Salera Capital Management, LLC et al v. Caisse

UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK
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In re: 	:
:
BRYAN CAISSE, 	: 	Chapter 7
: 	Case No. 15-12777 (SMB)
Debtor. 	:
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CHARLIE MILLS a/k/a CHARLES MILLS 	:
and SALERA CAPITAL MANAGEMENT, LLC, :
:
Plaintiffs, 	:
:
‒ against ‒ 	: 	Adv. Pro. No. 15-01435
:
BRYAN CAISSE, 	:
:
Defendant. 	:
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MEMORANDUM DECISION GRANTING IN
PART AND DENYING IN PART MOTION TO
DISMISS FIRST AMENDED COMPLAINT
A P P E A R A N C E S:
DAY PITNEY, LLP
Attorneys for Plaintiffs
1100 New York Avenue, N.W.
Suite 300
Washington, D.C. 20005
Steven A. Cash, Esq.
Of Counsel
KASEN & KASEN
Attorneys for Defendant
151 West 46 th Street – 4 th Floor
New York, New York 10036
Michael J. Kasen, Esq.
Of Counsel
STUART M. BERNSTEIN
United States Bankruptcy Judge:
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Charlie Mills a/k/a Charles Mills (“Mills”) and Salera Capital Management, LLC
(“Salera,” and collectively with Mills, the “Plaintiffs”), through their First Amended
Complaint, dated Aug. 12, 2016 (“FAC”) (ECF Doc # 16), 1 seek money judgments on
their claims and a declaration that the debts are nondischargeable. Bryan Caisse, the
defendant and debtor, has moved to dismiss the FAC for failure to state a claim upon
which relief can be granted pursuant to Rule 12(b)(6) of the Federal Rules of Civil
Procedure made applicable to this adversary proceeding by Rule 7012 of the Federal
Rules of Bankruptcy Procedure. (Memorandum of Law in Support of Defendant Bryan
Caisse’s Motion to Dismiss Plaintiffs’ First Amended Complaint, dated Aug. 26, 2016
(the “Motion”), at 1-2 (ECF Doc. # 19).) For the reasons that follow, the Motion is
granted in part and denied in part, and Salera is granted leave to replead the dismissed
claims.
BACKGROUND
Mills and Caisse attended the United States Naval Academy, and subsequently
served in the Marine Corps and Navy, respectively. (¶¶ 12-16, 23.)2 After Mills left the
Marine Corps, he joined Bear Stearns & Company and subsequently founded Salera, an
entity that made short-term secured and unsecured loans mostly to Government
contractors. (¶¶ 17-20.) After Caisse left the Navy, he worked in the financial industry.
(¶ 25.) He remained active in the extensive network of Naval Academy alumni, which
1 	“ECF Doc. # __” refers to documents filed on the docket in this adversary proceeding.
2 	“¶¶ __” refers to the paragraphs in the FAC.
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included Mills, and they maintained a close personal relationship largely based on their
shared college and military experiences. (¶¶ 24, 26.)
A. 	The Loans
In March 2009, Caisse contacted Mills to borrow money. (¶ 32.) According to
the FAC, Caisse made two false statements to induce Mills or Salera to make a loan.
First, he told Mills that he needed the funds for a venture, Huxley Capital Management
(“Huxley”). (¶ 33.) Second, he claimed that he was due a significant tax refund and
would send the refund directly to Salera as payment for the loan. (¶ 36.) To bolster this
representation, Caisse sent Mills a copy of his 2008 tax return, under cover of a letter
from Bloom CPA, PLLC, and an IRS Form 8822 ‒ a change of address form ‒ dated April
4, 2006. (¶ 36.) Together, they purported to show that Caisse was due a tax refund of
$175,144, and the refund would be sent directly to Mills. (¶ 37.) Relying on these
representations, Salera made a loan to Caisse or Huxley in April 2009 (the “April
Loan”), but the FAC does not state the amount of the loan. (¶ 38.)
By August 2009, Caisse had defaulted on the April Loan, and sought to refinance
it. (¶ 41.) To induce a second loan, Caisse made further representations to Mills,
including that the IRS refund had not been received but was imminent. (¶ 41.) On or
about August 5 and 6, 2009, Caisse and Salera entered into an agreement to loan Caisse
$150,000, to be repaid within ninety days, Caisse signed two promissory notes, and
Salera disbursed $150,000 to Caisse (the “August Loan”). (¶¶ 42-44.) The April 2009
loan was eventually repaid, (¶ 38), apparently from another source of funds.
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The due date for the repayment of the August Loan was November 3, 2009, but
Caisse defaulted. (¶ 47.) Following the default, Caisse made several false statements to
Mills to the effect that repayment would be forthcoming, and as a result, Mills and
Salera did not take legal action. (¶¶ 48-53.) On January 21, 2010, Mills sent Caisse a
demand letter advising him of his default, (¶ 55; FAC, Ex. A), but Caisse and a person
purporting to be Caisse’s attorney continued to indicate that Caisse would repay the
August Loan, and Mills and Salera continued to forebear. (¶¶ 56-68.)
