Miner v. Mines (In re Mines)

630 B.R. 107

IN RE: Barry MINES, Debtor.

Robert Miner and Laurie Miner, Plaintiffs,

v.Barry Mines, Defendant.

Case No. 8-19-70078-reg

Adv. Proc. No. 8-19-08019-reg

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

Signed June 3, 2021

Richard G. Gertler, Gertler Law Group, LLC, East Meadow, NY, for Plaintiffs.

Michael J. Macco, Macco & Stern LLP, Islandia, NY, Robert L. Pryor, Pryor & Mandelup, LLP, Westbury, NY, for Defendant.

DECISION

Robert E. Grossman, United States Bankruptcy Judge

Before the Court is an adversary proceeding commenced by Robert and Laurie Miner (the "Plaintiffs") against the debtor, Barry Mines (the "Debtor" or "Defendant"), seeking to except from the Debtor's discharge a claim ("Claim") in the amount of $173,748. The Claim is based on a prepetition arbitration award (the "Award"), subsequently confirmed and reduced to judgment by the Supreme Court of Suffolk County, NY ("Judgment"),¹ which found the Debtor violated unspecified provisions of the Virginia Consumer Protection Act (the "VCPA"). The Plaintiffs argue that this Court must not only give full faith and credit to the arbitrator's determination of liability, but the Court is also bound to find that the determination of liability in the arbitration proceeding is sufficient, when applying the principles of collateral estoppel, to require this Court to find that all the requisite elements of section 523(a)(2)(A) have been established. The Debtor argues that the elements of section 523(a)(2)(A) were not established by the Award and therefore collateral estoppel on the issue of non-dischargeability should not apply.

Application of collateral estoppel to a prepetition judgment in a section 523 proceeding implicates potentially two distinct analyses. First, if the prepetition judgment contained express findings of fact and conclusions of law, the bankruptcy court must consider whether those findings and conclusions, considered in the aggregate, establish the elements of section 523 by a preponderance of the evidence. Second, if the prepetition judgment did not contain express findings and conclusions, the bankruptcy court must look behind the judgment at the claims asserted, the arguments made and the elements of the prepetition claim and attempt to reconstruct the reasoning and uncover the foundational elements of the prior ruling. See CB Research & Dev., Inc. v. Kates (In re Kates) , 485 B.R. 86 (Bankr. E.D. Pa. 2012). Under this analysis, collateral estoppel will only apply if the foundational elements of the prior ruling align precisely with section 523.

In this case, apart from granting actual and treble damages pursuant to unspecified provisions of the VCPA, the Award contains no factual findings or legal conclusions made with any specificity. Nor does the underlying record provide a basis for this Court to conclude that the necessary elements of section 523(a)(2)(A) were established. Therefore, the Award, while given preclusive effect with respect to the Debtor's liability to the Plaintiffs under the VCPA, does not require this Court to conclude the Debtor's conduct satisfies the elements of section 523(a)(2)(A).

Barring a finding for the Plaintiffs based on collateral estoppel principles, Plaintiffs must present sufficient independent evidence to establish the elements of section 523(a)(2)(A) and the Debtor is free to present defenses. For the reasons that follow, the Court finds that the Plaintiffs have failed to meet their burden.

FACTS

The Debtor owns and operates, Boating Times Long Island, Boating Times Holdings, LLC ("BTH") and Promotion Marketing Management, LLC, through which he advertises opportunities for individuals to create and operate their own boating magazines. The Plaintiffs engaged in discussions with the Debtor about investing in and creating a boating magazine for the Chesapeake Bay area of Virginia. On or about October 29, 2014, the Plaintiffs entered into an Operating Agreement (the "Agreement") with the Debtor and his companies.

On or about March 27, 2017, the Plaintiffs, acting pro se , sent the Debtor a Notice of Demand for Arbitration (the "Notice of Demand"). The Notice of Demand states that it is Plaintiffs' intention to assert claims against the Debtor which include but are not limited to: (1) "[m]ultiple instances of violation of the Operating Agreement," (2) "[d]eception, fraud, fraud in the inducement, false pretense, and misrepresentation," and (3) "[p]unitive damages in the form of treble damages, attorneys' fees, and costs, as justified by Respondents' willful conduct." ECF No. 26, Exhibit 2. Despite the reference to fraud, false pretenses and misrepresentation in the first paragraph, the remaining seven pages of the Notice of Demand do not contain allegations of fraud. Rather, they allege multiple violations of the Operating Agreement by: violating "exclusive region" and non-compete clauses of the Operating Agreement; failing to provide the "Hungry Boater" app; and infringing on Plaintiffs' editorial rights. The only reference to the VCPA in the Notice of Demand was contained in the conclusion, where the Plaintiffs state that the Debtor's "willful and deliberate violations warrant an award of treble damages, attorney fees, and costs. Va. Code Ann. § 59.1-204 (2016)."

