1342 Restaurant Group, Inc. et al v. Modiri

UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK
__________________________________________
)
In re: 	) 	Chapter 7
)
MICHAEL MODIRI, 	) 	Case No. 06-12421 (REG)
)
Debtor. 	)
__________________________________________)
)
1342 RESTAURANT GROUP, INC., 	)
) 	Adversary Proceeding
Plaintiff, 	) 	No. 07-01005 (REG)
)
against 	)
)
MICHAEL MODIRI, 	)
)
Defendant. 	)
__________________________________________)
DECISION AFTER TRIAL
APPEARANCES:
BUDOW AND NOBLE, P.C.
Attorneys for Plaintiff 1342 Restaurant Group
7315 Wisconsin Avenue
Bethesda, MD 20814
By: 	Richard E. Schimel, Esq. (argued)
ANTHONY BALSAMO, ATTORNEY AT LAW
Attorney for Defendant Debtor
40 Exchange Place
New York, NY 10005
By: 	Anthony Balsamo, Esq. (argued)
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ROBERT E. GERBER
UNITED STATES BANKRUPTCY JUDGE
In this adversary proceeding under the umbrella of the Chapter 7 bankruptcy case
of Michael Modiri (the “Debtor” or “Modiri”), plaintiff 1342 Restaurant Group, Inc.
(“Restaurant Group”) a corporation owned by Benson J. Fischer (“Fischer”) and his
wife, seeks a judgment, under Sections 523(a)(6) and 523(a)(2)(A) of the Bankruptcy
Code, declaring that a debt resulting from a judgment for breach of a lease (or more
precisely, a sub-sublease) in favor of Restaurant Group and against Modiri in the
Superior Court of the District of Columbia is nondischargeable. 	After a trial, in which
the Court found much of the testimony of both Modiri and Fischer not to be credible and
to be materially incomplete,1 the Court determines that Restaurant Group has failed to
establish nondischargeability under either ground, and judgment will be entered ruling
that the debt is dischargeable.
The Court’s Findings of Fact and Conclusions of Law in connection with this
determination follow.
Findings of Fact
Modiri is an individual now residing in New York with his girlfriend and former
business partner Hyang C. Yi (“Yi”).2 Restaurant Group is a corporation owned and
operated by Fischer in the District of Columbia.
1 	For that reason, testimony this Court heard that it disbelieved, that amounted to half-truths; or that
otherwise provides an insufficient basis for factual findings is preceded by words like “testified
that,” “claimed,” or “asserted.” Facts actually found are stated in unqualified terms.
2 	Though spelled with the letter “Y,” Yi’s name was typically pronounced as if it began with an
“L,” and documents and transcripts often reflected a phonetic spelling, such as “Lee” or “Li.” She
submitted a direct testimony affidavit, but her cross-examination was waived.
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Fischer, addressed as “Bennie,”3 is or was in the real estate brokerage business,
though the record does not reflect whether or not he is or was licensed. Fischer
established Restaurant Group in 1993, and by sublease described below, leased a three-
story building with a basement at 1342 G Street N.W., in Washington DC (the “G Street
Property”). After doing so, Fischer opened a restaurant known as Bensoni’s on the first
floor and basement, and established his real estate brokerage office on the second and
third floors. Thereafter, Restaurant Group closed the businesses in the building, and then
subleased out the space on all three floors. It subleased the first floor and basement to an
entity known as Katie’s Kitchen, and eventually subleased the third, and later the second
and third, floors to Modiri.4
The debt in question is a judgment, in the amount of approximately $500,000,
secured after a bench trial in the DC Superior Court (and later affirmed on appeal), for
damages for breach of contract (though not fraud).5 The judgment resulted from the
breach of a nonmonetary covenant in a sub-sublease agreement between Restaurant
Group and Modiri (the “Sub-sublease”). The covenant provided:
Compliance with Legal and Insurance
Requirements The Subtenant, in the use and
occupancy of the Premises, shall comply with all
rules, regulations, laws, ordinances, statutes, codes,
recommendations, and requirements of
governmental authorities (including local Health
Departments, the Environmental Protection Agency
and the District of Columbia Department of the
Environment) casualty insurance carriers insuring
the premises and the Fire Insurance Rating
Organization and Board of Fire Insurance
3 	See. e.g., Def. Exh. D.
4 	Fischer Aff. ¶¶ 3-7.
5 	See Modiri v. 1342 Restaurant Group, Inc., 904 A.2d 391, 393 (D.C. 2006) (“Modiri-Appellate”)
(“This case arises from breach of a lease of real property . . .”).
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Underwriters having jurisdiction over the Premises
as now in effect or promulgated in the future, and
whether foreseen or unforeseen or ordinary or
extraordinary.6
Restaurant Group brought its action against Modiri after Restaurant Group lost its
sublease upon a determination of a breach of the prime lease resulting from prostitution
in the G Street Property, discussed below.
1. The G Street Property Lease and Subleases
Minna Carry and several co-owners (“Original Owners”) originally leased the
G Street Property to Creative Hairdressers, Inc. (“Creative Hairdressers”), in 1983.
About ten years later, in June of 1993, Creative Hairdressers subleased the G Street
Property to Fischer, personally. Fischer later assigned the sublease to his corporation,
Restaurant Group, as was permitted by his agreement with Creative Hairdressers.
In 1999, Modiri inquired about renting the third floor of the G Street Property to
start a day spa. Before entering into a sublease, Modiri and Fischer had a number of
interactions. Fischer visited the property with Modiri, and Fischer had discussions about
the purported day spa with Modiri. In that conversation, Fischer claims that Modiri had
told him that “[the day spa] would perform massages and the services that . . . went along
with that—that business.”7 Fischer did not further specify what “services . . . went along
with that business.”
