Court Opinion

ID: 71413
Source: CourtListenerOpinion
Date Created: 2010-04-26 07:18:14+00
Date Added: 2024-06-11T17:14:58.839903
License: Public Domain

United States Court of Appeals,

                          Eleventh Circuit.

                              No. 95-2988

                        Non-Argument Calendar.

                   In re Paul A. BILZERIAN, Debtor.

        HSSM # 7 LIMITED PARTNERSHIP, Plaintiff-Appellee,

                                  v.

             Paul A. BILZERIAN, Defendant-Appellant.

                            Dec. 3, 1996.

Appeal from the United      States District Court for the Middle
District   of  Florida.     (No.   93-2149-Civ-T-23C), Harvey E.
Schlesinger, Judge.

Before KRAVITCH, COX and DUBINA, Circuit Judges.

     PER CURIAM:

     In this case, the district court reversed the bankruptcy

court's holding that a fraud judgment debt owed by appellant Paul

A. Bilzerian ("Bilzerian") to appellee HSSM # 7 Limited Partnership

("HSSM") was dischargeable. Bilzerian, a Chapter 7 debtor, appeals

pro se the district court's reversal of the bankruptcy court's

holding.   Because we conclude that Bilzerian received a benefit

from his fraud, and that collateral estoppel prevents relitigation

of the necessary elements of fraud under 11 U.S.C. § 523(a)(2)(A),

we affirm the district court's judgment.

                            I. BACKGROUND

     HSSM brought suit against Bilzerian and Bicoastal Financial

Corporation ("BFC") in the United States District Court for the

Northern District of Texas.    In its fifth amended complaint, HSSM

alleged that Bilzerian made a series of misrepresentations to HSSM
to induce HSSM to invest $20.4 million in Suncoast Partners Limited

Partnership          ("Suncoast").         Such        representations          involved

Bilzerian's skill and expertise in securities transactions and his

agreement to repurchase HSSM's interest in Suncoast.                        The latter

agreement, known as "the put," entailed Bilzerian's contracted

agreement       to   purchase    HSSM's    interest       in     Suncoast      at    HSSM's

election. The district court in Texas found that this arrangement:

     was a specifically negotiated contract provision resulting
     from the clear understanding of the parties that plaintiff
     HSSM ... needed the opportunity to have liquidity from its
     investment in Suncoast ... on an annual basis or it would not
     make the investment....       Without Section 5.6 in the
     partnership agreement, HSSM would not have become a partner in
     Suncoast.

Findings of Fact and Conclusions of Law, BR42, Ex. F at 1-2.

     The    case      was    tried    to   a    jury,    which     answered         special

interrogatories and returned a verdict in favor of HSSM and against

Bilzerian and BFC, jointly and severally. The Texas district court

entered    judgment      on     the   jury's     verdict,      and   concluded         that

Bilzerian and BFC were guilty of actual fraud.                           Moreover, the

district court rescinded the partnership agreement and ordered

Bilzerian and BFC, jointly and severally, to pay HSSM $19.839

million    in    compensatory         damages,       $1.224    million    in    punitive

damages, and post-judgment interest to accrue at the rate of 6.46

percent per annum.          The court subsequently amended its judgment to

correct     a    clerical       error.         The     amended     judgment         awarded

$26,861,312.78 in compensatory damages and prejudgment interest,

and the punitive damage award and rate of post-judgment interest

remained the same.          On February 24, 1992, the district court filed

its Findings of Fact and Conclusions of Law.                       The Fifth Circuit
Court of Appeals affirmed the district court's judgment.

       On August 5, 1991, both Bilzerian and BFC filed voluntary

petitions for relief under Chapter 11 of the Bankruptcy Code (the

"Code").         After the United States Supreme Court denied certiorari

in another case involving Bilzerian's conviction for securities

fraud, Bilzerian's bankruptcy case was converted to one under

Chapter 7. HSSM filed a Complaint To Determine Dischargeability Of

Debt       and   Objecting    to   Discharge       in    bankruptcy   court   against

