Ershowsky v. Freedman (In Re Freedman) , 427 F. App'x 813 ( 2011 )

[DO NOT PUBLISH]
IN THE UNITED STATES COURT OF APPEALS
FILED
FOR THE ELEVENTH CIRCUIT COURT OF APPEALS
U.S.
________________________ ELEVENTH CIRCUIT
MAY 26, 2011
No. 10-15407 JOHN LEY
Non-Argument Calendar CLERK
________________________
D.C. Docket No. 0:10-cv-61486-KMM
BKCY No. 09-01382-BKC-RBR
In Re: SETH FREEDMAN,
Debtor.
__________________________________________________________________
PHYLLIS ERSHOWSKY,
Plaintiff-Appellee,
versus
SETH FREEDMAN,
Defendant-Appellant.
________________________
Appeal from the United States District Court
for the Southern District of Florida
________________________
(May 26, 2011)
Before HULL, PRYOR and FAY, Circuit Judges.
PER CURIAM:
Seth Freedman, proceeding pro se, appeals from the district court’s
dismissal of his appeal from the bankruptcy court’s finding that Freedman owes
Phyllis Ershowsky a nondischargeable debt, pursuant to 11 U.S.C.
§ 523(a)(2)(A).1 He claimed in the district court that § 523(a)(2)(B) requires an
allegedly fraudulent misrepresentation to be made in writing, and, thus, his oral
representation to Ershowsky was insufficient to support a finding of
nondischargeability. He claims here that the district court erred in holding that he
had waived this argument by failing to raise it in the bankruptcy court, and in
holding that no exception to the waiver doctrine applied. For the reasons set forth
below, we affirm.2
I.
Freedman purchased Image Marketing Associates, Inc. (“Image
Marketing”), in 2002 for approximately $1 million. Ershowsky was its most
important employee in terms of client contact and relationships. As a sign of her
importance to the company, the former owners gave Ershowsky $20,000 when
1
Freedman does not challenge the finding that his debt to Ershowsky for an unmatched
retirement-account contribution is nondischargeable under § 523(a)(4). See Greenbriar, Ltd. v. City
of Alabaster, 881 F.2d 1570, 1573 n.6 (11th Cir. 1989) (holding that issues not raised in the initial
brief are abandoned).
2
Ershowsky has moved for sanctions against Freedman for filing a frivolous appeal, pursuant
to Fed.R.App.P. 38. We generally decline to impose Rule 38 sanctions on pro se litigants, and this
case does not require us to depart from that position. Woods v. IRS, 3 F.3d 403, 404 (11th Cir.
1993). Accordingly, Ershowsky’s motion is DENIED.
2
they sold the business and orally promised her another $20,000 if she stayed with
the business through the end of 2003. They paid her as promised. In 2004,
Ershowsky decided to leave Image Marketing and start her own business. After
she gave Freedman one month’s notice of her departure, he offered her an
immediate $15,000 raise, an annual raise of 10% each year thereafter, additional
perks related to vacation time and working remotely, and a share of any profits
related to the ultimate sale of the company. He said that he intended to grow the
business and sell it within four to five years. He indicated that the business was
worth approximately $1 million and that Ershowsky would make $400,000 to
$500,000 on the sale of the business. She knew that the original owners had sold
Image Marketing to Freedman for $1 million, Freedman did not tell her that the
company had any substantial debt, and she was not aware that Freedman had
obtained a small-business loan of approximately $600,000 in order to purchase the
company.
Approximately six months passed before the one-page profit-sharing
agreement, or “Phantom Stock Agreement,” was drafted. In the interim,
Ershowsky received the $15,000 raise and most of the other perks. In late
December 2004, the parties reached a final agreement as to the profit-sharing
arrangement, and a final Phantom Stock Agreement was signed in January 2005.
3
Ershowsky also signed an employment contract as part of that transaction. When
Ershowsky asked Freedman why the Phantom Stock Agreement included a
provision for deducting corporate liabilities, he told her only that he might borrow
money in the future in order to grow the company or that he might lend his
personal money to the company, and they agreed that such obligations should be
paid first. He did not tell her that there were existing, significant obligations.
After completion of the Phantom Stock Agreement, the parties’ relationship
carried on as normal, but Freedman did not notify Ershowsky when he began to try
to sell the company at least as early as June 2005. In mid-2006, he agreed to sell
Image Marketing to Crab Key Holdings, LLC (“Crab Key”). Crab Key required
Ershowsky to sign a new employment agreement as part of the sale. No one
approached Ershowsky about that agreement, and she did not learn of it until after
Freedman sold the company. Instead, Freedman forged her signature on the
agreement.
