VW Credit, Inc. v. Salim (In re Salim)

In re: JULIAN SALIM, Debtor.

VW CREDIT, INC., Plaintiff, v. JULIAN SALIM, Defendant.

Case No. 13-42974-ess

Adv. Pro. No. 13-01442-ess

UNITED STATES BANKRUPTCY COURT EASTERN DISTRICT OF NEW YORK

March 16, 2015

Chapter 7

MEMORANDUM DECISION ON THE MOTION OF VW CREDIT, INC. FOR SUMMARY JUDGMENT

Appearances:

Jason A. Little, Esq.

Deily & Glastetter LLP

8 Thurlow Terrace

Albany, NY 12203

Jonathan R. Miller, Esq.

The Law Office of Jonathan R. Miller

1310 River Road

Titusville, NJ 08560

Attorneys for VW Credit, Inc.

George Bassias, Esq.

21-83 Steinway

Astoria, NY 11105

Phillip Jaffe, Esq.

370 East 76th Street

Suite C-1002

New York, NY 10021

Attorneys for Julian Salim

HONORABLE ELIZABETH S. STONG UNITED STATES BANKRUPTCY JUDGE

Introduction

Before the Court is the motion of VW Credit, Inc. for summary judgment on its claims that a debt owed to it by Julian Salim, the debtor in this Chapter 7 case, is nondischargeable pursuant to Bankruptcy Code Sections 523(a)(4) and 523(a)(6) because the debt arises from Salim's defalcation while acting as a fiduciary, from Salim's embezzlement, and from a willful and malicious injury by Salim to VCI or its property.

The debt at issue (the "Judgment Debt"), in the amount of $1,146,758.11, arises out of two agreements made between VW Credit, Inc. ("VCI") and Big Apple Volkswagen, LLC ("Big Apple") with respect to VCI's financing of Big Apple's automotive sales. The first is a promissory note in the amount of $3,347,500, secured by Big Apple's inventory, among other things (the "Wholesale Loan Agreement"). The second is a promissory note in the amount of $250,000, also secured by Big Apple's inventory (the "Capital Loan Agreement, and together with the Wholesale Loan Agreement, the "Loan Agreements"). Pursuant to the terms of the Loan Agreements, a default by Big Apple on either agreement triggers a default on the other. Salim, who initially held a 35 percent equity interest in Big Apple and later became the company's majority owner, executed a personal guaranty of Big Apple's obligations under the Loan Agreements (the "Salim Guaranty").

VCI brought an action against Big Apple, Salim, and others in the U.S. District Court for the Southern District of New York (the "District Court Action"), alleging that Big Apple breached the Loan Agreements by failing to remit payments to VCI for the automobiles that it sold. The District Court held that Salim and two other Big Apple members, John Koeppel and Grzegorz Samborski, were personally liable for Big Apple's breach of the Loan Agreements.The District Court entered judgment in favor of VCI and against Salim in the amount of $1,146,758.11, comprised of the value of the "sale out of trust" remaining after VCI's recovery from the liquidation of Big Apple's inventory, together with attorneys' fees and other expenses.

VCI seeks summary judgment on three claims pursuant to Federal Rule of Civil Procedure 56, made applicable in this adversary proceeding by Bankruptcy Rule 7056. First, VCI argues that the Judgment Debt should not be discharged pursuant to Bankruptcy Code Section 523(a)(4) because Salim's conduct giving rise to the debt constitutes a defalcation while acting in a fiduciary capacity. Second, VCI argues that the Judgment Debt should not be discharged pursuant to Section 523(a)(4) because Salim's actions giving rise to the debt amount to embezzlement. And third, VCI argues that the Judgment Debt should not be discharged pursuant to Bankruptcy Code Section 523(a)(6) because the debt arose from Salim's willful and malicious injury to VCI or its property. VCI also argues that as a threshold matter, collateral estoppel bars the relitigation of certain factual findings made in the District Court Action and relevant here.

In order to succeed on this motion, VCI must show that there is no genuine dispute as to a material fact as to each element of at least one of these claims. If so, VCI is entitled to judgment as a matter of law.

Jurisdiction and Authority To Enter a Final Order

"Congress has divided bankruptcy proceedings into three categories: those that 'aris[e] under title 11'; those that 'aris[e] in' a Title 11 case; and those that are 'related to a case under title 11.'" Stern v. Marshall, 131 S. Ct. 2594, 2603 (2011) (citing 28 U.S.C. § 157(a)) (alterations in original).

The district courts have original, but not exclusive, jurisdiction in all cases "arising under" the Bankruptcy Code or "arising in or related to" cases under the Bankruptcy Code. 28 U.S.C. § 1334(b). "[A] proceeding is related to a case under the Bankruptcy Code 'if the outcome of the litigation might have any conceivable effect on the bankruptcy estate, or has any significant connection with the bankrupt estate.'" Silverman v. A-Z Rx, LLC (In re Allou Distribs., Inc.), 2012 WL 6012149, at *6 (Bankr. E.D.N.Y. Dec. 3, 2012) (quoting Lead I JV, LP v. North Fork Bank, 401 B.R. 571, 581 (E.D.N.Y. 2009)).

