Gary L. Sharpe, Senior District Judge
Appellants Straight Line, L.L.C., Jeffrey E. Barber, Jean B. Barber, Emily J.
Straight Line is a business that provides financing to dealers who buy vehicles at auctions run by State Line Auto Auction, Inc., a related business also owned by appellants. (Bankr. MDO at 3 & nn. 4-5.)
Madigan allowed Joseph and Chauncy Strevell (hereinafter "the Strevells"), third parties who had been doing business with Straight Line for a month and had not yet made any payments, to substantially exceed their $200,000 credit limit. (Id. at 6, 7.) When the Strevells began to finance cars on behalf of RJC Trading with Straight Line, Madigan never established a credit line, performed a credit check on RJC, or required the Strevells to sign a financing agreement. (Id. at 7-8.) Moreover, Madigan routinely released vehicle titles to the Strevells before they paid, (id. at 8), which was something Straight Line only did in limited circumstances inapplicable here, (id. at 5-6).
During the time the Strevells had an active business relationship with Straight Line, Madigan did not disclose to appellants that the Strevells were in excess of their credit limit and lacked a financing agreement for RJC. (Id. at 8.) Madigan also did not disclose that he was releasing titles to the Strevells before payment; he did so for seventy-eight vehicles that were converted by the Strevells during the relevant time period. (Id. at 8, 11.)
Despite Barber asking Madigan numerous times about the Strevells, Madigan failed to disclose any of this information. (Id. at 8-9, 20.) Specifically, when Barber asked numerous times if the Strevells were "okay," Madigan "regularly responded that `[t]hey pay like clockwork.'" (Id. at 8.) Madigan also reported to appellants at weekly management meetings but never filled them in on the Strevells. (Id. at 8.)
Appellants terminated all business with the Strevells when they learned from an auction owner that they appeared to be legal risks. (Id. at 9.) Thereafter, Madigan engaged in a cover-up; he falsified business records and lied to Barber and the police about how much the Strevells owed Straight Line. (Id. at 10.) Madigan eventually pleaded guilty to nineteen misdemeanor counts of falsifying business records under § 175.05 of the New York Penal Code. (Id.)
District courts have jurisdiction to hear both interlocutory and final appeals
The sole issue on appeal concerns appellants' $1.5 million fraud claim against Madigan pursuant to § 523(a)(2)(A), (Dkt. No. 7 at 6 (citing Bankr. MDO at 17)), which Bankruptcy Court dismissed, (Bankr. MDO at 28, 32), for a lack of causation, (id. at 26, 28). The fraudulent misrepresentations
Bankruptcy Court analyzed the five elements of a § 523(a)(2)(A) fraud claim: 1) material false representation, 2) scienter, 3) intent to defraud, 4) justifiable reliance, and 5) causation. (Bankr. MDO at 18-19 (internal citations omitted).) Bankruptcy Court held that appellants established the first four elements. (Id. at 22-23.)
Causation in fact requires appellants' reliance to be "a substantial factor in determining the course of conduct that results in [their] loss." Restatement (Second) of Torts § 546 (Restatement).
Restatement § 546 cmt. b (emphasis added) (internal citation omitted).
Specifically, Bankruptcy Court concluded that "[t]he record is devoid ... of any evidence to support a finding of a point in time at which any remedial actions taken by [appellant]s would have prevented or even mitigated their loss." (Bankr. MDO at 25.) "Without those facts in evidence, ... [Bankruptcy] [C]ourt cannot find that [Madigan] deprived [appellant]s of a valuable remedial action, or, said another way, that [appellant]s' course of conduct (inaction) resulted in their loss." (Id.)
This court is mindful that "[a]ssessments of the credibility of the witnesses and the weight to be given to particular pieces of evidence are peculiarly within the province of the trier of fact and are entitled to considerable deference." Cont'l Ins. Co., 134 F.3d at 104 (internal citation omitted). However, as argued by appellants, (Dkt. No. 7 at 10-12), it was clearly erroneous for Bankruptcy Court to find that there was no evidence that remedial actions by appellants would have mitigated their loss. Jeffrey Barber testified that had Madigan made him aware of the full truth, he would have curtailed lending to the Strevells—he "would have shut them off," (Dkt. No. 3, Attach. 11 at 78)—and would have repossessed vehicles, (Bankr. MDO at 25). Barber also testified that appellants are able to repossess vehicles on their own and could have done so in this instance. (Dkt. No. 3, Attach. 11 at 78-79.)
Importantly, this testimony was unrebutted; there is no reference to any contrary testimony or evidence. (Dkt. No. 7 at 13); cf. First Fed. Sav. & Loan Ass'n of Pittsburgh v. Oppenheim, Appel, Dixon &
Moreover, at trial, Madigan admitted his role in causing appellants' damages:
(Id. at 23 n.15 (internal citations omitted).) Bankruptcy Court "consider[ed] [Madigan]'s statements for what they [we]re worth, but d[id] not find them to be beyond rebuttable proof of causation of [appellant]s' damages." (Id. at 23 (internal footnote omitted).) However, there is no mention of how this testimony was ever rebutted.
