JEAN K. FITZSIMON, Bankruptcy Judge.
The Plaintiff in this adversary proceeding (the "Adversary Proceeding"), Hartford Fire Insurance Company ("Hartford"), is the insurer and indemnitor for the losses of Aerogroup International, Inc. ("Aerogroup").
The seven-count complaint (the "Complaint") filed by Hartford against Ms. Lewis states the following causes of action: 1) violation of the Racketeer Influenced and Corrupt Organizations Act ("RICO"); 2) Conspiracy to Violate RICO; 3) Fraud; 4) Conspiracy to Commit Fraud; 5) Unjust Enrichment; 6) Conversion; and 7) Negligent Misrepresentation. (Doc. #1). The Complaint also seeks a denial of the discharge of any debt owed by Ms. Lewis to Hartford pursuant to §§ 523(a)(2) and (4) of the Bankruptcy Code. In addition to the Complaint, Hartford is pursuing its proof of claim in the Debtor's bankruptcy case in the amount of $929,985.60.
Following a one-day consolidated trial
The Debtor filed for Chapter 13 bankruptcy protection on April 1, 2010. On April 15, 2010, she proposed a plan providing for payments of $30 a month (the "Plan"). However, following objections to the Plan by both the Chapter 13 Trustee and Hartford, (see Doc. #'s 28 and 53 in the main case), the confirmation hearing has been continued many times and is currently scheduled for July 26, 2012. The seven-count Complaint in the Adversary Proceeding was filed on September 7, 2010 and is substantially similar to the District Court Complaint (on which the Proof of Claim is based). An Answer to the Complaint was filed by the Debtor on October 8, 2010. On July 6, 2011, for reasons stated on the record, the court denied the Plaintiff's motion for partial summary judgment (on Count III). (Doc. #38).
The Proof of Claim was filed by Hartford on October 4, 2010; the Debtor objected to the Proof of Claim on November 12, 2010. Following an uncontested motion by Hartford, the Proof of Claim and the Adversary Proceeding were consolidated. (Doc. #14).
Three witnesses testified at the consolidated trial on February 28, 2012: John Spina ("Spina"), Vice President and Corporate Counsel of Aerogroup; the Debtor; and James Palumbo ("Palumbo"), President of William Palumbo Trucking, Inc.
Upon consideration of the testimony and documentary evidence offered at trial, as well as the pleadings, including the Joint Pretrial Statement, the court makes the following findings of fact:
1. Ms. Lewis is in her early forties and lives in a home she owns, located at 105 Beaumont Drive in Newtown, PA (the "Debtor's Address"). She purchased this home in approximately 2001. (N.T. at 101).
2. The Debtor did not complete high school, nor has she received an equivalent degree (a "GED"). Ms. Lewis went to a "career center" for two years after leaving high school. (N.T. at 23).
3. Ms. Lewis met Jim Condon ("Condon"), her current boyfriend and the father of her only child, when she was 26 or 27. (N.T. at 101). Condon and the Debtor have been living together since about 2007. (N.T. at 102-103). He pays their household bills. (N.T. at 102).
4. After leaving high school, the Debtor worked as a waitress and at a retail store before becoming an exotic dancer at Delilah's Den in Philadelphia (the "Club") when she was 23 or 24 years old. (N.T. 23). Ms. Lewis worked at other similar establishments in New Jersey and Pennsylvania.
5. While employed as a dancer, the Debtor earned between five hundred and one thousand dollars a night in cash. (N.T. at 92).
6. Ms. Lewis discontinued her employment at the Club when she became pregnant with her daughter in early 2004; she has not worked at all since that time. (N.T. at 30).
7. Ms. Lewis maintains her own checking account and has never bounced a personal check. (N.T. at 78).
8. Ms. Lewis met Sam Nysenbaum
9. Nysenbaum was morbidly obese, weighing approximately 600 pounds. (N.T. at 27).
10. During the time that Ms. Lewis was employed, Nysenbaum would visit the Club two or three times a week for several hours at a time. (N.T. at 24, 25).
11. Nysenbaum paid the Club $400 an hour to spend time with Ms. Lewis. The two spent this time talking or watching sports. (N.T. at 26).
12. Nysenbaum and the Debtor became friends approximately one year after they met at the Club. They began socializing outside of Ms. Lewis' work, going to the movies or out to eat together. (N.T. at 26, 27).
13. Ms. Lewis found Nysenbaum "kind" and "funny," and appreciated that he treated her "like a human being." (N.T. at 27, 28).
14. At no time was the Debtor dating Nysenbaum, nor did the two have a sexual relationship. (N.T. at 27).
15. The Debtor took a few trips with Nysenbaum, to Atlantic City and to Las Vegas. (N.T. at 28). Ms. Lewis' daughter and parents accompanied her at times on trips to Atlantic City with Nysenbaum. (N.T. at 28-29).
16. Ms. Lewis met Nysenbaum's family. (N.T. at 28).
18. Mr. Nysenbaum helped Ms. Lewis with various matters, such as buying a home and finding an accountant to assist with her tax returns. (N.T. at 31).
19. Nysenbaum bought the Debtor and her daughter gifts in the nature of "trinkets" and gave Ms. Lewis small amounts of money to run errands for him. (N.T. at 81, 110-111). Occasionally, while Ms. Lewis was working at the Club, Nysenbaum bought gowns for her to wear while she performed. (N.T. at 110).
20. Because the Debtor appreciated this assistance, she wanted to help Nysenbaum in return. (N.T. at 31).
21. Nysenbaum died on December 11, 2006. (Joint Pretrial Statement ("JPS") at ¶ 16).
22. Prior to 2005, KIS operated as "KIS Logistics" with an address of P.O. Box 7666 Hicksville, N.Y. 11801. (See check #'s 046097, 046833, et seq. in Ex. 16). (N.T. at 115-116).
