Michael Kaplan and Nina Kaplan
MEMORANDUM OPINION
BY: THE HONORABLE MAGDELINE D. COLEMAN, CHIEF UNITED STATES BANKRUPTCY JUDGE
I. INTRODUCTION
The plaintiff, T. Levy Associates, Inc. (the “Plaintiff” or “TLA“), filed this adversary proceeding seeking a determination that the judgment debts (the “Judgments“) owed to it by Michael Kaplan (“Mr. Kaplan“) and Nina Kaplan (“Mrs. Kaplan,” and together with Mr. Kaplan, the “Debtors,” and both Debtors together with the Plaintiff, the “Parties“) are nondischargeable pursuant to sections
and various claims under Pennsylvania law. This Court held a two-day trial on October 19 and 21, 2020 (the “Nondischargeability Trial“), and upon the trial‘s conclusion took the matter under advisement and directed the Parties to submit proposed findings of fact and conclusions of law, which the Parties filed on December 4, 2020.2 After consideration of the Parties’ post-trial submissions and
II. RELEVANT FACTUAL AND PROCEDURAL BACKGROUND3
A. The Relationship Between the Debtors and TLA
TLA was a cosmetics and beauty wholesale supplier and retailer founded in the 1960s by Ted Levy (“Mr. Levy“), who is the father of the Debtor Mrs. Kaplan and the father-in-law of co-Debtor Mr. Kaplan. Mr. Levy was the President of TLA, as well as its sole shareholder until 2009. Mr. Levy‘s wife, Rosalind Levy (“Mrs. Levy“), also worked at TLA as a secretary and bookkeeper, but did not have any ownership interest. Sometime in or around 1982, Mr. Levy was diagnosed with Multiple Sclerosis and began to reduce his time spent actively managing TLA. By the late 1990s, Mr. Levy had withdrawn from TLA‘s wholesale operations entirely, and in the early 2000s he further reduced the time he spent actively managing TLA. Mr. Levy retired in 2003, and although he retained the title of President after he retired, he generally did not have an active role in TLA‘s business. Following his retirement, Mr. Levy purchased a beach home in New Jersey and spent the majority of his time there. Mrs. Levy, however, did not retire from TLA, and continued to work two or three days per week. Mr. and Mrs. Levy also spent time during the year in Florida, and in 2005 or 2006 they permanently relocated there. Mr. Levy was the 100% owner of TLA until 2009, when he gifted 1% ownership to each of Mr. Kaplan, Mrs. Kaplan, and Mr. Levy‘s other daughter, Cindy Fein (“Ms. Fein“). In 2010 he again gifted another 1% ownership to Mr. Kaplan, Mrs. Kaplan, and Ms. Fein.
Mr. Kaplan had a long career with TLA until he was terminated in March of 2016. Mr. Kaplan began working for TLA in the early 1980s, and eventually married Mrs. Kaplan. As noted above, TLA had two divisions: its retail business was conducted through “Beauty Land” retail stores, and its wholesale business was conducted through T. Levy Supply.4 Mr. Kaplan began his career with TLA in its retail operations, but after Mr. Levy was hospitalized in or around 1982 with Multiple Sclerosis, Mr. Kaplan took charge of TLA‘s wholesale business. When Mr. Levy retired in 2003, he ceded operating control of TLA to Mr. Kaplan and gave him full authority to take action and make decisions on behalf of the business. By 2008, Mr. Kaplan‘s title was Executive Vice President.
