Autism Intervention Specialists, LLC v. Aoude

UNITED STATES BANKRUPTCY COURT

DISTRICT OF MASSACHUSETTS

)

In re: ) Chapter 7

) Case No. 19-40474-CJP

NASSIM S. AOUDE )

)

Debtor )

)

)

AUTISM INTERVENTION )

SPECIALISTS, LLC )

) Adversary Proceeding

Plaintiff ) No. 19-04026-CJP

)

v. )

)

NASSIM S. AOUDE )

)

Defendant )

)

MEMORANDUM OF DECISION

ON DEFENDANT’S MOTION FOR SUMMARY JUDGMENT

Before the Court is a motion for summary judgment (the “Motion”) filed by Defendant

Nassim S. Aoude, who is the debtor in the main bankruptcy case. Def.’s Mot. Summ. J., Dkt.

No. 18. Plaintiff Autism Intervention Specialists, LLC (“AIS”), opposes the Motion. Pl.’s

Opp’n, Dkt. No. 24. For the reasons discussed below, I will deny Mr. Aoude’s Motion as filed

but may grant him summary judgment on other grounds I have raised sua sponte, after providing

the parties with an opportunity to address those grounds. See Fed. R. Civ. P. 56(f)(2)-(3); Fed.

R. Bankr. P. 7056 (applying Civil Procedure Rule 56 in adversary proceedings).

I. Background1

At all times relevant to the Complaint, Mr. Aoude was a board-certified behavior analyst

and a licensed applied behavior analyst. Def.’s Facts ¶ 1, Dkt. No. 20; Pl.’s Facts Resp. ¶ 1,

Dkt. No. 25. In early 2011, Mr. Aoude began providing autism services through AIS, which he

founded. See Def.’s Facts ¶ 2; Pl.’s Facts Resp. ¶ 2; Pl.’s Opp’n Ex. R (“N. Aoude Dep.”)

14:12-20, Dkt. No. 24-10. He served as AIS’s chief executive officer. Def.’s Facts ¶ 2; Pl.’s

Facts Resp. ¶ 2.

In October 2013, as AIS’s sole member and manager, Mr. Aoude executed an Equity

Interest Purchase Agreement (“Purchase Agreement” or “EIPA”), selling his entire membership

interest in AIS to Pacific Child & Family Associates, LLC (“PCFA”). See Def.’s Facts ¶ 4;

Def.’s Ex. C, EIPA 1, Dkt. No. 21-3; Def.’s Ex. E, EIPA Disclosure Sch. 4.1(b), Dkt. No. 21-5;

Pl.’s Facts Resp. ¶ 4.2 Among other things, the Purchase Agreement provided that Mr. Aoude

1 In addition to each party having filed a brief as to their respective positions (Dkt. Nos. 19, 24): Mr.

Aoude has filed a statement of material facts (Dkt. No. 20); AIS has responded to that statement and has

asserted additional material facts (Dkt. No. 25); and each party has filed exhibits (Dkt. Nos. 21, 24).

Unless otherwise noted, the facts discussed herein are undisputed at least for purposes of the Motion. No

party disputes the authenticity of the materials in the summary judgment record. Some additional details

that are not subject to genuine dispute have been drawn from those materials. See Fed. R. Civ. P.

56(c)(3); Fed. R. Bankr. P. 7056. As to its asserted additional material facts (which are a mix of factual

allegations and legal arguments), AIS suggested at a hearing on the Motion that, because Mr. Aoude did

not file a further statement controverting those facts, they should be deemed to have been admitted. I

decline to deem AIS’s asserted additional facts as admitted, because a nonmoving party such as AIS is

generally not entitled to such procedural relief, and, in any event, even if such facts were deemed to be

admitted they would not change the outcome of this decision. See D. Mass. L.R. 56.1; MLBR 7056-1,

9029-3; see also Tropigas de Puerto Rico, Inc. v. Certain Underwriters at Lloyd’s of London, 637 F.3d

53, 56–57 (1st Cir. 2011) (discerning no error in case where district court’s local rule specifically

provided for counterstatement of facts procedure and trial court did not “‘deem admitted’ the

supplemental facts” because “[t]o the extent that the items are factual, deeming them admitted [did] not

change the outcome of the case [and t]o the extent that they are non-facts, they are equally impuissant”).

2 As a material fact, Mr. Aoude states: “By document titled Equity Interest Purchase Agreement (the

Purchase Agreement) dated October 18, 2013[,] [PCFA] purchased Aoude’s membership interest in AIS.”

Def.’s Facts ¶ 4 (citing EIPA). In response, AIS does not dispute any specific assertion. AIS does state:

“Disputed that Aoude adequately or completely sets forth the provisions of the Purchase Agreement

which speaks for itself and to which direct reference may be had.” Pl.’s Facts Resp. ¶ 4. From AIS’s

statement and apparent agreement as to the operative version of the EIPA, I do not perceive any genuine

would receive immediate and future cash payments and a membership interest in PCFA’s parent

company. EIPA §§ 1.1-1.6. The Purchase Agreement also provided for Mr. Aoude’s

continued employment with AIS, and it limited his ability to provide professional services in

competition with AIS. See, e.g., EIPA §§ 5.3-5.6; see also EIPA § 6.1(d) (referencing

“Employment Agreements attached to this Agreement” that were not included among summary

judgment materials or otherwise in the record). He was permitted, however, “to see individual

patients and provide clinical services in an individual or BCBA supervisory capacity (overseeing

a maximum a [sic] fifteen cases) to individuals and families.”3 EIPA § 5.5.

