Gore v. Kressner (In Re Kressner)Gore v. Kressner (In Re Kressner)
Creditor Hilda Gore, executrix of the Estate of Bernard Gore (“Plaintiff”), commenced this adversary proceeding 1 seeking judgment declaring her $506.938.07 claim arising from a State Court judgment against debtor Mark Kressner (“Kressner” or “Defendant”) non-dischargeable under 11 U.S.C. § 523(a)(2)(A) and (a)(4) and to deny the debtor’s discharge pursuant to 11 U.S.C. § 727(a)(3), (4) and (6). 2
Factual Background
In order to fully understand the matter at hand, the Court must step back and consider all the events transpiring at the times in question. The chapter 7 debtor-defendant in this adversary proceeding was a practicing attorney specializing in negligence and medical malpractice eases in New York State since 1976. Defendant was suspended from the practice of law in 1985 and has since been reinstated as a practicing attorney.
The deceased, Bernard Gore (“Gore”), was an attorney who practiced law in New York State from 1935 until his deаth in 1982.
In the early 1980’s, as Gore’s health deteriorated, he began referring negligence and medical malpractice cases to Defendant who agreed to share the net fee earned equally with Gore. While Defendant paid Gore a referral fee in connection with most of the eases, Defendant did not split the fees with Gore in some of the referred cases. One such case was a medical malpractice matter entitled Newman v. City of New York (hereinafter the “Newman Matter”), although Debtor and Gore both signed a written agreement that they would share the fees earned in the Newman Matter on a 50-50 basis. (Plaintiff’s Exhibit F; Trial Transcript (“Tr”.) at 154-55). The record shows that Gore referred the Newman Matter to Kressner, and during the pendency of the case, Gore became seriously ill.
Gore died in 1982. Shortly after the funeral, Gore’s son, Nelson Gore, and daughter, Hilda Gore, met with Kressner to discuss his fee-splitting arrangement with their father. (Tr. at 26). Because he was under investigation by the Professional Disciplinary Committee at that time, 3 Kressner told Gore’s children he could not continue with the fee-splitting arrangement, asserting that he could uphold the arrangement only for cases on which Gore actually performed work. (Tr. at 27-28). One outcome of this meeting was to put Defendant on notice, as early as 1982, that Gore’s heirs claimed entitlement to fifty percent of the fees Defendant received from the referred cases. Indeed such was the arrangement because part of the record before this Court shows that Defendant did pay money over to the estate on many of the referred cases. These payments are an acknowledgment by Kressner that he did in fact have a 50-50 split fee agreement with Gore. Nevertheless, he .did make an exception for the fees received on the Newman Matter and several others. Kressner justifies his actions by asserting that Gore’s activity on the Newman Matter was limited to opening the file, conducting an interview of one of the plaintiffs and ensuring the retainer agreement was executed and filed. He further contends that because Gore was ■ deceased and obviously could not do any work on the' case going forward. Gore’s estate is not entitled to the fees sought.
As a result of the Debtor’s failure to divide the fees, Plaintiff commenced an action in the Supreme Court, New York County entitled
Gore v. Kressner
seeking a determination that the agreement entered into between Gore and the Defendant was valid and enforceable. Plаintiff alleged two causes of action; one sounding in contract and the other for fraud to recover one-half of the unpaid fees on several of the referred cases. On December 30,1988, the Honorable James N. White, rendered a written decision (the “State Court Decision”), ruling that the agreements to divide legal fees were valid and enforceable because Gore, as the referring attorney, had contributed sufficient work and/or services on the cases in question to uphold the fee-splitting agreements. The Court found that Defendant was liable on the contracts to Gore in the total amount of $507,938.07, allocated as follows: the sum of $350,000 with interest from March 26, 1984 regarding the Newman Matter; the sum of $500 with interest from January 11, 1983 regarding a matter entitled
McNamara v. Shivers;
the sum of $3,704.05 with interest from November 23, 1982 regarding a matter entitled
Saperstein v. Mt. Vernon Board of Education;
and the sum of $688.33 with interest from November 9, 1992 regarding a matter entitled
Kerr v. Matteo.
