NOT PRECEDENTIAL

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

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No. 16-1502

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IN RE: DAVID J. AIELLO,

 Debtor

MARIA A. AIELLO v. DAVID J. AIELLO, Appellant

 

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On Appeal from the District Court

for the Western District of Pennsylvania

(D.C. Civil No. 3-15-cv-00193) 

District Judge: Honorable Kim R. Gibson

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Submitted Pursuant to Third Circuit L.A.R. 34.1(a)

November 1, 2016

Before: HARDIMAN, SCIRICA, Circuit Judges, and ROSENTHAL,* District Judge

(Filed: November 28, 2016)

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OPINION**

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SCIRICA, Circuit Judge 

The United States Bankruptcy Court for the Western District of Pennsylvania

 *

 The Honorable Lee H. Rosenthal, United States District Judge for the Southern District 

of Texas, sitting by designation

** This disposition is not an opinion of the full Court and pursuant to I.O.P. 5.7 does not 

constitute binding precedent.
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granted Appellee Maria Aiello’s Motion for Summary Judgment, finding the debt owed 

to her by Appellant David J. Aiello was nondischargeable in bankruptcy under 11 U.S.C. 

§ 523(a)(4). The District Court affirmed the Bankruptcy Court order, and Mr. Aiello 

appeals.1

 We will affirm.

I.

Maria Aiello was married to David Aiello’s brother. When Ms. Aiello’s husband 

passed away in 1977, Ms. Aiello renounced her appointment as executor of his estate, 

and David Aiello stepped in to serve as executor. Ms. Aiello later filed a petition seeking 

an accounting of Mr. Aiello’s administration of the estate, and in 2001, filed exceptions 

to the accounting in the Court of Common Pleas of Elk County, Orphans’ Court Division 

(“Orphans’ Court”). Ms. Aiello alleged Mr. Aiello had engaged in self-dealing and 

breached his fiduciary duty. 

The Orphans’ Court held an evidentiary hearing over the course of several days, 

after which it issued its Findings of Fact, Conclusions of Law and Opinion. The 

Orphans’ Court found:

• Mr. Aiello redeemed 100 shares of the estate’s interest in Ridgway Cable 

Television, Inc. for a $200,000 note after the shares had been valued at $400,000 

and shortly before the company was sold for $1.5 million. Mr. Aiello and 

another brother, Victor, were the only two remaining shareholders. The 

Orphans’ Court imposed a $300,000 surcharge against Mr. Aiello for selfdealing.

• Mr. Aiello purchased 125.5 of the estate’s shares of stock in St. Mary’s Pressed 

Metals, Inc. (“SMPM”) without making an effort to market the estate’s shares 

 1 The Bankruptcy Court had jurisdiction pursuant to a Chapter 7 bankruptcy filed on 

September 6, 2012. The District Court had jurisdiction over the appeal from the 

Bankruptcy Court’s order under 28 U.S.C. § 158(a). We have jurisdiction under 28 

U.S.C. § 158(d)(1).
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publicly or privately. Other shares of the estate’s stock were purchased by a 

group of individuals that included Mr. Aiello and the attorney he hired to 

represent the estate. The Orphans’ Court described Mr. Aiello’s actions in 

connection with the sale and purchase of the shares of SMPM stock as “blatant 

acts of self-dealing” and voided the transfer of the estate’s shares of stock. J.A. 

125. 

• Mr. Aiello loaned $250,000 of the estate’s funds to SMPM without disclosing the 

loan to Ms. Aiello. Mr. Aiello subsequently forgave the balance of the loan. Mr. 

Aiello was also a creditor of SMPM, but he did not forgive any obligation owed 

to him by SMPM. The Orphans’ Court found Mr. Aiello offered “no reasonable 

or rational explanation” for forgiving the balance due to the estate and imposed a 

surcharge of $49,268.12, equal to the balance of the loan. J.A. 116.

• Mr. Aiello failed to have a stock certificate issued for the estate’s remaining 18 

shares of SMPM stock. The Orphans’ Court found Mr. Aiello “ha[d] not 

fulfilled his duties as the Estate executor” in connection with those shares. J.A. 

116.

• Mr. Aiello encouraged Ms. Aiello to invest estate funds in Salberg Auto 

Wreckers, of which Mr. Aiello owned 50%. At his urging, Ms. Aiello invested 

$50,000 of the estate’s funds in the business. Ms. Aiello never received any 

income or return on her investment, and when the business was sold, Ms. Aiello 

received only $31,571.75 from the sale proceeds. The Orphans’ Court imposed a 

surcharge for the $18,428.35 loss based on Mr. Aiello’s self-dealing.

• The estate held interests in three pieces of real property. Mr. Aiello conveyed the 

estate’s interest in each of the three properties: one to himself, one to his brother, 

Victor, and one to Victor’s family trust. The estate’s interest in each of the three 

properties was conveyed without consideration. The Orphans’ Court found Mr. 

Aiello “unequivocally violated his fiduciary duty with regard to these 

conveyances.” J.A. 129. It voided Mr. Aiello’s interest in the property he 

conveyed to himself and imposed a constructive trust for Ms. Aiello’s benefit. 

