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Ginsburg ex rel Vertical Group, Inc. v. Birenbaum

IN THE UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF PENNSYLVANIA


February 9, 2009

STEVEN D. GINSBURG, ON BEHALF OF THE VERTICAL GROUP, INC. AND STEVEN D. GINSBURG, APPELLANT,
v.
DAVID J. BIRENBAUM, APPELLEE.

The opinion of the court was delivered by: Judge Nora Barry Fischer

(Appeal Related to: Bankruptcy Case No. 05-20640 and Adversary Proceeding No. 05-2506)

MEMORANDUM OPINION

I. INTRODUCTION

Pending before the Court is an appeal from an order issued by the United States Bankruptcy Court for the Western District of Pennsylvania ("Bankruptcy Court") and entered in Bankruptcy Case No. 05-20640, Adversary Proceeding No. 05-2506 (Docket No. 1). Pursuant to 28 U.S.C. § 158(a), Appellant Steven D. Ginsburg ("Appellant") filed the instant appeal after the Bankruptcy Court granted judgment in favor of David J. Birenbaum ("Appellee") and against Appellant. (Docket No. 29-5). On March 27, 2008, this Court issued a Memorandum Order ("March 27 Memorandum Order") denying the appeal for failure to file a transcript of a proceeding in the underlying bankruptcy action as required under the Federal Rules of Bankruptcy Procedure. (Docket No. 15).*fn1

The March 27 Memorandum Order has been vacated by the Court's Order of February 3, 2009, filed contemporaneously with this Memorandum Opinion. (Docket No. 30). Thus, the Court can now address the merits of this case.

The primary issues raised in this appeal are whether the Bankruptcy Court committed legal error by: 1) failing to collaterally estop Appellee from denying his alleged admissions of embezzlement and larceny in state court proceedings in Florida; and, 2) by concluding that the debt owed to Appellant was not excepted from discharge under 11 U.S.C. § 523(a)(4). For the reasons outlined herein, the Court finds that the Bankruptcy Court did not err in determining that collateral estoppel did not apply to the underlying action and that the debt was non-dischargeable under Section 523(a)(4). Accordingly, the Order of the Bankruptcy Court is affirmed.

II. FACTUAL AND PROCEDURAL BACKGROUND

The following undisputed facts are taken from the hearing held before the bankruptcy court (Docket No. 17-1), the submissions of the parties (Docket Nos. 4, 8), and the Bankruptcy Court's Opinion of July 6, 2006.

The Vertical Group, Inc. ("Vertical Group") was a closely-held Florida corporation, wherein Appellant and Appellee each held fifty percent of its outstanding shares. (Docket No. 4 at 4-5).

Appellee was a director of the Vertical Group as well as its president and treasurer. (Id. at 5). In March of 1997, Appellant extricated himself from the affairs of the business, leaving Appellee in sole control of the Vertical Group's day-to-day operations. (Docket No. 29-5 at 2). Subsequently, the business relationship between Appellant and Appellee deteriorated, which resulted in Appellant instituting a shareholder derivative action against Appellee on behalf of the Vertical Group in the Circuit Court for Miami-Dade County, Florida, on April 11, 2000 ("Complaint").*fn2 (Id. at 2-3.)

A. Florida State Court Proceedings

On September 26, 2000, Appellant and Appellee executed a settlement agreement ("Settlement Agreement"), which purported to resolve the state court case.*fn3 (Id. at 4; Docket No. 14-9).