23. Nysenbaum did not trust his former partner at KIS Logistics, Christopher Henning. (N.T. at 32, 120).
24. In approximately 2005, Nysenbaum told Ms. Lewis that he was very upset that Chris Henning, his former partner, was stealing from him, and that she could help him by signing some checks. (N.T. at 32).
25. Ms. Lewis had no knowledge of the difference between KIS and KIS Logistics, but did understand there to be "two KISes." (N.T. at 38, 127).
26. Ms. Lewis viewed KIS as "Sam's company." (N.T. at 37).
27. An unsigned and undated KIS Operating Agreement states that Ms. Lewis was a Member and President of KIS Transport, LLC. (the "Operating Agreement," Ex. P-2). The Debtor testified that she has no knowledge of and has never seen this document. (N.T. at 47, 90).
28. The Debtor signed a one-page document, dated February 24, 2005, titled "Limited Liability Company Banking Resolution" (the "Banking Resolution"). (Ex. P-3). The document showed her as a "Manager of KIS Transport LLC." Ms. Lewis testified that she has no idea of what is in this document and did not read or even look at the document prior to signing it. (N.T. at 33-34, 43).
29. Ms. Lewis testified that she did not have an ownership in KIS, never participated in the business, never prepared invoices or arranged for shipping and never made any operational decisions for the Company. (N.T. at 38, 39, 121).
30. Ms. Lewis never spoke with anyone from Aerogroup or Aerosoles, nor did she have any written communication with the company. (N.T. at 39).
31. KIS maintained a bank account at Commerce Bank; the account number was 7858121861 (the "Bank Account"). (JPS ¶ 10).
32. Ms. Lewis was a signatory on the Bank Account. (Ex. P-3).
32. The Debtor twice signed a form regarding the Bank Account with Commerce Bank dated February 24, 2005 (the "Commerce Bank Form"). The Debtor's title was denoted "Manager of KIS Transport" under her signature on this form. However, Ms. Lewis did not read this document prior to signing it. (N.T. at 43, 88; Ex. P-5).
33. Ms. Lewis' social security number was on the Commerce Bank Form. She did not provide this information to the Bank, and assumes that Nysenbaum did. (N.T. at 45).
34. Ms. Lewis signed KIS checks, at Nysenbaum's request, until her "hand hurt[]." (N.T. at 35, Ex. D-4). The Debtor did not, however, fill in or date the checks, nor did she look at the checks as she was signing them. (N.T. at 37, 91, 101).
35. Ms. Lewis neither deposited money into nor withdrew cash out of the Bank Account. (N.T. at 53, 119).
36. The Debtor did not notice the name "KIS" or her address on the checks she signed. (N.T. at 79). Ms. Lewis thought that the Bank Account was Nysenbaum's. (N.T. at 126).
37. The only reason Ms. Lewis signed the checks was that Nysenbaum requested she do so. (N.T. at 77).
38. Ms. Lewis signed at least 324 checks drawn on the KIS bank account. (JPS ¶ 13).
39. Several withdrawals and deposits were made on the Bank Account in Plainview, New York, in addition to other locations which were not near the Debtor's Address. (N.T. at 105-106, 108; Ex. P-19).
40. The address on the Bank Account was the Debtor's Address from February through August, 2005 and, after that time, was changed to an address in Old Bethpage, New York. (N.T. at 107-108, 121; Ex. 19).
42. The Debtor received a total of six checks from Nysenbaum, payable to her and drawn on the KIS Bank Account. (N.T. at 40; Ex. P-7).
43. The checks received by Ms. Lewis from Nysenbaum total $16,050 and are dated between June, 2005 and January, 2006. (Ex. P-7). Specifically, the checks made payable to the Debtor and drawn on the Bank Account are as follows:
Check No. Amount Date 112 $3,000 June 9, 2005 121 $3,000 July 13, 2005 130 $2,550 July 28, 2005 171 $2,500 November 7, 2005 179 $2,000 November 15, 2005 215 $3,000 January 12, 2006
44. Ms. Lewis testified that Nysenbaum gave her these checks only to pay her back for cash she lent him so that he could go to Atlantic City.
45. The Debtor usually had cash on hand in her home from her dancing job.
47. Other than receipt of these six checks, the Debtor received no money or income from KIS. (N.T. at 40, 76, 91).
48. Anthony Spota, an accountant recommended by Nysenbaum, prepared the Debtor's 2004 tax returns. (Ex. P-13). Ms. Lewis never spoke to Mr. Spota; she relied on Nysenbaum to deal with her taxes. (N.T. at 57, 58, 94).
49. The Debtor's 2004 personal income tax returns state, on Schedule C, that she earned $37,000 as a "personal care consultant." However, Ms. Lewis never worked as a personal care consultant and did not give this information to Mr. Spota (she assumes that Nysenbaum did). (N.T. at 57; Ex. P-13).
50. The Debtor reported an adjusted gross income of $28,372 on her 2005 taxes, although she was not working at this time. (Ex. P-13). She filed a Schedule C, reporting that she was a "consultant," with a gross income of $35,500. (Id.). However, the Debtor was not a consultant and did not personally give this information to Mr. Spota, her accountant that year. (N.T. at 66).
51. Ms. Lewis signed and paid her 2005 taxes without reviewing the documents. (N.T. at 97-98). She relied on Nysenbaum to know the amount that was due on her taxes and returned the check to him; "Sam took care of it for me." (N.T. at 124-125 (quote at 125)).
