Salim v. VW Credit, Inc.

577 B.R. 615

Julian SALIM, Appellant,

v.VW CREDIT, INC., Appellee.

16–CV–01930(KAM)

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

Signed September 29, 2017

George E. Bassias, Astoria, NY, Navpreet Gill Kaur, Gill & Kadochnikov, P.C., Kew Gardens, NY, Phillip Jaffe, New York, NY, for Appellant.

Jason A. Little, Jonathan D. Deily, Deily & Glastetter, LLP, Albany, NY, for Appellee.

MEMORANDUM AND ORDER

KIYO A. MATSUMOTO, United States District Judge:

Julian Salim ("Salim" or "appellant") brings this appeal from the March 16, 2015 Memorandum Decision of Judge Elizabeth S. Stong of the Bankruptcy Court for the Eastern District of New York, which granted partial summary judgment to VW Credit, Inc. ("VCI" or "appellee"). For the reasons set forth below, the court DENIES appellant's appeal, and AFFIRMS the Bankruptcy Court's decision in its entirety.

BACKGROUND

The facts giving rise to this dispute are not contested by either party.¹

Big Apple Volkswagen, LLC, ("Big Apple") is a car dealership in the Bronx, New York. Appellant was a managing member and a part owner with John Koeppel and Gzregorz Samborski of Big Apple.² (ECF No. 5, Appellant Br. at 5; Adv. Proc. No. 31, Salim Aff. ¶ 2.)³

I. The Loan Agreements

VCI provided Big Apple with a loan to enable Big Apple to purchase an inventory of motor vehicles, and provided Big Apple with a working capital line of credit in the form of promissory notes, executed on June 12, 2006, and March 19, 2007, respectively.

On June 12, 2006, Big Apple executed a promissory note, in the amount of $3,347,500.00, and a master security agreement (collectively, "Wholesale Loan Agreement"). (ECF No. 7, Appellee Opp. Br. at 4; Adv. Proc. No. 24, Jeffrey–Alexander Aff. ¶ 9.) Under the terms of the Wholesale Loan Agreement, upon the sale or lease of any vehicle, Big Apple was obligated to, inter alia, remit to VCI all sums owing from VCI's advance on the vehicle. (Adv. Proc. No. 24, Jeffrey–Alexander Aff. Ex. 1, Master Sec. Agmt. at 1.) Big Apple also agreed to repay VCI the total amount outstanding under the note, in the event of a default. (Id. at 4.) On March 19, 2007, Big Apple executed a second promissory note, in the amount of $250,000.00, and a master security agreement (collectively, "Capital Loan Agreement"). (Adv. Proc. No. 24, Jeffrey–Alexander Aff. ¶ 13.) Pursuant to the terms of the Capital Loan Agreement, Big Apple agreed to repay the sums owing, with interest, at a schedule specified therein. (Id.¶ 14.)

Under the terms of both loan agreements, Big Apple granted to VCI a security interest in Big Apple's inventory of vehicles, chattels, and proceeds. (Adv. Proc. No. 24, Jeffrey–Alexander Aff. Ex. 1, Master Sec. Agmt. at 2; id. Ex. 2, Sec. Agmt. and Capital Loan Agmt. at 2.) The two loan agreements were cross-defaulted, meaning that a default under either loan agreement would constitute a default of the other. (Id. Ex. 1, Master Sec. Agmt. at 4; id. Ex. 2, Sec. Agmt. and Capital Loan Agmt. at 5.) On October 29, 2008, appellant executed a continuing guaranty, under which he personally guaranteed Big Apple's obligations to VCI under both loan agreements. (Id. Ex. 3, Continuing Guaranty.)

Appellant claims to have borrowed $300,000.00 from Salim's mother, which he states was used to provide initial funding for Big Apple. (ECF No. 5, Appellant Br. at 6.) A letter loan agreement, "effective June 1, 2006," reflects that Big Apple and appellant would make annual payments to Salim's mother, with the loan to be paid in full by April 1, 2011. (Adv. Proc. No. 23, Little Decl. at 1118.) Appellant testified that he believed the loan from his mother was a secured debt, noticed with a UCC financing statement, but could not explain why the UCC financing statement was filed two years after the purported loan from his mother. (Adv. Proc. No. 23, Little Decl. Ex. 18, Julian Salim Dep. at 39–40; Adv. Proc. No. 23, Little Decl. at 1124.)

II. VCI's Interest and Audit

On March 11, 2011, upon learning that Big Apple was four months past due on a mutual vendor's account, VCI sought to audit Big Apple's automobile inventory. (Adv. Proc. No. 24, Jeffrey–Alexander Aff. ¶¶ 21–22.) VCI's audit team was initially turned away by Big Apple management. (Id.¶ 23.) On March 15, 2011, VCI learned that Big Apple was conducting a "secret liquidation of its inventory." (Id.¶ 24.) VCI was successfully able to complete an audit by March 16, 2011. The audit revealed that Big Apple had sold seventy-eight vehicles from its inventory and failed to remit payments, in the amount of $1,237,615.86, to VCI as required by the loan agreements. (Id.¶ 26.) In the automobile finance industry, such a sale is sometimes termed a "sale out of trust." VW Credit, Inc. v. Salim (In re Salim), No. 13–42974, Adv. 2015 WL 1240000, at *3 (Bankr. E.D.N.Y. Mar. 16, 2015). In response, VCI accelerated Big Apple's obligations under the loan documents. (Adv. Proc. No. 23, Little Decl. at 255.) At that time, the accelerated amount immediately due and payable to VCI from Big Apple was $3,888,059.84 under the Wholesale Loan Agreement and $54,263.45 under the Capital Loan Agreement.