Thereafter, Appellee defaulted on his obligations arising under the Settlement Agreement. (Docket No. 8 at 8). Appellee filed a Stipulation for Entry of Final Judgment Execution Withheld. (Docket No. 14-14) ("Stipulation").*fn4 In part, the Stipulation provided that the allegations in Appellant's Complaint "set forth sufficient facts to entitle [Appellant] to a final judgment which facts are true and shall have res judicata and collateral estoppel effect in any bankruptcy case or proceeding concerning the dischargeability of the debts and obligations ... and such debts shall be non-dischargeable and shall be excepted from discharge." (Docket No. 14-14 at ¶1). On January 29, 2001, the Florida Circuit Court held a hearing,*fn5 at which it granted Appellant's motion to enforce the settlement agreement and issued a final judgment ("Final Judgment") in favor of Appellant in the amount of $90,000.*fn6 (Docket No. 29-5 at 5). Appellee did not appeal the Florida Court's January 29, 2001 Order. Subsequently, on October 4, 2001, the Florida court issued an order, awarding Appellant attorney's fees and costs in the amount of $40,000. (Docket No. 14-13). Following the state court's order, Appellee filed a Motion to Vacate Final Judgment, for Rehearing and Motion to Stay Execution with the Florida Circuit Court. (Docket No. 14-15) ("Motion to Vacate"). On June 5, 2001, the Florida Circuit Court entered an order denying Appellee's Motion to Vacate based on Appellee's failure to comply with a prior court order compelling discovery. (Docket No. 14-17).

B. Bankruptcy Court Proceedings

On January 19, 2005, Appellee filed a voluntary chapter 7 petition with the Bankruptcy Court sitting in Pittsburgh, Pennsylvania. (Docket No. 29-5 at 5). The Appellee identified Ginsburg on the schedules as having an undisputed general, unsecured claim in the amount of $94,875. Id. Subsequently, Appellant commenced an adversary action against Appellee, seeking a determination that the $90,000 debt arising under the Final Judgment and the $40,000 debt arising from the order of October 4, 2001 are excepted from discharge by § 523(a)(4)*fn7 of the Bankruptcy Code. (Id. at 6).

An adversary hearing was held on March 8, 2006 regarding the matter. (See Transcript at Docket No. 17). The Bankruptcy Court entered an order and judgment in favor of Appellee on July 6, 2006. (Docket No. 29-5 at 21). Applying Florida law, the Bankruptcy Court concluded that Appellee was not collaterally estopped in the adversary proceeding from denying his alleged admissions of embezzlement and larceny in the state court proceedings because not all of the elements of collateral estoppel were met. (Id. at 6-12). The Bankruptcy Court further found that the debt owed to Appellant was not excepted from discharge by § 523(a)(4) of the Bankruptcy Code. (Id. at 12-20). The Court now turns to the specifics of the Bankruptcy Court's decision, particularly as to collateral estoppel and dischargeability.

C. Bankruptcy Court's Ruling on Collateral Estoppel

The Bankruptcy Court found that Appellee's stipulation regarding the dischargeability of his debt to Appellant was inconsequential because Appellee "cannot in advance of a bankruptcy filing contract away the right to have his or her debts discharged." (Docket No. 29-5 at 7)(citing Alsan Corp. v. DiPierro (In re DiPierro), 69 B.R. 279, 282 (Bankr. W.D. Pa. 1987)). The Bankruptcy Court determined that the Final Judgment "merely enforced the settlement between [Appellee] and [Appellant]." (Id. at 10). Turning to the elements of collateral estoppel, the Bankruptcy Court found that the Final Judgment did not satisfy the third and fifth prongs of collateral estoppel.*fn8 As to the third prong, i.e., the same parties or their privies to the prior litigation, the Court concluded that "the judgment and order resolved only matters concerning the settlement agreement between [Appellee] and [Appellant], which in turn had nothing to do with the causes of action [Appellant] had asserted in the complaint on behalf of the corporation." (Id. at 11). As to the fifth prong, i.e., whether the issue was critical and necessary to the prior determination, the Court concluded that the seventh provision of the Final Judgment regarding the collateral estoppel effect "was gratuitous for purposes of enforcing the settlement agreement between [Appellee] and [Appellant]. Those facts were not relevant to whether the settlement agreement should be enforced." (Id.).

D. Bankruptcy Court's Ruling on Dischargeability

With regard to dischargeability, the Bankruptcy Court found that the debt owed to Appellant was not excepted from discharge by § 523(a)(4) of the Bankruptcy Code even if all of the elements of collateral estoppel were satisfied because Appellee's actions did not amount to fraud or embezzlement. (Id. at 12). The Bankruptcy Court stated that the fraud exception did not apply because one of the elements for fraud, fiduciary status, was not satisfied. (Id. at 15). The Bankruptcy Court stated that the concept of a fiduciary for the purposes of § 523(a)(4) applies in situations with respect to express or technical trusts. (Id. at 14). The Bankruptcy Court found that the "record in this case is devoid of any evidence indicating that an express trust of which [Appellee] was the trustee, existed in this case." (Id. at 15).