In a schedule to the Purchase Agreement, Mr. Aoude disclosed that a tort lawsuit was

pending in state court against him, AIS, and another person (the “Preexisting Litigation”).4 See

Def.’s Facts ¶¶ 6-7; EIPA § 4.21; Def.’s Ex. E, EIPA Disclosure Sch. 4.21; Pl.’s Facts Resp. ¶¶

6-7. The Purchase Agreement required Mr. Aoude to defend and indemnify AIS from and

against all costs and liabilities arising from the Preexisting Litigation. See EIPA § 7.2(a)(iii); N.

Aoude Dep. 25:13-26:13; see also EIPA 43 (defining “‘Designated Pre-Closing Liabilities’” in

subsection (g) as referenced in § 7.2(a)(iii)).

At some point after executing the Purchase Agreement, Mr. Aoude began providing

autism services apart from AIS through another entity. Def.’s Facts ¶ 8; Pl.’s Facts Resp. ¶ 8.

The parties dispute the timing and extent of this new practice. Compare Def.’s Facts ¶ 8, and N.

dispute regarding this fact. See Fed. R. Civ. P. 56(c)(1), (e)(2).

3 Although undefined, “BCBA” presumably refers to Board Certified Behavior Analyst.

4 In his material facts, Mr. Aoude states that “AIS listed” the Preexisting Litigation on the relevant

disclosure schedule. Def.’s Facts ¶¶ 6-7. It is undisputed that at the time that the disclosure schedule

was generated Mr. Aoude was solely in control of AIS and was the only individual who would have acted

on AIS’s behalf in making disclosures for the Purchase Agreement.

Aoude Dep. 87:5-88:6, 129:3-130:1, with Pl.’s Facts Resp. ¶¶ 8, 31-40, 52-55. In mid-2014,

Mr. Aoude left his employment with AIS while certain terms of the Purchase Agreement were

ongoing, including the potential for Mr. Aoude to receive further payments based upon AIS’s

financial performance and the limits on his ability to engage in competing work. See, e.g., EIPA

§§ 1.6, 5.5; N. Aoude Dep. 39:22-23; see also EIPA 49 (defining “‘Restricted Period’” as

referenced in § 5.5). Approximately fifteen months later in New York state court, Mr. Aoude

sued PCFA, AIS, and others involved in the Purchase Agreement, asserting claims such as

breach of contract and fraudulent misrepresentation. Def.’s Facts ¶ 9; Pl.’s Facts Resp. ¶ 9; Pl.’s

Opp’n Ex. S, Dkt. No. 24-11.5 In response, PCFA and AIS asserted similar counterclaims. See

Def.’s Facts ¶ 9; Pl.’s Facts Resp. ¶ 9; Pl.’s Opp’n Ex. T 15-30, Dkt. No. 24-12. The entities

alleged that Mr. Aoude never intended to honor the Purchase Agreement’s limits on competition,

knowingly hid this intention, and thereby fraudulently induced PCFA into executing the

Purchase Agreement.6 The entities also alleged that Mr. Aoude subsequently breached the

Purchase Agreement, including its covenants not to compete. Separately, in Massachusetts state

5 In his material facts, Mr. Aoude generally describes this and another state court lawsuit discussed

below. See Def.’s Facts ¶ 9. AIS does not dispute any specific assertion. Rather, it “[d]ispute[s] that

Aoude adequately or completely sets forth the allegations of the pleadings . . ., which speak[] for

themselves and to which direct reference may be had.” Pl.’s Facts Resp. ¶ 9. AIS provided copies of

the relevant state court pleadings among its exhibits. See Pl.’s Opp’n Exs. S-U. Despite AIS’s

professed dispute here, none exists for the purposes of addressing this Motion. See Fed. R. Civ. P.

56(c)(1), (e)(2).

6 The entities’ counterclaim asserts that “[h]ad [PCFA] and AIS been aware of [Mr.] Aoude’s plan . . .

[they] would not have entertained let alone entered into the [Purchase Agreement].” Pl.’s Opp’n Ex. T

22 (¶ 32). It also asserts that PCFA and AIS relied on allegedly false representations from Mr. Aoude

when entering into the Purchase Agreement. Id. at 26 (¶¶ 52-55). As to AIS, such assertions are a

factual and legal impossibility. Although AIS was a separate legal entity, Mr. Aoude was the sole member

and manager of AIS at the time of the Purchase Agreement. AIS thus did not separately entertain or

enter into the Purchase Agreement with him, and AIS could not have been relying upon representations,

false or otherwise, from Mr. Aoude. His knowledge is imputed to AIS. Alone in acting on AIS’s

behalf, Mr. Aoude could not have fraudulently induced himself into executing the Purchase Agreement.

court, PCFA and AIS also sued Mr. Aoude’s new practice, his father, his cousin, and another

allegedly related entity, asserting that each had a role in Mr. Aoude’s alleged scheme to compete

with PCFA and AIS in violation of the Purchase Agreement. Def.’s Facts ¶ 9; Pl.’s Facts Resp.

