                                                                                                                           Opinions of the United
2006 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit


12-14-2006

In Re Schlessinger
Precedential or Non-Precedential: Non-Precedential

Docket No. 05-5542




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Recommended Citation
"In Re Schlessinger " (2006). 2006 Decisions. Paper 93.
http://digitalcommons.law.villanova.edu/thirdcircuit_2006/93


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                                              NOT PRECEDENTIAL

     UNITED STATES COURT OF APPEALS
          FOR THE THIRD CIRCUIT

                    ___________

                    No. 05-5542
                    ___________

         IN RE: DAVID SCHLESSINGER,

                       Debtor


       DAVID EDWARD SCHLESSINGER,

                     Appellant

                         v.

             DAVID SCHLESSINGER
                 ___________


   On Appeal from the United States District Court
        for the Western District of Pennsylvania
              (D.C. Civil No. 05-cv-00174)
   District Judge: The Honorable Gary L. Lancaster

                    ___________

     Submitted Under Third Circuit LAR 34.1(a)
                 October 27, 2006


Before: SMITH, WEIS, and NYGAARD, Circuit Judges.


             (Filed December 14, 2006)
                                        ___________

                                OPINION OF THE COURT
                                     ___________

NYGAARD, Circuit Judge.

                                              I.

       Dave Schlessinger (Schlessinger) and his son, David (David), formed a freight

shipping partnership called Dave-N-Son. Later, Schlessinger began operating another

shipping firm called Ryno Express Steel Division, which competed with Dave-N-Son.

The two men terminated their partnership and sued one another in the Allegheny County

Court of Common Pleas.

       At the conclusion of the trial in equity, the court directed the parties to submit

proposed factual findings and conclusions of law. David submitted proposed findings and

conclusions, but Schlessinger did not. Thereafter, the Common Pleas Court issued an

adjudication and decree nisi adopting David’s proposed findings and conclusions in their

entirety and awarded him $189,453 in damages “based upon Defendant’s (Schlessinger’s)

breach of fiduciary duty.”

       Schlessinger filed exceptions to the court’s decree. Before the state court could

issue a ruling, Schlessinger stayed the state court proceedings by filing a voluntary

Chapter 7 petition with the U.S. Bankruptcy Court for the Western District of

Pennsylvania. David commenced an adversary action seeking exception from discharge

for the damages awarded by the Common Pleas court pursuant to Bankruptcy Code

                                              2
§§523(a)(4) and 523(a)(6). 11 U.S.C.A. §523(a) (2004). Schlessinger filed a counterclaim

alleging David mismanaged the partnership and diverted partnership business for his own

use.

       U.S. Bankruptcy Judge Bernard Markovitz held a hearing and trial on the parties’

claims. At the hearing, Schlessinger testified that he and his son both diverted partnership

business to their respective personal uses according to an oral agreement. David, relying

solely upon the Common Pleas Court record, adjudication and decree nisi, argued

collateral estoppel precluded Schlessinger from discharging the state damages award.

       Judge Markovitz issued an order and opinion in which he rejected both sides’

claims. First, Markovitz concluded David failed to show collateral estoppel or the

Bankruptcy Code’s exceptions to discharge applied to deny his father’s discharge of the

state court judgment. Second, Markovitz concluded Schlessinger’s own testimony refuted

his claims that his son negligently mismanaged or converted Dave-N-Son’s business. U.S.

District Judge Gary Lancaster affirmed the Bankruptcy Court’s order. We too, will affirm.

                                             II.

       On appeal, David argues his damages award is entitled to exception from

discharge as arising from embezzlement or larceny under subsection (a)(4) or from willful

and malicious injury by the debtor under subsection (a)(6).

       §§523(a)(4) and 523(a)(6) provide, in relevant part:

                     (a) A discharge under section 727, 1141,
                     1228(a), 1228(b), or 1328(b) of this title does

                                             3
                     not discharge an individual debtor from any
                     debt –
                     (4) for fraud or defalcation while acting in a
                     fiduciary capacity, embezzlement or larceny;
                     (or)
                     (6) for willful or malicious injury by the debtor
                     to another entity or the property of another
                     entity...