• The Orphans’ Court found Mr. Aiello “failed entirely to keep and protect the 

Estate records and to properly administer the Estate, which he treated as a 

clearinghouse for his own transactions and enterprises.” J.A. 113. The Orphans’ 

Court added, Mr. Aiello “failed in the performance of his fiduciary duties by not 

exercising the assiduity, caution, acumen and expertise that a prudent or 

reasonable person would ordinarily utilize in the management of their own 

affairs.” J.A. 113. It imposed a surcharge of $25,000 for Mr. Aiello’s failure to 

act in the best interest of the estate and its beneficiaries.

Mr. Aiello appealed, and the Superior Court of Pennsylvania affirmed the decision of 
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the Orphans’ Court.

In 2010, judgment was entered against Mr. Aiello in the amount of $1,021,723.34, 

based upon the surcharges, with interest, imposed by the Orphans’ Court. Mr. Aiello 

filed a Chapter 7 bankruptcy petition in the United States Bankruptcy Court for the 

Western District of Pennsylvania in 2012. In 2014, Ms. Aiello filed a complaint to 

determine dischargeability in Mr. Aiello’s bankruptcy proceeding. She subsequently 

moved for summary judgment, contending the judgment arising from the Orphans’ 

Court decision was nondischargeable and the doctrine of collateral estoppel precluded 

Mr. Aiello from relitigating issues previously decided by the Orphans’ Court and the 

Superior Court.

The Bankruptcy Court granted Ms. Aiello’s motion and found the debt 

nondischargeable because it arose from “fraud or defalcation while acting in a fiduciary 

capacity.” 11 U.S.C. § 523(a)(4). It applied the doctrine of collateral estoppel to the 

findings of the state courts regarding Mr. Aiello’s conduct and found the record 

sufficient to establish as a matter of law that Mr. Aiello had the requisite scienter for 

defalcation. 

Mr. Aiello appealed the Bankruptcy Court’s decision to the District Court, and the 

District Court affirmed the Bankruptcy Court’s order in its Memorandum Opinion and 

Order dated February 17, 2016. This appeal followed.

II.2

 2 In reviewing orders of the Bankruptcy Court, we review factual findings for clear error 

and exercise plenary review over questions of law. In re Graves, 33 F.3d 242, 246 (3d 

Cir. 1994). “[O]ur review duplicates that of the district court and we view the bankruptcy 
5

Mr. Aiello’s primary argument is that the Bankruptcy Court erred in its application 

of the doctrine of collateral estoppel. Mr. Aiello contends the Orphans’ Court was not 

required to, and indeed did not, make any findings with regard to Mr. Aiello’s state of 

mind when it entered judgment against him for self-dealing and breach of fiduciary 

duty.3

 The absence of any finding regarding his state of mind, Mr. Aiello contends, 

precludes the application of the doctrine of collateral estoppel because the United States 

Supreme Court has held defalcation requires “an intentional wrong.” Bullock v. 

BankChampaign, N.A., 133 S. Ct. 1754, 1759 (2013). Mr. Aiello contends his state of 

mind remains in dispute, and summary judgment was improperly granted.

Determination of whether an exception to discharge applies is the province of 

federal bankruptcy courts. Grogan v. Garner, 498 U.S. 279, 284 n.10 (1991). Although 

state courts may not determine dischargeability of a debt, the principles of collateral 

estoppel may be applied to discharge exception proceedings to prevent relitigation of 

relevant issues that have previously been adjudicated by state courts. Id. at 284 n.11. 

Here, the Bankruptcy Court correctly applied the principles of issue preclusion under 

Pennsylvania law.4

 The Bankruptcy Court’s determination of whether Ms. Aiello’s 

 

court decision unfettered by the district court’s determinations.” In re Brown, 951 F.2d 

564, 567 (3d Cir. 1991).

3 Pennsylvania law does not require a showing of bad faith or fraudulent intent on the part 

of the fiduciary where self-dealing is apparent from the circumstances. In re Dobson’s 

Estate, 417 A.2d 138, 142 n.6 (Pa. 1980).

4 Where the preclusive effect of a state court judgment is at issue, the federal court must 

apply state preclusion principles to determine the extent to which the state court judgment 

bars relitigation of the issues. Marrese v. Am. Acad. of Orthopaedic Surgeons, 470 U.S. 

373, 381–82 (1985). Under Pennsylvania law, an issue previously decided cannot be 

relitigated when: (1) the issue decided in the prior case is identical to the one presented in 
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judgment against Mr. Aiello could be discharged turned on whether the judgment arose 

from “fraud or defalcation while acting in a fiduciary capacity.” 11 U.S.C. § 523(a)(4). 

The Orphans’ Court and Superior Court had conclusively resolved key issues 

underlying that determination, including Mr. Aiello’s status as a fiduciary and the 

wrongfulness of his conduct while acting in that capacity. Those issues were essential 

to the state court’s judgment, and the Bankruptcy Court was obligated to address those 

identical issues to determine dischargeability. Accordingly, the Bankruptcy Court 

correctly applied the doctrine of collateral estoppel and found Mr. Aiello could not 

contest the Orphans’ Court findings regarding his conduct. The Bankruptcy Court’s 

dischargeability determination also requires a finding regarding Mr. Aiello’s state of 

mind, see Bullock, 133 S. Ct. at 1759–60, but that does not diminish the preclusive 

effect of the state court’s findings regarding Mr. Aiello’s conduct while acting as a 

fiduciary. 