Fischer further testified that “at the time we were discussing it, it seemed to be on
the up and up with me.” 8 Further, Fischer claims that he was concerned about the legality
6 	Sub-sublease ¶ 7 (the “Lawful Operation Clause”). The judgment may also have been based on
a violation of a separate covenant in the Sub-sublease, ¶ 9 (the “Use Clause”), which provided
that “Subtenant shall use the Premises for a therapeutic massage facility.”
7 	Trial Tr. 100.
8 	Id.
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of Modiri’s operations, and that Fischer made it clear to Modiri that he wanted no illegal
activity on the premises. Fischer noticed at the time that there is a “fine line between a
massage parlor and a house of prostitution.”9 Fischer claims that he had “inquired of [the
concern about prostitution] at the time” and testified that “[Modiri] assured me that that
was not his business.”10
Prior to the signing of the lease, but after Fischer had shown Modiri the space, the
parties discussed the addition of a provision to the lease which stated that the “subtenant
shall use the premises for a therapeutic massage facility.” The provision, which with or
without changes evolved into the Use Clause,11 was drafted by Fischer’s attorney, Stanley
Goldschmidt. Fischer and Modiri had conversations during which the parties “specified
what [Modiri] was going to do there, specifically.”12 Fischer went on to explain that this
language was then conveyed to Goldschmidt so that an appropriate provision could be
written in order to “satisfy the requirement of the tenant, and also to satisfy my
requirement as a landlord.”13
9 	Specifically, Fisher testified to his recollection of conversations with Modiri from before the lease
signing:
I remember discussing the issue with Mr. Modiri and
specifically recalling that I was concerned that what he was
doing was legal, and that I did not want anything illegal in the
premises to take place. And there is that fine line between a
massage parlor and a house of prostitution. He assured me
that that was not his business. Because I inquired of it at the
time.
Trial Tr. 101.
10 	Trial Tr. 101.
11 	See n.6 supra.
12 	Trial Tr. 98.
13 	Id.
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In October 1999, the Restaurant Group entered into the Sub-sublease, with Modiri
and Sea K. Oh,14 for the third floor of the G Street Property. Modiri, Modiri’s girlfriend
and business partner Yi, and Fischer were at the signing. 	Yi signed the lease as a
witness. Two months later, on December 10, 1999, Restaurant Group and Modiri entered
into an amendment to the Sub-sublease, under which Modiri agreed to sublease the
second floor as well as the third floor of the G Street Property.
Although Modiri was the subtenant of record under the sub-sublease, Yi—
Modiri’s girlfriend and business partner—was the primary operator of the purported
massage facility at the G Street Property. However, Modiri never formally sub-leased the
property to either Yi or any entity bearing the trade names 15 she used to operate the
business.
The original permits for the build-out of Modiri’s subleased space in the G Street
Property, in December 1999 and February 2000, referred to its use as “tanning & skin
care salon.”16 The Certificate of Occupancy, issued later in July 2000, referred to the
purposes of the occupancy as “skin care & tanning services—not sexually oriented.”17
Later, in March 2001, after issues as to the use of the G Street Property came to a head,
Fischer recommended to Modiri “that you get the necessary Certificate of Occupancy for
a massage parlor.” 18
14 	Sea K. Oh was no longer a party to the G Street Location lease effective as of the First
Amendment to the Real Property Lease dated December 10, 1999. Pl. Exh. 13A.
15 	The premises operated under the trade names Time Out and Tan Q, Inc.
16 	Pl. Exh. 2.
17 	Pl. Exh. 14.
18 	Pl. Exh. 21.
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A little less than a year later, in September 2000, Tomkat, Inc. (“Tomkat”)
purchased the property from the Original Owners and assumed the Master Lease with
Creative Hairdressers. On February 7, 2001 (five or six months after its acquisition of
the G Street Property), Tomkat notified Creative Hairdressers, Tomkat’s prime tenant,
that Creative Hairdressers was in default on the Master Lease, because Creative
Hairdressers had permitted the premises to be operated as a house of prostitution in
violation of local law. The Court does not make a finding as to whether or not this was
the real reason that Tomkat raised the issue.19 As a result, Creative Hairdressers notified
Fischer’s corporation of the default, and Fischer then notified Modiri.
At about the same time, the District of Columbia issued two Notices of Infractions
arising from improper permits with respect to the use of the G Street Property. On
February 22, 2001, Fischer took Yi and Modiri to consult with one Barry Haberman, Esq,
one of Fischer’s lawyers, 20 in connection with the Notices of Infractions.21 By letter
written that same day addressed to Tan Q (but c/o Modiri), Haberman confirmed the
terms under which he would represent Tan Q with respect to the Notices of Infractions.
The letter was countersigned by one Hyang Chong, on behalf of Tan Q. 22
19 	In a letter dated March 6, 2001, Fischer wrote Modiri:
As you know the new owner of the building is trying to
assemble the block and our leases stand in his way. It is clear
from my conversations with the master tenant, Creative
Hairdressers that the new owners want to tear down the
property. They have asked Creative Hairdressers to vacate the
property; however, they have no authority to do so without my
approval.
Pl. Exh. 21.
20 	Haberman began representing Fischer and his various corporations some time in either the late
1990s, 2000 or 2001. Haberman Dep. at 7-8.
21 	Modiri Aff. ¶ 17.
22 	Pl. Exh. 12.
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Thereafter, Fischer sent Modiri and others several letters during this time period.