52. Due to Nysenbaum's death in 2006, H & R Block prepared the Debtor's 2006 taxes. (N.T. at 70, 99). Ms. Lewis met with H & R Block and provided them with the appropriate paperwork. (Id.).
53. The Debtor's 2006 tax return (Schedule C-EZ) reports $6,102 in income from work as a "beauty consultant." (Ex. P-13). Ms. Lewis did not tell H & R Block that she worked as a beauty consultant, which she did not, and does not have any knowledge of who told them this information. (N.T. at 71-73). The Debtor was not working at this time.
54. In 2005, Ms. Lewis received a 1099 taxable income form from KIS Transport, LLC, reporting $13,050 in income; in 2006 she received a 1099 from KIS, reporting $5,910 in income (together, the "1099s"). (Ex. P-13; N.T. at 76). Ms. Lewis gave at least the 2006 1099 to her accountant. (N.T. at 76).
55. Ms. Lewis maintained an investment account at Charles Schwab (the "Charles Schwab Account") that was set up by Jim Condon's father ("Mr. Condon"). The Charles Schwab Account was opened with money that the Debtor saved from working at the Club. (N.T. at 62, 95).
56. The Debtor set up the Charles Schwab Account when she was about 23 or 24 years old. (N.T. at 96).
57. Ms. Lewis opened the Charles Schwab Account because she wanted aggressively to save the money that she had earned working at the Club.
58. In 2004, a total of $172,442.11 in stocks and mutual funds were purchased in the Debtor's Charles Schwab Account. (Ex. 13). These purchases were made by Mr. Condon. (N.T. at 64).
59. In 2005, a total of $257,295.77 in transactions were processed in the Charles Schwab Account. (N.T. at 69).
60. Between approximately February 2005 and November 2006, KIS sent numerous invoices to Aerogroup for shipping services. (Ex. P-10). Because these invoices contained Aerogroup's address, it was "assume[d]" that they were received by Aerogroup. (N.T. at 9).
61. Between approximately April 2005 and November 2006, Aerogroup issued numerous checks to KIS for payment of invoices sent to it by the Company. (Ex. P-11).
62. Although the Debtor's Address was on the checks below KIS' name, it is not known whether or not the checks were sent to Ms. Lewis from Aerogroup.
63. The Debtor received mail at her house for KIS Transport for "a little bit" in 2005-perhaps a couple of weeks — but then the mail stopped coming. When she received such mail, Ms. Lewis gave it to Nysenbaum, unopened. (N.T. at 38-39, 80).
64. Invoices from William Palumbo Trucking, Inc., a trucking company doing business with KIS, had the Debtor's Address on them from April 2005 through approximately October 2006, but Palumbo testified that he has no direct knowledge of the mailing of the invoices and that it is possible that they were sent somewhere else. (N.T. at 141-144; Ex. 46).
65. Palumbo spoke to Nysenbaum when dealing with KIS, and never to Ms. Lewis. (N.T. at 145-6).
66. During all relevant times in the litigation,
67. Hartford, an insurance company, issued a fidelity bond, (policy #13 BDD CZ 3300, the "Bond"), in favor of Aerogroup. The Bond covered all losses which are the subject matter of this litigation. (JPS ¶ 5).
68. During the Relevant Time Period, Nysenbaum's duties as Shipping Manager at Aerogroup included coordinating the shipping of Aerogroup's merchandise. (JPS ¶ 6).
69. Pursuant to the terms of the Bond and the related release and assignment executed by Aerogroup and Hartford, Hartford has the right, title and interest to all losses sustained by Aerogroup. (JPS ¶ 19).
70. KIS charged Aerogroup a total of $918,000.32 for shipping costs during the Relevant Time Period; these invoices were paid by Aerogroup. (JPS ¶ 9).
72. In approximately early 2007, Aerogroup made a claim on the Bond in the amount of $309,313.11. (JPS ¶ 17).
73. Because Aerogroup had a $15,000 deductible on its insurance policy, Hartford paid $294,313.11 to Aerogroup. (JPS ¶ 21).
74. The parties agree that Nysenbaum "either individually and/or on behalf of KIS, retained at least a portion" of this loss. (JPS ¶ 35).
75. On March 19, 2008, Hartford settled its claims against Nysenbaum for $92,500.
76. Ms. Lewis did not receive, endorse or sign any check from Aerogroup. (N.T. at 113).
The Plaintiff is pursuing Ms. Lewis on a wide variety of causes of action. Central to its theory is the notion that the Debtor's participation in the scheme with Nysenbaum to defraud Aerogroup was so extensive — her address was used, she signed her name to certain allegedly critical documents and to numerous checks, — that the defense of ignorance or of being an innocent bystander is insufficient and unconvincing. Some counts on which Hartford seeks relief, such as conversion, do not have a specific mens rea requirement. However, most of the causes of action for which the Plaintiff seeks relief, as discussed in detail below, do require that in order to be found liable one must have formed a specific intent.
The court therefore finds it important initially to address the fact that it found the Debtor at trial to be a highly credible witness. Upon having the chance to observe Ms. Lewis over the course of the day-long trial, particularly after being subject to intense cross-examination, the court finds no reason to doubt Ms. Lewis' testimony that she did not have an intent to perpetrate, nor any knowledge or understanding of Nysenbaum's scheme to defraud Aerogroup.
The Debtor does not strike one as lacking intelligence; but she is uneducated, unsophisticated and clearly relies on advice from the men in her life for all financial decisions.
