United States District Court, D. New Jersey
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FENG LI, Appellant, Pro se, EAST HANOVER, NJ.
KENNETH ELLMAN, Appellant, Pro se, NEWTON, NJ.
For DIANA PENG, as Administratrix of the Estate of Alfred T.C. Peng, TZULI HSU, JOSEPH HUANG, STEPHEN HUANG, PEN FA LEE, VERONICA WAN, as Administratrix of the Estate of Chee C. Wan, Appellees: DAVID H. STEIN, LEAD ATTORNEY, WILENTZ, GOLDMAN & SPITZER, P.A., WOODBRIDGE, NJ.
Honorable Freda L. Wolfson, United States District Judge.
Before the Court is the appeal of Feng Li (" Appellant" or " Feng Li" ) and Kenneth Ellman (collectively " Appellants" ) from the Order of the Bankruptcy Court granting summary judgment to Diana Peng, et al. (" Appellees" ). Following a hearing held on December 16, 2013, the Bankruptcy Court, the Honorable Michael B. Kaplan presiding, found that Appellants' obligations are not dischargeable in bankruptcy, pursuant to 11 U.S.C. § 727(a)(4), because Appellant knowingly and fraudulently made a false oath or account in connection with his bankruptcy petition. Alternatively, the Bankruptcy Court found that Appellant was collaterally estopped from challenging the finding of the New Jersey Supreme Court that he knowingly misappropriated client funds, and therefore denied Appellant discharge pursuant to § 523(a)(4). Appellant appealed.
For the reasons set forth below, this Court finds that i) the Bankruptcy Court's findings that Appellant made misrepresentations in connection with his bankruptcy petition are not clearly erroneous, ii) Appellant is collaterally estopped from challenging the findings of the New Jersey Supreme Court, and iii) the Bankruptcy Judge properly dismissed Appellants' counterclaims. Accordingly, the decision of the Bankruptcy Court is affirmed in its entirety.
I. FACTUAL BACKGROUND AND PROCEDURAL HISTORY
In September of 2005, Appellees retained Appellant, an attorney, to represent them in a New York state lawsuit against Appellees' former business partner, alleging, inter alia, that the former partner
engaged in fraud in connection with a commercial property development in which Appellees had been persuaded to invest. [Record on Appeal, hereinafter A1341-42]. Prior to Appellant's involvement, Appellees had been represented by at least two other attorneys during fifteen years of largely inconclusive litigation. [A1342]. Appellant and Appellees entered into a contingent fee agreement, drafted by Appellant, to compensate Appellant for the legal services he was to provide. [A1239-41]. Importantly for the later dispute, the agreement was hastily drafted and contained numerous, serious ambiguities and omissions. After what all parties acknowledge was a significant expenditure of effort by Appellant over four years, including a full trial, Appellees won their lawsuit. Judgment was entered in favor of Appellees on March 24, 2008, in the amount of approximately $3.5 million, including both damages and substantial prejudgment interest. [A1243-45]. The court in which the suit was litigated, the New York Supreme Court, Queens County, directed that the judgment be paid to " Feng Li, Esq. the attorney for the petitioners, to be deposited in the attorney's escrow account from which he shall make the appropriate distributions to the petitioners/judgment creditors." [A1248]. One of Appellees' prior counsel had already secured a partial recovery totaling approximately $515,000, representing the proceeds from a real estate sale by the former business partner which had been held in trust for Appellees by the former partner's attorney. After Appellees' favorable judgment, on March 25, 2008, the New York Supreme Court ordered that this sum too should be transferred to Appellant for distribution to Appellees. [A1251-54]. Appellant received the $515,000 and deposited it in a Sovereign Bank trust account on May 8, 2008. [A1347].
Appellees' former business partner appealed the judgment and posted with the court $3,544,000, the amount of the judgment and prejudgment interest. In an opinion issued on May 5, 2009, [A687], and an order issued on July 23, 2009, the judgment was affirmed. [A1247-48]. The dispute between the parties to this action began when the time came to distribute the judgment funds. On August 1, 2009, before the New York state court had released any funds to Appellant, Appellees met with Appellant to discuss the terms of the distribution of the judgment funds and of the funds already held in the Sovereign Bank trust account. [A1257]. The parties disputed the scope of their fee agreement. Specifically, Appellees sought to enforce the agreement as written, which appeared to be governed by New Jersey law, made no provision for the taking of a contingent fee on prejudgment interest -- a large portion of the recovery from the suit -- and provided a sliding scale to determine Appellant's percentage of recovery. [A1239-41]. Appellant, claiming to have made a mistake in the drafting of the agreement, stated his intention to unilaterally reform the agreement under New York law to a 1/3 contingent fee on the whole amount of the recovery, including prejudgment interest. The parties also disagreed about whether, if the sliding scale were to apply, whether it should be applied to each Appellee separately or to all of the Appellees as a single group. The former would result in a considerably larger fee for Appellant. [A1349-1350]. This Court could continue to discuss the precise nature of the fee dispute at length, and, indeed, Appellants devoted all of the briefing concerning their counterclaims below and much of their briefing on appeal arguing the merits of reforming the fee agreement. However, neither the validity of Appellants' concerns about the fairness of the fee agreement, nor the appropriateness of
reforming the agreement are before this Court. As explained below, before the fee dispute could be adjudicated before any court or other authority, Appellant engaged in unethical self-help and simply acted as if his version of the fee agreement were in force.
