National Fertilizers, LTD v. Vepuri et al

In its adversary complaint, NFL raised two counts. Count I sought1
nondischargeability of its claim under 11 U.S.C. § 523(a)(2)(A), (a)(2)(B), (a)(4), and (a)(6). At
trial, however, it elected to proceed under only § 523(a)(2)(A) and (a)(6). Count II sought denial
of the debtors’ discharge under § 727.
By order dated January 21, 2009, I conditionally granted the plaintiff’s motion to
voluntarily dismiss Count II of its complaint seeking denial of the debtors’ discharge pursuant to
11 U.S.C. § 727(a). I allowed any creditor or party in interest to substitute itself as plaintiff
under Count II by filing and serving a motion by January 30, 2009. See Fed. R. Bankr. P. 7041;
In re Donovan, 2009 WL 595927, at *8 (Bankr. S.D. Fla. 2009) (“[C]ourts generally have
permitted another party in interest to step into the shoes of the plaintiff moving to dismiss § 727
(continued...)
UNITED STATES BANKRUPTCY COURT
FOR THE EASTERN DISTRICT OF PENNSYLVANIA
In re 	: 	Chapter 7
MURTY S. VEPURI and 	:
VARALXMI VEPURI
Debtors 	: 	Bankruptcy No. 08-11730bf
____________________________________
NATIONAL FERTILIZERS, LTD. 	:
Plaintiff 	:
v. 	:
MURTY S. VEPURI and 	:
VARALXMI VEPURI
Defendant 	: 	Adversary No. 08-0156
____________________________________
.................................................
MEMORANDUM
.................................................
In the above-captioned adversary proceeding, plaintiff National Fertilizers,
Ltd. (referred to by the parties as “NFL”) asserts that the defendants’ $2,000,000 federal
district court judgment debt to it is nondischargeable pursuant to 11 U.S.C. §
523(a)(2)(A) and (a)(6). 	As will be discussed, NFL relies exclusively on the estoppel1
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(...continued)1
claims.”). As no substitution request was made, this count was dismissed with prejudice.
Accordingly, the only relief NFL sought at trial was nondischargeability under
section 523(a)(2)(A) and/or (a)(6).
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effect of the judgment rendered against Mr. and Mrs. Vepuri after a jury trial concluded
in the United States District Court for the District of New Jersey in May 2005.
The Vepuris also presented no evidence at trial. They too rely upon the
prepetition judgment rendered against them, and contend that the federal court jury failed
to make findings that would constitute the elements necessary to hold NFL’s judgment
nondischargeable under section 523(a)(2)(A) or (a)(6).
In addition, the Vepuris filed a motion under section 522(f) to avoid the
judicial lien held by NFL based upon the this prepetition judgment. See generally In re
Miller, 299 F.3d 183 (3d Cir. 2002). At the request of the parties, this avoidance motion
was heard at the same time as trial on NFL’s nondischargeability complaint. At trial, the
parties agreed that if NFL’s claim is dischargeable, then the debtors are entitled to relief
under section 522(f). If the claim is nondischargeable, however, then the debtors’ section
522(f) motion is contested.
I.
At trial, neither party called any witnesses. Instead, six exhibits were
offered in evidence. Exhibit P-1 is a copy of transcripts of the entire trial from May 4,
2005 to May 25, 2005 in the United States District Court for the District of New Jersey,
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There are multiple copies of some of the volumes.2
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consisting of volumes 1 through 13. 	Exhibit P-2 is a copy of the docket entries from that2
case: 01-cv-05397. Exhibit P-3 is a copy of NFL’s second amended complaint filed in
the district court litigation. Exhibit P-4 is a copy of the jury verdict, and exhibit P-5 is a
copy of the judgment from the district court litigation. Finally, exhibit P-6 is a copy of
the debtors’ bankruptcy Schedule C. The parties also agreed that I should take judicial
notice under Fed. R. Evid. 201 of all of the debtors’ bankruptcy schedules.
From these documents, the following material facts are established.
NFL commenced a civil action against the Vepuris in the United States
District Court for the District of New Jersey on November 11, 2001. See ex. P-2. In its
amended complaint, NFL described an elaborate plan wherein a Turkish corporation,
Karsan Danismanlik Turizm Sanayi Ticaret Ltd. Sti. (“Karsan”), sought to defraud NFL
by entering into a contract to supply urea fertilizer to NFL that Karsan never intended to
perform. See ex. P-3. Karsan was alleged to have disbursed the $38 million prepayment
made to it by NFL to international entities. Id.
