAUM: And was that before you invested the second tranche of $400,000? MR. POSEN: I believe so.”). The inaccuracies contained in the tax return аre undoubtedly an indication of deception and once he learned of them, Posen had a duty to investigate further. Instead, he chose to invest an additional $400,000. Having failed to investigate, Posen cannot now argue that his reliance is justifiable as to this $400,000 investment.
Whether creditor was damaged
Having just determined that Ar-dizzone and Posen cannot have justifiably relied on Debtor’s representations after becoming aware that the Defendant tried
Posen testified that after he became aware that the Defendant received monies from Mocerino, he confronted Mocerino she refunded him $500,000. See Jan 7, 2015 Trial Tr. 221:22-222:2 (“MR. WEX-ELBAUM: Did you subsequently receive a refund of any sort from the monies you had invested with 24 Susan Mocerino? MR. POSEN: I did. MR. WEXELB-AUM: And how much was refunded to you? MR. POSEN: $500,000”). He also confronted the Debtor and the testimony of all the parties indicated that Posen and the Debtor agreed to settle this debt by forming Crossfire.
Posen re-invested the $500,000 debt he believed the Debtor still owed
Posen was involved in the formation of Crossfire and the company was formed by Posen’s accountant at his behest. Id. Po-sen testified that he was “happy to receive” profits from Crossfire as long as he did not have to invest any money. Id. at 266:11-14. He believed himself to be a “passive investor” in Crossfire for the purpose of recouping his investment in MJ Communications. See id. at 270:3-5.
As for the Debtor’s part of this deal, he invested the $465,000 that he personally received from Mocerino to fund Crossfire. In July 2007, Defendant made the initiаl investment in Crossfire of $465,000 by writing a check to Crossfire from his company, Oracle Trading Corp. Id. at 227:9-228:1; see also Trial Ex. 9 (check from Oracle to Crossfire). In this way, the Debtor turned over to Posen, by way of Crossfire, all of the monies he received from Mocerino. See Jan. 9, 2015 Trial Tr. 113:2-13 (Since Posen and the Defendant agreed to this deal after Posen became fully aware of all of the Debtor’s misrepresentations, he can no longer argue that he was defrauded by the Debtor. Instead, he made a businеss decision to invest in Crossfire. See Jan. 8, 2015 Trial Tr. 252:16-19 (Scott Scialdone testifying
Conclusion
For the foregoing reasons, the Court finds that Plaintiffs have failed to meet their burden of showing justifiable reliance and damages. The Defendant shall submit an order consistent with this decision.
Notes
. The parties refer to Mocerino and her business MJ Communications interchangeably. No one has objеcted to this and so for purposes of this decision, the Court will also refer them as one in the same.
. Debtor is the President of Oracle, which operates as a trading company at the New York Mercantile Exchange. The parties refer to the Debtor and Oracle interchangeably as well. It appears that Debtor did not receive any money from Mocerino or MJ Communi
.Defendant testified that this was the repayment of a loan he had previously made to Mocerino.
. The Court finds that MJ Communications did exist — but was not generating the kind of profits the Plaintiffs were promised.
. Although this case states that reliance must be reasonable, the Supreme Court subsequently established the appropriate standard is justifiable reliance. Field v. Mans,
. The Court makes no legal finding as to whether this $500,000 was owed to Posen by the Debtor. The Court simply finds that the Debtor and Posen seem to agree that it was owed and created a new business as a way for him to recoup this money.
. The transcript has a transcription error; from the transcript it appears like pebtor's counsel is testifying when in fact Scott Scial-done is answering the question posed by counsel.