Kerin Enterprises Holding Company, Ltd., as Succes v. Marklin

UNITED STATES BANKRUPTCY COURT

EASTERN DISTRICT OF NEW YORK

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In re:

Case No. 8-21-71030-reg

DANIEL MARKLIN aka DANIEL E. MARKLIN,

Chapter 7

Debtor.

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KERIN ENTERPRISES HOLDING COMPANY, LTD.,

as Successor in Interest to MCKINNON DOXSEE

AGENCY, INC. and MILLENNIUM ALLIANCE

GROUP, LLC.,

Plaintiff,

- against - Adv. Proc. No. 8-21-08136-reg

DANIEL MARKLIN aka DANIEL E. MARKLIN,

Defendant.

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DECISION AFTER TRIAL

Before the Court is an adversary proceeding commenced by Kerin Enterprises Holding

Company, Ltd. (the “Plaintiff”) against Daniel Marklin aka Daniel E. Marklin (the “Debtor” or

“Defendant”) seeking a finding of non-dischargeability pursuant to 11 U.S.C. §§ 523(a)(4)

and/or (a)(6) and denial of the Debtor’s discharge under 11 U.S.C. § 727(a)(4)(A).

The Plaintiff’s claims are predicated on conduct which was the basis of an action brought

by the Debtor’s former employer in New York State Supreme Court. The former employer was

not successful at the trial level where the Debtor and a co-defendant, Frank Gallina (“Gallina”)

were found not liable under various causes of action alleging that they had misappropriated

certain customer account information from their former employer for their own benefit and

provided that information to their prospective employer. On appeal, the Appellate Division

reversed the trial court in part, and found the Debtor liable for aiding and abetting Gallina in

Gallina’s breach of fiduciary duty to their former employer and found that the Debtor and

Gallina had engaged in unfair competition against their former employer.

The Plaintiff is the successor in interest to the Debtor’s former employer and asks the

Court to deny the Debtor’s discharge pursuant to § 727(a)(4)(A). The Plaintiff argues that the

Debtor failed to disclose in his petition and schedules his interest in several assets, as is required.

These assets include the book of business in which the Debtor acknowledged co-owning with his

prior employer in the state court action. The Plaintiff also argues that the Debtor’s conduct in

assisting Gallina’s actions in breaching his fiduciary duty to his employer and providing his

employer’s customer account information to a competitor requires the Court to find that the debt

owed by the Debtor to the Plaintiff is non-dischargeable pursuant to §§ 523(a)(4) and (a)(6).

For the reasons that follow, the Court finds that the Debtor’s discharge should be denied

under § 727(a)(4)(A). The Debtor had a duty to disclose to the Court and his creditors his interest

in the book of business he co-owned with his former employer. A finding that a debtor is not

entitled to a discharge under § 727(a)(4)(A) would normally render a discussion of the § 523

causes of action unnecessary. The Plaintiff herein has not withdrawn the § 523 causes of action

and the Court finds it important to examine how findings in a state court proceeding may impact

a non-dischargeability action in the Bankruptcy Court. Dischargeability and § 523 are creatures

of federal bankruptcy law, and the Bankruptcy Code provides the sole grounds for determining

whether a judgment debt should be excepted from a debtor’s discharge. In resolving an action

pursuant to § 523 in the Bankruptcy Court, the findings in a state court proceeding regarding a

debtor’s conduct may be used to establish certain necessary elements in a non-dischargeability

proceeding. Collateral estoppel may be appropriate to preclude the relitigation of issues already

decided by another court of competent jurisdiction. In this case, several key points decided by

the state court, including the Debtor’s conduct of appropriating assets belonging to his former

employer for use by himself and his future employer, plus his assistance in helping Gallina do

the same, satisfied certain elements of § 523(a)(6). The trial before this Court established the

additional necessary elements so as to allow the court to find the Debtor’s conduct was willful

and malicious, which gives rise to a finding that the debt is non-dischargeable.

Procedural History

On June 1, 2021, the Defendant filed a voluntary petition (“Petition”) for relief under

chapter 7 of the United States Bankruptcy Code and Richard Stern was duly appointed and

qualified as the chapter 7 trustee. ECF No. 1.1 On September 3, 2021, the Plaintiff, successor in

interest to McKinnon Doxsee Agency, Inc. (“McKinnon”) and Millennium Alliance Group,

LLC2 (“Millennium”), commenced this adversary proceeding. ECF No. 1.3 On June 10, 2022,

the Plaintiff filed a motion for partial summary judgment (“MSJ”) with respect to the causes of

action under §§ 523(a)(6) and (a)(4) and § 727(a)(4)(A). ECF No. 20. On July 11, 2022, the

Defendant submitted a memorandum of law in opposition (“Opposition”) to the MSJ. On July

15, 2022, the Plaintiff submitted a response to the Opposition. Thereafter, both parties submitted

briefs addressing the sole issue of whether the Plaintiff, as transferee of claims previously held

by McKinnon and Millennium, may seek to have such claims deemed non-dischargeable under §

523(a)(6). Pl.’s Br., ECF No. 27; Def.’s Br., ECF No. 28; Pl.’s Reply Br., ECF No. 29. On

October 3, 2022, this Court issued a Memorandum Opinion holding that the Plaintiff, as the valid

1 This ECF reference is to the Defendant’s docket in the chapter 7 bankruptcy case.

2 The Plaintiff purchased a majority ownership interest in Millennium from McKinnon, and as part of the

purchase agreement, the Plaintiff obtained the “sole right to manage, defend and make all decisions”

relating to the state court action against the Defendant and Gallina. Pl.’s Reply Br., ECF No. 29, ¶ 10-11.

