Melvin S. Hoffman, U.S. Bankruptcy Judge.
In this adversary proceeding, the plaintiff, Vera Lee, a creditor of the defendant, Jane Daniel, the debtor in the main case, has moved for summary judgment on all counts of her four-count complaint. Ms. Lee seeks a judgment that the debt owed to her by Ms. Daniel be excepted from discharge under subparts (a)(2), (a)(4), and (a)(6) of Bankruptcy Code § 523 and that Ms. Daniel be denied a discharge altogether under subparts (a)(3) and (a)(4) of § 727 of the Code.
The facts relevant to a determination of Ms. Lee's summary judgment motion are drawn from findings set forth in my February 23, 2017 Memorandum and Order on Debtor's Emergency Motion to Enforce the Automatic Stay in the main case (the "Stay Ruling"), In re Daniel, No. 13-16365-MSH, 2017 WL 727540, at *1 (Bankr. D. Mass. Feb. 23, 2017), the findings of the jury and the judge in Lee v. Mt. Ivy Press, L.P. & Others, Middlesex County Superior Court, CA No. 98-2456 (opinion at 2002 WL 31482112, Mass. Super., Jan 14, 2002), as well as the Superior Court's docket in that proceeding, Ms. Lee's Statement of Undisputed Facts,
Ms. Lee's claims against Ms. Daniel arose from a book publishing project involving a Holocaust survivor's memoir entitled Misha: A Memoir of the Holocaust Years. The subject of the memoir was Misha Defonseca, who claimed her parents
In 1995, Ms. Daniel, Ms. Defonseca and Ms. Lee entered into a publishing agreement with respect to the creation, publication, marketing and profit sharing with respect to Ms. Defonseca's memoir. The parties agreed that Ms. Lee and Ms. Defonseca would share the copyright to the work but that Ms. Defonseca would retain exclusively the rights to the French version of her memoir. Ms. Defonseca and Ms. Lee executed their own collaboration agreement in which they agreed to create Misha together and share authorship credit on the book's cover.
During the process of writing and publishing Misha, Ms. Daniel engaged in a determined campaign to deprive Ms. Lee and Ms. Defonseca of various rights and royalties to which they were entitled under their agreements. For example, as Misha neared publication in April of 1997, Ms. Daniel coerced Ms. Lee, through various threats, into entering into an agreement that gave Mt. Ivy half of Ms. Lee's copyright interest in the book. At or about the same time, Ms. Daniel tricked Ms. Defonseca, who was not a native English speaker, into signing a memorandum with respect to the French version of the book granting the copyright to Mt. Ivy. Once the book was published, Ms. Daniels employed a variety of scams and schemes to deprive both Ms. Lee and Ms. Defonseca of revenues generated by the book.
When Misha debuted in 1997, it became a best-seller in Italy, France and Quebec, Canada. It never took off in the U.S., however. Despite Ms. Daniel's representations, relied on by Ms. Lee and Ms. Defonseca, that she was an experienced and adequately capitalized publisher, she lacked both the financial wherewithal to publish sufficient copies of the book in its first U.S. printing and the marketing skill to generate the necessary publicity for the book.
The book was published without Ms. Lee's name on the cover and this last straw caused Ms. Lee to initiate the Middlesex County Superior Court lawsuit that ultimately resulted in her judgment against Ms. Daniel.
Lee v. Mt. Ivy Press, No. MICV1998-02456, 2002 WL 33956822 (Mass. Super. Apr. 12, 2002).
On April 17, 2002, the Middlesex Superior Court entered judgment in favor of Ms. Lee and against Ms. Daniel in excess of $11 million. This amount was arrived at by the judge's trebling the jury's damage calculation. By the time the judgement became final on June 15, 2005, after all appeals had been exhausted and accrued interest added, the judgment had swollen to more than $21 million.
As outlined in the Stay Ruling, Ms. Daniel managed to keep Ms. Lee at bay for years, doing her utmost to evade the day of reckoning as to Ms. Lee's judgment. Finally, on October 13, 2014, having run
On Schedule B — Personal Property of the schedules of assets and liabilities filed in support of Ms. Daniel's bankruptcy petition, Ms. Daniel listed as an asset a one-third beneficial interest in the Daniels [sic] Family Trust having an unknown value. On Schedule D — Creditors Holding Secured Claims Ms. Daniel listed Emigrant Mortgage Company twice. Both entries listed Emigrant as holding claims of $325,000 secured by mortgages but the loan account numbers were different reflecting that these were separate mortgage claims.
