IN THE UNITED STATES BANKRUPTCY COURT

FOR THE WESTERN DISTRICT OF PENNSYLVANIA

IN RE:

DAVID J. BIRENBAUM, : Bankruptcy No. 05-20640 BM

:

:

Debtor : Chapter 7

*******************************

STEVEN D. GINSBURG, on behalf of :

THE VERTICAL GROUP, INC. and :

STEVEN D. GINSBURG, :

:

Plaintiff :

:

v. : Adversary No. 05-2506 BM

:

DAVID J. BIRENBAUM, : Trial On Compliant To Determine

: Dischargeability Of Debt

Defendant :

Appearances: Charles E. Bobinis, Esq. for Plaintiffs

 Donald Calaiaro, Esq. for Defendant

MEMORANDUM OPINION

Plaintiff Steven Ginsburg seeks a determination in this adversary action that a

debt owed to him by debtor David Birenbaum, which arose out of a final judgment and

order enforcing a settlement agreement issued by a court in Florida, is excepted from

discharge by § 523(a)(4) of the Bankruptcy Code. He maintains that debtor is collaterally

estopped from re-litigating certain issues of fact determined by the Florida court.

Debtor denies that he is collaterally estopped from re-litigating those issues of

fact in this case and asserts that the debt is not excepted from discharge by § 523(a)(4).

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1. Paragraph 1 of the complaint asserted that the lawsuit was “a derivative action to

prosecute a cause of action held by the corporation for damages”.

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Judgment will be entered in favor of defendant debtor and against plaintiff

Ginsburg. We conclude that collateral estoppel does not apply to this adversary action and

that the debt in question is not excepted from discharge by § 523(a)(4).

– FACTS –

The Vertical Group, Inc., a closely-held Florida corporation which was

incorporated in 1993, was in the business of buying and selling real estate for commercial

development. Debtor and Ginsburg each held fifty percent of its outstanding shares at all

times relevant to this adversary action.

Debtor was a director of the corporation as well as its president and treasurer.

Ginsburg disengaged himself from the affairs of the corporation in March of 1997, leaving

debtor in sole control of its day-to-day operations. Ginsburg, an attorney, thereafter

devoted himself to the full-time practice of law.

The relationship of debtor and Ginsburg, who had been best friends, deteriorated

and became highly contentious at some unknown time after March of 1997. On April 11,

2000, Ginsburg commenced a shareholder derivative action against debtor on behalf of the

corporation1

 in The Circuit Court for Miami-Dade County, Florida.

Among other things, Ginsburg asserted in Count I of the complaint that debtor

had: used funds of the corporation to make loans to himself and to others for his sole

benefit (¶ 6.c); withdrawn cash from the corporation for his sole benefit (¶ 6.d);

misappropriated funds of the corporation and disposed of its property without paying the

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proceeds derived therefrom to the corporation (¶ 6.e); borrowed funds from the

corporation when there was no reasonable expectation of a benefit to the corporation (¶

6.f); spent, diverted and otherwise disbursed funds of the corporation without maintaining

proper records and without accounting for the expenditures (¶ 6.g); wrongfully and

unlawfully discharged his duties as a director and an officer of the corporation (¶ 6.h);

misapplied and wasted the corporation’s assets (¶ 6.i); disposed of property of the

corporation without accounting for it (¶ 6.j); unlawfully paid dividends (¶ 6.k) refused to

account for the profits of the corporation or to repay amounts he withdrew from it (¶ 6.l);

and refused to permit inspection of the corporation’s books and records or to substantiate

the above transactions (¶ 6.m). In the ad damnum clause, Ginsburg requested a monetary

judgment in favor of the corporation and attorney’s fees and costs incurred in prosecuting

the matter.

It was alleged in paragraph 7 of the complaint that, as a result of the actions set

forth in paragraph 6, the corporation lost earnings from the assets debtor withdrew and

lost profits as a result of the sale of assets debtor withdrew from the corporation.

Count II of the complaint requested an order directing debtor to permit an

inspection of the corporation’s books and records. 

In Count III, Ginsburg alleged that he and debtor as directors and shareholders

were deadlocked in managing the corporation’s affairs. He requested an order dissolving

the corporation and appointing a receiver to liquidate its assets.

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Debtor and Ginsburg executed a settlement agreement on September 26, 2000,

which purported to resolve the above lawsuit. The settlement agreement provided, among

other things, that debtor would purchase Ginsburg’s shares in the corporation for the sum

of $90,000.