Bankruptcy Court also posited "alternative scenarios" that "could have unfolded," and offered, as examples, what might have happened in 2013 or February 2014. (Id. at 25.) However, Bankruptcy Court determined the relevant time period during which appellants suffered their loss to be from March 28 to May 23, 2014. (Id. at 11, 21.) The court agrees with appellants that these alternative scenarios amount to speculation outside the relevant time period. (Dkt. No. 7 at 15.) Bankruptcy Court also noted that, after ending their business relationship with the Strevells, appellants "made two fruitless attempts to limit their exposure" and "even when [appellant]s knew of the Strevells' duplicitous conduct and attempted to repossess vehicles for which they held titles, they still suffered a loss." (Bankr. MDO at 26.) But, as appellants argue, after the relationship with the Strevells ended, the loss had already occurred; the question is whether anything could have been done during the relevant time period, not afterward when it was too late. (Dkt. No. 7 at 15.)
Bankruptcy Court explained that it "d[id] not find that the self-serving statements by [appellant]s about their hypothetical conduct, made with the benefit of hindsight, are sufficient to meet their burden of proof." (Bankr. MDO at 26.) However, the fact that Barber's unrebutted testimony is self-serving is not, standing alone, a basis to disregard it. See Genn v. New Haven Bd. of Educ., 219 F.Supp.3d 296, 313 (D. Conn. 2016) ("The fact that testimony is self-serving does not render it useless to the [c]ourt. Were it otherwise, courts could rarely rely upon any evidence offered by either side in a litigated matter."); cf. Shon v. Sayres Corp., No. 93 Civ. 7654, 1995 WL 244582, at *2 n.3 (S.D.N.Y. Apr. 26, 1995) ("The fact that [evidence] is self-serving does not mean it is false."). Moreover, the court agrees with appellants that an analysis of causation in fact necessarily entails looking back with the benefit of hindsight. (Dkt. No. 7 at 16.) In a similar case cited by Bankruptcy Court, (Bankr. MDO at 23), the First Circuit analyzed causation in fact—using hindsight—and reasoned that "had [debtor] not lied to [plaintiff] about the building-permit
In sum, appellants established that their reliance on Madigan's fraudulent misrepresentations was a substantial factor in determining their inaction to curtail lending and repossess vehicles, which resulted in the loss, and Bankruptcy Court's contrary finding is clear error.
Despite concluding that there was no causation in fact, Bankruptcy Court prudently continued its analysis by examining legal causation. (Bankr. MDO at 27.) Legal causation hinges on reasonable foreseeability. (Id. at 24, 27 (internal citations omitted)); see Restatement § 548A ("A fraudulent misrepresentation is a legal cause of a pecuniary loss resulting from action or inaction in reliance upon it if, but only if, the loss might reasonably be expected to result from the reliance.") (emphasis added).
Bankruptcy Court determined that Madigan "could not have reasonably foreseen that his misrepresentation ... would open the door for nefarious actors such as the Strevells to steal $1.5 million from [appellants]." (Bankr. MDO at 27.) However, it also found that Madigan's conduct
(Id. at 27-28). Even so, Bankruptcy Court reasoned that holding Madigan liable for $1.5 million is "disproportionate to his culpability, especially in light of the criminal acts of the Strevells." (Id. at 28.) It also posited an analogy: "[W]ere a bank employee to negligently leave a vault unlocked and lie to their employer about the error, that lie could not reasonably be considered the legal cause of the loss suffered when a third party robbed the vault through the unlocked door." (Id. at 28 n.17.)
For the following reasons, the court is left with the definite and firm conviction that a mistake has been committed, and Bankruptcy Court's finding of no legal causation constitutes clear error. See Glossip, 135 S. Ct. at 2786.
First, the analogy is flawed because Madigan did not act negligently but—as Bankruptcy Court found—fraudulently. (Bankr. MDO at 21-23, 26.) Moreover, the analogy ignores that appellants' loss might reasonably be expected to result from their reliance on Madigan's fraudulent misrepresentations, which kept them from curtailing lending and repossessing vehicles. See Restatement § 548A; cf. In re Parmalat Sec. Litig., 501 F.Supp.2d 560, 580 (S.D.N.Y. 2007) ("It is reasonably foreseeable that misrepresenting a company's financial condition, and thus hiding from its innocent managers that the company is being driven into the ground, will cause the company harm."). In terms of the analogy, appellants could have acted to prevent their loss while the vault that Madigan left unlocked was being robbed by the Strevells, but Madigan's fraudulent misrepresentations kept them from doing so.