The Verpuris were sued because Karsan, through Mr. Sambasiva Rao, an
agent of Karsan, transferred $2 million of this $38 million to Malyn Holding Ltd., a
corporation controlled by the Vepuris Id. Malyn was a Bermuda company with a bank
account in New Jersey’s Midlantic Bank. Id.
At trial in federal court in New Jersey, Mr. Vepuri testified that on
November 30, 1995, Malyn received $2 million from Mr. Rao to invest on his behalf. Ex.
P-1, Vol. 7, pp. 824-25. Malyn invested these funds in securities. Ex. P-1, Vol 7, pp.
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801-02. The funds, however, were never placed by Mr. Verpuri in an account with Mr.
Rao’s name. Ex, P-1, Vol 7, p. 849.
Mr. Vepuri later received a communication from Mr. S.K. Sharma, a
representative of Karsan, who, Mr. Vepuri testified, told him that the $2 million belonged
to Karsan, but would be owed to Mr. Rao as a commission and was to be invested by Mr.
Rao. Ex. P-1, Vol. 7, pp. 850-54. Mr. Verpuri also denied knowing that these funds
came from NFL. Ex. P-1, Vol. 7, p. 854.
The jury also was informed that, during a trip to India in early June 1996,
Mr. Vepuri learned that Mr. Rao was interrogated by the Indian investigating agency,
“CBI,” regarding NFL and fertilizer supply contracts. Ex. P-1, Vol. 7, pp. 822-23. 	Mr.
Vepuri testified, however, that Mr. Rao informed him that Karsan had a contract dispute
with NFL, and not that any attempt was made to defraud NFL. Ex. P-1, Vol. 7, pp. 845-
46.
The jury trial further revealed that on June 12, 1996, Mr. Vepuri’s brother-
in-law sent him a facsimile transmission from India that contained copies of newspaper
articles about the investigation. Ex. P-1, Vol. 7, pp. 840-41. These articles referenced an
Indian company called Amertek, also owned by the Vepuris, which had a contract to
supply fertilizer to NFL, but failed to do so and so lost its billing bond. Ex. P-1, Vol. 7,
pp. 824, 844. Mr. Rao was the chief executive of Amertek. Id., at p. 819.
Also on June 12, 1996, Mr. Vepuri flew to Bermuda to inform Malyn’s
board of directors and attorney of the India investigation and that Malyn was in
possession of $2 million transferred by Mr. Rao. Ex. P-1, Vol. 7, pp. 825-29; Vol. 8, p.
882. According to Mr. Vepuri, the board of directors, through its attorney, advised the
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Attorney General of Bermuda of the money that was sent by Mr. Rao and of the
newspaper articles; Mr. Vepuri then awaited further developments. Ex. P-1, Vol. 8, p.
885-86.
Mr. Vepuri explained to the jury that he did not inform the CBI of his
receipt of funds from Mr. Rao because he was uncertain that their source was NFL, and
did not know that Karsan was not entitled to these funds. Ex. P-1, Vol. 7, pp. 854-56.
Nor did he tell the CBI about an August 29, 1996 letter he received instructing him to
await a directive to transfer the $2 million to a post office box in India. Ex. P-1, Vol. 8,
pp. 884-86, 875. (Such a directive was never given.)
On October 29, 1998, Mr. Vepuri disbursed $100,000 of the $2 million to
two accounts payable to two individuals upon instruction of Mr. Sharma. Ex. P-1, Vol. 8,
pp. 889-893. He did not inform the CBI of these transactions, either, he says because he
did not really know whose money it was. Ex. P-1, Vol. 8, pp. 893-94. Mr. Vepuri
testified that he lost the rest of the money invested on behalf of Mr. Rao. Ex. P-1, Vol. 9,
p. 1105.
Despite having a controlling interest in Malyn, Mrs. Vepuri did not take
part in the business, according to Mr. Vepuri. Ex. P-1, Vol. 7, p. 768. She focused on her
medical career, on the Vepuri’s children, and upon practicing her faith. Ex. P-1, Vol. 8,
p. 869.
