In re Burke

405 B.R. 626

In re Barry E. BURKE, Debtor Colemichael Investments, L.L.C., Plaintiff, v. Barry E. Burke, Defendant.

Bankruptcy No. 08 B 01548.

Adversary No. 08 A 00252.

United States Bankruptcy Court, N.D. Illinois, Eastern Division.

June 10, 2009.

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Michael R. Richmond, Heller & Richmond Ltd, Chicago, IL, for debtor.

David R. Brown, Springer, Brown, Covey, Gaertner & Davis, Wheaton, IL, trustee.

MEMORANDUM OPINION

JOHN H. SQUIRES, Bankruptcy Judge.

This matter comes before the Court on the complaint objecting to the discharge of a debt filed by ColeMichael Investments, L.L.C. ("ColeMichael") against the debtor, Barry E. Burke ("Burke"). The complaint seeks a finding that the debt reflected by a default judgment entered by the District Court of Dallas County, Texas on March 11, 1999 (the "Final Default Judgment") is not dischargeable under 11 U.S.C. § 523(a)(2)(A), § 523(a)(4), and § 523(a)(6). Count I of the complaint alleges that Burke is collaterally estopped from re-litigating the issues of non-dischargeability of the debt reflected by the Final Default Judgment. Counts II through IV of the complaint seek a determination that the debt owed by Burke to ColeMichael is nondischargeable under § 523(a)(2)(A), § 523(a)(4), and § 523(a)(6), respectively.

For the reasons set forth herein, the Court holds that ColeMichael has failed to establish the elements required to apply collateral estoppel to the Final Default Judgment. ColeMichael has also failed to prove that the debt falls within the exceptions to discharge under §§ 523(a)(2)(A) or 523(a)(6). Consequently, Counts I, II, and IV of ColeMichael's complaint are dismissed. The Court finds that ColeMichael has demonstrated by a preponderance of credible evidence that the debt was caused by Burke's defalcation while acting as ColeMichael's fiduciary. The Court, therefore, holds that the debt in the principal amount of $21,178,261 reflected by the Final Default Judgment is non-dischargeable under § 523(a)(4). In addition, the Court finds that interest in the amount of $34,565,369.51 is non-dischargeable. The Court grants judgment in favor of ColeMichael on Count III of the complaint in the total sum of $55,743,630.51.

I. JURISDICTION AND PROCEDURE

The Court has jurisdiction to entertain this matter pursuant to 28 U.S.C. § 1334(a) and Internal Operating Procedure 15(a) of the United States District Court for the Northern District of Illinois. It is a core proceeding under 28 U.S.C. § 157(b)(2)(A), (I), and (O).

II. UNDISPUTED FACTS AND BACKGROUND

Previously, this Court issued a Memorandum Opinion in this matter wherein it denied ColeMichael's motion for judgment on the pleadings and set this adversary proceeding for trial. ColeMichael Invs., L.L.C. v. Burke (In re Burke), 398 B.R. 608 (Bankr.N.D.Ill.2008). In that Opinion, the Court set forth the undisputed facts as well as the applicable law. Id. Those findings of facts and conclusions of law are incorporated here by reference. The Court ultimately denied the motion for judgment on the pleadings because not all of the elements of collateral estoppel had been met. Id. at 626-28. On February 23, 2009, this Court issued another Memorandum Opinion that denied ColeMichael's motion to reconsider denial of the motion for judgment on the pleadings and for summary judgment because material issues of fact existed as to the requisite elements of the dischargeability claims. ColeMichael Invs., L.L.C. v. Burke (In re Burke), Nos. 08 B 01548, 08 A 00252, 2009 WL 435099 (Bankr.N.D.Ill. Feb.23, 2009). The Court rejected ColeMichael's argument that the Final Default Judgment meets the "actually litigated" requirement for the application of collateral estoppel. Id. at *3-4.

The matter was scheduled for trial on May 4, 2009. The parties stipulated to facts and evidence in lieu of live testimony and evidentiary presentation at trial. In addition to the pleadings of record in this matter, the following documents were offered by ColeMichael and received into evidence at trial: participation agreement dated October 1, 1996, with accompanying addenda (Ex. No. 1); letters from Burke to ColeMichael from June 13, 1997 though May 29, 1998 (Ex. Nos. 2-11, 13 & 14); letter from Bayvest to ColeMichael dated May 2, 1998 (Ex. No. 12); transcript of deposition of Burke taken at the Cook County jail on October 5, 2005 (Ex. No. 25); citation to discover assets served upon Burke and filed in Cook County (with attachments) (Ex. No. 28); answer to rider to citation to discover assets filed by Burke dated November 27, 2002 (Ex. No. 29); and Burke's reply to rider to citation to discover assets (Ex. No. 30). Some of these exhibits were not previously furnished in connection with the motions for judgment on the pleadings and summary judgment. Most of the facts and background are undisputed. The following facts are taken from the parties' stipulations and from all evidence, public records, and proceedings to which the parties refer.

ColeMichael is a limited liability company organized under the laws of the State of Nevada with its principal place of business located in Dallas, Texas. (Stipulation dated April 24, 2009) ("Stipulation (4/24/09)" ¶ 1.) Burke is an individual who resides in Lombard, Illinois. (Stipulation (4/24/09) ¶ 2.) Burke was admitted to practice law in the State of Illinois in 1976. (Stipulation (4/24/09) ¶ 4.) On September 21, 2006, Burke was disbarred on consent by order of the Illinois Supreme Court. (Stipulation (4/24/09) ¶ 6.) From his admission until his disbarment, Burke was an Illinois attorney licensed to practice law in the State of Illinois, and admitted to the bars of the Illinois Supreme Court and the United States District Court for the Northern District of Illinois. (Stipulation (4/24/09) ¶ 5.)