In the most important of them, sent on March 6, 2001 (which the Court finds to be plainly
self-serving), Fischer wrote to Modiri:
[y]ou have represented [sic.] me that you are not
involved in anything that would be considered an
infraction under the lease and/or illegal. As I have
stated to you, if in fact you are in breach of the
lease, I will immediately terminate your lease and
take possession of the premises. I do not look upon
this matter lightly. I am a well-respected
businessman and have been doing business in this
city for over 25 years and would not want my name
involved in any illegal activity.23
Fischer further stated that he had talked to “your attorney, Barry Haberman,” and
“I believe for the time being you are in good shape.”24 Fischer also recommended that
Modiri “get the necessary Certificate of Occupancy for a massage parlor.”
Ultimately, Tomkat filed a complaint against Creative Hairdressers in the Civil
Division of the DC Superior Court. By reason of a series of indemnification obligations
in the waterfall of subleases (and, presumably, because it was allegedly Modiri’s
subtenancy that was causing the problem), Modiri became the party responsible for
defending the litigation.25 Modiri advised that he did not want his name appearing
anywhere,26 but Fischer knew of Modiri’s role. As Haberman needed a witness to contest
the eviction proceeding, Modiri “sent a lady, I forget her name, who was a manager,
23 	Pl. Exh. 21.
24 	Id.
25 	Haberman Dep. 30.
26 	Id. 20, 31.
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apparently, of the facility.”27 During the trial, not just Haberman, but also Fischer, met
with her in the DC court cafeteria to interview her and prepare her to testify. 28
Tomkat prevailed in the eviction action, which, as noted, was technically speaking
against the first level tenant, Creative Hairdressers29 in the trial court. Though the record
before this Court as to the matter is incomplete, the controversy apparently went up on
appeal. In a series of aggressive letters to an individual who from the context appears to
have been Tomkat’s counsel, Fischer spoke of his ability to impede Tomkat’s “ability to
vacate the Property”30 and “ability to move forward with his project,”31 and of his ability
to tie up Tomkat in court.
Under the terms of the sublease, Modiri could be held responsible for any
Restaurant Group liability to Creative Hairdressers, if caused by actions by Modiri, the
sub-subtenant. Accordingly, in early 2004, Restaurant Group filed suit against Modiri
and won a $494,055.35 judgment for damages sustained as a result of Modiri’s default
under the Sub-sublease and related amendment.32
Modiri subsequently filed for bankruptcy protection in this Court and sought to
discharge his debt, including the judgment owed to Restaurant Group. Restaurant Group
brought this action seeking a declaration by this Court that the judgment entered by the
DC Superior Court is nondischargeable under sections 523(a)(6) and 523(a)(2)(A).
27 	Id. 31. Whoever the witness was, it was not Yi. See id. 35.
28 	Id. 31-32.
29 	Judge Linda D. Turner concluded that the sub-tenant had indeed conducted illegal activity on the
premises and therefore Creative Hairdressers was responsible for damages suffered as a result.
See Tomkat, Inc. v. Creative Hairdressers, No. LT 10689-01 (Sup. Ct. D.C., decided May 10,
2001) (“Tomkat”).
30 	Def. Exh. C.
31 	Def. Exh. F.
32 	See n.33 infra.
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2. Development and Use of the G Street Property
Upon taking possession of the G Street Property, Modiri and Yi developed and
used the property as a brothel. The premises were operated under the trade names “Time
Out” and “Tan Q, Inc.” By reason of earlier rulings in the District of Columbia, Modiri is
collaterally estopped from denying that a brothel existed on the premises.33 The Superior
Court’s findings are further buttressed by evidence provided in this trial, particularly the
videotaped deposition testimony of Leon Stover, a construction worker employed by
Johnny B. Quick, Inc. (“Johnny B. Quick”), a local construction company, discussed
below.
3. Stover’s Testimony
Prior to or contemporaneous with entering the lease with Restaurant Group at the
G Street Property, Modiri contracted with Johnny B. Quick to make various repairs and
aesthetic changes to another facility in Washington DC at Bladensburg Road and New
York Avenue (the “Bladensburg Property”). First on behalf of Johnny B. Quick, and
then as an individual, construction worker Stover worked on each of the Bladensburg
Property and the G Street Property.
As Stover testified, the Bladensburg Property was also a brothel, at which he
provided construction services to Modiri and Yi—often receiving payment in sexual
favors in lieu of cash.
33 	In a previous suit between Tomkat and Creative Hairdressers, the court determined that
prostitution had occurred on the premises. See Tomkat, No. LT 106891 01 (Sup. Ct. D.C., decided
May 10, 2001), aff’d, Creative Hairdressers, Inc. v. Tomkat, Inc., Nos. 01-CV-798 (D.C. May 13,
2003). Restaurant Group obtained a judgment against Modiri, affirmed on appeal, in which
collateral estoppel was held to be properly invoked. See 1342 Restaurant Group, Inc. v. Farzad
Michael Modiri, No. 01-CA-005164 (Sup. Ct. D.C. filed Sept. 20, 2004) (finding that the “spa was
a front for prostitution” and noting that Modiri is collaterally estopped from claiming otherwise);
See also Modiri Appellate, 904 A.2d at 391 (upholding the lower court’s collateral estoppel
ruling). Modiri’s counsel acknowledges that Modiri is collaterally estopped from denying that
prostitution occurred on the premises. Trial Tr. 79.
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Shortly after the completion of construction work at the Bladensburg location,
Stover came to work on the G Street Property. There too he completed certain repairs
and other construction-related jobs in exchange for sex with employees of the “parlor.”
According to Stover, Modiri was present during the construction of the facilities at both
the Bladensburg Property and the G Street Property, and was aware that those premises
would be used as brothels. 34
The Court finds Stover’s testimony to be credible. Unlike each of Modiri and
Fischer, Stover had no financial interest in the outcome of the case. The Court could
observe Stover’s testimony on tape, and he answered questions quickly and directly.