Mrs. Kaplan, on the other hand, did not work for TLA; instead, she operated various stores and businesses of her own. Beginning in 1989 or 1990, Mrs. Kaplan was the sole owner of several retail locations selling jewelry, home accessories, and antiques, which eventually consolidated at a single location in Newtown, Pennsylvania with a store called Angel Heart. In 2006, Mrs. Kaplan created an entity called Hip² (“Hip Squared“), of which she was the sole owner, to operate a store in Pennington, New Jersey selling clothing, cosmetics,
B. The District Court Action
After Mr. Kaplan was terminated from TLA in March 2016, TLA filed a complaint in the District Court Action against both Mr. and Mrs. Kaplan and BLC Pennsylvania, asserting that, through various actions, they had pillaged TLA‘s assets for the benefit of themselves personally and Mrs. Kaplan‘s businesses. TLA alleged that one or both Debtors (i) embezzled $492,922.99 by charging that amount on TLA‘s American Express Card for the benefit of the Debtors personally and to support Mrs. Kaplan‘s business, (ii) embezzled $224,857.66 by expending TLA funds to purchase products for Mrs. Kaplan‘s business, (iii) used TLA funds in the amount of $284,168.00 to repay personal loans from Mr. Levy to Mr. and Mrs. Kaplan, (iv) used TLA funds in the amount of $216,269.00 to pay BLC Pennsylvania‘s rent, and (v) caused $200,391.00 in lost profits for calendar year 2016 by diverting TLA‘s long-time wholesale customers to BLC Pennsylvania.
As noted supra, the Judgments were rendered against the Debtors in the District Court Action after a four-day trial. During that trial, both Debtors, Mr. Levy, and Ms. Fein each testified, as did certain other individuals who were either employed by the Plaintiff or served in an advisory or retained professional role to the Plaintiff.
The jury in the District Court Action returned a unanimous verdict in favor of TLA. The jury found Mr. Kaplan liable (i) in the amount of $222,087.50 for violating RICO, (ii) in the amount of $100,000.00 for converting TLA‘s property, (iii) in the amount of $100,000.00 for breach of fiduciary duties to TLA, and (iv) in the amount of $100,000.00 for tortiously interfering with TLA‘s contractual relationships. The jury found Mrs. Kaplan liable (i) in the amount of $161,044.00 for violating RICO, and (ii) in the amount of $100,000.00 for converting TLA‘s property.5 The damages for the RICO claims were automatically tripled.
On June 30, 2017, after the jury verdict was entered, the District Court entered the Judgments in favor of TLA, in the amount of $966,262.50 against Mr. Kaplan, and in the amount of $583,132.00 against Mrs. Kaplan. On August 21, 2017, as authorized due to the Kaplans having been found liable for violation of RICO, the District Court awarded TLA an additional $482,959.60 in legal fees and expenses, holding Mr. and Mrs. Kaplan jointly and severally liable for them. As such, the total of the Judgments against the respective Debtors is $1,449,222.10 against Mr. Kaplan, and $1,066,091.60 against Mrs. Kaplan. It is with respect to these amounts that the Plaintiff seeks a nondischargeability determination in this adversary action.
On August 30, 2017, the Debtors filed their bankruptcy case under chapter 7 of the Bankruptcy Code. On December 13, 2017, the Plaintiff initiated this adversary action by filing a Complaint against both Debtors to contest the discharge of the Judgments.6 The Complaint asserts that the Judgments are nondischargeable under various subsections of
the Judgments were incurred by false pretenses, false representations, and actual fraud, rendering them nondischargeable pursuant to
1. The First Summary Judgment Motion
On July 16, 2019, the Plaintiff moved for summary judgment (the “First Summary Judgment Motion“) on each count of the Complaint, relying on the application of collateral estoppel to the jury verdict in the District Court Action.7 With respect to its
On October 4, 2019, the Court issued a Memorandum Opinion (the “First Summary Judgment Opinion“) and an Order granting the First Summary Judgment Motion in part and denying it in part, based on the application of collateral estoppel to the Judgments in the District Court Action.9
First, the Court found that the jury verdict in favor of the Plaintiff on the RICO claims against each Debtor, based on mail and wire fraud, established (i) the culpable act by the Debtors that constitutes fraud for purposes of
Second, the Court found that the jury verdict in favor of the Plaintiff on the RICO claim also established, for purposes of
Finally, the Court found that the jury verdict in favor of the Plaintiff on its breach of fiduciary duty and tortious interference with contract claims, as to Mr. Kaplan only, did not establish any of the elements of the Plaintiff‘s claim under
As a result of the Court‘s rulings on the First Summary Judgment Motion, the Plaintiff was left to prove (i) with respect to its actual fraud claim under
2. The Second Summary Judgment Motion
On March 3, 2020, the Plaintiff again moved for summary judgment (the “Second Summary Judgment Motion“).11 As Judge FitzSimon stated in her Memorandum Opinion denying the Second Summary Judgment Motion, “The second motion aim[ed] to achieve by way of proof what was missing the first time in the way of preclusion.”12 Specifically, the Plaintiff argued that the record established (i) the justifiable reliance element of its “actual fraud” claim under
With respect to the justifiable reliance element of the Plaintiff‘s actual fraud claim under
TLA‘s declining financial health under Mr. Kaplan‘s watch. With respect to the intent to injure element of the Plaintiff‘s willful and malicious injury claim under
At the Nondischargeability Trial, the Court heard limited testimony from the Debtors as well as TLA‘s founder and President, Theodore Levy (“Mr. Levy“), each of whom the Debtors presented as part of their case-in-chief (Mr. Levy was presented as-on-cross) and admitted various documents into evidence. Rather than present new testimony at the Nondischargeability Trial in support of the remaining elements of its claims, however, the Plaintiff elected to rely on the transcript of the District Court Action (the “District Court Transcript“), which was entered into evidence.14 As such, the Court‘s resolution of the Plaintiff‘s nondischargeability claims in this adversary action turns on the limited testimony in the Nondischargeability Trial and the documents entered into evidence at that trial, including the District Court Transcript.