Paragraph 9 of the agreement provided that the Florida court would retain

jurisdiction to enforce the settlement agreement. In the event of a default by debtor, the

Florida court would enter a final judgment in favor of Ginsburg for the sums “due

hereunder”, in addition to attorney’s fees and costs Ginsburg incurred in enforcing the

settlement agreement.

Paragraph 10 of the settlement agreement provided that it would have res

judicata and collateral estoppel effect in any bankruptcy proceeding concerning the

dischargeability of the debts set forth therein. Such debts, in other words, were not

dischargeable in bankruptcy.

Debtor defaulted on his obligations arising under the settlement agreement,

whereupon Ginsburg filed a so-called “stipulation” in the Florida court for entry of a final

judgment. Among other things, the “stipulation” provided that if debtor filed a bankruptcy

petition, he agreed that Ginsburg had not waived his right to object to the dischargeability

of any debt arising under the settlement agreement or any final judgment. Despite the

representation that debtor had “stipulated” to the entry of a final judgment in favor of

Ginsburg, only Ginsburg signed the “stipulation”. Neither debtor nor his attorney had done

so. 

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A hearing on the “stipulation” was held by the Florida court on January 29, 2001.

While it is certain that debtor’s attorney was not present at the hearing, there was

conflicting testimony as to whether debtor participated on a pro se basis. 

At the conclusion of the hearing, the Florida court granted the motion to enforce

the settlement agreement and issued a final judgment in favor of Ginsburg in the amount

of $90,000. Paragraph 7 of the order provided as follows:

Pursuant to the Settlement Agreement, the allegations of Plaintiff’s

Complaint in Case No. 00-9410 (CA 21) set forth sufficient facts to

entitle Plaintiff to a final judgment[,] which facts are true and are

stipulated to by Birenbaum. As further agreed to by Birenbaum and

pursuant to the Settlement Agreement, this Final Judgment shall have

res judicata and collateral estoppel effect in any bankruptcy case or

proceeding concerning the dischargeability of the debts and obligations

set forth herein or in any final judgments resulting hereunder, whether

the discharge is sought under § 523 of § 727 or any other provision of

the United States Bankruptcy Code, and such debts shall be nondischargeable and excepted from discharge.

Debtor did not appeal the order issued by the Florida court on January 29, 2001.

The Florida court subsequently issued an order on October 4, 2001, awarding

Ginsburg attorney’s fees and costs in the amount of $40,000 plus interest. This was in

addition to the $90,000 it had awarded him in the order dated January 29, 2001.

Debtor filed a voluntary chapter 7 petition on January 19, 2005. Ginsburg was

identified on the schedules as having an undisputed general unsecured claim in the

amount of $94,875 arising from the above order of January 29, 2001. 

Ginsburg thereafter commenced this adversary action against debtor. He seeks

a determination that the $90,000 debt arising from the order of January 29, 2001, and the

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$40,000 debt arising from the order of October 4, 2001, are excepted from discharge by

§ 523(a)(4) of the Bankruptcy Code. 

The matter has been tried and is now ready for decision.

– ANALYSIS –

Does Collateral Estoppel Apply?

As was noted, the judgment and order the Florida court issued on January 29, 2001,

declared in paragraph 7 that the facts as alleged in the complaint in that lawsuit were true

and sufficed to warrant a final judgment in Ginsburg’s favor. It further declared that the

final judgment would have collateral estoppel effect in any future bankruptcy proceeding

concerning the dischargeability of the debts set forth in that judgment. Those debts, in

other words, were not dischargeable in bankruptcy. 

According to Ginsburg, the facts “embodied” in paragraph 7 of the above order

are binding on this court. Moreover, he continues, debtor is collaterally estopped from relitigating in this adversary action the facts alleged in the complaint in the Florida action

which were found to be true by the Florida court in the above judgment and order.

To the extent that the Florida court merely recited the principle that the facts as

determined by it may have collateral estoppel effect in this adversary action, the

declaration is not objectionable. Collateral estoppel applies in proceedings arising under

§ 523(a)(4) of the Bankruptcy Code. Grogan v. Garner, 498 U.S. 279, 285 n.11, 111 S.Ct.

654, 658 n.11, 112 L.Ed.2d 755 (1991).

