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Sarasota Ccm, Inc., E.D. v. Catherine Kuncman

January 23, 2012


Bankr. Adv. Proc. No. 10-08306(RG)

The opinion of the court was delivered by: Seybert, District Judge:


Plaintiff/Appellant Sarasota CCM, Inc. ("Plaintiff" or "Sarasota") appeals from an April 12, 2011 decision from the Bankruptcy Court. In the bankruptcy proceeding, Plaintiff sought a determination that a debt owed to it by Defendant/Appellee Catherine Kuncman ("Debtor") should not be discharged in Debtor's bankruptcy. The underlying debt stemmed from a pre-petition judgment that Sarasota had obtained against Debtor in Nassau County Supreme Court. The issues in this appeal are whether the Bankruptcy Court erred by not giving the state court judgment preclusive effect and whether the Bankruptcy Court erred in its own determination that Sarasota had not proven actual fraud under the Bankruptcy Code provision governing exceptions to discharge ability. For the following reasons, the Bankruptcy Court Order is AFFIRMED in its entirety and Sarasota's appeal is DISMISSED.


Debtor's former husband defaulted on a debt owed to Plaintiff, for which Plaintiff obtained a judgment against her former husband in the amount of $96,042.36 in August 2004. (App'x 1). Unable to recover from the ex-husband, Sarasota brought an action against Debtor in Nassau County Supreme Court, alleging that during the course of their marriage Debtor's husband had fraudulently conveyed to her several assets and properties, and that Debtor should be held personally liable for the judgment against her husband. Specifically, Sarasota identified the transfer of shares in a corporation that owned two Dunkin' Donuts franchises.*fn1 (Id.)

In September of 2009, the Nassau County Supreme Court awarded Sarasota summary judgment, and entered judgment against Debtor equal to the amount owed by her ex-husband (the "Judgment Debt"). (App'x 11.) Certain aspects of the state court's order are unclear, and in fact it is this ambiguity that is at the heart of this appeal. However, it is clear that the state court found that Debtor's then-husband, as part of a scheme to defraud his creditors, made fraudulent conveyances to Debtor, and that Debtor participated in this scheme. (App'x 14-16.)

After judgment was entered against her, Debtor filed for bankruptcy protection seeking to have the Judgment Debt discharged. Plaintiff in turn filed an adversary proceeding contending that the Judgment Debt was non-dischargeable under Section 523(a)(2)(A) of the Bankruptcy Code ("Section 523"), which excepts from discharge any debt "obtained by false pretenses, a false representation, or actual fraud." Plaintiff then filed a motion for summary judgment, asserting that the elements of fraud under New York law are the same as those under the nondischargeability statute and that the state court made a finding of fraud by the Debtor. Therefore, Sarasota argued, the state court decision should collaterally estop Debtor from excepting the Judgment Debt from discharge.

The Bankruptcy Court denied Plaintiff's motion, concluding that the state court order did not make a finding of actual fraud sufficient to meet the requirements of Section 523. Specifically, the Bankruptcy Court found that the state court had made no finding of fraudulent intent. (App'x 112). Rather, the state court's decision rested on New York Debtor Creditor Law Section 273 ("DCL 273"). (Id.) Under this statute, any conveyance that renders the transferor insolvent, or is made by a person who is already insolvent, is considered to be a fraudulent conveyance if the transferor receives no consideration for the transfer. N.Y. DEBT. & CRED. LAW § 273. DCL

273 expressly does not require any evidence of intent, id.; without evidence of intent the fraud is constructive--not actual.

In contrast, Bankruptcy Code Section 523 only applies if there is actual fraud. Therefore, the Bankruptcy Court held that without further evidence of the required intent the Judgment Debt could not be excepted from discharge. (App'x 116.) Sarasota never provided any such evidence, and relied instead on the state court order and the pleadings, motions, and exhibits it submitted to the state court. (App'x 116-17.) After a trial, the Bankruptcy Court dismissed Sarasota's adversary proceeding, ruling that there was insufficient evidence to support a finding of actual fraud. (App'x 113.) This appeal followed.


There are two issues on appeal: first, Sarasota challenges the Bankruptcy Court's interpretation of the state court order and the corresponding decision not to give it preclusive effect; second, Sarasota argues that the Bankruptcy Court erred in its own determination that the Judgment Debt should be excepted from discharge.

I. Standard of Review

The Court has appellate jurisdiction pursuant to 28 U.S.C. § 158. The Court reviews the Bankruptcy Court's findings of fact under a "clearly erroneous" standard, and its legal conclusions de novo. FED. R. BANK. P. 8013; In re U.S. Lines, Inc., 318 F.3d 432, 435-36 (2d Cir. 2003). A court's "interpretation of the text of a court order or judgment is considered a conclusion of ...

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