Crescent Electric Supply Company Inc. of New York v. Bartolomeo

OCR transcription for search; preserved printed pages are authoritative

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UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK

In re:

ANTHONY J. BARTOLOMEO, : Chapter 7
Case No. 19-12294 (LGB)
Debtor.

Crescent Electric Supply Company, Inc.,

Plaintiff,
Adv. Pro. No. 19-01328 (LGB)
- against -

ANTHONY J. BARTOLOMEO,

Defendant.

BENCH DECISION ON DEFENDANT’S MOTION TO DISMISS

APPEARANCES

KORSINSKY & KLEIN LLP
Attorneys for Plaintiff Crescent Electric Supply Company Inc. of New York
BY: Marc Illish

Michael Korsinsky

DAVIDOFF HUTCHER & CITRON LLP
Attorneys for Defendant Anthony J. Bartolomeo
BY: James B. Glucksman

Robert Leslie Rattet

TARTER KRINSKY & DROGIN LLP

Attorneys for Trustee Deborah J. Piazza
BY: Arthur Goldstein

AUTHENTICATED
U.S. GOVERNMENT
INFORMATION

GPO

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LISA G. BECKERMAN
UNITED STATES BANKRUPTCY JUDGE

On October 14, 2020, Anthony J. Bartolomeo, defendant in the adversary proceeding 19-
01328, filed a declaration of Anthony Bartolomeo in support of the motion to dismiss [Docket
No. 28] with respect to the amended complaint [Docket No. 22] (the “Complaint’’) and an
accompanying memorandum of law [Docket No. 30]. On November 4, 2020, the plaintiff,
Crescent Electric Supply Company Inc. of New York, filed a memorandum in opposition to the
motion to dismiss [Docket No. 32]. On January 7, 2021, the defendant filed a reply in support of
the motion to dismiss [Docket No. 36].

The defendant is a debtor in a chapter 7 proceeding, Case No. 19-12294 (LGB), which
was commenced on July 16, 2019 and is pending before this Court.

Based upon the pleadings submitted to the Court, I am granting the defendant’s motion to
dismiss in part and denying the motion to dismiss in part.

In the Complaint, the plaintiff is seeking an exception to discharge for debt owed by the
defendant to the plaintiff under sections 523(a)(2), 523(a)(4) and 523(a)(6) of the Bankruptcy
Code. The Complaint states that the debt owed to plaintiff is an unsecured non-priority claim in
the amount of $188,645.39. Complaint §] 24, Docket No. 22.

The defendant seeks to dismiss the Complaint on various grounds including res judicata
and collateral estoppel based upon the decision issued by Judge Tanya R. Kennedy of the
Supreme Court of State of New York dated July 3, 2019 (the “State Court Decision”) which is
attached to the declaration of Anthony Bartolomeo as Exhibit 1. Having reviewed the Complaint
and the State Court Decision, the plaintiff is not seeking to relitigate issues that were previously
determined in the state court proceeding before Judge Kennedy. Thus, the State Court Decision
does not provide grounds to dismiss the Complaint on grounds of res judicata or collateral
estoppel or the “Rooker-Feldman Doctrine,” notwithstanding similarities of the complaint. In
part, this is because Judge Kennedy granted leave for the plaintiff to replead two of the causes of
action (the sixth and seventh causes of action in the state court complaint regarding trust assets)
and in part because the plaintiff seeks relief in the Complaint under the Bankruptcy Code
(precluding a discharge of debt) that differs from the relief sought in the state court complaint
before Judge Kennedy.

Section 523(a)(6) provides that “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 to the property of another entity.” To be
considered “willful” under this section, the injury itself must be “deliberate or intentional,” it is
not enough that a deliberate or intentional act led to an injury. Kawaauhau v. Geiger, 523 U.S.
57, 61-62 (1998). The actor must have intended “‘the consequences of an act,’ not simply ‘the
act itself.” /d. (citations omitted).

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The plaintiff alleges in the Complaint that the defendant intentionally participated and
knew about the use of trust funds for non-trust purposes in his role as a member, principal, and
officer of Innovative Electrical Services LLC (“Innovative”). Complaint § 62. The plaintiff
further alleges that it is undisputed that the plaintiff knowingly participated in Innovative’s
diversion of trust funds when said funds were used for non-trust purposes to pay Provident Bank,
a non-trust beneficiary creditor of Innovative. Complaint { 67. The plaintiff also alleges that,
upon information and belief, the defendant in his role as an officer of Innovative intentionally
consented to and/or signed multiple false waivers before a notary public, including lien waivers
with respect to projects for which the plaintiff was owed money. Complaint ¥ 73.