Additionally, the Bankruptcy Court stated that the embezzlement exception did not apply in the matter because Appellant was only seeking a determination in his own right and not with respect to the corporation. (Id. at 17). Therefore, the second and third prong of the embezzlement requirements were not met because Appellant "did not own the property [Appellee] supposedly misappropriated or converted to his own use. It was owned by the corporation." (Id. at 18.) Furthermore, the Bankruptcy Court determined that the fifth prong for the embezzlement exception, fraudulent intent, was not satisfied because both parties were using the corporation's assets for their personal benefit. (Id.).

Thereafter on July 17, 2006, Appellant filed a Motion to Reconsider the Bankruptcy Court's Memorandum Opinion and Order of July 6, 2006, (Docket No. 1-7), which he amended the following day. On July 21, 2006, the Bankruptcy Court entered an order denying Appellant's Motion to Reconsider Memorandum Opinion and Order of July 6, 2006. (Docket No. 1-10). On July 31, 2006, Appellant filed this timely appeal. (Docket No. 1).

E. The Instant Appeal

On October 10, 2006, Appellant filed his Brief of Appellant Steven Ginsburg. (Docket No. 4). Subsequently, on October 17, 2006, the Honorable Thomas M. Hardiman, the former presiding Judge in this matter, exempted this case from the Court's pilot alternative dispute resolution program because the Court found that the "appeal present[ed] a question of law which the parties require[d] an adjudication on the merits." (Docket No. 5 at 1). Accordingly, on November 6, 2006, Appellee filed his Brief of Appellee. (Docket No. 8). On December 4, 2006, after an extension of time granted by the Court, Appellant filed his Reply Brief of Appellant Steven Ginsburg.*fn9 (Docket No. 11). On June 22, 2007, the Court ordered the parties to file a notice advising of any changes in the law concerning the issues on appeal. (June 22, 2007 text order). On July 6, 2007, Appellee filed a Notice of Appellee Regarding Changes in Case Law After Filing of Brief. (Docket No. 12). On July 9, 2007, Appellant filed Appellant's Notice Regarding Changes in Case Law After Briefs. (Docket No. 13). In their respective notices, both parties advised that there were no substantive changes in case law since the filing of their initial briefs. Finally, on March 11, 2008, Appellant filed a Supplement, attaching numerous exhibits. (Docket No. 14).

On March 27, 2008, this Court issued a Memorandum Order denying the Appellants's Motion to Reconsider the Bankruptcy Court's Memorandum Opinion and Order of July 6, 2006 for failure to file a transcript of a proceeding in the underlying bankruptcy action as required under the Federal Rules of Bankruptcy Procedure. (Docket No. 15). The March 27 Memorandum Order has been vacated by the Court's Order of February 3, 2009 filed contemporaneously with this Memorandum Opinion. (Docket No. 30). Thus, the Court can now address the merits of this case.

In the instant appeal, Appellant argues that the Bankruptcy Court erred in its decisions because all of the elements for collateral estoppel were met and there were sufficient findings to support Appellant's claim that Appellee committed embezzlement or larceny and thus, Appellee's debt is not dischargeable under § 523(a)(4) of the Bankruptcy Code. (Docket No. 3). Appellee responds that the Bankruptcy Court's decision was proper because not all of the elements for collateral estoppel were met. (Docket No. 8). Specifically, Appellee asserts that the Final Judgment was not a full litigation on the merits and that the issues in the prior and present litigation are not the same. (Docket No. 8 at 12, 14).

III. STANDARD OF REVIEW

This Court has appellate jurisdiction over final judgments, orders and decrees of the Bankruptcy Court pursuant to 28 U.S.C. § 158(a)(1). The Court reviews the Bankruptcy Court's findings of fact under a clearly erroneous standard and its conclusions of law under a de novo standard. In re SubMicron Sys. Corp., 432 F.3d 448, 454 (3d Cir. 2006).

