Knoll v. Uku (In re Uku)

658 B.R. 812

IN RE: Eustace O. UKU, Debtor.

Charles A. Knoll, Jr., Plaintiff, v. Eustace O. Uku, Defendant.

Bankruptcy No. 21-21712-CMB

Adversary No. 21-2104-CMB

United States Bankruptcy Court, W.D. Pennsylvania

Signed April 24, 2024

David M. Nernberg, Esq., Pittsburgh, PA, for Plaintiff.

Andrew K. Pratt, Esq., for Defendant/Debtor.

MEMORANDUM OPINION

Carlota M. Böhm, United States Bankruptcy Judge

The matter before the Court is the Amended Rule 7056 Motion for Summary Judgment ("Motion," Doc. No. 33) filed by Plaintiff Charles A. Knoll, Jr., seeking a determination that the debt owed to him is non-dischargeable.¹ The debt is the result of a judgment entered in his favor and against the Debtor, Eustace O. Uku, by the Court of Common Pleas of Allegheny County ("State Court"). Debtor opposes the Motion. Resolution of this matter is dependent upon the applicability of collateral estoppel to certain findings made by the State Court and whether those findings alone are sufficient to meet the requisite elements of the relied-upon provisions of 11 U.S.C. § 523. For the reasons set forth herein, the Court finds that summary judgment is not appropriate, and the Motion must be denied.

Background and Procedural History

On July 29, 2021, Debtor commenced his bankruptcy case by filing a petition for relief under Chapter 13 of the Bankruptcy Code. Mr. Knoll filed a proof of claim on August 12, 2021, identifying a secured claim in the amount of $380,699.65, which has been reduced due to payments made throughout this case. On October 22, 2021, Mr. Knoll filed his Adversarial Claim for Fraud Against Debtor, Eustace O. Uku, Pursuant to 11 USCS 523(a) and 727 ("Complaint," Doc. No. 4) asserting that the debt owed to him is non-dischargeable, specifically citing to 11 U.S.C. § 523(a)(4) and (6),² and relying upon findings made by the State Court in support of the Complaint. Debtor filed an Answer (Doc. No. 11) denying that Debtor's conduct meets the requirements of either provision of § 523.

In the pending Motion, Mr. Knoll relies upon the State Court findings and the application of collateral estoppel in support of his argument that the debt is not dischargeable pursuant to § 523(a)(2) and (4), despite the fact that § 523(a)(2) was not referenced within the Complaint. For a period of time, the Motion was held in abeyance while the parties attempted to resolve their disputes. Ultimately, negotiations failed, and mediation proved unsuccessful. Thereafter, a scheduling order was entered on the Motion.

In support of his Motion, Mr. Knoll filed an appendix of documents.³ Debtor did not produce such an appendix; instead, Debtor takes the position that Mr. Knoll cannot meet his burden by relying on the State Court findings and collateral estoppel. Having considered the parties' briefs and submissions as well as the arguments presented on April 11, 2024, the matter is now ripe for decision.

Standard

Exceptions to discharge under § 523 are generally construed in favor of the debtor. See Lepre v. Milton (In re Milton), 595 B.R. 699, 712 (Bankr.W.D.Pa. 2019). In this adversary proceeding, the burden is on Mr. Knoll to prove the debt is non-dischargeable by a preponderance of the evidence. See id. Mr. Knoll contends he can meet this burden at this juncture based on the State Court's findings.

Mr. Knoll's Motion is governed by Fed. R.Civ.P. 56, made applicable by Fed. R.Bankr.P. 7056. Such a motion will be granted "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." See Fed.R.Civ.P. 56(a). A fact that may impact the outcome under applicable substantive law is deemed material, and a dispute over such a fact is genuine if a verdict could be returned in favor of the nonmoving party by a reasonable jury. See Santini v. Fuentes, 795 F.3d 410, 416 (3d Cir. 2015) (citing Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986)).

Initially, it is the movant's burden to identify the portions of the record establishing the absence of a genuine dispute as to any material fact. See Santini, 795 F.3d at 416 (citing Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986)). If movant satisfies that burden, the non-moving party must come forward with specific facts to demonstrate the existence of a genuine dispute for trial. See Santini, 795 F.3d at 416 (citing Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986)). All evidence is construed in the light most favorable to the non-moving party. See Santini, 795 F.3d at 416 (citing United States v. Diebold, Inc., 369 U.S. 654, 655, 82 S.Ct. 993, 8 L.Ed.2d 176 (1962)).

