Bach v. Cabot (In re Cabot), Case No.: 20-18361-BKC-MAM

644 B.R. 232

IN RE: Melanie Hollingsworth CABOT, Debtor(s).

Susan Bach, Bob Murphy, and Infosage Corporation, Plaintiff(s),

v.Melanie Hollingsworth Cabot, Defendant(s).

Case No.: 20-18361-BKC-MAM

Adv. Proc. No.: 20-01412-MAM

United States Bankruptcy Court, S.D. Florida.

Signed August 2, 2022

Filed August 3, 2022

Zach B. Shelomith, Ft. Lauderdale, FL, for Plaintiff(s).

Brian K. McMahon, Esq., West Palm Beach, FL, for Defendant(s).

MEMORANDUM OPINION AND ORDER DENYING IN PART AND GRANTING IN PART MOTION FOR PARTIAL SUMMARY JUDGMENT (ECF NO. 59)

Mindy A. Mora, Judge

Summary judgment can be tricky for fact-based claims. Add in a dose of collateral estoppel, slightly different legal standards of liability, complicated factual findings, and a request for "partial" summary judgment, and a recipe for murkiness emerges. Such is the case here, where the Court has a final fact-intensive state court opinion but must place that ruling in the context of nondischargeability, which only a bankruptcy court can determine. In the end, Plaintiffs’ request for summary judgment must be denied in part, due to Plaintiffs’ failure to demonstrate the existence of a statutory or express trust, but also granted in part based upon the clarity of the state court's assessment of damages in connection with Cabot's fraudulent representations. The Court explores its rulings on both bases in this Opinion.

PROCEDURAL HISTORY

Plaintiffs Susan Bach, Bob Murphy, and Infosage Corporation commenced this adversary proceeding on December 18, 2020, about six months after the Petition Date (July 31, 2020). Their initial Complaint (ECF No. 1) seeks damages against Debtor Melanie Hollingsworth Cabot under three theories of liability: (i) nondischargeabilty under 11 U.S.C. § 523(a)(2)(A) in favor of Murphy and Infosage, (ii) nondischargeabilty under 11 U.S.C. § 523(a)(4) in favor of Murphy and Infosage, and (iii) nondischargeabilty under 11 U.S.C. § 523(a)(2)(A) in favor of Bach.¹ As a basis for liability, Plaintiffs attached to the Complaint a copy of the Findings of Fact, Rulings of Law, and Order for Judgment After Jury Waived Trial (the "State Court Opinion") issued by the Superior Court for the Commonwealth of Massachusetts in Suffolk County, Massachusetts (the "State Court") in a prior case styled as Bach v. Melanie Cabot and Where to Park, Inc ., SUCV2005-04042-D (the "State Court Case").²

Within the thirty-day period allowed for a response to the Complaint, Cabot filed a motion to dismiss (ECF No. 7) the adversary proceeding. The Court issued an order granting in part and denying in part that motion, after which Plaintiffs filed an Amended Complaint (ECF No. 30). The Amended Complaint seeks relief upon the same three bases previously described.

About a year after the filing of the Amended Complaint, Plaintiffs moved for partial summary judgment (ECF No. 59) (the "Motion"). The Motion seeks judgment on counts two and three of the Amended Complaint only, namely in favor of Murphy and Infosage under § 523(a)(4) (Count Two), and in favor of Bach under § 523(a)(2)(A) (Count Three). The Court will address each Count individually after briefing describing the history of the State Court Opinion.

STATE COURT OPINION AND GENERAL BACKGROUND

The State Court Opinion spanned 45 pages and contained a detailed discussion of the parties’ business dealings. This Court accepted the State Court's factual findings as true and recounts the history here in the briefest manner possible.

Cabot, Murphy, and Infosage

Around April 2002, Murphy and Cabot embarked upon a business venture together. The venture focused upon publication of a parking guide for the Boston area. To further their efforts, Murphy and Cabot incorporated their venture as "Infosage, Inc."

By July 2004, tensions between Murphy and Cabot escalated, prompting Cabot to resign from her role as a principal of Infosage. This resignation did not end Cabot's efforts to pursue and promote a parking guide for the Boston area. Despite the rather obvious conclusion that her continued pursuit would place her new parking product in direct competition with Infosage's (and thus Murphy's) parking guide, Cabot rationalized her actions by claiming that the resulting guide would be "better", and therefore not a breach of any duty she owed to Infosage.³

Cabot engaged in her new venture by reusing maps and other information that was demonstrably the work product of Murphy and Infosage. This conclusion, along with a host of other factual findings, prompted the State Court to hold Cabot liable to Murphy and Infosage for breach of fiduciary duty and tortious interference with advantageous business relations. The State Court awarded Murphy and Infosage (jointly) the amount of $31,134.95 as a collective award under both theories of liability.⁴

Cabot and Bach

During the course of Cabot's new venture, she enlisted the help of Bach. Although not directly relevant to their legal dispute, it is helpful to note that Bach and Cabot shared a familial history because Bach had been married to Cabot's father for 15 years. The close nature of this tie likely inspired an initial level of confidence atypical of most arms-length business partners. As events unfolded, however, the fragility of their relationship became apparent.

