In re Adler

395 B.R. 827

In re Stewart ADLER, Debtor Stewart Adler, Appellant, v. Lisa Ng and Charming Trading Company, Appellees.

No. 07-CV-3265 (JFB).

United States District Court, E.D. New York.

September 15, 2008.

COPYRIGHT MATERIAL OMITTED

Shari H Braverman, Esq., of Braverman Law Office PC, Uniondale, NY, for the Appellant.

Bradford D. Conover, Esq., of Conover Law Offices, and David H. Wander, Esq., of Wander & Associates, P.C., New York, NY, for the Appellees.

MEMORANDUM AND ORDER

JOSEPH F. BIANCO, District Judge.

The instant case is an appeal from the voluntary bankruptcy proceeding of Debtor Stewart Adler ("Debtor" or "Adler" or "appellant"), pursuant to Chapter 7 of the Bankruptcy Code, in the United States Bankruptcy Court for the Eastern District of New York ("Bankruptcy Court").

Debtor appeals from the June 13, 2007 Order ("June 13 Order") of the Honorable Joel B. Rosenthal, United States Bankruptcy Judge, granting the motion filed by plaintiffs Lisa Ng ("Ng") and Charming Trading Company ("Charming Trading" or the "Company") (collectively, "plaintiffs" or "appellees"), for partial summary judgment, in which the Bankruptcy Court (1) found Debtor's debt to be non-dischargeable under 11 U.S.C. § 523(a)(2)(A); and (2) denied Debtor a discharge under 11 U.S.C. § 727(a)(4)(A). Specifically, the Bankruptcy Court concluded (1) that findings of fraud in a state court action against corporations owned by Debtor had binding effect in the bankruptcy proceeding against Debtor and prevented Debtor from arguing that he did not obtain his debt through fraud; and (2) the automatic stay was not violated by giving these findings collateral estoppel effect, even though Debtor was severed from the state action because of his pending bankruptcy petition. Moreover, the Bankruptcy Court concluded that Debtor should be denied a discharge under Section 724(a)(4)(A) because he knowingly and fraudulently made a false oath or account with respect to filing his petition.

Debtor appeals from the June 13 Order on the following grounds: (1) as to the Section 523 claim, the Bankruptcy Court erred (a) in finding a debt due from Adler to plaintiffs, and (b) finding Adler committed fraud; and (2) as to the Section 727 claim, the Bankruptcy Court erred (a) in finding that plaintiffs are creditors of Adler, and (b) in finding that Adler knowingly and fraudulently made a false oath or account.

As set forth below, the Court reverses the Bankruptcy Court's June 13 Order granting plaintiffs' motion for partial summary judgment. The Bankruptcy Court erred in giving collateral estoppel effect to the state court findings because Debtor was severed from the case when he filed for bankruptcy and, therefore, did not have a full and fair chance to litigate the issues in the state court proceeding. Contrary to plaintiffs' suggestion that Debtor participated in the state court proceeding because he appeared as a representative of the company, Debtor did not participate in the state court action in his individual capacity and any such participation would have violated the automatic stay. Therefore, if the state court's findings of fraud are made binding against the Debtor with respect to any alleged debt owed to plaintiffs, those findings would violate the automatic stay and would be void ab initio. Moreover, the Bankruptcy Court also erred in determining, on a motion for summary judgment, that Debtor should be denied a discharge in bankruptcy under Section 727(a)(4)(A) because he made false statements knowingly and with fraudulent intent with respect to the filing of his petition. The Court finds that clear disputed issues of fact, and the reasonable inferences to be drawn from those facts, exist with respect to Debtor's intent that should have been resolved only after a trial in which evidence could be considered and credibility determinations made. In short, having carefully reviewed the record, the Court concludes that the Bankruptcy Court erred in granting partial summary judgment in favor of plaintiffs, and remands the matter to the Bankruptcy Court for further proceedings consistent with this Memorandum and Order.

I. BACKGROUND

A. Facts

1. The Alleged Fraudulent Behavior

Adler was the President and sole owner of five (5) New York corporations (the "Adler Corps") that he used to import and sell denim jeans in the United States.¹ (See State Court Opinion, dated Aug. 4, 2005 ("State Ct. Op."), at 2.) Ng and her company, Charming Trading, served as agents in Hong Kong for several American jeanwear importers. (Id. at 3.) In 1997, Ng met Adler and began doing business with him as an agent for his companies. (Id.)