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To the extent that the Florida court has arrogated unto itself the authority to

determine whether the debts owed by debtor to Ginsburg are or are not dischargeable in

bankruptcy, however, its declaration is objectionable. Congress reserved for bankruptcy

courts exclusive jurisdiction to determine whether a particular debt is dischargeable in

bankruptcy. Grogan, 498 U.S. at 284 n.10, 111 S.Ct. at 658 n.11. 

It is of no consequence for this adversary action that debtor stipulated in the

settlement agreement that the debt he owed to Ginsburg was not dischargeable. A debtor

cannot in advance of a bankruptcy filing contract away the right to have his or her debts

discharged. Alsan Corp. v. DiPierro (In re DiPierro), 69 B.R. 279, 282 (Bankr. W.D. Pa.

1987). A pre-petition waiver of the discharge of a particular debt undercuts one of the

primary purposes of the Bankruptcy Code and is not enforceable. Hayhoe v. Cole (In re

Hayhoe), 226 B.R. 647, 654 (9th Cir. BAP 1998). Such a waiver is contrary to public policy.

Bank of China v. Huang (In re Huang), 275 F.3d 1173, 1177 (9th Cir. 2002).

Having said all of the above, it is for this court to determine whether debtor is

collaterally estopped from denying the facts as determined by the Florida court in its

judgment and order enforcing the settlement agreement.

The criteria for determining whether collateral estoppel applies in a particular

case depend on which court rendered the prior decision. If a federal court rendered the

prior decision, federal criteria apply. Wolstein v. Docteroff (In re Docteroff), 133 F.3d 210,

214 (3d Cir. 1997). If a state court rendered it, the criteria of the state in which the

judgment was rendered apply. A federal court must accord the judgment of the state

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court the same preclusive effect as it would have under the laws of the state in which it

was rendered. Marrese v. American Academy of Orthopaedic Surgeons 470 U.S. 373, 380,

105 S.Ct. 1327, 1331-32, 84 L.Ed.2d 274 (1985).

The prior judgment at issue here was rendered by a Florida state court.

According to Florida law, collateral estoppel precludes re-litigating an issue when: (1) the

identical issue; (2) previously was fully litigated; (3) by the same parties or their privies;

(4) a final decision was rendered by a court of competent jurisdiction; and (5) the issue

was critical and necessary to the prior determination. Wingard v. Emerald Venture Florida,

438 F.3d 1288, 1293 (11th Cir. 2006).

The party invoking collateral estoppel to prevent the re-litigation of an issue

decided in a prior proceeding has the burden of establishing its applicability with “sufficient

certainty” through the record or by extrinsic evidence. Campbell v. State of Florida, 906

So. 2d 293, 295 (Fla. App. 2d 2004).

As has been noted, paragraph 7 of the judgment and order of January 29, 2001,

provided in part as follows:

Pursuant to the Settlement Agreement, the allegations of Plaintiff’s

Complaint ... set forth sufficient facts to entitle Plaintiff to a final

judgment[,] which facts are true and are stipulated to by Birenbaum.

The critical allegations against debtor in Count I of the complaint in the Florida

action, wherein Ginsburg sought a monetary judgment in favor of the corporation, were

set out in paragraphs 6 and 7. The specifics of those allegations were detailed previously

in this memorandum opinion and will not be reiterated here.

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As we understand it, the Florida court was referring to the factual allegations in

paragraphs 6 and 7 of the complaint when it decreed in paragraph 7 of its judgment and

order of January 29, 2001, that the facts set forth in the complaint were true and entitled

Ginsburg to a judgment in his favor.

We are not convinced that all of the above requirements for the application of

collateral estoppel are satisfied in this instance. In particular, we are not convinced that

the document captioned “Final Judgment and Order Enforcing Settlement Agreement”,

which was issued by the Florida court on January 29, 2001, was a final judgment which

disposed of the shareholder derivative action on behalf of the corporation Ginsburg had

brought. In addition, we are not convinced that the determination made in paragraph 7

of the Florida court’s judgment and order that the facts alleged in the complaint were true

and entitled Ginsburg to a judgment in his favor was necessary for the issuance of that

judgment and order in favor of Ginsburg.