The Plaintiff thereafter sold its interest in Millennium but retained its right to maintain the state court

action against the Defendant and Gallina.

3 Unless otherwise noted, ECF references are to the adversary proceeding docket, No. 21-8136.

assignee and holder of the claims, may maintain the two causes of action under 11 U.S.C. §

523(a). ECF No. 30. An order was entered on November 7, 2022, denying the MSJ and a trial

date was scheduled. A trial was held on May 9, 2023, at which the Defendant testified. All

exhibits were stipulated into evidence. The parties subsequently filed post-trial briefs on June 30,

2023. ECF Nos. 37, 38. Thereafter, the adversary proceeding was marked submitted.

Facts

The Defendant was employed as an insurance sales agent by MRW Group, Inc.

(“MRW”) from 1987 to 1993, where he developed a book of business (“Marklin Book”), in

which he and MRW each held a 50% interest. Compl., ECF No. 1, at 2, ¶10-11. Gallina

developed a separate book of business (“Gallina Book”), in which MRW and Gallina each held a

50% interest. Compl. at 2, ¶12 (the Marklin Book and the Gallina Book shall be referred to

collectively as the “Books”). In the insurance business a “book of business” is defined as a

compilation of customer names along with information regarding the insurance policies

purchased by each customer. This information includes the dates of insurance policies, the

amounts of insurance, the premiums, and a description of the covered property. In re Est. of

Corning, 488 N.Y.S.2d 477, 480 (App. Div. 3d Dep’t 1985).

On September 1, 1993, McKinnon, owned at the time by its principal, James McKinnon,

contracted with Gallina, the Defendant, and MRW (“MRW Agreement”) to purchase MRW’s

50% interest in both the Marklin Book and the Gallina Book. Compl. at 2, ¶13. The aggregate

purchase price for the Books was approximately $260,000. Trial Transcript (“Tr.”) at 14:2-5,

ECF No. 35. According to the MRW Agreement, the purchase of the Books included the

customer list and accounts, together with all original records pertaining to said customer

accounts. The records included, but were not limited to, applications, dailies, policies,

correspondence, memoranda, listing of billings and payments received, and losses. Pl.’s Trial Ex.

A, at 1.

The percentage of commissions paid to the Defendant did not correspond to his 50%

ownership of the Marklin Book.4 Tr. 13:20-25, 14:1. On this same day, the Defendant and

Gallina commenced their employment at McKinnon as insurance agents. Compl. at 2, ¶14. Also

on this day, a handwritten agreement (“Danford Agreement”) was executed by the Defendant

and Gallina. Tr. at 16:1-11; Compl. at 2-3, ¶15; Pl.’s Trial Ex. C. The Danford Agreement

provided that in the event either the Defendant or Gallina terminated their relationship with

McKinnon, they would take ownership of the portion of the Books that McKinnon had

purchased and would assume McKinnon’s responsibility to pay MRW as well as reimburse

McKinnon for any payments made to MRW. Tr. at 17:12-18; Pl.’s Trial Ex. C. The Defendant

never entered into an employment agreement or a non-compete agreement with McKinnon. Tr.

at 66:15-17.

At some point in time, James McKinnon considered forming a related entity that would

act as an “umbrella” under which various insurance agencies could operate as member agencies,

for the purpose of sharing expenses and increasing revenues. Tr. at 23:6-12. As a result,

Millennium was officially formed in 1998 to act in this fashion. Compl. at 3, ¶16; Tr. at 25:14-

18. McKinnon subsequently became one of the member insurance agencies of Millennium. Tr. at

24:1-3. In addition to working at McKinnon, the Defendant became the COO of personal lines at

Millennium where he was responsible for hiring. However, he was eventually terminated from

that position in 2006. Tr. at 24:22-25, 25:1-4; Pl.’s Trial Ex. D. Gallina was a member of

4 For example, although the Defendant owned 50% of the Marklin Book, he did not receive 50%

commissions. In fact, for some time, the Defendant’s sales commission was fixed at 30%. Tr. 13:20-25,

14:1.

Millennium’s Board of Directors. Tr. at 25:16-18. Despite his termination as COO of

Millennium, the Defendant continued to be employed at McKinnon.

On December 4th, 2007, the Defendant and Gallina resigned from their respective

positions at McKinnon and Millennium.5 Tr. at 27:7-11, 20-21; Pl.’s Trial Exs. E, F, G. On this

same day, the Defendant and Gallina became employed by AC Edwards Inc. d/b/a Edwards &

Company (“Edwards”). Tr. at 70:5-9.

