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Economic Development v. Edward J. Mcdermott

August 7, 2012


The opinion of the court was delivered by: Scullin, Senior Judge



Currently before the Court is Plaintiffs-Appellants' appeal from the U.S. Bankruptcy Court for the Northern District of New York's Memorandum-Decision and Order dated May 4, 2010, in which it dismissed Plaintiffs-Appellants' claims that Defendant-Appellee's debts were non-dischargeable under the Bankruptcy Code.


Plaintiffs-Appellants Economic Development Growth Enterprises Corporation ("EDGE") and Utica Industrial Development Corporation ("UIDC") made loans to Defendant-Appellee Edward J. McDermott in exchange for two promissory notes, secured by perfected security agreements for certain collateral. Defendant-Appellee was attempting to grow two now-insolvent corporations of which he was an officer and director - Integrated Sensors, Inc. ("ISI") and Sensor Applications, Inc. ("SAI").

Defendant-Appellee and the two corporations ultimately defaulted on both the EDGE and UIDC promissory notes; and, by December 31, 2005, the corporations ceased all operations and had become insolvent. In January 2006, in the process of winding down the corporations' affairs, Defendant-Appellee retained counsel to provide advice on how to best liquidate their assets and pay off creditors. On July 27, 2006, Defendant-Appellee filed a petition for Chapter 7 bankruptcy. The instant appeal before this Court involves disputed issues concerning the dischargeability of the debt that Defendant-Appellee owes to Plaintiffs-Appellants.

In the Bankruptcy Court proceeding, Plaintiffs-Appellants asserted the following two causes of action, violations of which, they argued, required a determination that Defendant-Appellee's debt was non-dischargeable: (1) for breach of fiduciary duty by fraud or defalcation pursuant to 11 U.S.C. § 523(a)(4) and (2) for wilful and malicious injury pursuant to § 523(a)(6).

In their first cause of action under § 523(a)(4), Plaintiffs-Appellants contended that Defendant-Appellee, as an officer and director of the two insolvent corporations, owed a fiduciary duty to the corporations' creditors to preserve the remaining assets for their benefit and that any intercompany transfers should have ceased until all of the corporations' creditors were paid. Plaintiffs-Appellants' second cause of action was based on allegations that Defendant-Appellee willfully and maliciously injured them pursuant to § 523(a)(6).

In its Memorandum-Decision and Order, the Bankruptcy Court dismissed Plaintiffs-Appellants' claims based on its finding that Defendant-Appellee's debt to Plaintiffs-Appellants was dischargeable under Bankruptcy Code §§ 523(a)(4) and 523(a)(6). See Dkt. No. 1-5, Bankruptcy Court Memorandum-Decision and Order dated May 4, 2010. On June 16, 2010, Plaintiffs-Appellants filed a Notice of Appeal in this Court, see Dkt. No. 1, and submitted a brief in support thereof on July 27, 2010, see Dkt. No. 5. On September 7, 2010, Defendant-Appellee filed a brief in opposition thereto. See Dkt. No. 7. On September 27, 2010, Plaintiffs-Appellants submitted a reply brief in further support of their appeal. See Dkt. No. 8.


A. Standard of review

Federal district courts have jurisdiction to hear appeals from final judgments, orders, and decrees of bankruptcy courts under 28 U.S.C. § 158(a). See 28 U.S.C. § 158(a). When reviewing a bankruptcy court's findings of fact, a district court reviews for clear error only and accepts its factual findings unless they are clearly erroneous. See Ames Dep't Stores, Inc. v. Ames Merch. Corp. (In re Ames Dep't Stores, Inc.), 470 B.R. 280, 283 (S.D.N.Y. 2012) (citations omitted). The bankruptcy court's legal conclusions, however, are subject to de novo review. See id. (citations omitted).

B. Plaintiffs-Appellants' claims pursuant to Bankruptcy Code § 523(a)

Pursuant to Bankruptcy Code § 523(a), 11 U.S.C. §§ 101-1532, courts narrowly construe the limited exceptions to the discharge of a debt and resolve any genuine doubts in favor of the debtor. See Denton v. Hyman (In re Hyman), 502 F.3d 61, 66 (2d Cir. 2007) (citations omitted). It is a creditor's burden to establish non-dischargeability by a preponderance of the evidence. See Grogan v. Garner, 498 U.S. 279, 291 (1991). Plaintiffs-Appellants ...

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