In its amended district court complaint, NFL asserted five counts against the
Vepuris: fraud, conversion, unjust enrichment, “imposition of a constructive trust,” and
civil conspiracy. Ex. P-3. NFL demanded judgment, including compensatory damages,
equal to the full amount of NFL’s losses from the “urea scam,” imposition of a
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In addition, after NFL had rested its case, the Vepuris moved to dismiss NFL’s3
punitive damages request. Ex. P-1, Vol. 8, p. 938. NFL admitted that in its case in chief it
needed to have shown harm suffered by NFL as a result of Mr. Vepuri’s acts or omissions, and
that his conduct was malicious or that he acted in a wanton and willful disregard of another’s
rights. Ex. P-1, Vol. 8, p. 941. In granting the motion, the court stated that the evidence
presented did not meet New Jersey’s punitive damages clear and convincing standard, “even
drawing inferences in favor of the plaintiff . . . that any acts or omissions attributed or ascribed to
Mr. Vepuri were actuated by actual malice on the one hand or wanton or willful disregard of
persons who might be harmed by those acts or omissions on the other.” Ex. P-1, Vol. 10, p.
1323.
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constructive trust, punitive damages, interest, costs of suit including reasonable attorneys’
fees, and such other relief the court deemed just and proper. Id.
During the trial, NFL withdrew its fraud claim, stating that the allegations it
had pled in connection with that count were substantially similar to its allegations made in
the conversion count, and that it was not alleging that the Vepuris made any
misrepresentations. Ex. P-1, Vol. 4, pp. 511-12. “[W]e’re not really alleging that Mr.
Vepuri or Mrs. Vepuri made representations, what we’re alleging is there was a fraud,
and they were civil conspirators in connection, in part, of that fraud in connection with
hiding the money. And that’s, essentially, the claim as opposed to they made
misrepresentations.” Id. 	Later in the trial, NFL’s counsel explained to the trial judge:3
“Our theory is Karsan defrauded NFL. Mr. Vepuri’s role in this was to hide the money.
And that’s the civil conspiracy. And he joined the conspiracy at some point after the
fraud had been committed.” Ex. P-1, Vol. 10, p. 1178.
After the plaintiff’s fraud count was withdrawn, there remained four counts
asserted against the Vepuris: conversion, unjust enrichment, constructive trust, and civil
conspiracy. Ex. P-3. In its closing arguments to the jury, however, NFL sought a verdict
only upon three claims:
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First, the Vepuris, acting through a corporation they
controlled, committed something called conversion:
Wrongfully interfering with NFL’s right to possession of its
money when NFL had a right to immediate possession of its
money by withholding NFL’s $2 million.
***
NFL’s second claim is for unjust enrichment, because NFL
believes that the Vepuris were unjustly enriched by their
receipt of NFL’s $2 million.
***
NFL’s final claim for your consideration is one for civil
conspiracy, because the evidence shows that the Vepuris
joined the conspiracy in which NFL had been defrauded of its
money and then acted for years to further that conspiracy by
keeping the proceeds of the fraud hidden.
Ex. P-1, Vol. 12, p. 1455-56. Therefore, the constructive trust claim was not presented to
the jury.
At the conclusion of the trial, the trial judge gave general and specific
instructions to the jury. Ex. P-1, Vol. 13, pp. 1568-84. Those specific instructions, as
relevant to this adversary proceeding, were as follows:
Conversion is the unauthorized assumption and exercise of
the right of ownership over goods or personal chattels
belonging to another . . . to the alteration of their condition or
the exclusion of an owner’s rights.
To establish a claim of conversion, a plaintiff must prove the
following elements: Number one, that ther exists property;
Number two,, that the plaintiff has the right to immediate
possession of that property; and Number three, that the
defendant has interfered wrongfully with the plaintiff’s right
to possession of the property. . . .
[C]onversion is an intentional tort – tort’s fancy word for a
civil wrong as opposed to a criminal wrong, okay?
So conversion is an intentional tort, which means that it is any
injury that one party intentionally inflicts upon another. Since
conversion is intentional wrongdoing, the law provides that a
plaintiff is not barred from recovery merely because of its
own carelessness or negligence in the transaction or
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circumstances leading up to the conversion. Negligence, as
used in this context, means less care than that which a
reasonable person or company would exercise in their affairs
under similar conditions, or like conditions.
. . . The elements of good faith, intent or negligence do not
play a part in an action for damages in conversion. It is not
essential to conversion that the motive or intent with which
the act was committed should be wrongful, willful or corrupt.
The question of good faith, and the additional questions or
elements of motive, knowledge, ignorance, or care or
negligence, are not involved in actions for conversion. The
state of a person’s knowledge with respect to the rights of an
owner is of no importance and cannot in any respect affect the
case.
The general rule is that a person who exercises unauthorized
acts of dominion over the property of another, in exclusion of
another’s rights or inconsistent [sic] is liable in conversion
although the person acted in good faith and in ignorance of
the rights or title of the owner.