On October 2,1996, ColeMichael entered into a joint venture participation agreement ("participation agreement") with a company known as Bayvest Capital Funding Limited ("Bayvest"). (Stipulation (4/24/09) ¶ 8.) Burke agreed to serve as legal counsel for the joint venture created to invest in the "high yield capital enhancement strategy." (Stipulation (4/24/09) ¶ 9). The participation agreement stated in relevant part:

THE BUSINESS AFFAIRS OF THE VENTURE SHALL BE MANAGED, DIRECTED AND ADMINISTERED BY BAYVEST, WHICH SHALL ACT IN A FIDUCIARY CAPACITY FOR THE VENTURE.

BAYVEST SHALL HAVE THE SOLE RESPONSIBILITY AND THE EXCLUSIVE RIGHT AND AUTHORITY TO MANAGE AND ADMINISTER (WITH THE POWER TO DELEGATE SUCH RIGHT AND AUTHORITY IN WHOLE OR IN PART TO OTHERS) THE IMPLEMENTATION, OPERATION AND COMPLETION OF THE PLAN, AND IN THAT REGARD, TO NEGOTIATE, SIGN AND DELIVER ON BEHALF OF THE VENTURE ALL CONTRACTS, INSTRUCTIONS AND ANY OTHER DOCUMENTS WHATSOEVER, TO OPEN AND OPERATE BANK ACCOUNTS, TO PURCHASE AND SELL MONETARY TRANSFER INSTRUMENTS, BANK DEBENTURE INSTRUMENTS, SECURITIES AND CURRENCIES, TO RECEIVE AND DISBURSE, OR TO DIRECT AND CO-ORDINATE THE DISBURSEMENT OF, PROFITS AND TO EXERCISE ALL RIGHTS AND MAKE AND DO ALL ARRANGEMENTS NECESSARY OR INCIDENTAL TO THE IMPLEMENTATION, OPERATION AND COMPLETION OF THE PLAN FOR THE BENEFIT OF THE VENTURE.

(Ex. No. 1 §§ 3.1-3.2.) (emphasis added).

Addendum A to the participation agreement stated in relevant part:

THE FUNDER WILL PROVIDE FOR INVESTMENT IN THE PLAN THE SUM OF THREE HUNDRED THOUSAND UNITED STATES DOLLARS ... (the "INVESTMENT AMOUNT") TOGETHER WITH AN ADDITIONAL ONE THOUSAND DOLLARS ... (the

"EXPENSE FUND") AS A RETAINER FOR BARRY E. BURKE, ATTORNEY AND COUNSELOR AT LAW ... (the "LEGAL COUNSEL").

(Ex. No. 1 Addendum A § 2.1.) (emphasis added).

Addendum B to the participation agreement stated in relevant part as follows:

ALL DISTRIBUTIONS OF INCOME OF THE VENTURE TO THE PARTIES SHALL BE MADE THROUGH THE DISTRIBUTION ACCOUNT OPERATED UNDER THE EXCLUSIVE SIGNATORY AUTHORITY OF THE LEGAL COUNSEL OR THE CLIENT TRUST ACCOUNT OF SUCH OTHER LAW FIRM, BANK OR OTHER FINANCIAL INSTITUTION AS BAYVEST AND THE LEGAL COUNSEL SHALL MUTUALLY AGREE UPON....

(Ex. No. 1 Addendum B § 3.10.)

A copy of a letter of instructions sent to Burke as legal counsel for the joint venture was attached to Addendum B of the participation agreement as "Exhibit 1: Specimen Instructions to the Legal Counsel." (Ex. No. 1, Addendum B, Ex. No. 1 "Letter of Instructions.") The Letter of Instructions stated in relevant part:

Please be advised that instructions have been given to BANK OF AMERICA ... to transfer the sum of U.S. $301,000 to your Client Trust Account at First National Bank of Chicago.... These funds are being transferred to your Client Trust Account on and subject to the following terms and conditions.

1. The sum of U.S. $300,000 (the "INVESTMENT AMOUNT") is for investment in the IMF sponsored enhanced return strategy (the "PLAN") ... between COLEMICHAEL INVESTMENTS, L.L.C. (the "FUNDER") and BAYVEST CAPITAL FUNDING LIMITED ("BAYVEST")....

2. The sum of U.S. $1,000 (the "EXPENSE FUND") is for payment of your out of pocket expenses pertaining to the implementation and carrying out of the PLAN.

3. This confirms that BAYVEST and the FUNDER have entered into a joint venture (the "VENTURE").... BAYVEST has the sole responsibility and the exclusive right and authority to manage and administer (with the power to delegate such right and authority in whole or in part to others) the implementation, operation and completion of the PLAN....

4. You are hereby authorized and directed to comply with all lawful instructions of BAYVEST pertaining to the utilization the INVESTMENT AMOUNT in the PLAN subject only to the provisions set out in paragraphs 5, 6 and 7 below....

5. The INVESTMENT AMOUNT is transferred to your Client Trust Account on the express condition that you will utilize and deal with the INVESTMENT AMOUNT in such manner as shall...