Stover’s testimony was detailed and to the point, and he even testified to matters that
might be embarrassing (or perhaps even illegal), such as admitting to acceptance of sex in
exchange for his services.
4. Modiri’s Claims
Modiri disputes that he was aware of the prostitution occurring on the premises,
despite a great deal of evidence suggesting his involvement in its operation. Modiri was
listed in official documents and tax returns as the president and 100% shareholder of Tan
Q. 35 He signed Tan Q’s checks.36 He received compensation in the form of dividends
and payments from Tan Q’s payroll, as it operated its brothel.37 Stover’s testimony
places Modiri at the scene of each of the two brothel locations. And finally, the Court
remains mindful that the brothel was operated by Modiri’s girlfriend Yi; it is difficult for
34 	Stover Dep. 16-22.
35 	Trial Tr. 176-180.
36 	Pl. Exh. 15.
37 	Trial Tr. 176-180.
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the Court to believe that Modiri’s girlfriend would have concealed from him what was
going on there.
Modiri claimed ignorance, testifying that he lived in California during the
duration of the lease and believed that Yi was running the business as a legitimate spa.
He testified that he only signed the lease as a guarantor for Yi,38 and that his name was on
the certificate of incorporation as a temporary convenience that he later intended to
amend, but did not.39 Modiri further claimed that he signed the tax returns without
reading them, and that the payments from Tan Q were either reimbursements or
accounting errors, and were not compensation.40 He asserted that Stover lied in the vast
majority of his deposition.41 But for reasons apparent from the preceding discussion, the
Court believes Stover, not Modiri. The coincidences alleged by Modiri are too great and
too many for Modiri’s claims of ignorance to be credible.
5. Fischer’s Claims
The Court does not find Fischer’s testimony to be credible either. As a
consequence of his demeanor at trial, inconsistencies in his testimony, evidence that
Fischer unpersuasively attempted to explain away, inconsistencies between his various
accounts and other evidence in the record, and his bias,42 the Court finds the key elements
of Fischer’s testimony to be unworthy of belief.
38 	Id. at 138-140.
39 	Id. at 168-169.
40 	Id. at 140-142, 169, 177-180.
41 	Id. at 142-145.
42 	Fischer had an on obvious personal interest in preserving the enforceability of the $500,000
judgment Restaurant Group secured. He also revealed his personal animosity toward the debtor.
See Def. Exh. D (responding to a letter request from Haberman seeking approval of a replacement
subtenant and termination of Modiri’s lease, “I will never let Mike out of the lease. He has caused
me much heartache.”).
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As a preliminary matter, the Court notes its strongly adverse impression of
Fischer’s trial demeanor. Fischer was not at all straightforward. Neither his eye contact
nor his tone of voice inspired confidence in the accuracy of what he said, or, especially,
its completeness. When questions sought detail as to what Fischer said had transpired,
Fischer could not recall, or “specifically recall.”43 Fischer appeared much less than
candid in the courtroom, and came across as a “wise guy.” In fact, the Court cannot
recall a less credible witness in over 10 years on the bench.
Fischer’s claims were also unworthy of belief by reason of objective facts.
Fischer was shown to be untruthful in his efforts to portray surprise in February 2001 at
the presence of the operator of the massage parlor, Tan Q. In a letter to Modiri on
February 15, 2001, Fischer stated:
I have received a rental check for last month’s rent
from a corporation “Tan Q Inc.” I’m enclosing the
rental check for your review. It is clear to me that
you have a [sic.] transferred to the lease to this
corporation, which seems to be owned by [your
alleged manager] Christine. Pursuant to the lease,
any transfer of ownership has to be approved by me.
Since I have not approved a lease transfer and/or
even been notified, I can only advise you that your
are in default of your sub-sublease. We need to
rectify this situation and know who the actual tenant
is if the spa is to stay. As you know, you have
personally guaranteed the lease.44
But Modiri had not guaranteed the lease; he was the signatory as a principal, not
guarantor. Fischer’s belief that Modiri was merely a guarantor confirms that Fischer had
well understood that another entity was on the lease, or at least operating there, despite
Fischer’s protestations to the contrary in February 2001. Fischer further confirmed his
43 	See., e.g., Trial Tr. 95, 97, 100.
44 	Def. Exh. A. (underlining in original; italics added).
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understanding that Tan Q was on the lease, or at least operating there, in his June 6, 2001
letter to Stacey Costello, in which Fischer also referred to one or more communications
he had with Tan Q. 45
Likewise, in his February 15, 2001 letter, Fischer professed surprise upon
receiving a check from Tan Q, and exploited this as if receipt of payment from Tan Q
was something new. In fact Fischer had received and deposited an earlier check from
Tan Q, in September 2000, five months earlier.
Further, the Certificate of Occupancy, issued in July 2000, nine months earlier,
was issued to Tan Q. The Certificate of Occupancy was required by law to be posted
conspicuously on the premises at all times, 46 though the record is silent as to whether or
not it was actually posted as the law required. But it is clear that Modiri provided Fischer
with the Certificate of Occupancy, as Fischer confirmed in his testimony on direct. And
the Court also finds that Modiri gave Fischer the Certificate of Occupancy in connection
with future operations—as contrasted, for example, to having given it to Fischer at a
much later time. Fischer stated, in his direct testimony:
When Mr. Modiri provided me with the Certificate
of Occupancy for the leased property, I noticed that
it was in the name of Tan Q, Inc. He explained that
he had formed a corporation that was going to be
the business entity in which the business was to be
run.47
45 	Trial Tr. 48-49 and Def. Exh. C (“Additionally, the former tenant, TanQ [sic.], has indicated to me
that they would also like to re-open in the premises and they assured me that they would acquire
all of the necessary permits required under the law.”) (emphasis added). Of course, if Fischer had
not in fact been communicating with Tan Q, then Fisher’s reference to such communication once
more evidences his tendencies to shade the truth.
