Bankruptcy No. 99 B 25354, Chapter 7, Adversary No. 00 A 00047.United States Bankruptcy Court, N.D. Illinois, Eastern Division
July 17, 2001
[EDITORS’ NOTE: THIS OPINION HAS BEEN DESIGNATED “NOT FOR PUBLICATION”.]
Kevin Hermanek, Chicago, IL., Attorney for Defendant.
Jeffrey R. Kulwin, Kulwin Associates, Chicago, IL., Attorney for Plaintiff.
Glen R. Heyman, Dannen, Crane, Heyman Simon, Chicago, IL., Attorney for Trustee, U.S. Trustee’s Offfice, Chicago, IL.
MEMORANDUM OPINION AND ORDER
ROBERT E. GINSBERG, United States Bankruptcy Judge.
This matter is before the court on the cross motions of Raymond and Jacquelyn Pargulski (the “Plaintiffs”) and William Murphy (the “Debtor” or the “Defendant”) for summary judgment on the Plaintiffs’ adversary complaint seeking to determine the dischargeability of a debt. For the reasons stated below, the court finds that there are material issues of fact in dispute, and that neither party is entitled to judgment as a matter of law. Accordingly, both parties’ motions for summary judgment are denied.
Standards for Summary Judgment
To prevail on a motion for summary judgment, the movant must meet the criteria set out in Rule 56 of the Federal Rules of Civil Procedure, made applicable to adversary proceedings in bankruptcy cases under Federal Rule of Bankruptcy Procedure 7056. Summary judgment is appropriate if the entire record, including pleadings, depositions, answers to interrogatories, admissions on file, and any affidavits, show that there is no genuine issue of material fact and that the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c); Fed.R.Bankr.P. 7056; Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 2552, 91 L.Ed.2d 265 (1986).
Summary judgment is granted to avoid unnecessary trials when there is no genuine issue of material fact in dispute. Anderson v. LibertyLobby, Inc., 477 U.S. 242, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986);Matushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 585-86, 106 S.Ct. 1348, 1355, 89 L.Ed.2d 538 (1986). The movant bears the burden of showing that no genuine issue of material fact is in dispute. Anderson, 477 U.S. at 248; Celotex, 477 U.S. at 322;Matsushita, 475 U.S. at 585-86. Once the motion for summary judgment is supported by a prima facie showing that the moving party is entitled to judgment as a matter of law, Rule 56(e) provides that a party opposing the motion may not rest upon the mere allegations or denials in its pleadings; instead, the response of that party must set forth specific facts showing that there is a genuine factual issue for trial. Anderson, 477 U.S. at 248; Celotex, 477 U.S. at 324; Matsushita, 475 U.S. at 587;Doe v. Cunningham, 30 F.3d 879, 882 (7th Cir. 1994).
Procedure for Summary Judgment Motions
Local Rule 402.M of the Local Bankruptcy Rules adopted for this District requires a party moving for summary judgment to file, among other things, a detailed statement consisting of a statement of the material facts as to which the movant contends there is no genuine issue. The 402.M statement “shall consist of short numbered paragraphs, including within each paragraph specific references to the affidavits, parts of the record, and other supporting materials relied upon to support the facts set forth in that paragraph. Failure to submit such a statement constitutes grounds for denial of the motion.” Local Rule 402.M, U.S. Bankruptcy Court, N.D. Ill. (1994, rev. 2001).
By the same token, a party opposing a summary judgment motion is required by Local Rule 402.N to respond to the movant’s 402.M statement, paragraph by paragraph, and to identify those material facts that would require denial of summary judgment, specifically referring to the record for support of each denial of fact.
Compliance with Local Rules 402.M and 402.N is not a mere technicality. Courts rely on the information presented in the statements to identify the facts about which there is a genuine dispute from those as to which there is no dispute. American Ins. Co. v. Meyer Steel Drum,Inc., 1990 WL 92882 at *7 (N.D.Ill. June 27, 1990). The statements required by Rule 402 are not intended to be superfluous abstracts of the evidence. Rather, they are intended to assist the court in determining what facts are in dispute and to point the court to specific evidence in the record that supports or rejects a party’s contentions as to each of these questions of fact. In other words, the statements required by Local Rules 402.M and 402.N assist the court in fulfilling its most basic task in resolving a summary judgment motion, i.e., determining whether there really are unresolved issues of material fact between the parties.Waldridge v. American Hoechst Corp., 24 F.3d 918, 921 (7th Cir. 1994). In effect, the Local Rule 402.M and 402.N statements function as roadmaps. The court should not have to proceed without them, even if it might be able to find the relevant information on its own. Wolford v. Ward (In reWard), 233 B.R. 810, 814 (Bankr.N.D.Ill. 1999).