Summary judgment in favor of Ms. Aiello was also correctly granted by the 

Bankruptcy Court. Summary judgment is appropriate “if the movant shows that there is 

no genuine dispute as to any material fact and the movant is entitled to judgment as a 

matter of law.” Fed. R. Civ. P. 56(a). A dispute is genuine only if there is sufficient 

 

the later action; (2) there was a final adjudication on the merits; (3) the parties in the later 

proceeding are identical or in privity to those in the earlier proceeding; (4) the party 

seeking to relitigate the issue decided had a full and fair opportunity to litigate the issue 

in the prior proceeding; and (5) the determination in the prior proceeding was essential to 

the judgment. Metro. Edison Co. v. Pa. Pub. Util. Comm’n, 767 F.3d 335, 351 (3d Cir. 

2014); Office of Disciplinary Counsel v. Kiesewetter, 889 A.2d 47, 50–51 (Pa. 2005). 

There is no dispute between the parties that the second, third, and fourth elements are 

satisfied. 
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evidentiary basis on which a reasonable trier of fact could return a verdict for the nonmoving party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). 

Under Bullock, defalcation encompasses “conduct that the fiduciary knows is 

improper [and] reckless conduct of the kind that the criminal law often treats as the 

equivalent.” 133 S. Ct. at 1759. It includes a fiduciary’s conscious disregard of “‘a 

substantial and unjustifiable risk’ that his conduct will turn out to violate a fiduciary 

duty.” Id. (quoting ALI, Model Penal Code § 2.02(2)(c) (1985)). “That risk must be of 

such a nature and degree that, considering the nature and purpose of the actor’s conduct 

and the circumstances known to him, its disregard involves a gross deviation from the 

standard of conduct that a law-abiding person would observe in the actor’s situation.” 

Id. at 1760 (internal quotation marks omitted). 

The state court’s findings are conclusive on Mr. Aiello’s wrongful conduct; 

accordingly, the only remaining issue in dispute was whether Mr. Aiello knew his 

conduct was unlawful or consciously disregarded a substantial risk that his conduct 

violated his fiduciary duty. The Bankruptcy Court correctly concluded no reasonable 

trier of fact could find that Mr. Aiello did not act in violation of his fiduciary duty with 

the state of mind required by Bullock. 

Intent “must be gleaned from inferences drawn from a course of conduct.” Rosen 

v. Bezner, 996 F.2d 1527, 1534 (3d Cir. 1993) (quoting In re Kauffman, 675 F.2d 127, 

128 (7th Cir. 1981)). Many courts have concluded that undisputed evidence of 

egregious fiduciary violations may be used at summary judgment to find that a debtor 

was reckless as to the impropriety of his actions. See, e.g., In re Heers, 529 B.R. 734 
8

(9th Cir. BAP 2015) (looking to the undisputed facts in the record—a pervasive and 

unjustified series of breaches of fiduciary duties—to find recklessness at the summary 

judgment stage); Stoughton Lumber Co. v. Sveum, 787 F.3d 1174, 1177 (7th Cir. 2015) 

(similarly inferring recklessness based on cumulative facts).

Mr. Aiello’s course of conduct provides sufficient circumstantial evidence of 

intent to conclude as a matter of law that he knew his conduct was unlawful.5

 Mr. 

Aiello engaged in several transactions that benefited himself and his brother Victor to 

the clear detriment of the estate. He sold the estate’s shares of Ridgway Cable 

Television to himself and his brother for half their value. He sold the estate’s shares of 

SMPM stock to himself and his business associates at prices he set. He conveyed three 

separate pieces of real property to himself and his brother without consideration. He 

urged Ms. Aiello to invest estate funds in his own ill-fated business, and he forgave the 

balance of a substantial loan from the estate without any rational explanation. Mr. 

Aiello’s efforts to conceal his self-dealing transactions provide further circumstantial 

evidence of intent. Mr. Aiello failed to keep estate records, failed to keep Ms. Aiello 

informed about his management of the estate, and failed to seek court approval for 

transactions that required it. Mr. Aiello’s repeated and blatant self-dealing and his 

efforts to conceal it constitute a gross deviation from the standard of conduct that a lawabiding person would observe. Summary judgment was appropriate, and the judgment 

against Mr. Aiello is not dischargeable.

 5 Alternatively, there is sufficient evidence to conclude he was at least reckless as to the 

impropriety of his conduct, which is sufficient under Bullock. 133 S. Ct. at 1759 

(defining defalcation to include “reckless conduct of the kind that the criminal law often 

treats as the equivalent” of knowing conduct). 
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III.

For the foregoing reasons, we will affirm the District Court’s order entered on 

February 17, 2016, which affirmed the order of the Bankruptcy Court.