A bankruptcy court's "findings of fact are clearly erroneous when, after reviewing the record, the appellate court 'is left with the definite and firm conviction that a mistake has been committed.'" In re Piccoli, Civ. Action No. 06-2142, 2007 U.S. Dist. LEXIS 72533, at *9 (E.D. Pa. Sept. 27, 2007) (citing Anderson v. Bessemer City, 470 U.S. 564, 573 (1985) (quoting United States v. U.S. Gypsum Co., 333 U.S. 364, 395 (1948))). Under this standard, "[i]t is the responsibility of an appellate court to accept the ultimate factual determinations of the fact-finder unless that determination is either (1) completely devoid of minimum evidentiary support displaying some hue of credibility or (2) bears no rational relationship to the supportive evidentiary data." DiFederico v. Rolm Co., 201 F.3d 200, 208 (3d Cir. 2000) (citations omitted). In reviewing the Bankruptcy Court's findings, the Court gives "due regard" to the Bankruptcy Court's credibility determinations. FED. R. BANKR. P. 8013.

IV. ANALYSIS

Appellant raises the following issues on appeal:

1. Whether the Bankruptcy Court committed legal error when [it] rejected the [Appellee's] admissions of embezzlement and larceny made in the Florida State Court?

2. Whether the Bankruptcy Court committed legal error by failing to collaterally estop the [Appellee] from denying his admissions of embezzlement and larceny in the Florida State Court?

3. Whether the Bankruptcy Court committed legal error by concluding that Appellant did not have standing to bring the underlying non-dischargeability complaint?

(Docket No. 3 at 2). The Court finds that the first two issues (as presented by Appellant) are closely intertwined and raise the same discrete issue to be decided: whether, as a matter of law, the Florida Final Judgment would have collateral estoppel effect in any future bankruptcy proceeding concerning the dischargeability of the debts set forth in the judgment. Hence, the Court will address the first two issues together and then address the third issue separately.

A. Collateral Estoppel

As an initial matter, the Court notes that the collateral estoppel provision in the Settlement Agreement and Final Judgment do not necessarily bind the Court (as it did not bind the Bankruptcy Court) because a "debtor cannot contract away the right to a bankruptcy discharge in advance of the bankruptcy filing." In re DiPierro, 69 B.R. at 282 (citing Klingman v. Levinson (In re Levinson), 58 B.R. 831, 836-837 (Bankr. N. D. Ill. 1986), aff'd, 66 B.R. 548 (N.D. Ill. 1986)).

Collateral estoppel, also known as issue preclusion, "bars relitigation of issues adjudicated in a prior action." Swineford v. Snyder County, 15 F.3d 1258, 1266 (3d Cir. 1994). "The principles of collateral estoppel apply in discharge proceedings in bankruptcy court." Wolstein v. Docteroff (In re Docteroff), 133 F.3d 210, 214 (3d Cir. 1997) (citing Grogan v. Garner, 498 U.S. 279, 284-85 n.11 (1991); In re McNallen, 62 F.3d 619, 624 (4th Cir. 1995)). "The Court shall apply federal principles of ... collateral estoppel with respect to decisions rendered by a federal court, and must apply corresponding state principles with respect to decisions rendered by a state court." Smith v. Cowden (In re Cowden), 337 B.R. 512, 529 (W.D. Pa. 2006)(citations omitted). See also Del. River Port Auth. v. FOP, Penn-Jersey Lodge 30, 290 F.3d 567, 573 (3d Cir. 2002) ("A federal court looks to the law of the adjudicating state to determine ... [the] preclusive effect" to be accorded a state court decision). Here, the prior judgment at issue was rendered by the Florida state court, therefore the Court will look to Florida law.*fn10

Under Florida law, collateral estoppel will preclude relitigation of an issue when (1) an identical issue, (2) has been fully litigated, (3) by the same parties or their privies, and (4) a final decision has been rendered by a court of competent jurisdiction. Moreover, [(5)] the litigated issue must have been a critical and necessary part of the prior determination.