46 	Pl. Exh. 14 (“THIS CERTIFICATE SHALL BE POSTED CONSPICUOUSLY ON THE ABOVE
PREMISES AT ALL TIMES”) (block caps in original).
47 	Fisher Aff. ¶ 13 (emphasis added in each instance).
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Fischer’s belief that Modiri was only a guarantor, his receipt of the Certificate of
Occupancy, and his earlier deposit of Tan Q’s check, all (and especially collectively)
confirm his knowledge of Tan Q’s occupancy all along.
Fischer’s testimony was unworthy of belief in other respects as well. At trial,
Fischer could not remember having seen Tan Q’s Certificate of Occupancy—despite
having expressly said that he had seen it in his direct testimony affidavit.48 At trial,
Fischer testified that he had heard about the prostitution at the G Street Property only
from Stover, at the time of Stover’s deposition—but Stover, whose testimony the Court
found credible (both when it cut against Modiri and when it cut against Fischer), testified
that he had told Fischer about the prostitution a year before the deposition.49 And Fischer
testified that it was a regular practice for landlords to receive checks from entities
different from their named tenants, but then could not explain why his receipt of a check
from Tan Q prompted him to accuse Modiri of assigning the lease.50
Other facts too, especially in combination, cause the Court to doubt Fischer’s
denials of notice of what was going on. According to Fischer, Modiri told him that he
wanted to operate a health spa requiring his customers to walk up two flights, up to the
third floor, to get to the premises.51 But there was no discussion concerning whether the
public would find that convenient or inconvenient.52
Despite the importance, according to Fischer, of inclusion of clauses in the Sub-
sublease describing the prospective use of the property, and requiring compliance with
48 	Compare Trial Tr. 42-44 with Fisher Aff. ¶ 13.
49 	Compare Trial Tr. 35-37 with Stover Dep. 39.
50 	Compare Trial Tr. 65 with Def. Exh. A. See also, Trial Tr. 16.
51 	Trial Tr. 97.
52 	Id.
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law, Fischer never inquired, between the time the Sub-sublease was signed and DC raised
its issues, 16 months later, to ascertain whether the premises were being used for a lawful
purpose.53
During the time of operation of the brothel (with the exception only of the two
instances in which he received a Tan Q check), Fischer received the rent each month—
$5,800 per month—in cash.54 “Sometimes they were all hundreds. Sometimes fifties and
some twenties.”55 Fischer agreed that this would mean 58 Hundred Dollar bills, or more
if the cash handed over was in smaller bills.56
In his direct testimony, Fischer evasively used the passive form—“[t]he payments
were delivered to my office . . .”—without saying that Modiri made them. In fact, as
Fischer testified, they were transported to Fischer’s office in a pocketbook, 57 by one or
more women—who, it may fairly be inferred, either were employed at the G Street
Property, or knew those who were. Any mystery as to who paid the rent was resolved by
53 	Id. at 103-104. The testimony was:
I took him for his word. I had no reason to doubt him. He
seemed like he was an honorable man. He came in and did
everything a tenant would do. He looked at the location. He
negotiated a lease. He brought in the right amount of deposits.
He did everything that, you know, a tenant would do. … He
didn’t—raise any suspect. [sic.]
54 	See Fischer Aff. ¶ 16.
55 	Id. at 103-104.
56 	Id. at 103. Fischer testified that this was “not something that was out of the ordinary,” and that
about “fifty percent of the tenants of properties that we handled were paying cash.” Id. at 104.
The Court is not in a position to determine whether or not that is true. But payments of large
amounts of cash—especially from those whose businesses may or may not be lawful—inevitably
cause concerns. Fischer’s efforts to downplay this, initially and then again on follow-up
questioning, id. 124-125, failed to satisfy the Court’s concerns in this regard.
57 	Trial Tr. 104-105.
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Yi, in testimony the Court finds credible in this respect. It was she who paid Fischer, and
there were even times that Fischer came to the spa to collect the rent.58
In the one visit to the premises during the construction period that Fischer said he
could remember, Fischer observed that the only signage on the property was a small sign
on the front door of the G Street Property, which when entered would lead up to the
second and third floor, that read “Time Out Day Spa”—despite the fact that Fischer “had
a sign on the building that was a good sized sign that he [Modiri] was allowed to use.”59
The small sign had no description of the services that were being provided.60 Fischer did
not recall seeing a sign on the third floor.61 The small and minimal signage—when much
more extensive signage would be expected for a business with a lawful purpose—further
supports an inference that Fischer knew, or closed his eyes to the fact, that lawful activity
was not underway there.
Other Yi testimony is also more credible than Fischer’s, when considered in the
context of surrounding facts, its much greater specificity, and common sense. In other
testimony that the Court accepts, Yi testified that:
58 	Yi testified:
Almost every month, except for the few times that he [Fischer]
came to the spa to collect the rent, I went to his office to pay
him. The payments were in cash as per his request. On one
occasion he drove me from his office back to the spa.
Yi Aff. ¶ 10(c). The Court makes no finding as to the accuracy of Yi’s statement, disputed by
Fischer, that Fischer requested that the payments be made in cash. It finds the remainder, which
addresses matters as to which Fischer’s testimony was vague, to be credible, principally by reason
of its greater specificity and consistency with other established facts.
