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Collateral Estoppel Bars Debt from Being Dischargeable Under the Fraud Exception

By: Brandon Dorman

St. John’s Law Student

American Bankruptcy Institute Law Review Staff


            Pursuant to § 523(a)(2)(A) of the Bankruptcy Code, a debtor is not discharged from his or her debt for money, property, or services if it were obtained by false pretenses, a false representation, or actual fraud.”[1]  Non-dischargeability is generally a “matter of federal law governed by the terms of the Bankruptcy Code.”[2]  Nevertheless, a court may consider state rulings in determining whether fraud was committed.  Indeed, the Bankruptcy Court of the Eastern District New York decided that a state court’s finding of fraud under § 523(a)(2)(A)[3] estopped Anthony Ottimo (“Debtor”) from discharging his debt under chapter 7.[4]

United Service Organizations, Inc. (“Plaintiff”) used Debtor’s company, Jet One, to broker jet chartering services to transport Plaintiff’s entertainers.[5]  Jet One secured the services of Seagrave, a chartering service, but Seagrave rejected Jet One’s credit card.[6]  To ensure Plaintiff’s event was not canceled, Plaintiff entered into an agreement with Seagrave based on Jet One’s assurance that it would not charge Plaintiff twice.[7]  However, Plaintiff was charged twice, once by Jet One and once by Seagrave.[8]  A New York Supreme Court found Debtor guilty of common law fraud under New York state law, held Debtor liable for $330,791.80, and permitted Plaintiff to pierce the corporate veil to allow Plaintiff to recover from Louis and Anthony Ottimo.[9]  Debtor later filed for bankruptcy under chapter 7 of the Bankruptcy Code.[10]  Plaintiff filed a complaint seeking to prevent Debtor from discharging his debt.[11] Ultimately, in considering the Plaintiff’s motion for summary judgment, the Bankruptcy Court held (1) that it was collaterally estopped from re-litigating the fraud issue and that all previously adjudicated debt was non-dischargeable, because New York common law established actual fraud under § 523(a)(2)(A), and (2) that a finding of willful and malicious injury and embezzlement under § 523(a)(2)(6) and § 523(a)(4) could not be established since it was not raised during the state court proceedings.[12]

             In order to grant summary judgment due to collateral estoppel, the issue being litigated must be identical to the prior litigation and the party being denied re-litigation must have had a fair opportunity to litigate the matter.[13]   The court here held that actual fraud under § 523(a)(2)(A) and common law fraud under state law were identical[14] because they had the same elements.[15] Furthermore, the court found the burden of proof of clear and convincing evidence in state court is greater than the bankruptcy court’s burden of proof of preponderance of the evidence, as established in Grogan v. Garner.[16] The Court reasoned that because (1) common law fraud and actual fraud are identical and (2) since the state court held the Debtor guilty of fraud and an engaged participant in the litigation, the Debtor’s debt was collaterally estopped from being discharged.[17]

            A debtor seeking relief of its obligations that arose from a fraud is not automatically relieved of its obligation by filing for chapter 7.  In New York, common law fraud and actual fraud pursuant to § 523(a)(2)(A) are identical.[18] Therefore, in New York a debtor will not be able to escape its state court imposed debt obligation by filing for bankruptcy.  The elements of fraud in other states, however, may not be identical to the Bankruptcy Code’s elements of fraud.  Thus, a finding of fraud in a state court may not be determinative in a bankruptcy case, and it may be necessary to compare the two standards of fraud to determin

[1] 11 U.S.C.A. § 523(a)(2)(A) (2016).

[2] Grogan v. Garner, 498 U.S. 279, 284 (1991).

[3] In re Ottimo, No. 8—15—74712 slip op. at *1, *1 (Bankr. E.D.N.Y. June 7, 2017).

[4] See id. at *5.

[5] See id. at *1.

[6] See id.

[7] See id.

[8]  See id.

[9] See id. at *2–3.

[10] See id. at *3.

[11] See id.

[12] See id. at *2, 5.

[13] Evans v. Ottimo, 469 F.3d 278, 281 (2d Cir. 2006).

[14] See id.

[15] See id. (finding that both common law and bankruptcy law include elements of “false representation, scienter, reliance and harm”).

[16] See Garner 498 U.S. at 291.

[17] See id. at 3—4.

[18] See Ottimo, slip op. at *3.