In the instant proceeding, the Debtor has not filed a 402.M statement as part of his summary judgment motion, nor has he filed a 402.N statement. No reason has been offered for his failure to meet the requirements of the Local Bankruptcy Rules of this District. The Plaintiffs did file a document entitled “Plaintiff’s 12(M) Statement of Material Facts Requiring the Entry of Summary Judgment.” Since the Rule 402.M statement was once known as a Rule 12(m) statement, the Court will consider it to be Plaintiffs’ 402.M statement. See, e.g., EnvirodyneIndustries, Inc. v. American Express (In re Envirodyne Industries,Inc.), 176 B.R. 825, 827 (Bankr.N.D.Ill. 1995).
The undisputed material facts with respect to the motions for summary judgment, as determined by this court from the 402.M statement of the Plaintiffs are as follows:
The Debtor was at one time the Plaintiffs’ investment advisor. (402.M ex. C). In 1997, the Plaintiffs filed a lawsuit against the Debtor in the Circuit Court of Cook County for fraud, unsuitability, breach of fiduciary duty and churning resulting from the Debtor’s handling of the Plaintiffs’ investment account. The Debtor was defended in this lawsuit by James Moylan of the firm Arnstein Lehr. (402.M ¶ 1).
The Debtor responded to the lawsuit by demanding that the Plaintiffs dismiss the suit and instead submit the matters raised by the complaint to the National Association of Securities Dealers, Inc. (the “NASD”) for arbitration, as required by the client agreement executed by the parties. (402.M ¶ 2, 402.M ex. B). The Plaintiffs apparently dismissed the complaint and instead filed a Statement of Claim with the NASD against the Debtor, alleging claims for fraud, unsuitability, breach of fiduciary duty and churning resulting from the Debtor’s handling of their investment account. (402.M ¶ 3, 402.M ex. C). The Statement of Claim contains a detailed account of the relationship between the Plaintiffs and the Debtor. (402.M ex. C). The Plaintiffs sought an award of $250,000.00, consisting of over $90,000.00 plus interest in money lost through inappropriate and unauthorized trading by the Debtor, attorneys’ fees and costs, and other relief as deemed appropriate. The Debtor, in his First Amended Answer and Affirmative Defenses to the Statement of Claim in Arbitration and Third Party Statement of Claim in Arbitration, raised numerous defenses in response to the Statement of Claim. These concluded with the assertion that he did not act fraudulently, and thus could not be personally liable to the Plaintiffs. (402.M ¶ 4, 402.M ex. D). The parties engaged in discovery in preparation for the NASD arbitration hearing. The Debtor was represented by counsel throughout the NASD arbitration proceedings. (402.M ¶ 5). On December 1, 1998, the parties began the NASD arbitration hearing, which lasted for three days, and was attended by both Plaintiffs and the Debtor. (402.M ¶ 6). The Debtor did not testify to refute the Plaintiffs’ testimony and evidence, and as a result, the Debtor never orally denied the allegations in the Statement of Claim at the hearing. (402.M. ¶ 7). The Debtor’s attorney had the opportunity to present evidence and to cross-examine the Plaintiffs and their expert witness. (402.M ¶ 8). At the conclusion of the arbitration hearing, counsel for both parties had the opportunity to submit documentary evidence, make closing arguments and submit memoranda of law regarding the legal and factual issues asserted at the arbitration hearing. (402.M ¶ 9).
The panel of arbitrators considered the testimony, documents, evidence and arguments presented at the hearing. (402.M. ¶ 10). The panel found in favor of the Plaintiffs on their Statement of Claim, and awarded them $32,394.00 in damages, plus interest. (402.M. ¶ 11). The Debtor never satisfied the Award. (402.M ¶ 11).
On November 3, 1999, the Debtor filed a petition under Chapter 7 of the Bankruptcy Code. (402.M ¶ 12). On January 18, 2000, the Plaintiffs filed the instant adversary complaint which seeks to determine the dischargeability of the debt owed to them. (402.M ¶ 13). In response to the adversary complaint, the Debtor asserted that he did not defraud the Plaintiffs and that the Award made no finding of fraud or fraudulent conduct. (402.M ¶ 14).