Bilzerian.         HSSM objected to the discharge of the judgment debt

Bilzerian        owed    to   HSSM,   as    well    as    to   Bilzerian's    general

discharge.         Count one of the adversary complaint—the only count

relevant to this appeal—alleged that Bilzerian's judgment debt to

HSSM was a debt for money obtained by actual fraud and was thereby

excepted from discharge under 11 U.S.C. § 523(a)(2)(A).1

       HSSM filed a motion for summary judgment on count one alleging

that, under principles of collateral estoppel, the debt arising

from       the   Texas   judgment     was   nondischargeable       because    it   was

obtained by fraud.            Bilzerian filed a cross motion for summary

judgment arguing, among other issues, that collateral estoppel

should not apply because the Texas court did not actually litigate

several issues, such as whether Bilzerian had directly received any

money or property as a result of the alleged fraud, and whether

HSSM had failed to show that it sustained a loss as a result of

Bilzerian's false representations.             The bankruptcy court concluded

that in order for a debt to be excepted from discharge under §

       1
      All the other counts alleged in HSSM's adversary complaint
have been dismissed or resolved.
523(a)(2)(A), "the Debtor himself must obtain the money, property,

services    ...    by       misrepresentation,       false   pretenses    or    actual

fraud."      HSSM       #    7    Limited   Partnership      v.   Bilzerian    (In    re

Bilzerian), 162 B.R. 583, 589 (Bankr.M.D.Fla.1993).                    Accordingly,

the bankruptcy court granted summary judgment in favor of Bilzerian

because it found that the evidence in the Texas case did not show

that Bilzerian individually obtained any money or property from

HSSM. On appeal the district court rejected the bankruptcy court's

interpretation of § 523(a)(2)(A) and concluded that the provision

requires    only    that         the   debtor   receive   some    benefit,     even   if

indirectly.       The district court found that Bilzerian received a

benefit from HSSM's investment in his business venture and that the

issue of fraud was actually and necessarily litigated in the Texas

case such that collateral estoppel precluded litigating the fraud

issue     again    in       the    bankruptcy     dischargeability       proceeding.

Bilzerian then perfected this appeal.

                                        II. ISSUES

     We address the following issues on appeal:

(1) whether a debtor, who did not individually receive the fruits
     of his or her fraud, but nevertheless received some benefit,
     has obtained "money, property, services, or an extension,
     renewal or refinancing of credit" for purposes of 11 U.S.C. §
     523(a)(2)(A); and

(2) whether collateral estoppel prevents relitigation of elements
     necessary to render Bilzerian's debt excepted from discharge
     under 11 U.S.C. § 523(a)(2)(A).

                                 III. STANDARD OF REVIEW

        Because the district court functions as an appellate court in

reviewing bankruptcy court decisions, this court is the second

appellate court to review bankruptcy court cases.                    Haas v. I.R.S.
(In re Haas), 31 F.3d 1081, 1083 (11th Cir.1994), cert. denied, ---

U.S. ----, 115, S.Ct. 2578, 132 L.Ed.2d 828 (1995).                   This court

reviews determinations of law, whether from the bankruptcy court or

the district court, de novo.       Id.      By contrast, this court reviews

the bankruptcy court's factual findings under the clearly erroneous

standard.   Id.

                                IV. ANALYSIS

A. 11 U.S.C. § 523(a)(2)(A) Exception From Discharge

     The issue of exception of debts from discharge is governed by

11 U.S.C. § 523. Section 523(a)(2)(A) provides that "[a] discharge

[in bankruptcy] does not discharge an individual debtor from 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[.]" (emphasis added).          This appeal involves the meaning

of the word "obtain" in § 523(a)(2)(A).

     Bilzerian    contends      that   in    order    for   the   exception   to

discharge found in § 523(a)(2)(A) to apply, a debtor must directly

obtain the money or property in question.            Thus, he concludes that

since he was not the direct recipient of HSSM's investment, § 523

is inapplicable to him.      The bankruptcy court accepted Bilzerian's

argument.2 The district court, however, disagreed with this rather

     2
      The bankruptcy court found as follows:

            There is nothing in this record, or the record of the
            Texas litigation, to establish the fact that Bilzerian
            individually obtained any money or property from HSSM.
            In fact, HSSM's entire investment was received by
            Suncoast, not Bilzerian. For a debt to be deemed
narrow reading of § 523(a)(2)(A).

         This issue is one of first impression in the Eleventh

Circuit.    Three views have emerged regarding the issue of whether

a debtor must personally receive money before the exception to

discharge of § 523(a)(2)(A) can apply.    The first view, which was

adopted by the bankruptcy court and is the narrowest, requires that

the debtor personally receive the fruits of the fraud.3   The second

view, which was adopted by the district court, is termed the

"receipt of benefits" theory. This theory requires that the debtor

gain a benefit from the money that was obtained by fraudulent

means.4    A third view, which is the broadest, requires simply that

            nondischargeable pursuant to § 523(a)(2)(A), the Debtor
            himself must obtain the money, property, services or an
            extension, renewal or refinancing of credit by
            misrepresentation, false pretenses or actual fraud.
            Inasmuch as Bilzerian never received any money,
            property, services, or an extension, renewal or
            refinancing of credit from HSSM, this Court is
            satisfied that it is appropriate to deny HSSM's Motion
            as to Count I ...