A shareholder derivative action, originally a product of the common law, was

created to provide a vehicle for shareholders of a corporation to police “faithless directors

and managers”. Larsen v. Island Developers, Ltd., 769 So. 2d 1071, 1072 (Fla. App. 3d

2000)(quoting Cohen v. Beneficial Industrial Loan Corp., 337 U.S. 541, 548, 69 S.Ct. 1221,

93 L.Ed. 1528 (1949)). A shareholder is permitted in such a lawsuit to pursue causes of

action belonging to the corporation. Provence v. Palm Beach Taverns, Inc., 676 So. 2d

1022, 1024 (Fla. App. 4th 1996). The corporation is the real party in interest, while the

shareholder is only a nominal party. Id.

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Review of the so-called “Final Judgment and Order Enforcing Settlement

Agreement” the Florida court issued on January 29, 2001, indicates that, in spite of its

caption, it merely enforced the settlement between debtor and Ginsburg. It did not

resolve in any way the causes of action belonging to the corporation that were asserted

in the complaint; it was not a judgment of any kind with respect to those causes of action.

Paragraphs 1 and 2 of the recital portion of the self-styled final judgment and

order stated that debtor had failed to perform the settlement agreement and that Ginsburg

consequently had to spend additional funds of his own to enforce their agreement. The

causes of action belonging to the corporation Ginsburg had asserted on its behalf were not

mentioned. 

Paragraph 1 of the decretal portion of the judgment and order granted Ginsburg’s

motion to enforce the settlement agreement and entered judgment in his favor in his own

right. As we understand it, final judgment was not issued on behalf of the corporation.

Paragraph 2 of the decretal portion of the judgment and order decreed that

Ginsburg was to recover the sum of $90,000 from debtor plus attorney’s fees in an amount

to be determined at a later time. Once again, no mention was made of the corporation.

Paragraph 3 adopted the settlement agreement, in which the corporation was not

involved in any way.

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2. For reasons that are not of record, the judgment and order enforcing the settlement

agreement had no paragraphs 4 and 5.

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Paragraph 6 of the judgment and order2 decreed that Ginsburg was entitled to

recover reasonable attorney’s fees and costs he incurred in enforcing the settlement

agreement.

We conclude in light of the foregoing that the document captioned “Final

Judgment and Order Enforcing Settlement Agreement” issued by the Florida court on

January 29, 2001, did not dispose of or adjudicate the issues raised in the complaint by

Ginsburg on behalf of the corporation. The judgment and order resolved only matters

concerning the settlement agreement between debtor and Ginsburg, which in turn had

nothing to do with the causes of action Ginsburg had asserted in the complaint on behalf

of the corporation. The judgment and order of January 29, 2001, in other words, does not

satisfy requirement (3) for collateral estoppel to apply to this adversary action.

We further conclude that requirement (5) for collateral estoppel to apply also is

not satisfied in this instance. The statement in paragraph 7 of the decretal portion of the

judgment and order of January 29, 2001, that the facts as alleged in the complaint brought

in the shareholder derivative action were true and entitled Ginsburg to a judgment in his

favor was gratuitous for purposes of enforcing the settlement agreement between debtor

and Ginsberg. Those facts were not relevant to whether the settlement agreement should

be enforced

The proposed judgment and order which the Florida court issued on January 29,

2001, was drafted and submitted by Ginsburg. We have no doubt that Ginsburg included

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the superfluous language in paragraph 7 of the decretal portion of the judgment and order

because he was concerned that debtor might file a bankruptcy petition and attempt to

have the debt he owed to Ginsburg discharged. By including paragraph 7 in the decretal

portion of the judgment and order, Ginsburg went beyond what was necessary for the

Florida court to enforce the settlement agreement.

We conclude in light of the foregoing considerations that not all of the

requirements for collateral estoppel to apply to this adversary action have been satisfied.

Ginsburg’s attempt to preclude debtor from re-litigating the factual determinations made

by the Florida court in paragraph 7 of the decretal portion of its judgment and order of

January 29, 2001, must fail.

Does § 523(a)(4) Apply ?

Our discussion does not end with the conclusion that collateral estoppel does not

apply to this adversary action. The debt owed to Ginsburg in his own right by debtor

which arises from the judgment and order enforcing the settlement agreement between

them is not excepted from discharge by § 523(a)(4) even if all of the above requirements

of collateral estoppel were satisfied.

Section 523(a)(4), upon which Ginsburg relies, provides in part as follows:

(a) A discharge under section 727 ... of this title does not discharge an

individual debtor from any debt -- ....