Ex. P-1, Vol. 13, pp. 1569-71.
Unjust enrichment, which is Count Two of the complaint,
unjust enrichment is a legal doctrine which seeks to prevent a
person from enriching himself or herself unfairly at the
expense of another.
In order to establish the defendants were unjustly enriched,
the plaintiff has the burden of proving the following elements
by a preponderance of the credible evidence:
Number one, that the defendants were enriched by receipt of a
benefit; and
number two, that the defendants’ retention of the benefit
would be unjust.
As used in this context, the retention of a benefit is unjust
where the retention of the benefit or enrichment would be
unfair.
Under the law of unjust enrichment, benefit is liberally
construed. A person confers a benefit by giving another party
possession or or an interest in property. To confer a benefit
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means to provide any form of benefit. The receipt of money
qualifies as the receipt of a benefit.
Id., at p. 1571.
A civil conspiracy is a combination of two or more persons
acting in concert to commit an unlawful act or to commit a
lawful act by unlawful means. Such an agreement may be
made orally or in writing or may be implied by the conduct of
the parties.
The principal elements of a civil conspiracy are, number one,
an agreement between two or more persons, number two, to
inflict a wrong against or injury upon another, number three,
an overt act that, number four, results in damage. To establish
a civil conspiracy, it must be shown that there was a simple
plan, the essential nature and general scope of which was
known to each person who is to be held responsible for its
consequences. . . .
In order to prove the alleged civil conspiracy, plaintiff must
prove that one of the conspirators defrauded NFL. To prove a
fraud, a plaintiff must show by clear and convincing evidence
that a person or conspirator made, one, a material
misrepresentation of of a present or past fact, number two,
with knowledge of its falsity, number three, with the intention
that the plaintiff would rely upon that material
misrepresentation of a past or present fact, and number four,
which resulted in reasonable reliance by the plaintiff. . . .
. . . A person need not be a member of a conspiracy from its
inception. A person can become a member of an existing
conspiracy by cooperating to further the object of the
conspiracy.
Id., at pp. 1572-75.
On May 26, 2005, the jury found both Vepuris liable for conversion and
unjust enrichment, and assessed damages on both counts in the amount of $2 million. Ex.
P-4. Furthermore, although the jury found that a fraud had been committed, and that a
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Specifically, the Verdict Sheet asked: “Has Plaintiff NFL proven, by clear and4
convincing evidence, that all of the elements of fraud have been met?" Ex. P-4, at #6. The jury
answered this question "yes." Id. Then the jury was asked “Has Plaintiff NFL proven, by a
preponderance of the credible evidence, that a civil conspiracy existed and that the conspiracy
defrauded NFL?" Id., at #7. The jury also answered this question "yes." Id. 	However, when
then asked "Has Plaintiff NFL proven, by a preponderance of the credible evidence, that Murty
Vepuri was a member of the conspiracy that defrauded NFL?" the jury answered "no," and
answered the same in reference to Mrs. Vepuri. Id., at ##6, 7.
NFL is not scheduled as a secured creditor on amended Schedule D.5
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civil conspiracy existed that defrauded NFL, the jury did not find that either of the
Vepuris were members of the conspiracy that defrauded NFL. Id. 4
On June 23, 2005, the New Jersey court entered a judgment on the jury
verdict against the Vepuris in the sum of $2 million, jointly and severally, plus interest
and costs of suit. See ex. P-5 (undated); ex. P-2, entry #122 (providing date). That
judgment was later transferred to Pennsylvania Court of Common Pleas of Bucks County
(and to the United States District Court for the Eastern District of Pennsylvania). Motion
and Answer to Avoid Judicial Liens, ¶¶ 5-6.
Finally, in their amended bankruptcy schedules, the Vepuris claimed a
homestead exemption in the real property located at 1707 Scott Drive, Newtown,
Pennsylvania. Ex. P-6. They valued the realty at $1,090,000, and asserted that six
mortgages and a lien for unpaid real estate taxes against the realty totaled $1,372,753.25.
See Amended Schedule A, C, and D. Thus, on amended schedule C they valued their
homestead exemption at $0. The parties agree that the entry of these transferred
judgments created judicial liens on the Newtown realty. 	See 42 Pa.C.S.A. § 4303(a); In5
re Upset Sale, Tax Claim Bureau of Berks County, 505 Pa. 327 (1984). Motion and
Answer to Avoid Judicial Liens, ¶ 7.
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II.