The State Court Opinion sets forth a tale worthy of a novel. At various points in time, Cabot misrepresented or intentionally omitted key facts to Bach, including Cabot's misappropriation of work material in which both Murphy and Infosage held an interest. The State Court explicitly found that Bach accepted and relied upon Cabot's misrepresentations to her detriment. But ... the saga then took a twist.

When Bach learned that Cabot had misrepresented the scope of Cabot's ownership of the work material, Bach flipped the script on Cabot and shopped the parking guide concept to yet another player. As the State Court summed it up, "Bach did to Cabot what Cabot had done to Murphy."⁵ In other words, Bach was not blameless in terms of her actions. She too concocted a scheme to defraud, and the scope of her own potential liability for that scheme is not clear from the record.⁶

In the end, the State Court found Cabot liable to Bach upon three legal theories: breach of fiduciary duty, fraud, and breach of contract. The State Court awarded Bach the lump sum amount of $86,444.51 for her injuries under all three theories of liability.⁷

LEGAL STANDARDS

Multiple legal standards informed the Court's analysis of summary judgment in this Adversary Proceeding. Because several concepts apply at once, the Court will explain each legal standard first, then apply all standards as needed in its analysis.

I. Summary Judgment

Federal Rule of Civil Procedure 56(a) provides that the Court shall grant summary judgment "if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(a).⁸ "When deciding summary judgment, the Court may look to materials in the record such as depositions, documents, affidavits or declarations, and admissions." Certain Interested Underwriters at Lloyd's, London v. AXA Equitable Life Ins. Co ., 981 F. Supp. 2d 1302, 1305-06 (S.D. Fla. 2013) (citing Fed. R. Civ. P. 56(c) ).

The Court "must view all the evidence and all factual inferences reasonably drawn from the evidence in the light most favorable to the nonmoving party." Diaz v. Amerijet Int'l, Inc ., 872 F. Supp. 2d 1365, 1368 (S.D. Fla. 2012) (quoting Stewart v. Happy Herman's Cheshire Bridge, Inc ., 117 F.3d 1278, 1285 (11th Cir. 1997) ) (internal quotation marks omitted); see also Morton v. Kirkwood , 707 F.3d 1276, 1280 (11th Cir. 2013). The moving party "always bears the initial responsibility of informing the ... court of the basis for its motion, and identifying those portions of ‘the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any,’ which it believes demonstrate the absence of a genuine issue of material fact." Celotex Corp. v. Catrett , 477 U.S. 317, 323, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986) ; see also Josendis v. Wall to Wall Residence Repairs, Inc ., 662 F.3d 1292, 1314-15 (11th Cir. 2011).

II. 11 U.S.C. § 523(a)(4)

Debts incurred as a result of "fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny" are nondischargeable in bankruptcy. 11 U.S.C. § 523(a)(4) (" § 523(a)(4)"). To deem a debt nondischargeable under the "defalcation" provision of § 523(a)(4), a bankruptcy court must find the existence of both a fiduciary relationship and a defalcation. Guerra v. Fernandez-Rocha (In re Fernandez-Rocha) , 451 F.3d 813, 817 (11th Cir. 2006). Creditors must establish both elements by a preponderance of the evidence. Grogan v. Garner, 498 U.S. 279, 286, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991).

Federal law, not state law, determines the definition of a fiduciary relationship for the purpose of § 523(a)(4). Liberty Nat'l Bank v. Wing (In re Wing) , 96 B.R. 369, 374 (Bankr. M.D. Fla. 1989). Federal courts have narrowed the scope of "fiduciary relationships" to include only those situations involving express or technical trust, and to exclude fiduciary relationships that are implied from contract. Id. (quoting Chapman v. Forsyth , 43 U.S. 2 How. 202, 208, 11 L.Ed. 236 (1844) ). "An express or technical trust exists when there is a segregated trust res, an identifiable beneficiary, and affirmative trust duties established by contract or by statute." Am. Sur. & Cas. Co. v. Hutchinson (In re Hutchinson), 193 B.R. 61, 65 (Bankr. M.D. Fla. 1996) (internal quotation marks and citation omitted).

Within the context of § 523(a)(4), defalcation is the failure to produce funds entrusted to a fiduciary. Quaif v. Johnson, 4 F.3d 950, 955 (11th Cir. 1993). The level of misconduct required for defalcation is relatively low. Morales v. Codias (In re Codias) , 78 B.R. 344, 346 (Bankr. S.D. Fla. 1987) ("Defalcation is...