Approximately one month prior to leaving McKinnon to join Edwards, the Defendant and

Gallina, without the consent or knowledge of McKinnon, made copies of some customer files,

which included each customer’s name, address, telephone number, policy information, carrier

name, type of policy, and policy number. Tr. at 31:1-14, 32:6-23, 36:15-17. The files were

provided to Edwards approximately two weeks prior to the Defendant’s and Gallina’s

resignation. Tr. at 37:6-8. When asked at trial why he copied the customer information and

provided it to Edwards, the Defendant testified that he did so to negotiate a commission structure

for himself and to have Edwards prepare the “BOR” (broker of record) letters6 so he could start

earning commissions under Edwards quickly. Tr. at 37:20-24. Some of the BOR letters were

dated prior to the Defendant’s resignation on December 4, 2007. Tr. at 41:6-13. According to the

Defendant’s testimony, he owned 100% of the book of business upon his departure from

McKinnon. Tr. at 52:17-20.

5 The Defendant resigned as an employee of McKinnon; Gallina resigned as an employee of McKinnon

and as a member of the Board of Directors at Millennium.

6 A “broker of record” letter is a letter that is signed by an insured client and sent to an insurance carrier,

indicating that the client wants to change its insurance broker. The current broker would then have

between five to ten days to obtain a “countermanding broker of record,” in which the current broker can

contact the client and attempt to convince the client to remain with them. The insurance carrier will then

pay commissions to whomever keeps the client. Tr. at 33.

In 2015, several years after leaving McKinnon, the Defendant and Edwards signed an

employment contract. Tr. at 52:24-25, 53:1-3. It was at this time that the Defendant claims his

100% ownership in the Marklin Book was transferred to Edwards. According to the Defendant,

Edwards currently owns the Marklin Book. Pl.’s Mot. For Summ. J., Ex. 3 at 45:9-14, ECF No.

20. However, Edwards paid nothing for the acquisition of the Marklin Book, and the

employment contract contained no language effectuating a transfer of an interest in the Marklin

Book to Edwards. Tr. at 53:21-25, 54:1-17; Pl.’s Trial Ex. I.

On December 10, 2007, McKinnon and Millennium brought an action against the

Defendant and Gallina in the Supreme Court of New York, Nassau County (the “New York

Supreme Court”) seeking damages based on the following causes of action: (1) conversion, (2)

breach of fiduciary duty, (3) aiding and abetting a breach of fiduciary duty, (4) unfair

competition, and (5) a demand for an accounting. On December 23, 2016, the New York

Supreme Court entered a decision finding that McKinnon and Millennium had not established

any of their claims by a preponderance of the evidence and dismissed the complaint in its

entirety. Mckinnon Doxsee Agency, Inc. v. Gallina, No. 022005-07, 2016 WL 9774707, at *1

(N.Y. Sup. Ct. Dec. 23, 2016).

On October 7, 2020, the Appellate Division, Second Department (the “Appellate

Division”) affirmed the New York Supreme Court’s dismissal of the claim for conversion and

demand for an accounting. However, it reversed in part and found Gallina liable for breach of

fiduciary duty and the Defendant liable for aiding and abetting Gallina’s breach of his fiduciary

duty. Gallina and the Defendant were also found liable for unfair competition. See McKinnon

Doxsee Agency, Inc. v. Gallina, 132 N.Y.S.3d 144, 146 (App. Div. 2d Dep’t 2020) (“Appellate

Decision”). The Defendant’s wrongful diversion of contact information and information

regarding insurance policies for his benefit and to the detriment of his employer, plus the

solicitation of customers prior to his resignation, constituted unfair competition under New York

law. Id. at 149. In addition, the Appellate Division found that Gallina had a fiduciary duty as a

member of the board of directors of Millennium and by his conduct, he breached that duty.

Furthermore, the Appellate Division held the Defendant liable for aiding and abetting Gallina in

his breach of fiduciary duties. Id. at 148-49.

On June 1, 2021, before a trial on damages could be held, the Defendant filed the

Petition. In his schedules and statement of financial affairs, the Defendant failed to disclose the

Marklin Book and his two licenses to sell various insurance products. The Defendant also

omitted Ashley Funding Services, LLC as a creditor. In his schedules, the Defendant listed

Gallina as a creditor, listed the Plaintiff with an “unliquidated claim” in the amount of $500,000,

and claimed income from operating a business.

Discussion

I. Book of Business

Critical to any examination of the causes of action in this adversary proceeding is an

understanding of the term “book of business.” “In the insurance industry, the term ‘book of

business’ . . . refers to a copy of the policy issued to the insured and contains ‘the date of the

insurance policy, the name of the insured, the date of its expiration, the amount of insurance,

premiums, property covered and terms of insurance.’” In re Est. of Corning, 488 N.Y.S.2d at

480. This meaning corresponds to the description of the book of business contained in the MRW

Agreement.

II. Denial of Discharge under § 727(a)(4)(A)

Section 727(a)(4)(A) of the Bankruptcy Code states, “[t]he court shall grant the debtor a

discharge, unless . . . the debtor knowingly and fraudulently, in or in connection with the case . . .

made a false oath or account.” 11 U.S.C. § 727(a)(4)(A).

To satisfy § 727(a)(4)(A), the plaintiff bears the burden of establishing each element by a

preponderance of the evidence and must prove “(1) the debtor made a statement under oath; (2)

the statement was false; (3) the debtor knew the statement was false; (4) the debtor made the

statement with fraudulent intent; and (5) the statement related materially to the bankruptcy case.”