59 	Id. 109.
60 	Id.
61 	Id. 110.
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(1) Fischer called Yi when the first floor restaurant owner
“complained about the location in the back of the building where our trash
was placed”; 62
(2) On another occasion, Fischer called Yi “when the first floor
restaurant complained about water that was being leaked into the
restaurant from my steam cubicle”;63
(3) During the construction of the third floor, Fischer repeatedly
contacted Yi, “and requested that I take over the second floor as well.
After I told him that I would consider [sic.], he came on at least two
occasions, to show me the floor.”64
For these reasons, the Court finds the great bulk of Fischer’s testimony unworthy
of belief. The Court finds that at some point in time, no later than very early in Modiri’s
tenancy, Fischer was aware of the unlawful activity. The Court further finds that Fischer
did not rely (much less reasonably rely) on anything Modiri might have said about use of
the G Street Property. Restaurant Group’s loss of its G Street Property leasehold in the
litigation in the DC courts came only after—long after—Fischer knew what the premises
were being used for, and failed to take action to stop it.
6. Ultimate Facts
The Court finds, as ultimate facts:
62 	Yi Aff. ¶ 10(a).
63 	Id. ¶ 10(b).
64 	Id. ¶ 10(d).
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1. Modiri knowingly allowed the G Street Property to be used for
purposes of prostitution, and knowingly violated Paragraphs 7 and 9 of the
Sub-sublease.
2. Modiri did not attempt to injure Restaurant Group or Fischer,
willfully, maliciously or otherwise. Modiri lacked any intent to cause any
injury, malicious or otherwise, to Restaurant Group or Fischer. Modiri
merely wished to facilitate the prostitution that took place there, either for
his own benefit or, more likely, for the benefit of his girlfriend.
3. Modiri discussed his plans for the G Street Property with
Fischer. If (though the Court doubts it) Modiri actually made a
representation to Fischer that the G Street Property would be used as a
“spa” or massage parlor and not for prostitution, Fischer did not believe it
or reasonably rely upon it.
4. To the contrary, Fischer knew what the G Street Property really
was being used for within a very short time after the tenant improvements
were completed. Fischer closed his eyes to the future use of the G Street
Property before the Sub-sublease was signed, and closed his eyes (to the
extent that he had not yet become fully aware) to the actual use of the
G Street Property thereafter.
5. Fischer was on notice, before the Sub-sublease was entered
into, that the G Street Property very possibly might be used for
prostitution, and knew after the Sub-sublease was entered into, but before
Restaurant Group’s lease was lost in the DC Courts litigation, that the
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G Street Property was in fact being used for prostitution. To the extent
that Fischer did not know, before the Sub-sublease was entered into, that
the G Street Property would be used for prostitution or likely would be, he
willfully closed his eyes to that eventuality. To the extent that Fisher did
not know, prior to the execution of the Sub-sublease that the G Street
Property would be used for prostitution, Fisher recklessly disregarded that
likelihood.
6. Fischer did not rely on any representations that the G Street
Property would be used as a day spa or only for lawful purposes.
7. To the extent Fischer relied on any Modiri statements as to the
future use of the premises or an intent to comply with law (which the
Court finds is not at all), any such reliance, in light of the surrounding
facts and circumstances, was neither reasonable nor justifiable.
Discussion
I.
Burden of Proof
The burden of proof in a Section 523(a) claim of nondischargeability requires the
creditor to prove each element of the claim by a preponderance of the evidence.65 This
standard applies to claims under each of sections 523(a)(6) and 523(a)(2)(A).66
65 	See Grogan v. Garner, 498 U.S. 279, 290-91 (1991).
66 	See id. at 291 (“[W]e hold that the standard of proof for the dischargeability exceptions in 11
U.S.C. § 523(a) is the ordinary preponderance-of-the-evidence standard”); In re Mitchell, 227
B.R. 45, 50 (Bankr. S.D.N.Y. 1998) (Bernstein, C.J.) (applying standard to both categories of
discharge exceptions) (“Mitchell”).
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Exceptions to discharge must be literally and strictly construed against the creditor and
liberally in favor of the debtor.67
II.
Section 523(a)(6)
Willful and Malicious Injury
Plaintiff Restaurant Group asserts first that Modiri’s breach of the lease was a
“willful and malicious injury,” resulting in a judgment that created a nondischargeable
debt under Section 523(a)(6) of the Code. The Court disagrees. There was no showing
that Modiri intended to cause any injury, much less any injury that was “willful and
malicious.”
Section 523(a) provides, in relevant part:
(a) a discharge . . . does not discharge an individual
debtor from any debt—
. . .
(6) for willful and malicious injury by the
debtor to another entity or to the property of
another entity.”68
By section 523(a)(6)’s plain terms, to be nondischargeable under this subsection, debt
must arise from both willful and malicious conduct.
In Kawaauhau v. Geiger69, the Supreme Court explained that the “willful”
requirement of section 523(a)(6) means having the intent to create the resulting injury,
and not just to take an act that results in such. It stated:
67 	See Mitchell, 227 B.R. at 50; See also Colonial Nat’l Bank, USA v. Carrier, 181 B.R. 742, 746
(Bankr. S.D.N.Y. 1995) (Bernstein, C.J.).
68 	11 U.S.C. § 523(a)(6).
69 	523 U.S. 57 (1998).
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The word “willful” in (a)(6) modifies the word
“injury,” indicating that nondischargeability takes a
deliberate or intentional injury, not merely a
deliberate or intentional act that leads to injury. . . .
