Stanley Supply & Tool, Inc. v. Smallwood (In re Smallwood)

Chapter 7

Jonathan M. Cader, Esq. Craig B. Sanders, Esq. Barshay Sanders, PLLC

Jeff Morgenstern, Esq. One Old Country Road

DECISION

NANCY HERSHEY LORD, UNITED STATES BANKRUPTCY JUDGE

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This matter comes before the Court on the motion of the plaintiff, Stanley Supply & Tool, Inc. (the "Plaintiff"), for summary judgment against Robert Smallwood ("Smallwood") excepting the debt owed to Plaintiff from Smallwood's discharge pursuant to 11 U.S.C. § 523(a)(4) and (a)(6).^[1] Smallwood opposes the motion. For the following reasons, the Plaintiff's motion for summary judgment is granted in part and denied in part.

JURISDICTION

This Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334(b), and the Eastern District of New York standing order of reference dated August 28, 1986, as amended by order dated December 5, 2012. This matter is a core proceeding under 28 U.S.C. § 157(b)(2)(I). This decision constitutes the Court's findings of fact and conclusions of law to the extent required by Rule 7052 of the Federal Rules of Bankruptcy Procedure (the "Bankruptcy Rules").

BACKGROUND

Unless otherwise noted, the following facts are undisputed or are matters of which judicial notice may be taken.

In April 2008, the Plaintiff hired Smallwood as an employee for its retail operations in Long Island City, NY, and Smallwood eventually became the store manager. (Pl. Statement of Undisputed Facts ¶ 6, ECF No. 10-15; Def. Counterstatement ¶ 6, ECF No. 16.)^[2] Concurrently, from April 21, 2008 through December 8, 2011, Smallwood was also a director, officer, and/or executive of a business known as Dynasty Flooring Supply, Inc ("Dynasty"). (Pl. Statement of Undisputed Facts ¶ 7, ECF No. 10-15; Def. Counterstatement ¶ 7, ECF No. 16.) Smallwood was also a director, officer, and/or executive of a business known as Lightning Stainless Bolt

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Company ("Lightning"), which was incorporated in December 2011. (Pl. Statement of Undisputed Facts ¶ 8, ECF No. 10-15; Def. Counterstatement ¶ 8, ECF No. 16.)

On February 7, 2012, the Plaintiff commenced an action (the "State Court Action") against Smallwood, Dynasty, and Lightning (together, the "State Court Defendants") in the Supreme Court of the State of New York, Queens County (the "State Court"), alleging, inter alia, that Smallwood stole in excess of $50, 000 in cash and in excess of $300, 000 in inventory or merchandise from the Plaintiff. (Pl. Statement of Undisputed Facts ¶ 41, ECF No. 10-15; Def. Counterstatement ¶ 41, ECF No. 16; Cader Decl. Ex. 1 ¶¶ 15-28, ECF No. 10-2.) The Plaintiff alleged that Smallwood, through Dynasty and/or Lightning, sold the stolen merchandise at below market prices to third parties, including some of the Plaintiff's existing customers. (Cader Decl. Ex. 1 ¶¶ 18, 20, 22, 24, 27, 28, 32, 37, ECF No. 10-2.) The Plaintiff asserted claims of (1) conversion, (2) unjust enrichment, (3) tortious interference with prospective business relationships, (4) unfair competition, and (5) misappropriation of trade secrets. (Cader Decl. Ex. 1, ECF No. 10-2.) The Plaintiff sought an award of compensatory damages, punitive damages, and attorney's fees. (Cader Decl. Ex. 1, ECF No. 10-2.)

On March 12, 2012, the State Court Defendants filed an answer in the State Court Action. (Pl. Statement of Undisputed Facts ¶ 42, ECF No. 10-15; Def. Counterstatement ¶ 42, ECF No. 16; Cader Decl. Ex. 2, ECF No. 10-3.) Thereafter, the State Court Defendants refused to comply with discovery, asserting the Fifth Amendment right against self-incrimination. (Pl. Statement of Undisputed Facts ¶¶ 43, 44, ECF No. 10-15; Def. Counterstatement ¶¶ 43, 44, ECF No. 16; Cader Decl. Ex. 3 ¶¶ 2, 3, 5, ECF No. 10-4.) The Plaintiff filed a motion to compel discovery, which was opposed by the State Court Defendants. (Pl. Statement of Undisputed Facts ¶¶ 43, 44, ECF No. 10-15; Def. Counterstatement ¶¶ 43, 44, ECF No. 16.)

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On December 24, 2012, the State Court issued an order granting the Plaintiff's motion to compel (the "Discovery Order"), ruling that it could not sustain Smallwood's "blanket invocation of the privilege against self-incrimination," and noting that Dynasty and Lightning cannot invoke the Fifth Amendment privilege. (Pl. Statement of Undisputed Facts ¶ 45, ECF No. 10-15; Def. Counterstatement ¶ 45, ECF No. 16; Cader Decl. Ex. 4, ECF No. 10-5.) The Discovery Order directed the State Court Defendants to respond to the discovery requests within 30 days. (Cader Decl. Ex. 4, ECF No. 10-5.)

