Jaroslawicz v. Steinberg (In re Steinberg)

In re: SAMUEL STEINBERG, Debtor.

DAVID JAROSLAWICZ, et al., Appellants, v. SAMUEL STEINBERG, Appellee.

16 Civ. 4074 (LGS)

UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK

March 29, 2017

OPINION AND ORDER

LORNA G. SCHOFIELD, District Judge:

This bankruptcy cross-appeal arises from an adversary proceeding brought by investors in a failed Romanian real estate venture that the Debtor managed. Appellants David Jaroslawicz, David Walker, Howard Freund, Neil Herskowitz, Phil Lifschitz and Abraham Elias (collectively, "Appellants") appeal the Bankruptcy Court's Order and Opinion ("Opinion") issued after a trial overruling their objections to the dischargeability of debts that Appellee Samuel Steinberg allegedly owes them. Steinberg cross-appeals the dismissal of his counterclaim seeking judgment against Jaroslawicz for indemnification for legal fees Steinberg incurred in connection with the adversary proceeding. For the reasons set forth below, the judgment of the Bankruptcy Court is affirmed in part, vacated in part and remanded for further proceedings.

I. BACKGROUND

A. The Romanian Real Estate Venture

Steinberg and Jaroslawicz were friends who knew each other since the 1990s and had previously invested in businesses together. In 2005, Steinberg proposed to Jaroslawicz a plan to buy and sell Romanian real estate. Steinberg told Jaroslawicz that he had recently sold his apartment and had funds available to invest. Steinberg testified that, although he sold the apartment for $6.5 million, he had only $2.5 million remaining after paying loans and other encumbrances.

The two traveled to Romania in early 2006 to see potential properties to acquire. During the trip, Steinberg and Jaroslawicz visited a Romanian bank. While there, Steinberg showed a bank employee a financial statement from the business of Steinberg's father-in-law, Israel Taub, a successful real estate investor. Steinberg attests that he brought the financial statement merely to show that he came from a wealthy family.

Steinberg and Jaroslawicz verbally agreed to invest in Romanian real estate. The two initially decided that they would be "fifty-fifty partners" and split equally any profit from the sale of any real estate. Jaroslawicz also contends the two agreed that each would "put up fifty percent of the money." Steinberg denied that they agreed to contribute an equal amount. Steinberg and Jaroslawicz never entered into a written agreement that memorialized the terms of their venture, which also lacked a budget, minimum capital requirement and designated term. As Steinberg testified, they "took each deal as it came."

Steinberg "was the man on the ground" in Romania where he hired accountants, bookkeepers and Romanian lawyers to assist with the transactions. In 2006, he formed three limited liability companies under Romanian law, referred to as the Romusa LLCs. Steinberg andJaroslawicz co-owned the Romusa LLCs. According to Steinberg, the venture's real estate transactions were conducted through the Romusa LLCs.

Throughout the venture, Jaroslawicz solicited investments from other parties. These investors provided funds to Jaroslawicz who sent the money to Steinberg. Jaroslawicz did not enter into a written agreement with the outside investors. Some of these "side deals" may have altered Steinberg and Jaroslawicz's agreement to split the profits equally.

For instance, Appellant Lifschitz testified that in 2006 or 2007 he gave $100,000 to Jaroslawicz to invest in the Romanian real estate venture. When asked to describe the terms of his investment, Lifschitz testified: "it was my understanding that for every dollar put in, they [i.e., Jaroslawicz and Steinberg] make half, I make half. That's it." Lifschitz did not know in what property, if any, his money was invested. Appellant Herskowitz testified that he gave Jaroslawicz $100,000 "for the purpose of investing in Romania." Herskowitz testified that he thought his money was invested "in Brasov" but also said that "[he] could be wrong" and that he was unaware that there were four separate transactions conducted in Brasov County. Steinberg acknowledges that, in total, Jaroslawicz contributed -- either directly or through investors or lenders -- $16,642,887 to the venture.

The extent of these outside investors' involvement is disputed. Steinberg testified that he "never spoke" with any of them and that Jaroslawicz "never disclosed" their identities. By contrast, both Lifschitz and Herskowitz testified that they discussed the terms of their investments with both Jaroslawicz and Steinberg.

In 2007, Steinberg told Jaroslawicz that he planned to place mortgages on their properties in order to obtain loans from a Romanian bank for their venture. Over the next four years, the two executed documents that encumbered the Romanian properties with mortgages. Steinbergagreed to pay the interest on the mortgages, which Steinberg or his family did for the next two or three years.

