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district court rescinded the partnership agreement and ordered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.