Wingard v. Emerald Venture Fla. LLC, 438 F.3d 1288, 1293 (11th Cir. 2006) (citations and internal quotations omitted). See also CSX Transp.,Inc. v. Bhd. of Maint. of Way Emples., 327 F.3d 1309, 1317 (11th Cir. 2003); Goodstein Realty Boca Raton, LLC v. Gelinas (In re Gelinas), Case No. 05-36668, 2007 Bankr. LEXIS 1431, at *12-13 (Bankr. S. D. Fla. April 18, 2007).*fn11 A court must find that all the elements are satisfied before applying collateral estoppel to the dischargeability of the debt. In re Smith, 128 B.R. 488, 490 (S.D. Fla. 1991).*fn12 Moreover, the "party claiming the benefit of the former adjudication has the burden of establishing, with sufficient certainty by the record or by extrinsic evidence, that the matter was formerly adjudicated." State St. Bank & Trust Co. v. Badra, 765 So. 2d 251, 254 (4th Fla. Dist. Ct. App. 2000).

The Court agrees with the well-reasoned analysis of the Bankruptcy Court as to collateral estoppel, in particular as to the fourth element (final decision)*fn13 and fifth element (litigated issue was critical and necessary to prior determination). First, as to the fourth element, the Bankruptcy Court drew the following conclusion:

[T]he document captioned "Final Judgment and Order Enforcing Settlement Agreement"issued by the Florida court on January 29, 2001, did not dispose of or adjudicate the issues raised in the complaint by [Appellant] on behalf of the corporation. The judgment and order resolved only matters concerning the settlement agreement between [Appellee] and [Appellant], which in turn had nothing to do with the causes of action [Appellant] had asserted in the complaint on behalf of the corporation. The judgment and order of January 29, 2001, in other words, does not satisfy requirement (3) for collateral estoppel to apply to this adversary action. (Docket No. 29-5 at 11).

The Court agrees with the Bankruptcy Court's determination as to this issue insofar as there has been no final adjudication on the merits of the three counts in the Florida state court Complaint with respect to the derivative action brought on behalf of the Vertical Group. "A derivative action is one in which a stockholder seeks to sustain in his own name a right of action existing in the corporation. Accordingly, the corporation is the real party in interest with the stockholder being only a nominal plaintiff." Provence v. Palm Beach Taverns, 676 So. 2d 1022, 1024 (4th Fla. Dist. Ct. App. 1996) (citations omitted)(emphasis added). See also Liddy v. Urbanek, 707 F.2d 1222, 1224 (11th Cir. 1983). Here, the Final Judgment did not encompass any relief with respect to the Vertical Group's causes of action. Rather, the Final Judgment stated in paragraphs 1 and 2 of the recital portion that Appellant had failed to perform with respect to the Settlement Agreement and therefore, "caused [Appellant] to spend unnecessary and additional sums in seeking [Appellee]'s performance and enforcement of the Settlement Agreement." (Docket No. 14-12 at 1, ¶¶ 1-2). Moreover, in paragraphs 1 and 2 of the decretal portion, the Final Judgment stipulated that "Ginsburg's Motion to enforce the Settlement Agreement is hereby granted, and Final Judgment is hereby entered in favor of Ginsburg" and "Ginsburg hereby recovers from Birenbaum the sum of $90,000." (Docket No. 14-12 at 2, ¶¶ 1-2). The Final Judgment does not pertain to the Vertical Group. Thus, the Court finds that the Bankruptcy Court was correct in concluding that a final determination was not made concerning the three counts in the Complaint filed in Florida state court with respect to the Vertical Group. (See Docket No. 29-5 at 11).

Second, the Court agrees with the Bankruptcy Court's assessment of the fifth element, i.e., whether the litigated issue was critical and necessary to prior determination. See Wingard, 438 F.3d at 1293. The Court finds that the fifth element of collateral estoppel has not been met. As to this issue, the Bankruptcy Court concluded:

The statement in paragraph 7 of the decretal portion of the judgment and order of January 29, 2001, that the facts as alleged in the complaint brought in the shareholder derivative action were true and entitled Ginsburg to a judgment in his favor was gratuitous for purposes of enforcing the settlement agreement between [Birenbaum] and Ginsburg. Those facts were not relevant to whether the settlement agreement should be enforced.