In a similar case cited by Bankruptcy Court, (Bankr. MDO at 23), the First Circuit determined that legal causation existed. See Goguen, 691 F.3d at 70-72. There, the debtor was a contractor whom the plaintiff hired to build an addition; the plaintiff stressed the importance of pouring
Safeguards such as credit limits and a policy of requiring payment before releasing vehicle titles are meant to protect against the very harm that the Strevells inflicted, i.e., stealing vehicle titles and failing to pay. (Bankr. MDO at 4-6 (describing credit limit and title policy); 11 (describing Strevells' conversion of seventy-eight vehicles); 13-14 (noting "obvious importance of Straight Line's retention of title documents pending receipt of payment" (emphasis added)).) It is thus especially foreseeable that the loss would result from appellants' reliance on Madigan's repeated fraudulent misrepresentations concerning the Strevells. Cf. Charney v. Wilkov, 734 F. App'x 6, 11 (2d Cir. 2018) (reasoning defendant's lack of knowledge that third parties would commit criminal acts irrelevant because "[t]he loss of [real estate] investments was a foreseeable out-come from her failure to do any due diligence or to monitor the properties"); Oei v. Citibank, N.A., 957 F.Supp. 492, 509 (S.D.N.Y. 1997) (reasoning third party's fraud did not break chain of causation because it was "one of the evils [defendant] was supposed to guard against" and "the harm was foreseeable"); Kush v. City of Buffalo, 59 N.Y.2d 26, 33, 462 N.Y.S.2d 831, 449 N.E.2d 725 (1983) ("When the intervening, intentional act of another is itself the foreseeable harm ..., the defendant who fails to guard against such conduct will not be relieved of liability when that act occurs.")
Bankruptcy Court also focused on "policy considerations that serve to place manageable limits upon the liability that flows from negligent conduct." (Bankr. MDO at 28 (internal quotation marks and citation omitted) (emphasis added).) But fraudulent misrepresentation is an intentional tort, see Field, 516 U.S. at 70, 116 S.Ct. 437, and the same policy considerations do not apply, see Meyers v. Epstein, 282 F.Supp.2d 151, 154 (S.D.N.Y. 2003) ("[R]esponsibility for harmful consequences should be carried further in the case of one who does an intentionally wrongful act than in the case of one who is merely negligent or is not at fault.") (quoting Restatement § 435B cmt. a) (internal citations omitted). "For an intended injury, the law is astute to discover even very remote causation." Associated Gen. Contractors of Calif, Inc. v. Calif State Council of Carpenters, 459 U.S. 519, 548 n.3, 103 S.Ct. 897, 74 L.Ed.2d 723 (1983) (internal quotation marks and citation omitted); see also Knepper v. Brown, 345 Or. 320, 330, 195 P.3d 383 (2008) ("Courts have noted that, when an intentional tort is involved, the range of legal causation can be quite broad[.]") (internal citations omitted).
Bankruptcy Court considered $1.5 million to be "an amount disproportionate to [Madigan's] culpability" and "too out of proportion to [his] misrepresentation[s]." (Bankr. MDO at 28 & n.17.) But legal causation turns on reasonable foreseeability, not proportionality. See Restatement
Finally, Bankruptcy Court reasoned that "holding employees personally liable for the conduct of third parties, even where they lie to their employers about their conduct, would wrongly absolve employers of their responsibility to supervise adequately their employees." (Id.) But Bankruptcy Court found that Madigan trained for eight months under Straight Line's long-time credit manager and "was well aware that he was violating company policy" as to the Strevells. (Id. at 4, 21.) Furthermore, "[i]t was [Madigan]'s job to be on top of the very issues he hid from [appellants,] and [appellant]s were justified in relying upon [him] to perform the core responsibilities attendant to the position." (Id. at 23.) It is thus difficult to say that appellants failed to adequately supervise Madigan.
As explained above, appellants established causation in fact and legal causation. However, what remains to be determined is how much of their $1.5 million loss was caused by Madigan's fraudulent misrepresentations. Bankruptcy Court defined the relevant period as March 28 to May 23, 2014, during which the Strevells converted seventy-eight vehicles with a value of $1,500,580.00. (Id. at 11, 21.) But even appellants recognize that Madigan is not responsible for all of their $1.5 million loss. (Dkt. No. 7 at 12 ("Had [Barber] known the truth early in [the relevant] [p]eriod, the majority of the damages would have been prevented.") (emphasis added).)
After concluding on appeal that causation had been established for a § 523(a)(2)(A) claim, in Goguen the First Circuit remanded for a determination of how much of the loss at issue was attributable to the debtor's fraudulent misrepresentations. See 691 F.3d at 72 (deciding "[a]t least some portion of ... damages is attributable to the [the debtor's fraudulent misrepresentations]" and remanding because "the bankruptcy judge made no findings on that score, which is not surprising given that [the plaintiff] simply offered a ballpark estimate ... [and] provid[ed] no precise figures"). A remand here is necessary for the same reasons. See id.
Thus, Bankruptcy Court's May 8, 2018 Judgment, (Dkt. No. 2 at 43), is vacated, and the case is remanded to Bankruptcy Court for further proceedings consistent with this Memorandum-Decision and Order.