The State Court Decision also dismissed Plaintiffs second cause of action for fraud
5
and dismissed all three of Defendant’s counterclaims. The judgment reflecting the State Court Decision was entered by the clerk of the Supreme Court, County of New York, on March 29, 1989. The Appellate Division, First Department affirmed the judgment in January, 1990 in an opinion which stated Bernard Gore had provided sufficient services to justify the judgment in favor of Plaintiffs decedent.
See Gore v. Kressner,
The Bankruptcy Proceedings
On September 16, 1991, Defendant filed a voluntary petition in this Court for relief under Chapter 7 of the United States Bankruptcy Code, listing Plaintiff as a creditor. By reason of numerous extensions to file a complaint objecting to discharge, requested by Gore and agreed to by Kressner, the time to object to the liability of the debt owing to Plaintiff and to object to the Debtor’s discharge was extended through February 2, 1993. Plaintiff commenced this adversary proceеding by filing a summons and a complaint on February 2, 1993. Thereafter on March 6, 1993, Defendant filed a motion for summary judgment seeking dismissal of the complaint. On May 25,1993, the late Honorable Howard Sehwartzberg rendered a written decision denying the Defendant’s summary judgment motion.
See In re Kressner,
Plaintiff’s adversary complaint asserts six causes of action against the Debtor-Defendant. Plaintiff moved for partial summary judgment under Section 523(a)(4), and the motion was denied in a written decision by Judge Sehwartzberg dated February 18, 1994.
See In re Kressner,
DISCUSSION
The First Cause of Action: Section 523(a)(2)(A)
In the First Cause of Action, Plaintiff seeks a declaration’ that her claim is nondischargeable under section 523(a)(2)(A), which excludes from discharge any debt:
(2) for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by—
(A) false pretenses, a false representation, or actual fraud, other than a statement in writing respecting the debtor’s or an insider’s financial condition.
II U.S.C. § 523(a)(2)(A).
To sustain a cause of action under this section, Plaintiff must establish by a preponderance of the evidence that Kressner: (1) made false representations, (2) which he knew were false at the time they were made, (3) which were made with the intent to deceive, (4) upon which Plaintiff relied, and (5) which reliance caused Plaintiff to suffer a loss.
In re Guerrerio,
More importantly, Plaintiff has lost sight of the critical point at issue, specifically, whatever Kressner may have or did in fact say to Hilda Gore has nothing to do with the creation of the debt herein.
See In re Schmidt,
Significantly, Judge Schwartzberg concluded that
res judicata
bars the Plaintiff from asserting an action against Kressner for fraudulently inducing Bernard Gore to enter into the fee-splitting agreement because this issue was already actually litigated in the State Court.
Kressner,
Finally, even if the Court were to adopt Hilda Gore’s allegation that Kressner’s false statements induced her to forebear from ex
An analogous situation occurred in In re Schmidt, supra, wherein that Court concluded that the fact that the settlement agreement itself may have been induced by fraudulent acts of the debtor did not render the debt non-dischargeable, where the mutual release in the settlement agreement settled a dischargeable claim. As the Court concluded in Schmidt:
It appears to this Court that where a Debtor, such as Schmidt, by his conduct fraudulently induces a settlement agreement, the consideration received by the Debtor must have been the receipt of actual money or tangible property or services or the release of an underlying claim which is itself non-dischargeable, as a direct result of the fraud, and if all that was obtained by the Debtor was the release of a general, unsecured claim for monies due and owing which could have been discharged in bankruptcy notwithstanding the mutual release, then the Debtor has not received any property of the creditor. It is obvious that after the mutual release was executed, Schmidt was not precluded from filing bankruptcy and discharging any otherwise dischargeable claims that formed the basis of the mutual release.
In re Schmidt,
Similarly, in the instant case, the Debtor did not receive actual money or tangible property or services or the release of an underlying claim which is itself non-disehargeable, as a direct result of the fraud. The underlying judgment of liability against Kressner recognizes nothing more than a breach of contract, a dischargeable debt. Any alleged forebearing of collection efforts of an underlying dischargeable claim by Hilda Gore does not constitute the extension of credit or the receipt of property or money within the meaning of the Bankruptcy Code governing non-dischargeability on the basis of fraud.