     Bilzerian, 162 B.R. at 589-90 (citations omitted) (emphasis
     added).
     3
      This view originated in Rudstrom v. Sheridan, 122 Minn.
262, 142 N.W. 313 (1913). The Rudstrom court found that: "In
order ... to bring the statute into operation, and prevent the
full discharge of the bankrupt, it should be made to appear that
property of some kind, tangible or intangible, was thus obtained
by him." Id. 142 N.W. at 314. However, as the bankruptcy court
noted in Simmons v. Wade (In re Wade ), 43 B.R. 976
(Bankr.D.Colo.1984), the creditor in Rudstrom suffered no loss
and thus failed to prove the elements of fraud; therefore, this
language in Rudstrom was dictum. Id. at 980-81.
     4
      We also note, as did the district court, that Bankruptcy
Chief Judge Paskay previously advocated the "receipt of benefits"
theory:

            According to one view, unless the debtor actually
            obtained money or property for himself through false
            representations, the debt remains dischargeable. The
a debtor obtain money by fraudulent means such that a debtor does

not necessarily have to receive money personally or receive any

benefit at all.5

     The bankruptcy courts diverge on this question;             however, the

three circuit courts that have considered the issue have rendered

decisions    favoring      the   "receipt   of   benefits"     theory.     See

BancBoston Mortgage Corp. v. Ledford (In re Ledford), 970 F.2d 1556

(6th Cir.1992), cert. denied, 507 U.S. 916, 113 S.Ct. 1272, 122

L.Ed.2d 667 (1993);         Luce v. First Equip. Leasing Corp. (In re

Luce), 960 F.2d 1277 (5th Cir.1992);             Ashley v. Church (In re

Ashley), 903 F.2d 599 (9th Cir.1990).            We agree with our sister

circuits    that   the    "receipt   of   benefits"   theory    is   the   more

well-reasoned approach.

     The Ninth Circuit's opinion in Ashley is the most analogous to

the instant case.        In Ashley, the debtor was involved in a plan to

finance, establish, and develop machine shops. Like Bilzerian, the

            better view, however, appears to be that the debtor
            need not actually procure the money or property for
            himself. If the debtor benefits in some way from the
            property obtained through his deception, the debt is
            nondischargeable.

     Century First Nat'l Bank v. Holwerda (In re Holwerda), 29
     B.R. 486, 489 (Bankr M.D.Fla.1983) (citations omitted).
     Thus, Chief Judge Paskay's language in Bilzerian evidences a
     dramatic shift away from the "receipt of benefits" theory.
     As a result of this shift, the Eastern District of
     Pennsylvania cited Bilzerian for the proposition that
     property received by fraud must be obtained by the debtor
     personally for purposes of § 523(a)(2)(A). See Sears,
     Roebuck and Co. v. Naimo (In re Naimo), 175 B.R. 878, 880
     (Bankr.E.D.Pa.1994).
     5
      For a thorough discussion of these three theories, see
Jacobs v. Mones (In re Mones), 169 B.R. 246, 250-53
(Bankr.D.C.1994), and Wade, 43 B.R. at 980-82.
debtor in      Ashley argued that he did not receive the money for

himself.       However, the debtor had contributed to loans to keep the

business afloat, and the debtor's conduct in arranging the loans

from the creditors was part of "a business plan to gain a foothold

in the machine shop industry."         Ashley, 903 F.2d at 604.    Although

the Ninth Circuit found the debtor's connection to the business to

be somewhat attenuated, the court nevertheless concluded that it

"placed him in a position to benefit from any infusion of capital

to that enterprise."       Id.6

     The Fifth and Sixth Circuits addressed the meaning of "obtain"

in § 523 in the context of deciding whether the fraud of a partner

should    be    imputed   to   an   "innocent"   partner.   Both   circuits

concluded that the claim against the innocent partner was subject

to § 523 because the "innocent" partner received benefits from the

fraudulent conduct.       Ledford, 970 F.2d at 1561-62;     Luce, 960 F.2d

at 1281-83.       But see Allison v. Roberts (In re Allison), 960 F.2d

481, 486 (5th Cir.1992) (declining to impute the fraudulent acts of

one spouse to the other uninvolved spouse).