While the parties were still disputing the appropriate distribution, collection of the judgment went forward, and, on August 14, 2009, the Commissioner of Finance for the State of New York sent Appellant a check for $3,548,506.91, representing the amount of the judgment affirmed on appeal plus interest. [A1348]. Appellant deposited the check in an attorney trust account at JP Morgan Chase Bank. [A1348]. Unbeknownst to Appellees, shortly thereafter, on August 18, 2009, Appellant transferred $242,575 from the Sovereign Bank trust account into a trust in favor of his son, Vincent Li, and $282,459 from the Sovereign trust account into a trust in favor of his daughter, Christine Li. On or around the same date, Appellant transferred from the JP Morgan trust account $382,903 into the trust for his son and $352,005 into the trust for his daughter. [A1354]. All told, Appellant transferred $1,259,942 of the litigation proceeds from the trust accounts held for his clients to personal trusts established for the benefit of his children.
As August 2009 continued, certain of Appellees began retaining counsel and sending letters to Appellant instructing him not to dissipate any of the judgment funds until the fee dispute had been resolved. Appellant responded on September 8, 2009, by sending a letter to all Appellees, making a thinly veiled threat to report to the New York State court that certain of Appellees had misrepresented their damages at trial, and openly threatening to charge Appellees an additional $273,375 fee for the handling of the appeal and collection actions if Appellees persisted in litigating the fee dispute. [A1357-58]. With no resolution in sight, on September 11, 2009, Appellees filed a lawsuit against Appellant in the Superior Court of New Jersey, Law Division, Middlesex County, concerning the funds held in the trust accounts. On September 23, the New Jersey Court issued an order to show cause, returnable on September 25, temporarily restraining Appellant from dissipating the funds received on his client's behalf. [A1359-60]. Appellant immediately requested that the order to show cause hearing be adjourned to give him time to prepare, and the hearing was moved to October 2, 2009. Once again unbeknownst to the Appellees, and without informing the New Jersey Court, Appellant used the extension of time before the Order to Show Cause hearing to transfer all of the moneys he had taken from the attorney trust accounts from his children's accounts to parties in China. [A1360]. Specifically, after having received the temporary restraining order, in four transactions on September 23, 2009, Appellant's wife, at Appellant's direction, wired all $1,293,783.73 -- the new total with accrued interest -- to Chinese nationals Liu Xi Yu and Lui Qi Yu, and to accounts with the Bank of China and Honkong & Shanghai Banking. [A1360]. At the hearing on October 2, 2009, it became clear that Appellant had transferred the judgment funds out of the attorney trust funds. The New Jersey Court ordered Appellant to return, within ten days of the court's order, any monies he had transferred out of the attorney trust accounts. [A1510:8-15]. The New Jersey Court formally memorialized its oral order from the hearing in a written order on October 15, 2009.
Appellant did not comply with the New Jersey Court's order, and instead responded by filing a lawsuit against Appellees in the Supreme Court of New York, Westchester
County, seeking to enjoin the New Jersey Superior Court action. [A1435]. On December 30, 2009, the New York Supreme Court, Westchester County, ruled that it would not enjoin the New Jersey proceeding. Appellant appealed. [A1364]. The Supreme Court of New York, Appellate Division for the Second Judicial Department, affirmed the lower court's order on January 25, 2010. [A1435]. Having failed in his attempt to enjoin the New Jersey action by prosecuting his case in another forum, Appellant nevertheless again failed to comply with the New Jersey Court's order to return the dissipated funds. Instead, Appellant filed for bankruptcy on January 26, 2010, the day after losing his New York appeal. [A1364].