This Court may hear each of VCI's claims as an "arising under" matter. VCI seeks a determination that the Judgment Debt is nondischargeable under the Bankruptcy Code. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(I). As such, this Court has jurisdiction to consider these claims under 28 U.S.C. § 1334(b) and the Standing Order of Reference dated August 28, 1986, as amended by Order dated December 5, 2012, of the U.S. District Court for the Eastern District of New York.

While it is clear that the bankruptcy court has jurisdiction over these claims, that is not the end of the inquiry. This Court is constrained by both statutory and constitutional limits to its authority to enter a final judgment. Judiciary Code Section 157 "permits a bankruptcy court to adjudicate a claim to final judgment in two circumstances - in core proceedings, see § 157(b), and in non-core proceedings 'with the consent of all the parties,' § 157(c)(2)." Executive Benefits Ins. Agency v. Arkison, 134 S. Ct. 2165, 2174 (2014). In addition, in order to enter a final judgment in a core proceeding, a bankruptcy court must have constitutional authority to do so pursuant to the Supreme Court's decisions in Northern Pipeline Construction Co. v. Marathon Pipeline Co., 458 U.S. 50 (1982), Stern, and Executive Benefits. As the SupremeCourt observed, "Congress may not bypass Article III simply because a proceeding may have some bearing on a bankruptcy case; the question is whether the action at issue stems from the bankruptcy itself or would necessarily be resolved in the claims allowance process." Stern, 131 S. Ct. at 2618. For non-core proceedings and for core proceedings for which the bankruptcy court does not have constitutional authority to enter a final judgment, the bankruptcy court may "'hear [the] proceeding,' and then 'submit proposed findings of fact and conclusions of law to the district court.'" Executive Benefits, 134 S. Ct. at 2172 (quoting 28 U.S.C. § 157(c)(1)) (alterations in original).

VCI's claims of nondischargeability arise under the Bankruptcy Code, and could not be asserted independent of Salim's bankruptcy case. These nondischargeability claims are core matters as to which this Court has constitutional authority to enter a final judgment, because they stem "from the bankruptcy itself." Stern, 131 S. Ct. at 2618. Accordingly, this Court may render a final decision and order adjudicating these claims. See 28 U.S.C. § 157(b)(2)(B).

Background

The Debtor's Bankruptcy Case

On May 15, 2013, Julian Salim filed a petition for relief under Chapter 7 of the Bankruptcy Code. Salim lists VCI on Schedule F of his Chapter 7 petition as a creditor holding an unsecured nonpriority claim in the amount of $1,146,758, and described the claim as "Personal Liability on debt to [Salim's] failed car dealership called Big Apple Volks[w]ag[e]n." Bankr. 13-42974, Dkt. 1, Pet. 17. In his Statement of Financial Affairs, Salim indicates that in the year preceding his bankruptcy filing, he was a defendant in an action captioned VW Credit, Inc. v. Salim, Case No. 11-1950, pending in the U.S. District Court for the Southern District ofNew York. On August 15, 2013, the Trustee in Salim's Chapter 7 case filed a Report of No Distribution, and on October 28, 2014, Salim received a discharge.

The District Court Action

On March 22, 2011, VCI commenced the District Court Action against Big Apple, Salim, and the two other Big Apple members, John Koeppel and Gzregorz Samborski, by filing a complaint setting forth claims for breach of contract, breach of guaranties, and replevin of its collateral. VW Credit, Inc. v. Big Apple Volkswagen, LLC, 2012 WL 919386, at *2 (S.D.N.Y. Mar. 15, 2012). On July 11, 2011, Salim and Samborski filed an answer. Id.

The record shows that Salim was a member, and eventually majority equity holder, of Big Apple, an automobile dealership in the Bronx, New York. As the District Court found, VCI "loaned Big Apple money for its inventory of motor vehicles and provided a working capital line of credit." VW Credit, 2012 WL 919386, at *1. Big Apple's indebtedness to VCI was memorialized in a promissory note, dated June 12, 2006, in the amount of $3,347,500, and a security agreement dated June 12, 2006. Id. In the Wholesale Loan Agreement, Big Apple "agreed . . . to remit to VCI the portion of each vehicle sale or lease which represented the monetary amount supplied by VCI to Big Apple under the loan," as well as to repay to VCI all funds loaned, with specified interest. Id. About nine months later, on March 19, 2007, Big Apple executed the agreements comprising the Capital Loan Agreement, an additional promissory note for $250,000 and a related security agreement, under which Big Apple agreed to repay VCI with interest on a specified timetable. Id. In the Wholesale Loan Agreement and Capital Loan Agreement, Big Apple "granted to VCI a security interest in Big Apple's inventory of vehicles, chattels, and proceeds." Id.

As the District Court also found, Salim and the two other members of Big Apple each executed continuing...