III. DISCUSSION
A goal of the bankruptcy process is to provide debtors with a fresh start, and exceptions to discharge are construed strictly against the creditor and liberally in favor of the debtor. Linder v. Berry (In re Berry), 2012 Bankr. LEXIS 4668, at *8 (Bankr. W.D. Pa. Oct. 2, 2012) (citing
Ins. Co. of N. Am. v. Cohn (In re Cohn), 54 F.3d 1108, 1113 (3d Cir. 1995)). The Plaintiff bears the burden of proof and must prove the elements of its nondischargeability claims by a preponderance of the evidence. Larson v. Bayer (In re Bayer), 521 B.R. 491, 499 (Bankr. E.D. Pa. 2014); Berry, 2012 Bankr. LEXIS 4668, at *9 (citing Grogan v. Garner, 498 U.S. 279, 285, 111 S. Ct. 654, 112 L. Ed. 2d 755 (1991)).
A. Actual Fraud Under §523(a)(2)(A)
Section
As discussed supra, the Court has already ruled that the jury verdict in the District Court Action on the Plaintiff‘s RICO claims against the Debtors, which found them liable for mail and wire fraud, established the “actual” and the “fraud” components of an actual fraud claim under
In its First Summary Judgment Opinion, this Court observed that in Husky International Electronics v. Ritz, 136 S. Ct. 1581, 194 L. Ed. 2d 655 (2016), the Supreme Court “recognized that it ‘has historically construed the terms in
evidentiary basis for the actual fraud, nondischargeability claim, the other element normally associated with common law fraud; to wit, reliance, must also be present.”16 This Court concluded that because the record in the District Court Action did not establish the reliance requirement, and “because reliance is required for fraud under Bankruptcy Code
The Plaintiff argues that, contrary to the Court‘s reasoning, Husky “established that reliance is not an element of a
The undersigned believes a closer examination of Husky‘s holding is appropriate. The Husky case came to the Supreme Court on appeal of a Fifth Circuit decision holding, in the context of asserted fraudulent conveyances by the debtor, that a necessary element of an actual fraud claim is a misrepresentation from the debtor to the creditor. Husky, 136 S. Ct. at 1585-1586. The Supreme Court reversed, holding that the term “actual fraud” in
common law of fraud, which indicated that fraudulent conveyances, although a “fraud,” do not require a misrepresentation from a debtor to a creditor. Id. at 1587. The Husky court then drew a very important distinction between what it called inducement-based frauds and frauds of concealment and hindrance:
As a basic point, fraudulent conveyances are not an inducement-based fraud. Fraudulent conveyances typically involve “a transfer to a close relative, a secret transfer, a transfer of title without transfer of possession, or grossly inadequate consideration.” In such cases, the fraudulent conduct is not in dishonestly inducing a creditor to extend a debt. It is in the acts of concealment and hindrance. In the fraudulent-conveyance context, therefore, the opportunities for a false representation from the debtor to the creditor are limited. The debtor may have the opportunity to put forward a false representation if the creditor inquires into the whereabouts of the debtor‘s assets, but that could hardly be considered a defining feature of this kind of fraud.
