Kaczkowski v. Dovan (In re Dovan)

IN RE: Emil Richard Dovan, Jr., Debtor.

Michael Kaczkowski, Plaintiff, v. Emil Richard Dovan, Jr., Defendant.

Case No. 13-10820C-13G

Adversary No. 13-2055

UNITED STATES BANKRUPTCY COURT MIDDLE DISTRICT OF NORTH CAROLINA GREENSBORO DIVISION

September 29, 2015

MEMORANDUM OPINION

Plaintiff brought this adversary proceeding to determine the dischargeability of a prepetition judgment for fraud based upon a jury verdict entered against the Debtor Emil Richard Dovan, Jr. ("Debtor" or "Dovan") by the United States District Court for the Southern District of Mississippi (the "District Court") [Adv. No. 13-2055, Doc. # 25, Exhibit B] (the "Judgment").¹ The Judgement was affirmed by the United States Court of Appeals for the Fifth Circuit in a percuriam opinion. [Adv. No. 13-2055, Doc. # 25, Exhibit C]. This Court finds that the Judgment is a non-dischargeable debt for fraud under 11 U.S.C. § 523(a)(2).

Procedural Background

Michael Kaczkowski ("Plaintiff" or "Kaczkowski") timely filed a complaint in this Court against the Debtor, requesting that the Court determine the Judgment is non-dischargeable under 11 U.S.C. §§ 1328(a)(2) and 523(a)(2) [Adv. Pro. 13-2055, Doc. # 1] (the "Original Complaint"). The Original Complaint alleged only the existence of the Judgment, recited the jury instructions given by the District Court, attached the underlying state court complaint, the notice of removal to the District Court, the jury verdict, the Judgment, and the opinion of the Fifth Circuit, and thereupon requested that this Court declare the Judgment non-dischargeable. On December 31, 2013, the Plaintiff filed his first motion for summary judgment, requesting that the Court determine that the Judgment was non-dischargeable based upon collateral estoppel of the jury verdict and Judgment [Doc. # 12]. On April 17, 2014, the Court denied the first motion for summary judgment, finding that the jury verdict was insufficient to establish each element required under 11 U.S.C. § 523(a)(2) [Doc. # 18]. Specifically, the jury instructions in the Mississippi Litigation required that the jury find that Dovan "did know that the representation was false or was ignorant of its truth; . . . that Emil Dovan did intend that the representation should be acted upon by Michael Kaczkowski; . . . [and] that Michael Kaczkowski did have a right rely on the representation." [Doc. # 25, Exhibit C, p.6] (emphasis added). Based upon the jury instructions and the fact that the jury refused to impose punitive damages in the Mississippi case, the Court determined that the jury instructions did not establish by collateral estoppel that the Debtor knew his representations were false at the time that he made them. The Court also questioned: (a) whether the Mississippi law standard of intent by the defendant for the plaintiff toact in reliance was the same standard as intent to deceive under 11 U.S.C. § 523(a)(2); and (b) whether the "right to rely" standard under Mississippi law constitutes justifiable reliance under 11 U.S.C. § 523(a)(2). Therefore, the Court denied summary judgment.

After the Court denied summary judgment, the Plaintiff filed an Amended Complaint [Adv. Pro. 13-2055, Doc. # 25] (the "Amended Complaint"), specifically alleging certain facts underlying the Judgment, and asserting that those facts rendered the Judgment non-dischargeable. After filing the Amended Complaint, the Plaintiff filed his second motion for summary judgment on December 4, 2014 [Doc. # 33], seeking to narrow the issues for trial. On February 17, 2015, the Court entered its Order Denying in Part and Granting in Part Plaintiff's Motion for Partial Summary Judgment and Narrowing of Issues for Trial [Doc. # 39] (the "Second Summary Judgment Order"). In the Second Summary Judgment Order, the Court concluded that the following issues were collaterally estopped by the Judgment and the underlying jury verdict: (a) that the Defendant made representations to the Plaintiff; (b) that the representations were false; (c) that the Defendant intended that the Plaintiff rely upon the representations; (d) that the Plaintiff did in fact rely upon the representations; (e) that the Plaintiff suffered loss as a result of his reliance upon the representations; and (f) that the damages were established by the amount of the Judgment. The Second Summary Judgment Order therefore narrowed the issues for trial to the following: (a) whether the Defendant knew that the representations were false; (b) whether the Defendant intended to deceive the Plaintiff; and (c) whether the Plaintiff justifiably relied upon the representations.

