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In re Margulies

United States District Court, S.D. New York

March 20, 2017



          KATHERINE POLK FAILLA United States District Judge

         For the second time, Appellant/Cross-Appellee Joshua Simon Margulies (“Margulies”) comes before this Court to appeal from a judgment of the United States Bankruptcy Court for the Southern District of New York (Bernstein, J.), and, more particularly, its finding that his debt to Appellee/Cross-Appellant Dennis Hough (“Hough”) was not dischargeable pursuant to 11 U.S.C. § 523(a)(6) because it arose from Margulies's willful and malicious conduct. Hough cross-appeals from the Bankruptcy Court's determination that USAA Casualty Insurance Company (“USAA”) was not liable for the judgment pursuant to New York Insurance Law § 3420, because Margulies's injurious conduct did not qualify as an “accident” under New York law. For the reasons set forth below, the judgment of the Bankruptcy Court is affirmed and both appeals are denied.


The Court assumes familiarity with the complex and lengthy history of this litigation, which has been set forth in (i) the Bankruptcy Court's previous decisions in Hough v. Margulies (In re Margulies), 476 B.R. 393 (Bankr. S.D.N.Y. 2012) (“Margulies I”); Hough v. Margulies (In re Margulies), Adv. No. 10-04050, 2012 WL 3782535 (Bankr. S.D.N.Y. Aug. 31, 2012) (“Margulies II”); Hough v. Margulies (In re Margulies), Adv. No. 10-04050, 2013 WL 2149610 (Bankr. S.D.N.Y. May 16, 2013) (“Margulies III”); and Hough v. Margulies (In re Margulies) (“Margulies V”), 541 B.R. 156 (Bankr. S.D.N.Y. 2015); (ii) this Court's previous decision, In re Margulies (“Margulies IV”), 517 B.R. 441 (S.D.N.Y. 2014); and (iii) the filings contained in the dockets for In re Margulies, No. 10-14012 (SMB) (Bankr. S.D.N.Y.); Hough v. Margulies, Adv. No. 10-04050 (SMB) (Bankr. S.D.N.Y.); and In re Margulies, No. 13 Civ. 6009 (KPF) (S.D.N.Y.). Therefore, the Court will focus here on the procedural developments that followed this Court's September 9, 2014 Opinion and Order (the “2014 Opinion”) and the facts found by the Bankruptcy Court on remand.

         A. The 2014 Opinion

         The Bankruptcy Court entered its first final judgment in the adversary proceeding on May 29, 2013. (No. 10-04050, Dkt. #118). On June 11, 2013, Margulies filed a notice of appeal from the May 29, 2013 judgment, and Hough's cross-appeal followed on June 13, 2013. (No. 10-04050, Dkt. #121). The parties' respective notices of appeal were docketed by this Court on August 27, 2013. (No. 13 Civ. 6009, Dkt. #1, 2).

         After considering at length the Bankruptcy Court's factual findings and legal analysis, this Court determined that further factual findings and the application of a different legal framework were required. See generally Margulies IV. The Court remanded to this end. Id. at 462. Specifically, the Court directed the Bankruptcy Court to determine on remand:

• With regard to Margulies's dischargeability claim, “(i) whether Margulies was substantially certain that Hough's injuries would occur, and if he was not, (ii) whether that finding impacts the Bankruptcy Court's determination that Margulies's actions were malicious; as well as (iii) whether Margulies's actions were undertaken for the purpose of economic benefit.” Id.
• With regard to Hough's § 3420 claim, “(i) whether Margulies's intent and knowledge establish that Hough's injuries were the sort that would flow ‘directly and immediately' from Margulies's actions; and (ii) whether the [underlying incident (the ‘Incident')] was accidental, that is, ‘unusual, unforeseen, or unexpected' from Margulies's perspective.” Id.

         B. The Proceedings on Remand and the November 16, 2015 Judgment

         1. The Bankruptcy Court Proceedings

         On December 22, 2014, USAA advised United States Bankruptcy Judge Stuart M. Bernstein that the Court had vacated the May 29, 2013 judgment and remanded the case for further proceedings consistent with the Court's decision. (No. 10-04050, Dkt. #145). USAA offered its belief that “[b]ased on the substantial evidence adduced at the [Bankruptcy Court's one-day bench trial on December 19, 2012], ... the record [was] sufficient to allow the [Bankruptcy] Court to issue additional post-trial findings of fact which answer the questions posed” in this Court's Opinion. (Id.).[2] Margulies concurred, writing separately to express his agreement that the parties need not submit new proposed findings of fact given the sufficiency of the already-existing record. (No. 10-04050, Dkt. #147).

         Judge Bernstein directed the parties to appear at a conference on February 3, 2015. (See No. 10-04050, Dkt. #148). At the conference, Hough took a different position from Margulies and USAA, agreeing that additional testimony was not required but arguing that he should be permitted to supplement the record to support his res judicata argument. (No. 10-04050, Dkt. #148). Judge Bernstein decided that the parties should submit proposed findings of fact and conclusions of law, and set a schedule for same. (Id.).

         Hough filed his proposed findings of fact and conclusions of law on March 23, 2015 (No. 10-04050, Dkt. #150-51), to which he appended three exhibits to supplement the record (No. 10-04050, Dkt. #149). USAA objected to the length of Hough's filings, and argued that the Bankruptcy Court should strike the supplemental exhibits that, it contended, Hough had filed impermissibly. (No. 10-04050, Dkt. #152). The Bankruptcy Court convened a second conference on April 7, 2015. (No. 10-04050, Dkt. #154).

