ERIC L. FRANK, Bankruptcy Judge.
In this more than decade old adversary proceeding, Plaintiff Philip J. Von Kahle, the court-appointed Receiver (the "Receiver") for Professional Resources Systems International, Inc. ("PRSI")
On October 11, 2011, I ruled on the parties' cross-motions for summary judgment. In the accompanying opinion, I explained that the Receiver had not come forward with evidence supporting certain essential elements of his § 523(a)(4) claim, thereby failing to meet the evidentiary burden under Fed. R. Bankr.P. 7056 and Fed.R.Civ.P. 56 borne by a responding party who bears the burden of proof on the claim at issue. Consequently, I entered summary judgment in favor of the Debtor and against the Receiver. See In re Roemmele, 2011 WL 4804833 (Bankr. E.D.Pa. Oct. 11, 2011).
Presently before the court is the Receiver's motion for reconsideration ("the Motion for Reconsideration") of the October 11, 2011 order insofar as it granted the Debtor's motion for summary judgment ("the Debtor's 2008 MSJ").
I will deny the Receiver's Reconsideration Motion because it is "too little, too late."
The prior opinion set out the factual and lengthy procedural background in this adversary proceeding. The complete details need not be repeated here. The discussion is aided, however, by a review of certain parts of the procedural history.
The Receiver filed this adversary proceeding on December 26, 2001, requesting both a determination of dischargeability under 11 U.S.C. § 523(a) and the denial of the Debtor's discharge under 11 U.S.C. § 727(a). In general terms, the Receiver asserted that the Debtor, acting in his capacity as Chief Executive Officer of CitX Corporation ("CitX") and through a series of contracts between CitX and PRSI, fraudulently induced PRSI to pay CitX $700,000.00 or otherwise misappropriated that sum.
The parties filed their first cross-motions for summary judgment in April 2004 (Doc. #s 110 and 114). On February 17, 2005, the court denied the Receiver's request for summary judgment in its entirety and granted the Debtor's request in part, dismissing one (1) of the Receiver's § 523(a) claims. Through the same order, by agreement of the parties, the court dismissed two (2) of the Receiver's § 727(a) claims. (Doc. #156). Shortly thereafter, on March 30, 2005, at the parties' joint request, the court stayed this adversary proceeding pending resolution of the Debtor's criminal trial in the United States District Court for the Southern District of Florida ("the Florida Criminal Proceeding"). (Doc. # 168). In September 2006, after a status hearing,
On January 12, 2007, the Receiver filed a second motion for summary judgment, to which the Debtor responded ("the Receiver's 2007 MSJ"). (Doc. #'s 184 and 209). After a hearing on the Receiver's 2007 MSJ and consideration of two (2) letters the Receiver sent to the court (Doc. #s 218 and 221), the court entered an Order on August 27, 2007:
(Doc. #222).
Notably, the Receiver sought a stay of the proceedings in August 2007 because he discovered that the Debtor had been convicted of certain crimes (discussed below) in the U.S. District Court for the Southern District of Florida on August 15, 2006 (the "Florida Criminal Proceeding"). (Doc. #221). The criminal conviction resulted in the entry of an order on January 26, 2007 requiring the Debtor to pay in excess of $14 million in criminal restitution and the forfeiture of $480,000.00 in assets. See U.S. v. Roemmele, 2011 WL 4625348, at *1 (S.D.Fla. Oct. 3, 2011). The Debtor appealed his conviction. In requesting the stay, the Receiver suggested to the court that if the criminal conviction and the restitution/forfeiture order were affirmed on appeal, he was unlikely to continue pursuing his § 523(a)(4) claim in this court.
On July 31, 2008, notwithstanding the August 27, 2007 stay order, the Debtor filed his second motion for summary judgment, (i.e., the Debtor's 2008 MSJ, subsequently granted by the order that is the subject of the Receiver's Motion for Reconsideration). (Doc. #227). The court then entered an order holding the Debtor's 2008 MSJ in suspense until the existing stay was lifted. (Doc. #230).
On March 28, 2011, upon motion of the Debtor, the court terminated the stay of this adversary proceeding. The March 28, 2011 Order also established a schedule to permit the parties to supplement their pending motions (i.e., the Receiver's 2007 MSJ and the Debtor's 2008 MSJ) and set a briefing schedule, for what was now, the second round of cross-motions for summary judgment ("the Second Cross-Motions").