Id. This distinction between inducement-based frauds and frauds of concealment and hindrance makes clear that, while both fit within the universe of actual fraud, only some subset of that universe is premised on a false representation.
The question then raised is whether an actual fraud that does not entail a false representation could still somehow require reliance by the aggrieved party. Husky answers this in the negative in rejecting the dissent‘s position that to be nondischargeable based on actual fraud, a debt had to not only result from or be traceable to fraud, but also had to result from fraud at the “inception of a credit transaction.” Id. at 1589-1590. The Husky majority acknowledged that in Field v. Mans, 516 U.S. 59, 116 S. Ct. 437, 133 L. Ed. 2d 351 (1995), the Supreme Court noted that “certain forms of bankruptcy fraud require a degree of direct reliance by a creditor on an action taken by a debtor.” Husky, 136 S. Ct. at 1589. Critically, however, the Husky majority then clarified the context in which Field did so: “But Field discussed such ‘reliance’ only in setting forth the requirements of the form of fraud alleged in that case – namely, fraud perpetrated through a misrepresentation to a creditor. The Court was not establishing a
‘reliance’ requirement for frauds that are not premised on such a misrepresentation.” Id. at 1589-1590 (emphasis added). With that clarification, the undersigned believes there is only one conclusion to be drawn from Husky; a claim of actual fraud under
The Plaintiff goes too far in arguing that under Husky, reliance is not an element of actual fraud. Reliance is an element if the actual fraud centers on a misrepresentation by the debtor. See Lenchner v. Korn (In re Korn), 567 B.R. 280, 304 (Bankr. E.D. Mich. 2017) (“This Court concludes that even after the Supreme Court‘s 2016 decision in Husky, justifiable reliance by the creditor is a necessary element of ‘actual fraud’ under
This leads to the final piece of the analysis: if the Plaintiff‘s mail and wire fraud claims under RICO were not premised on misrepresentations by the Debtors, the Plaintiff was not required to establish reliance in connection with its
already established by operation of collateral estoppel the actual fraud claim. On the other hand, if the mail and wire fraud claims were premised on misrepresentations by the Debtors, then reliance is an element the Plaintiff was required to prove in this adversary proceeding to succeed on its claim for actual fraud.
The Court has reviewed the testimony and evidence in the District Court Action
Rather, the evidence supports the conclusion that once Mr. Kaplan was in control of TLA and Mr. Levy was no longer involved in its operations, the Debtors used TLA‘s funds, employees, retail space, and wholesale operations to support Mrs. Kaplan‘s businesses and their own personal expenses. Although too voluminous to fully summarize here, the evidence in the District Court Action was that long after Mr. Levy had ceased to be involved in TLA‘s
operations, and without consulting with or even informing Mr. Levy as President and sole or majority shareholder, the Debtors (i) insured Mrs. Kaplan‘s Hip Squared business using TLA funds; (ii) established BLC New Jersey‘s operations by having TLA sign the lease for BLC‘s retail location, by having a TLA shareholder consent prepared and executed authorizing the amendment of TLA‘s bylaws to conduct business under the name of BLC New Jersey,19 and by having TLA register to do business in the State of New Jersey at BLC New Jersey‘s address in Princeton; (iii) ordered product for Mrs. Kaplan‘s business that was billed to TLA but never reimbursed by Mrs. Kaplan, (iv) used TLA‘s American Express account to make purchases both for themselves and for Mrs. Kaplan‘s business; (v) used TLA funds to repay loans Mr. Levy had made to them personally; (vi) allowed BLC Pennsylvania to occupy half, then all, of TLA‘s retail space in Newtown, Pennsylvania without paying monthly rent; and (vii) diverted TLA‘s largest wholesale customers to BLC Pennsylvania. None of these acts were premised on misrepresentations the Debtors made to TLA or to Mr. Levy; they were premised on actions the Debtors took while Mr. Kaplan was running TLA‘s operations to misappropriate TLA funds and other corporate assets for the benefit of themselves and Mrs. Kaplan‘s businesses. Much like the fraudulent conveyances at issue in Husky, these acts constitute fraud by concealment and omissions, rather than inducement-based fraud, and any misrepresentations that the Debtors may have made to Mr. Levy incidental to those acts “could hardly be considered a defining feature of this kind of fraud.” Husky, 136 S. Ct. at 1587. The jury verdict on the mail and wire fraud claims, which forms the basis of the Plaintiffs actual fraud claim under
therefore not premised on misrepresentations by the Debtors.