In fact, on the date of her bankruptcy filing Ms. Daniel was the beneficiary of three trusts and owed only one mortgage debt to Emigrant Mortgage Company. After being made aware of these errors by Ms. Lee's counsel, Ms. Daniel amended her Schedule B to list her beneficial interest in the three trusts and her Schedule D to reflect only a single mortgage debt to Emigrant.
On August 31, 2015, while her bankruptcy case was pending, Ms. Daniel, through the law firm of Orlando & Associates, sent a demand letter to Ms. Defonseca asserting a Chapter 93A claim against her for conduct relating to revenue generated by Misha from 2001 and after. Ms. Daniel's Chapter 93A claim was not listed as an asset on her schedules, nor were the schedules ever amended to reflect the claim.
In this adversary proceeding, on June 30, 2015, Ms. Lee promulgated a discovery request upon Ms. Daniel for the production of documents including personal income tax returns, personal financial statements, business records, business and personal bank statements, and business and personal income records.
A court "shall grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed. R. Civ. Pro. 56, made applicable by Fed. R. Bankr. P. 7056.
A genuine issue is "one that is supported by such evidence that `a reasonable jury, drawing favorable inferences,' could resolve
The moving party in a summary judgment motion bears the initial burden of demonstrating that no genuine issue of material fact exists by pointing to materials of evidentiary quality such as affidavits or depositions that are so one-sided as to warrant judgment as a matter of law. See Anderson v. Liberty Lobby, 477 U.S. 242, 252, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986); In re Varrasso, 37 F.3d 760, 763 (1st Cir. 1994). "Only if the record, viewed in that manner and without regard to credibility determinations, reveals no genuine issue as to any material fact may the court enter summary judgment." Cadle Co. v. Hayes, 116 F.3d 957, 959 (1st Cir. 1997).
A creditor requesting that a debt be excluded from discharge must prove, by a preponderance of the evidence, that the particular debt falls under one of the exceptions to discharge in Code § 523(a). Grogan v. Garner, 498 U.S. 279, 286-91, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991), see also Palmacci v. Umpierrez, 121 F.3d 781, 787 (1st Cir. 1997). To obtain a determination of nondischargeability on summary judgment, "the record must compel a determination of nondischargeability as a matter of law." In re Porcaro, 545 B.R. 384, 396 (1st Cir. BAP 2016) (citing In re Tacason, 537 B.R. at 49-50 (citations omitted)).
In her motion for summary judgment on counts I, II, and III of her complaint, under Bankruptcy Code § 523(a)(2)(A), (a)(4), and (a)(6), respectively, Ms. Lee asserts that the judgment of the Middlesex Superior Court is preclusive as to this adversary proceeding with respect to the issues determined in connection with that judgment. "The doctrine of issue preclusion, also referred to as collateral estoppel, bars the relitigation of issues determined in prior court actions." Gray v. Tacason (In re Tacason), 537 B.R. 41, 50 (1st Cir. BAP 2015). In considering the preclusive effect of a state court judgment, a "federal court must give to a state court judgment the same preclusive effect as would be given that judgment under the law of the State in which the judgment was rendered." In re Lambert, 459 B.R. 519, 522 (Bankr. D. Mass. 2011). It has been established that "[issue preclusion] principles... apply in discharge exception proceedings pursuant to § 523(a)." Grogan v. Garner, 498 U.S. 279, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991).
Under Massachusetts law, to determine whether collateral estoppel applies "a court must answer affirmatively four questions: (1) was there a final judgment on the merits in the prior adjudication; (2) was the party against whom estoppel is asserted a party (or in privity with a party) to the prior adjudication; (3) was the issue decided in the prior adjudication identical with the one presented in the action in question; and (4) was the issue decided in the prior adjudication essential to the judgment in the prior adjudication?" Alba v. Raytheon Co., 441 Mass. 836, 842, 809 N.E.2d 516, 521 (2004).