Further, the Debtor's testimony made clear that her relationship with Nysenbaum was not conspiratorial in nature. Rather, just as one might suspect of a dancer who befriends a patron at a nightclub, Nysenbaum and Ms. Lewis appeared to have a friendship of convenience. He benefitted her by buying her trinkets, taking her out to dinner, treating her "like a person," and helping with tax forms and the like. In return, she helped him by joining him for dinner, running errands, and, as it turned out, signing documents and checks after he told her that his partner was cheating him. This evidences ignorance and, perhaps, unwarranted trust on the part of the Debtor, but not an intent to steal hundreds of thousands from Nysenbaum's employer — a company with which the Debtor had no contact and from which she received nothing directly.
The court finds Ms. Lewis' testimony that she signed checks and got money for Nysenbaum ignorantly but not maliciously to be believable. As noted above, she placed her trust in the men in her life. However misplaced that trust, it explains why she did things without questioning the reasons. It is not alleged that Ms. Lewis signed any document which was presented to Aerogroup. Consequently, as will be fleshed out below, Ms. Lewis will not be held to have any intent to defraud Aerogroup or conspire with Nysenbaum.
In Counts One and Two of the Complaint, Hartford seeks to hold Ms. Lewis liable for violations of the RICO statute and conspiracy to commit RICO violations. While the Debtor's lack of intent to participate in any criminal or fraudulent scheme (as just discussed) would seem to warrant simple disposal of these causes of action, both the complex nature of the statute and the fact that the Plaintiff has sued under each subsection of RICO necessitate a lengthier discussion.
RICO, which stands for "Racketeer Influenced and Corrupt Organizations," was intended, in large part, to "protect legitimate enterprises by attacking and removing those who had infiltrated them for unlawful purposes." In re Le-Nature's, Inc., 2011 WL 2112533, at *3 (W.D.Pa. May 26, 2011) (quoting U.S. v. McDade, 28 F.3d 283, 296 (3d Cir.1994)). According to the Third Circuit:
Kehr Packages, Inc. v. Fidelcor, Inc., 926 F.2d 1406, 1411 (3d Cir.1991).
To prove that a defendant has committed any violation of the RICO statute, 18 U.S.C. § 1962, a plaintiff must first show a "pattern" of an underlying racketeering activity. See Jennings v. Emry, 910 F.2d 1434, 1439 (7th Cir.1990) (quoting Triad Assoc., Inc. v. Chi. Hous. Auth., 892 F.2d 583, 594 (7th Cir.1989)); accord Brown v. Protective Life Ins. Co., 353 F.3d 405, 407 (5th Cir.2003). A pattern requires commission of at least two acts from the list of predicate offenses (in 18 U.S.C. §§ 1961(1) and (5)). Kehr, 926 F.2d at 1411-1412.
In addition, in order for a pattern of predicate acts to be established, the Plaintiff must show that these acts are "related" and "amount to or pose a threat of continued criminal activity." Kolar v. Preferred Real Estate Inv., Inc., 361 Fed. Appx. 354, 363, 2010 WL 104500, at *5 (3d Cir. Jan. 12, 2010) (not precedential) (quoting H.J., Inc. v. Northwestern Bell Tel. Co., 492 U.S. 229, 239, 109 S.Ct. 2893, 106 L.Ed.2d 195 (1989)); accord Jennings v. Emry, 910 F.2d 1434, 1439 (7th Cir.1990) (noting that "a complaint asserting a pattern of racketeering activity must allege facts from which such a continuous and related course of conduct — one indicating the threat of continuing criminal activity — reasonably may be inferred"). Both the "relatedness" and "continuity" tests "depend heavily on the specific facts of each case." Kehr, 926 F.2d at 1412.
Here, the Plaintiff alleges that the underlying predicate act to the Debtor's RICO violation was either: 1) mail and/or wire fraud pursuant to 18 U.S.C. §§ 1341, 1343; or 2) theft in interstate shipping pursuant to 18 U.S.C. § 659. See Trial Memo at 22.
The preliminary (and determinative) question in our RICO analysis is thus whether Ms. Lewis is responsible for either of these alleged predicate offenses; if not, then a RICO violation did not occur. See In re Jamuna Real Estate, LLC, 2010 WL 2773395, at *3 (Bankr.E.D.Pa. July 13, 2010) ("The modus operandi of a RICO defendant is through a `pattern of racketeering activity.'").
The federal mail and wire fraud statutes prohibit the use of the mail or interstate wires for purposes of carrying out any scheme or artifice to defraud. 18 U.S.C. §§ 1341, 1343. A scheme or artifice to defraud "need not be fraudulent on its face, but must involve some sort of fraudulent misrepresentation or omission reasonably calculated to deceive persons of ordinary prudence and comprehension." Lum v. Bank of Am., 361 F.3d 217, 223 (3d Cir.2004), cert. denied 543 U.S. 918, 125 S.Ct. 271, 160 L.Ed.2d 203 (2004) (citing Brokerage Concepts, Inc. v. U.S. Healthcare, Inc., 140 F.3d 494, 528 (3d Cir.1998)).
In order for Hartford to prove that Ms. Lewis committed the predicate act of mail or wire fraud, the Plaintiff must
The evidence presented here in no way proves that Ms. Lewis violated the mail or wire fraud statutes, much less that a pattern of such behavior existed. In fact, Hartford failed even to establish that Ms. Lewis had any knowledge of the scheme to defraud Aerogroup. Nor did it show that the Debtor assisted Nysenbaum in the use of the mail or wires to defraud Aerogroup. Lewis' alleged participation was by "sending paper mail and e-mail and/or in using her home address and/or in assisting Nysenbaum in using paper and/or electronic mailings in furtherance of the fraudulent scheme." Trial Memo at 24. Nothing of this nature was demonstrated at trial; the Debtor was not aware of what Nysenbaum was up to and nothing suggests she knowingly participated in his scheme. The only evidence presented was the admitted short term use of her home address for KIS mail. This alone does not establish participation in activity involving Aerogroup.
