Tri-State Surgical Supply & Equip. Ltd. v. McKinnon (In re McKinnon)

653 B.R. 821

IN RE, Neill T. MCKINNON, Debtor.

Tri-State Surgical Supply & Equipment Ltd., Plaintiff, v. Neill T. McKinnon, Defendant.

C/A No. 22-02896-EG

Adv. Pro. No. 23-80006-EG

United States Bankruptcy Court, D. South Carolina

Signed September 25, 2023

Benjamin R. Matthews, Benjamin R. Matthews & Associates, Columbia, SC, for Defendant.

William Harrison Penn, Penn Law Firm, LLC, Columbia, SC, for Plaintiff.

JUDGMENT

Elisabetta G. M. Gasparini, United States Bankruptcy Judge

Based on the findings of fact and conclusions of law set forth in the attached Order of the Court, the Motion for Summary Judgment filed by Defendant Neill T. McKinnon is GRANTED as to Plaintiff's cause of action for non-dischargeability of its claim under 11 U.S.C. § 523(a)(4) and is DENIED as to as to Plaintiff's causes of action for non-dischargeability of its claim under 11 U.S.C. §§ 523(a)(2) and 523(a)(6).

ORDER GRANTING IN PART AND DENYING IN PART MOTION FOR SUMMARY JUDGMENT

THIS MATTER is before the Court on the Motion for Summary Judgment ("Motion") filed by Neill T. McKinnon ("McKinnon" or "Debtor"), the Defendant in this adversary proceeding, as to Tri-State Surgical Supply & Equipment LTD's ("Tri-State") complaint seeking to have its unliquidated debt deemed nondischargeable pursuant to 11 U.S.C. § 523(a)(2)(A), 523(a)(4), and/or 523(a)(6) (the "Complaint").¹ Tri-State filed an Objection to and Opposition to Motion for Summary Judgment, and a hearing was held.² The parties agree that this is a core proceeding under 28 U.S.C. § 157(b)(2)(I) and that the Court has authority to enter a final order and judgment in this matter.³ For the reasons set forth below, the Court grants Summary Judgment in Debtor's favor as to the claim of nondischargeability pursuant to 11 U.S.C. § 523(a)(4) but denies it as to the other claims.

STATEMENT OF FACTS AND PROCEDURAL BACKGROUND

McKinnon filed a voluntary petition for relief under Chapter 7 of the Bankruptcy Code on October 25, 2022, C/A No. 22-02896-EG ("Bankruptcy Case").⁴ Tri-State is a retail and wholesale medical supply business licensed under the laws of the State of New York. In Schedule E/F filed in the Bankruptcy Case, McKinnon listed Tri-State as a creditor with a disputed, unsecured claim of $4,860,000.00 for breach of contract.⁵ The Chapter 7 Trustee appointed in the Bankruptcy Case filed a Report of No Distribution on December 2, 2022, advising that there is no property from the estate available for distribution to Debtor's creditors over and above that exempted by law.

A. The Federal Action

The Complaint is based on the same set of facts and predicated upon similar claims raised in litigation ("Federal Complaint") that Tri-State commenced against McKinnon and GoCloud Technologies Inc. ("GoCloud," and collectively with Debtor, "Defendants") in the United States District Court for the Eastern District of New York, Docket No. 12-cv-00333-PKC-TAM (the "Federal Action") on September 20, 2021.⁶ The Federal Action includes claims for breach of contract, common law fraud, tortious interference with contract, and tortious interference with prospective economic relations, and seeks damages of at least $4,500,000.00 against Defendants. The claims are based upon allegations that Defendants fraudulently induced Tri-State to enter into a contract with GoCloud (the "Contract") for the sale of medical grade examination gloves ("the Merchandise"), upon Defendants' representations that they were in possession of the Merchandise. Contrary to their representations, the Federal Complaint alleges that Defendants neither owned the Merchandise nor were able to fulfill the terms of the Contract, which in turn caused Tri-State to breach various agreements and lose the benefit of other prospective contracts with third parties.

The only document attached as an exhibit to the Federal Complaint is a copy of the Contract—a single-page document purporting to be a "Full Corporate Offer" from GoCloud, as seller, to Plaintiff, as buyer, for the sale and delivery of 120,000 boxes of gloves.⁷ The Contract is signed by Dr. Umashankar Das, President and CEO of GoCloud, and Daniel Burg, as Tri-State's representative, and provides that "we confirm with full legal and corporate responsibility that we are ready, willing, and able to sell and deliver the . . . [120,000 boxes of Nitrile Gloves]." It further provides that GoCloud would pay consultants' fees in connection with the transaction to an unnamed party. McKinnon is not named as a party nor is he a signatory to the Contract.