When a creditor seeks a determination that it holds a nondischargeable debt
under 11 U.S.C. § 523(a), it bears the burden of demonstrating nondischargeability by a
preponderance of the evidence. See, e.g., Grogan v. Garner, 498 U.S. 279, 291 (1991); In
re Graham, 973 F.2d 1089, 1101 (3d Cir. 1992). Generally, the provisions of section
523(a) are “strictly construed against creditors and liberally construed in favor of
debtors,” owing to the overriding bankruptcy purpose of granting debtors a fresh start. In
re Cohn, 54 F.3d 1108, 1113 (3d Cir. 1995); see also Lugo v. Paulsen, 886 F.2d 602, 611
(3d Cir. 1989); In re Lee, 2000 WL 815928, at *2 (Bankr. E.D. Pa. 2000) In re Perkins,
2000 WL 1010580, at *3 (Bankr. E.D. Pa. 2000).
Collateral estoppel (a/k/a issue preclusion) applies to nondischargeability
issues under section 523(c) (section 523(a)(2), (4), (6)) stemming from pre-bankruptcy
state court litigation. Grogan v. Garner, 498 U.S. 279, 284 n.1 (1991); see In re Graham,
973 F.2d 1089 (3d Cir. 1992); In re Schlessinger, 208 Fed. Appx. 131, 132 (3d Cir. 2006)
(non-precedential). The Third Circuit Court of Appeals explained the proper application
of collateral estoppel in this context:
Because the prior judgment was rendered by a federal court,
we apply federal principles of collateral estoppel. . . . For a
party to be estopped from relitigating an issue, the following
elements must be present: (1) the issue sought to be precluded
must be the same as the one involved in the prior action; (2)
the issue must have been actually litigated; (3) the issue must
have been determined by a valid and final judgment; and (4)
the determination must have been essential to the prior
judgment. In re Ross, 602 F.2d 604, 608 (3d Cir. 1979);
accord Restatement (Second) Judgments § 27 (1982).
In re Docteroff, 133 F.3d 210, 214 (3d Cir. 1997).
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A.
To determine whether issue preclusion will mandate nondischargeability of
NFL’s claim under section 523(a)(6) in this proceeding, I must consider whether the
federal court’s jury verdict established all of the elements of willful and malicious
conduct on the part of the Vepuris.
Collateral estoppel is applicable if the facts established by the
previous judgment in the Washington court that the progress
payments were obtained by fraud, embezzlement, and
willfully injurious conduct, meet the requirements of
nondischargeability listed in 11 U.S.C. § 523(a)(2)(A), (a)(4),
and (a)(6), namely that the money was obtained by fraud,
embezzlement, or willful conduct. See In re Halpern, 810
F.2d 1061, 1064 (11th Cir.1987) (bankruptcy court makes
ultimate determination regarding debt’s dischargeability;
collateral estoppel permits court to accept facts established by
previous judgment as evidence of nondischargeability); In re
Martin, 130 B.R. 930, 942 (Bankr. N.D. Ill.1991) (collateral
estoppel may be invoked to foreclose relitigation of facts
underlying dischargeability determination).
In re Docteroff, 133 F.3d at 215; see In re Schlessinger, 208 Fed. Appx. at 132; In re
Langeslag, 366 B.R. 51, 59 (Bankr. D. Minn. 2007). Section 523(a)(6) provides:
A discharge under section 727, 1141, 1228(a), 1228(b), or
1328(b) of this title does not discharge an individual debtor
from any debt—
(6) for willful and malicious injury by the debtor to another
entity or the property of another entity.
The United States Supreme Court, in Kawaauhau v. Geiger, 523 U.S. 57
(1998), narrowly defined the phrase “willful and malicious” used in section 523(a)(6).
The Court limited section 523(a)(6)’s scope to intentional torts:
The word “willful” in (a)(6) modifies the word “injury,”
indicating that nondischargeability takes a deliberate or
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intentional injury, not merely a deliberate or intentional act
that leads to injury. Had Congress meant to exempt debts
resulting from unintentionally inflicted injuries, it might have
described instead “willful acts that cause injury.” Or,
Congress might have selected an additional word or words,
i.e., “reckless” or “negligent,” to modify “injury.” . . .
Moreover, as the Eighth Circuit observed, the (a)(6)
formulation triggers in the lawyer’s mind the category
“intentional torts,” as distinguished from negligent or reckless
torts. Intentional torts generally require that the actor intend
“the consequences of an act,” not simply “the act itself.”
Restatement (Second) of Torts § 8A, comment a, p. 15 (1964)
(emphasis added).
Id. at 61-62; see also In re Markowitz, 190 F.3d 455, 464 (6th Cir. 1999).
