United States District Court, E.D. New York
September 29, 2004.
In re: RANDALL S. APPEL, Debtor. NORMAN BARD and SHIRLEY BARD, Plaintiffs-Appellees,
RANDALL S. APPEL, Defendant-Appellant.
The opinion of the court was delivered by: JOANNA SEYBERT, District Judge
MEMORANDUM AND DECISION
Pending before this Court is an appeal arising from a Chapter 7
bankruptcy action filed in the United States Bankruptcy Court for
the Eastern District of New York by Debtor Randall S. Appel
("Debtor"). Appellees, Norman Bard and Shirley Bard, filed an
adversary proceeding against Debtor, seeking a declaration that
the Debtor was not entitled to discharge under § 523 of the
Bankruptcy Code. Debtor appeals from that portion of the Order of
the Honorable Dorothy Eisenberg, U.S.B.J., dated October 2, 2003,
which granted Appellees motion for summary judgment and declared
that the Debtor was not entitled to a discharge under § 523 of
the Bankruptcy Code (the "Bankruptcy Order").
Debtor represented the Appellees as their registered investment
advisor. Appellees, an elderly couple, entrusted Debtor to
conservatively manage their life savings. Debtor instead placed
Appellees' funds into a series of high-risk investments, while
receiving enormous commissions, "kickers" and other bonuses from
the companies he recommended. The Appellees' investments ended in
an incredible loss of their life savings.
The Appellees then commenced an arbitration proceeding against
Debtor and his entities encaptioned Norman Bard and Shirley Bard
v. Randall S. Appel, Appel Financial Planning, Ltd., Strategic
Assets, Inc. and Ameriprop, Inc., National Association of
Securities Dealers (NASD) Arbitration No. 00-01340, in Boca
Raton, Florida on or about March 27, 2000 ("Arbitration
Proceeding"). Appellees sought recovery against Debtor on claims
for breach of contract, violations of Sections 517.01 and 517.301
of the Florida Securities and Investor Protection Act, breach of
fiduciary duty, breach of duty of loyalty, violation of SEC Rule
10b-5 and Section 10(b) of the Securities and Exchange Act of
1934, negligence and common law fraud.
On October 23, 2001, the eve of trial in the Arbitration
Proceeding, Debtor and his entities filed voluntary petitions
under Chapter 7 of the Bankruptcy Code. Thereafter, the Appellees
obtained relief from the automatic stay from the Bankruptcy Court
for leave to prosecute the Arbitration Proceeding. Debtor failed
to comply with at least three orders previously entered in the
Arbitration Proceeding. Due to Debtor's failure to comply, he was
precluded from presenting testimony and cross-examining witnesses
at the Arbitration Proceeding. Debtor was, however, permitted to
appear at the Arbitration Proceeding and the Arbitration Panel
did read and consider Debtor's answer. The Arbitration Panel
issued an award on or about December 5, 2002 against Debtor and
in favor of Appellees. Debtor never appealed the award.
On January 17, 2002, the Appellees commenced an adversary
proceeding in the United States Bankruptcy Court for the Eastern
District of New York seeking a ruling that Debtor's liability to
them was non-dischargeable under Sections 523(a)(2), 523(a)(4)
and 523(a)(6) of the United States Bankruptcy Code. On October 2,
2002, the Bankruptcy Court entered the Bankruptcy Order which
granted Appellees' motion for summary judgment and stated that
Debtor was collaterally estopped from relitigating the issues
that were previously determined after years of litigation in the
Arbitration Proceeding. Debtor now appeals the Bankruptcy Order.
STANDARD OF APPELLATE REVIEW
Under Rule 8013 of the Federal Rules of Bankruptcy, "on an
appeal the district court . . . may affirm, modify, or reverse a
bankruptcy judge's judgment, order, or decree or remand with
instructions for further proceedings." FED. R. BANK. P. 8013. The
court's "finding[s] of fact, whether based on oral or documentary
evidence, shall not be set aside unless clearly erroneous. . . ."
Id.; see also In re Momentum Mfg. Co., 25 F.3d 1132, 1136
(2d Cir. 1994); In re PCH Assoc., 949 F.2d 585, 597 (2d Cir.
1992). The bankruptcy court's legal conclusions are evaluated
de novo. See In re Momentum Mfg. Co., 25 F.3d at 1136.
A court may properly grant summary judgment only "if the
pleadings, depositions, answers to interrogatories, and
admissions on file, together with the affidavits, if any, show
that there is no genuine issue as to any material fact and that
the moving party is entitled to judgment as a matter of law."
FED. R. CIV. P. 56(c). The burden of proof is on the moving party
to show that there is no genuine issue of material fact, Gallo
v. Prudential Residential Servs., L.P., 22 F.3d 1219, 1223 (2d
Cir. 1994) (citing Heyman v. Commerce & Indus. Ins. Co.,
524 F.2d 1317, 1320 (2d Cir. 1975)), and "all ambiguities must be
resolved and all inferences drawn in favor of the party against
whom summary judgment is sought." Id. (citing Eastway Constr.