Pergament v. Gonzalez (In re Gonzalez), 553 B.R. 467, 473 (Bankr. E.D.N.Y. 2016) (quoting

Carlucci & Legum v. Murray (In re Murray), 249 B.R. 223, 228 (E.D.N.Y. 2000)).

A debtor’s petition, schedules and related statements are declarations made under penalty

of perjury and therefore “constitute a statement under oath for purposes of § 727(a)(4)(A).” In re

Gonzalez, 553 B.R. at 473-74 (quoting Nof v. Gannon (In re Gannon), 173 B.R. 313, 320

(Bankr. S.D.N.Y. 1994)). “Omissions as well as affirmative misstatements qualify as false

statements for Section 727(a)(4)(A) purposes.” Republic Credit Corp. I v. Boyer (In re Boyer),

367 B.R. 34, 45 (Bankr. D. Conn. 2007), aff’d, 384 B.R. 44 (D. Conn. 2008), aff’d, 328 F.App’x

711 (2d Cir. 2009). Even “one single false oath or account is sufficient to deny a debtor’s

discharge.” TD Bank, N.A. v. Nazzaro (In re Nazzaro), No. 10–8500 (REG), 2013 WL 145627, at

*7 (Bankr. E.D.N.Y. Jan. 14, 2013).

In making its determination, “[c]ourts may consider the debtor’s education, business

experience, and reliance on counsel when evaluating the debtor’s knowledge of a false statement,

but the debtor is not exonerated by pleading that he or she relied on patently improper advice of

counsel.” Bub v. Rockstone Capital, LLC, 516 B.R. 685, 695 (E.D.N.Y. 2014) (quoting Montey

Corp. v. Maletta (In re Maletta), 159 B.R. 108, 112 (Bankr. D. Conn. 1993)). “A statement is

considered to have been made with knowledge of its falsity if it was known by the debtor to be

false, made without belief in its truth, or made with reckless disregard for the truth.” In re

Gonzalez, 553 B.R. at 474 (quoting In re Maletta, 159 B.R. at 112).

In examining whether a debtor exhibits a reckless disregard for, or indifference to

the truth, courts consider (a) the serious nature of the information sought and the

necessary attention to detail and accuracy in answering; (b) a debtor’s lack of

financial sophistication as evidenced by his or her professional background; and (c)

whether a debtor repeatedly blamed recurrent errors on carelessness or failed to

take advantage of an opportunity to clarify or correct inconsistencies.

In re Gonzalez, 553 B.R. at 474 (quoting Gobindram v. Bank of India, 538 B.R. 629, 638

(E.D.N.Y. 2015)).

A court may find that a debtor’s acts constitute a reckless indifference to the truth and

may infer fraudulent intent “from a series of incorrect statements and decisions contained in the

schedules.” Bub, 516 B.R. at 694. Once a plaintiff produces evidence that a false statement was

made, the burden then shifts to the debtor to produce a credible explanation. Virovlyanskaya v.

Virovlyanskiy (In re Virovlyanskiy), 485 B.R. 268, 272 (Bankr. E.D.N.Y. 2013). If the debtor

fails to do so, a court may infer fraudulent intent. Pergament v. DeRise (In re DeRise), 394 B.R.

677, 691 (Bankr. E.D.N.Y. 2008). Lastly, a statement or omission will be considered material if

it “bears a relationship to the bankrupt’s business transactions or estate, or concerns the

discovery of assets, business dealings, or the existence and disposition of his property.” Agai v.

Antoniou (In re Antoniou), 515 B.R. 9, 22 (Bankr. E.D.N.Y. 2014) (quoting Chalik v. Moorefield

(In re Chalik), 748 F.2d 616, 618 (11th Cir. 1984)).

The Plaintiff alleges that the Defendant should not be granted a discharge for failing to

list his ownership of the Marklin Book and his two licenses to sell insurance. The Defendant’s

failure to list a material asset, his interest in the Marklin Book, constitutes a false oath under §

727(a)(4)(A), as it directly relates to the Defendant’s estate, discovery of assets, and disposition

of his property. However, the Defendant’s failure to list the insurance licenses does not provide

grounds for denial of his discharge.

The record establishes that the Defendant owned 50% of the Marklin Book during the

time he worked at McKinnon and upon his departure from McKinnon, he took ownership of

100% of the Marklin Book. The Defendant is an experienced insurance salesman and he has

been in the insurance industry for years. The Defendant was personally involved in and was a

signatory to the MRW Agreement which obligated him to compensate McKinnon if the

Defendant took the Marklin Book. The Defendant never transferred any of his interest in the

Marklin Book when he joined Edwards, so that interest remained with him on the date the

Petition was filed. Whether that interest is 50%, or 100%, his failure to list his interest in this

asset is significant.

The Plaintiff met its burden of establishing that the Defendant made a false statement,

which creates a rebuttable inference of fraudulent intent. The Defendant has failed to rebut this

inference. At trial, the Defendant testified that he owned 100% of the Marklin Book until he

signed an employment agreement with Edwards in 2015. Tr. at 47:24-25, 48:1-3. According to

the Defendant, the non-compete and confidentiality provisions “divested” him of his interest.