On February 6, 2012, Mills sued Caisse in Virginia state court. (¶ 69.) Following
a one-day trial at which both Mills and Caisse testified, the court found in Salera’s favor
and entered a judgment on March 12, 2013 in the amount of $694,910, plus post-
judgment interest at the judgment rate (the “Judgment”). (¶¶ 76-77.) Of that amount,
$150,000 represented the unpaid August Loan. On May 31, 2013, the Judgment was
domesticated as a New York judgment. 3 (¶ 78.)
B. 	The Criminal Proceedings
Around the same time, the New York District Attorney (the “DA”) began a
criminal investigation of Caisse. (¶¶ 79-81.) On October 9, 2013, Caisse’s attorney
asked the DA to return Caisse’s passport, which had been seized during the execution of
a search warrant, stating that Caisse had to travel on business and would return to face
any proceedings. (¶¶ 82-83.) In addition, the DA was assured that Caisse would not
3 	The Judgment and the order domesticating the Judgment are attached to Salera’s Proof of Claim,
dated Nov. 9, 2015 (the “Salera Claim”). The Court takes judicial notice of the contents of the Claim which
is referred to in the FAC. (See ¶ 110.)
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abandon his young daughter. (¶84.) The DA returned the passport, but Caisse fled to
Colombia. (¶¶ 84-89.)
Sometime thereafter, the DA indicted Caisse on eleven counts. (FAC, Ex. C.)
Counts III and IV charged Caisse with Grand Larceny in the Second Degree against
“INDIVIDUAL #3” during the periods August 6 to August 26, 2009 and April 7, 2009 to
May 8, 2009, respectively. “INDIVIDUAL #3” referred to Mills. (¶ 94.) Count XI
charged Caisse with a Scheme to Defraud in the First Degree, alleging that between
April 2008 and October 25, 2013, he “engaged in a scheme constituting a systematic
ongoing course of conduct with intent to defraud more than one person and to obtain
property from more than one person by false and fraudulent pretenses, representations
and promises.”
Caisse was subsequently arrested in Bogota, Colombia on January 18, 2014, and
returned to the United States. (¶ 89.) The DA’s Office issued a press release a few days
later announcing the indictment. (¶ 99.) The press release stated that Caisse had run a
Ponzi scheme through Huxley, had defrauded friends and Naval Academy classmates of
over $1 million and had made additional fraudulent representations to evade his
victims’ efforts to collect their money. (Id.; accord ¶ 101.)
Caisse pleaded guilty on August 11, 2014 in the Supreme Court of the State of
New York to Counts VIII and XI, (¶ 103; FAC, Ex. D), and was sentenced to 1 ½ to 4 ½
years in prison. (¶ 107.) The Supreme Court issued an Order, dated November 12, 2015
(the “Restitution Order”), (FAC, Ex. E, at pp. 1-5), as part of the plea agreement. Among
other things, the Restitution Order required Caisse to pay restitution to Safe Horizon
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which was designated pursuant to New York Criminal Procedure Law § 420.10(1) as the
restitution agency. (Restitution Order at p. 1 ¶ 2.) Safe Horizon would receive the
payments, establish a restitution fund, and distribute the payments to the individuals
listed on the annexed Exhibit A. (Id. at pp. 1-3 ¶¶ 2, 5.) Exhibit A included Mills and
indicated that he was due restitution in the amount of $119,000.00. In addition, Caisse
signed an Affidavit of Confession of Judgment, sworn to October 8, 2014 (the
“Confession”) in favor, inter alia, of Mills for the same amount. (FAC, Ex. E at p. 7 ¶ 2.)
C. 	The Bankruptcy
After his release from prison, Caisse filed a chapter 7 petition on October 14,
2015. (¶¶ 108-09.) Salera thereafter filed the Salera Claim in the amount of
$854,434.68, (¶ 110), apparently representing the amount of the Judgment plus accrued
post-judgment interest. In addition, Mills filed a proof of claim in the amount of the
Restitution Order, $119,000 (the “Mills Claim”). (¶ 111.)
The Plaintiffs filed this adversary proceeding on December 30, 2015, and filed the
FAC on August 12, 2016. The FAC asserts four claims for relief. Salera seeks a
declaration of non-dischargeability of the Salera Claim in the First, Second and Third
Claims under 11 U.S.C. § 523(a)(2)(A), (a)(2)(B) and 523(a)(4), respectively. In the
Fourth Claim, Mills seeks a declaration of non-dischargeability of the Mills Claim, which
is based on the Restitution Order, under 11 U.S.C. § 523(a)(7). The Plaintiffs also seek a
money judgment in the amount of the Salera Claim acknowledging that it subsumes the
Mills Claim. (FAC at pp. 21-22.) Caisse filed the Motion to dismiss all of the claims for
failure to state a claims on which relief can be granted.