Corp. v. City of New York, 762 F.2d 243, 249 (2nd Cir. 1985));
See also Hayes v. New York City Dept. of Corrs.,
84 F.3d 614, 619 (2d Cir. 1996). "Factual disputes that are irrelevant or
unnecessary will not be counted." Anderson v. Liberty Lobby,
Inc., 477 U.S. 242, 247 (1986) (citing 10A Charles A. Wright,
Arthur R. Miller, & Mary Kay Kane, Federal Practice and
Procedures § 2725, at 93-95 (1983)).
A party opposing a motion for summary judgment "may not rest
upon the mere allegations or denials of his pleadings, but . . .
must set forth specific facts showing that there is a genuine
issue for trial." Anderson, 477 U.S. at 248 (quoting First
Nat'l Bank v. Cities Serv. Co., 391 U.S. 253, 288-89 (1968)).
Under the law of the Second Circuit, "when no rational jury could
find in favor of the nonmoving party because the evidence is so
slight, there is no genuine issue of material fact and a grant of
summary judgment is proper." Gallo, 22 F.3d at 1224 (citing
Dister v. Continental Group, Inc., 859 F.2d 1108, 1114 (2d Cir.
1988)). Mere conclusory allegations, speculations or conjecture
will not avail a party opposing summary judgment. Kulak v. New
York, 88 F.3d 63, 71 (2d Cir. 1996).
"`The relief of discharge is a cornerstone of the debtor's
"fresh start" in bankruptcy. It enables the debtor to begin his
post-bankruptcy life with a clean slate vis-à-vis his
creditors.' Such relief, however is a privilege not a right and
should inure only to the benefit of the honest Debtor." In re
Pimpinella, 133 B.R. 694, 697 (Bankr. E.D.N.Y. 1991) (internal
citations omitted). The provisions of the Bankruptcy Code which
pertain to exceptions to discharge state:
§ 523. Exceptions to Discharge.
(a) 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
. . .
(2) for money, property, services, or an extension, renewal, or
refinancing of credit, to the extent obtained by
(A) false pretenses, a false representation, or
actual fraud, other than a statement respecting the
debtor's or insider's financial condition; . . .
. . .
(4) for fraud or defalcation while acting in a
fiduciary capacity, embezzlement, or larceny; . .
. . .
(6) for willful and malicious injury by the debtor to
another entity or to the property of another entity;
. . .
11 U.S.C. § 523(a)(2), (4), and (6). In this case, the Debtor was
found, in the Arbitration Proceeding, to have committed a fraud.
As such, pursuant to § 523(a), the debt in question is
non-dischargeable if the findings of the Arbitration Panel are
given effect here. In the instant proceeding, the Debtor seeks to
relitigate the merits of the Appellee's fraud claim while the
Appellees seek to apply the doctrine of collateral estoppel to
bar any such relitigation.
"In determining whether an arbitration decision in [Florida]
collaterally estops the debtor from relitigating the issues which
relate to dischargeability, the Court must refer to the
applicable [Florida] law which would give preclusive effect to
the decision and judgment, and decide if the required elements
have been satisfied." In re Guccione, 268 B.R. 10, 14 (Bankr.
E.D.N.Y. 2001) (applying Arizona law); see also In re
Hartman, 274 B.R. 911, 914 (Bankr. M.D. Fla. 2002) (applying
Florida law to determine preclusive effect of state court
judgment); In re Zangara, 217 B.R. 26, 31 (Bankr. E.D.N.Y.
1998) (stating "[a] prior state court judgment may bar discharge
of the debt evidenced by that judgment if . . . the law of the
state where the judgment was rendered would give preclusive
effect to the judgment. . . ."). The parties here do not dispute
that Florida law controls the applicability of collateral
estoppel in this proceeding. See Appellee Br. p. 9-10; Debtor
Br. p. 13-14.
Under Florida Law, three elements must be met for issue
preclusion apply: "(1) the issue at stake must be identical to
the one involved in the prior proceeding; (2) the issue must have
been actually litigated in the prior proceeding; and (3) the
determination must have been a critical and necessary part of the
judgment in that prior proceeding." In re Hartman,
274 B.R. at 914 (interpreting Florida's law of collateral estoppel); In re
Bush, 62 F.3d 1319, 1322 (11th Cir. 1995) (same).
The first element requires that the issue at stake must be
identical to the one involved in the prior proceeding. In re
Hartman, 274, B.R. at 914. Here, the Appellees alleged facts in
the Arbitration Proceeding nearly identical to the ones alleged
in the non-dischargeability proceeding. See id. at 915 ("To
prove fraud under Florida Law, a plaintiff must establish that
the defendant made a `deliberate and knowing misrepresentation
designed to cause, and actually causing detrimental reliance by
the plaintiff.'"). "The Eleventh Circuit has held that the
elements for common law fraud in Florida closely mirror the
requirements of § 523(a)(2)(A)." Id. (citing In re St.