Consistent with Geiger, the Third Circuit Court of Appeals had observed:
[W]hen Congress required more than recklessness for
nondischargeability, it required that the debtor have engaged
in conduct more culpable than taking a deliberate action that
had a high probability of producing harm. . . . Rather, for the
injury to have been “willed” by the debtor, it must at least
have been substantially certain to result from the debtor’s act.
In re Conte, 33 F.3d 303, 307 (3d Cir. 1994). Accordingly, “[a]n injury is willful and
malicious under the Code only if the actor purposefully inflicted the injury or acted with
substantial certainty that injury would result.” Id., at 305. “We hold that actions are
willful and malicious within the meaning of § 523(a)(6) if they either have a purpose of
producing injury or have a substantial certainty of producing injury.” Id. at 307; see, e.g.,
In re Giarratano, 2004 WL 2827138, at *3 (D. Del. 2004).
Although section 523(a)(6) requires that the debtor’s prepetition conduct
fall within the scope of an intentional tort, not all intentional torts are considered willful
and malicious. Davis v. Aetna Acceptance Co., 293 U.S. 328 (1934) (cited with approval
by Kawaauhau v. Geiger, 523 U.S. at 63-64); In re Schlessinger, 208 Fed. Appx. at 134
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(“Moreover, not all intentional torts are willful and malicious.”) (citing Davis). As
explained by one bankruptcy court,
[t]he Supreme Court never categorically stated that all
intentional torts were exempt from discharge under §
523(a)(6). Rather, it did the contrary. It emphasized that
those intentional torts within the contemplation of (a)(6) were
where the actor intends the consequences of his act, i.e.
intentional injury, and not simply the act itself.
In re Cantu, 2008 WL 5459834, at *4 (Bankr. S.D. Tex. Nov. 26, 2008).
In addition, section 523(a)(6) requires a finding of both willful and
malicious injury. In re Barboza, 545 F.3d 702, 706 (9th Cir. 2008); In re Langeslag, 366
B.R. at 57. While Geiger explained the meaning of “willful injury,” for the purpose of
section 523(a)(6), a malicious injury involves “(1) a wrongful act, (2) done intentionally,
(3) which necessarily causes injury, and (4) is done without just cause or excuse.” In re
Barboza, 545 F.3d at 706 (internal quotation omitted); see In re Jacobs, 381 B.R. 128, 136
(Bankr. E.D. Pa. 2008) (malice requirement refers to injuries that are wrongful and
without just cause or excuse, even in the absence of personal hatred, spite or ill-will); In
re Lucotch, 342 B.R. 469, 473 (Bankr. W.D. Pa. 2006) (same).
Indeed, one appellate court has concluded that section 523(a)(6) was
enacted by the Bankruptcy Reform Act of 1978 to overrule decisions that held conversion
debts nondischargeable in all instances:
In fact, by adopting the requirement that the conversion be
willful and malicious, Congress expressly overruled prior
caselaw that had refused dischargeability when the conversion
occurred innocently or recklessly. See H.R. Rep. No. 595,
95th Cong., 1st Sess. 365 (1977), reprinted in 1978 U.S. Code
Cong. & Ad. News 5787, 5963, 6320-21 (“reckless disregard”
standard of Tinker v. Colwell, 193 U.S. 473, 24 S. Ct. 505, 48
L. Ed. 754 (1902), and progeny, which refused
dischargeability to conversions recklessly done, overruled);
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see also 3 Collier on Bankruptcy ¶ 523.16[3] (L. King 15th
ed. 1984) (conversion without conscious intent to violate
rights of another or under mistake or misapprehension is
dischargeable even though debtor acted recklessly).
In re Held, 734 F.2d 628, 629-30 (11th Cir. 1984).
In this adversary proceeding, NFL relies heavily upon the jury finding the
Vepuris liable for conversion. As explained in the instructions given by the trial court to
the jury, conversion is indeed an intentional tort. See generally LaPlace v. Briere, 404
N.J. Super. 585, 595, 962 A.2d 1139, 1145 (App. Div. 2009). Nonetheless, the Supreme
Court in Geiger observed, with reference to Davis v. Aetna Acceptance Co., “that not
every tort judgment for conversion is exempt from discharge.”