As discussed at length above, where the actual fraud forming the basis of a
B. False Pretenses Under §523(a)(2)(A)
Although the Plaintiff has proven that the portion of the Judgments related to the RICO claims are nondischargeable because they are based on actual fraud, the Plaintiff has also asserted that they are nondischargeable because they are based on false pretenses under
A false pretense claim under
misrepresentation where an omission or failure to disclose creates a false impression known to the debtor. Id. A showing of fraudulent intent is required, and the court must look at the debtor‘s intention at the time the debt arose. Vidal, 2012 Bankr. LEXIS 4198, at *47-48.
My colleague Judge Chan recently noted that courts have articulated the elements of a false pretenses claim slightly differently:
Some courts have determined that in order for a debt to be declared nondischargeable based on false pretenses, plaintiffs must prove that: (1) the debtor impliedly made a false representation or engaged in deceptive conduct; (2) at the time of the representation or conduct, the debtor knew, or believed, the implied representation was false or the conduct was deceptive; (3) the debtor acted with an intent and purpose of deceiving the creditor; (4) the creditor justifiably relied upon the representation or conduct; and (5) the creditor sustained damage as a proximate result of the misrepresentation or act. Coluccio, 591 B.R. at 202; Johnnie‘s Rest. & Hotel Serv. Inc. v. Witmer (In re Witmer), 541 B.R. 769, 777 (Bankr. M.D. Pa. 2015); In re Ricker, 475 B.R. at 457.
Other courts have articulated those same essential elements slightly differently, finding that, to prove a §523(a)(2)(A) claim based on false pretenses, the plaintiff must show that: “(1) the [defendant] made an omission or implied misrepresentation; (2) promoted knowingly and willingly by the defendant; (3) creating a contrived and misleading understanding of the transaction on the part of the plaintiff; (4) which wrongfully induced the plaintiff to advance money...to the defendant.” Carto, 503 B.R. at 432; In re Vidal, 2012 Bankr. LEXIS 4198, 2012 WL 3907847 at *16.
Adesanya, 613 B.R. at 828. Distilling both formulations, each requires an act of hidden deception by the debtor intended to mislead the creditor, which creates a misunderstanding by the creditor that leads to the creditor incurring damages.
The Plaintiff argues that the Debtors’ RICO liability was incurred by false pretenses because their violations “were essentially hidden: [Mr. Kaplan] presented himself as a loyal CEO
while he was actually conspiring with Nina and BLC to plunder his employer.”20 The Plaintiff argues that much of the conduct that constitutes the Debtors’ actual fraud also constitutes false pretenses because “The Kaplans knew their conduct was deceptive and they acted with an intent and purpose of deceiving TLA‘s principal owner.”21
The Court, however, is not convinced. For the same reason that the Plaintiff‘s actual fraud claim does not require it to prove reliance, the Plaintiffs false pretenses claim fails: the RICO claims were not premised on misrepresentations, overt or implied, directed towards TLA or Mr. Levy. Rather, they were premised on the Kaplans’ concealed raiding of corporate assets, using the mail and electronic communications, while Mr. Kaplan was in control of TLA. The picture painted through the testimony in the District Court Action and the Nondischargeability Trial was that Mr. Kaplan was handed the keys to the company, and while Mr. Levy was casually involved at times in certain deliberations or decisions, he essentially was not “minding the store,” having left it to Mr. Kaplan. While deceptive conduct, as opposed to implied misrepresentation, can form the basis of a false pretenses claim, the evidence does not establish that the mail and wire fraud in which the Debtors were engaged was intended to have TLA or Mr. Levy misunderstand any particular transaction which then led TLA or Mr. Levy to incur damages. In fact, as stated above, it is difficult as a logical matter to understand the assertion that Mr. Kaplan was both in total control of TLA while at the same time engaged in deceptive conduct or implied misrepresentations intended to mislead TLA. While Mr. Levy remained the President of TLA, the Plaintiff admits he was not actively involved in managing it after 2003.22
As such, the Court finds that the Plaintiff has not established the elements of a false pretenses claim under
C. Fraud or Defalcation While Acting in a Fiduciary Capacity Under §523(a)(4)
Section
If the Plaintiff establishes that either Debtor was in a fiduciary relationship with it within the narrow scope of
citations omitted). Defalcation includes any failure to account for funds that have been entrusted to a fiduciary. Id. (“For purposes of section
“Fiduciary capacity” generally has a narrower meaning in bankruptcy than its traditional common law definition. Vidal, 2012 Bankr. LEXIS 4198, at *65; Estate of Harris v. Dawley (In re Dawley), 312 B.R. 765, 777 (Bankr. E.D. Pa. 2004). For purposes of
fiduciary duties to a beneficiary, and (3) impose the trust prior to and without reference to the wrong that created the debt. Id. The parties must also manifest their intention to create a trust. Dawley, 312 B.R. at 777.