¶ 9; Pl.’s Opp’n Ex. U, Dkt. No. 24-13.

In March 2016, the two lawsuits were resolved through a global Settlement Agreement

and Release (“Settlement Agreement” or “SAR”). Def.’s Facts ¶ 10; Pl.’s Facts Resp. ¶ 10;

Def.’s Ex. G, SAR, Dkt. No. 21-7. Each party denied wrongdoing and liability. SAR ¶ 14.

Mr. Aoude agreed to release an estimated $463,000 in escrowed funds and to pay $1,000,000 in

additional funds to PCFA’s parent company over an approximately 18-month period.7 SAR ¶¶

1, 3. He also agreed to forfeit his interest in the parent company. SAR ¶ 2. The parties agreed

to void the Purchase Agreement’s (and related agreements’) restrictive covenants, which

included the limits on Mr. Aoude’s ability to engage in competing work.8 See SAR ¶ 7.

Among other provisions, the parties further agreed to mutual releases of liability. See SAR ¶¶

9-12. Mr. Aoude also “reaffirm[ed] his existing indemnification obligation, including but not

limited to his obligation to indemnify AIS,” in the Preexisting Litigation that Mr. Aoude had

disclosed at the time of the Purchase Agreement. SAR ¶ 6.

In March 2018, Mr. Aoude’s new practice closed “after Blue Cross[] Blue Shield, the

primary insurance company providing insurance coverage for approximately 80% of its clients,

refused to pay for services rendered.” Def.’s Facts ¶ 15; Def.’s Ex. H (“BCBS Letter”), Dkt.

No. 21-8; Pl.’s Facts Resp. ¶ 15. Within a year after his practice closed, Mr. Aoude stopped

7 It is undisputed that Mr. Aoude paid these amounts, which amounts are not the subject of any claims in

this adversary proceeding or the main bankruptcy case.

8 The parties did, however, also agree that certain parties’ ability to solicit or hire AIS employees would

be restricted for the duration of the Settlement Agreement’s payment term. See SAR ¶ 5.

paying AIS’s defense costs in the Preexisting Litigation, citing his inability to afford those

payments. Def.’s Facts ¶ 17; N. Aoude Dep. 123:24-124:9; Pl.’s Facts Resp. ¶ 17.9

In March 2019, about a year after his practice closed, Mr. Aoude filed an individual

petition under Chapter 7 of the Bankruptcy Code.10 See Def.’s Facts ¶ 18; Pl.’s Facts Resp. ¶

18; Pet., In re Aoude, Case No. 19-40474 (Bankr. D. Mass. Mar. 26, 2019). Mr. Aoude listed

AIS as a creditor holding a nonpriority unsecured claim of “[u]nknown” value, which he denoted

as disputed but not contingent or unliquidated. Sch. E/F at 4 (No. 4.4) & Attach. 1, In re Aoude,

Case No. 19-40474 (Bankr. D. Mass. Mar. 26, 2019), Dkt. No. 1-1 (describing claim as

“Demand for legal fees regarding lawsuit involving debtor’s business”). He also listed AIS as a

co-debtor on two debts related to the Preexisting Litigation and on another unrelated debt. See

Sch. H at 2 (No. 3.6), In re Aoude, Case No. 19-40474 (Bankr. D. Mass. Mar. 26, 2019), Dkt.

No. 1-1; Sch. E/F at 5 (No. 4.8), 10 (No. 4.23), 18 (No. 4.46). He did not list any other adverse

party from the Purchase Agreement or Settlement Agreement on his bankruptcy schedules or

statements. It appears to be undisputed that Mr. Aoude has no outstanding obligations to those

other parties. See, e.g., Def.’s Facts ¶¶ 11, 14; N. Aoude Dep. 123:9-23, 124:10-13; Pl.’s Facts

Resp. ¶ 14.11

9 The parties dispute the precise timing for when Mr. Aoude stopped paying. Compare Def.’s Facts ¶¶

16-17 (asserting that Mr. Aoude “defended the [Preexisting Litigation] until calendar year 2019” and until

he “‘went bankrupt’”), with Pl.’s Facts Resp. ¶¶ 16-17 (asserting that new counsel for AIS entered

appearance in Preexisting Litigation in April 2018 and that new counsel’s fees “have gone unpaid”). As

will be evident later, the precise timing within this timeframe need not be pinpointed for the purposes of

addressing the Motion, as it would not alter my analysis or conclusions.

10 Unless otherwise noted, all section references herein are to Title 11 of the United States Code, 11

U.S.C. §§ 101, et seq., as amended (the “Bankruptcy Code” or “Code”).