The Court disagrees.

There is nothing in the record that indicates any purchase, sale, transfer or assignment of

the Defendant’s interest in the Marklin Book to Edwards. The Defendant even conceded that no

document exists evidencing Edwards’s alleged purchase of any portion of the Marklin Book. Tr.

at 50:9-15. The Defendant also admitted at trial that in a prior deposition, he testified that he

owned 50% of the Marklin Book and Edwards owned the other 50% prior to his contract with

Edwards. Tr. at 45:24-25, 46:1-5. The Defendant then immediately corrected his testimony to

state that he owned 100% of the Marklin Book prior to finalizing an agreement with Edwards.

Tr. at 46:16-25. He also admitted that he testified, in that same deposition, that he and Edwards

had discussions about the purchase of the Marklin Book but produced no evidence demonstrating

an actual purchase. Therefore, the Defendant retained an interest in the Marklin Book, which was

not disclosed in the Petition. Accordingly, the Court finds that the Plaintiff has established that

the Defendant made a materially false oath with fraudulent intent, and Defendant failed to rebut

this finding with any credible evidence.

The Plaintiff also alleges that the Defendant failed to list his two licenses to sell

insurance, as they are considered “professional” licenses required to be disclosed in his Petition.

The Defendant possessed one license to sell property and casualty insurance, and another to sell

life insurance. The Defendant acknowledged that he needs these licenses to work in the

insurance industry, he held these licenses for almost forty years, he needed to pass examinations

and re-certify every two years to maintain these licenses, and he did not disclose these licenses in

his Petition. Tr. at 55:17-25, 56. The Defendant maintains, however, that he was not required to

list these licenses because insurance brokers are not “professionals” and therefore, his licenses to

sell insurance are not “professional licenses.” Further, he argues he did not act with fraudulent

intent because he did not believe he was required to disclose them. The Court agrees.

The law is unsettled as to whether licenses to sell insurance are professional licenses

requiring disclosure in bankruptcy petitions. In some contexts, such as malpractice actions,

insurance agents are not considered “professionals.” See Chase Sci. Rsch., Inc. v. NIA Group,

Inc., 749 N.E.2d 161, 166-67 (N.Y. 2001) (holding that insurance agents and brokers are not

“professionals” within the context of N.Y. C.P.L.R. § 214(6), after considering criteria such as

extent of formal learning and training, licensure and regulation requirements, whether a code of

conduct imposes standards beyond those accepted in the marketplace, and whether a system of

discipline for violation of those standards exists).

In other contexts, however, insurance agents and other similar occupations can be

considered “professionals.” See Westchester Fire Ins. Co. v. Metro. Life Ins. Co., 721 N.Y.S.2d

14, 15 (App. Div. 1st Dep’t 2001) (finding that the sale of life insurance was a professional

service under a policy’s professional services exclusion); Cunningham v. Ins. Co. of N.A., 521

F.Supp.2d 166, 184 (E.D.N.Y. 2006) (“that New York law does not recognize ‘professional

malpractice’ claims against insurance brokers . . . rests on a fundamental misreading of the

law”); David Lerner Assocs., Inc. v. Phila. Indem. Ins. Co., 934 F.Supp.2d 533, 544-45

(E.D.N.Y. 2013), aff’d, 542 F.App’x 89 (2d Cir. 2013) (distinguishing Chase because of its

limited context and choosing to apply the “common understanding of the term” in determining

what constitutes a “professional”).

Regardless of whether a license to sell insurance is considered a professional license,

there was no discernable fraudulent intent in the Defendant’s failure to disclose his licenses. At

trial, the Defendant explained that he considered “professional licenses” to mean professionals

such as doctors or lawyers. Tr. at 56-57. He also testified that he did not consider his licenses to

be considered “professional.” Specifically, he testified that he had previously attended an “errors

and omissions seminar” and the lawyer presenting the seminar discussed cases where insurance

agents were not considered professionals. Tr. at 73:1-4. The Defendant relied on this guidance

and provided a good faith basis for his failure to list the licenses. While the failure to list the

licenses alone would not warrant denial of the Defendant’s discharge, this Court finds that the

Defendant’s failure to disclose his interest in the Marklin Book provides adequate grounds to

deny the Defendant’s discharge under § 727(a)(4)(A).7

Before analyzing the remaining causes of action, the Court shall examine res judicata and

collateral estoppel and their effect on the remaining claims.

III. Res Judicata and Collateral Estoppel

Res judicata “prevents litigation of all grounds for, or defenses to, recovery that were

previously available to parties, regardless of whether they were asserted or determined in the

prior proceeding.” Ling’s Props. LLC v. Bode (In re Bode), No. 14-82802 (REG), 2015 WL

4594539, at *3 (Bankr. E.D.N.Y. July 30, 2015) (citing Brown v. Felson, 442 U.S. 127, 131

(1979)). However, “res judicata does not bar the bankruptcy court from deciding the issue of

whether a debt is dischargeable, even when similar issues have already been decided by a state

court of competent jurisdiction.” Margulies v. Hough (In re Margulies), 517 B.R. 441, 451-52

(S.D.N.Y. 2014). Collateral estoppel, however, can preclude certain issues from being

relitigated. Collateral estoppel “bars the relitigation of an issue that was raised, litigated, and

actually decided by a judgment in a prior proceeding regardless of whether the two suits are

based on the same cause of action.” Postlewaite v. McGraw-Hill, 333 F.3d 42, 48 (2d Cir. 2003)

(citing Lawlor v. Nat’l Screen Serv. Corp., 349 U.S. 322, 326 (1955)).