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DISCUSSION
To state a legally sufficient claim, “a complaint must contain sufficient factual
matter, accepted as true, to state a claim to relief that is plausible on its face.” Ashcroft
v. Iqbal, 556 U.S. 662, 678 (2009) (citation omitted); accord Bell Atl. Corp. v.
Twombly, 550 U.S. 544, 570 (2007). “A claim has facial plausibility when the plaintiff
pleads factual content that allows the court to draw the reasonable inference that the
defendant is liable for the misconduct alleged.” Iqbal, 556 U.S. at 678; accord
Twombly, 550 U.S. at 556. In deciding the motion, “courts must consider the complaint
in its entirety, as well as other sources courts ordinarily examine when ruling on Rule
12(b)(6) motions to dismiss, in particular, documents incorporated into the complaint
by reference, and matters of which a court may take judicial notice.” Tellabs, Inc. v.
Makor Issues & Rights, Ltd., 551 U.S. 308, 322 (2007). A complaint is deemed to
include any written instrument attached to it as an exhibit, documents incorporated in it
by reference, and other documents “integral” to the complaint. Chambers v. Time
Warner, Inc., 282 F.3d 147, 152-53 (2d Cir. 2002) (quotations and citations omitted);
accord Int’l Audiotext Network, Inc. v. Am. Tel. & Tel. Co., 62 F.3d 69, 72 (2d Cir.
1995); Cortec Indus., Inc. v. Sum Holding L.P., 949 F.2d 42, 47 (2d Cir. 1991), cert.
denied, 503 U.S. 960 (1992).
If the complaint alleges fraud, the plaintiff must also satisfy Rule 9(b) of the
Federal Rules of Civil Procedure, made applicable to this adversary proceeding by
Federal Bankruptcy Rule 7009. Federal Civil Rule 9(b) requires the plaintiff to plead
fraud with particularity.4 	Although scienter may be pleaded generally, the pleader must
4 	Federal Civil Rule 9(b) states:
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“allege facts that give rise to a strong inference of fraudulent intent.” Shields v. Citytrust
Bancorp, Inc., 25 F.3d 1124, 1128 (2d Cir. 1994) (citations omitted). Finally, even when
fraud is not an element of the claim, the allegations must satisfy F ED. R. CIV. P. 9(b) if
the claim sounds in fraud. See Rombach v. Chang, 355 F.3d 164, 171 (2d Cir. 2004)
(“Rule 9(b) . . . is not limited to allegations styled or denominated as fraud or expressed
in terms of the constituent elements of a fraud cause of action.”). “Generally, a non-
fraud claim will ‘sound in fraud’ if the claim arose out of events that the pleading
describes in terms of fraud or the pleading includes a claim based on fraud, and the non-
fraud claim incorporates the fraud allegations.” Official Committee of Unsecured
Creditors of Grumman Olson Indus., Inc. v. McConnell (In re Grumman Olson Indus.,
Inc.), 329 B.R. 411, 429 (Bankr. S.D.N.Y. 2005); accord Levy v. Young Adult Inst., Inc.,
103 F. Supp. 2d 426, 442 (S.D.N.Y. 2015); see Xpedior Creditor Trust v. Credit Suisse
First Boston (USA) Inc., 341 F.Supp.2d 258, 269 (S.D.N.Y.2004) (“A claim sounds in
fraud when, although not an essential element of the claim, the plaintiff alleges fraud as
an integral part of the conduct giving rise to the claim.”).
Before turning to the claims some preliminary observations are in order. First,
the April Loan was repaid and is not included in the Judgment. Thus, there is not debt
arising from the April Loan that can be non-dischargeable. Second, the Plaintiffs seek a
money judgment in the amount of the Salera Claim, but already have a judgment plus
interest in that amount. The Court may declare a “debt” non-dischargeable, and that
includes a debt merged into a judgment. The Plaintiffs do not explain why another
In alleging fraud or mistake, a party must state with particularity the circumstances
constituting fraud or mistake. Malice, intent, knowledge, and other conditions of a
person’s mind may be alleged generally.
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money judgment is appropriate or necessary. Third, the amount of the Judgment far
exceeds the amount of the $150,000 August Loan. The Plaintiffs have not explained
why the entire Judgment, which is subsumed in the Salera Claim, should be declared
non-dischargeable.
A. 	First Claim – 11 U.S.C. § 523(a)(2)(A)
Bankruptcy Code § 523(a)(2)(A) excepts from discharge any debt “for money,
property, services, or an extension, renewal, or refinancing of credit, to the extent
obtained by . . . false pretenses, a false representation, or actual fraud, other than a
statement respecting the debtor’s or an insider’s financial condition.” The Supreme
Court has historically given the terms in § 523(a)(2)(A) their common law meaning.
