Tavadia Enterprises, Inc. v. MitchellTavadia Enterprises, Inc. v. Mitchell
MEMORANDUM OPINION
This matter is before the Court on the Motion for Summary Judgment of the Plaintiffs, Tavadia Enterprises, Inc. (“TEI“) and Behram Tavadia (“Tavadia,” and together, “Plaintiffs“), and on Plaintiffs’ prior Motion to Determine Nondischargeability of Debt. Plaintiffs seek to deny a discharge from Sheri A. Mitchell (“Mitchell“), the defendant in this adversary proceeding and debtor in the underlying bankruptcy case, for debts owed to them under a State Court judgment against Mitchell finding her liable for fraud in connection with business loans Plaintiffs lent her. Plaintiffs seek to deny
The Court has jurisdiction over this adversary proceeding pursuant to
FACTUAL AND PROCEDURAL BACKGROUND
The Court will note at the outset that much of the factual background recited in this opinion has been incorporated from the findings of the Jefferson Circuit Court and the Kentucky Court of Appeals in their respective decisions about the same transactions and circumstances that form the basis of this adversary proceeding. See Tavadia v. Mitchell, 564 S.W.3d 322, 329 (Ky. Ct. App. 2018) (reviewing The Circuit Court, Jefferson County, Mary M. Shaw, J., NO. 15-CI-005387). The dispute arose out of a business agreement between Plaintiffs and Defendant, whereby Plaintiffs lent money to Mitchell‘s business called One Sustainable Method Recycling, LLC (“OSM“). Plaintiffs lent $40,000 to OSM in June 2013, an additional $12,000 in the fall of 2014, and another $250,000 in February 2015 pursuant to a loan agreement that was signed at that time (the “2015 Agreement“). The parties agreed that Tavadia would be repaid $1000 per month, and, in the 2015 Agreement, that Tavadia would receive a 25% ownership in OSM and 25% of its net monthly profits. Tavadia also helped OSM secure an additional $150,000 loan from Louisville‘s Metropolitan Business Development Corporation (“METCO“) by agreeing to act as a personal guarantor for the METCO loan to OSM.
Despite receiving these loans, OSM‘s financial condition deteriorated. Between April 2014 and September 2015, OSM incurred $14,540 in overdraft charges on its bank account, had not paid off its loans from Plaintiffs, and had not realized any profits. In August 2015, OSM obtained a $20,000 loan from Fundworks, LLC. Mitchell caused OSM to obtain this loan by signing the loan application and a personal guaranty with both her signature and Tavadia‘s signature. By October 2015, OSM had ceased operations and Mitchell sold some of OSM‘s equipment for a total of $46,899. Of that, $24,929 went into Mitchell‘s personal bank account and $21,970 went into OSM‘s account.
On October 21, 2015, Tavadia filed an action in the Jefferson Circuit Court against OSM and Mitchell, asserting claims for breach of contract, breach of fiduciary duty, misappropriation and conversion of company assets, and failure to
On October 7, 2016, Mitchell filed a voluntary petition for Chapter 7 bankruptcy relief in this Court. On October 19, Plaintiffs filed their Complaint with this Court, giving rise to this adversary proceeding. Because the Jefferson Circuit Court action was still pending at that time and dealt with issues parallel to this adversary proceeding, the parties tendered an Agreed Motion for Relief from Stay to allow the Jefferson Circuit Court action to continue, and this Court entered an Order granting that motion on December 13, 2016.
The Jefferson Circuit Court conducted a bench trial in its case on May 26, 2017. On August 4, 2017, the Circuit Court entered an opinion and order dismissing all claims against Mitchell. Tavadia appealed that opinion to the Kentucky Court of Appeals. A trial was held in that appeal on October 19, 2018, and the Court of Appeals reversed the order of the Circuit Court in an opinion titled Tavadia v. Mitchell, 564 S.W.3d 322 (Ky. Ct. App. 2018). In its reversing opinion, the Court of Appeals afforded the Jefferson Circuit Court “the deference due the trial court‘s factual findings,” and analyzed the Circuit Court‘s legal conclusions de novo, pursuant to Kentucky law. Id. at 326. The Court of Appeals found that the Circuit Court erred in denying Plaintiffs’ claims against Mitchell, and remanded the matter to the Circuit Court for further proceedings consistent with its opinion.