See In re Bacher,
The Second and Third Causes of Action: Section 523(a)(4)
In the Second and Third Causes of Action, Plaintiff seeks a declaration that her claim is non-dischargeable under Section 523(a)(4) which excepts from discharge any debt “for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny.” 11 U.S.C. § 523(a)(4). Plaintiff claims Defendant fraudulently misappropriated funds that he was obliged to tender to Gore under the fee-splitting agreement. Plaintiff further alleges that Kressner embezzled the funds while he acted as a fiduciary. The premise of Plaintiff’s allegations is that the relationship between Gore and the Debtor constituted a joint venture, which therefore established that the Debtor acted in a fiduciary capacity. Debtor argues that no such relationship has been established because the fee-splitting agreement was only a contract that does not impose fiduciary duties upon him.
For Plaintiff to prevail on her Second Cause of Action, it must be initially established that the Defendant acted in a fiduciary capacity.
Teichman v. Teichman (In re Teichman),
Plaintiff contends that the fee-splitting agreement was a joint venture agreement. In that regard, Plaintiff alleges that as a result of the parties’ agreement to share in the profits, a partnership relationship was created. The elements of a joint venture are: (i) an express or implied agreement manifesting the parties intent to be joint venturers, (ii) a contribution by both to the joint task, (iii) sharing of profits and losses, and (iv) joint control.
See Natuzzi v. Rabady,
Even assuming,
arguendo,
that Plaintiff adequately plead the elements of a joint venture, the fee-splitting agreement did not create a trust relationship between the parties because, as a matter of law, Defendant did not act in a “fiduciary” capacity within the meaning of the discharge exception.
In re Mason (Tillman v. Mason),
A case on point is
People v. Keeffe,
In
Keeffe,
a wrongful death action was settled by Keeffe, an attorney. In a compromise approval proceeding that followed, a predecessor attorney, DTsemia, claimed a lien on the settlement proceeds for his fee.
Id.
at 448,
The Court of Appeals concluded that all that the intermediate order adjudged the former attorney to have “was a contract right to recover a fee, not any ‘property' or ‘owner’ interest superior to that of defendant in the proceeds of settlement of the malpractice action.”
Id.
at 450,
Similarly, and for many of the aforementioned reasons articulated in the Keeffe, ease, this Court cannot escalate Kressner’s failure to meet a contractual obligation into a breach of fiduciary duty under New York law as well as under Bankruptcy Code Section 523(a)(4).
Moreover, while it is well established under New York law, that an attorney stands as a fiduciary to his client,
(See In re Riley,
Furthermore, as the Court concluded in
Marchiando,
Plaintiff produced an expert witness, Mr. Anthony Davis, who testified why he believed a fiduciary relationship existed between Debtor and Gore based upon legal ethics/professional responsibility. It appears to the Court that Mr. Davis viewed this case in a vacuum, considering his admission that he did not review the entire case file, specifically that he had not read any of the opposition papers or prior published decisions in this case. (Tr. at 71). He further testified that he did not even review the entire transcript of the trial in the State Court action. (Tr. at 71). Additionally, “[although the concept of fiduciary is to be narrowly defined as a matter of federal law, state law is to be consulted to determine when a trust in this strict sense [i.e., under section 523(a)(4) ] exists.”
In re Stone,
In the Third Cause of Action, Plaintiff objects to the dischargeability of her claim against the Defendant on the ground that the debt resulted from the Defendant’s embezzlement of Plaintiff’s funds while acting in a fiduciary capacity, as escrow agent and individually. Embezzlement under Section 523(a)(4) is to be determined under federal common law, which defines it as the fraudulent appropriation of money by a person to whom such property had been entrusted or into whose hands it has lawfully come.
In re Bevilacqua,
An obligation may be found nondisehargeable for embezzlement under Section 532(a)(4) even if the debtor did not act in a fiduciary capacity.