Husky Int’l Elec., Inc. v. Ritz, 136 S. Ct. 1581, 1586 (2016) (citing Field v. Mans, 516 U.S.
59, 69 (1995)). The parties agree that under § 523(a)(2)(A), the plaintiff must allege
that the defendant knowingly made a misrepresentation with the intent to deceive the
plaintiff, and the plaintiff justifiably relied on the misrepresentation and suffered
damages as a result. (Compare Motion at 7 with Plaintiff’s Memorandum of Law in
Opposition to Defendant’s Motion to Dismiss Amended Complaint, dated Sept. 20,
2016, at 3-4 (“Opposition”) (ECF Doc. # 21).) Whether a debtor intended to defraud a
creditor within the scope of Section 523 depends on the debtor's “actual state of mind ...
at the time the charges were incurred,” Fleet Credit Card Servs. v. Macias (In re
Macias), 324 B.R. 181, 188 (Bankr. E.D.N.Y. 2004) (quoting MBNA Am. v. Parkhurst
(In re Parkhurst), 202 B.R. 816, 822 (Bankr. N.D.N.Y. 1996)), and allegations that
Caisse failed to perform promises he made at the time the debt was incurred do not
imply that he did not intend to fulfill those promises at the time they were made.
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Citibank (South Dakota), N.A. v. Spradley (In re Johnson), 313 B.R. 119, 129 (Bankr.
E.D.N.Y. 2004) (citing Colonial Nat’l Bank v. Leventhal (In re Leventhal), 194 B.R. 26,
31 (Bankr. S.D.N.Y. 1996) (quoting Chase Manhattan Bank v. Murphy (In re Murphy),
190 B.R. 327, 333-34 (Bankr. N.D. Ill. 1995))). Otherwise, every breach of contract
claim would also sound in fraud.
The FAC alleges that Salera was induced to make the August Loan based upon the
representation that the IRS payment had not yet been received but was imminent, (¶
41), and perhaps by implication carried over from the April Loan, that the refund would
be paid directly to Salera. The FAC also alleges that Caisse made “further
representations,” (see ¶ 41), but does not set them out as required by Federal Civil Rule
9(b).
Finally, the FAC alleges that Caisse and a person purporting to be his attorney
made additional false representations when Salera demanded repayment, (¶¶ 48, 51, 57,
60, 63, 66), but does not allege that Salera obtained any additional money, property or
services after the August Loan. Salera does allege that it “extended” the August Loan as
a result of the misrepresentations, (¶¶ 49, 52, 58, 61, 64, 67), but confuses an extension
with forbearance. An “extension agreement” is “[a]n agreement providing additional
time for the basic agreement to be performed.” B LACK ’ S L AW D ICTIONARY 703 (10th ed.
2014). “Forbearance” refers to “[t]he act of refraining from enforcing a right, obligation,
or debt.” Id. at 760.
The FAC does not allege that Salera extended the due date for the August Loan.
Instead, it alleges that Salera “declin[ed] to take legal action” based on the allegedly false
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representations. (¶¶ 49, 52, 58, 61, 64, 67.) A creditor cannot predicate a non-
dischargeability claim based on fraudulently induced forbearance in the absence of a
separate injury, and Caisse’s subsequent fraudulent conduct is irrelevant to the non-
dischargeability claim. Wright v. Minardi (In re Minardi), 536 B.R. 171, 188 (Bankr.
E.D. Tex. 2015) (“[F]raudulent conduct occurring subsequent to the time that an
indebtedness is created is generally irrelevant to the issue of whether the debt was
‘obtained by false pretenses, a false representation, or actual fraud’ within the meaning
of § 523(a)(2)(A) of the Bankruptcy Code.”); Standard Bank & Trust Co. v. Iaquinta (In
re Iaquinta), 95 B.R. 576, 578 (Bankr. N.D. Ill. 1989) (“Subsequent misrepresentations
or fraud will have no effect upon the discharge of the debtor.”) Consequently, the only
representation that the FAC specifically identifies as inducing the August Loan is the
one regarding the imminent receipt of the tax refund.
Caisse contends that the FAC fails to allege falsity, intent to deceive or damages,
(Motion at 7-8), and Plaintiffs concede that the FAC does not include “boilerplate”
allegations of knowledge of falsity and intent to defraud. (Opposition at 5.) Mere
“boilerplate” allegations, however, are not sufficient. Twombly, 550 U.S. at 555 (“[A]
plaintiff's obligation to provide the ‘grounds’ of his ‘entitle[ment] to relief’ requires more
than labels and conclusions, and a formulaic recitation of a cause of action's elements
will not do.”). Salera must allege facts that support a claim under § 523(a)(2)(A). 5
5 	The FAC alleges that the statements relating to the refund were false, and “upon information and
belief, that Caisse was due and received no refund.” (¶ 40.) A plaintiff may plead facts alleged on
information and belief “where the facts are peculiarly within the possession and control of the
defendant…or where the belief is particularly based on factual information that makes the inference of
culpability plausible.” Arista Records, LLC v. Doe 3, 604 F.3d 110, 120 (2d Cir. 2010) (citations omitted).
