Schlessinger v. Schlessinger (In Re Schlessinger)

Opinions of the United
2006 Decisions States Court of Appeals
for the Third Circuit
12-14-2006
In Re Schlessinger
Precedential or Non-Precedential: Non-Precedential
Docket No. 05-5542
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Recommended Citation
"In Re Schlessinger " (2006). 2006 Decisions. Paper 93.
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NOT PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
___________
No. 05-5542
___________
IN RE: DAVID SCHLESSINGER,
Debtor
DAVID EDWARD SCHLESSINGER,
Appellant
v.
DAVID SCHLESSINGER
___________
On Appeal from the United States District Court
for the Western District of Pennsylvania
(D.C. Civil No. 05-cv-00174)
District Judge: The Honorable Gary L. Lancaster
___________
Submitted Under Third Circuit LAR 34.1(a)
October 27, 2006
Before: SMITH, WEIS, and NYGAARD, Circuit Judges.
(Filed December 14, 2006)
___________
OPINION OF THE COURT
___________
NYGAARD, Circuit Judge.
I.
Dave Schlessinger (Schlessinger) and his son, David (David), formed a freight
shipping partnership called Dave-N-Son. Later, Schlessinger began operating another
shipping firm called Ryno Express Steel Division, which competed with Dave-N-Son.
The two men terminated their partnership and sued one another in the Allegheny County
Court of Common Pleas.
At the conclusion of the trial in equity, the court directed the parties to submit
proposed factual findings and conclusions of law. David submitted proposed findings and
conclusions, but Schlessinger did not. Thereafter, the Common Pleas Court issued an
adjudication and decree nisi adopting David’s proposed findings and conclusions in their
entirety and awarded him $189,453 in damages “based upon Defendant’s (Schlessinger’s)
breach of fiduciary duty.”
Schlessinger filed exceptions to the court’s decree. Before the state court could
issue a ruling, Schlessinger stayed the state court proceedings by filing a voluntary
Chapter 7 petition with the U.S. Bankruptcy Court for the Western District of
Pennsylvania. David commenced an adversary action seeking exception from discharge
for the damages awarded by the Common Pleas court pursuant to Bankruptcy Code
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§§523(a)(4) and 523(a)(6). 11 U.S.C.A. §523(a) (2004). Schlessinger filed a counterclaim
alleging David mismanaged the partnership and diverted partnership business for his own
use.
U.S. Bankruptcy Judge Bernard Markovitz held a hearing and trial on the parties’
claims. At the hearing, Schlessinger testified that he and his son both diverted partnership
business to their respective personal uses according to an oral agreement. David, relying
solely upon the Common Pleas Court record, adjudication and decree nisi, argued
collateral estoppel precluded Schlessinger from discharging the state damages award.
Judge Markovitz issued an order and opinion in which he rejected both sides’
claims. First, Markovitz concluded David failed to show collateral estoppel or the
Bankruptcy Code’s exceptions to discharge applied to deny his father’s discharge of the
state court judgment. Second, Markovitz concluded Schlessinger’s own testimony refuted
his claims that his son negligently mismanaged or converted Dave-N-Son’s business. U.S.
District Judge Gary Lancaster affirmed the Bankruptcy Court’s order. We too, will affirm.
II.
On appeal, David argues his damages award is entitled to exception from
discharge as arising from embezzlement or larceny under subsection (a)(4) or from willful
and malicious injury by the debtor under subsection (a)(6).
§§523(a)(4) and 523(a)(6) provide, in relevant part:
(a) A discharge under section 727, 1141,
1228(a), 1228(b), or 1328(b) of this title does
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not discharge an individual debtor from any
debt –
(4) for fraud or defalcation while acting in a
fiduciary capacity, embezzlement or larceny;
(or)
(6) for willful or malicious injury by the debtor
to another entity or the property of another
entity...
