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In re Vepuri

March 31, 2010


The opinion of the court was delivered by: Golden, J.


Before the Court is an appeal from the Order of the Bankruptcy Court on March 25, 2009, holding dischargeable the Debtors/Defendants/Appellees Murty S. and Varalaxmi Vepuri's (the "Vepuris") debt owed to Plaintiff/Appellant National Fertilizers, Ltd. ("NF"). For the following reasons, the Court will affirm the Bankruptcy Court's Order.


The relevant facts are set forth at length in the Bankruptcy Court's Memorandum, see In re Vepuri, Bankruptcy No. 08-11730bf, 2009 WL 2921305, at *1-5 (Bankr. E.D. Pa. Mar. 25, 2009), and shall not be reiterated here in toto. It bears repeating, however, that NF originally brought a five-count complaint against the Vepuris, alleging fraud, conversion, unjust enrichment, "imposition of a constructive trust," and civil conspiracy in the United States District Court for the District of New Jersey. At the jury trial, NF withdrew its fraud claim, noting that it was not alleging that the Vepuris made any misrepresentations, and declined to submit its imposition claim to the jury. As a result, NF only sought judgment upon its conversion, unjust enrichment, and civil conspiracy claims. Thereafter, the jury, found the Vepuris liable for conversion and unjust enrichment,*fn1 and awarded NF $2 million in damages in May 2005.

Subsequently, NF filed a complaint in the United States Bankruptcy Court for the Eastern District of Pennsylvania, contending that its $2 million award was non-dischargeable under 11 U.S.C. § 523(a)(2)(A), (a)(2)(B), (a)(4), and (a)(6). NF later elected to pursue the action under only Section 523(a)(2)(A)*fn2 and (a)(6).*fn3 At trial, NF introduced evidence from the New Jersey trial to establish these claims, including: (1) a copy of the original trial transcripts; (2) a copy of the docket entries; (3) a copy of NF's seconded amended complaint; (4) a copy of the jury verdict; and, (5) a copy of the judgment.

On March 25, 2009, the Bankruptcy Court issued a Memorandum Opinion and Order holding the Vepuris' New Jersey judgment debt dischargeable. Addressing NF's Section 523(a)(6) claim, Judge Bruce Fox, noting the parties' reliance upon the New Jersey jury's verdict, reviewed the verdict and the trial transcripts and determined that although the jury found the Vepuris' acceptance and retention of NF's funds intentional, the jury did not have to conclude that the conversion was willful and malicious, or that the Vepuris even knew the funds were NF's property. In re Vepuri, 2009 WL 2921305, at *9. Moreover, Judge Fox stated, inter alia, that NF could not prevail on its Section 523(a)(2)(A) claim because the jury clearly held that any fraud perpetuated against NF was committed not by the Vepuris, but by other individuals. Id. at *10-11; see also (Ex. B. to NF's Brief, ¶¶ 7-9.)

On May 4, 2009, NF appealed the Bankruptcy Court's Order of March 25, 2009, to this Court. This Court has jurisdiction over appeals of final judgments and orders of the Bankruptcy Court under 28 U.S.C. § 158(a)(1). "In considering such bankruptcy appeals, the district courts are thus generally required to review the bankruptcy court's findings of fact for clear error and apply plenary review to its conclusions of law." In re South Canaan Cellular Investments, LLC, No. 09-CV-2840, 2009 WL 3682338, at *4 (E.D. Pa. Nov. 3, 2009) (citations omitted). "[D]etermining dischargeability of debt arising from willful and malicious injury is a question of law." In re Granoff, 250 Fed. Appx. 494, 495 (3d Cir. 2007) (citing In re Gerhardt, 348 F.3d 89, 91 (5th Cir. 2003)).


In the appeal before the Court, NF contends that the Bankruptcy Court erred in ruling that the Vepuris' judgment debt is dischargeable*fn4 pursuant to Section 523(a)(6).*fn5 In support of its contention, NF states that the New Jersey jury's verdict confirms that the Vepuris inflicted a willful and malicious injury upon NF, and that the Bankruptcy Court violated the collateral estoppel doctrine*fn6 by holding otherwise. The Vepuris, on the other hand, assert that the Bankruptcy Court correctly concluded that the jury verdict did not demonstrate that NF's injury was willful and malicious, and that, because the verdict was the only evidence introduced to establish that the injury was willful and malicious, there was no basis to find that their debt was not dischargeable.

In the original trial, "the jury found both Vepuris liable for conversion and unjust enrichment, and assessed damages on both counts in the amount of $2 million." In re Vepuri, 2009 WL 2921305, at *5 (internal citations omitted). As to conversion, the trial judge's jury instructions read, in pertinent part, as follows:

[C]onversion is an intentional tort, which means that it is any injury that one party intentionally inflicts upon another. Since conversion is intentional wrongdoing, the law provides that a plaintiff is not barred from recovery merely because of its own carelessness or negligence in the transaction or circumstances leading up to the conversion....... The elements of good faith, intent or negligence do not play a part in an action for damages in conversion. It is not essential to conversion that the motive or intent with which the act was committed should be wrongful, willful or corrupt. The question of good faith, and the additional question or elements of motive, knowledge, ignorance, or care or negligence, are not involved in actions for conversion. The state of a person's knowledge with respect to the rights of an owner is of no importance and cannot in any respect affect the case.

The general rule is that a person who exercises unauthorized acts of dominion over the property of another, in exclusion of another's rights or inconsistent [sic] is liable in conversion although the person acted in good faith and in ignorance of the rights or title of the owner.

Id. at 4 (citation omitted) (emphasis added). NF maintains that any verdict levied pursuant to these instructions was predicated on NF's suffering a willful and malicious injury,*fn7 and that the collateral estoppel doctrine barred Judge Fox from making a conflicting determination. The Court disagrees. The Bankruptcy Court correctly determined that, in accordance with New Jersey law,*fn8 the instructions clearly informed the jury that it need not find that the Vepuris' actions were wrongful, willful, or in bad faith to find them liable for conversion. In other words, the jury's finding that the Vepuris converted NF's property, and were unjustly enriched by the conversion, did not necessarily indicate that the Vepuris intended to willfully and maliciously injure NF.

The Court also notes that the record evidence does not indicate that the Vepuris knew that NF rightfully owned the $2 million in their possession or that their receipt of the funds advanced the interests of an illegal enterprise.*fn9 Mr. Vepuri convincingly testified that he was uncertain that the funds he received belonged to NF and did not know that Karsan Danismanlik Turizm Sanayi Ticaret Ltd. Sti. ("Karsan") was not entitled to the $2 million. He also testified that although he was aware of a dispute between Karsan and NF, he was informed that they were embroiled in a contractual dispute, not that NF was the victim of fraud. A willful and malicious injury cannot be established absent such knowledge. See In re Blanchard, 201 B.R. 108, 118 (Bankr. E.D. Pa. 1996) ("[T]o be non-dischargeable the ...

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