11 In his material facts, Mr. Aoude states simply that he “paid in full” the amount owed under the

Settlement Agreement and that he “released” escrowed funds. Def.’s Facts ¶ 14. AIS does not dispute

that Mr. Aoude took such actions. AIS responds: “Disputed that the payment . . . and release . . .

represent[] payment ‘in full’ as suggested. To the contrary, Aoude also remained obligated under the

Settlement Agreement to continue to defend and indemnify AIS [in the Preexisting Litigation].” Pl.’s

In July 2019, AIS commenced this adversary proceeding seeking to prevent Mr. Aoude

from discharging in bankruptcy “the debt owed to AIS” and asserting that “the obligation of

[Mr.] Aoude to AIS is a debt ‘for fraud’ so as to bring the debt within the [exceptions to

discharge set forth in] 11 U.S.C. §523(a)(2)(A) and 11 U.S.C. §523(a)(4).” Compl. ¶¶ 1-2, Dkt.

No. 1. More specifically, the “debt” and “obligation” arise from Mr. Aoude’s defense and

indemnification obligations in connection with the Preexisting Litigation. See Def.’s Facts ¶ 19;

Pl.’s Facts Resp. ¶ 19; Compl. ¶¶ 30, 33-34; N. Aoude Dep. 7:24-8:7, 36:13-36:19, 106:1-6.12

In September 2019, AIS filed a proof of claim in the main bankruptcy case. Claim No. 17, In re

Aoude, Case No. 19-40474 (Bankr. D. Mass. Sept. 3, 2019). In it, AIS asserts that from late

February 2018 (around when Mr. Aoude’s new practice closed) to August 2019, Mr. Aoude

owes $28,721.91 for AIS’s defense costs in the Preexisting Litigation, noting that such costs

continue to accrue. See Claim No. 17 Ex. C (reflecting that $17,641.00 is alleged to have

accrued prepetition); Def.’s Facts ¶ 15; BCBS Letter; Pl.’s Facts Resp. ¶ 15.13 AIS projects that

Facts Resp. ¶ 14. Mr. Aoude does not contend that any such obligation has been satisfied. See Def.’s

Facts ¶¶ 17, 19; N. Aoude Dep. 123:24-124:3, 124:10-13, 131:21-132:8.

12 In his material facts, Mr. Aoude states that the “Adversary Proceeding has been filed to prevent the

discharge of [Mr.] Aoude’s agreement in the Purchase Agreement and Settlement Agreement to continue

to provide a defense in the [Preexisting Litigation].” Def.’s Facts ¶ 19 (emphasis added). AIS purports

to dispute these facts, asserting that it’s also seeking to prevent the discharge of Mr. Aoude’s Preexisting

Litigation-related obligations under the “March 11, 2015 Settlement Agreement and Release”—

misstating the year of that agreement and possibly having misread Mr. Aoude’s statement as not

including the Settlement Agreement. See Pl.’s Facts Resp. ¶ 19. It is also possible that AIS disputes

Mr. Aoude’s reference only to “defense” without mentioning “indemnification.” See Pl.’s Facts Resp. ¶

12 (disputing Mr. Aoude’s statement “agreed to continue to defend” by asserting that Settlement

Agreement required Mr. Aoude both “to defend” and “to indemnify”). But see SAR ¶ 6 (referencing only

“indemnification” and “indemnify”). Mr. Aoude has not denied having agreed to indemnify, indicating

that omissions of that term were inadvertent. See Answer ¶ 30, Dkt. No. 7. Even if there is a dispute

about the extent of Mr. Aoude’s obligations, it would not affect my analysis.

13 I note that another proof of claim filed in May 2019 in the main case for AIS’s defense costs in the

Preexisting Litigation, which was scheduled as a joint debt of Mr. Aoude and AIS, reflects a similar

timeline for when payments ended, asserting that the last payment was made in early February 2018

(leaving a $0.00 balance due) and that no payments were made from March 2018 through April 2019

additional defense costs through trial in the Preexisting Litigation will total $150,000. Claim

No. 17 Ex. D. AIS further estimates that the plaintiff in the Preexisting Litigation could receive

a “demanded” $750,000. See id. Thus, AIS asserts a total nonpriority unsecured claim for

$928,721.91 based upon the accrued and projected amounts.

As noted, Mr. Aoude has moved for summary judgment in this adversary proceeding, and

AIS has opposed it. Having considered the parties’ filings, the arguments of counsel at a

hearing on the matter, and the record before me, for the reasons below I deny Mr. Aoude’s

Motion, but also address the possibility of granting him summary judgment on other grounds.

II. Legal Standards

a. Summary Judgment

If a party seeking summary judgment “shows that there is no genuine dispute as to any

material fact and [that he] is entitled to judgment as a matter of law,” the court must grant

summary judgment in his favor. Fed. R. Civ. P. 56(a); see also Fed. R. Bankr. P. 7056

(applying Civil Procedure Rule 56 to adversary proceedings). To establish that it is entitled to

summary judgment, a party may show that the adverse party lacks sufficient admissible evidence

to meet its burden of proof at trial. See Fed. R. Civ. P. 56(c)(1); Celotex Corp. v. Catrett, 477

U.S. 317, 322-23 (1986). Similarly, upon evaluating or identifying for the parties the

undisputed material facts, and after giving the parties notice and reasonable time to respond, the

court may grant summary judgment on grounds raised solely by the court, including a party’s

lack of sufficient admissible evidence to meet its burden at trial. See Fed. R. Civ. P. 56(f)(2)-

(3); cf. Celotex, 477 U.S. at 322-23. A “principal purpose[] of the summary judgment rule is to

(leaving a $33,692.19 balance due). See Claim No. 1, In re Aoude, Case No. 19-40474 (Bankr. D. Mass.