The following actions form the basis for plaintiffs' filing of the fraud claim underlying this appeal:

Plaintiffs alleged that Debtor, acting on behalf of Adler Corps, placed orders and received shipments under different corporate names. (Minson Aff., Exh. B ("State Ct. Op."), at 2.) They further alleged that Adler Corps did not have sufficient funds to pay for orders up front, nor did they have sufficient credit to obtain letters of credit. (Id.) Plaintiffs then claim that Debtor directed Ng to use her own credit to purchase merchandise from the Hong Kong manufacturers, pay the shipping costs, and then invoiced Adler Corps for the goods, in an arrangement that allowed Debtor to rely on Ng's credit and have more time to pay her Company, instead of the manufacturers. (Id.) Plaintiffs claim that this arrangement continued over seven shipments. (Id. at 3.) On most of the transactions, Adler Corps failed to pay plaintiffs in full or in a timely manner. (Id. at 6.) Ng had to mortgage her home to pay some of the manufacturers, as well as shipping costs and other expenses, for merchandise received by Adler Corps. (Id.) Some manufacturers initiated lawsuits against Ng and her Company and one of them obtained a judgment against her. (Id. at 4.) The manufacturers allegedly hounded Ng to the point where she had to leave Hong Kong, abandon her business, and flee to the United States. (Id.)

2. The State Court Action

In July 2003, plaintiffs Ng and Charming Trading sued Debtor and Adler Corps in the Supreme Court of the State of New York. (Undisp.Facts. ¶ 1.) Plaintiffs' amended verified complaint contained eleven (11) causes of action, including fraud. (Id. ¶ 2.)

On August 19, 2004, the state court severed the action against Debtor because he had filed a bankruptcy petition. (State Ct. Op., at 1.) Specifically, the state court stated that it "stayed the seventh [cause of action] for piercing the corporate veil against defendant Adler . . . ." (Id.) The state court also struck the Adler Corps' answer for failing to comply with discovery. (Undisp. Facts ¶ 4; State Ct. Op., at 1.)

The state court held a six-day inquest and assessment of damages solely as to Adler Corps (hereinafter, the "Damages Inquest").² (Undisp. Facts ¶ 5.) It is undisputed that Debtor appeared at the Damages Inquest in his capacity as an officer of the Corporations. (Id. ¶ 6.) However, although Debtor was present at the Damages Inquest as a corporate representative, Debtor notes that Debtor did not testify in the state action, present evidence, or participate in the Damages Inquest. (Def.'s Br., at 11.) Plaintiffs do not provide any evidence to refute that contention and the record does not reflect any participation by Debtor. Instead, at the Damages Inquest, Ng testified for plaintiffs and was cross-examined. (Undisp. Facts ¶ 7.) Plaintiffs also submitted extensive documentary evidence. (Id.)

On August 4, 2005, the state court issued an eight-page decision (the "Decision") resulting in a $2,025,841.97 judgment against Adler Corps. (See Minson Aff., Exh. B.) The portion of the Decision relating specifically to Debtor's conduct forms the basis of the instant appeal. Specifically, the state court stated:

[P]laintiff Lisa Ng is entitled to an additional recovery as a direct result of the defendant corporations['] fraud on her. Mr. Adler, on behalf of the corporations, represented to Ms. Ng that if she paid manufacturers and shipping and other costs to send the garments to the United States, his corporations would not only reimburse her but also pay past due commissions because the corporations had the present capacity to complete the transactions . . . .

The evidence shows that Mr. Adler and the corporations had no intention of carrying out these representations or the present capacity to do so. In reliance on these misrepresentations, Ms. Ng had a mortgage placed on her home, allowed companies to invoice to plaintiff Charming Trading Company, paid many of the invoices, was threatened when she could no longer pay, was sued in China and Hong Kong and fled to the United States. That experience as well as her past and future loss of income are not subsumed in the other causes of action. The credible evidence establishes that, as a direct result of the fraud and resulting debt . . . Ms Ng's total income loss caused by defendants' fraud is $209,675.

(State Ct. Op., at 7) (emphases added). Plaintiffs contend that the Decision contained extensive findings of fact regarding Debtor's fraudulent conduct. (Undisp. Facts ¶ 8.) However, Debtor disagrees, arguing that the Decision improperly included dicta relating to Debtor's liability, which was severed from the case. (Counter-Statement Undisp. Facts ¶ 8.)

3. The Bankruptcy Filing

On July 28, 2004, Debtor filed a Chapter 7 bankruptcy petition (the "Petition") with the Bankruptcy Court. (Undisp. Facts ¶ 11.) The Petition included Schedules of Assets and Liabilities ("Schedules") and a Statement of Financial Affairs ("SOFA"). The Schedules and SOFA required Debtor to disclose detailed information about his assets, liabilities, and financial affairs. As discussed more in detail infra, plaintiffs allege that there were various mistakes and omissions in the petition warranting a denial of discharge in bankruptcy. Defendants dispute...