However, allegations pled on information and belief “must be ‘accompanied by a statement of the facts
upon which the belief is founded.’” Munoz-Nagel v. Guess, Inc., No. 12-CV-1312 ER, 2013 WL 1809772, at
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Furthermore, the FAC’s incorporation of the indictment and reiteration of the
allocution and the DA’s statements do not cure the deficiencies because they do not
identify any knowingly false statements that Caisse made to induce the August Loan.
The Third Count of the Indictment accused Caisse of Grand Larceny in the Second
Degree by stealing property exceeding $50,000 in value from Mills in violation of N.Y.
PENAL L AW § 155.40(1). (FAC, Ex. C, at p. 2.) “Larceny” includes common larceny by
trespassory taking and by acquiring lost property, which do not require fraudulent
statements, as well as common law larceny by trick, obtaining property by false
pretenses and false promise, which do. See N.Y. PENAL L AW § 155.05(2)(a), (b), (d).
Thus, the mere charge of larceny does not satisfy the elements of common law fraud,
and in this case, does not include facts detailing a connection between the crime charged
and the allegations needed to plead a legally sufficient fraud claim. The Eleventh Count
alleges an ongoing systematic course of fraudulent conduct involving false and
fraudulent pretenses, representation and promises, but does not identify a specific
pretense, representation or promise made by Caisse to Mills or imply that Caisse
knowingly misrepresented the imminence of a tax refund. Caisse’s allocution is no more
specific and merely recites the allegations in the Indictment. (¶ 103.)
The DA’s statements amplify the criminal charges but still fall short. They
include assertions that Caisse operated a Ponzi scheme, and induced friends and
acquaintances through false representations to invest in Huxley, the vehicle for his
fraud. In addition, Caisse continued to make false statements and engage in fraudulent
*3 (S.D.N.Y. Apr. 30, 2013) (quoting Prince v. Madison Square Garden, 427 F. Supp. 2d 372, 385
(S.D.N.Y. 2006)). The FAC includes no such factual allegations.
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conduct to cover up his crimes. The DA’s statements, like the Indictment, do not
identify any specific representation that Caisse made to Mills. They highlight a pattern
of dishonesty relating to Caisse’s solicitation of money from acquaintances, but do not
say or imply that everything that Caisse said to Mills, particularly regarding the
imminence of the tax refund, was false or made with the intent to deceive. In fact, the
FAC does not allege that Caisse told Mills that the August Loan was for Huxley or his
ventures; instead, it alleges that it was solicited to refinance the April Loan which was
eventually repaid although apparently from other sources.
In short, the FAC does not plausibly imply that Caisse told Mills the August Loan
would be used to fund Huxley, that Caisse knew that a refund was not actually imminent
or that Caisse lied when he told Mills that he had directed the IRS to pay the imminent
refund to Salera. Instead, the FAC alleges that Caisse was a fraudster and a convicted
felon, (e.g., ¶¶ 1-6), but it is not enough that Caisse is a bad person. The allegations of a
fraudulent scheme that do not identify with sufficient particularity how Caisse
defrauded Salera do not fill the vacuum.
B. 	Second Claim – 11 U.S.C. § 523(a)(2)(B)
Bankruptcy Code § 523(a)(2)(B), in relevant part, excepts from discharge any
debt “for money, property or services, or an extension, renewal, or refinancing of credit,
to the extent obtained by . . . use of a statement in writing . . . that is materially false; . . .
respecting the debtor’s . . . financial condition; . . . on which the creditor . . . reasonably
relied; and . . . that the debtor caused to be made or published with intent to deceive.”
The Second Claim does not identify the written statement of financial condition that
Caisse showed the Plaintiffs to induce the August Loan. Assuming that it is referring to
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the tax return shown to induce the April Loan, and without deciding whether a tax
return is a statement of financial condition within the meaning of § 523(a)(2)(B), the
Second Claim suffers from the same pleading deficiencies as the First. 6 The FAC fails to
allege facts supporting the inference that the tax return was false, that Caisse knew it
was false or that he showed it to the Plaintiffs to induce the August Loan with the intent
to deceive them.