         At the conference, Hough made two arguments. First, Hough argued that he needed to submit these additional exhibits so that the Bankruptcy Court could reconsider Hough's res judicata claim. (No. 10-04050, Dkt. #154). Though the Bankruptcy Court believed this Court had precluded its reconsideration of that question on remand, it did not strike Hough's exhibits and reserved decision on the propriety of his renewed res judicata claim. (Id.).

         Second, Hough moved for extensions of time and page length with regard to his proposed findings of fact and conclusions of law. (No. 10-04050, Dkt. #154). Hough claimed that he could not make his case within the confines previously set. (Id.). Judge Bernstein retorted that Hough's difficulty derived from his decision to plead his claim in the alternative: “That's because that's the way you cast your pleading and when you address one, you shoot yourself in the foot on the other. ... And maybe you ought to make a choice.” (Id.). Hough responded that he was unable to do so - to dismiss his claim against Margulies and proceed against USAA alone - because of USAA's contention that the underlying incident was intentional, not accidental. (Id.). Hough reasoned that if the Court found for USAA on that claim, “then that would also require under these facts a finding that there was malice, ” such that Margulies's debt would be “not dischargeable.” (Id.).

         The Bankruptcy Court scheduled a second round of briefing with revised page limits. (No. 10-04050, Dkt. #158). Hough filed his proposed findings of facts and conclusions of law on April 28, 2015 (No. 10-04050, Dkt. #156-57); USAA filed its proposed findings of fact and memorandum of law on May 29, 2015 (No. 10-04050, Dkt. #160); and Margulies filed his brief on remand on May 30, 2015 (No. 10-04050, Dkt. #161-62).

         2. The November 16, 2015 Decision

         Judge Bernstein issued his Post-Remand Memorandum Decision Regarding the Dischargeability of Debt Under 11 U.S.C. § 523(a)(6) and Indemnification Under New York Insurance Law § 3420 on November 16, 2015. Margulies V, 541 B.R. 156. In sum, the Bankruptcy Court found that (i) “Margulies acted willfully and maliciously, and accordingly, [that] his debt to Hough is not dischargeable” and (ii) “the incident that gave rise to Hough's injury was not an accident within the meaning of New York's insurance law, and hence, is not covered by the USAA policies issued to Margulies.” Id. at 159.

         a. Factual Background

         Regarding the circumstances of the Incident, the Bankruptcy Court found these facts:

On August 3, 2000, Margulies was driving north on Manhattan's Sixth Avenue, a one-way northbound road with six lanes, five of which were open to traffic. Kristopher Zdyb was a passenger in the car. They were headed to an important business meeting with former New York Governor Mario Cuomo, and they were running late. At the time, Hough was working as a flagman tasked with stopping traffic on Sixth Avenue to allow vehicles to enter and exit a construction site midway between 22nd and 23rd Streets.
Margulies was stopped by Hough in the middle lane of Sixth Avenue, his car the first one in line. While stopped, one or two trucks exited the construction site, but Hough continued to hold traffic even after it appeared that no more trucks were entering or exiting the site. Margulies and Zdyb became increasingly impatient as they watched the traffic light at 23rd Street pass through two full cycles without seeing any trucks enter or leave the site.
Margulies made eye contact with Hough and communicated his intention to move forward when the light turned green by tapping or pointing to his watch and revving his engine. He testified that he intended to convey that he planned to move forward regardless of whether Hough wanted him to stay put. When the light turned green, Margulies took his foot off the brakes and his car rolled slowly at a speed of one to two miles per hour, or roughly 1.5 to 3 feet per second. When the car started rolling forward Hough was not in Margulies's lane, but Hough backed into his lane when the car was about a car-length away from Hough.
Margulies tried to veer to the left and drive around Hough but traffic in that lane prevented him from doing so. Margulies continued to move forward expecting Hough to get out of his way but Hough held his ground, in Margulies's view, “simply to annoy” him. Margulies continued to roll forward toward Hough, and did not apply his brakes until after he hit Hough. Seeing Hough fall, get up and thinking he was unharmed, Margulies continued up Sixth Avenue to his meeting.
Margulies subsequently pled guilty to misdemeanor assault in the third degree under N.Y. Penal Law § 120.00(2) (McKinney 2015). A person is guilty of misdemeanor assault in the third degree when he “recklessly causes physical injury to another person.” N.Y. Penal Law § 120.00(2). Under N.Y. Penal Law § 15.05(3), “[a] person acts recklessly with respect to a result or to a circumstance described by a statute defining an offense when he is aware of and consciously disregards a substantial and unjustifiable risk that such result will occur or that such circumstance exists. The risk must be of such nature and degree that disregard thereof constitutes a gross deviation from the standard of conduct that a reasonable person would observe in the situation.”
Prior to the commencement of this bankruptcy case, Hough sued Margulies for negligence. USAA failed to defend the action and Hough obtained a $4.8 million default judgment (the “Judgment”) against Margulies. Hough subsequently brought a direct action against USAA to collect the Judgment pursuant to N.Y. Ins. Law § 3420 (McKinney 2015).
After Margulies filed his chapter 7 bankruptcy petition, Hough initiated this adversary proceeding contending that [i] the Judgment was not dischargeable under 11 U.S.C. § 523(a)(6) because Margulies had acted willfully and maliciously (the “Dischargeability Claim”), or alternatively, [ii] USAA was liable for the Judgment up to the limits of the insurance policies pursuant to N.Y. Ins. Law § 3420 because the incident was an “accident” (the “§ 3420 Claim”).

Margulies V, 541 B.R. at 159-61.[3] The Bankruptcy Court then proceeded for a second time to analyze these facts under the law, in keeping with this Court's ...

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