- Case Type:
- Case Status:
- 16-1502 (3rd Circuit, Nov 28,2016) Not Published
Third Circuit affirmed judgments of bankruptcy court and district court, finding individual debtor's debt non-dischargeable under 11 U.S.C. Section 523(a)(4) (fraud or defalcation while acting in fiduciary capacity) after giving collateral estoppel effect to the findings of the state court regarding the debtor's conduct as the executor of a decedent's estate.
- Procedural context:
Bankruptcy court and district court found debt non-dischargeable and the Third Circuit affirmed.
David Aiello served as executor of his deceased brother's estate. The widow of the brother filed a petition in state court seeking an accounting of David Aiello's administration of the estate, and eventually, after filing exceptions to the accounting, alleged that Aiello had engaged in self-dealing and breached his fiduciary duties. After a lengthy evidentiary hearing, the state court found that Aiello engaged in several transactions that benefitted himself, his brother Victor, and other business associates to the detriment of the estate. He sold estate's shares in a company to himself and his brother for half their value. He sold other estate assets to himself and other business associates at prices he set. He conveyed three separate pieces of real property to himself and his brother for no consideration. He failed to keep proper records and to obtain court approval for transactions that required it. He also concealed his self-dealing from the estate's beneficiaries and the court. As a result of such findings, the state court entered a judgment in the approximate amount of $1 million against Aiello. The judgment was affirmed on appeal. Subsequently, Aiello filed a Chapter 7 bankruptcy peition in the Bankruptcy Court for the District of Western Pennsylvania. During the bankruptcy proceeding, the widow filed a non-dischargeability action against Aiello. She moved for summary judgment, contending that the state court judgment was non-dischargeable and the doctrine of collateral estoppel precluded Aiello from relitigating issues decided by the state court. The Bankruptcy Court granted the summary judgment motion, finding the debt non-dischargeable. It applied the doctrine of collateral estoppel to the findings of the state court regarding Aieloo's conduct and found the record sufficient to establish as a matter of law that Aiello had the requisite scienter for defalcation. The district court affirmed. Before the Third Circuit, Aiello argued that the application of collateral estoppel was error because the state court was not required (and indeed did not) make any findings regarding his state of mind. The absence of such finding, Aiello argued, should have precluded the application of collateral estoppel because the Supreme Court held in Bullock v. Bank Champaign, N.A., 133 S.Ct. 174 (2013), that defalcation requires "an intentional wrong." The Third Circuit rejected the argument, noting that the fact findings underlying the state court judgment were enough establish intent, as a matter of law, from the course of conduct displayed by Aiello.
- Hardiman, Scirica and Rosenthal
IN RE: JOHN FLISS
Summarizing by Shane Ramsey
3584 in the system
10 Being Processed