       11 U.S.C.A. §523(a)(2004).

       David carries the burden of establishing embezzlement, larceny, or willful and

malicious injury by a preponderance of the evidence. Grogan v. Garner, 498 U.S. 279,

287 (1991). These and other subsection (a) exceptions to discharge are construed strictly

against the objecting creditor. In re Fegeley, 118 F.3d 979, 983 (3d Cir. 1997).

       On appeal, David continues to rely exclusively upon the state court record,

adjudication and decree nisi as evidence to support his exception claims. He argues his

father was collaterally estopped from denying the damages award arose from

embezzlement, larceny or from willful and malicious injury. In addition, he argues the

Bankruptcy Court should have rejected his father’s testimony because the Common Pleas

Court adopted a proposed conclusion that his father was not credible.

       Issue preclusion principles “do indeed apply in discharge exception proceedings

pursuant to 11 U.S.C. §523(a).” Grogan v. Garner, 498 U.S. 279, 284-85 n.11 (1991).

Pursuant to the Full Faith & Credit Act, 28 U.S.C. §1738, we must determine whether

Pennsylvania law would accord preclusive effect to the state court’s judgment. Marrese v.

Am. Acad. of Orthopaedic Surgeons, 470 U.S. 373, 380 (1985). Under Pennsylvania law,

                                             4
issue preclusion applies where 1) the issue decided in the prior adjudication is identical to

the one presented in the later action; 2) there was a final judgment on the merits; 3) the

party against whom it is asserted was a party or is in privity with a party to the prior

adjudication; and 4) the party against whom it is asserted had a full and fair opportunity to

litigate the issue in a prior action. Greenleaf v. Garlock, Inc., 174 F.3d 352, 357-58 (3d

Cir. 1999). David carries the burden of establishing each element. Suppan v. Dadonna,

203 F.3d 228, 233 (3d Cir. 2000).

       As an initial matter, we conclude the Bankruptcy Court properly considered

Schlessinger’s testimony. The Bankruptcy Court was not required to limit its review to

the state court record. Brown v. Felsen, 442 U.S. 127, 139 (1979). Nor was Schlessinger’s

credibility necessary to the state court’s judgment for purposes of issue preclusion. Balent

v. City of Wilkes-Barre, 669 A.2d 309, 313 (Pa. 1995).

       Second, we conclude David has failed to show the issue decided in the state court is

identical to the issue of whether his father committed embezzlement or larceny.

Embezzlement is the fraudulent appropriation of property by a person to whom such

property has been entrusted or into whose hands it has lawfully come. Moore v. United

States, 160 U.S. 260, 268 (1895). Larceny, on the other hand, is the felonious taking of

another’s personal property with the intent to convert it or deprive the owner of the same.

4 C OLLIER O N B ANKRUPTCY ¶523.10 (15th ed. 2006). The Common Pleas Court never

adopted a finding that Schlessinger engaged in embezzlement or larceny, so we may not



                                               5
infer one. See Davis v. Aetna Acceptance Co., 293 U.S. 328, 332 (1934). In addition, as

the Bankruptcy Court pointed out, embezzlement and larceny both require the

appropriation or taking of another’s property. Here, Schlessinger took business

opportunities and commissions before they ever materialized as “property” of either David

or Dave-N-Son.

       David has also failed to establish the issue decided by the state court is identical to

a finding that Schlessinger willfully and maliciously injured Dave-N-Son or its property.

To establish entitlement to an exception under subsection (a)(6), David must show his

father actually intended to injure Dave-N-Son or its property. Kaawauhau v. Geiger, 523

U.S. 57, 63 (1998). Negligent or reckless acts do not suffice to establish that a resulting

injury is “willful and malicious.” Kaawauhau, 523 U.S. at 64 (quoting Aetna Acceptance

Co., 293 U.S. at 332). Moreover, not all intentional torts are willful and malicious. Aetna

Acceptance Co., 293 U.S. at 332. The state court record, when viewed in combination with

Schlessinger’s testimony, does not indicate Schlessinger intended to injure Dave-N-Son or

its property.

                                              III.

       Because we conclude the Common Pleas Court’s judgment did not preclude

Schlessinger from discharging his son’s damages award in bankruptcy, we will affirm the

district court’s order.




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