Appellant was deposed in connection with his bankruptcy petition on June 2, 2010. Appellees' counsel questioned Appellant about what he had done with the money held in the attorney trust funds. Appellant responded that he had disbursed $2.8 million out of the approximately $4 million judgment to his clients. After considerable questioning, during which Appellant often provided vague and evasive answers, Appellant testified that he took the other $1.2 million in legal fees and used it to pay debts owed to the National Business Loan Creditor and Imperial Creditors and to pay down his law school student loans. Appellant did not disclose that he had in fact transferred the money to accounts and individuals in China. [A1368].
While the Bankruptcy proceedings were still progressing, Appellees lodged formal complaints against Appellant with the New York ethics authorities sometime in early 2010, and with the New Jersey Office of Attorney Ethics (" OAE" ) on January 24, 2011. Appellees complained that Appellant had knowingly misappropriated client funds in violation of a Court Order. Reviewing the evidence and considerable discovery, the New Jersey OAE filed a detailed report, finding by clear and convincing evidence that Appellant had misappropriated client funds. The OAE recommended disbarment. [A1399-487]. On May 21, 2013, the Supreme Court of New Jersey considered the OAE's report, independently reviewed Appellant's conduct, concluded that Appellant knowingly misappropriated client funds, and ordered Appellant's disbarment. [A1335-37]. Discovery and briefing in the New York ethics actions proceeded parallel to the New Jersey action until Appellant moved in the New Jersey Federal District Court to withdraw the reference of his case from the Bankruptcy Court to the District Court. [A426-27]. Appellant successfully sought a stay of the New York ethics proceeding pending the resolution of his motion to withdraw reference. [Joint Brief of Appellants, Exhibit A]. At this point, this Court feels compelled to note a flagrant misrepresentation made by Appellant in his briefing on appeal. Appellant represents to this Court that the Supreme Court of New York, Appellate Division for the Second Judicial Department " the only Sovereign with Subject Matter and Geographical Jurisdiction," " has refused to suspend or discipline [Appellant]." [Joint Brief of Appellants, 12 (emphasis in original)]. Upon review of the Court's order, and after consultation with New York Appellate Division's clerk's office, it is clear that the proceeding before that court is only stayed pending the resolution of the motion to withdraw reference by another judge in this District. [Joint Brief of Appellants, Exhibit A]. The New York court was not even aware of the present appeal before this Court, and certainly did not render any findings in favor of Appellant concerning his handling of the fee dispute and attorney trust funds. In short, Appellant
has misrepresented to this Court that a court judgment conflicting with the findings of the New Jersey Supreme Court was issued by the courts of the State of New York.
The hearing in Appellant's case was held before the Bankruptcy Court on December 16, 2013, the Honorable Michael B. Kaplan presiding. The Bankruptcy Court denied discharge to Appellant under two alternate and independent bases. First, " based on the filings that are of record in the debtor's case" and " not rely[ing] upon the findings of the New Jersey Supreme Court," the Bankruptcy Court ruled that Appellant " knowingly and fraudulently, in connection with [his bankruptcy] case made a false oath or account," and accordingly his obligations were nondischargeable under § 727(a)(4). [A1628]. Second, applying the doctrine of collateral estoppel to rely upon the findings of the New Jersey Supreme Court, the Bankruptcy Court ruled that " the debtor engaged in a knowing . . . misappropriation of client funds, and that the debtor did not have a good faith belief as to the entitlement of those funds," and accordingly his obligations were nondischargeable under § 523(a)(4). [A1630]. Appellant now appeals both determinations.