(4) for fraud or defalcation while acting in a fiduciary capacity,

embezzlement, or larceny.

11 U.S.C. § 523(a)(4).

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A creditor objecting to the dischargeability of a particular debt has the burden of

proving, by a preponderance of the evidence, that the debt falls within the scope of one

of the numerous exceptions to dischargeability found at § 523(a). Grogan, 498 U.S. at

291, 111 S.Ct. at 661.

To prevail on the theory that debtor committed fraud or defalcated while acting

in a fiduciary capacity for purposes of § 523(a)(4), Ginsburg must prove that: (1) debtor

was acting in a fiduciary capacity when the alleged wrongful conduct occurred; and (2)

debtor committed fraud or defalcation while acting in that capacity. Heer v. Scott (In re

Scott), 294 B.R. 620, 630 (Bankr. W.D. Pa. 2003). He also must prove that damages

resulted. Financial Partnership v. Steele (In re Steele), 2005WL281154, *3 (Bankr. E.D. Pa.

2005).

Under Florida law, a director of a corporation is obligated to exercise his or her

duties as a director in good faith, with the level of care an ordinarily prudent person in a

like position would exercise under like circumstances, and in a manner he or she believes

is in the best interest of the corporation. Fla. Stat. Ann. § 607.0830(1)(a)-(c).

The relationship between a director and the corporation and its shareholders has

been variously described by Florida courts. Some have characterized it as a fiduciary

relationship. E.g., Rehabilitation Advisors, Inc. v. Floyd, 601 So. 2d 1286, 1288 (Fla. App

5th 1992). Others have characterized it as a quasi-fiduciary relationship. E.g., Florida

Equipment & Engineering Corp. v. Shelton, 103 So. 2d 615, 626 (Fla. 1958). 

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We fortunately need not sort through this difference in terminology to determine

whether, for purposes of § 523(a)(4), debtor owed a fiduciary duty to the corporation and

to Ginsburg as a shareholder.

 The United States Court of Appeals for the Third Circuit apparently has not said

whether the criteria for determining whether a debtor acted in a fiduciary capacity are the

same as the criteria for making such a determination under state law. Appellate courts

which have addressed the issue, however, have concluded that federal rather state law

governs in this regard. E.g., Commonwealth Land Title Co. v. Blaszak (In re Blaszak), 397

F.3d 386, 390 (6th Cir. 2005); Blyler v. Hemmeter (In re Hemmeter), 242 F.3d 1186, 1189

(9th Cir. 2001).

The concept of a fiduciary for purposes of § 523(a)(4) is narrower than it is under

state law. Blaszak, 397 F.3d at 391; Miller v. J. D. Abrams (Matter of Miller), 156 F.3d 598,

602 (5th Cir. 1998), cert. denied, 526 U.S. 1016, 119 S.Ct. 1250, 143 L.Ed.2d 347 (1999).

A debtor may, in other words, qualify as a fiduciary under state law while not so qualifying

for purposes of § 523(a)(4). 

The concept of a fiduciary for purposes of § 523(a)(4) applies only in situations

in which an express or technical trust exists. Among other things, the alleged trustee’s

obligations must have arisen prior to rather than as a consequence of tortious conduct by

that individual. A constructive trust or a trust ex maleficio consequently does not fall

within the scope of § 523(A)(4). Texas Lottery Commission v. Tran (Matter of Tran), 151

F.3d 339, 342 (5th Cir. 1998).

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While federal rather than state law controls in defining what it is to be a fiduciary

for purposes of § 523(a)(4), we may look to state law, in this instance the law of Florida,

to determine whether the required express or technical trust is present. Lewis v. Scott (In

re Lewis), 97 F. 3d 1182, 1185 (9th Cir. 1996).

For an express trust to exist under Florida law, there must be: (1) a settlor or

grantor; (2) a trustee; (3) one or more beneficiaries; and (4) an indication that property

was conveyed for purposes of the trust. McLemore v. McLemore, 675 So. 2d 202, 205 (Fla.

App. 1st 1996). There also must be a definite intent on the settlor’s part to create a trust

and also be clearly ascertainable beneficiaries. Id. The legal and equitable interests in the

trust res must reside in separate entities. Contella v. Contella, 559 So. 2d 1217, 1218 (Fla.

App. 5th 1990).