7 In many cases, denial of a debtor’s discharge would render a discussion of additional causes of action

under § 523 unnecessary. Nevertheless, it is worthwhile in this case to rule on the §§ 523(a)(4) and (a)(6)

causes of action brought by the Plaintiff. As discussed, the Appellate Division found the Defendant liable

for (1) aiding and abetting Gallina’s breach of his fiduciary duty, and (2) unfair competition, with

damages to be determined. A finding of liability under these state law causes of action does not guarantee

that debts arising from these claims will be non-dischargeable because they do not precisely match the

requirements of §§ 523(a) (4) or (6). However, res judicata does not bar the creditor from seeking to have

the debts deemed non-dischargeable, and collateral estoppel can preclude the relitigation of certain

elements which were already determined in the prior non-bankruptcy proceeding. In this case, there are

findings in the Appellate Decision which satisfy several elements of § 523(a)(6).

Under New York law, collateral estoppel applies when “(1) the identical issue necessarily

was decided in the prior action and is decisive of the present action, and (2) the party to be

precluded from relitigating the issue had a full and fair opportunity to litigate the issue in the prior

action.” Denton v. Hyman (In re Hyman), 502 F.3d 61, 65 (2d Cir. 2007). The Defendant does not

dispute that he had a full and fair opportunity to litigate the claims in state court. Nor is there any

doubt that this Court is bound by the state court decision finding the Defendant liable for (1) aiding

and abetting breach of fiduciary duty and (2) unfair competition. In New York, the elements

constituting a claim for aiding and abetting a breach of fiduciary duty consist of (1) a breach of

fiduciary duty, (2) that the defendant knowingly induced or participated in the breach, and (3) that

the plaintiff suffered damages from the breach. Off. Comm. of Unsecured Creditors v. Blomen (In

re Hydrogen, LLC), 431 B.R. 337, 352 (Bankr. S.D.N.Y. 2010). In New York, unfair competition

is found where a defendant “wrongfully divert[s] the plaintiff’s business to itself.” Baldeo v.

Majeed, 55 N.Y.S.3d 340, 343 (App. Div. 2d Dep’t 2017). To establish a claim for unfair

competition based on misappropriation of confidential information in New York, a plaintiff must

prove that “the defendant solicited the plaintiff's customers where the customer list was a trade

secret, or where the defendant engaged in wrongful conduct.” Id. This conduct includes

“physically taking or copying files or using confidential information.” Id. (quoting Starlight

Limousine Serv., Inc. v. Cucinella, 713 N.Y.S.2d 195, 196 (App. Div. 2d Dep’t 2000)). To the

extent that the Appellate Decision contains findings relevant to elements of § 523(a)(6), the Court

may adopt these findings in this decision.

IV. Non-dischargeability Under § 523(a)(6)

Section 523(a)(6) of the Bankruptcy Code provides that “[a] discharge . . . does not

discharge an individual debtor from any debt for willful and malicious injury by the debtor to

another entity or to the property of another entity.” 11 U.S.C. § 523(a)(6).

“Willful” and “malicious” are separate elements with distinct meanings and both must be

satisfied by a preponderance of the evidence. Cocoletzi v. Orly (In re Orly), No. 16-01020 (JLG),

2016 WL 4376947, at *3 (Bankr. S.D.N.Y. Aug. 10, 2016) (citing Rescuecom Corp. v. Khafaga

(In re Khafaga), 419 B.R. 539, 548 (Bankr. E.D.N.Y. 2009)).

The term “willful” means “a deliberate or intentional injury, not merely a deliberate or

intentional act that leads to injury.” Kawaauhau v. Geiger, 523 U.S. 57, 61 (1998). Willfulness is

found where the debtor “knows that the consequences are certain, or substantially certain, to

result from his act.” Myer’s Lawn Care Servs., Inc. v. Fragala (In re Fragala), 645 B.R. 488,

499 (Bankr. E.D.N.Y. 2022) (quoting Salim v. VW Credit, Inc., 577 B.R. 615, 625 (E.D.N.Y.

2017)); see also DeCurtis v. Ferrandina (In re Ferrandina), 533 B.R. 11, 26 (Bankr. E.D.N.Y.

2015) (“Courts within the Second Circuit have found that if a debtor believes that an injury is

substantially certain to result from his conduct, the debtor will be found to have possessed the

requisite intent to injure required under Geiger”). Courts in the Second Circuit generally apply a

subjective standard of intent to determine willfulness. Owens v. Powell (In re Powell), 567 B.R.

429, 434 (Bankr. N.D.N.Y. 2017).

The term “malicious” has been defined to mean “wrongful and without just cause or

excuse, even in the absence of personal hatred, spite, or ill-will.” Navistar Fin. Corp. v. Stelluti

(In re Stelluti), 94 F.3d 84, 87 (2d Cir.1996). As defined by courts in the Second Circuit,

“malicious” conduct can involve actual or implied malice. In re Khafaga, 419 B.R. at 550 (citing

In re Stelluti, 94 F.3d. at 88). Generally, there are three types of conduct that can lead to a

finding of malice, as the court in Khafaga explained.