According to Appellants, one individual, Manouchehr Malekan, provided approximately $690,000 for the acquisition of a property in Romania referred to as the Cluj property. Appellants contend that one-half of the $690,000 was a loan and one-half was an investment. In 2008, a potential buyer of the Cluj property defaulted and Steinberg collected the defaulted buyer's deposit. While Appellants alleged in their pretrial submissions that the deposit was $1.5 million, the parties at trial did not dispute that the deposit was actually €1.5 million. Part of the deposit was used to pay an entity called Spring Farm, a hard money lender from whom Jaroslawicz had borrowed $1.785 million at a high interest rate, and part was used to pay the principal portion of the mortgages on some of the venture's real estate. Appellants dispute whether any of the deposit proceeds were used to repay the loan portion of Malekan's contribution.

Jaroslawicz executed four powers of attorney running to Steinberg in connection with the Romanian properties. As pertinent here, Jaroslawicz and Steinberg executed a power of attorney in May 2008 for the three Romusa LLCs. It authorizes Steinberg "to approve in [Jaroslawicz's] name and on [his] behalf the following:" (1) the "purchase or sale of [the] Companies' [i.e., the Romusa LLCs'] assets, including real estate[];" (2) "setting up mortgages or other type of liens over the Companies' assets, including real estate;" and (3) "any other matter related to the proper administration of the Companies." The May 2008 power of attorney also includes the following:

Whereas the empowered person is acting in my name, on my behalf and for my benefit, I hereby ratify and agree to ratify whatever my attorney will do or have to do in the limits of the law and of the present power of attorney. I hereby guaranty that my attorney will be exonerated of any liability for any losses and damages that may occur, arising from or in connection with fulfilling the present power of attorney.

In June 2013, Steinberg commenced Romanian insolvency proceedings for each Romusa LLC. Steinberg testified that he turned over the accounting files for the Romusa LLCs to a judicial administrator when he filed for insolvency and did not retain any copy of these files.

B. Procedural History

In March 2014, Appellants filed an involuntary petition for relief against Steinberg under Chapter 7 of the U.S. Bankruptcy Code. See 11 U.S.C. § 303(b). In December 2014, Appellants initiated an adversary proceeding, objecting to the dischargeability of debts they alleged Steinberg owed to Jaroslawicz, Herskowitz and Lifschitz.¹ As pertinent here, they objected pursuant to 11 U.S.C. § 523(a)'s discharge exemption for (1) debts obtained by "false pretenses, a false representation, or actual fraud," § 523(a)(2)(A), and (2) debts acquired through "embezzlement," § 523(a)(4).² In addition, Appellants -- including Appellants Walker and Elias who, unlike the other Appellants, were judgment creditors of Steinberg -- objected to Steinberg's general discharge on the grounds that he failed to preserve records under 11 U.S.C. § 727(a)(3). In January 2015, Steinberg asserted a counterclaim for indemnification against Jaroslawicz based on the May 2008 power of attorney.

The Bankruptcy Court held a four-day trial in December 2015. Five witnesses testified: Steinberg, Steinberg's wife, Jaroslawicz, Herskowitz and Lifschitz. In March 2016, the Bankruptcy Court issued its 45-page Opinion, which contained findings of fact and conclusions of law pursuant to Federal Rule of Bankruptcy Procedure 7052. The Bankruptcy Court held that Appellants had failed to carry their burden to show the exemptions to discharge applied and dismissed Appellant's Complaint with prejudice. It also held that Steinberg was not entitled to indemnification and dismissed his counterclaim with prejudice. Both parties timely appealed.

II. STANDARD

When reviewing a bankruptcy court's decision, the district court reviews factual findings for clear error and legal conclusions de novo. In re Charter Commc'ns, Inc., 691 F.3d 476, 483 (2d Cir. 2012). "A factual finding is not clearly erroneous unless the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed." In re CBI Holding Co., 529 F.3d 432, 449 (2d Cir. 2008) (internal quotation marks omitted). "[I]f the bankruptcy court's account of the evidence is plausible in light of the record viewed in its entirety," a reviewing court "may not reverse it even though convinced that had it been sitting as the trier of fact, it would have weighed the evidence differently." In re Motors Liquidation Co., 829 F.3d 135, 158 (2d Cir. 2016) (internal quotation marks omitted). "Where there are two permissible views of the evidence, the factfinder's choice between them cannot be clearly erroneous." UFCW Local One Pension Fund v. Enivel Props., LLC, 791 F.3d 369, 372 (2d Cir. 2015) (internal quotation marks omitted).

III. DISCUSSION

A. ...