The Debtor filed a Written Response to Complaint (the "Debtor's Rebuttal") rebutting each of the assertions of the Notice of Demand and asserting counterclaims against Plaintiffs. On or about August 18, 2017, the Plaintiffs filed a reply to the Debtor's Rebuttal and counterclaims.

On or about February 26, 2018, the Plaintiffs submitted their Pre-Hearing Brief for the arbitration. The Introduction section states:

This action is submitted pursuant to Virginia Limited Liability Company Act, Va. Code Ann. § 13.1 et seq. (2016), Virginia Consumer Protection Act, Va. Code Ann. § 59.1-198 (2016), Va. Code Ann. § 59.1-200 et seq. (2016), Va. Code Ann. § 59.1-204 (2016), and any other relevant authorities as deemed appropriate by the Arbitrator.

The remainder of the Pre-Hearing Brief makes no reference to any particular subsection of any of these statutes, except for the claim for treble damages under VCPA § 59.1-204. The Plaintiffs asserted four claims sounding in breach of contract and one claim for "fraud and deception" under the § 18.2-216 of the Virginia Code resulting from Debtor's alleged violation of the Virginia Retail Franchising Act, Va. Ann. Code § 13.1-559,² based on the Debtor's representation that their business was a partnership when in fact it was a franchise, and the Debtor's failure to provide a disclosure statement as mandated by the Virginia Code. The Plaintiffs also asserted that the Debtor attempted to commit fraud during the course of the arbitration by asserting counterclaims demanding payments for work done on a magazine issue that was never printed.

On or about February 28, 2018, the Debtor, along with BTH, Boating Times Long Island, and Promotion Marketing Management, submitted their Pre-Hearing Brief. At the arbitration, which was held in March 2018, the Plaintiffs appeared pro se and the Debtor appeared with counsel. The arbitrator found for the Plaintiffs. The Award stated the following:

An award is granted against Respondents Barry Mines, Boating Times Long Island, Boating Times Holdings, LLC, and Promotion Marketing Management, LLC, jointly and severally, in the amount of $156,417.12, consisting of $45,736 in actual damages ($137,208 after trebling, pursuant to Code of Virginia section 59.1-204 ) and $19,209.12 in prejudgment interest from November 19, 2015 at the statutory rate of 6% per annum.

ECF No. 26, Exhibit 2.

On or about December 19, 2018, a judgment was entered by the Suffolk County Supreme Court in the sum of $162,448.37 (the "Judgment"), confirming the Award and adding costs and interest. To the Court's knowledge the Judgment is final and non-appealable.

On January 4, 2019, the Debtor filed a petition for relief under chapter 7 of the Bankruptcy Code. On February 13, 2019, Robert Miner filed a claim based on the Judgment in the amount of $173,748, including interest and costs from the date of the Award to the bankruptcy filing.

PROCEDURAL HISTORY

On January 25, 2019, the Plaintiffs commenced this adversary proceeding under section 523(a)(2)(A) alleging that the Award is entitled to collateral estoppel effect on the issue of nondischargeability because "[t]he Arbitrator granted treble damages and such an award requires a finding of deception, fraud, use of false pretenses, false promises and/or misrepresentation, and/or a willful violation of Virginia Consumer Protection Act." Complaint, ECF No. 1, ¶14. The Debtor filed a timely answer which generally denied the claims and asserted affirmative defenses that the complaint failed to state a cause of action upon which relief could be granted and failed to plead the elements of fraud with particularity. Answer to Complaint, ECF No. 8.

On April 22, 2019, the Plaintiffs moved for summary judgment re-asserting the collateral estoppel argument set forth in the complaint. Mot. for Summ. Jmt., ECF No. 14. On May 3, 2019, the Debtor filed a Motion to Dismiss the adversary proceeding, and opposition to the Plaintiffs' summary judgment motion. Mot. to Dismiss, ECF No. 15. The Debtor asserted that the arbitrator did not make any determination that the Debtor committed fraud, as fraud was neither sufficiently alleged in the arbitration nor specifically found in the Award. Id . Both parties filed supplemental briefs.

By Order, dated June 7, 2019, the Court denied both the Plaintiffs' motion for summary judgment and the Debtor's motion to dismiss, and directed that this matter proceed to trial. A pretrial order was entered setting discovery and motion deadlines, and the final pretrial conference was held on December 18, 2019. A trial was scheduled for April 28, 2020, which was delayed due to the intervening COVID-19 pandemic.

On March 11, 2021, the parties agreed to submit this matter...