On October 11, 2011, the court granted the Debtor's 2008 MSJ and denied the Receiver's 2007 MSJ, entering final judgment in favor of the Debtor.
One final piece of background information requires mention. Because the Motion focuses on the Debtor's criminal conviction, it is helpful to review briefly some of the history of the Florida Criminal Proceeding.
The Debtor's August 15, 2006 conviction in the Florida Criminal Proceeding was for:
(Exh. J to Doc. #184); see also U.S. v. Roemmele, 2011 WL 4625357, at *1.
The Debtor's conviction was affirmed on appeal by the Eleventh Circuit, although his sentence was vacated and remanded. U.S. v. Hein, 395 Fed.Appx. 652 (11th Cir.2010). (the "11th Cir. Decision"). However, the Debtor's appeal is not final.
After reviewing the pleadings and evidentiary record submitted by the parties in connection with the Second Cross-Motions, I concluded that the Debtor was entitled to summary judgment because the Receiver had not met his burden under § 523(a)(4) with respect to any of the three "prongs" of § 523(a)(4): (a) fraud or defalcation while acting in a fiduciary capacity; (b) embezzlement and (c) larceny. I reached this result because:
Federal Rule 59(e), made applicable to this proceeding by Bankruptcy Rule
It is well established that a litigant moving for reconsideration must overcome a "high burden" in meeting the above standard. ABS Brokerage Servs., LLC v. Penson Fin. Servs., Inc., 2010 WL 3257992, at *5 (D.N.J. Aug. 16, 2010); see also Blystone, 664 F.3d at 404 ("the scope of a motion for reconsideration . . . is extremely limited"); Fanelli v. Continental Cas. Co., 2006 WL 3387187, at *2 (M.D.Pa. Nov. 21, 2006) ("reconsideration of judgment is an extraordinary remedy, and such motions should be granted sparingly") (citation omitted); Conway v. A.I. duPont Hosp. for Children, 2009 WL 1492178, at *2 (E.D.Pa. May 26, 2009) ("Parties may not use rule 59(e) motions as a vehicle to ask . . . courts to rethink what they have already thought through—rightly or wrongly") (internal citations and quotations omitted); In re Kuhar, 2007 WL 2245912, *2 (Bankr.E.D.Pa. Aug. 1, 2007) ("courts should grant such motions sparingly because of their strong interest in finality of judgment") (citations omitted).
The Receiver seeks reconsideration pursuant to the third prong of the Rule 59(e) test. He asserts that the court has "crafted a decision that is manifestly unjust." (Receiver's Motion for Reconsideration at 3).
There is no judicial consensus regarding the meaning of the term "manifestly unjust" as it pertains to a Rule 59(e) motion, but several courts have applied the Black's Law Dictionary definition, which states that "manifest injustice" is "an error in the trial court that is direct, obvious, and observable, such as a defendant's guilty plea that is involuntary or that is based on a plea agreement that the prosecution rescinds." Conway, 2009 WL 1492178, at *6 n. 8 (citation omitted); accord Brown v. Zickefoose, 2011 WL 5007829, at *2 n. 3 (D.N.J. Oct. 18, 2011); Tri-State Truck Ins., Ltd. v. First Nat'l Bank of Wamego, 2011 WL 4691933, at *3 (D.Kan. Oct. 6, 2011). A party may only be granted reconsideration based on manifest injustice if the error is "apparent to the point of being indisputable." Tri-State Truck Ins., 2011 WL 4691933, at *3 (quoting Shirlington Limousine Transp. Inc. v. U.S. 78 Fed. Cl. 27, 31 (2007)). In order for a court to reconsider a decision due to `manifest injustice,' the record presented must be "so patently unfair and tainted that the error is manifestly clear to all who view [it.]" Conway, 2009 WL 1492178, at *6 n. 8 (citation omitted).
The Receiver presents three (3) grounds for reconsideration of the October 11, 2011 Order based on "manifest injustice:"
None of these arguments has merit.
The Receiver appears to base his first argument on either of two (2) related legal premises: (a) that the subject debt should be determined nondischargeable simply because the Debtor is a convicted criminal; or (b) that the subject debt should be determined nondischargeable because the Debtor is not an "honest debtor." In the context of this § 523(a)(4) proceeding, both premises are incorrect.