In the Plaintiff‘s Post-Trial Brief, the Plaintiff did not address the existence of an express trust at all, focusing solely on whether Mr. Kaplan acted in a fiduciary capacity with respect to a technical trust due to his role as an officer of TLA. That argument is addressed supra, but the Court first finds that no express trust existed that placed either Debtor in a fiduciary capacity, which may explain why the Plaintiff failed to address it in its brief. First, the evidence does not support the conclusion that TLA, which is the Plaintiff, or even Mr. Levy, who is not the Plaintiff, had the express intent to create a trust with respect to which either Debtor would be a fiduciary. Mr. Levy, as President and sole shareholder, appointed Mr. Kaplan as his successor to manage TLA upon Mr. Levy‘s retirement. While management of TLA clearly entailed management of its assets, no express trust was created by Mr. Kaplan‘s appointment. He served as a corporate officer, with the duties and responsibilities that entailed, but there is no evidence that either he or Mr. Levy saw that role as one of a trustee, or TLA‘s assets as the res of a trust. Likewise, to argue that Mrs. Kaplan was the trustee of an express trust is even more of a stretch. She did not serve in any capacity with respect to TLA, had no responsibility for its assets, and there is no evidence that either she or Mr. Levy ever envisioned or discussed her serving as a trustee over a res that consisted of TLA‘s assets. Simply, there can be no argument that either Debtor acted in a fiduciary capacity with respect to an express trust.
The Plaintiff argues in its Post-Trial Brief that a technical trust may have been created by virtue of Mr. Kaplan‘s role as a corporate officer of TLA.24 The source of law that Plaintiff argues would support the existence of a technical trust is Pennsylvania‘s corporate fiduciary law holding that a corporate officer owes his employer a fiduciary duty of loyalty.25 Whether the Debtors were acting in a fiduciary capacity is a question of federal law, but state law determines whether the requisite trust relationship exists. Villas at Bailey Springs Homeowners Ass‘n v. Laricci, 2011 U.S. Dist. LEXIS 11231, at *6 (M.D. Pa. Sept. 30, 2011); Bayer, at 508 n.32 (while the label state law places on a relationship is not dispositive in the context of
Plaintiff is correct in stating that Pennsylvania imposes a fiduciary duty of loyalty on its corporations’ officers. See, e.g., Seaboard Indus., Inc. v. Monaco, 442 Pa. 256, 262 (Pa. 1971); Lutherland, Inc. v. Dahlen, 53 A.2d 143, 147 (Pa. 1947) (“[O]fficers and directors are deemed to stand in a fiduciary relation to the corporation. They must devote
The fact that an officer of a Pennsylvania corporation is a fiduciary, however, does not necessarily establish that they were acting in a fiduciary capacity under
D. Embezzlement Under §523(a)(4)
Although the Plaintiff did not address embezzlement in its Post-Trial Brief at all, in its first motion for summary judgment it argued that embezzlement was established by the jury‘s finding of liability on the Plaintiff‘s conversion claim in the District Court Action.26 The Court rejected that argument, and upon review of the evidence now finds the Plaintiff did not prove that any portion of the Judgments are nondischargeable because they represent debts incurred through the Debtors’ embezzlement.