In rendering its verdict in favor of Ms. Lee, the Middlesex Superior Court jury found, among other things, that Ms. Daniel fraudulently induced Ms. Lee to enter into certain agreements and that Ms. Daniel's conduct was willful and knowing. The jury found that Ms. Daniel's fraudulent, willful
The state trial court judge, relying on the jury's findings, made her own findings with respect to Ms. Daniel's violation of Chapter 93A. The judge "agreed with the jury's advisory conclusion that both Mt. Ivy and [Ms. Daniel] deceptively engaged in business dealings with [Ms. Lee]," and determined "that any reasonable businessperson would find [Ms. Daniel's] and Mt. Ivy's conduct reprehensible" in a way that clearly violated Chapter 93A. The judge found that Ms. Daniel's conduct was willful, knowing, and "extremely egregious," meriting an award to Ms. Lee of treble damages, the maximum allowed under the law.
The Bankruptcy Code provides in § 523(a)(2)(A) that 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 ... for money, property, services, or an extension, renewal, or refinancing of credit, to the extend obtained by ... false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor's or an insider's financial condition." 11 U.S.C. § 523(a)(2)(A).
To establish that a debtor obtained a debt by false pretenses or false representation, a creditor most show that: (1) the debtor made a knowingly false representation or one made in reckless disregard of the truth, (2) the debtor intended to deceive, (3) the debtor intended to induce the creditor to rely upon the false statement, (4) the creditor actually relied upon the false statement, (5) the creditor's reliance was justifiable, and (6) the reliance upon the false statement caused damage. In re Smith, 555 B.R. 96, 104 (Bankr. D. Mass. 2016) (citing In re Spigel, 260 F.3d 27, 32 (1st Cir. 2001)).
In re Lambert, 459 B.R. 519, 525 (Bankr. D. Mass. 2011). Both the trial court jury's findings in rendering its verdict and the trial court judge's findings regarding the Chapter 93A claim meet § 523(a)(2)(A)'s less stringent requirements for justifiable reliance.
Applying the state court's findings to the test under § 523(a)(2)(A), I find that: (1) Ms. Daniel made knowingly false and fraudulent misrepresentations to Ms. Lee, (2) these representations were willful, (3) the willful misrepresentations were intended to induce Ms. Lee to join the publishing project (4) and in fact caused Ms. Lee to do so justifiably and to her detriment and (5) Ms. Lee's reliance on Ms. Daniel's deceptive conduct caused her substantial damage.
With respect to § 523(a)(6), which excepts from discharge any debt for "willful and malicious injury by the debtor to another entity or to the property of another entity," 11 U.S.C. § 523(a)(6), the issues decided in the state court were identical with the issues raised in this adversary proceeding relevant to a finding of nondischargeability.
In re Vasa, No. 14-12324-JNF, 2016 WL 890130, at *14 (Bankr. D. Mass. Mar. 8, 2016).
The state court jury found that Ms. Daniel injured Ms. Lee in the amount of $2,200,000 due to interference with contractual relations and in the amount of $1,000,000 due to breach of contract, and the state court judge trebled that amount under Chapter 93A. To prevail on her summary judgment claim under § 523(a)(6), Ms. Lee must demonstrate that in entering judgment against Ms. Daniel the state court judge and jury necessarily decided each of the elements to establish nondischargeability.
The tests under § 523(a)(6) and Chapter 93A are not interchangeable, as "it would be possible for a state court to find a violation of [Ch.] 93A ... for behavior which lacks the characteristics of misconduct necessary to support a ... finding of nondischargeability." In re Porcaro, 545 B.R. at 399 (1st Cir. BAP 2016) (quoting Commonwealth v. Hale, 618 F.2d at 147). The First Circuit has previously agreed "with the `majority of courts that ... have concluded that a state court judgment that could have been based on reckless disregard is not the equivalent of the substantial certainty required by § 523(a)(6),'" but "this does not mean that a Ch. 93A judgment may not be given preclusive effect in a § 523(a)(6) nondischargeability proceeding." Porcaro, 545 B.R. at 398-99 (quoting In re Bradley, 466 B.R. 582, 588 (1st Cir. BAP 2012) (citing cases)).
Porcaro, 545 B.R. at 397.
Though the standard for establishing a Chapter 93A violation may be lower than that required to establish nondischargeability under the Bankruptcy Code, the judgment against Ms. Lee in the state court satisfies the heightened standard of willfulness under § 523(a)(6).