(Docket No. 29-5 at 11)(emphasis in original). While the Bankruptcy Court determined that the fifth prong of collateral estoppel was not met because the provision regarding collateral estoppel in the Final Judgment was "gratuitous," this Court finds that the Appellant failed to satisfy the "critical and necessary" element for additional reasons, to which the Court now turns.*fn14

In In re Green, 262 B.R. 557, 571 (Bankr. M. D. Fla.2001), the bankruptcy court engaged in an extensive analysis of the "critical and necessary" element to collateral estoppel. There, the controversy concerned a plaintiff's assertion of collateral estoppel arising from a state court judgment. Id. at 559. The plaintiff sought to preclude the defendant's defenses of dischargeability based on the state court default judgment due to the defendant's failure to answer a five-count complaint. Id. at 559-560. The state court entered a default final judgment against the defendant, however, it did not address any individual causes of action. Id. at 564. The bankruptcy court denied the plaintiff's complaint for nondischargeability and denied reconsideration of the final judgment, finding that, after a long and thorough analysis of collateral estoppel under Florida law, in particular the "critical and necessary" element:

To apply the doctrine of collateral estoppel under Florida law, it must be shown that an issue was a "critical and necessary" part of the judgment entered in the prior proceeding. Where the complaint in the prior proceeding contains multiple counts, but the final judgment only awards the plaintiff a monetary amount without designating the basis for the judgment, the doctrine of collateral estoppel should not be applied because it cannot be shown that any particular allegations in the complaint were "critical and necessary" to the judgment.

Id. at 570-71.*fn15 The Court noted the obstacles in attempting to apply collateral estoppel in such cases:

Even if all of the allegations in a complaint are deemed established, however, this Court cannot conclude that allegations regarding fraud are a "critical and necessary" part of a simple default judgment in those cases in which both fraud counts and non-fraud counts were asserted in the state court complaint and there is no way to distinguish which count is the basis for the judgment.

Id. at 564. Stated differently, "[n]o court subsequently reviewing the judgment can know which of the allegations were essential to the judgment, and the later court cannot know which of the allegations were 'critical and necessary' to the final judgment." Id. at 567. Accordingly, the court held that the doctrine of collateral estoppel did not apply. Compare In re Gregg, 268 B.R. at 300 (holding that summary judgment was precluded because the prior court's judgment did not address separate counts in the complaint and did not indicate the basis for its decision; therefore, there was a question as to whether both or either action was essential to the judgment)*fn16 with Halpern v. First Georgia Bank (In re Halpern), 810 F.2d 1061, 1065 (11th Cir. 1987) (finding that the inclusion of detailed findings of fact in the state court judgment satisfied the "critical and necessary" element) and Smith v. Beeson (In re Smith), 128 B.R. 488, 492 (S. D. Fla. 1991) (finding that the consent judgments at issue were based on the common law fraud count of each respective complaint and thus, the fraud issue was critical and necessary part of each of the consent judgments).