C. 	Third Claim – 11 U.S.C. § 523(a)(4)
Bankruptcy Code § 523(a)(4) excepts from discharge debts “for fraud or
defalcation while acting in a fiduciary capacity, embezzlement, or larceny.” “The
meaning of the words in § 523(a)(4) is a question of federal law.” McGee v. Mitchell (In
re McGee), 353 F.3d 537, 540 (7th Cir. 2003); Adamo v. Scheller (In re Scheller), 265
B.R. 39, 53 (Bankr. S.D.N.Y. 2001) (citing cases). The Third Claim invokes the “larceny”
exception, which, contrary to Caisse’s argument, (see Motion at 9-10), does not require a
fiduciary relationship. Bullock v. BankChampaign, N.A, 133 S. Ct. 1754, 1760 (2013)
(Section 523(a)(4) “makes clear that [larceny and embezzlement] apply outside of the
fiduciary context.”); 4 A LAN N. R ESNICK & H ENRY J. SOMMER , COLLIER ON B ANKRUPTCY ¶
523.10[2], at 523-76 (16th ed. 2016) (“In section 523(a)(4), the term ‘while acting in a
fiduciary capacity’ does not qualify the words ‘embezzlement’ or ‘larceny.’ Therefore,
any debt resulting from embezzlement or larceny falls within the exception of clause
(4).”) (footnote omitted).
6 	The Plaintiffs may also be relying on the accountant’s letter and IRS Form 8822 given to Mills at
the same time. The FAC does not disclose the contents of the accountant’s letter, and hence, fails to show
that it related to Caisse’s financial condition. Similarly, the change of address form does not appear to
relate to Caisse’s financial condition.
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“Larceny is the (1) wrongful taking of (2) property (3) of another (4) without the
owner’s consent (5) with intent to convert the property,” Scheller, 265 B.R. at 53, and
requires proof that the debtor fraudulently intended to take the creditor’s property.
New York v. Sokol (In re Sokol), 170 B.R. 556, 560 (Bankr. S.D.N.Y. 1994), aff’d, 181
B.R. 27 (S.D.N.Y. 1995), aff’d and remanded, 113 F.3d 303 (2d Cir. 1997); see Bullock,
133 S. Ct. at 1760 (“‘larceny’ requires taking and carrying away another’s property.”)
Larceny and embezzlement are substantially similar, but differ in one important respect.
“Larceny is the fraudulent and wrongful taking and carrying away of the property of
another with intent to convert the property to the taker’s use without the consent of the
owner. As distinguished from embezzlement, the original taking of the property must
be unlawful.” 4 C OLLIER ¶ 523.10[2], at 523-77 (footnote omitted); accord Scheller, 265
B.R. at 54.
Salera essentially contends that Caisse obtained title to and possession of its
funds by misrepresenting a past or present fact (i.e., larceny by false pretenses) or his
future intention to perform (i.e., larceny by false promise). See People v. Norman, 650
N.E. 2d 1303, 1307-08 (N.Y. 1995) (explaining the distinctions between the common law
crimes of larceny). In either case, the discharge exception depends on proof, inter alia,
that Caisse knowingly made a false statement or promise with the intent to induce
Salera and/or Mills to loan him money. Federal Civil Rule 9(b) applies because the
claim is based on Caisse’s fraud, but the FAC fails to plead fraud with the particularity
for the reasons stated.
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Accordingly, the First, Second and Third Claims are dismissed. However, it
appears that Salera may be able to cure the pleading deficiencies, and the Court grants
leave to replead these claims.
D. 	Fourth Claim – 11 U.S.C. § 523(a)(7)
Bankruptcy Code § 523(a)(7), in relevant part, excepts a debt from discharge “to
the extent such debt is for a fine, penalty, or forfeiture payable to and for the benefit of a
governmental unit, and is not compensation for actual pecuniary loss.” To be non-
dischargeable, the debt must satisfy three elements: (1) the debt must be for a fine,
penalty or forfeiture, (2) it must be payable to and for the benefit of a governmental unit
and (3) it must not be compensation for actual pecuniary loss. The last two elements are
referred to as the qualifying clauses. Whether a debt is the type excepted from discharge
under § 523(a)(7) is a question of federal law. Caisse contends that Mills has not shown
that Caisse owes him any money and his inclusion in the Restitution Order was
improper, that the restitution was not for the benefit of a governmental unit and the
restitution was compensation for actual pecuniary loss. (Motion at 8-10)
Caisse’s first argument deserves short shrift. The Restitution Order was part of
the plea and sentence agreement, (Restitution Order at p. 1 ¶ 1), required Caisse to pay
Mills (among others) $119,000, (id. at .p. 1 ¶ 1 and p. 5) and provided that the failure to
make the restitution payments would subject Caisse to prosecution for criminal
contempt or other crimes. (Id. at ¶ 7.) Caisse signed the Restitution Order
acknowledging his obligation, inter alia, to Mills, and the possible consequence if he
failed to comply. In addition, Caisse signed the Confession in favor of Mills for the same
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amount, (FAC, Ex. E at p. 7 ¶ 2.), and acknowledged that the Confession was a condition
of his negotiated guilty plea. (FAC, Ex. E. at p. 8 ¶ 4). Even if Caisse did not owe a debt
to Mills before the guilty plea, he voluntarily assumed a debt directly to Mills as a
condition to his guilty plea.