The sale closed in July 2006. Ershowsky was out of town at the time and
learned of the sale via telephone. This was the first indication she received that
the company had been for sale. She asked Freedman how much she would be
receiving as a result of the Phantom Stock Agreement, but he told her that the
accountant was still working on the details. When she returned to the office, she
4
found on her desk a redacted copy of the closing statement, a redacted copy of
some additional numbers, and a check for $21,956. The redacted version revealed
only the ultimate proceeds received after all deductions were paid. Freedman
refused to provide an unredacted version of the document. The unredacted version
that was filed with the bankruptcy court showed that the business had sold for
$945,000 plus the payment of certain closing costs, but that $583,210.02 were
used to pay off the small-business and purchase-money loans. The bankruptcy
court calculated damages of $166,660 based on the proceeds that would have been
available if the debts had not existed, as well as $4,445.16 in unmatched
retirement-account contributions and $851.96 in unreimbursed expenses.
After Freedman filed a Chapter 7 petition in the bankruptcy court,
Ershowsky filed a complaint alleging that he owed her a nondischargeable debt,
pursuant to 11 U.S.C. § 523(a)(2)(A), (a)(4), on grounds of false pretenses, false
representations, actual fraud, and fraud as fiduciary. Freedman answered through
counsel, stating as an affirmative defense that Ershowsky had failed to set forth a
cause of action upon which relief could be granted. In his written, pro se opening
statement, Freedman stated that Ershowsky was represented by an attorney during
the negotiation of the Phantom Stock Agreement, that she never requested a
financial review or attempted to discuss the financial condition of the company,
5
and that the two of them never discussed the company’s financial condition,
revenue, gross margins, expenses, or debts. He further stated that he paid her
$21,936 upon sale of the company, pursuant to the Phantom Stock Agreement, and
that her claim that he represented any specific future financial benefit was
completely false and without merit.
During Freedman’s cross-examination of Ershowsky at trial, she testified
that he told her, “[I]f it’s worth about a million dollars now, if you think about it[,]
within four or five years, that’s 400- or $500,000, and that would give you a
comfortable retirement . . . .” She acknowledged that he never provided her with
documentation to back up the claim that the company was worth a million dollars,
and that they never discussed the value of the company apart from “the alleged
representation” at that meeting. Freedman questioned whether she merely “had
the million dollar figure in [her] mind prior to that conversation” because she had
heard that he bought the company for $1 million, but she responded that she had
heard that figure some time before the conversation and had not been thinking
about it.
On examination by Ershowsky’s counsel,3 Freedman testified that he never
3
Freedman appears to have prepared written direct testimony on his own behalf, but as he
failed to file it with the bankruptcy court, the court did not consider it.
6
represented to Ershowsky that the company was worth $1 million, that she never
asked to see the company’s books, and that she knew nothing about the company’s
revenues, gross margin, or debt structure. He also said that he could not recall
having any conversations with Ershowsky about how long he would retain the
business.
The bankruptcy court found that Freedman had made false and fraudulent
representations to Ershowsky in order to deceive her into remaining with Image
Marketing, when he (1) represented to her that Image Marketing had a $1 million
value and (2) failed to inform her of the company’s long-term debt. The court
further found that Ershowsky had justifiably relied upon Freedman’s
misrepresentations, and that his statement that the net-liabilities language in the
Phantom Stock Agreement referred only to future debt was as inaccurate and
misleading as his previous statements. Furthermore, Ershowsky was damaged by
Freedman’s false representations. Accordingly, the bankruptcy court found that
Freedman was liable to Ershowsky for $166,660 under the Phantom Stock
Agreement and $851.96 for the unreimbursed expenses, all of which was
nondischargeable pursuant to § 523(a)(2)(A). Finally, the failure to make a
matching contribution to Ershowsky’s retirement account constituted fraud by a
fiduciary, and, thus, Freedman owed Ershowsky an additional $4,415.16, which
7
was nondischargeable pursuant to § 523(a)(4).
Freedman appealed to the district court. He argued, in relevant part, that his
representations about the value of the company were oral, not written, and, thus,
could not serve as a basis for a finding of nondischargeability under
§ 523(a)(2)(A), (B).4 He contended that he had repeatedly emphasized that the
promise on which Ershowsky based her claim of reliance was an oral one, and, as
such, was exempted from a fraud claim.
The district court held that, even when Freedman’s brief was construed
liberally, none of the issues he raised on appeal had been raised in the bankruptcy
court. Furthermore, Freedman had not argued that any of his claims fit an
exception under which the court could exercise discretion to review them, and,
regardless, his claims did not fit any such exception. Accordingly, the district
court dismissed Freedman’s appeal.
II.
An appeal from the bankruptcy court to the district court “shall be taken in
the same manner as appeals in civil proceedings generally are taken to the courts
of appeals from the district courts.” 28 U.S.C. § 158(c)(2). “The district court in a
4
Although Freedman raised additional arguments on appeal to the district court, he does not
argue to us that the district court erred in finding that he had waived them. Accordingly, we do not
consider them. See Greenbriar, Ltd., 881 F.2d at 1573 n.6.
8
bankruptcy appeal, like this Court itself, functions as an appellate court in
reviewing the bankruptcy court’s decision.” In re Sublett, 895 F.2d 1381, 1383
(11th Cir. 1990). Thus, the district court is not authorized to make independent
factual findings. Id. at 1384. As the second court of review, we review the district
court’s decision entirely de novo. Id. We review the bankruptcy court’s factual
determinations for clear error and its legal determinations de novo. Id. at 1383.