Embezzlement pursuant to
E. Willful and Malicious Injury Under §523(a)(6)
The Plaintiff seeks a determination that the Judgments against both Debtors for RICO violation and conversion, as well as the Judgment against Mr. Kaplan for breach of fiduciary duty and tortious interference with contractual relations, are nondischargeable pursuant to
As such, willful injury requires a deliberate or intentional injury, not merely a deliberate or intentional act that leads to injury. Id. (quoting Kawaauhau). A party seeking a nondischargeability determination must show that the debtor actually intended to injure the party or its property; negligent or reckless acts do not suffice to establish that a resulting injury is willful and malicious. Schlessinger v. Schlessinger (In re Schlessinger), 208 Fed. Appx. 131, 134 (3d Cir. 2006) (citing Kawaauhau); Corcoran v. McCabe (In re McCabe), 588 B.R. 428, 433 (E.D. Pa. 2018) (“A debt is non-dischargeable under
a. Judgment on the RICO Claims Against Both Debtors
The Court first addresses the RICO portion of the Judgments, i.e. mail and wire fraud, because following the First Summary Judgment Opinion, all that was left to prove is that the Debtors intended to injure the Plaintiff or their actions were substantially certain to cause injury to the Plaintiff. Based on the evidence in the District Court Action, there were a multitude of acts by the Debtors that together constituted their mail and wire fraud, including (i) insuring Mrs. Kaplan‘s Hip Squared business using TLA funds; (ii) establishing BLC New Jersey‘s operations by having TLA sign the lease for BLC‘s retail location, having a TLA shareholder consent prepared and executed authorizing the amendment of TLA‘s bylaws to conduct business under the name of BLC New Jersey, and having TLA register to do business in the State of New Jersey at BLC New Jersey‘s address in Princeton; (iii) ordering products for Mrs. Kaplan‘s business that was billed to TLA but never reimbursed by Mrs. Kaplan, (iv) using TLA‘s American Express account to make purchases both for themselves and for Mrs. Kaplan‘s business; (v) using TLA funds to repay loans Mr. Levy had made to them personally; (vi) allowing BLC Pennsylvania to occupy half, then all, of TLA‘s retail space in Newtown, Pennsylvania without paying monthly rent; and (vii) diverting TLA‘s largest wholesale customers to BLC Pennsylvania.
The Court concludes that these acts, taken as a whole, establish the Debtors’ intent to injure TLA, or at least the substantial certainty that they would injure TLA. The Debtors could not have committed these acts without knowing that TLA was going to be injured as a result. For example, the Debtors had to understand that by BLC occupying TLA‘s retail space without paying full rent, and sometimes no rent at all, TLA would suffer injury. Likewise with respect to ordering products for BLC using TLA credit and diverting TLA wholesale customers to BLC. These actions were not done without the understanding, at the least, that TLA would be injured as a result, whether that was the Debtors’ intent or not. See In re Fugazy, 157 B.R. 761, 766 (Bankr. S.D.N.Y. 1993) (finding RICO judgment against the debtor for mail and wire fraud was nondischargeable under
b. Judgment on the Conversion Claims Against Both Debtors
The jury in the District Court Action found each Debtor liable for conversion, in the amount of $100,000.00 each. The District Court instructed the jury that conversion is the deprivation of another person‘s or party‘s interest in property or right in property or use or possession of tangible personal property, or other interference without the owner‘s consent and without lawful justification.