Caisse’s second and third points focus on the qualifying clauses in § 523(a)(7):
the restitution must be payable to and for the benefit of a governmental unit and cannot
be compensatory. 7 Essentially, he contends that the restitution was payable to Mills, not
a governmental unit, and was intended to compensate him for his actual pecuniary loss,
even though Caisse argues that Mills did not suffer an actual pecuniary loss.
In any event, the Supreme Court rejected Caisse’s interpretation of § 523(a)(7) in
Kelly v. Robinson, 479 U.S. 36 (1986). There, the debtor pleaded guilty to larceny
involving the receipt of welfare benefits. The state court placed the debtor on probation,
and as a condition of probation, ordered her to make restitution payments in the exact
amount of the improperly obtained welfare benefits to the Connecticut Office of Adult
Probation. Id. at 38-39. After she filed for bankruptcy and received a discharge, the
Connecticut Probation Office sought to collect the restitution, and the debtor
commenced an adversary proceeding seeking a declaration that the obligation was
discharged. Id. at 39-40.
Relying on the longstanding judicially-created exception to discharging criminal
restitution judgments and principles of federalism, id. at 47-49, the Supreme Court
ruled that § 523(a)(7) excepts from discharge “any condition a state criminal court
7 	Caisse does not dispute that the restitution obligation qualifies as a “fine, penalty or forfeiture.”
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imposes as part of a criminal sentence.” Id. at 50. Furthermore, neither of the
qualifying clauses allowed the discharge of a state criminal judgment that took the form
of restitution. First, the criminal justice system is operated to benefit society as a whole
and not just the victim. Although restitution resembles a judgment for the benefit of the
victim, that conclusion is undermined by the fact that the victim has no control over the
amount of restitution or whether it will be awarded, and the decision to impose
restitution turns on the penal goals of the state and the defendant’s situation rather than
on the victim’s injury. Id. at 52; accord United States v. Gelb (In re Gelb), No. 95–CV–
4725 (FB), 1998 WL 221366, at *2 (E.D.N.Y. Apr. 29, 1998). In short, a criminal
judgment that includes restitution is always for the benefit of a governmental unit
because it vindicates the governmental unit’s interest in the punishment and the
rehabilitation of the defendant. See Kelly v. Robinson, 479 U.S. at 53. Second, because
restitution is imposed for the benefit of the governmental unit to advance its
rehabilitative and penal goals, it is not assessed for the compensation of the victim. Id.;
Gelb, 1998 WL 221366, at *3.
The Restitution Order falls squarely within the broad rule established in Kelly
because it was imposed as part of a state criminal sentence. Furthermore, New York law
recognizes that restitution serves the dual purpose of compensating the victim and
advancing the state’s penal goals. People v. Home, 767 N.E.2d 132, 136 (N.Y. 2002)
(The sponsors of the 1983 amendments to N.Y. P ENAL L AW § 60.27 recognized that
“restitution serves the dual, salutary purposes of easing the victim's financial burden
while reinforcing the offender's sense of responsibility for the offense and providing a
constructive opportunity for the offender to pay his or her debt to society”); People v.
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Kim, 694 N.E.2d 421, 423 (N.Y. 1998) (The goals of restitution “are to insure, to the
maximum extent possible, that victims will be made whole and offenders will be
rehabilitated and deterred, by requiring all defendants to confront concretely, and take
responsibility for, the entire harm resulting from their acts.”); People v. Hall-Wilson,
505 N.E.2d 584, 585 (N.Y. 1987) (“Viewed from the perspective of punishing a
defendant, restitution is recognized as an effective rehabilitative penalty because it
forces defendants to confront concretely—and take responsibility for—the harm they
have inflicted, and it appears to offer a greater potential for deterrence.”) (citing Kelly,
479 U.S. at 49 n.10). And because it serves the state’s penal goals, the restitution
payment is for the benefit of the state. 8
Caisse’s alternative, narrow interpretation of § 523(a)(7), which seeks to limit
Kelly’s holding to its facts, “the wrongful receipt of welfare benefits” from a
governmental unit, (Motion at 11-12), is unconvincing. He relies on two cases
originating within the Sixth Circuit. In Hughes v. Sanders, 469 F.3d 475 (6th Cir. 2006),
cert. denied, 549 U.S. 1341 (2007), the Court of Appeals concluded that Kelly applied
narrowly to criminal restitution payable to a governmental unit, id. at 478, and did not
except from discharge a punitive monetary sanction entered in civil litigation because it
was payable to a private litigant to compensate him for his injuries. Id. at 479. The
Bankruptcy Court in Heitmanis v. Rayes (In re Rayes), 496 B.R. 449 (Bankr. E.D. Mich.