On January 31, 2019, the Jefferson Circuit Court entered a Final Judgement in favor of Plaintiffs and against Mitchell. Consistent with the factual findings from its initial bench trial and the Kentucky Court of Appeals’ conclusions of law based on those findings, the Circuit Court held that Mitchell committed fraud against Plaintiffs, forged Tavadia‘s signature to obtain the Fundworks loan, and misappropriated funds from OSM. As such, it granted judgment in favor of Plaintiffs for the following:
- The unpaid principal amount of $302,000.00 on the Loan Agreements;
- Late fees pursuant to the Loan Agreements in the amount of $850.00;
- Fraud damages in the amount of $100,000.00;
- Pre-judgment interest on the principal sum of $302,000.00 at the contractual rate of six percent (6%) per annum;
- Reasonable attorney‘s fees and costs in the amount of $93,009.79;
- Punitive damages in the amount of $100,000.00; and
- Post judgment interest at the rate of 6% per annum on the entire amount of the Judgment from the date of Judgment until paid in full.
Having resolved the state law cases as intended by this Court‘s prior Order granting relief from the automatic stay, Plaintiffs filed a Motion to Determine Nondischargeability of Debt with this Court on December 9, 2019. On January 16, 2020, Plaintiffs filed a Motion for Summary Judgment. On February 10, Mitchell filed a motion to extend the time to respond to the Motion for Summary Judgment, and on February 13, Mitchell‘s counsel filed a Motion to Withdraw as Attorney, which the Court granted. Mitchell was given 60
PLAINTIFFS’ MOTION TO DETERMINE NONDISCHARGEABILITY
The dischargeability of a debt in bankruptcy is an issue that must be determined in an adversary proceeding, not through motion practice.
SUMMARY JUDGMENT STANDARD
Federal Rule of Civil Procedure 56(c), made applicable to bankruptcy proceedings by Bankruptcy Rule 7056, provides that a court shall render summary judgment if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.
The party moving the Court for summary judgment bears the burden of showing that “there is no genuine issue as to any material fact and that [the moving party] is entitled to judgment as a matter of law.” Jones v. Union County, 296 F.3d 417, 423 (6th Cir. 2002); see generally Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986). Once the moving party meets that burden, the nonmoving party “must identify specific facts supported by affidavits, or by depositions, answers to interrogatories, and admissions on file that show there is a genuine issue for trial.” Hall v. Tollett, 128 F.3d 418, 422 (6th Cir. 1997).
In determining the existence or nonexistence of a material fact, a court will view the evidence in a light most favorable to the nonmoving party. Tennessee Dep‘t of Mental Health & Mental Retardation v. Paul B., 88 F.3d 1466, 1472 (6th Cir. 1996). Absent such evidence from the nonmoving party, the Court need not comb the entire record to determine if any of the available evidence could be construed in such a light. See In re Morris, 260 F.3d 654, 665 (6th Cir. 2001) (holding that the “trial court no longer has the duty to search the entire record to establish that it is bereft of a genuine issue of material fact“).
DISCUSSION
Plaintiffs seek to have the debt owed by Mitchell deemed nondischargeable and hence not covered by the discharge Mitchell received on January 18, 2017 in her underlying Chapter 7 bankruptcy. They point to the Kentucky Court of Appeals opinion and the Final Judgment entered by the Jefferson Circuit Court as the bases for having proved the claims in their Motion for Summary Judgment, and also argue that Kentucky law bars these claims from being relitigated in Bankruptcy Court under the doctrine of issue preclusion.
A federal court deciding whether to apply issue preclusion to an earlier state court judgment must first examine the issue preclusion law of the state in which the judgment was rendered. Bay Area Factors v. Calvert (In re Calvert), 105 F.3d 315, 317 (6th Cir. 1997) (quoting Marrese v. Am. Acad. of Orthopaedic Surgeons, 470 U.S. 373, 375 (1985)). Here, that is Kentucky law. For Plaintiffs to prevail on their Motion for Summary Judgment, they must satisfy the following elements of issue preclusion under Kentucky law:
An earlier case only bars subsequent litigation over issues that (1) are the same as the issues now presented, (2) were actually litigated, (3) were actually decided, and (4) were necessary to the prior court‘s judgment.... [B]efore issue preclusion will stick against a current defendant who lost earlier [t]wo further elements must be met: (5) the defendant must have had a “realistically full and fair opportunity to litigate the issue,” and (6) preclusion must be consistent with “principles of justice and fairness.”