Starting with the asserted legal significance of the Debtor's criminal conviction, the Receiver cites no authority— and my research did not uncover any— supporting his contention that anyone who has committed a crime is per se dishonest within the meaning of the Bankruptcy Code or is ineligible to receive a bankruptcy discharge. This is apparent from consideration of those provisions of the Bankruptcy Code that relate to criminal convictions and an individual's access to a bankruptcy discharge.
Nothing in 11 U.S.C. § 109, which governs eligibility to be a debtor generally, restricts a convicted criminal's access to the bankruptcy system. Similarly, nothing in 11 U.S.C. § 727(a) bars a debtor from receiving a discharge based solely on a criminal conviction. Nor does any provision of 11 U.S.C. § 523(a) or § 1328(a) render any debt nondischargeable based solely on a debtor's status as a convicted criminal. While § 523(a) and § 1328(a) include provisions that except from discharge criminal restitution debts,
The Receiver's second legal premise is equally flawed. The oft-repeated (and indisputable) principle that the benefits of a bankruptcy discharge are reserved for the "honest" debtor is not a discrete element of any statutory cause of action found in 11 U.S.C. § 523(a) that excepts a particular debt from discharge or that mandates the denial of a debtor's entire discharge under 11 U.S.C. § 727(a). Rather, the "honest debtor principle" is a general expression of the public policy that underlies the existence of certain Code provisions that limit the scope or require denial of a debtor's discharge. See, e.g., 11 U.S.C. § 523(a)(2), (4), (6); id. § 727(a)(2), (3), (4). However, each of those Code provisions includes specific statutory elements that must be satisfied before a debt is excepted from discharge or a discharge denied.
Indeed, one might characterize the principle that the full bankruptcy discharge should not be afforded to a dishonest debtor as the ultimate conclusion made by the bankruptcy court after finding that all of the elements of a particular Code provision that limits the scope or mandates the
Most fundamentally, the Receiver appears to misunderstand that in order to prevail under § 523(a)(4), a plaintiff must prove all of the elements of the claim set forth in the statute. In some circumstances, a criminal conviction may have some evidentiary value in proving one of the elements, if, for example, collateral estoppel applies (a subject discussed further in the next section of this Memorandum). But the existence of a criminal conviction, in and of itself, or the notion that a particular type of conviction establishes the dishonest character of a debtor does not alone make out a claim under § 523(a)(4).
For all of the same reasons, the Receiver's bold but unsubstantiated assertion that the bankruptcy court's equitable nature dictates a reversal of the prior decision, (Motion at 6), is equally insupportable. The Receiver's loss on summary judgment may not be reconsidered simply because, from the Receiver's perspective, the decision resulting in the discharge of a debt of a convicted criminal is "unfair"— even if, in some abstract sense, it could be so characterized.
The decisive legal principle here is that if a bankruptcy court concludes correctly that a plaintiff in an action under § 523(a)(4) fails to produce evidence supporting an essential element of the claim, that is the end of the matter; judgment must be entered in favor of the debtor. While the Receiver cites a number of cases in support of the broad position that "the discharge is inapplicable to the dishonest debtor,"
Finally, the Receiver's suggests that dischargeability determinations under § 523(a) involve the application of different legal standards, depending upon whether the proceeding involves an "honest debtor." See Motion ¶ 7 ("In utilizing the [legal] standard reserved for honest debtors, this Court has crafted a decision that is manifestly unjust. . . .") (emphasis added); id. ¶ 8 ("the Court appears to have utilized a traditional analysis . . . for a determination whether the elements of Section 523(a)(4) have been adequately established to defeat [the Debtor's] motion. . . . [T]hat traditional analysis is wholly inadequate."); Receiver's Reply Brief at 4 ("Simply put, to the extent that this Court applied the standard for dischargeability reserved for the honest debtor to a patently dishonest debtor, this Court clearly misapplied the law") (emphasis added).
I reject out of hand this insupportable legal theory. There is no legal authority whatsoever that supports the Receiver's contention that in a § 523(a) dischargeability determination the court is obliged to undertake a two-step process—first determining whether the defendant-debtor is "honest" and then applying or fashioning different, non-statutory elements for a "dishonest" debtor. I decline to adopt the Receiver's imaginary legal principles.
The Receiver is at least on more conventional ground in complaining that I accorded insufficient weight to the Debtor's conviction in the Florida Criminal Proceeding in evaluating whether the Receiver proved the Debtor's fraudulent intent.