The record in this case is devoid of any evidence indicating that an express trust,

of which debtor was the trustee, existed in this case. There was no settler or grantor who

conveyed legal title to the corporation’s asserts to debtor. Legal title to the corporation’s

assets remained in the corporation at all relevant times. There also was no cestui que

trust – i.e., beneficiary – who held the equitable interest in those assets. The equitable

interest also resided in the corporation at all relevant times.

Debtor was a director and officer of the corporation who undoubtedly was

charged with managing its affairs in good faith and in a manner which was in its best

interest. While he may have qualified under Florida law as a fiduciary with respect to the

corporation and its shareholders, he did not so qualify for purposes of § 523(a)(4). 

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Having so determined, we need not consider whether debtor committed fraud or

defalcation when he supposedly misappropriated the corporation’s assets for his own

personal benefit, as set forth in paragraph 6 of the complaint in the Florida action.

Our inquiry does not end with this last determination. The exception to the

discharge of a particular debt in accordance with § 523(a)(4) may still apply if debtor’s

actions amounted to embezzlement or larceny.

As is the case with the phrase “while acting in a fiduciary capacity”, the meanings

of the terms “embezzlement” and “larceny” for purposes of this provision are determined

by federal rather than state law. In re Steele, 2005WL281154 at *3.

A debtor need not act in a fiduciary capacity when committing embezzlement or

larceny for the resulting debt to be excepted from discharge by § 523(a)(4). Webber v.

Giarratano (In re Webber), 299 B.R. 328, 337 (Bankr. D. Del. 2003). The phrase “while

acting in a fiduciary capacity” modifies only the phrase “fraud or defalcation”; it does not

modify the phrase “embezzlement or larceny”.

To prove that debtor committed embezzlement within the meaning of § 523(a)

(4), Ginsburg must establish that: (1) debtor was entrusted; (2) with property; (3) of

another; (4) which debtor appropriated for his own use; and (5) with fraudulent intent. Id.

To prove that a debtor committed larceny within the meaning of the same provision,

Ginsburg must establish that: (1) debtor wrongfully took; (2) property; (3) of another; (4)

without the consent of the owner; and (5) with intent to convert the property. Id.

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3. This conclusion is reinforced by the characterization of this adversary action in the joint

pretrial stipulation as a proceeding to determine whether the debt owed to Ginsburg is

excepted from discharge by § 523(a)(4). Nothing is said about any debt owed to the

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Fraudulent intent is a requirement common to both embezzlement and larceny.

Id. Without it, there can be no embezzlement or larceny for purposes of § 523(a)(4).

Although the caption of the complaint in this adversary action names the

corporation as well Ginsburg as plaintiffs, a fair reading of the complaint makes it

abundantly clear that Ginsburg only seeks a determination in this case that the debt owed

to him in his own right is excepted from discharge by reason of § 523(a)(4). He is not

seeking a determination that any debt owed to the corporation by debtor is excepted from

discharge by this provision of the Bankruptcy Code. 

In paragraphs 1 and 2 of the complaint in this adversary action, Ginsburg refers

to the settlement agreement he and debtor entered into on September 29, 2001, and to

the order issued on January 29, 2001, in which the Florida court enforced the settlement

agreement. We previously determined that the relief granted in the order of January 29,

2001, was in favor of Ginsburg in his own right and that no relief was granted to the

corporation. In paragraph 3, Ginsburg refers to the subsequent order issued on October

4, 2001, in which the Florida court awarded Ginsburg in his own right an additional

$40,000 in attorney’s fees and costs. In paragraphs 14 and 16, Ginsburg maintains that

the debts resulting from these orders remain unsatisfied. In the “Wherefore” clause of the

complaint in this adversary action, Ginsburg requests a determination that the debt owed

to him which arises out of the orders issued by the Florida court on January 29, 2001, and

October 4, 2001, are not dischargeable.3

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corporation by debtor. 

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The conclusion that Ginsburg is not seeking a determination in this adversary

action that any debt owed by debtor to the corporation is excepted from discharge, but

instead is seeking a determination that the debt owed by debtor to Ginsburg in his own

right is not dischargeable, is significant in determining whether debtor committed

embezzlement or larceny for purposes of § 523(a)(4) when he allegedly committed the

acts set forth in paragraph 6 of the complaint in the Florida case. The evidence in this

case does not support the conclusion that if debtor committed those acts, he thereby

committed embezzlement or larceny with respect to Ginsburg. 