In re Nageleisen, 523 B.R. 522, 528 (Bankr. E.D. Ky. 2014) (citing Columbia Gas Transmission, LLC v. Raven Co., Inc., 2014 WL 2711943, at *4 (E.D. Ky. June 13, 2014)). To meet the first element of issue preclusion and prove that the issues before this Court are the same as those previously litigated, Plaintiffs must show that the State Court decisions satisfy the elements of their claims under the Bankruptcy Code. In re Berge, 953 F.3d 907, 917 (6th Cir. 2020). For the reasons set forth below, the Court finds that issue preclusion does not cause the State Court decisions to satisfy the elements of any of the claims pressed by Plaintiffs in their Motion for Summary Judgment, because those claims do not present the “same issues” as those decided in State Court.
§ 523(a)(2)(A)
Plaintiffs contend that Mitchell‘s misconduct constitutes fraud under
(a) A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from 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 respecting the debtor‘s or an insider‘s financial condition; ...
To succeed on any claim made under
(1) the debtor obtained money through a material misrepresentation, that, at the time, the debtor knew was false or made with gross recklessness as to its truth; (2) the debtor intended to deceive the creditor; (3) the creditor justifiably relied on the false representation; and (4) its reliance was the proximate cause of loss.
Rembert v. AT & T Universal Card Servs., Inc. (In re Rembert), 141 F.3d 277, 280-81 (6th Cir. 1998). Plaintiffs must show that these elements have been satisfied by the State Court decisions for issue preclusion to apply and entitle them to a ruling of nondischargeability on summary judgment in this Court. Having carefully examined those decisions, this Court finds that the requirements of
In fact, this specific finding from the Court of Appeals decision does not prove Plaintiffs’
This is not to say that the State Court decisions did not involve findings of misconduct on Mitchell‘s part. They certainly did, such as the findings that Mitchell spent loan funds on extravagant personal expenses and commingled proceeds from the sale of equipment with her personal bank account. These findings, however, do not establish that any of the loans to OSM were “obtained by” fraud, as required by
The Court of Appeals also found that Mitchell forged Tavadia‘s signature on a loan and personal guaranty in order to obtain additional funding from Fundworks. While it is true that Mitchell used fraudulent means - forging Tavadia‘s signature - to obtain the Fundworks loan, the unpaid balance of that loan is not part of the unpaid loan damages from the Circuit Court‘s judgment, which only covers the amount that Plaintiffs lent. Plaintiffs did not lend the fraudulently obtained Fundworks funds, and so, as the Circuit Court pointed out, Plaintiffs have not shown any damages from Mitchell‘s forgery of Tavadia‘s signature in obtaining the Fundworks loan.3 Tavadia v. Mitchell, 564 S.W.3d at 326.
While the Court of Appeals held that the forgery was fraudulent in and of itself and should have been considered for nominal and potential punitive damages, the damages eventually awarded did not specify an amount that can be attributed to the forgery. Aside from those associated with the unpaid loan, the other damages listed were $100,000 in unspecified “fraud damages,” another $100,000 in unspecified punitive damages, attorney‘s fees, and post-judgment interest. In examining these awards, this Court cannot attribute any of them to the forgery specifically. As such, issue preclusion does not apply to Plaintiffs’ award with respect to Mitchell‘s forgery. In re Henkel, 490 B.R. 759, 783 (Bankr. S.D. Ohio 2013) (denying summary judgment on a
None of Mitchell‘s fraudulent conduct described by the Court of Appeals, nor the damages awarded by the Circuit Court,
Plaintiffs also argue that the State Court decisions have proved their claims under
§ 523(a)(4)
Plaintiffs include a claim under
(a) A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual Defendant from any debt -
(4) for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny;...