In re Stephens,
It is abundantly clear to this Court that Plaintiff has failed to meet her burden in proving that the debt is non-disehargeable under Section 523(a)(4). Plaintiff has failed to establish that a true fiduciary relationship existed by operation of law. At best, this is a breach of contract claim. Therefore, this Court finds that the contract establishing the fee-splitting arrangement between Gore and Kressner did not give rise to a fiduciary relationship and that there was no evidence of fraudulent intent. 7
Denial of Discharge — Section 727
In the Fourth Cause of Action, Plaintiff seeks a denial оf the Defendant’s discharge under Section 727(a)(3) on the ground that Defendant “failed to keep or preserve records, or that the debtor unjustifiably destroyed such records.”
In re Wolfson,
The adequacy of a debtor’s books and records is to be evaluated on a case-by-case basis, considering the size and complexity of the debtor’s business.
In re Potter,
In Plaintiffs Fifth Cause of Action, Plaintiff objects to the debtor’s discharge under Section 727(a)(4)(A) on the ground that he knowingly and fraudulently made a false account of the current status of his assets in his petition filed September 17, 1991. In order to establish a basis for the debtor’s discharge pursuant to Section 727(a)(4)(A), Plaintiff must establish that (1) the debtor made a statement under oath, (2) the statement was false, (3) the debtor knew the statement was false, (4) the debtor made the statement with fraudulent intent, and (5) the statement related materially to the bankruptcy case.
In re Emery,
Plaintiff relies upon an asset and liability sheet dated June 20, 1988 (Plaintiffs Exhibit A), prepared by Defendant’s accountant, Mark Goldfarb. Plaintiff alleges that Defendant’s discharge should be denied because the sheet shows that as of June 20, 1988, Debtor and his wife owned personal property worth approximately $140,000.00 (Tr. at 199-200), and Defendant testified that as of the date of the filing of his petition in September, 1991, the personal property no longer had any value. (Tr. 199-201) Plaintiff alleges that Defendant has failed to account for the property or provide a list of the property and their disposition. Kressner testified that the personal property was mostly gifts his wife had received from her parents and that the cars (which were also repossessed) also belonged to his wife. Plaintiff then asks the Court to compare the asset-liability sheet against a 1988 loan application for Dollar Dry Doсk where Defendant listed that he alone had approximately $180,-000 in personal property. A blind reading of these documents is unjustified, and the picture must be examined. In fact, three years after this loan application was submitted, Defendant filed his bankruptcy petition. In the Court’s view, this reflects a definite change in financial circumstances amply supported by testimony of a number of witnesses at trial. The $180,000 value listed by Defendant was an optimistic estimate of Defendant’s worth. Then when things went badly for the Defendant and his financial situation deteriorated, he was forced to look at the reality of what his assets were really worth.
Defendant was subpoenaed to produce cheeks at his 2004 examination. While Defendant failed to bring the checks, he did produce his bank records. Defendant was questioned concerning his 1990 Income Tax Return, filed the year he filed for bankruрtcy protection, which indicates a receipt of $553,-000 in income and which money is reflected in the bank records. Defendant testified that the $523,000 “phantom income” derived from tax shelters, and “[n]ot one penny of that did [he] ever get in actual money” but it was fully disclosed on his tax return. (Tr. at 204). Mark Goldfarb, Defendant’s accountant also testified that the $553,000 dealt with investments. Additionally, Defendant testified that he received income from investments of approximately $40,000 and $17,000. This disclosure of the income earned prepetition is relevant to an understanding of a • debtor’s financial condition. Plaintiff has failed to prove that Defendant’s failure to disclose the information requested precludes discharge.
The record is replete with testimony evidencing the hardships faced by Defendant and his family and Defendant’s bleak finan
In the Sixth Cause of Action, Plaintiff asserts that the Defendant’s discharge should be denied pursuant to sections 727(a)(6)(A) and (a)(6)(C) because the Defendant failed to answer questions or provide information at an examination ordered and directed by the Court pursuant to an order dated December 2, 1991, for a rule 2004 examination. The Court has reviewed the transcript of the Defendant’s examination (Plaintiffs Exhibit 0-1 & 2) and is satisfied that the Defendant answered the questions to the best of his knowledge and produced all relevant documentation within his control. The Court finds that Defendant did not violate the 2004 order. As for the allegation that the Defendant refused to respond to questions posed to him at the 2004 examination, the Court finds that the Defendant was exercising his rights and not necessarily disobeying a Court order.