May 9, 2019) (supporting invoices list AIS as client in Preexisting Litigation); Pet. at 32 (4.23).

isolate and dispose of factually unsupported claims or defenses.” Celotex, 477 U.S. at 323-24

(interpreting prior but substantively similar version of Rule 56); see also Fed. R. Civ. P. 56

advisory committee’s note to 1987, 2007, 2009, 2010 amendments (noting that changes have

been stylistic or related to specific procedures but not affecting summary judgment standard).14

b. Bankruptcy Code § 523

Section 523 of the Bankruptcy Code excepts certain types of debt from being discharged

in bankruptcy. Subsections (a)(2)(A) and (a)(4) are at issue here. Subsection (a)(2)(A) excepts

from discharge “any debt . . . for money, property, services, or . . . credit, to the extent obtained

by . . . false pretenses, a false representation, or actual fraud . . . .” 11 U.S.C. § 523(a)(2)(A).

Subsection (a)(4) excepts from discharge “any debt . . . for fraud or defalcation while acting in a

fiduciary capacity, embezzlement, or larceny.” 11 U.S.C. § 523(a)(4). As is apparent from the

quoted language, subsections (a)(2)(A) and (a)(4) have some overlapping and some differing

elements, discussed further as needed in the analysis below. See Husky Int’l Elecs., Inc. v. Ritz,

578 U.S. 356, 363 (2016). A creditor seeking to have a debt owed to it excepted from a debtor’s

discharge under one of these subsections must establish, by a preponderance of the evidence,

each element of the asserted exception. Palmacci v. Umpierrez, 121 F.3d 781, 787-88 (1st Cir.

1997) (citing Grogan v. Garner, 498 U.S. 279, 291 (1991)). A creditor’s failure or inability to

do so as to any element dooms the claim—including, potentially, before trial, as discussed above.

See id. at 787-88; Celotex, 477 U.S. at 322-23.

14 I note that both parties quoted from and cited Rule 56 as it existed before it was significantly revised

and restructured through an amendment effective in 2010. See Def.’s Mot. Summ. J. Mem. 2, Dkt. No.

19; Pl.’s Opp’n 8-9, Dkt. No. 24. This was not material to disposition of the Motion.

III. Analysis

Under a single “Cause of Action” in its Complaint, AIS incorporates both § 523(a)(2)(A)

and § 523(a)(4). While generally acknowledging that § 523(a)(2)(A) addresses three types of

fraud—false pretenses, false representations, and actual fraud—AIS does not state the particular

type being asserted here. See Compl. ¶¶ 2, 36; see also Dewitt v. Stewart (In re Stewart), 948

F.3d 509, 520-21 (1st Cir. 2020) (comparing elements of § 523(a)(2)(A)’s fraud subtypes).

Similarly, AIS generally acknowledges that § 523(a)(4) focuses on multiple types of

misconduct—fraud while acting in a fiduciary capacity, as well as embezzlement, larceny, and

defalcation while acting in a fiduciary capacity—but does not specify any particular type being

pursued. See Compl. ¶¶ 2, 36; see also Bullock v. BankChampaign, N.A., 569 U.S. 267, 273-75

(2013) (comparing select elements among § 523(a)(4)’s misconduct types and noting, among

other distinctions, that “‘defalcation,’ unlike ‘fraud,’ may be used to refer to nonfraudulent

breaches of fiduciary duty”).

AIS asserts that the alleged debt is one for fraud. Compl. ¶¶ 2, 37-38. From AIS’s

allegations about misrepresented intentions and assertions of fraudulent inducement, it is clear on

this record that AIS is pursuing a fraudulent misrepresentation (or deceit) theory of fraud under §

523(a)(2)(A) and § 523(a)(4). See Stewart, 948 F.3d at 520-21; Bullock, 569 U.S. at 275; see

also Palmacci, 121 F.3d at 786-87 (discussing typical common law elements of fraudulent

misrepresentation). As such, my analysis focuses on fraudulent misrepresentation.15 It also

15 Palmacci is often relied upon for its description of “the traditional common law rule” for fraudulent

misrepresentation, as drawn from § 525 of the Restatement (Second) of Torts. See Palmacci, 121 F.3d at

786; see also Stewart, 948 F.3d at 520; McCrory v. Spigel (In re Spigel), 260 F.3d 27, 32 (1st Cir. 2001).

This version of the rule contemplates that the requisite false representation will have been made to the

party who is thereby induced into action or inaction and who ultimately suffers a resulting pecuniary loss.

See Palmacci, 121 F.3d at 786. That is not this case. PCFA was allegedly fraudulently induced by Mr.

Aoude into executing the Purchase Agreement, but PCFA is not a party to this adversary proceeding.