         If it is acceptable to impute the fraud of one partner to

other partners who had no knowledge of the fraud simply because

     6
      The Ninth Circuit explained the debtor's benefit in the
following statement:

               One may characterize this event in either of two ways:
               (a) [the debtor] was sufficiently closely related to
               AMM to be considered a recipient of the $61,000 loan;
               or (b) although not a recipient of the $61,000, [the
               debtor] did profit because he had a financial interest
               in AMM. On either theory, [the debtor] obtained
               "money, property, services, ... or ... credit" for
               himself.

     Ashley, 903 F.2d at 604 n. 5.
they received a benefit, then it is certainly logical to hold

Bilzerian responsible here because of his active participation in

the fraud and his receipt of benefits therefrom.            Suncoast was

composed of HSSM, as sole limited partner, and BFC as the general

partner.7      Bilzerian induced HSSM to invest in Suncoast.      As the

other partner in Suncoast, BFC stood to benefit from HSSM's $20.4

million      investment   in   Suncoast.   In   addition,    Bilzerian's

connections with the companies "placed him in a position to benefit

from any infusion of capital to that enterprise." Ashley, 903 F.2d

at 604.       Furthermore, the district court in Texas found that

"Bilzerian personally had an override of 25% on the partnership

investment by Suncoast in Bilzerian Partners Limited Partnership 1

(BPLP-1) and in Bilzerian Partners Limited Partnership, Series B

(BPLP-B)."      Findings of Fact and Conclusions of Law, BR42, Ex. F at

2.8

          It is true that courts should narrowly construe exceptions to

      7
      In his brief, Bilzerian refers to BFC as "one of my
companies." Appellant's Initial Br. at 6. In addition,
Bilzerian admitted to the following sentence in HSSM's Complaint
To Determine Dischargeability Of Debt And Objecting To Discharge:
"HSSM is a limited partner in an entity known as Suncoast ... a
Bilzerian controlled partnership, and in which Bicoastal
Financial Corporation ... is the general partner." BR1 at 1;
BR31 at 1 (emphasis added).
      8
      When discussing the value of HSSM's interest in Suncoast,
the district court commented about the interrelationships among
these companies and partnerships as follows:

              HSSM's limited partnership interest in Suncoast is a
              unique asset of a peculiar character and value because
              it is an interest in a limited partnership with a
              narrow purpose and due to Mr. Bilzerian's control of
              the investment and the interrelationships of Suncoast,
              BPLP-1, and BPLP-B....

      Findings of Fact and Conclusions of Law, BR42, Ex. F at 3.
discharge against the creditor and in favor of the debtor.            See St.

Laurent v. Ambrose (In re St. Laurent),        991 F.2d 672, 680 (11th

Cir.1993).    However, granting a debtor a discharge based solely on

the fact that he or she did not directly receive a benefit places

a limitation on § 523 that is not apparent from the text of the

provision itself.        Moreover, such a limitation would provide a

dangerous    incentive    for   the   sophisticated   debtor,   who    could

circumvent the provision by creating a shell corporation to receive

the fruits of his or her fraud.        As we have previously stated, we

will not allow "the malefic debtor [to] hoist the Bankruptcy Code

as protection from the full consequences of fraudulent conduct."

St. Laurent, 991 F.2d at 680.

     In light of persuasive circuit authority, we conclude in this

case that the district court properly applied the "receipt of

benefits" theory in concluding that Bilzerian's debt to HSSM was

subject to the § 523(a)(2)(A) exception to discharge.9

B. Collateral Estoppel

         Bilzerian also faults the district court for applying the

principles of collateral estoppel to deny the discharge of his debt

to HSSM.    He argues that HSSM suffered no loss as a result of his

allegedly fraudulent representations.          HSSM contends that as a

     9
      Bilzerian criticizes the district court for making its own
review of the Texas record to determine if he received a benefit
and thus making its own fact-findings rather than accepting those
of the bankruptcy court. The district court did re-construct and
present a version of the facts in the Texas court that was not
contained in the jury instructions or the Texas district court's
factual findings. However, we are persuaded from the jury
instructions, the Findings of Fact and Conclusions of Law of the
district court in Texas, and Bilzerian's own admissions to HSSM's
adversary complaint, that he obtained a benefit.
result of the Texas judgment, Bilzerian is collaterally estopped

from relitigating the elements of § 523(a)(2)(A).