While the Complaint includes allegations that defendant acted knowingly and
intentionally in taking actions in his role as an officer of Innovative to divert trust funds to non-
trust purposes, the Complaint does not contain any allegations that the defendant willfully and
maliciously intended to injure the plaintiff by these alleged acts. Therefore, the motion to
dismiss with respect to the count in the Complaint seeking a denial of the discharge of the debt
under section 523(a)(6) is granted.

The Complaint also seeks a denial of the discharge of the debt under section 523(a)(2) of
the Bankruptcy Code on the grounds that the debt was incurred for services rendered that were
obtained by fraud. Complaint § 58.

Section 523(a)(2) of the Bankruptcy Code is more broadly worded. It precludes a debt
from being discharged if it is 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.

In interpreting section 523(a)(2), courts have applied a five-part test. Each of these five
elements must be established:

(1) the debtor made a representation;

(2) the debtor knew the representation was false at the time it was made;

(3) the representation was made with the intent to deceive the creditor;

(4) the creditor relied on the representation; and

(5) the creditor was injured by the representation and suffered damages as a result.

Kuper v. Spar In re Spar), 176 B.R. 321, 326 (Bankr. S.D.N.Y. 1994).

In the Complaint, the plaintiff alleges that the defendant swore that all of the
beneficiaries, including the plaintiff, were paid in full in respect of the construction projects for
which Innovative was being paid in exchange of the lien waivers. Complaint 4 74. The plaintiff
also alleges that these representations were false when made and the defendant knew them to be
false. Complaint § 75. The Complaint further alleges that as a result of signing false waivers
and the making of false representations as stated therein, the defendant induced general
contractors and owners to make payment of lien trust funds. Complaint { 76.

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What the Complaint does not allege is that the false representations were made with the
intent to deceive the plaintiff, as opposed to the general contractors and the owners. The
Complaint also does not allege that the plaintiff, as opposed to the general contractors and the
owners, relied upon the defendant’s false representation. Plaintiff has not met its burden of
pleading in the Complaint with respect to the required five elements. Accordingly, the motion to
dismiss with respect to the count in the Complaint seeking a denial of the discharge of the debt
under section 523(a)(2) is granted.

Under section 523(a)(4) of the Bankruptcy Code, the debt may be excepted from
discharge for fraud or defalcation while acting in a fiduciary capacity, embezzlement or larceny.
The Complaint alleges that the defendant committed defalcation while acting in a fiduciary
capacity and larceny.

The Complaint cites to section 79-a of New York Lien Law (the “Lien Law’’) which
states “an officer, director or agent of such trustee, who applies or consents to the application of
trust funds received by the trustee as money or an instrument for the payment of money for any
purpose other than the purposes of that trust, as defined in section seventy-one, is guilty of
larceny and punishable as provided in the penal law.” Complaint {| 70. To sufficiently plead
larceny, the Complaint must allege that the funds received by Innovative from the owner or
general contractor were trust funds, that Innovative was the trustee of such trust funds, that the
defendant was an officer of Innovative at the time of the application of the trust funds and that
the defendant consented to the application of the trust funds. The Complaint alleges each of
these elements of larceny. Complaint 9 29-39, 48-49.

The State Court Decision held that Article 3-A of the Lien Law creates “‘trust funds out
of certain construction payments or funds to assure payment of subcontractors, suppliers,
architects, engineers, laborers, as well as specified taxes and expenses of construction.’”
Crescent Elec. Supply Co., Inc., of N.Y. v. Innovative Elec. Servs. LLC, 2019 N.Y. Misc. LEXIS
3657, at *6 (N.Y. Sup. Ct. 2019) (quoting Caristo Constr. Corp. v. Diners Fin. Corp., 21 N.Y .2d
507, 512 (1968)). Bankruptcy Courts in New York have held that Article 3-A of the Lien Law
creates an express statutory trust which qualifies as a trust for purposes of section 523(a)(4). See
Besroi Constr. Corp. v. Kawczynski In the Matter of Kawczynski), 442 F.Supp. 413 (W.D.N.Y.
1977); Truax & Hovey, Ltd. v. Grosso Un re Grosso), 9 B.R. 815 (Bankr. N.D.N.Y. 1981);
Sandak v. Dobrayel (In re Dobrayel), 287 B.R. 3 (Bankr. S.D.N.Y. 2002). Funds received by a
contractor are held in trust for the benefit of certain beneficiaries, including subcontractors and
materialmen. N.Y. Lien Law § 70(3) (Consol. 2021). Lien Law section 71(2) includes
materialmen in the list of parties that may be paid out of the trust assets. The contractor is in a
fiduciary relationship to the beneficiaries as the statutory trustee. N.Y. Lien Law § 70(3)
(Consol. 2021). Courts have held that officers of a corporate trustee may be held personally
liable under the Lien Law for a corporation’s diversion of trust funds. See Curtis Lumber Co.,
Inc. v. Waldron (In re Michael J. Waldron), 2015 WL 6734481, at *1 (Bankr. N.D.N.Y. 2015).


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