8 	Further, the restitution was payable to a governmental unit in the first instance. The restitution
was payable to Safe Horizon, which was designated pursuant to N.Y. CRIM P ROC. L AW § 420.10(1) as the
restitution agency. Section 420.10(1) directs the sentencing court to designate an official or organization
other than the district attorney to receive the payments. In New York City, the mayor designates the
official or organization eligible for selection by the court. Id., § 420.10(8)(a). Thus, Safe Horizon was
selected and is controlled by New York City and the selecting court, and receives restitution payments as
the agent for the government.
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2013) followed Hughes and ruled that a criminal restitution judgment initially payable
to the Probation Department for ultimate payment to the victims was dischargeable. Id.
at 454, 456. Construing Kelly narrowly, the Rayes court criticized the Supreme Court’s
decision as going “materially and unnecessarily beyond its facts, and to that extent at
least, may well be seen as dicta.” Id. at 454.
The Rayes court’s reasoning was rejected three years later by its own District
Court in Auto-Owners Ins. Co. v. Smith (In re Smith), 547 B.R. 774 (E.D. Mich. 2016).
There, the debtor pleaded guilty to assault and battery arising from a “road rage”
incident. The criminal judgment included a restitution order payable to the county
clerk, who would in turn distribute funds to the victim and her insurer as compensation
for losses they had incurred. Id. at 775-76. The debtor filed for bankruptcy and sought a
declaration that the restitution judgment was discharged. The Bankruptcy Court denied
the insurer’s motion for summary judgment because the judgment was not payable for
the benefit of a governmental unit and was compensation for a pecuniary loss. Id. at
776-77.
The District Court reversed. After reviewing the Kelly decision and its grounding
in the historic judicial exception to discharging criminal restitution and the principles of
federalism, the District Court first concluded that Hughes v. Sanders was “neither
applicable nor instructive” because it dealt with civil rather than criminal restitution.
Id. at 778. Furthermore, under Kelly, a state criminal restitution judgment is not
dischargeable even if it is ultimately payable to a non-governmental victim and is
intended to compensate the victim for her pecuniary loss. See id. at 778-79. Kelly
means that all state criminal restitution judgments are non-dischargeable. See id. at
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779; accord Colton v. Verola (In re Verola), 446 F.3d 1206, 1209 (11th Cir.), cert denied,
549 U.S. 885 (2006); Sokol, 170 B.R. at 559 (“The import of Kelly v. Robinson is that
the Bankruptcy Code's dischargeability provisions are not intended to interfere with
state criminal sentencing procedures. Judgments of restitution, regardless of how they
are computed, are penal and not dischargeable under 11 U.S.C. § 523(a)(7).”).
The continuing vitality of Kelly’s broad holding is also apparent from Congress’s
failure to change it. “If Congress wants to supersede the Supreme Court's decisions, it
must amend the statute the Court has construed; continuity of text equals continuity of
meaning.” In re Towers, 162 F.3d 952, 954 (7th Cir. 1998), cert. denied, 527 U.S. 1004
(1999).
Finally, Caisse’s argument essentially advocates the minority decision in Kelly
that was rejected by the majority. The minority criticized the Court’s decision because
the restitution judgment was intended, in part, to compensate the victim for its actual
damage. Kelly, 479 U.S. at 55 (Marshall, J., dissenting). The minority also pointed out
that the other qualifying exception did not apply because the restitution was payable to
the state for its own injury, and criticized the majority opinion as broad enough to mean
that any fine, penalty or forfeiture would be for the benefit of a governmental unit,
making § 523(a)(7) superfluous. Id. at 55 n.3. Despite these criticisms, the Supreme
Court “went out of its way to engage this qualifying clause and to stress that it posed no
serious threat to criminal restitution orders imposed by a state.” In re Thompson, 418
F.3d 362, 366 (3d Cir. 2005). While the Rayes court criticized certain parts of the Kelly
decision as dicta to support its narrow reading, “[w]e are to give great weight to the
Supreme Court's considered dicta in limning the breadth of situations its decisions
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govern.” Id.; accord McDonald v. Master Fin., Inc. (In re McDonald), 205 F.3d 606,
612 (3d Cir.) (“[W]e should not idly ignore considered statements the Supreme Court
makes in dicta. The Supreme Court uses dicta to help control and influence the many
issues it cannot decide because of its limited docket.”), cert. denied, 531 U.S. 822
(2000).
Accordingly, the motion to dismiss the Fourth Claim is denied, and the First,
Second and Third Claims are dismissed with leave to replead within thirty days of the
date of the order reflecting the disposition of the Motion. Submit order.
Dated: 	New York, New York
February 21, 2017
/s/ Stuart M. Bernstein
STUART M. BERNSTEIN
United States Bankruptcy Judge
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