Indeed, the Court in Davis specifically addressed the application of that tort
to the former Bankruptcy Act’s nondischargeability provision for willful and malicious
injuries to the person or property of another, stating: “[t]here is no doubt that an act of
conversion, if wilful and malicious, is an injury to property within the scope of this
exception. . . . But a wilful and malicious injury does not follow as of course from every
act of conversion, without reference to the circumstances. There may be a conversion
which is innocent or technical, an unauthorized assumption of dominion without
wilfulness or malice.” Davis, 293 U.S. at 332; see In re Peklar, 260 F.3d 1035, 1038 (9th
Cir. 2001) (under California law, a conversion is not always a willful and malicious injury
to the property of another); see also Robertson v. Interstate Securities Co., 435 F.2d 784,
788 (8th Cir. 1971) (following Davis; conversion without showing of willfulness and
maliciousness is a dischargeable debt).
In considering the preclusive effect of the jury verdict against the Vepuris, I
note that the trial court judge carefully instructed the jury that, although conversion
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Under New Jersey substantive law, “‘[t]he elements of good faith, intent or6
negligence do not play a part in an action for damages in conversion.’” Barco Auto Leasing
Corp. v. Holt, 228 N.J. Super. 77, 83 (App. Div. 1988) (quoting McGlynn v. Schultz, 90 N.J.
Super. 505, 526 (Ch. Div. 1966), aff’d, 95 N.J. Super. 412 (App. Div. 1967), certif. den., 50 N.J.
409 (1967).
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qualified as an intentional tort, the element of intent to cause injury was not required. To
this point, the district court judge explained:
The elements of good faith, intent or negligence do not play a
part in an action for damages in conversion. It is not essential
to conversion that the motive or intent with which the act was
committed should be wrongful, willful or corrupt. The
question of good faith, and the additional questions or
elements of motive, knowledge, ignorance, or care or
negligence, are not involved in actions for conversion. The
state of a person’s knowledge with respect to the rights of an
owner is of no importance and cannot in any respect affect the
case.
Ex. P-1, Vol. 13, p. 1570. 6
Therefore, in entering its verdict against the Vepuris, the jury had to find
that their act in accepting and retaining NFL funds wrongfully obtained by Karsan or Mr.
Rao was intentional, but the jury did not have to find that these actions were malicious:
i.e., intended by the Vepuris to inflict injury upon NFL. Indeed, the jury was not even
required to find that the Vepuris knew that the funds came from NFL and knew that these
funds were the product of a fraud.
Thus, despite liability for conversion constituting an intentional tort, the
district court conversion verdict against the Vepuris did not necessarily include all the
elements required to establish nondischargeability under section 523(a)(6). See In re
Peklar, 260 F.3d at 1039:
A judgment for conversion under California substantive law
decides only that the defendant has engaged in the “wrongful
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exercise of dominion” over the personal property of the
plaintiff. It does not necessarily decide that the defendant has
caused “willful and malicious injury” within the meaning of §
523(a)(6). A judgment for conversion under California law
therefore does not, without more, establish that a debt arising
out of that judgment is non-dischargeable under § 523(a)(6).
See In re Burke, 354 B.R. 579, 583 (Bankr. D. Mass. 2006) (“[T]here is nothing in the
[state court] record before the Court to suggest that the Debtor’s conversion of funds for
his own use was carried out with the actual intent to cause injury.”). Since the jury
verdict did not establish the Vepuris’ maliciousness in converting NFL’s funds, the
plaintiff has not met its burden under section 523(a)(6). See In re Held,
734 F.2d at 630 (“Since the state court award of punitive damages did not necessarily
decide the question of willfullness and malice, principles of collateral estoppel did not
preclude the bankruptcy court from considering whether the conversion was willful and
intentional under § 523(a)(6) so as to deny dischargeability to the judgment.”); Delawder
v. Mynes, 2007 WL 2116382, at *4 (S.D. W. Va. 2007):
In Kawaauhau v. Geiger, 523 U.S. 57 (1998), the Supreme
Court stated that § 523(a)(6) only applies to “acts done with
the actual intent to cause injury” and “nondischargeability
takes a deliberate or intentional injury, not merely a deliberate
or intentional act that leads to injury.” 523 U.S. at 61
(emphasis original). Here, the jury instructions given in the
state court proceeding did not require the jury to find
Appellee’s actions were willful and malicious in order to find
conversion. Likewise, there is nothing on the verdict form
which indicates the jury’s decision establishes willful and
malicious actions by Appellee.
See also In re West, 339 B.R. 557, 565 (Bankr. E.D.N.Y. 2006) (same). Compare
Garoutte v. Damax, Inc., 2009 WL 530905, at *4 (S.D. Ind. 2009) (state court judgment
of criminal conversion establishes the elements of section 523(a)(6)).