Rather, AIS is the party alleging damages. At the hearing on Mr. Aoude’s Motion, his counsel suggested

seems clear that AIS is not asserting a theory of embezzlement, larceny, or defalcation while

acting in a fiduciary capacity under § 523(a)(4), as AIS has offered no factual support in the

Complaint for such theories and none is apparent from the summary judgment record.16 See

Bullock, 569 U.S. at 275.

a. Mr. Aoude’s Motion for Summary Judgment

Requesting summary judgment in his favor, Mr. Aoude emphasizes that AIS seeks to

prevent only the discharge of his obligations as to the Preexisting Litigation, and he contends that

the record contains no evidence of fraud in relation to those obligations. Mr. Aoude notes that,

in connection with the Purchase Agreement, he disclosed the Preexisting Litigation. He states

that he “agreed to continue defending the [Preexisting] Litigation and [to] indemnify PCFA . . .

[if] judgment in that litigation w[ere to be] granted to the plaintiffs.” Def.’s Mot. Summ. J.

Mem. 1, Dkt. No. 19. He also notes that, in the Settlement Agreement, he reaffirmed his

Preexisting Litigation-related obligations. See Def.’s Mot. Summ. J. Mem. 2. There are no

allegations that, when making these specific commitments, Mr. Aoude intended not to honor

them or otherwise engaged in any deceit specifically relating to these obligations. In fact, it is

undisputed that Mr. Aoude paid for AIS’s defense in the Preexisting Litigation for more than

that only a deceived party could claim damages, implying that AIS cannot be the proper party to bring

this nondischargeability action. Neither § 523(a)(2)(A) nor § 523(a)(4) specifies that a creditor seeking

the nondischargeability of a debt must have been the one deceived. See Stallworth v. McBride (In re

McBride), 512 B.R. 103, 112 (Bankr. D. Mass. 2014). For purposes of this decision, I assume without

deciding that a party other than the one deceived is not precluded from seeking relief. If this matter

proceeds to trial, I expect the parties will address this issue further.

16 Further as to AIS’s fiduciary fraud claim under § 523(a)(4), the parties have not addressed whether the

fiduciary component is factually supported. Although a lack of factual support could provide other

grounds for partial summary judgment on the Court’s own motion, it is beyond the scope of the

discussion in this decision.

four years after the Purchase Agreement and two years after the Settlement Agreement—until

after his new practice closed.

In response, AIS contends that Mr. Aoude has impermissibly narrowed or misperceived

AIS’s argument. AIS asserts, and Mr. Aoude disputes, that certain evidence related to Mr.

Aoude’s new practice supports an inference that he never intended to comply with the Purchase

Agreement’s limits on competition.17 See, e.g., Pl.’s Opp’n 3-6; N. Aoude Dep. 45:20-55:16,

61:5-10, 64:9-65:24, 69:24-70:23, 71:17-24, 101:20-102:11, 104:17-104:22; see also Stewart,

948 F.3d at 523 (noting that “inference[s] may be derived from the totality of circumstances,

including from circumstantial facts and post-transaction conduct”). AIS maintains that, had

PCFA known that Mr. Aoude intended to compete in violation of the agreed upon limits, PCFA

would not have executed the Purchase Agreement, thereby avoiding exposure to the risks of

associated losses, including those due to any failure of Mr. Aoude to defend and indemnify AIS

in the Preexisting Litigation as agreed. See Pl.’s Opp’n 2, 6, 10-11. AIS thus asserts that, but

for Mr. Aoude (allegedly) fraudulently inducing PCFA into executing the Purchase Agreement,

AIS would not be facing defense costs and potential liabilities associated with the Preexisting

Litigation, now that Mr. Aoude is no longer meeting—and is seeking a bankruptcy discharge

of—his contractual obligations to defend and indemnify AIS in that Preexisting Litigation.18

See id. As will be discussed below, AIS’s theories of causation and damages are problematic.

17 In its Complaint, AIS also asserts that Mr. Aoude had a “plan to withhold his cooperation in the

integration of the business.” Compl. ¶ 25; see also Compl. ¶ 5; Pl.’s Opp’n 1, 2, 3, 6, 10. There appears

to be no factual support alleged in the Complaint or within the summary judgment record for this

assertion, and it is unclear how it fits into AIS’s overall argument.

18 For simplicity, I have taken a broad view of AIS’s arguments. AIS erroneously includes itself in

certain assertions—for example: “Had AIS been aware of [Mr.] Aoude’s plan . . . AIS would not have

entertained let alone entered into the underlying transaction that exposed it to ongoing liability for [the

Preexisting Litigation].” See Pl.’s Opp’n 2, 6, 11; see also Pl.’s Facts Resp. ¶ 58. As explained above,

see supra note 6, because AIS was entirely controlled by Mr. Aoude at the time of the Purchase

Ultimately, AIS contends that because Mr. Aoude’s debt to AIS originates from his

alleged fraud in inducing PCFA into executing the Purchase Agreement, the debt is

nondischargeable, notwithstanding any liability waivers in the Settlement Agreement. See Pl.’s

Opp’n 11-16. AIS appears to argue that, because material facts are genuinely disputed as to

whether Mr. Aoude made a fraudulent misrepresentation to PCFA, summary judgment is not

possible. See Pl.’s Opp’n 11-12, 15-16; see also Martinez v. Colon, 54 F.3d 980, 984 (1st Cir.