Laurent, II, 991 F.2d 672, 676 (11th Cir. 1993)). In fact, the
Arbitration Award recites verbatim the applicable elements under
§ 523(a). Therefore, the first element of collateral estoppel is
met here because the issues alleged in the Arbitration Proceeding
are identical to the necessary elements of § 523(a)(2)(A).
The second element requires that the issue presented must have
been actually litigated in the prior proceeding. Id. at 914.
The Debtor argues that he did not have a full and fair
opportunity to litigate the issue at the Arbitration Proceeding
because the Arbitration Panel, while allowing him to be present,
precluded him from testifying or offering evidence in his own
behalf. See Debtor Br. p. 22. Due to his inability to
participate, Debtor argues that the Arbitration Award is not
entitled to full faith and credit or collateral estoppel. Id.
However, what Debtor fails to include in his brief are the
facts which both Appellees and the Bankruptcy Court found to be
relevant: Debtor's preclusion from presenting evidence at the
hearing resulted from his failure to respond to three prior
orders throughout the arbitration, which took several years to
conclude. See Appellees' Br., p. 14. "His choice to comply or
not to comply with the directives were his choice. Failure to
defend is not the same as not having the opportunity to
defend. . . . Collateral estoppel applies where a party takes
some steps to litigate, but then abandons his defense."
Appellees' Br. p. 15 (citing Transcript of Arbitration Proceeding
at 21:14 to 22:13.).
"`"Actually litigated" only contemplates that the defendant has
been given a full opportunity to defend himself.'" In re
Hartman, 274 B.R. at 915 (quoting In re Seifert, 130 B.R. 607,
609 (Bankr. M.D. Fla. 1991). Furthermore, under Florida Law, a
pure default judgment entered when there is no participation by
the defendant is sufficient to satisfy the "actually litigated"
prong of collateral estoppel. Id.; see also In re
Seifert, 130 B.R. at 609 ("Debtor/defendant could have
reasonably foreseen the consequences of not defending an action
based in part on fraud. It would be undeserved to give
debtor/defendant a second bite at the apple when he knowingly
chose not to defend himself in the first instance."). In the
instant case, the Court finds that the actually litigated element
is met, because Debtor had the full opportunity to defend himself
at the Arbitration Proceeding and voluntarily chose not to comply
with several orders.
The final element necessary to establish collateral estoppel
under Florida Law is that the determination must have been a
"critical and necessary" part of the judgment in that prior
proceeding. In re Hartman, 274 B.R. at 914. As discussed
earlier, the Arbitration Panel necessarily made findings of fraud
identical to the requirements under § 523(a) of the Bankruptcy
Code. The findings made by the Arbitration Panel were plainly a
"critical and necessary" part of the Arbitration Award and the
determination that the Debtor had defrauded the Appellees. Thus,
the Court finds the elements of § 523(a) to be critical and
necessary to the Arbitration Award.
In addition, "[t]he United States Supreme Court has declined to
bar the use of collateral estoppel with respect to arbitration
awards in subsequent federal court litigation." In re Zangara,
217 B.R. at 35 (citing Dean Witter Reynolds, Inc. v. Byrd,
470 U.S. 213, 233, 105 S. Ct. 1238, 84 L. Ed. 2d 158 (1985)). More
recently, the Supreme Court's decision in Grogan v. Garner,
498 U.S. 279, 111 S. Ct. 654, 112 L. Ed. 2d 755 (1991), specifically
stated that "collateral estoppel or issue preclusion may be
applied in reaching conclusions about certain underlying factual
issues that are necessary to establish dischargeability in
actions commenced under 11 U.S.C. Sec. 523(a)." In re Zangara,
217 B.R. at 35 (citing Grogan, 498 U.S. at 284-85). Therefore,
this Court finds that there is no federal exception to "full
faith and credit" for non-dischargeability proceedings.
Having found that the Debtor is barred from relitigating the
merits of the fraud claim presented in the Arbitration
Proceeding, and recognizing that the elements of a fraud claim
under Florida law are the same as the elements for establishing
the non-dischargeability of a debt under § 523(a), the Court
finds that the debt in question is in fact non-dischargeable and
upholds the Order of the Bankruptcy Court.
The Court finds that collateral estoppel prevents the Debtor
from relitigating the truth or merits of the allegations of fraud
or the effect of the release signed between himself and
Appellees. The Arbitration Award was rendered in Florida under
Florida Law. If the Debtor had any objections to the Award, the
proper forum for his objections would have been in a Florida
State court, not Bankruptcy Court and certainly not in this
For all the reasons set forth herein, the Order of the
Bankruptcy Court is AFFIRMED and the Debtor's appeal is
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