Pursuant to the Court order, the parties filed Joint Stipulations and Statements by Plaintiff and Defendant on June 23, 2015 [Doc. # 54] (the "Pre-Trial Stipulations"). In the Pre-Trial Stipulations and consistent with the Second Summary Judgment Order, the parties stipulated tothe following facts: that the Defendant made representations to the Plaintiff; that the representations were false; that the Defendant intended the Plaintiff to rely upon the representations; that the Plaintiff did in fact rely upon the representations; that the Plaintiff suffered loss as a result of the representations; and that the damages were established by the Judgment.

The adversary proceeding came before the Court for trial on July 9, 2015. The Court, having considered the arguments, filings, and memoranda submitted by the parties, the evidence presented and admitted at the hearing, the testimony and demeanor of the witnesses, and the record in this case, finds the debt owed to the Plaintiff by the Debtor as ordered by the Judgment in the amount of $168,000 and asserted as Claim Number 11 in Debtor's Case No. 13-10820C-13G is non-dischargeable under 11 U.S.C. §§ 1328(a)(2) and 523(a)(2).

FACTS²

Kaczkowski and Dovan met in 1999. At the time, Kaczkowski lived in New York and was a 50% owner of a business. Dovan had established himself in Mississippi, and both men worked in the field of prosthetics, although Kaczkowski had more experience and expertise with the design and function of prosthetic devices. At some time prior to the summer of 1999, Dovan contacted Kaczkowski and proposed that they jointly enter a business venture wherein Kaczkowski would design prosthetic devices and Dovan would run the business aspects of the venture. After various discussions regarding the proposal, Kaczkowski sold his business and moved to Mississippi to work with Dovan starting a new company that would focus on prosthetic hands. Dovan intended to use Kaczkowski's skills in the area of prosthetics to create a new business called Alatheia Prosthetics Rehabilitation, LLC ("Alatheia"). Alatheia was formed inJune of 1999. Kaczkowski contends that Dovan enticed him to sell his prior business and move with his family to Mississippi based upon a representation that Kaczkowski would become a co-owner in Alatheia, and that Dovan continued these representations of co-ownership to Kaczkowski over the next nine years during the operation of the business. Kaczkowski also contends that Dovan repeatedly assured Kaczkowski that he would put Kaczkowski's co-ownership in writing at any time that Kaczkowski requested.

At the inception of the business, around July, 1999, Dovan, Kaczkowski, and a third potential business investor named Richard A. Psonak, met to discuss the financing of Alatheia. [See Defendant's Exhibit 1]. Dovan drafted a document for the meeting that provided each of the three men would contribute $25,000 in capital to the business and have a 33.33% ownership of the LLC (the "Business Proposal"). However, Kaczkowski testified that Dovan told him specifically that an actual contribution from Kaczkowski would not be required. At some time later, Richard A. Psonak backed out of having any part in Alatheia. Neither Psonak nor Kaczkowski made capital contributions in the amount of $25,000 to the company as contemplated in the draft Business Proposal.

Dovan contends that the company was solely owned by him and that Kaczkowski became merely an employee, not an owner, as Kaczkowski never contributed any capital to Alatheia. Dovan testified that he and Kaczkowski had a "deal" from the beginning of their business relationship that Kaczkowski would only be an owner of Alatheia if one of three things happened: (1) Kaczkowski contributed sufficient capital to the company; (2) the company made enough money for Dovan to recover half of the funds he initially invested; or (3) another investor contributed enough capital for Dovan to recover half of the funds he initially invested. Dovan testified that Kaczkowski was aware of these conditions to the "deal," as evidenced by theBusiness Proposal. Dovan also testified that any statement he made representing that Kaczkowski would be an owner in the business or a "partner" was not false because, as a result of the "deal," such a statement was expressly conditioned upon the contribution of capital.

Kaczkowski was surprised by the capital contribution mentioned in the Business Proposal and questioned Dovan about that provision because, due to Dovan's representations, he thought he already was an owner. Dovan had previously and repeatedly represented to Kaczkowski that Kaczkowski was an owner of the business and, as an owner, was expected to put in more hours and effort as "sweat equity." When Kaczkowski asked Dovan why there was a capital contribution in the draft proposal, Dovan reassured him that it was a formality and only applied to Psonak. Based upon Dovan's reassurances, Kaczkowski believed that the amount of work he put into Alatheia, the talent he brought to the company, and the amount of personal money he put into supplies fulfilled his obligation to make any capital contribution. Kaczkowski does not dispute that he also was an employee of Alatheia. He received a pay check from Alatheia as an employee, and the business paid for Kaczkowski's personal home electrical bill on occasion because h...