The Award, attached as a Exhibit E to the Plaintiffs’ 402.M statement provides as follows:
After considering the pleadings, the testimony and the evidence presented at the hearing, the undersigned arbitrators have decided in full and final resolution of the issues submitted for determination as follows:
1. Respondent William Murphy is liable for and shall pay to Claimants Raymond Pargulski and Jacquelyn Pargulski the sum of $32,394.00 as actual damages, plus interest at the rate of 5% per annum accruing from August 28, 1995 until the date of award. After the date of award, post-judgment interest shall be paid at the rate of 9% per annum with the interest accruing from the date of award until the award is paid in full;
2. The parties shall bear their own costs of arbitration, including attorneys’ fees, except for those specifically enumerated herein; and
3. Any relief not specifically awarded is hereby denied.
The Plaintiffs argue that under federal law, arbitration awards are to be construed liberally, and that bankruptcy courts are precluded from re-litigating issues raised, litigated and resolved in prior arbitration proceedings. See In re Beeber, 239 B.R. 13 (Bankr.E.D.N.Y. 1999); In reLang, 108 B.R. 586 (Bankr.N.D.Ohio 1989). The Debtor, according to the Plaintiffs, is attempting to litigate here the issue of whether his conduct with respect to the Plaintiffs was fraudulent, an issue that according to the Plaintiffs has already been litigated in the arbitration proceeding. The arbitration panel rejected the Debtor’s defenses to the statement of claim, which was based entirely on the Debtor’s alleged fraudulent conduct, and entered an award in favor of the Plaintiffs.
The Debtor, on the other hand, argues that the NASD award contains no findings of fraud. In addition, the Debtor points out that the amount awarded by the arbitration panel was less than thirteen percent of the $250,000.00 in damages the Plaintiffs sought. The Debtor agrees that this Court is precluded from re-litigating issues already determined by the arbitration panel, under the doctrine of res judicata. See11 U.S.C. § 523(a)(4); Beeber, 239 B.R. at 20.
In addition, the Debtor argues that he was not a fiduciary as the term is defined in the dischargeability context because an ordinary commercial relationship does not give rise to a fiduciary duty. See Lang, 108 B.R. at 589.
This Court has jurisdiction over this proceeding pursuant to 28 U.S.C. § 1334(b) as a matter arising under § 523 of the Bankruptcy Code. The matter is before this Court under Internal Operating Procedure 15(a) (formerly known as Local Rule 2.33) of the United States District Court for the Northern District of Illinois, automatically referring bankruptcy cases and proceedings to this court for hearing and determination. This is a core proceeding under 28 U.S.C. § 157(b)(2)(I).
Conclusions of Law
Section 523(a)(2) of the Bankruptcy Code, 11 U.S.C. § 523(a)(2), provides, in relevant part:
A discharge under section 727 . . . of this title does not discharge an individual debtor from any debt — for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by —
(A) false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor’s or an insider’s financial condition[.]
Section 523(a)(4) of the Bankruptcy Code, 11 U.S.C. § 523(a)(4), provides:
A discharge under section 727 . . . of this title does not discharge an individual from any debt — for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny[.]
To prevail on a complaint under 11 U.S.C. § 523(a)(2), a plaintiff must establish three elements. First, the plaintiff must prove that the debtor obtained money, property, services, or an extension, renewal or refinancing of credit from the plaintiff by making representations that the debtor knew to be false or that were made with such reckless disregard for the truth as to constitute willful misrepresentations.Ward, 233 B.R. at 815; see also Mayer v. Spanel Intern. Ltd., 51 F.3d 670, 673074 (7th Cir. 1995); P S X-Ray Company, Inc. v. Dawes (In reDawes), 189 B.R. 714, 720 (Bankr.N.D.Ill. 1995). Second, the plaintiff must prove that the debtor acted with an intent to deceive. Ward, 233 B.R. at 815. Finally, the plaintiff must prove that it justifiably relied on the debtor’s false statements. Id.; see also Field v. Mans, 516 U.S. 59, 74-75, 116 S.Ct. 437, 133 L.Ed.2d 351 (1995).
To prevail on a complaint under 11 U.S.C. § 523(a)(4), a plaintiff must prove that the debt was produced by the debtor’s (1) fraud or defalcation while acting as a fiduciary; or (2) embezzlement; or (3) larceny. Morgan v. LeRoy (In re LeRoy), 251 B.R. 490, 499
(Bankr.N.D.Ill. 2000). To establish that a debt is nondischargeable because of fraud or defalcation while acting as a fiduciary, the plaintiff must establish, by a preponderance of the evidence, that there was an express trust or fiduciary relationship, and a debt caused by the debtor’s fraud or defalcation while acting as a fiduciary. Id.; seealso Grogan v. Garner, 498 U.S. 279, 291, 111 S.Ct. 654, 661,112 L.Ed.2d 755 (1991) (holding that ordinary preponderance of the evidence standard applies in dischargeability actions). Thus, the first requirement for a debt to be found nondischargeable under 11 U.S.C. § 523(a)(4) is that there must be a fiduciary relationship. Additionally, to establish fraud under § 523(a)(4), the plaintiff must show that there was a positive, intentional act involving moral turpitude, as constructive fraud is insufficient. Illinois v. Monahan (In re Monahan), 2000 WL 225893 at *6 (Bankr.N.D.Ill. Feb. 24, 2000).