      Collateral estoppel prevents the relitigation of issues

already litigated and determined by a valid and final judgment in

another    court.     It    is   well-established    that    the    doctrine   of

collateral estoppel applies in a discharge exception proceeding in

bankruptcy court.      See Grogan v. Garner, 498 U.S. 279, 284 n. 11,

111 S.Ct. 654, 658 n. 11, 112 L.Ed.2d 755 (1991);             Hoskin v. Yanks

(In re Yanks), 931 F.2d 42, 43 n. 1 (11th Cir.1991).                   However,

collateral estoppel only applies if the following elements are

present:

(1) The issue in the prior action and the issue in the bankruptcy
     court are identical;

(2) The bankruptcy issue was actually litigated in the prior
    action;

(3) The determination of the issue in the prior action was a
     critical and necessary part of the judgment in that
     litigation; and

(4) The burden of persuasion in the discharge proceeding must not
     be significantly heavier than the burden of persuasion in the
     initial action.

Bush v. Balfour Beatty Bahamas, Ltd. (In re Bush), 62 F.3d 1319,

1322 (11th Cir.1995) (citation omitted).

      In order to prevail on its § 523(a)(2)(A) claim, HSSM as the

creditor    must    prove   by   a   preponderance   of     the    evidence    the

following elements:         (1) the debtor made a false representation

with intent to deceive the creditor;          (2) the creditor relied on

the representation;         and (3) the creditor sustained a loss as a

result of the representation.           St. Laurent, 991 F.2d at 676-77.

Moreover, the creditor's reliance must be justified.               See Field v.
Mans, --- U.S. ----, ----, 116 S.Ct. 437, 445-46, 133 L.Ed.2d 351

(1995);   City Bank & Trust Co. v. Vann (In re Vann), 67 F.3d 277,

281 (11th Cir.1995). The Texas court instructed the jury regarding

fraud as follows:

          In order to establish that it was defrauded by
     Defendants, HSSM must prove:          (1) that a material
     representation of fact, either past or present, was made by
     Mr. Bilzerian;   (2) that it was false;    (3) that when the
     misrepresentation was made, Mr. Bilzerian knew it was false or
     made it recklessly without any knowledge of its truth; (4)
     that Mr. Bilzerian made the misrepresentation with the
     intention that HSSM act on it; and (5) that HSSM acted in
     reliance on the representation.
BR42, Ex. C at 6.    The issues presented to the jury in the Texas

case are almost identical to the issues in the bankruptcy case.

The only difference is that the Texas court instructed the jury

that HSSM's reliance on the representation must be "reasonable"

instead of justifiable.   See id.   The reasonable reliance standard

is more stringent than is the justifiable reliance standard. Vann,

67 F.3d at 280.   Thus, by meeting the more stringent standard, HSSM

has satisfied the reliance element.10

     Furthermore, the fraud issue was actually litigated in the

     10
      Bilzerian argues that because HSSM alleged four
misrepresentations, one of which he claims is insufficient under
§ 523(a)(2)(A), and because the jury rendered a general verdict,
the issues in the Texas litigation were different from those in
the bankruptcy proceeding. Bilzerian is concerned about the
misrepresentation HSSM alleged that he made regarding his net
worth. The Fifth Circuit rejected Bilzerian's multiple theory
argument as meritless but gave no reasons for its conclusion.
HSSM # 7 Limited Partnership v. Bilzerian, No. 92-1261, 988 F.2d
1209 (5th Cir. March 9, 1993) (per curiam). However, the
district court in Texas specifically found that without the
"put," HSSM would not have become a partner in Suncoast.
Findings of Fact and Conclusions of Law, BR42, Ex. F at 2. Thus,
the jury verdict, when taken in conjunction with the Texas
district court's finding, compels the conclusion that Bilzerian
was found to have made misrepresentations on topics other than
his net worth.
Texas case during a seven-day trial, and the issue was a necessary

part of the Texas judgment.   HSSM was required to prove its case by

a preponderance of the evidence, the same burden applied to §

523(a) discharge cases.   The elements of collateral estoppel are

present in this case. Accordingly, Bilzerian was properly estopped

from relitigating the fraud issue in the bankruptcy court.

     Finally, Bilzerian's argument that HSSM did not sustain a loss

is meritless in light of the money judgment entered in favor of

HSSM in the Texas case.

                          V. CONCLUSION

     For the foregoing reasons, we affirm the district court's

judgment reversing the bankruptcy court's order.

     AFFIRMED.11

     11
      We deny all pending motions filed by the appellant and the
appellee.