Ms. Lewis, therefore, is not liable for the predicate RICO offenses of mail and wire fraud.
The alternate RICO predicate offense alleged by Hartford is theft from interstate shipping. The statute, 18 U.S.C. § 659, makes it a crime to:
This provision is intended to protect the flow of interstate commerce and requires a showing of interstate commerce at the time of the theft. U.S. v. Murray, 946 F.2d 154, 156 (1st Cir.1991) (citations omitted). The "goods" covered in section 659 include money and cash. U.S. v. Bryser, 954 F.2d 79, 85 (2d Cir.1992). The facilities protected by the interstate shipping statute may be broken into four main categories: (1) means of surface transportation (vehicles and the like); (2) support facilities for surface transportation (tank or storage facility); (3) means of interstate shipment over water and support facilities (steamboat or vessel); and (4) means of interstate air shipment and support facilities
Application of the above standard to the evidence presented at trial makes it clear that Ms. Lewis has not committed theft in interstate shipping. Preliminarily, no theft from the enumerated places detailed in the statute has been alleged by Hartford, i.e. there has been no allegation, much less proof, of interstate thievery pursuant to 18 U.S.C. § 659. The Plaintiff alleges that the Debtor stole money in connection with shipping goods; this is not equivalent to physically stealing from an interstate commerce facility. Further, no evidence has been offered that Ms. Lewis had knowledge as to the suspect nature of any goods or money she may have been receiving. For these reasons, theft by interstate shipping may not serve as a predicate RICO offense.
Hartford has failed to show that the Debtor committed a pattern of an underlying racketeering activity. For this reason, the Plaintiff may not prevail on its RICO claim.
In addition to the federal statutory offense of RICO, Hartford also alleges that the Debtor committed common law fraud by her participation and assistance in Nysenbaum's scheme. To establish fraud in Pennsylvania, a plaintiff must prove:
Colaizzi v. Beck, 895 A.2d 36, 39 (Pa.Super.Ct.2006). See also Lorah v. SunTrust Mortg., Inc., 2010 WL 5342738, at *4 n. 10 (E.D.Pa. Dec. 17, 2010); Ndubizu v. Drexel Univ., 768 F.Supp.2d 796, 803 (E.D.Pa. 2011). As discussed below, Hartford did not prove any of these elements at trial.
A misrepresentation is material if "it is of such character that if it had not been misrepresented, the transaction would not have been consummated." Colaizzi, 895 A.2d 36, at 39-40; GMH Assoc., Inc. v. The Prudential Realty Group, 752 A.2d 889, 902 (Pa.Super.2000) (citation omitted). Silence "in the absence of a duty to speak" does not amount to fraudulent concealment. GMH, 752 A.2d at 902. Hartford contends that the Debtor misrepresented to Aerogroup that her home address was that of KIS. Trial Memo at 13. Further, the Plaintiff contends that by signing KIS' Banking Resolution, the Debtor misrepresented that she was a manager and member of KIS. Id.; See Finding of Fact no. 28.
In addition, Hartford has not demonstrated that the existence of these documents was a material fact, i.e. there has been no showing that Nysenbaum's scheme could not have been consummated without Ms. Lewis' participation. Given that the KIS entity (then operating as "KIS Logistics") existed prior to any involvement by the Debtor, it would certainly be difficult for the Plaintiff to assert that Nysenbaum's scheme was impossible without Ms. Lewis.
A defendant who makes a false statement without the requisite intent or scienter is not guilty of fraud. U.S. v. Saybolt, 577 F.3d 195, 204 (3d Cir.2009); Restatement (Second) of Torts § 526; Leason v. Berg, 927 F.2d 609 (9th Cir. 1991) (unpublished) (applying California law); Marci's Fun Food, LLC v. Shearer's Food's, Inc., 2011 WL 5360808, at *4-5 (W.D.Pa. Nov. 7, 2011) (granting summary judgment to Plaintiff on fraud count due to lack of evidence of intent); In re Marta Group, Inc., 47 B.R. 220, 224 (Bankr. E.D.Pa.1985) (finding that Plaintiff could not recover for fraud where there was no evidence of Defendant's intent). No showing of the Debtor's intent was made by Hartford. The court will not belabor this point, since it has already discussed that Ms. Lewis did not have the requisite mens rea to perpetrate a fraudulent scheme against Aerogroup.
The Plaintiff complaining of fraud must show not just reliance, but detrimental reliance, i.e., that it suffered harm as a result of relying on the fraudulent conduct. Debbs v. Chrysler Corp., 810 A.2d 137, 157 (Pa.Super.2002); Ndubizu, 768 F. Supp.2d. at 804.
Hartford contends that "Aerogroup relied on [the Debtor's] misrepresentations when it paid the KIS invoices and forwarded the payments to her home address." Trial Memo at 13.
This contention was not supported by any evidence at trial.
After all, how could Aerogroup have relied on the alleged misrepresentations of the Debtor when it had no contact or relationship with her? Cf. State Farm Mut. Auto. Ins. Co. v. Lincow, 715 F.Supp.2d 617, 631 (E.D.Pa.2010), aff'd 444 Fed.Appx. 617 (3d Cir. Sept. 16, 2011) (upholding, inter alia, a jury award for fraud claim in suit alleging scheme to defraud insurers). In State Farm, the court noted that the Plaintiff's corporate witness provided "detailed ... first hand knowledge" that it had "in fact, relied on the patients' records in the evaluation and payment of the claims." Id. at 631. Such detailed testimony allowed the State Farm court to conclude that the Plaintiff had "showed actual reliance' supporting its fraud claim." Id. at 631. No such reliance was proven here.
