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.
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:
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 Moreover, the district court rescinded the partnership agreement and ordered Bilzerian and BFC, jointly and severally, to pay HSSM $19.839 million in compensatory damages, $1.224 million in punitive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).
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
We address the following issues on appeal:
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.
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.
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.
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 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.
If it is acceptable to impute the fraud of one partner to other partners who had no knowledge of the fraud simply because 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.
It is true that courts should narrowly construe exceptions to 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.
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 result of the Texas judgment, Bilzerian is
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); Hoskins 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:
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:
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.
Furthermore, the fraud issue was actually litigated in the Texas case during a sevenday 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
For the foregoing reasons, we affirm the district court's judgment reversing the bankruptcy court's order.
Bilzerian, 162 B.R. at 589-90 (citations omitted) (emphasis added).
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).
Ashley, 903 F.2d at 604 n. 5.
Findings of Fact and Conclusions of Law, BR42, Ex. F at 3.