[T]he (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.” 70
Thus the caselaw makes clear that for an act to be willful, one must intend to
inflict the particular harm that created the debt, not just to commit an act that results in
the harm.71
Surprisingly, Restaurant Group relies on an old 1986, In re Clayburn, 72 stating
that “[w]illful conduct is that conduct which is deliberate, intentional, and voluntarily
undertaken by the debtor, and which is sufficient to cause the wrongful act.” 73 But
Clayburn, (aside from the fact that it is inconsistent with the law in this District, such as
Gabor) no longer can be regarded as good law, since it was decided before the Supreme
Court’s decision in Geiger. In fact, in making its determination, the Clayburn court
adopted the definition of willfulness that was expressly rejected by the Supreme Court in
Geiger, when the Clayburn court stated that “this Court does not subscribe to the
distinction made by some Courts between the intent to do harm and the intent to do the
act from which harm results.”74
70 	Id. (emphasis in original in each instance).
71 	See In re McDermott, 434 B.R. 271, 283 (Bankr. N.D.N.Y. 2010) (Davis, J.); In re Gabor,
2009 WL 3233907, *6 (Bankr. S.D.N.Y. Oct. 8, 2009) (Gropper, J.) (“Gabor”) (though ultimately
finding all debts of the debtor nondischargeable on other grounds).
72 	67 B.R. 522 (Bankr. N.D. Ohio 1986) (“Clayburn”).
73 	Id. at 525.
74 	Id. at 526.
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Whatever Modiri’s purposes may have been in operating a brothel in violation of
his lease, this Court found as a fact that he did not do so in an effort to cause any injury
(willfully, maliciously, or otherwise) to Restaurant Group or Fischer.75 This was not a
case of meeting a burden. Restaurant Group offered no evidence whatever to support the
notion that Modiri intended to hurt it. Judgment must be, and is, granted in Modiri’s
favor on Restaurant Group’s section 523(a)(6) claim.
III.
Section 523(a)(2)(A):
(False pretenses, false representation, or actual fraud”)
Restaurant Group then argues, in the alternative, that its judgment claim is
nondischargeable under section 523(a)(2)(A) of the Code, contending that the debt was
for money or property obtained by false pretenses, a false representation, or actual fraud.
Once more, the Court disagrees. The debt in question arose as a matter of contract, and
not fraud, 76 and there were no “false pretenses, false representation, or actual fraud,” as
those words have taken their meaning in federal bankruptcy law.
Section 523(a) provides, in relevant part:
(a) a discharge . . . 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 . . .” 77
75 	See page 18 supra.
76 	See Modiri-Appellate, 904 A.2d at 393.
77 	11 U.S.C. § 523(a)(2)(a).
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As usual,78 the Court starts with textual analysis. Subsection (a) provides for an
exception to discharge “from any debt” that meets the requirements of one of the
subsections that follows it. The “debt” for which Restaurant Group seeks an exception is
the judgment debt Restaurant Group secured in the DC courts. The judgment was based
on breach of contract, as noted in Modiri-Appellate, and as this Court found 79 —not on
fraud. So unless there is some basis for recharacterizing it, or looking to its substance
beyond its form, section 523(a)(2)(A) has not been satisfied.
While the Court assumes that consideration of the substance of the claim might
sometimes be appropriate, there is no basis for any different conclusion based on
substance here. Restaurant Group secured its judgment based on the violation of a
contractual covenant as to which Modiri’s scienter was irrelevant. Paragraph 9 of the
Sub-sublease simply required Modiri’s compliance with law. Modiri allowed the
G Street Property to be used in violation of law, and for that the DC courts entered a
judgment against him for the resulting damages. But violation of Paragraph 9 was
sufficient to support the DC judgment without any evidence whatever of Modiri’s intent
in entering into the Sub-sublease or operating the premises. And that is all that the DC
courts needed to, and did, find.
Of course, Restaurant Group bases its complaint here on a second contention as
well—that Modiri defrauded it when Modiri expressed the alleged intention to use the
G Street Property as a spa and not in violation of law. But here too the Court cannot find
that the requirements of section 523(a)(2)(A) were met.
78 	See, e.g., In re General Motors Corp., 407 B.R. 463, 486 (Bankr. S.D.N.Y. 2009), appeal
dismissed and aff'd, 428 B.R. 43 (S.D.N.Y. 2010) and 430 B.R. 65 (S.D.N.Y. 2010).
79 	See n.5 supra.
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First, of course, the above quoted “debt” requirement has not been satisfied,
because the DC courts did not base their judgment on this basis either. And looking
behind that, to realities, Restaurant Group suffered the losses that formed the bases for its
judgment on defaults on its sublease arising from activities on the G Street Property of
which Fischer was aware by the time Tomkat brought its action. Fischer had many
months to stop the illegal activity before Tomkat secured its judgment, but failed to do
so. Even if Modiri had intended to, and did, defraud Fischer and/or Restaurant Group
with respect to the future use of the G Street Property, there would have been no loss to
Restaurant Group if it had timely acted when it became aware of everything that was
going on.
Going even further behind that, to other realities (assuming, arguendo, that such
is required), the requirements of section 523(a)(2)(A) still were not satisfied. The
judgment was not for fraud, but considering (without here deciding that such is
appropriate) whether a judgment could have been entered in Restaurant Group’s favor for
fraud (or false pretenses or false representations), here the Court cannot reach such a
conclusion.