First, some conduct may be inherently malicious. In re Khafaga, 419 B.R. at 550 (citing

Novartis Corp. v. Luppino (In re Luppino), 221 B.R. 693, 700 (Bankr. S.D.N.Y. 1998)). For

example, assault may be inherently and patently malicious. In re Luppino, 221 B.R. at 700.

Actual malice may also be an essential element of some causes of action, such as malicious

prosecution. Id.

Second, there are instances where actual malice may be inferred or imputed, known as

“implied malice,” where “the debtor's conduct giving rise to liability has no potential for

economic gain or other benefit to the debtor, from which one could only conclude that the

debtor's motivation must have been to inflict harm upon the creditor.” In re Khafaga, 419 B.R. at

550 (citing In re Luppino, 221 B.R. at 700). Malice may also be implied when “anyone of

reasonable intelligence knows that the act in question is contrary to commonly accepted duties in

the ordinary relationships among people, and injurious to another.” Yash Raj Films (USA), Inc. v.

Akhtar (In re Akhtar), 368 B.R. 120, 132 (Bankr. E.D.N.Y. 2007) (quoting Voyatzoglou v.

Hambley (In re Hambley), 329 B.R. 382, 402 (Bankr. E.D.N.Y. 2005)). Implied malice is

typically found where the behavior is of the kind that the court cannot justify on any level.

Whitaker Secs., LLC v. Rosenfeld (In re Rosenfeld), 543 B.R. 60, 76 (Bankr. S.D.N.Y. 2015).

Third, there are situations where the debtor’s conduct giving rise to liability is clearly

motivated by profit or gain or other benefit to the debtor. In re Luppino, 221 B.R. at 700. When

this is the case, “the underlying conduct, however deplorable, would not give rise to liability

under § 523(a)(6) in the absence of some additional, aggravating conduct on the part of the

debtor of sufficient gravity to warrant an inference of actual malice under the Second Circuit

decision in [Stelluti].” Khafaga, 419 B.R. at 550 (citing In re Luppino, 221 B.R. at 700).

Consequently, “an ordinary tort or breach of contractual or statutory duty generally is not

sufficient to deny discharge under subsection (6) without some aggravating circumstance . . . .”

In re Luppino, 221 B.R. at 700. Whether circumstances are sufficiently aggravating to support a

finding of malice is a fact-specific determination made on a case-by-case basis. Wu v. Lin (In re

Qiao Lin), 576 B.R. 32, 43 (Bankr. E.D.N.Y. 2017). “A court should look to the totality of the

circumstances to determine malice.” Forrest v. Bressler (In re Bressler), 387 B.R. 446, 455

(Bankr. S.D.N.Y. 2008).

In the instant case, the Defendant’s conduct falls within the third category, as it was

clearly motivated by profit or gain. Therefore, this Court must find “additional, aggravating

conduct” by the Defendant sufficient to conclude that this debt is non-dischargeable under §

523(a)(6).

The Plaintiff has established that the Defendant’s actions were both willful and

malicious. It is undisputed that approximately one month prior to his departure from McKinnon,

the Defendant, in contemplation of leaving McKinnon, began making copies of McKinnon

customer lists and providing these lists to Edwards, which in turn utilized the information to

prepare the BOR letters. These findings were detailed in the Appellate Decision and were

necessary elements of each cause of action for which the Defendant was found liable. The

Defendant conceded that the number of policies he copied were in the hundreds and that when

these customers agreed to switch to Edwards, they were no longer included as part of

McKinnon’s book of business. Tr. at 39:4-8. Any income via commissions that would have

otherwise been McKinnon’s now became the income of Edwards. The Defendant knew that his

conduct was substantially certain to result in economic injury to McKinnon, and therefore, his

conduct was “willful” under § 523(a)(6).

The Defendant’s conduct was also “malicious.” The Defendant exhibited wrongful

behavior by accessing the customer insurance information contained on McKinnon’s computer,

copying that information, and subsequently providing it to Edwards while still an employee of

McKinnon. This wrongful behavior was necessarily determined in the Appellate Decision in

connection with both causes of action. The BOR letters, which were introduced as exhibits at

trial, which were dated prior to the date that the Defendant and Gallina resigned, and for which

the Defendant “provided no specific explanation,” are further evidence of the Defendant’s

improper conduct. Pl.’s Trial Ex. H; McKinnon Doxsee Agency, Inc, 132 N.Y.S.3d at 148-49.

The Defendant argues that even though he provided the client lists to Edwards, the clients

could still choose whether they wanted to remain with McKinnon. The Defendant fails to

acknowledge that whether the clients had a choice to either stay with McKinnon or follow the

Defendant to Edwards is irrelevant. It is the knowing exploitation of his employer’s assets for his

benefit that gives rise to a finding of malice. The Defendant’s misappropriation of the customer

lists and information which made up the Marklin Book had two components: (1) the transfer to

Edwards was for the Defendant’s benefit and (2) the transfer harmed McKinnon. This is what

takes the Defendant’s conduct beyond a breach of contract or simple tort action and provides the

additional aggravating conduct that is required for a finding of malice.