In the instant matter, the Final Judgment: (1) rendered a single monetary award in favor of Appellant for Appellee's failure to perform pursuant to the Settlement Agreement of September 26, 2000 in the amount of $90,000, (Docket No. 14-12 at 1, 2); (2) concerned a multi-count complaint containing a fraud count and two non-fraud counts;*fn17 and (3) it did not determine which of the allegations were essential to the judgment.*fn18 There is no evidence in the Final Judgment that the Florida state court based its decision solely on the alleged misappropriation of corporate assets with respect to the enforcement of the Settlement Agreement. Moreover, a review of the Final Judgment reveals no inclusion of detailed findings of fact with respect to the allegation in the derivative action. The entire weight of Appellant's argument hinges on the statement set forth in paragraph 7: "Pursuant to the Settlement Agreement, the allegations of Plaintiff's Complaint ... set forth sufficient facts to entitle [Appellant] to a final judgment which facts are true and are stipulated to by [Appellee]." (Docket No. 14-12 at 4). This Court does not find that this statement is sufficient to establish that any of the particular allegations were "critical and necessary" to the Final Judgment. The fact that the Florida state court stated that all the allegations were true or even that Appellee stipulated that all the claims were true*fn19 does not resolve the question of which allegations were "critical and necessary" to the state court's Final Judgment. Of significant relevance here, the Green Court noted that "the 'critical and necessary' test is most often used in Florida to distinguish facts essential to a judgment where only one cause of action has been litigated." In re Green, 262 B.R. at 565. However here, for example, the Final Judgment could have been based on a finding that both Count I (alleged misappropriation of corporate funds) and Count II (relief under a Court-ordered inspection under Florida law) were "critical and necessary" to its decision but not Count III (relief of a receiver and to dissolve a corporation under Florida law). Or, the Final Judgment could have been based on a finding that Count II and Count III were "critical and necessary" but not Count I. The lack of specificity for any rationale in the Final Judgment lends itself to numerous hypothetical situations, leaving the Court to speculate as to which allegations the Florida state court based its determination.*fn20 As a result, this Court cannot ascertain which allegations were "critical and necessary." The Court declines to speculate "because it cannot be shown that any particular allegations in the complaint were 'critical and necessary' to the judgment." In re Green, 262 B.R. at 567. Therefore, the Court finds that the Appellant has failed to carry his burden as to the "critical and necessary" prong of the collateral estoppel analysis and, because not all of elements were satisfied, collateral estoppel does not apply here.*fn21 See In re Smith, 128 B.R. 488, 490 (S.D. Fla. 1991) ("a Court must find that four elements are satisfied before applying collateral estoppel to prevent the discharge of a debt").*fn22

B. Section 523(a)(4) Dischargeability

Section 523(a)(4) excepts from discharge a debt "for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny." 11 U.S.C. § 523(a)(4).*fn23 However, "exceptions to discharge are to be strictly construed in favor of the debtor." United States v. Fegeley (In re Fegeley), 118 F.3d 979, 983 (3d Cir. 1997)(citing Dalton v. IRS, 77 F.3d 1297, 1300 (10th Cir. 1996)).

1. Fraud or Defalcation While Acting In a Fiduciary Capacity

The Bankruptcy Court made a determination as to whether Appellee committed fraud or defalcation while acting in a fiduciary capacity for purposes of § 523(a)(4), finding that Appellee did not commit fraud or defalcation because the first prong (fiduciary capacity) was not met. "In order to demonstrate Appellee committed fraud or defalcation, Appellant must prove that: "(1) [Appellee] was acting in a fiduciary capacity; and (2) [Appellee] committed fraud or defalcation while acting in that capacity." Heer v. Scott (In re Scott), 294 B.R. 620, 630 (Bankr. W. D. Pa. 2003) (citing Subich v Verrone (In re Verrone), 277 B.R. 66, 71 (Bankr. W.D. Pa. 2002)). The Bankruptcy Court stated that the "concept of a fiduciary for purposes of § 523(a)(4) applies only in situations in which an express or technical trust exists." (Docket No. 29-5 at 14).*fn24 Under Florida law, "[t]he essential elements of a trust are: (1) the settlor or grantor, (2) the trustee, (3) the beneficiaries, and (4) an indication of the property conveyed for the purpose of the trust." McLemore v. McLemore, 675 So. 2d 202, 205 (1st Fla. Dist. Ct. App. 1996)(citing Reid v. Barry, 112 So. 846, 854 (Fl. 1927)). " 'The intent to create a trust must be definite and particular,' and the beneficiaries of a trust must be clearly ascertainable." McLemore, 675 So. 2d at 205 (quoting Watson v. St. Petersburg Bank & Trust Co., 146 So. 2d 383, 385 (2d Fla. Dist. Ct. App. 1962)). The Bankruptcy Court found that the "record in this case [was] devoid of any evidence indicating that an express trust, of which debtor was the trustee, existed in this case." (Docket No. 29-5 at 15). On appeal, Appellant does not challenge the Bankruptcy Court's finding as to the fraud exception. Therefore, the Court need not address this issue. Rather, Appellant only addresses the Bankruptcy Court's finding as to the "embezzlement or larceny" exception, (Docket No. 3 at 29), to which the Court now turns.