Proof that Hartford suffered damages as a result of Ms. Lewis' alleged fraud, like the other elements of this common law tort, must be proven by clear and
Because none of the above elements of common law fraud has been satisfied, the Plaintiff may not prevail on its claim that Ms. Lewis committed fraud.
The lack of viability of a fraud cause of action also means that Hartford may not succeed on its count for conspiracy to commit fraud. The elements of a claim of civil conspiracy are: "1) a combination of two or more persons acting with a common purpose to do an unlawful act or to do a lawful act by unlawful means or for an unlawful purpose, 2) an overt act done in pursuance of the common purpose, and 3) actual legal damage." Phillips v. Selig, 959 A.2d 420, 437 (Pa.Super.2008) (citation omitted). See also State Farm Mut. Auto. Ins. Co. v. Ficchi, 2011 WL 2313203, at *11 (E.D.Pa. June 13, 2011) ("under Pennsylvania common law, to plead a claim for civil conspiracy, [Plaintiff] must show that two or more persons `combined or agreed with intent to do an unlawful act or to do an otherwise lawful act by unlawful means.'") (citations omitted).
A discussion of whether the elements of conspiracy have been shown here is not necessary, however, due to the fact that the Plaintiff has failed to prove that the Debtor committed fraud. It is well settled that "civil conspiracy may not exist without an underlying tort." Boyanowski v. Capital Area Intermediate Unit, 215 F.3d 396, 405 (3d Cir.2000) (citation omitted). See also GMH, 752 A.2d 889 at 905 ("Because we conclude that no fraud was committed, we correspondingly find that no civil conspiracy to defraud occurred."); In re Orthopedic Bone Screw Prods. Liab. Litig., 193 F.3d 781, 789 (3d Cir.1999) ("The established rule is that a cause of action for civil conspiracy requires a separate underlying tort as a predicate for liability.... Standing alone, a conspiracy does no harm and engenders no tort liability. It must be activated by the commission of an actual tort.") (quotation marks and citations omitted); Pellegrino v. U.S. Transp. Sec. Admin., 2012 WL 661773, at *9 (E.D.Pa. Feb. 28, 2012) ("In the end, only a finding that the underlying tort has occurred will support a claim for civil conspiracy.") (quotation marks and citation omitted); Glass v. City of Philadelphia, 455 F.Supp.2d 302, 359 (E.D.Pa.2006) ("Unlike in the criminal conspiracy context, where the crime lies in the agreement itself, a cause of action for civil conspiracy requires a distinct underlying tort as a predicate to liability.") (citations omitted).
Because Ms. Lewis did not perpetrate a fraud on Hartford, neither is she liable for conspiracy to commit fraud.
Although it is the last count of the Complaint, because the elements of negligent misrepresentation and fraud are so similar, see, e.g. Liebman v. Prudential Fin., Inc., 2002 WL 31928443, at *5 (E.D.Pa. Dec. 30,
In order to prevail under this cause of action, the Plaintiff must prove each of the following:
Smith v. Lincoln Benefit Life Co., 395 Fed.Appx. 821, 824, 2010 WL 3730196, at *3 (3d Cir. Sept. 24, 2010) (non precedential) (finding that the complaint "failed to state how the [defendant] detrimentally relied upon or was injured" by the misrepresentation) (citing Bilt-Rite Contractors, Inc. v. The Architectural Studio, 581 Pa. 454, 866 A.2d 270, 277 (2005)); accord Azarchi-Steinhauser v. Protective Life Ins. Co., 629 F.Supp.2d 495, 501 (E.D.Pa. 2009) (finding that plaintiffs did not knowingly make a material misrepresentation); Brandow Chrysler Jeep Co. v. DataScan Tech., 511 F.Supp.2d 529, 536 (E.D.Pa. 2007). A plaintiff must prove the elements of negligent misrepresentation by a preponderance of the evidence. Banco Urquijo S.A. v. Signet Bank/Maryland, 861 F.Supp. 1220, 1247-48 (M.D.Pa.1994).
As a preliminary matter, Hartford cannot prevail on this cause of action because it has not shown that Ms. Lewis owes it a duty. The tort of negligent misrepresentation is "premised on the existence of a duty owed by one party to another." Gibbs v. Ernst, 538 Pa. 193, 647 A.2d 882, 890 (1994) (holding that an adopting parent may state a claim for negligent misrepresentation because an adoption agency "has assumed a duty to tell the truth when it volunteers information to prospective parents...."); Restatement (Second) of Torts § 552, cmt. (c) (1977) ("If [a defendant] has no pecuniary interest and the information is given purely gratuitously, he is under no duty to exercise reasonable care and competence in giving it"); Schnell v. Bank of N.Y. Mellon, 2011 WL 5865966, at *5 (E.D.Pa. Nov. 22, 2011) (dismissing negligent misrepresentation cause of action because no evidence of duty between the plaintiff and defendant); State College Area Sch. Dist. v. Royal Bank of Can., 825 F.Supp.2d 573, 592 (M.D.Pa.2011) (dismissing negligent misrepresentation claim against third-party defendant due to lack of duty to provide information); Lind v. Jones, Lang Lasalle Americas, Inc., 135 F.Supp.2d 616, 621 n. 3 (E.D.Pa.2001) ("There is nothing in this record to suggest that Defendant owed any duty to the Plaintiff as is required to maintain a cause of action for negligent misrepresentation.").