In his defense, the Defendant argues that even if the other elements of § 523(a)(6) are met,

his 50% ownership of the Marklin Book constitutes “just cause or excuse” for his conduct. Def.’s

Post-Trial Br. at 9. The Defendant rationalizes that since he owned half of the Marklin Book, he

had the right to copy the customer lists which contained all relevant policy information and provide

it to Edwards for the purpose of negotiating his employment. That argument fails as a matter of

law.

The Defendant’s partial ownership of the Marklin Book is immaterial to the fact that he

knowingly misappropriated McKinnon’s assets and provided them to a competitor. Whether the

Defendant owned 1% or 100% of the customer information comprising the Marklin Book, he

intentionally copied the information without his employer’s knowledge, he transferred that

valuable information to a competitor, and that competitor used that information for its own benefit,

to the detriment of McKinnon. The Defendant also did so without reimbursing McKinnon pursuant

to the Danford Agreement. Tr. at 17:25, 18:1-3. The Defendant’s explanation also does not excuse

his conduct in aiding and abetting Gallina’s breach of his fiduciary duty. The customer lists and

insurance information comprising the Gallina Book were assets that belonged to McKinnon, so

there could be no “just cause or excuse” in helping Gallina transfer this information to Edwards.

This is not a case where a debtor fails to pay one creditor in favor of another, breaches a

contract or infringes on a copyright patent. See Bundy Am. Corp. v. Blankfort (In re Blankfort),

217 B.R. 138 (Bankr. S.D.N.Y. 1998) (while a breach of a franchise contract and copyright and

trademark infringement would not give rise to non-dischargeability under § 523(a)(6), sanctions

awarded based on the blatant violation of a court order specifically enjoining the debtor from

continuing to breach the franchise agreement would render the sanctions award non-

dischargeable). Blankfort highlights the distinction between debts that fall within § 523(a)(6) and

debts that do not. The Defendant’s conduct is not equivalent to an ordinary breach of contract

action. The record at trial supports a finding that the Defendant misappropriated his employer’s

assets by copying its valuable information and providing it to a competitor company and

proffered no justification for his actions. The Defendant’s conduct, when considered in the

context of federal bankruptcy law, is sufficient to satisfy § 523(a)(6).

Therefore, the Defendant’s actions were willful and malicious, and this debt is non-

dischargeable under § 523(a)(6). While the dollar amount of this debt has not been fixed, any

judgment emanating from the state court action will be non-dischargeable.

V. Non-dischargeability Under § 523(a)(4)

Under § 523(a)(4), a debt is non-dischargeable if it is one “for fraud or defalcation while

acting in a fiduciary capacity, embezzlement, or larceny.” 11 U.S.C. § 523(a)(4). To prove non-

dischargeability under this subsection, the Plaintiff must show that “(1) an express [or technical]

trust existed, (2) the debt was caused by fraud or defalcation, and (3) the debtor acted as a

fiduciary to the [plaintiff] at the time the debt was created.” Palisades Tickets, Inc. v. Daffner (In

re Daffner), 612 B.R. 630, 651 (Bankr. E.D.N.Y. 2020).

The term “fiduciary duty” is not defined in the Bankruptcy Code. Courts within the

Second Circuit define “fiduciary duty” narrowly in the bankruptcy context: “[t]he broad, general

definition of fiduciary, involving confidence, trust and good faith, is not applicable in

dischargeability proceedings under § 523(a)(4).” Presbyterian Home for Cent. N.Y. Inc. v.

DeFazio (In re DeFazio), No. 20-80009-6, 2022 WL 2288242, at *3 (Bankr. N.D.N.Y. June 23,

2022) (citing Zohlman v. Zoldan, 226 B.R. 767, 772 (Bankr. S.D.N.Y. 1998)). An

employee/employer relationship alone would not create the necessary fiduciary relationship for

purposes of § 523(a)(4). Grow Up Japan, Inc. v. Yoshida (In re Yoshida), 435 B.R. 102, 110

(Bankr. E.D.N.Y. 2010) (other citations omitted).

In this proceeding, the only allegations supporting a finding under § 523(a)(4) are

conclusory statements contained in the complaint. The record, as well as the Plaintiff’s

submissions to the Court, are otherwise devoid of any discussion of the Defendant’s liability

under this section. The record before this Court is insufficient to support a finding that a

fiduciary relationship existed between the Defendant and the Plaintiff. Therefore, this cause of

action seeking to have the debt deemed non-dischargeable under § 523(a)(4) is dismissed for the

Plaintiff's failure to establish a prima facie case.

Conclusion

For the foregoing reasons, the Court finds that the Plaintiff has satisfied its burden of

showing, by a preponderance of the evidence, that the Defendant is not entitled to a discharge

pursuant to § 727(a)(4)(A). Furthermore, the debt owed to the Plaintiff is non-dischargeable

pursuant to § 523(a)(6). The Court shall enter judgment consistent with this Decision.

SSD, ,

Fe i L Uf

Dated: Central Islip, New York ix ue ie

September 27, 2023 Robert E. Grossman

Cet United States Bankruptcy Judge

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