After the State Court Defendants failed to comply with the Discovery Order, the Plaintiff filed and served a motion for contempt and/or for sanctions, requesting that the State Court strike the answer filed by the State Court Defendants, and enter a default judgment. (Pl. Statement of Undisputed Facts ¶¶ 46, 47, ECF No. 10-15; Def. Counterstatement ¶¶ 46, 47, ECF No. 16; Cader Decl. Ex. 5, ECF No. 10-6.) The State Court Defendants did not oppose the motion. (Pl. Statement of Undisputed Facts ¶ 48, ECF No. 10-15; Def. Counterstatement ¶ 48, ECF No. 16.)

On September 9, 2013, the State Court granted the Plaintiff's motion and struck the answer filed by the State Court Defendants based upon their failure to comply with the Discovery Order. (Pl. Statement of Undisputed Facts ¶ 49, ECF No. 10-15; Def. Counterstatement ¶ 49, ECF No. 16; Cader Decl. Ex. 6, ECF No. 10-8.) Thereafter, an inquest was held on April 7, 2015. (Pl. Statement of Undisputed Facts ¶ 53, ECF No. 10-15; Def. Counterstatement ¶ 53, ECF No. 16; Cader Decl. Ex. 9, ECF No. 10-11; Smallwood Aff. Ex. B, ECF No. 17-2.) Based upon the record established at the inquest, the State Court awarded the Plaintiff: (1) $824, 244.12 for conversion; (2) $1 million for "tortious environment [sic] with respect to business relationships, lost profits, and lost business opportunities"; and (3) punitive damages of $424, 792.62 "as relates to attorney's fees." (Cader Decl. Ex. 9, ECF No. 10-11;

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Smallwood Aff. Ex. B, ECF No. 17-2.) Accordingly, on April 27, 2015, the State Court entered judgment against the State Court Defendants in the amount of $2, 249, 036.74, with interest from April 21, 2008, in the amount of $1, 152, 422.49 plus costs and disbursements in the amount of $1, 315.00, for a total of $3, 402, 774.23 (the "State Court Judgment"). (Pl. Statement of Undisputed Facts ¶ 54, ECF No. 10-15; Def. Counterstatement ¶ 54, ECF No. 16; Cader Decl. Ex. 10, ECF No. 10-12.)

On July 22, 2020, Smallwood filed a voluntary petition under chapter 7 of the Bankruptcy Code. Thereafter, on September 24, 2020, the Plaintiff commenced this adversary proceeding seeking to except the State Court Judgment from discharge pursuant to § 523(a)(4), as a debt "for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny," and pursuant to § 523(a)(6), as a debt "for willful and malicious injury."

On January 21, 2021, the Plaintiff filed this motion for summary judgment, which is opposed by Smallwood. Hearings were held on February 24, 2021 and May 13, 2021.

STANDARD FOR SUMMARY JUDGMENT

Federal Rule of Civil Procedure 56, made applicable to this proceeding by Bankruptcy Rule 7056, provides that "[t]he court shall grant summary judgment 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." Fed.R.Civ.P. 56(a); Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986). A court must determine "whether the evidence presents a sufficient disagreement to require submission to a jury or whether it is so one-sided that one party must prevail as a matter of law." Kulak v. City of New York, 88 F.3d 63, 70 (2d Cir. 1996) (quoting Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 251-52 (1986)). In ruling on a motion for summary judgment, a court looks to "pleadings, depositions, answers to interrogatories, and admissions on file, together with the

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affidavits, if any," Celotex, 477 U.S. at 322 (quoting Fed.R.Civ.P. 56(c)), and reviews the evidence in the light most favorable to the non-moving party, with all inferences drawn in that party's favor, Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587-88 (1986) (quoting United States v. Diebold, Inc., 369 U.S. 654, 655 (1962)); Marvel Characters, Inc. v. Simon, 310 F.3d 280, 286 (2d Cir. 2002).

While the initial burden is on the movant to demonstrate the absence of a genuine dispute of material fact with particular citations to the record, Celotex, 477 U.S. at 323; Marvel, 310 F.3d at 286, the non-moving party cannot defeat summary judgment by merely casting doubt on some of these facts, see Kulak, 88 F.3d at 71. Rather, the non-moving party must point to disputed facts that would affect the outcome of the case such that a reasonable trier of fact could find in favor of that party. Anderson, 477 U.S. at 247-48.

DISCUSSION

"A primary 'objective of the bankruptcy law is to afford a deserving debtor an economic rehabilitation or "fresh start" in life.'" Suparo Int'l Inc. v. Kedia (In re Kedia), 607 B.R. 101, 108 (Bankr. E.D.N.Y. 2019) (quoting First Am. Bank of N.Y. v. Bodenstein (In re Bodenstein), 168 B.R. 23, 27 (Bankr. E.D.N.Y. 1994)). However, this objective is "tempered by an equally important objective and that is to prevent the 'dishonest debtor's attempt to use the law's protection to shield his or her wrongdoing.'" Id. (quoting Bodenstein, 168 B.R. at 27).

The Plaintiff argues that it is entitled to summary judgment under the doctrine of collateral estoppel because the State Court Judgment, and the record upon which it is based, including the allegations in the complaint that are deemed admitted upon...