For the foregoing reasons, it is
ORDERED, that Plaintiffs complaint insofar as it seeks non-dischargeability of the debt claimed to be owing by the Defendant to the Plaintiff pursuant to Section 523(a)(2)(A) is denied: it is further
ORDERED, that Plaintiffs complaint insofar as it seeks non-dischargeability of the debt claimed to be owing by the Defendant to the Plaintiff pursuant to Section 523(a)(4) is denied: and it is further
ORDERED, that Plaintiffs complaint insofar as it seeks to have the discharge of the Debtor/Defendant barred pursuant to Sections 727(a)(3), (a)(4)(A), (a)(6)(A) and (a)(6)(C) is denied and his discharge shall remain in full force and effect.
Notes
. This Court has jurisdiction over this core proceeding under 28 U.S.C. § 1334(b) and 157(b)(2)(I) and (J).
. Unless otherwise indicated, all statutory references are to Title 11 of the United States Code.
. Defendant ultimately pled guilty to an unclassified misdemeanor, soliciting business on behalf of an attorney, a violation of Judiciary Law Section 479. By order of the Supreme Court of the State of New York, Appellate Division, First Department, dated May 16, 1985 and amended by order of said court dated June 27, 1985, Defendant was suspended from the practice of law for a period of three years and until further order of that court.
. Disciplinary Rule 9-102(A) of the New York Lawyers Code of Professional Responsibility provides that a lawyer in possession of funds or other property belonging to another person, where such possession is incident to his or her practice of law, is a fiduciary.
. The State Court dismissed the fraud claim since it concluded that "fraud is not an available remedy where the claim is that the defendant entered into a contract with no intention of performing it." Gore v. Kressner, No. 84-5825 at 3 (N.Y. Dec. 30, 1988).
. Plaintiff contends that Defendant is collaterally estopped in this action from denying that the debt, consisting of the monies obtained by Defendant from cases referred to him by Gore, is excepted from discharge. Plaintiff urges that at the outset, a joint venture existed between Gore and Defendant and argues that the New York Supreme Court's findings should be given collateral estoppel effect. The record must be clear that the State Court did not find the existence of a joint venture between Defendant and Gore. Plaintiff contends that since Judge White, in his written opinion, specifically found that Gore performed services on the cases at issue, and that the agreement to share the fee equally was valid and enforceable, collateral estoppel therefore applies. However, this Court, while mindful of the issues decided by the State Court, must take a step beyond that court’s findings to determine the dischargeability issues herein.
The doctrine of collateral estoppel prevents a party from re-litigating an issue clearly raised in prior action and necessarily decided against that party or those with whom the party shares privity.
Conte v. Justice,
The elements of the test for application of collateral estoppel are: (1) whether the issue sought to be litigated is identical to an issue necessarily decided in the prior action and decisive on the present action, and (2) whether the
The pre-bankruptcy judgment is res judicata on the issue of liability but not on the issue of dischargeability which is a new and different cause of action to be decided in a proceeding before this Court under Section 523 of the Code. It is the law of this case that said cause of action is not barred by res judicata or collateral estoppel.
See Kressner,
. Although Plaintiff does not assert, in her complaint, a claim against the Debtor under Section 523(a)(6), she contends in her Post-Trial Memorandum of Law at pp. 13-14, that the Debtor's actions constitute willful and malicious conduct pursuant to Section 523(a)(6). Since this claim was not asserted in the complaint nor did Plaintiff amend her complaint to include this сlaim, this claim is not properly before this Court and therefore this Court cannot address or consider it in rendering its decision.
. Upon review of the transcript of the trial of this matter, it was discovered that portions of the Defendant's character witnesses’ testimony was omitted from the transcript, apparently due to a faully audiotape. Nevertheless, in the interest of judicial economy, the parties agreed to allow the Court to render a decision based upon the Court’s notes and memory of the testimony.
As previously stated, it is the Plaintiff's burden of proof to show the elements necessary to bar a discharge or the dischargeability of a claim. Here, the omitted portions of the transcript solely relate to character witnesses called to testify by Kressner and not by the Plaintiff. These witnesses merely testified as to the character of the Defendant and thus, their testimony was accorded little weight by the Court.