The Federal Action is presently stayed due to the filing of the Bankruptcy Case, and no judgment has been entered establishing the amount or validity of Tri-State's claims.

B. Adversary Proceeding

Tri-State commenced this adversary proceeding on January 26, 2023 (the "Adversary Proceeding"), seeking a declaration that its unliquidated claim against McKinnon is nondischargeable despite the Bankruptcy Case for three reasons:⁸ (a) pursuant to 11 U.S.C. § 523(a)(2)(A), as a debt for money, property, services, or an extension, renewal or refinancing of credit obtained by false pretenses, a false representation, or actual fraud; (b) pursuant to 11 U.S.C. § 523(a)(4), as a debt from fraud or defalcation while acting in a fiduciary capacity; and (c) pursuant to 11 U.S.C. § 523(a)(6), as a debt for willful and malicious injury that McKinnon caused Tri-State or its property. Debtor filed an Answer raising various defenses.⁹

Similar to the allegations raised in the Federal Complaint, Tri-State asserts that Defendants enticed Tri-State's representative to fly to California to inspect the Merchandise under the premise that it was available for inspection, when in fact the Merchandise was not in Defendants' possession. Tri-State further alleges that while its representatives were in California and as a condition to inspect the goods, Defendants requested that Tri-State provide them with "confidential and personal financial information and asset attestations, which, upon information and belief, was misused by the Debtor and GoCloud."¹⁰ In the Answer, McKinnon asserts that he is the president and owner of Latitude Healthcare, LLC, a healthcare consulting firm separate and distinct from GoCloud, and that at all times relevant to the litigation, Latitude Healthcare, LLC was acting as a broker in the transaction between Tri-State and Go-Cloud for the purchase of the Merchandise.¹¹

Upon the conclusion of the discovery period and prior to the expiration of the deadline set in the Court's Scheduling Order, McKinnon filed the Motion on June 2, 2023 seeking summary judgment as to all three claims,¹² and Tri-State objected.¹³ The Court held a hearing on the Motion at which Tri-State confirmed that it is not seeking to have the amount of the debt determined through this Adversary Proceeding; rather, once the Court determines the dischargeability of the underlying debt, the parties will proceed with the Federal Action to determine the amount of the liability, if any.¹⁴ Prior to the hearing, the parties filed a Joint Statement of Dispute setting forth their respective positions on the issues presented in the Motion.¹⁵

CONCLUSIONS OF LAW

I. Summary Judgment Standard

Federal Rule of Civil Procedure 56(a), made applicable to adversary proceedings pursuant to Federal Rule of Bankruptcy Procedure 7056, provides that summary judgment is appropriate only if the moving party "shows that there is no genuine dispute as to any material fact and the [moving party] is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(a). "A party asserting that a fact cannot be or is genuinely disputed must support the assertion by: (A) citing to particular parts of materials in the record . . . ; or (B) showing that the materials cited do not establish the absence or presence of a genuine dispute, or that an adverse party cannot produce admissible evidence to support the fact." Fed. R. Civ. P. 56(c)(1). Rule 56 requires entry of summary judgment "against a party who fails to make a showing sufficient to establish the existence of an element essential to that party's case." Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986).

The moving party has the burden of proving that summary judgment is appropriate. Id. When determining whether a genuine issue of material fact exists, the evidence of the non-moving party is to be believed and all reasonable inferences must be drawn in favor of the non-moving party. Hunt v. Cromartie, 526 U.S. 541, 553, 119 S.Ct. 1545, 143 L.Ed.2d 731 (1999) (citing Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986)). "When the party moving for summary judgment does not bear the ultimate burden of persuasion at trial, it may discharge its burden by demonstrating to the court that there is an absence of evidence to support the non-moving party's case." Dan Ryan Builders W. Virginia, LLC v. Main St. Am. Assurance Co., 452 F. Supp. 3d 359, 364-65 (D.S.C. 2020) (citing Celotex Corp. v. Catrett, 477 U.S. at 325, 106 S.Ct. 2548). The non-moving party must then "make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial." Celotex, 477 U.S. at 322, 106 S.Ct. 2548. "As a general rule, when one party files a motion for summary judgment, the non-movant cannot merely rely on matters pleaded in the complaint, but must, by factual affidavit or the like, respond to the motion." Williams v. Griffin, 952 F.2d 820, 823 (4th Cir. 1991) (citing Celotex Corp. v. Catrett, 477 U.S. at 324, 106 S.Ct. 2548).

II. Discussion

McKinnon asserts that summary judgment is proper because Tri-State's evidence is insufficient to establish the elements of a claim under 11 U.S.C. § 523(a)(2), (4), and/or (6). As the defendant in this action, McKinnon does not bear the ultimate burden of persuasion on Tri-State's § 523 claims at trial; therefore,...