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Since the only evidence offered by NFL in this proceeding on its claim
under section 523(a)(6) was the district court verdict and judgment against the Vepuris, it
has not met its evidentiary burden on that issue.
B.
The plaintiffs also argue that their claim against the debtors is
nondischargeable under section 523(a)(2)(A) because all elements of fraud were proven
by the plaintiff in the prior federal court litigation. Section 523(a)(2)(A) states that:
A discharge under section 727 . . . does not discharge an
individual debtor from any 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;
See generally Field v. Mans, 516 U.S. 59 (1995); In re Brady, 243 B.R. 253, 258 (E.D.
Pa. 2000); In re Lee, 2000 WL 815928, at *2.
To successfully challenge the dischargeability of debt under section
523(a)(2)(A), the creditor must establish that: (1) the debtor made the representations
knowing they were false; (2) the debtor made the representations with the intent and
purpose of deceiving the plaintiff; (3) the creditor justifiably relied on the debtor’s false
representations; and (4) the creditor suffered a loss or damage as a proximate
consequence of the representation having been made. See Field v. Mans, 516 U.S. at 61
(1995); In re Ophaug, 827 F.2d 340, 342 n.1 (8th Cir. 1987); In re Maurer, 112 B.R. 710,
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In general, this test applies for all three grounds listed in section 523(a)(2)(A),7
even though the elements for each vary slightly. Thus, for example, a showing of justifiable
reliance and causation of loss must be made in order to recover under any component of section
523(a)(2)(A). See In re Ali, 321 B.R. 685, 690 (Bankr. W.D. Pa. 2005).
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712-13 (Bankr. E.D. Pa. 1990); see also In re Hilley, 124 Fed. Appx. 81, 82 (3d Cir.
2005) (“Central to a § 523(a)(2)(A) claim is that there must be a misrepresentation.”). 7
As with its contention under section 523(a)(6), in this adversary proceeding
NFL relies upon the prior jury verdict and district court judgment to establish the
elements of nondischargeability section 523(a)(2)(A). For the following reasons, such
collateral estoppel argument is unpersuasive.
As noted earlier, the jury did not find the Vepuris liable for fraud. Although
the jury found that “all of the elements of fraud have been met” and that a civil conspiracy
that defrauded NFL existed, the jury specifically found that the Vepuris were not
members of that conspiracy to defraud. Furthermore, the plaintiff withdrew its fraud
claim against the Vepuris in the district court litigation, acknowledging that the Vepuris
made no representations to NFL that could be deemed fraudulent.
In other words, NFL proved to the jury that it had been the victim of a
fraud, and that fraud also involved a civil conspiracy. But NFL did not prove to the jury
that the Vepuris were participants in that civil conspiracy. Thus, the fraud was committed
by others, and the Verpuris were found liable for unjust enrichment and, as discussed
earlier, conversion of NFL property. Therefore, in holding the Verpuris liable for $2
million, the district court did not find the elements necessary for relief under section
523(a)(2)(A).
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Moreover, even if one were to construe the jury instructions and verdict to
be unclear on the issue of whether the Vepuris committed fraud, since the jury did
conclude that a fraud was indeed committed, such ambiguity would still weigh in favor of
the defendants here, as it was NFL’s burden to prove nondischargeability by a
preponderance of the evidence. See In re West, 339 B.R. at 565 (where the bankruptcy
court is unable to determine whether the jury “actually decided” a required element for
nondischargeability, court concluded that plaintiffs failed to meet their burden).
In addition, the jury verdict holding the Vepuris liable for conversion does
not fall within the scope of section 523(a)(2)(A). The tort of conversion is “separate and
distinct from fraud, fraud in fiduciary capacity, embezzlement, and larceny.” In re Wiles,
145 B.R. 346, 350 (Bankr. M.D. Fla. 1992). Thus conversion liability alone could not
serve to demonstrate dischargeability under section 523(a)(2)(A).
III.
Accordingly, none of the jury findings support NFL’s assertion that its
claim against the Vepuris arose by reason of false pretense, a false representation, or
actual fraud; nor by a willful and malicious injury caused by the Vepuris to NFL or its
property. Therefore, as NFL did not sustain its burden of proof by a preponderance of the
evidence, its $2 million claim will not be deemed nondischargeable.
Further, given the stipulation of the parties at trial, any judicial lien held by
NFL is avoided under 11 U.S.C. § 522(f).
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An order consistent with this memorandum will be entered.
____________________________________
BRUCE FOX
United States Bankruptcy Judge
Dated: March 25, 2009
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