Even without taking into account the state court judge's findings under the Chapter 93A claim, simply considering Ms. Daniel's liability for the tort of interference with contractual relations establishes that the injury to Ms. Lee was committed willfully and maliciously. Ms. Daniel was found by the jury to have committed an intentional tort. As discussed in Porcaro this means that she was found to have intended the consequences of her act, the predicate for willfulness under § 523(a)(6). Under Massachusetts law, her conduct was malicious due to the nature of the tort she committed.
In re Dubian, 77 B.R. 332, 336 (Bankr. D. Mass. 1987)
In Dubian, the court was asked to determine whether a state court judgment for an injury caused by the debtor's intentional interference with the plaintiff's contractual relations satisfied the § 523 (a)(6) requirement of "willful and malicious injury" for purposes of invoking principles of collateral estoppel. The court found that "the `willful and malicious' conduct required for intentional interference with contractual relations is the same type of conduct for which a discharge is denied — conduct done intentionally without just cause or excuse which necessarily causes injury." In re Dubian, 77 B.R. 332, 337 (Bankr. D. Mass. 1987).
Section 523(a)(4) provides that: "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 — ... for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny; ..." 11 U.S.C. § 523(a)(4). This means that Ms. Lee must prove that Ms. Daniel's debt arose while Ms. Daniel was acting in a fiduciary capacity, and that the debt arose from her fraud or defalcation. As to the first element:
In re Melo, 558 B.R. 521, 556 (Bankr. D. Mass. 2016)
While Ms. Lee has alleged in her complaint in this adversary proceeding that Ms. Daniel "had a fiduciary responsibility to Ms. Lee in collecting monies from royalties with respect to the book Misha" and that Ms. Daniel "breached her fiduciary duty to Lee by diverting royalties due Lee to Mt. Ivy Press, International, a sham corporation set up and controlled by [Ms. Daniel] to defraud [Ms. Lee] and others," neither the findings in the state court action nor the summary judgment record as a whole supports such a conclusion. Therefore, Ms. Lee has failed to sustain her burden for obtaining summary judgment as to nondischargeability under § 523(a)(4).
Discharge is the embodiment of the fresh start policy of the Bankruptcy Code. It is the bullseye of bankruptcy and while virtually all debtors aim for this target, not all hit the mark. § 727 of the Bankruptcy Code enshrines a series of grounds by which a court may deny a debtor her discharge. Here, Ms. Lee demands summary judgment denying Ms. Daniel's discharge under § 727(a)(3) and (4). A debtor will be denied discharge under § 727(a)(3) if she "has concealed, destroyed, mutilated, falsified, or failed to keep or preserve any recorded information, including books, documents, records, and papers, from which the debtor's financial condition or business transactions might be ascertained, unless such act or failure to act was justified under all of the circumstances of the case." 11 U.S.C. § 727(a)(3). Under § 727(a)(4), "[t]he court shall grant the debtor a discharge unless the debtor knowingly and fraudulently, in or in connection with the case ... made a false oath or account." 11 U.S.C. § 727(a)(4).
In Harrington v. Simmons (In re Simmons), 525 B.R. 543 (1st Cir. BAP 2015), aff'd, 810 F.3d 852 (1st Cir. 2016), the United States Bankruptcy Appellate Panel for the First Circuit ruled that:
In re Simmons, 525 B.R. 543, 547 (1st Cir. BAP 2015), aff'd, 810 F.3d 852 (1st Cir. 2016); see also Salvador v. Kaplan, No. 14-10509-JNF, 2017 WL 1364966, at *11 (Bankr. D. Mass. Apr. 12, 2017) (relying on the decision to articulate the purpose of and elements of proof under § 727(a)(3)).
The initial burden of proof under § 727(a)(3) is on the party seeking discharge denial. That party must prove two things: "(i) that the debtor `concealed, destroyed, mutilated, falsified, or failed to keep or preserve any recorded information;' and (ii) that the recorded information was information `from which the debtor's financial condition or business transactions might be ascertained.'" Lassman v. Keefe (In re Keefe), 380 B.R. 116, 120 (Bankr. D. Mass. 2007). If the initial burden of proof is met, the burden shifts to the debtor to prove that "such act or failure to act was justified under all of the circumstances of the case." In re Hegarty, 400 B.R. 332, 341-42 (Bankr. D. Mass. 2008).