In analyzing that issue, the Court first assumes, without deciding, that although all
of the rent was paid, Modiri’s having secured the benefit of the leasehold while having
failed to meet a nonmonetary obligation on the lease would be sufficient to have met
subsection (2)’s requirement that “property” was obtained by fraud.80 But even so, given
80 	That is not entirely clear, but if, as the Court also assumes, a leasehold brings with it a bundle of
rights, coupled with a bundle of obligations, either side’s denying the entire bargained-for
exchange to the other could amount to the requisite transfer of “property.” Cf. In re Brewer,
66 B.R. 214, 217 (Bankr. S.D.N.Y. 1986) (Schwartzberg, J.) (for the purposes of 523(a)(2)(A), a
lease is “a credit transaction to the extent that the lessee is obligated to pay for the right of
possession which is transferred in exchange for the lessee's obligation to pay rent). Of course, any
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the Court’s factual findings, described above, Restaurant Group has failed to satisfy the
requirements under the caselaw for nondischargability for “false pretenses, a false
representation, or actual fraud” as used in section 523(a)(2)(A).
Chief Judge Bernstein has explained that “[a] party proceeding under this
subsection must establish five elements: (1) a representation, (2) falsity, (3) scienter,
(4) justifiable reliance and (5) damage.”81 Here at least82 the fourth and fifth
requirements under that standard are not satisfied.
The fourth requirement, that of justifiable reliance, is the most obvious element
that here is lacking. In Field v. Mans83 the Supreme Court discussed the form of reliance
required in context of 523(a)(2)(A). It held that a creditor’s reliance must be justifiable.
A party alleging fraud “is required to use his senses, and cannot recover if he blindly
relies upon a misrepresentation the falsity of which would be patent to him if he had
utilized his opportunity to make a cursory examination or investigation.”84 A showing of
justifiable reliance “is a matter of the qualities and characteristics of the particular
failure to deliver full performance on lease obligations (whether monetary or nonmonetary) could
not, without more, satisfy additional requirements to show fraud.
81 	Mitchell, 227 B.R. at 50 (citing Fellows, Read & Assocs. v. Rieder, 194 B.R. 734, 737 (S.D.N.Y.
1996), aff'd without opinion, 116 F.3d 465 (2d Cir. 1997)). Many other cases, in this District
alone, have held similarly. See In re Vanarthos, — B.R. —, 2011 WL 782044, *5 (Bankr.
S.D.N.Y. Mar 7, 2011) (Glenn, J.); In re Vanarthos, 440 B.R. 67, 73 (Bankr. S.D.N.Y. 2010)
(Glenn, J.) DeRosa v. Jacone (In re Jacone), 156 B.R. 740, 743-744 (Bankr. S.D.N.Y. 1993)
(Schwartzberg, J.).
82 	As noted above, see page 18 supra, the Court doubts that Modiri actually made the representation
to Fischer that the G Street Property would be used as a massage parlor and not for prostitution,
but for the sake of argument assumes that he did. Likewise, the evidence of scienter—intent on
Modiri’s part to deceive—was very thin, to the extent it was there at all, amounting to little more
than a showing of Modiri’s motivation to secure the leasehold. But once more, for the sake of
argument, the Court assumes that the scienter showing was sufficient. Of course, each of these
matters becomes moot in light of Restaurant Group’s failure to satisfy the requirements of
justifiable reliance and resulting damage.
83 	516 U.S. 59, 70-72 (1995).
84 	Id. 70.
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plaintiff, and the circumstances of the particular case, rather than of the application of a
community standard of conduct to all cases.”85 And, of course, even before the reliance
can be said to be justifiable, reliance in the first place must be shown.
As noted above in the Court’s Findings of Fact,86 the Court has found, among its
ultimate facts, that for reasons previously discussed at length, Fischer was on notice,
before the Sub-sublease was entered into, that the G Street Property very possibly might
be used for prostitution, and knew after the Sub-sublease was entered into, but before
Restaurant Group’s lease was lost in the DC courts litigation, that the G Street Property
was in fact being used for prostitution. To the extent that Fischer did not know, before
the Sub-sublease was entered into, that the G Street Property would be used for
prostitution or likely would be, he willfully closed his eyes to that eventuality.
Thus this Court has found that Fischer did not rely on any representations that the
G Street Property would be used as a day spa or only for lawful purposes. The Court
similarly has found that to the extent Fischer relied on any Modiri statements as to the
future use of the premises or an intent to comply with law (which the Court has
concluded was not at all), any such reliance, in light of the surrounding facts and
circumstances, was neither reasonable nor justifiable.87 Knowing as much as he did—
and willfully closing his eyes to what he saw—Fischer cannot show any reliance on
anything Modiri said, much less reasonable or justifiable reliance.
Fifth and finally, the Court agrees that Restaurant Group suffered damages, or at
least was injured. The problem is that the injury and alleged damages ultimately cannot
85 	Id. 71.
86 	See page 18 supra.
87 	See page 19 supra.
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be said to have flowed from what, if anything, Modiri said. Assuming, arguendo, that
Modiri made the representations Fischer claims, Fischer learned the truth very shortly
thereafter, and long before Restaurant Group lost the leasehold. If Fischer cared about
the violations of law the future absence of which he claims were represented to him, he
could have, and should have, taken action long before Tomkat commenced the legal
proceedings it did. If he had done so, Restaurant Group would have not suffered the
losses upon which its judgment was based.
Since Restaurant Group must prove by a preponderance of the evidence that all
five prongs are met in order to qualify for an exemption from discharge under section
523(a)(2)(A), Restaurant Group has failed to meet its burden.
Conclusion
For the foregoing reasons, judgment will be entered in favor of defendant Modiri
on each claim.
Pursuant to Fed. R. Civ. P. 58 (made applicable to this adversary proceeding by
Fed. R. Bankr. P. 7058), the Debtor is to settle a standalone judgment in accordance with
this Decision. The time to appeal will run from the time of entry of judgment, and not
from the date of this Decision.
Dated: New York, New York 	s/Robert E. Gerber
April 18th, 2011 	United States Bankruptcy Judge
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