Section 523(a)(4), therefore, provides three categories of debts that are not dischargeable in bankruptcy: first, debts arising from fraud or defalcation while acting in a fiduciary capacity; second, debts from the commission of embezzlement; and third, debts from larceny. Plaintiffs did not analyze any of these specific categories in their Motion for Summary Judgment, but did posit that
In the Sixth Circuit, the “fiduciary capacity” provision of
The remaining categories of nondischargeable debt under
Because a finding of larceny requires a taking of property that was unlawful when it occurred, the larceny provision of
That leaves only embezzlement as a potential category of nondischargeable debt under
The Court sees no reason to depart from this widespread approach here, particularly when Plaintiffs’ claim for embezzlement suffers from a lack of specificity about how Mitchell‘s conduct constituted embezzlement and how the damages accounted for it, both in their Motion for Summary Judgment and in the State Court decisions on which they rely. Because Plaintiffs have not shown that their property was “entrusted” with Mitchell,
Having examined all three categories of
§ 523(a)(6)
Plaintiffs seek to have their judgment from the Circuit Court deemed nondischargeable under
(b) A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual Defendant from any debt -
(6) for willful and malicious injury by the Defendant to another entity or to the property of another entity.
In the Sixth Circuit, “willful injury” and “malicious injury” are separate elements that must both be met for the discharge exception to apply. In re Berge, 953 F.3d at 914 (explicitly adopting the two-pronged “willful” and “malicious” test in the Sixth Circuit). A “willful” injury stems from conduct by which a defendant intended “the consequences of an act, not simply the act itself.” Kawaauhau v. Geiger, 523 U.S. 57, 61-62, (1998).
After the Supreme Court issued Geiger, the Sixth Circuit decided Markowitz v. Campbell (In re Markowitz), 190 F.3d 455 (6th Cir. 1999), holding that a willful injury occurs when the Defendant “desires to cause the consequences of his act, or ... believes that the consequences are substantially certain to result from it.” Id. at 464. As the Sixth Circuit Bankruptcy Appellate Panel has explained,
“this is a subjective standard... It does not matter if a reasonable, objective person would have been aware of the consequences of his or her action; if the Defendant did not subjectively intend those consequences or was not subjectively aware that the consequences were substantially certain to occur then the Defendant‘s action was not willful. The Defendant, however, need not intend or anticipate the precise nature of the injuries suffered, only that injury would ensue from his acts.”
In re Boland, 596 B.R. 532, 545 (B.A.P. 6th Cir. 2019) (internal citations omitted). Therefore, in arguing that the State Court decisions have preclusively proved their
Unfortunately for Plaintiffs, the State Court decisions on which they rely did not rule on or even discuss the intent behind Mitchell‘s conduct or her mental state, so those decisions cannot preclusively satisfy the intent requirement of
This situation, therefore, is entirely different from those where a state court judgment involved a determination of the debtor-defendant‘s mental state such that the reviewing bankruptcy court could find that the judgment satisfied the intent requirement of
Instead, the situation much more closely resembles one that was recently before the Sixth Circuit Court of Appeals in In re Berge, 953 F.3d 907 (6th Cir. 2020). There, the plaintiff sought to apply issue preclusion to a prior District Court judgment for copyright infringement and hold it nondischargeable under
Plaintiffs also argue that the Circuit Court‘s award of punitive damages in its Final Judgment establishes that Mitchell committed a willful and malicious injury. To the extent this can be read as an argument that this Court should infer from the award of punitive damages that Mitchell‘s fraud occurred with the requisite level of intent under
Plaintiffs’
CONCLUSION
Plaintiffs have failed to show that the State Court decisions have proved their claims under the Bankruptcy Code, or that these claims are issue precluded from being relitigated in bankruptcy court. The first element of issue preclusion under Kentucky law - that the state court judgment must have decided the “same issues” as the claims later brought in federal court - has not been met for any of Plaintiffs’ claims.
Plaintiffs’
Therefore, Plaintiffs have failed to establish that any of their claims under the Bankruptcy Code have been proved or are issue precluded from being relitigated, and their Motion for Summary Judgment is denied. The Court will issue a separate Order incorporating the findings of this Memorandum Opinion.
Thomas H. Fulton
United States Bankruptcy Judge
Dated: June 1, 2020
ORDER
Pursuant to the Court‘s Memorandum entered this date and incorporated herein by reference, and the Court being otherwise sufficiently advised,
IT IS ORDERED that the Plaintiffs’ Motion for Summary Judgment is denied. A pre-trial conference with the parties will be scheduled.
Thomas H. Fulton
United States Bankruptcy Judge
Dated: June 1, 2020