III. Southern District of New York District Court Proceedings

On March 21, 2011, VCI filed a complaint against Big Apple, appellant, Koeppel, and Samborski, in the Southern District of New York alleging claims for breach of contract, breach of guaranties, and replevin of the collateral. VW Credit, Inc. v. Big Apple Volkswagen, LLC, No. 11-cv-1950, 2012 WL 919386, at *2 (S.D.N.Y. Mar. 15, 2012) (" Big Apple I"). On March 30, 2011, Big Apple filed a voluntary Chapter 11 bankruptcy petition in Bankruptcy Court for the Southern District of New York, and the District Court action against Big Apple was stayed. After the parties completed discovery, it was revealed that Big Apple had withdrawn and transferred $718,000.00 out of its account on March 14, 2011, and had withdrawn and transferred $504,271.14 out of its account on March 15, 2011. (Adv. Proc. No. 24, Jeffrey–Alexander Aff. ¶¶ 34–41.) Appellant admits that money was transferred out of the account prior to Big Apple initiating bankruptcy proceedings, but disputes that Big Apple was considering bankruptcy at that time. Specifically, appellant states that he transferred $485,000.00 to Rami Osman, an individual in Syria from whom appellant sought to purchase vehicles, $325,000.00 to his brother in Syria to deliver to Osman in order to purchase vehicles, and $335,000.00 to his mother to repay her for her initial loan. (ECF No. 5, Appellant Br. at 6.)

On March 15, 2012, Judge Paul A. Engelmayer granted VCI summary judgment as to the liability portion of VCI's breach of contract claims against Koeppel, Samborski, and appellant. Judge Engelmayer found that Big Apple had sold numerous vehicles, but failed to remit any payment to VCI. Because Koeppel, Samborski, and appellant had personally guaranteed the contract, Judge Engelmayer concluded that they had breached their contract with VCI and were liable for damages. Id. at *3–4.

On November 29, 2012, Judge Engelmayer granted summary judgment on VCI's motion as to damages on the breach of contract claim against Koeppel, Samborski, and appellant. Judge Engelmayer found that there was no genuine issue of material fact as to the damages owed to VCI, and determined that Koeppel, Samborski, and Salim were liable to VCI in the amount of $1,146,758.11. VW Credit, Inc. v. Big Apple Volkswagen, LLC, No. 11-cv-1950, 2012 WL 5964393, at *5 (S.D.N.Y. Nov. 29, 2012) (" Big Apple II"). This sum was composed of $514,835.20 in principal and $59,476.29 in interest owing under the Wholesale Loan Agreement, $54,166.98 in principal and $2,245.24 in interest owing under the Capital Loan Agreement, $349,204.65 in attorneys' fees, $50,578.10 in private security expenses and $116,242.65 in management expenses. Id. at *3.

IV. Bankruptcy Proceedings

On May 15, 2013, appellant filed for Chapter 7 bankruptcy in the Eastern District of New York, in which he sought to discharge the $1,146,758.11 judgment entered against him in the Southern District action. In re Salim, 2015 WL 1240000, at *3. On August 15, 2013, VCI commenced an adversary proceeding by filing a complaint seeking a determination that the judgment against Salim is nondischargeable pursuant to Bankruptcy Code Section 523(a)(4), on the grounds that appellant's conduct of directing the sale of vehicles, failing to remit payments to VCI, and making unauthorized transfers of VCI's funds to his family members, constituted defalcation while acting in a fiduciary capacity or, alternatively, embezzlement; VCI also alleged nondischargeability pursuant to Section 523(a)(6) on the grounds that, by converting the funds from the sale of VCI's collateral, appellant willfully and malicious injured VCI. Id. at *5.

On June 11, 2014, VCI moved for summary judgment on its claims against appellant. On March 16, 2015, Bankruptcy Judge Elizabeth S. Stong denied VCI's motion for summary judgment with respect to its claims under Bankruptcy Code Section 523(a)(4), but granted VCI's motion for summary judgment under Bankruptcy Code Section 523(a)(6).

Judge Stong first found that collateral estoppel prevented the parties from relitigating Judge Engelmayer's determinations that Big Apple "sold 78 vehicles from its inventory, but did not remit payment, as required under the Wholesale Loan Agreement, to VCI," and that, in accordance with the terms of the continuing guaranty executed by appellant, appellant was liable to VCI in the amount of $1,146,758.11. Id. at *13. Judge Stong next denied VCI's motion for summary judgment on its Section 523(a)(4) claims. Finally, Judge Stong granted VCI summary judgment as to its claim under Bankruptcy Code Section 523(a)(6). Judge Stong concluded that summary judgment was appropriate because appellant had acted willfully and maliciously, and injured VCI. Id. at *25–29. Judge Stong's Memorandum Decision and Order entering summary judgment in favor of VCI was...