In the opinion accompanying the October 11, 2011 summary judgment order, I wrote:
See Roemmele, 2011 WL 4804833, at *7 n. 12.
In the Motion, the Receiver argues that the above statement was incorrect and that "the conviction arose, at least in part,
This argument, too, is without merit.
The Receiver does not dispute that, in response to the Debtor's 2008 MSJ (or in support of his 2007 MSJ), he presented no evidence to establish that the Debtor's criminal conviction was based on the same conduct giving rise to his 11 U.S.C. § 523(a)(4) claim. The Receiver's 2007 MSJ merely stated, conclusorily, that "the Defendant has been convicted of multiple acts of fraud" and attached the verdict in the Florida Criminal Proceedings (the "Verdict"). (Doc. #184 and Exh. J). The Verdict offers no background or explanation as to the circumstances of the Debtor's criminal conviction.
The Receiver has now come forward with the evidence that he contends meets his burden, having attached to the Motion and his Reply Brief copies of the following documents from the Florida Criminal Proceeding: (a) the 47 page indictment of the Debtor and his co-defendants; (b) the court docket entries from the Florida Proceeding; (c) the Jury Verdict; (d) the court's sentence of the Debtor; and (e) the appellate decision (cited earlier in this Memorandum and reported at U.S. v. Hein, 395 Fed.Appx. 652). According to the Receiver, these documents constitute evidence of the Debtor's fraudulent intent in connection with the larceny and embezzlement prongs of his § 523(a)(4) claim.
The Receiver can prevail on the Motion only if it is appropriate to permit him to present new evidence after the court has already entered judgment. Yet, he offers no reason why he failed to present all of this evidence previously in connection with the Second Cross-Motions. For this reason alone, the Motion must be denied. See Blystone v. Horn, 664 F.3d 397, 415-16 (3d Cir.2011) (defining "new evidence" for purposes of a motion to dismiss as "evidence that a party could not earlier submit to the court because that evidence was not previously available" and holding that evidence "that is not newly discovered, as so defined, cannot provide the basis for a successful motion for reconsideration") (quoting Harsco v. Zlotnicki, 779 F.2d 906, 909 (3d Cir.1985)); Egonmwan v. Cook County Sherriff's Dept., 602 F.3d 845, 852 (7th Cir.2010) ("motions under Rule 59(e) cannot be used to introduce evidence that could have been presented earlier").
Nor is it even clear that consideration of the Receiver's new evidence demonstrates that the entry of summary judgment against the Receiver resulted from any clear error of law or fact.
The allegations in Count I of the Indictment that led to the Debtor's trial and conviction do concern, at least in part, the transaction that is the subject of the adversary proceeding. The Indictment alleges, inter alia, that: (a) the CEO of PRSI was a co-conspirator of the Debtor; (b) PRSI, CitX, the Debtor and the Debtor's co-conspirators acted in association to
Thus, there is no doubt that the indictment which led to the Debtor's conviction made allegations of fraudulent activity and included PRSI (or at least its principals) as being involved in the alleged scheme. However, it is questionable, at best, whether the Indictment, by itself, constitutes any evidence that can be considered on summary judgment as it is nothing more than a series of unproven, hearsay allegations. The indictment, in conjunction with the conviction, could provide evidence material at the summary judgment stage of this adversary proceeding. Even so, it remains unclear whether PRSI's transfer of assets to CitX, in furtherance of a conspiracy among the principals of both companies, legally constituted an embezzlement or larceny by CitX (acting through the Debtor as its principal) of PRSI's property (i.e., the $700,000.00 at issue) within the meaning of 11 U.S.C. § 523(a)(4). It also is not necessarily obvious that all of the facts alleged in the Indictment were proven at trial. Rather relying on the broad brush of the Indictment in conjunction with the conviction as evidence of embezzlement or larceny, the Receiver could have offered excerpts from the trial transcripts in the Florida Criminal Proceeding in order to demonstrate at summary judgment that he had evidence supporting each element of his § 523(a)(4) case.
Even in presenting this new evidence to the court, the Receiver has asked the court to make sweeping conclusions without the benefit of any legal analysis. It is the Receiver's burden to "connect the dots" between the Indictment and/or the conviction and the elements of § 523(a)(4) and he has not done so. Suffice it to say, the Receiver's tardy evidence is not a "smoking gun" that demonstrates this court's clear error in granting the Debtor summary judgment, as is required under Rule 59(e).