While a plaintiff can state a claim for negligent misrepresentation when one assumes a duty to tell the truth by making an affirmative statement, see Bionix Dev. Corp. v. Sklar Corp., 2009 WL 3353154, at *4 (E.D.Pa. Oct. 14, 2009) (citing Gibbs v. Ernst, 538 Pa. 193, 647 A.2d 882, 891 (1994)), there is no evidence here that the Debtor made an affirmative statement to the Plaintiff or its insured. At best, Hartford could argue (although it has not) that by signing the Banking Resolution, the Commerce Bank Form, and the blank KIS checks Ms. Lewis made an affirmative statement and thereby created a duty to KIS.
In addition to this fatal flaw, Hartford has failed to offer evidence sufficient to support each of the four elements necessary to support a claim of negligent misrepresentation. No showing was made that the Debtor's alleged misrepresentations — her signatures on the documents and checks — were material to Hartford's loss. "A misrepresentation is material when it is of such a character that if it had not been made, the transaction would not have been entered into." Delahanty v. First Penn. Bank, N.A., 318 Pa.Super. 90, 464 A.2d 1243,1252 (1983) (citation omitted).
The KIS enterprise existed prior to any alleged involvement by the Debtor. Hartford itself viewed these two companies (i.e. before and after the documents and checks were signed by Ms. Lewis) as one in the same. See Ex. 16. The Bank Account, after briefly reflecting the Debtor's Address, was diverted to a different address.
Nor did Hartford show that it justifiably relied on a misrepresentation by the Debtor (the fourth element of negligent misrepresentation). First and foremost, there is no indication that Hartford actually relied on any information provided by Ms. Lewis. As discussed, she had no duty to Aerogroup (or to the Plaintiff) primarily because the Debtor had essentially no relationship with Aerogroup. The evidence at trial showed that Ms. Lewis had no contact with anyone at the company. Aerogroup's dealings were entirely with Nysenbaum; Hartford does not argue to the contrary.
For all these reasons, the Plaintiff cannot prevail on its claim of negligent misrepresentation.
Hartford next asserts that the Debtor benefitted unfairly from her alleged involvement with the KIS scheme and, therefore, that she is liable under the doctrine of unjust enrichment. "To recover under the equitable doctrine of unjust enrichment, otherwise known as `quasicontract' or `implied-in-law contract,' a plaintiff must establish the following:
Kia v. Imaging Scis. Int'l, Inc., 735 F.Supp.2d 256, 269 (E.D.Pa.2010) (quoting Wiernik v. PHH U.S. Mortgage Corp., 736 A.2d 616, 622 (Pa.Super.Ct.1999)), appeal denied, 561 Pa. 700, 751 A.2d 193 (2000)); see also EBC, Inc. v. Clark Bldg. Sys., Inc., 618 F.3d 253, 273-74 (3d Cir.2010).
"When considering the validity of a claim for unjust enrichment, we must focus on `whether the enrichment of the defendant is unjust. The doctrine does not apply simply because the defendant may have benefitted as a result of the actions of the plaintiff.'" Wiernik, 736 A.2d at 622 (citations omitted); see also Kia, 735 F.Supp.2d at 269; accord EBC, 618 F.3d at 273 ("a claimant must show that the party against whom recovery is sought either wrongfully secured or passively received a benefit that ... would be unconscionable for her to retain.") (citation omitted). The inquiry is fact specific. Kia, 735 F.Supp.2d at 269.
Malice on the part of the defendant is not required to show unjust enrichment. "It is clear that a showing of knowledge or wrongful intent on the part of the benefitted party is not necessary in order to show unjust enrichment. Rather, the focus is on the resultant unjust enrichment; not on the party's intention." Crossgates Realty, Inc. v. Moore, 279 Pa.Super. 247, 420 A.2d 1125, 1128 (1980) (citing Gee v. Eberle, 279 Pa.Super. 101, 420 A.2d 1050, 1059 (1980)); see also Stilwell Value Partners I, L.P. v. Prudential Mut. Holding Co., No. 06-4432, 2007 WL 2345281, at *11 (E.D.Pa. Aug. 15, 2007) (quoting Torchia v. Torchia, 346 Pa.Super. 229, 499 A.2d 581, 583 (1985)). Plaintiff must prove the elements of unjust enrichment by a preponderance of the evidence. Banco Urquijo S.A. v. Signet Bank/Maryland, 861 F.Supp. 1220, 1247-48 (M.D.Pa. 1994).
Because Hartford failed to prove that any benefit to Ms. Lewis was conferred by Aerogroup, this cause of action fails.
A litigant may not succeed on a claim for unjust enrichment without first demonstrating that a defendant has benefitted from the plaintiff-prong one of the above test. See Nicole Med. Equip. & Supply, Inc. v. TriCenturion, Inc., 2011 WL 1162052, at *7 n. 46 (E.D.Pa. Mar. 28, 2011) (finding that plaintiff had failed to state a cause of action for unjust enrichment because "Plaintiff does not allege any facts reflecting the contours of an agreement between it and Defendants from which Defendants benefitted financially, nor a benefit Plaintiff conferred upon Defendants under such circumstances that it
Here, Hartford has failed to produce evidence showing that the Debtor has received any benefit from the Plaintiff. According to Hartford, the benefits conferred on Ms. Lewis can be placed in two general categories: (1) the gifts, trinkets, trips, etc. that she received from Nysenbaum; and (2) the total of $18,960 allegedly paid to the Debtor by KIS in 2005 and 2006 as shown on the 1099s.