Although pro se pleadings are to be liberally construed, the courts may not
serve as de facto counsel for the litigant or rewrite an otherwise deficient pleading
in order to sustain an action. GJR Investments, Inc. v. County of Escambia, Fla.,
132 F.3d 1359, 1369 (11th Cir. 1998), overruled in part on other grounds,
Leatherman v. Tarrant County Narcotics Intelligence & Coordination Unit, 507
U.S. 163, 113 S.Ct. 1160, 122 L.Ed.2d 517 (1993), as recognized by Randall v.
Scott, 610 F.3d 701, 705-06 (11th Cir. 2010). An issue is not preserved for appeal
if it was not properly presented to the bankruptcy court. In re Espino, 806 F.2d
1001, 1002 (11th Cir. 1986).
In the bankruptcy court, Freedman asserted that he and Ershowsky had
never discussed Image Marketing’s financial condition, revenue, gross margins,
expenses, or debts, and that her claim that he had made specific financial
representations was entirely false. When he cross-examined her about her claim
9
that he had said that the company was worth approximately $1 million, he asked
her to acknowledge that he had never provided documentation to support “the
alleged representation,” and he suggested that she only thought the company was
worth $1 million because office rumors had put “the million dollar figure in [her]
mind prior to that conversation.” Freedman then testified that he never told
Ershowsky that Image Marketing was worth $1 million and that she knew nothing
about the company’s revenues, gross margin, or debt structure.
Thus, Freedman’s sole argument in this regard was that he never made the
$1 million assertion and that Ershowsky was incorrectly blaming him for having
put that figure in her mind. His questioning about the lack of written
documentation related only to the absence of corroborating evidence for
Ershowsky’s testimony. Nothing about Freedman’s questioning or pleadings
would have put the bankruptcy court on notice that Freedman believed an oral
representation to be legally insufficient to satisfy § 523(a)(2)(A), and the court
was not required to extrapolate new issues sua sponte from the details of the
parties’ testimony. See GJR Investments, 132 F.3d at 1369. Accordingly, the
district court did not err in holding that Freedman had waived this argument on
appeal by failing to raise it in the bankruptcy court. See Espino, 806 F.2d at 1002.
III.
10
An argument raised for the first time on appeal will be reviewed only in
special circumstances. Access Now, Inc. v. Sw. Airlines Co., 385 F.3d 1324, 1332
(11th Cir. 2004). We consider five circumstances in determining whether an
appellant may raise an issue for the first time on appeal: (1) whether the issue
involves a pure question of law and refusal to consider it would result in a
miscarriage of justice; (2) whether the appellant had an opportunity to raise the
objection in the trial court; (3) whether the interest of substantial justice is at stake;
(4) whether the proper resolution is beyond any doubt; and (5) whether the issue
presents significant questions of general impact or great public concern. Id.Whether to address a pure question of law that is raised for the first time on appeal
is a matter for the appellate court’s discretion. Sinaltrainal v. Coca-Cola Co., 578
F.3d 1252, 1269 n.19 (11th Cir. 2009).
Section 523(a) states that an individual debtor cannot discharge a debt
(2) 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;
(B) use of a statement in writing–
(i) that is materially false;
(ii) respecting the debtor’s or an insider’s financial
condition;
(iii) on which the creditor to whom the debtor is liable
for such money, property, services, or credit reasonably
11
relied; and
(iv) that the debtor caused to be made or published with
intent to deceive; or
(C) [certain presumptively nondischargeable consumer debts].
Thus, in order for a debt to be found nondischargeable under § 523(a)(2)(B), the
money or services must have been obtained through use of a false, written
statement regarding financial condition. § 523(a)(2)(B)(i)-(ii). For a debt to be
found nondischargeable under § 523(a)(2)(A), though, the statute includes no
written-statement requirement. § 523(a)(2)(A).
The bankruptcy court found that Freedman’s debt to Ershowsky under the
Phantom Stock Agreement was nondischargeable under paragraph (A), not
paragraph (B). Therefore, Freedman’s argument that an oral statement cannot
satisfy § 523(a)(2)(B) is inapposite to the bankruptcy court’s judgment, and failure
to consider the issue would not result in a miscarriage of justice or implicate the
interests of substantial justice. See Access Now, 385 F.3d at 1332. Furthermore,
Freedman had ample opportunity to raise the issue in the bankruptcy court, the
issue does not present significant questions of general impact or great public
concern, and to the extent that the proper resolution may be beyond any doubt, the
issue would be resolved in Ershowsky’s favor. See id. The district court correctly
found that no exception to the waiver doctrine applied, and it did not abuse its
12
discretion in declining to consider Freedman’s argument. Sinaltrainal, 578 F.3d at1269 n.19.
For the foregoing reasons, we affirm the district court’s dismissal of
Freedman’s appeal.
AFFIRMED.
13