Ginsburg did not own the property debtor supposedly misappropriated or

converted to his own use. It was owned by the corporation. Ginsburg has not explained

how debtor committed embezzlement or larceny with respect to him when debtor

supposedly misappropriated assets belonging to the corporation.

Even if this were not a problem, Ginsburg’s quest to have the debt owed to him

by debtor excepted from discharge must fail for another reason: the requisite fraudulent

intent for embezzlement or larceny to occur was not present.

Debtor and Ginsburg, by then the only shareholders of the corporation, had an

informal, pre-existing agreement between themselves that the corporation would serve as

their collective piggybank and that each of them would use the corporation’s assets for

their personal benefit when they saw fit to do so. The acts committed by debtor of which

Ginsburg complains in paragraph 6 of the Florida complaint fall squarely within the scope

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4. We do not know why Ginsburg elected to pursue debtor in the Florida action when he

did. The self-styled shareholder derivative action commenced in April of 2000, some seven

months before the corporation went into bankruptcy in The United States Bankruptcy Court

for the Southern District of Florida. How that bankruptcy case turned out is not apparent

from the record in this case. We are, however, left with the impression that debtor’s

cupidity in stripping the corporation of its assets had impinged upon Ginsburg’s opportunity

to do the same.

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of their informal agreement.4

 In light of this informal agreement, we are not willing to

conclude that when debtor misappropriated assets owned by the corporation and used

them for his personal benefit, he did so with intent to defraud Ginsburg. To the contrary,

he did so with the implicit consent of Ginsburg.

 We note in closing that neither party to this adversary action has displayed much

in the way of candor or integrity. Both obviously had much to hide from the court.

For his part, debtor calmly and reassuringly testified under oath that he had repaid

much of the money he took from the corporation and claimed that he had loaned it a

substantial sum of money which was never repaid. When asked on cross-examination

whether he had documents to support his testimony, debtor matter-of-factly admitted that

he did not and mumbled sotto voce he could not do so because “that was a long time

ago”. Debtor’s testimony that he had repaid the corporation was a palpable fabrication.

Ginsburg fared no better as a witness than did debtor. Ginsburg, who at one

time had been a prosecutor and surely knew what he was doing, repeatedly resorted to

inadmissible hearsay in response to questions asked by his own counsel. Moreover, his

testimony frequently was evasive and was not responsive to questions asked of him.

When he did not care to respond to a question, Ginsburg would change the subject and

talk about something else.

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In an ideal world, neither party would prevail in this adversary action. Ours,

unfortunately, is a far-from-ideal world. We are not part of a Ministry of Justice that has

a duty to effect true justice in every instance, but nonetheless have a duty to enforce the

law. Applying the evidence offered at trial to the law as we understand it, we conclude

that the debt owed by debtor to Ginsburg is not excepted from discharge by § 523(a)(4)

of the Bankruptcy Code. The debt, in other words, is dischargeable. 

An appropriate order shall issue.

 /s/ 

BERNARD MARKOVITZ

U.S. Bankruptcy Judge

Dated: July 6, 2006

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IN THE UNITED STATES BANKRUPTCY COURT

FOR THE WESTERN DISTRICT OF PENNSYLVANIA

IN RE:

DAVID J. BIRENBAUM, : Bankruptcy No. 05-20640 BM

:

:

Debtor : Chapter 7

*******************************

STEVEN D. GINSBURG, on behalf of :

THE VERTICAL GROUP, INC. and :

STEVEN D. GINSBURG, :

:

Plaintiff :

:

v. : Adversary No. 05-2506 BM

:

DAVID J. BIRENBAUM, : Complaint To Determine

: Dischargeability Of Debt

Defendant :

ORDER OF COURT

AND NOW, this 6th day of July, 2006, for reasons set forth in the foregoing

memorandum opinion, it hereby is ORDERED, ADJUDGED and DECREED that judgment

be and hereby is entered in favor of defendant/debtor David J. Birenbaum and against

plaintiff Steven D. Ginsburg. The debt owed by debtor to plaintiff is DISCHARGEABLE.

It is SO ORDERED.

 /s/ 

BERNARD MARKOVITZ

U.S. Bankruptcy Judge 

Service of this Memorandum Opinion and Order of Court shall be made on the following

parties: Charles E. Bobinis, Esq.; Donald R. Calaiaro, Esq.; Jeffrey J. Sikirica, Esq.; Office

of United States Trustee

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