2. Embezzlement or Larceny

Appellant has the burden of establishing embezzlement or larceny by a preponderance of the evidence. Grogan v. Garner, 498 U.S. 279, 287 (1991). These exceptions to discharge are "construed strictly against the objecting creditor." Schlessinger v. Schlessinger (In re Schlessinger), 208 Fed. Appx. 131, 133 (3d Cir. 2006)(non-precedential)(citing In re Fegeley, 118 F.3d at 983).*fn25

Additionally, "[t]he terms embezzlement and larceny are to [b]e determined under federal common law." N. Phila. Fin. P'ship v. Steele (In re Steele), Bank. No. 04-14597, 2005 Bankr. LEXIS 197, at *7-8 (Bankr. E.D. Pa. Jan. 28, 2005) (citing Nassau Suffolk Limonsine Association v. Jardula (In re Jardula), 122 B.R. 649, 653 (Bankr. E.D. N.Y. 1990)).

"Embezzlement is the fraudulent appropriation of property by a person to whom such property has been entrusted or into whose hands it has lawfully come." In re Schlessinger, 208 Fed. Appx. at 133 (citing Moore v. United States, 160 U.S. 268 (1895)). "Larceny, on the other hand, is the felonious taking of another's personal property with the intent to convert it or deprive the owner of the same." In re Schlessinger, 208 Fed. Appx. at 133 (citing COLLIER ON BANKRUPTCY AP523.10 (15th ed. 2006)).*fn26

As the Bankruptcy Court noted, embezzlement and larceny both require the appropriation of another's property. (Docket No. 29-5 at 16). The Bankruptcy Court found that Appellant was not seeking a determination that any debt owed to the Vertical Group by Appellee is excepted from discharge by § 523(a)(4) of the Bankruptcy Code, but rather that the debt owed to Ginsburg should be discharged.*fn27 (Id. at 17). Moreover, the Bankruptcy Court found that Appellant did not own the property that Appellee allegedly misappropriated or converted for his own use because it was owned by the corporation.*fn28 (Id. at 18). Lastly, the Bankruptcy Court found that "the requisite fraudulent intent for embezzlement or larceny to occur was not present" because there was "an informal, pre- existing agreement between [Appellant and Appellee] that the corporation would serve as their collective piggybank and that each of them would use the corporation's assets for their personal benefit when they saw fit to do so." (Id.)

The Court reiterates the fact that it reviews the Bankruptcy Court's findings of fact under a clearly erroneous standard. In re SubMicron Sys. Corp., 432 F.3d at 454. Under this standard, the Bankruptcy Court's factual findings with respect to credibility determinations will be given "due regard." In re Piccoli, 2007 U.S. Dist. LEXIS 72533, at *9.*fn29 This Court gives deference to the Bankruptcy Court's determination from the adversary hearing held on March 8, 2006 that both parties were participating in an informal agreement to use the Vertical Group's assets for their personal benefit and, therefore, the intent element of the embezzlement or larceny exception was not met. Anderson, 470 U.S. at 575.

Because Appellant is a shareholder of the Vertical Group and he is asserting a debt owed to him personally, the Court finds that a claim for the embezzlement or larceny exception has not been proven under § 523(a)(4) of the Bankruptcy Code. See Estate of Harris v. Dawley (In re Dawley), 312 B.R. 765, 781 (Bankr. E. D. Pa. 2004) (findings that debtor embezzled corporate funds did not establish nondischargeability of a judgment debt of a shareholder because it was the corporation's funds that were being misappropriated). Therefore, the Court concludes that the embezzlement or larceny exception does not apply in the instant matter and the debt owed by Appellee to Appellant is not excepted from discharge by § 523(a)(4) of the Bankruptcy Code.

V. CONCLUSION

In accordance with the foregoing, the Court finds that the Bankruptcy Court did not err in concluding that collateral estoppel did not apply in the present matter and that the debt owed by Appellee to Appellant is not excepted from discharge by § 523(a)(4) of the Bankruptcy Code. Accordingly, Appellant's appeal from the Bankruptcy Court's Order denying Appellant's Motion to Reconsider the Bankruptcy Court's Memorandum Opinion and Order of July 6, 2006 will be DENIED and the Bankruptcy Court's Order is AFFIRMED. An appropriate Order follows.

Nora Barry Fischer United States District Judge


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