The problem in the instant proceeding is that, even accepting as true everything in the Plaintiffs’ 402.M statement, this Court does not have enough facts to determine whether the above elements have been satisfied. It is not clear exactly what false representations the Debtor made, to whom they were made, whether they were made with intent to deceive and whether the Plaintiffs reasonably relied on those false representations.
Apparently, these issues were all litigated before the NASD arbitration panel. However, it is impossible to determine, from the arbitration Award, what facts and legal conclusions formed the basis of that award. This Court, from the record before it, cannot determine what factual allegations were actually litigated and proved before the arbitration panel. See, e.g., Anglo-Iberia Underwriting Mgmt. Co. v. Lodderhose (Inre Lodderhose), 2000 WL 1474441 at *4 (Bankr.N.D.Ill. Sept. 19, 2000).
Even if the arbitration panel’s Award set forth the facts on which it relied in making its decision, it is not clear that this Court would be bound by such findings. In his response to the Plaintiffs’ motion for summary judgment, the Debtor argues that the doctrine of res judicata should apply because the four elements for establishing res judicata have been met: (1) there is an existing final judgment based upon the merits of the case; (2) the judgment was rendered by a court of competent jurisdiction; (3) the judgment is conclusive of the causes of action and of facts and issues thereby litigated; and (4) the same parties are in the original case as are in the subsequent action. (Response p. 6); seealso In re Beeber, 239 B.R. at 20.
Part of the problem here is that the Debtor did not plead res judicata in his answer to the Plaintiffs’ adversary complaint. Bankruptcy Rule 7008(c) provides:
Affirmative Defenses. In pleading to a preceding pleading, a party shall set forth affirmatively accord and satisfaction, arbitration and award, assumption of risk, contributory negligence, discharge in bankruptcy, duress, estoppel, failure of consideration, fraud, illegality, injury by fellow servant, laches, license, payment, release, res judicata, statute of frauds, statute of limitations, waiver, and any other matter constituting an avoidance or affirmative defense . . . .
Fed.R.Bankr.P. 7008(c) (emphasis added).
The Debtor could, and should have, pled res judicata from the outset. The date of decision of the Award was March 9, 1999. The Debtor did not even file his Chapter 7 case until November 3, 1999, well after the NASD arbitration panel issued its decision. This is not a case where an arbitration proceeding was pending but no award had been issued at the time of the commencement of an adversary proceeding. See, e.g., Beeberv. Beeber (In re Beeber), 239 B.R. 13, 20 (Bankr.E.D.N.Y. 1999). InBeeber, the court excused the debtor from pleading res judicata because the award had not yet been entered. Id. However, the court went on to state that, regardless of whether res judicata should have been affirmatively pled, it “would not be appropriate [for res judicata] to tie this Court’s hands from confronting the issues raised as to the dischargeability of the arbitration award[.]” Id. at 21.
Arbitration awards do not necessarily have preclusive effects in subsequent proceedings in federal court. Arndt v. Hanna (In re Hanna), 163 B.R. 918, 923 (Bankr.E.D.N.Y. 1994); see also Dean Witter ReynoldsInc. v. Byrd, 470 U.S. 213, 223, 105 S.Ct. 1238, 84 L.Ed.2d 158 (1985). This is especially true when the prior decision, either by an arbitration panel or a state court, does not indicate the basis of the liability or a finding as to whether the debtor had committed fraud. Hanna, 163 B.R. at 924.
The Hanna case presents facts strikingly similar to the instant proceeding. There, the plaintiff sought a finding of nondischargeability under 11 U.S.C. § 523(a)(2) with respect to an arbitration award made by a panel of the NASD. Hanna, 163 B.R. at 920. The arbitration award was the result of a proceeding in which the plaintiff accused the debtor of trading the securities in her account without her prior authorization. Id. The NASD arbitration panel awarded the debtor $85,540.25. Id. at 921. However, the arbitration award did not specify which cause of action gave rise to the relief granted and contained no findings of fact. Id. at 922. The award did not indicate whether the debtor had committed fraud. Id. at 924. The court rejected the application of res judicata to the award. Id. The court determined that it must, instead of applying res judicata, “make `the fullest possible inquiry’ into the nature of the debt to accurately determine whether or not the Debtor in fact committed the fraud as alleged by the Plaintiff.” Id. (quoting Brown v. Felsen, 442 U.S. 127, 138, 99 S.Ct. 2205, 2212, 60 L.Ed.2d 767 (1979)). This Court will follow the approach in Hanna. Accordingly, the Court declines to apply res judicata to the Award.
The facts submitted by both motions are insufficient for the Court to proceed by way of summary judgment. Numerous material facts are in dispute. The Plaintiffs’ motion for summary judgment with respect to their adversary complaint to determine the dischargeability of a debt is denied, and the Debtor’s motion for summary judgment is also denied.