Ms. Lee asserts that Ms. Daniel's response to her discovery request for business records in this adversary proceeding, consisting of a single tax return, with a broken promise of additional documents to follow, establishes her failure to maintain books and records within the meaning of § 727(a)(3). I agree. Ms. Daniel's failure to produce any financial records save one tax return in response to a detailed request for production by Ms. Lee, followed by an admission, after promising to supplement production, that if she previously had additional documents "they have now been disposed of," is unreasonable and unjustified under all the circumstance of the main bankruptcy case and this adversary proceeding.
I find that Ms. Lee has satisfied her burden of proof and that Ms. Daniel's discharge should be denied under 11 U.S.C. § 727(a)(3).
The burden of proof is on the party seeking discharge denial under§ 727(a)(4) "to demonstrate by a preponderance
In re Crawford, 531 B.R. 275, 306-07 (Bankr. D. Mass. 2015), subsequently aff'd, 841 F.3d 1 (1st Cir. 2016)
The Bankruptcy Appellate Panel for the First Circuit has held that "[a] debtor's Schedules and Statement of Financial Affairs are the equivalent of a verification under oath." In re Cogswell, No. 10-43436-MSH, 2012 WL 2921021, at *1 (Bankr. D. Mass. July 17, 2012) (quoting In re Warner, 247 B.R. 24, 26 (1st Cir. BAP 2000) (citing 28 U.S.C. § 1746)).
Fontaine, 467 B.R. at 272.
In her untimely and thus disqualified response to Ms. Lee's statement of undisputed facts in support of her motion for summary judgment, Ms. Daniel stated that the Chapter 93A demand letter she sent to Ms. Defonseca evidences only that she discussed with an attorney a possible claim against Ms. Defonseca prior to her filing her Chapter 7 petition. She stated that since she did not conceive of the claim until two years after filing her bankruptcy petition, it did not occur to her to advise her bankruptcy counsel of it, and that in any event the claim was valueless and was never pursued further.
Even assuming Ms. Daniel's version of the story about her Chapter 93A claim is true and I had chosen to consider it, her excuses would be of no avail. The particular moment in time when a debtor realizes she has a claim has no relevance in determining whether the claim is an asset of her bankruptcy estate. What matters is when the claim arose and here Ms. Daniel's Chapter 93A claim against Ms. Defonseca was for conduct beginning in 2001, years prior to her bankruptcy. Once Ms. Daniel "conceived" of the claim in 2015, it was her obligation to amend her schedule to include it. A "debtor has a continuing duty to assure the accuracy and completeness of schedules. Postpetition discovery of rights that actually existed at the time of
As to Ms. Daniel's plea that her Chapter 93A claim had no value, value is not the sole determinant of materiality. In re Sohmer, 434 B.R. 234, 250 (Bankr. D. Mass. 2010). The "recalcitrant debtor may not escape a section 727(a)(4)(A) denial of discharge by asserting that the admittedly omitted or falsely stated information concerned a worthless business relationship or holding; such a defense is specious. It makes no difference that he does not intend to injure his creditors when he makes a false statement. Creditors are entitled to judge for themselves what will benefit, and what will prejudice, them." Sohmer, 434 B.R. at 250 (quoting Chalik v. Moorefield (In re Chalik), 748 F.2d 616, 618 (11th Cir. 1984)).
The summary judgment record establishes and I find that Ms. Daniel swore to the accuracy of her bankruptcy schedules when in fact they were not accurate in the following respects: She failed to disclose on her Schedule B her ownership interests in two trusts and her Chapter 93A cause of action against Misha Defonseca, and she represented on her Schedule D that she owed more than double the mortgage debt to Emigrant Mortgage Company than she actually owed.
While the misstatements as to the spendthrift trusts and the mortgage debt might arguably be excused as non-material or to some degree remedied by subsequent amendment, the failure of Ms. Daniel to disclose a Chapter 93A claim she thought was valuable enough to engage counsel to pursue was neither non-material nor remedied.
I find that Ms. Lee has satisfied her burden to prove each element of § 727(a)(4)(A) and that Ms. Daniel should be denied a discharge under that section.
An order consistent with this memorandum shall enter.