II. STANDARD OF REVIEW
The standard of review for Bankruptcy Court decisions is determined by the nature of the issues on appeal. Baron & Budd, P.C. v. Unsecured Asbestos Claimants Committee, 321 B.R. 147, 157 (D.N.J. 2005). Findings of fact are reviewed under a " clearly erroneous standard." Fed. R. Bankr. P. 8013. A factual finding is overturned as being " clearly erroneous" only when a reviewing court has a " definite and firm conviction that a mistake has been committed." Concrete Pipe & Prods. v. Constr. Laborers Pension Trust, 508 U.S. 602, 622, 113 S.Ct. 2264, 124 L.Ed.2d 539 (1993). On the other hand, legal conclusions from the Bankruptcy Court are subject to de novo, or plenary, review by the district court. Donaldson v. Bernstein, 104 F.3d 547, 551 (3d Cir. 1997). If the issues on appeal present both findings of fact and conclusions of law, the applicable standard, " clearly erroneous" or " de novo," must be appropriately applied to each component. Meridian Bank v. Alten, 958 F.2d 1226, 1229 (3d Cir. 1992) (citing In re Sharon Steel Corp., 871 F.2d 1217, 1222 (3d Cir. 1989) and Universal Minerals, Inc. v. C.A. Hughes & Co., 669 F.2d 98, 102-103 (3d Cir. 1981)). Lastly, decisions on procedural bases are reviewed for abuse of discretion. In re United Healthcare Sys., Inc., 396 F.3d 247, 249 (3d Cir. 2005). Deference is the hallmark of abuse of discretion review. See Gen. Elec. Co. v. Joiner, 522 U.S. 136, 143, 118 S.Ct. 512, 139 L.Ed.2d 508 (1997); Koon v. United States, 518 U.S. 81, 98-99, 116 S.Ct. 2035, 135 L.Ed.2d 392 (1996). Thus an exercise of discretion is not disturbed unless the court committed a clear error of judgment in making its decision, meaning that it relied upon " a clearly erroneous finding of fact, an errant conclusion of law or an improper application of law to fact." In re Nutraquest, Inc., 434 F.3d 639, 645 (3d Cir. 2006); see also In re Orthopedic Bone Screw Prods. Liab. Litig., 246 F.3d 315, 320 (3d Cir. 2001); Int'l Union, UAW v. Mack Trucks, Inc., 820 F.2d 91, 95 (3d Cir. 1987). See generally In re United Healthcare Sys., Inc., 396 F.3d 247, 249 (3d Cir. 2005) (quoting In re Trans World Airlines, Inc., 145 F.3d 124, 130-31 (3d Cir. 1998)) (a district court reviews " the bankruptcy court's legal determinations de novo, its factual findings for clear error and its exercise of discretion for abuse thereof." ).
In the present appeal, Appellant challenges the Bankruptcy Court's findings 1)
that Appellant made false oaths in the submission and handling of his bankruptcy petition, 2) that Appellant was collaterally estopped from challenging the findings of the New Jersey Supreme Court that Appellant misappropriated client funds, and 3) that Appellant was judicially estopped from bringing counterclaims not disclosed in his original or amended bankruptcy petition. The first challenge, to the finding of nondischargeability pursuant to § 727(a)(4), concerns questions of fact, and is subject to review for clear error. The second challenge, to the application of collateral estoppel to find nondischargeability pursuant to § 523(a)(4) concerns a question of law and is subject to de novo review by this Court. The third challenge, to the application of judicial estoppel to disallow counterclaims, concerns an exercise of the discretion of the bankruptcy court, and is reviewable for abuse of that discretion.
III. FACTUAL CHALLENGES: § 727(a)(4)
The Bankruptcy Court denied Appellant discharge on the basis of 11 U.S.C. § 727(a)(4)(A), which provides in relevant part that, " no discharge shall be granted if . . . the debtor knowingly and fraudulently, in or in connection with the case . . . made a false oath or account." Extreme carelessness when filling out a bankruptcy petition and " omission of assets from the debtor's reckless disregard for truth" will not suffice as a defense to knowingly and fraudulently making a false oath. Scimeca v. Umanoff 169 B.R. 536, 543 (D.N.J. 1993) affd sub nom. In re Scimeca, 30 F.3d 1488 (3d Cir.1994). See also, In re Elian,
10-49482 (DHS), 2014 WL 2976295 (Bankr. D.N.J. July 1, 2014). Judge Kaplan made numerous findings of fact on the record concerning specific incidences in which Appellant made false oaths or made omissions with reckless disregard for the truth. Although listed under nine separate headings in briefing, Appellant raises only eight challenges to the factual findings of the Bankruptcy Court.
A. Nondisclosure of the Attorney Trust Account
Appellant's first major contention on appeal is that the Bankruptcy Court was mistaken in finding that Appellant failed to disclose on Schedule B of his bankruptcy petition his attorney trust accounts and the transactions involving those accounts in the six months prior to the filing of his petition. In support of his contention, Appellant directs the Court to an amendment to add creditors made to Schedules F and I in 2013. [A1128, 1130]. The Bankruptcy Court in fact observed that this amendment existed, but opined that the amendments made to schedules other than Schedule B appeared only to have added additional creditors. [A1622:18-24]. The Bankruptcy Court remained " unaware" of any amendment to Schedule B disclosing either of the attorney trust accounts.
This Court agrees with the finding of the Bankruptcy Court that Appellant was required to disclose the attorney trust accounts on Schedule B, because it was clear from the undisputed facts that Appellant had used the account for personal purposes, specifically to repay personal creditors during the sixth month period before his bankruptcy filing. [A0954]. Reviewing Appellant's Schedule B, this Court finds no evidence of an Amendment to reflect the existence of Appellant's attorney trust accounts. Accordingly, this Court finds Appellant's alleged supporting ...