11 U.S.C.A. §523(a)(2004).
David carries the burden of establishing embezzlement, larceny, or willful and
malicious injury by a preponderance of the evidence. Grogan v. Garner, 498 U.S. 279,
287 (1991). These and other subsection (a) exceptions to discharge are construed strictly
against the objecting creditor. In re Fegeley, 118 F.3d 979, 983 (3d Cir. 1997).
On appeal, David continues to rely exclusively upon the state court record,
adjudication and decree nisi as evidence to support his exception claims. He argues his
father was collaterally estopped from denying the damages award arose from
embezzlement, larceny or from willful and malicious injury. In addition, he argues the
Bankruptcy Court should have rejected his father’s testimony because the Common Pleas
Court adopted a proposed conclusion that his father was not credible.
Issue preclusion principles “do indeed apply in discharge exception proceedings
pursuant to 11 U.S.C. §523(a).” Grogan v. Garner, 498 U.S. 279, 284-85 n.11 (1991).
Pursuant to the Full Faith & Credit Act, 28 U.S.C. §1738, we must determine whether
Pennsylvania law would accord preclusive effect to the state court’s judgment. Marrese v.
Am. Acad. of Orthopaedic Surgeons, 470 U.S. 373, 380 (1985). Under Pennsylvania law,
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issue preclusion applies where 1) the issue decided in the prior adjudication is identical to
the one presented in the later action; 2) there was a final judgment on the merits; 3) the
party against whom it is asserted was a party or is in privity with a party to the prior
adjudication; and 4) the party against whom it is asserted had a full and fair opportunity to
litigate the issue in a prior action. Greenleaf v. Garlock, Inc., 174 F.3d 352, 357-58 (3d
Cir. 1999). David carries the burden of establishing each element. Suppan v. Dadonna,
203 F.3d 228, 233 (3d Cir. 2000).
As an initial matter, we conclude the Bankruptcy Court properly considered
Schlessinger’s testimony. The Bankruptcy Court was not required to limit its review to
the state court record. Brown v. Felsen, 442 U.S. 127, 139 (1979). Nor was Schlessinger’s
credibility necessary to the state court’s judgment for purposes of issue preclusion. Balent
v. City of Wilkes-Barre, 669 A.2d 309, 313 (Pa. 1995).
Second, we conclude David has failed to show the issue decided in the state court is
identical to the issue of whether his father committed embezzlement or larceny.
Embezzlement is the fraudulent appropriation of property by a person to whom such
property has been entrusted or into whose hands it has lawfully come. Moore v. United
States, 160 U.S. 260, 268 (1895). Larceny, on the other hand, is the felonious taking of
another’s personal property with the intent to convert it or deprive the owner of the same.
4 C OLLIER O N B ANKRUPTCY ¶523.10 (15th ed. 2006). The Common Pleas Court never
adopted a finding that Schlessinger engaged in embezzlement or larceny, so we may not
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infer one. See Davis v. Aetna Acceptance Co., 293 U.S. 328, 332 (1934). In addition, as
the Bankruptcy Court pointed out, embezzlement and larceny both require the
appropriation or taking of another’s property. Here, Schlessinger took business
opportunities and commissions before they ever materialized as “property” of either David
or Dave-N-Son.
David has also failed to establish the issue decided by the state court is identical to
a finding that Schlessinger willfully and maliciously injured Dave-N-Son or its property.
To establish entitlement to an exception under subsection (a)(6), David must show his
father actually intended to injure Dave-N-Son or its property. Kaawauhau v. Geiger, 523
U.S. 57, 63 (1998). Negligent or reckless acts do not suffice to establish that a resulting
injury is “willful and malicious.” Kaawauhau, 523 U.S. at 64 (quoting Aetna Acceptance
Co., 293 U.S. at 332). Moreover, not all intentional torts are willful and malicious. Aetna
Acceptance Co., 293 U.S. at 332. The state court record, when viewed in combination with
Schlessinger’s testimony, does not indicate Schlessinger intended to injure Dave-N-Son or
its property.
III.
Because we conclude the Common Pleas Court’s judgment did not preclude
Schlessinger from discharging his son’s damages award in bankruptcy, we will affirm the
district court’s order.
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