The testimony revealed that the benefits received by Ms. Lewis from Nysenbaum were not nearly as extensive as Hartford asserts. The two took a few of trips to Atlantic City and Vegas. He bought the Debtor and her daughter a few "trinkets" and let her keep the change after running errands for him. Nysenbaum may have paid for dinner on occasion and purchased a gown for Ms. Lewis. The parties essentially agree on this. However, Hartford cannot hang its unjust enrichment claim on this fact because we have no way of knowing — and the Plaintiff has not proven — that the funds used by Nysenbaum to purchase items for the Debtor came from Aerogroup. Making this determination would be a two-step process. First, the Plaintiff must show that all of Nysenbaum's funds came from KIS. Next, Hartford would need to demonstrate that KIS existed solely due to its relationship with Aerogroup, i.e. that all of KIS' funds were funneled from Aerogroup.
Hartford proved neither. In fact, given that Nysenbaum was a gambler and a schemer, as well as a legitimately employed individual, there is simply no way of knowing what the source of the funds were that Nysenbaum used to purchase trips, gowns and the like for the Debtor. The evidence, therefore, does not establish that Ms. Lewis benefitted from or was unjustly enriched by Aerogroup as a result of gifts from Nysenbaum.
Equally fatal to Hartford's claim for unjust enrichment is the fact that the Plaintiff has failed to show that a payment from KIS necessarily equals a payment from Aerogroup. In other words, even if Ms. Lewis did receive $18,960 from KIS, why should we presume that she received a benefit from Aerogroup? While we can infer that some funds filtered through KIS came from Aerogroup — that much is
Lastly, the Plaintiff seeks to recover pursuant to a theory of common law conversion, asserting that Ms. Lewis has unjustly and illegally usurped Aerogroup's property as her own. Under Pennsylvania law, the elements of conversion are:
Universal Premium Acceptance Corp. v. York Bank & Trust Co., 69 F.3d 695, 704 (3d Cir.1995) (quoting Cenna v. U.S., 402 F.2d 168, 170 (3d Cir.1968)); see also Pierre & Carlo, Inc. v. Premier Salons, Inc., 713 F.Supp.2d 471, 480 (E.D.Pa.2010); Prudential Ins. Co. of America v. Stella, 994 F.Supp. 318, 323 (E.D.Pa.1998).
Money may be converted only "where the plaintiff had a property interest in the money at the time of the alleged conversion." Kia v. Imaging Sciences Int'l, Inc., 735 F.Supp.2d 256, 270 (E.D.Pa. 2010) (citing cases and holding that conversion claim failed because "there is nothing in the record to show that [plaintiff] had any property interest in the money allegedly converted by the ... defendants"); Thomas v. Phila. Hous. Auth., 2011 WL 2415157, at *8 (E.D.Pa. June 15, 2011) (citing Kia); In re Olick, 2011 WL 5075104, at *6 (Oct. 26, 2011) (finding that Plaintiff failed to state a claim for conversion because, inter alia, he had no interest in funds at issue); Lariviere, Grubman & Payne, LLP v. Phillips, 2008 WL 4097466, at *5 (D.Colo. Sept. 4, 2008) (applying Colorado law).
A Plaintiff must prove the elements of conversion by a preponderance of the evidence. Chrysler Credit Corp. v. First Nat'l. Bank and Trust Co. Washington, 746 F.2d 200 (3d Cir.1984).
Hartford asserts that Ms. Lewis "intentionally accepted moneys from KIS that were wrongfully obtained from Aerogroup, thereby exercising dominion and control." Trial Memo at 18. The Plaintiff's argument is that by accepting money from KIS, the Debtor essentially converted Aerogroup's funds because Aerogroup was a victim of Nysenbaum and KIS's fraudulent shipping scheme. However, for reasons just discussed, these assumptions cannot be made. First, there is inconclusive evidence that the Debtor actually gained financially from KIS. Second, and more critically, Hartford has not demonstrated that Aerogroup was the only source of funding for KIS. Because the Plaintiff failed to prove that it has an interest in the property allegedly converted by the Debtor, this cause of action fails as well.
Because, as discussed, the Debtor is not liable to Hartford under any of its stated substantive causes of action, the court need not reach the issue of nondischargeability pursuant to 11 U.S.C. §§ 523(a)(2) and (4).
The preliminary inquiry with regard to all dischargeability proceedings is whether or not the debtor owes an obligation to the creditor. See e.g., In re August, 448 B.R. 331, 346-47 (Bankr.
As stated at the outset, trial in this matter was a consolidated proceeding on the Plaintiff's Adversary Proceeding and its Proof of Claim. The Proof of Claim was filed on October 4, 2010, approximately one month after the Complaint was filed. It seeks $929,985.60 in damages
The standard for analyzing the shifting burden of a proof of claim was set forth by the Third Circuit in In re Allegheny Intern., Inc., 954 F.2d 167 (3d Cir. 1992):
In this case, by providing evidence to negate more than one of the Plaintiff's allegations in the Proof of Claim, the Debtor shifted the burden back to Hartford.
For all of the reasons discussed above, the court determines that the Plaintiff has failed to meet its burden of proof with regard to each of the seven causes of action stated in both the Adversary Proceeding and the Proof of Claim. Accordingly, judgment for the Debtor/Defendant will be entered with regard to the Adversary Complaint, and the Proof of Claim will be disallowed. An appropriate order will follow.
It is hereby
1.
2. The Defendant's Objection to the Proof of Claim is
However, it is worth noting that Aerogroup is not a party to any of the documents signed by Ms. Lewis, nor has the Plaintiff showed that these items were presented or made available to Aerogroup. In other words, the Banking Resolution and the Commerce Bank Form do not evidence that Ms. Lewis made representations to Aerogroup.