State Court Findings

In the State Court action, Mr. Knoll pursued multiple claims against the Debtor and other defendants, Yale Development & Contracting, Inc. ("Yale") and Exico, Inc ("Exico"). After a non-jury trial, Mr. Knoll's proposed findings of fact were adopted, with the exception of paragraphs 16 and 98, and Mr. Knoll was successful with respect to his claims against all defendants for breach of contract, breach of fiduciary duty, and conversion. A summary of the facts adopted by the State Court are set forth below.⁴

Debtor is the president and sole shareholder of Exico. Yale was a construction company created by Mr. Knoll and Debtor. Mr. Knoll was a 49% shareholder and vice president, and Debtor was a 51% shareholder and president. Mr. Knoll and Debtor had a contract to split the profits of Yale, with 51% to the Debtor and 49% to Mr. Knoll. The only way either party was to receive funds from Yale was through a distribution of profits. Nonetheless, Debtor and Exico received funds from Yale totaling in excess of $280,000.00 from 2008-2012 while Mr. Knoll received no distribution during that timeframe. Based on this conduct, Mr. Knoll alleged that Debtor and Exico withdrew funds from Yale and dissipated those funds for their own use, without lawful justification, and to his detriment. Though Debtor asserted he could manage the company in his best business judgment without accounting to Mr. Knoll for everything he did, Mr. Knoll established that Debtor and Exico were using Yale as their own personal piggy bank, and no legitimate business purpose existed for the payments. Debtor was unable to establish either of his alleged justifications for the withdrawals (that is, that (1) funds were deposited into Yale's account for which he and Exico were entitled to credit or (2) that he and Exico had any entitlement to "overhead" for support and services he claimed were provided to Yale). The State Court determined that, had the funds not gone to Debtor or Exico, they would have been profits of Yale. Accordingly, judgment was entered in favor of Mr. Knoll.

Analysis

Section 523(a)(2)

As a preliminary matter, this Court will address and dispose of Mr. Knoll's Motion to the extent he seeks relief under § 523(a)(2).⁵ Debtor argues that Mr. Knoll failed to plead a claim for such relief in his Complaint and therefore objects to consideration of the arguments made pursuant to that exception to discharge. In response, Mr. Knoll contends that § 523(a)(2) should nonetheless be considered because the Complaint alleges fraud and cites to § 523(a) generally. First, the general reference to § 523(a) appears in the title of the Complaint only. Second, the Court cannot agree with Mr. Knoll's position that simply identifying § 523(a) establishes that the Complaint encompasses any and all potentially relevant exceptions to discharge set forth in that section. This is especially true where two provisions of § 523(a) are explicitly relied upon within the Complaint: 11 U.S.C. § 523(a)(4) and (6). See Complaint at ¶9. There has been no attempt to amend, nor any other sufficient basis offered upon which this Court should consider § 523(a)(2) at this time.

Section 523(a)(4)

The issue remaining then is whether Mr. Knoll is entitled to summary judgment on his § 523(a)(4) claim, which excepts from discharge a debt "for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny." The Motion relies upon the application of collateral estoppel. That is, Mr. Knoll contends that all of the facts necessary to meet his burden have already been determined by the State Court and are binding in this proceeding. Significantly, "[e]ven upon a determination of the applicability of collateral estoppel, it must be determined whether the state court judgment and the underlying findings are sufficient to warrant summary judgment regarding the dischargeability of debt." Aiello v. Aiello (In re Aiello), 533 B.R. 489, 494-95 (Bankr. W.D.Pa. 2015). Although collateral estoppel may prevent the relitigation of issues previously decided, the question of dischargeability is a legal determination reserved for the bankruptcy court. Id. at 494.

The preclusive effect of the judgment will be determined by the law of the adjudicating state, in this case, Pennsylvania. See id. The application of collateral estoppel depends upon whether the following elements are met:

(1) an issue is identical to one that was presented in a prior case;

(2) there has been a final judgment on the merits of the issues in the prior case;

(3) the party against whom the doctrine is asserted was a party in, or in privity with a party in, the prior action;

(4) the party against whom the doctrine is asserted, or one in privity with the party, had a full and fair opportunity to litigate the issue in the prior proceeding; and

(5) the determination in the prior proceeding was essential to the judgment.

See Viener v. Jacobs (In re Jacobs), 381 B.R. 128, 142 & n.23 (Bankr.E.D.Pa. 2008) (noting that the fifth element is not always included by Pennsylvania and federal decisions applying the doctrine under Pennsylvania law). See also Aiello, 533 B.R. at 494 n.2 (noting that, whether stated as four or five elements, the doctrine is...