In the Plaintiff‘s Post-Trial Brief, it argues that “the conversion count relates to [the Debtors] taking merchandise that TLA paid for and using it as inventory for [Mrs. Kaplan‘s] business, BLC. That action was willful because it involved deliberate and intentional conduct, i.e., using TLA funds to purchase merchandise for the use of BLC and, in some cases, simply stealing TLA‘s own inventory and shipping it to BLC‘s Amazon customers. The [Debtors‘] actions were malicious because they involved wrongful action without just cause or excuse as [Mr. Kaplan] used TLA‘s funds to buy inventory for his wife‘s business, and she took that inventory... The harm to TLA from using its funds to purchase inventory for BLC, and from having its own inventory used to fulfill BLC‘s sales, is certain.”27
The Court finds that the Debtors’ conversion of TLA‘s inventory, whether by ordering inventory on TLA‘s account without reimbursement from BLC or by using TLA inventory to fill orders of BLC‘s customers, satisfies the elements of willful and malicious injury. Conversion clearly satisfies the wrongful act requirement. The Debtors did not engage in these practices negligently or recklessly, they did so intentionally. Moreover, the Court finds that the Debtors’ conversion of TLA‘s inventory could only have been done with intent to injure TLA; there can be no reasonable argument that the Debtors engaged in this practice motivated solely by their own financial gain and indifferent to the harm TLA would suffer as a result. Consequently, the portions of the Judgments related to the conversion claim against each Debtor, each in the amount of $100,000.00, are nondischargeable because they represent debts for willful and malicious injury under
c. Judgment on the Tortious Interference with Contractual Relations Claim Against Mr. Kaplan
Finally, the jury found Mr. Kaplan liable for tortious interference with contractual relations and assessed resulting damages of $100,000.00.
The Plaintiff argues that the claim relates to the diversion of TLA‘s wholesale customers in the last three months of Mr. Kaplan‘s employment, and the liability is nondischargeable: “The diversion of TLA‘s wholesale customers was willful because it involved deliberate and intentional conduct, i.e., contracting wholesale sales to TLA‘s historical customers on behalf of BLC. [Mr. Kaplan‘s] actions were malicious because they involved wrongful action without just cause or excuse as [Mr. Kaplan] was still employed by TLA and was using its confidential business information when he diverted TLA‘s wholesale sales to [Mrs. Kaplan‘s] business.”28
The Court finds that Mr. Kaplan‘s actions that formed the basis for the tortious
d. Judgment on the Breach of Fiduciary Duty Claim Against Mr. Kaplan
The jury found Mr. Kaplan liable for breach of his fiduciary duty to TLA and assessed damages of $100,000.00 against him. The Plaintiff argues that the totality of Mr. Kaplan‘s actions that constituted a breach of his fiduciary duty to TLA also constitute willful and malicious injury to TLA: “Everything [Mr. Kaplan] did abusing his confidential relationship with TLA to benefit [Mrs. Kaplan‘s] business at the expense of TLA – from using TLA funds to set up the New Jersey store for [Mrs. Kaplan] then giving it to her outright, to using TLA‘s funds for BLC‘s unreimbursed purchases, to permitting [Mrs. Kaplan] to avoid rent payments which TLA covered, to using TLA‘s funds to pay personal expenses and obligations, to diverting TLA‘s wholesale business to BLC – involved deliberate and intentional misconduct and was wrongful. And every instance was certain to injure TLA because every action involved misusing its funds for improper purpose.”29
The Court finds that the same course of conduct that served as the basis for the Plaintiff‘s mail and wire fraud claims, conversion claim, and tortious interference claim, served as the basis for its breach of fiduciary duty claim, and constitutes willful and malicious injury to TLA. Mr. Kaplan, as an officer of TLA and the individual in control of the entity, engaged in a series of acts and practices, as detailed supra, that breached his duties of care, loyalty, and good faith to TLA. Those acts and practices were not done negligently or recklessly, they were done intentionally, without just cause or excuse, and with either intent to harm TLA or substantial certainty that they would. As such, the portion of the Judgment against Mr. Kaplan for breach of his fiduciary duty to TLA, in the amount of $100,000.00, constitutes a debt for willful and malicious injury to TLA,
IV. CONCLUSION
For the reasons set forth supra, the Court finds that the Judgments against the Debtors are excepted from discharge pursuant to
An Order consistent with this Memorandum Opinion will be entered.
Dated: August 30, 2021
MAGDELINE D. COLEMAN
CHIEF U.S. BANKRUPTCY JUDGE
Leslie B. Baskin, Esquire
Daniel J. Dugan, Esquire
Spector Gadon Rosen
Seven Penn Center – 7th Floor
1635 Market Street
Philadelphia, PA 19103
Paul J. Winterhalter, Esquire
Offit Kurman, P.A.
Ten Penn Center
1801 Market Street, Suite 2300
Philadelphia, PA 19103