In any event, based on the Receiver's failure to offer this evidence in a timely fashion and my conclusion that he is not entitled to do so now, it is not necessary to decide whether the evidence the Receiver now seeks to offer would create a material issue of fact so as to preclude the entry of summary judgment.
Finally, the Receiver suggests that he has been denied the opportunity to take the discovery necessary to prove his case. (Motion ¶ 1). This argument is simply frivolous.
At the outset of this adversary proceeding, the Receiver had the opportunity to conduct discovery for almost two (2) years—between the December 2001 commencement of the adversary proceeding and the December 15, 2003 discovery deadline set by the court. (Doc. # 78). The adversary proceeding was not stayed initially by the court until March 30, 2005, more than another year after the close of discovery, during which time the Receiver could have requested leave to take additional discovery.
Further, the Receiver believed the record sufficiently developed to file not one (1), but two (2) motions for summary judgment.
Perhaps most significantly, if the Receiver believed that he needed additional discovery in order to defend against the Debtor's 2008 MSJ, he could have asserted
Finally, I note that promptly after the entry of judgment, the Receiver proffered to the court additional evidentiary material derived from the Florida Criminal Proceeding that undoubtedly was available to him earlier. Among those documents was the court docket, which shows that numerous trial transcripts were available for review by the Receiver and submission to this court. If, as the Receiver contends, the criminal case and this adversary proceeding relate to the same transactions, those transcripts undoubtedly would contain sworn statements in support of the Receiver's case that he could have submitted in support of his 2007 MSJ and in opposition to the Debtor's 2008 MSJ.
Based on this history, it is impossible to believe that the Receiver lacked an adequate opportunity to marshal his case before this court resolved the cross-motions for summary judgment in 2011.
At the summary judgment stage of this adversary proceeding, the Receiver erred by losing sight of the requirement that, in responding to a defendant's motion for summary judgment under Rule 56, a plaintiff who bears the burden of proof must come forward with evidence that satisfies every element of his claim.
The Receiver's Motion for Reconsideration is based on the implicit premises that his right to survive the Debtor's 2008 MSJ and proceed to trial should have been evident to the court from the Debtor's criminal conviction and that it was equally evident that the nondischargeability claim under 11 U.S.C. § 523(a)(4) stemmed from the same conduct that resulted in the Debtor's conviction. Neither of these predicates was in the record or is as obvious as the Receiver suggests. In the alternative, the Receiver asks this court for a second chance to present his case by now offering evidence that was available earlier, again because he considers it obvious that the Debtor is unworthy of receiving a full bankruptcy discharge.
The Receiver's Motion must be denied because he has offered no excuse for his failure to come forward with his evidence in a timely fashion and no justification for granting him a second bite at the apple. Contrary to his suggestion, there are no legal principles that justify the application of more lenient standards to the Receiver under Fed.R.Civ.P. 56 and 59 based solely on the Debtor's criminal conviction. While the Receiver's argument that dishonest debtors should be denied a complete bankruptcy discharge at least has some bearing in logic and public policy, the Receiver has offered no excuse for his procedural neglect. The Receiver and his counsel have been litigating this case for ten (10) years and only in the last exhibit to his Reply Brief on a Motion for Reconsideration did the Receiver finally attach some evidence that the Debtor's conviction may be related to this adversary proceeding (and even then, the Receiver did not spell out how so with any precision).
Further, even if I were to heed the Receiver's request to approach the request for reconsideration with the maximum liberality available to a court of equity, I would reach the same result. Not only has the Receiver's failed to present his evidence timely as required by Rule 56 without any excuse, but it appears probable that a restitution and forfeiture order will be issued, eventually, in the Florida Criminal Proceeding, thereby providing PRSI's creditors with an a remedy equivalent to that available from this court. These circumstances lead me to conclude that this is not a case in which the equities dictate the conclusion that any manifest
In reaching this result, I am cognizant that there may be merit to the Receiver's § 523(a)(4) claim and I do not lightly deny the Motion. However, in my judgment, in the particular circumstances presented here, the policies embodied in Fed.R.Civ.P. 56 and 59, that are designed to promote an orderly and efficient adjudication process and to accord finality to that process are paramount, outweighing the risk that an incorrect result on the merits has been reached in this proceeding.
For the reasons set forth above, the Reconsideration Motion will be denied. An appropriate order will be entered.
It is hereby