1995) (describing “material” disputed facts as those with “potential to change the outcome of the

suit under the governing law”); Medina-Munoz v. R.J. Reynolds Tobacco Co., 896 F.2d 5, 8 (1st

Cir. 1990) (describing “genuine” disputes as those where “evidence, viewed in the light most

favorable to the nonmovant, would permit a rational factfinder to resolve the issue in favor of

either party” (citation omitted)).

I agree that Mr. Aoude presented an overly narrow version of AIS’s position in his

Motion and that summary judgment cannot be granted based upon the reasons specifically

advanced by Mr. Aoude. I disagree, however, that any genuinely disputed facts as to whether

Mr. Aoude deceived PCFA are material such that summary judgment is necessarily precluded on

this record.

b. Other Grounds for Summary Judgment

Although not sufficient to support entry of summary judgment based upon the reasons

asserted, Mr. Aoude’s Motion highlights a seeming disconnect between his alleged misconduct

and AIS’s alleged damages. While any debt for liability that arises from fraud may be

Agreement, it could not have separately entertained or entered into the Purchase Agreement. Further, as

discussed below, AIS’s exposure to liability for the Preexisting Litigation did not result from Mr. Aoude’s

default on his contractual obligations to defend and indemnify AIS. Rather, the exposure arose from AIS

being a defendant facing defense costs and potential direct liability in the Preexisting Litigation, an

ongoing circumstance that existed before and entirely apart from the Purchase Agreement.

determined to be nondischargeable in an individual debtor’s bankruptcy, e.g., Cohen v. de la

Cruz, 523 U.S. 213, 218-19, 223 (1998), liability does not necessarily follow from every

fraudulent misrepresentation, see Sharfarz v. Goguen (In re Goguen), 691 F.3d 62, 67 (1st Cir.

2012). To establish a defendant’s liability, causation is among the elements that the plaintiff

must prove. Goguen, 691 F.3d at 67. In this context, causation has two components: cause in

fact and legal cause. Id. at 67, 69-71. If the plaintiff cannot establish both components, the

plaintiff cannot establish the defendant’s liability—in tort under a fraudulent misrepresentation

theory—for the plaintiff’s claimed damages. Without establishing such liability, the plaintiff

cannot succeed in establishing that its damages are a nondischargeable debt of the debtor under

the fraudulent misrepresentation-based exceptions to discharge in § 523(a)(2)(A) and §

523(a)(4). See id.; Palmacci, 121 F.3d at 786-88.

As noted, AIS has alleged that Mr. Aoude fraudulently misrepresented his intent to

PCFA—alleging specifically that Mr. Aoude intended to compete while manifesting his

agreement not to—thereby fraudulently inducing PCFA into executing the Purchase Agreement,

which, among numerous other provisions, obligated Mr. Aoude to defend and indemnify AIS in

the Preexisting Litigation. With Mr. Aoude no longer meeting those contractual obligations,

AIS contends that the alleged deceit that induced PCFA to sign the Purchase Agreement set off

the chain of events that led to AIS’s alleged damages, i.e., having to pay its own defense costs

and potentially further costs of a judgment or settlement in the Preexisting Litigation.

AIS’s “but for” argument here focuses on cause in fact. This element is established

when one’s justifiable reliance upon a fraudulent misrepresentation is shown to have been a

substantial factor in deciding whether to take the action (or not) that resulted in the loss.

Restatement (Second) of Torts § 546 & cmt. b; see also Goguen, 691 F.3d at 67.19 Setting aside

the justifiable reliance and action components, the misrepresentation must be shown to have

caused a claimed loss. Restatement (Third) of Torts: Liab. for Econ. Harm §§ 9, 11; see also id.

§ 11 cmt. a (noting “usual requirement in tort that a defendant’s wrong be a factual or ‘but for’

cause of the harm that the plaintiff suffered”).

AIS appears to be unable to establish that Mr. Aoude’s alleged misrepresentation to

PCFA caused the alleged “loss” to AIS. Prior to and after the date that Mr. Aoude and PCFA

executed the Purchase Agreement, AIS was and is a defendant in the Preexisting Litigation,

facing defense costs and exposure for a potential judgment or settlement. Contrary to AIS’s

“but for” argument above, Mr. Aoude’s alleged misrepresentation to PCFA, which induced

PCFA into executing the Purchase Agreement, placed AIS (as opposed to PCFA) in a better

position as to the Preexisting Litigation, because as part of the Purchase Agreement Mr. Aoude

agreed to defend and indemnify AIS, mitigating AIS’s exposure.20 Mr. Aoude’s subsequent

default on his contractual obligations caused AIS to pay for its own defense. That ongoing

expense and related potential losses are due to AIS’s status as a defendant in the Preexisting

Litigation, not due to Mr. Aoude’s alleged misrepresentation to PCFA. AIS argues that PCFA

never would have signed the Purchase Agreement had Mr. Aoude not misrepresented his

19 Goguen addresses fraudulent misrepresentations under § 523(a)(2)(A), using the Restatement (Second)

of Torts to inform the analysis. Goguen, 691 F.3d at 67 n.3 (noting that Field v. Mans, 516 U.S. 59, 70-

71 (1995) “tells judges that it is okay to use the Restatement when dealing with 11 U.S.C. §

523(a)(2)(A)”). Although § 523(a)(4) is not addressed in Goguen, there is no reason to expect that the

analysis would differ as to fraudulent misrepresentations there. See Husky Int’l Elecs., Inc., 578 U.S. at

363 (noting overlap between § 523(a)(2)(A) and § 523(a)(4) as to fraudulent misrepresentation

component).

20 The alleged misrepresentation may well have caused a loss to PCFA, but PCFA is not a plaintiff in this

case.

intentions. While that may be true, as to the Preexisting Litigation, AIS is in the same position

as it would have been if the parties had never entered into the Purchase Agreement and thus

cannot have suffered cognizable damage as a result of the alleged misrepresentation. Thus, it

appears that AIS could not meet its burden on cause in fact on this record.

Even if AIS could meet the burden of showing that it suffered damages caused in fact by

misrepresentations made by Mr. Aoude, that alone would not be sufficient. AIS must also

establish legal cause, which focuses on foreseeability. See Goguen, 691 F.3d at 67, 70 (citing

Restatement (Second) of Torts § 548A & cmt. a) (noting that foreseeability “shape[s] and

delimit[s] a rational remedy: otherwise the chain of causation could be endless” (alterations in

original) (internal quotation marks omitted)). “A fraudulent misrepresentation is a legal cause

of a pecuniary loss resulting from action or inaction in reliance upon it if, but only if, the loss

might reasonably be expected to result from the reliance.” Restatement (Second) of Torts §

548A.

In general, [a] misrepresentation is a legal cause only of those pecuniary losses that

are within the foreseeable risk of harm that it creates. . . . Pecuniary losses that

could not reasonably be expected to result from the misrepresentation are, in

general, not legally caused by it and are beyond the scope of the maker’s liability.

Restatement (Second) of Torts § 548A cmts. a-b (providing examples and noting analogy from

legal causation in this intentional tort context to same concept in negligence context). Put

another way: “An actor who makes a fraudulent misrepresentation is subject to liability for harm

only if the risk of the harm was foreseeably increased by the fraud.” Restatement (Third) of

Torts: Liab. for Econ. Harm § 12 (succeeding § 548A, among others, in Restatement (Second) of

Torts).

AIS does not assert, nor does the summary judgment record readily suggest, that Mr.

Aoude’s allegedly false promise not to compete foreseeably increased the risk that he would not

or could not defend and indemnify AIS in the Preexisting Litigation. That is, from the

undisputed material facts, AIS does not appear to establish its prima facie case for legal cause.

See Goguen, 691 F.3d at 70-71 (cautioning that “when events have run their course, it is easy to

label ‘foreseeable’ everything that has in fact occurred—but this we cannot do” (internal

quotation marks omitted)).

If Mr. Aoude misrepresented his intent not to compete, undoubtedly there would be types

of losses that could reasonably be expected to result from PCFA’s alleged reliance upon that

specific false promise. Examples might include losses due to any actual competition and

diversion of services that should have been provided by Mr. Aoude through AIS. These are not

the types of losses alleged here. Rather, the losses alleged in this case stem from Mr. Aoude’s

financial inability to continue financing AIS’s defense in the Preexisting Litigation and potential

future losses if AIS becomes liable under a judgment or settlement. Mr. Aoude’s financial

difficulties followed from the closure of Mr. Aoude’s new practice due to a billing dispute with

the insurer for the bulk of his patients. It is unclear how AIS’s alleged losses in these

circumstances, even when viewed more generally or abstractly, could have been reasonably

expected to result from PCFA’s reliance upon Mr. Aoude’s allegedly false promise not to

compete. See Restatement (Second) of Torts § 548A. At the time of the Purchase Agreement’s

execution, it should have been a known risk that Mr. Aoude might one day be unable to pay in

connection with the Preexisting Litigation. It is unclear how Mr. Aoude’s allegedly false

promise not to compete could have foreseeably increased that risk. See Restatement (Third) of

Torts: Liab. for Econ. Harm § 12.

Without establishing the two elements of causation, AIS cannot succeed. At the hearing

on Mr. Aoude’s Motion, although not speaking in terms of factual or legal cause specifically, I

questioned whether there was a sufficient link between AIS’s claimed damages and its

allegations of fraud. Having now further developed the issues above as potential grounds for

summary judgment in favor of Mr. Aoude, I will provide the parties with a reasonable time to

respond.

IV. Conclusion

For the above reasons, the Motion (Dkt. No. 18) will be denied, and the parties will be

provided an opportunity to address the Court’s stated grounds for granting summary judgment in

Mr. Aoude’s favor. See Fed. R. Civ. P. 56(f)(2)-(3). A separate order consistent with this

decision will be issued.

Dated: February 18, 2022 By the Court,

fe Panos

U.S. Bankruptcy Judge

18