Nasif v. Palladino (In re Palladino)

Citation: 560 B.R. 608Docket: Case No. 14-15774-JNF; Adv. P. No. 15-1055

Court: United States Bankruptcy Court, D. Massachusetts; November 3, 2016; Us Bankruptcy; United States Bankruptcy Court

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The memorandum addresses whether the definitions of larceny under Massachusetts law and the Bankruptcy Code are equivalent and if the Defendant’s guilty plea to larceny in state court binds the Court in determining the dischargeability of the Plaintiffs’ debt under 11 U.S.C. § 523(a)(4). This arises from Gregory Steven Palladino's Motion for Summary Judgment against Kenneth and Teresa Nasif's Complaint objecting to dischargeability. The Court granted Palladino’s motion to supplement exhibits after a hearing on September 13, 2016, and instructed the parties to submit supplemental briefs by October 14, 2016. The Plaintiffs also requested summary judgment under § 523(a)(4), leading the Court to treat the proceedings as cross-motions for summary judgment. Although Palladino did not comply with procedural requirements regarding a concise statement of material facts, the Court found sufficient undisputed material facts from the filings and exhibits.

Palladino filed for Chapter 7 bankruptcy on December 16, 2014, while incarcerated, listing no assets or debts in his initial schedules, except for two credit card claims on Schedule F, which he later amended to include the Plaintiffs and others. He reported no income or expenses and disclosed past earnings from 'Viking' and 'Catz, Viking'. The Chapter 7 Trustee reported no distribution, and the Court granted Palladino a discharge of debts on March 30, 2015. The Plaintiffs subsequently filed their complaints under the relevant sections of the Bankruptcy Code, and Palladino updated his address on April 17, 2015.

The Plaintiffs’ Complaint is found to be lacking in detailing the claims for relief, yet the Plaintiffs are pursuing summary judgment based on 11 U.S.C. § 523(a)(4), which pertains to the exception to discharge for larceny. The Plaintiffs, a married couple, reference findings from a Suffolk Superior Court case involving several parties against Viking Financial Group, Inc., and relevant criminal proceedings against Gregory Palladino. They allege that the Palladinos operated Viking, an asset-based corporation providing high-interest loans to developers unable to secure traditional financing. The Debtor is identified as the son of Steven Palladino and step-son of Lori Palladino, having worked closely at Viking from 2009 to 2013. 

The Plaintiffs assert that Viking issued promissory notes to investors with interest rates exceeding 10% and falsely claimed that investments would finance secured loans at even higher rates. They allege that the loans were purportedly secured by first mortgages on valuable properties, but Viking rarely made actual loans. Instead, it misappropriated investor funds to support the Palladino family's extravagant lifestyle, including luxury items and to pay interest to investors, thereby concealing the operation's fraudulent nature, described as a Ponzi scheme. The Debtor's role included banking activities such as check deposits and delivering interest payments. The Plaintiffs highlight a note executed by Viking in their favor for $60,000 on May 1, 2011, and subsequent investments, culminating in a final note for $470,000 on January 1, 2013.

Plaintiffs claim the Debtor was indicted for charges related to a Ponzi scheme and pled guilty to several criminal offenses, including usury, conspiracy, and multiple counts of larceny on January 21, 2014. The Suffolk Superior Court issued an Order on October 22, 2018, following defaults by all defendants between June and September 2013, leading to a judgment against the Debtor and co-defendants for significant amounts: $470,000 to the Plaintiffs, $1,960,000 to Ronald Nasif, $800,000 to Robert and Marion Ward, and $1,485,000 to Elissa M. Ferris. Shortly after, the Plaintiffs initiated another action in Norfolk Superior Court involving multiple defendants. They articulated two counts against the Debtor: Count I under 11 U.S.C. § 523(a)(2)(A, B) and (a)(4), and Count II under 11 U.S.C. § 523(a)(4), with both counts alleging the Debtor committed fraud and larceny by misusing funds from the Nasifs for personal luxuries while falsely representing the use of these funds for legitimate investments. At a summary judgment hearing, Plaintiffs clarified Count I pertains to § 523(a)(2)(A) and Count II to § 523(a)(4); this Memorandum focuses solely on Count II.

The Defendant denied the allegations in the Complaint and raised four affirmative defenses. 

1. **Suffolk County Criminal Complaint**: The Suffolk County District Attorney’s Office found that the Defendant had a minor role and was not involved in soliciting funds. His role was limited to delivering envelopes for his father, and he lacked decision-making authority at Viking Financial Group, as supported by Robert Ward’s affidavit.

2. **Solicitation of Funds**: a) The Defendant contended that the Plaintiffs misrepresented him as the one soliciting funds; instead, it was their brother, Ernest Nasif, Jr., who did so. The Plaintiffs’ own complaints and affidavits confirm this assertion. b) The Plaintiffs lack standing to object to the Defendant’s discharge since they admitted not being harmed by him and did not obtain permission from the Trustee, Mark DeGiacomo, to pursue additional claims. c) The Plaintiffs’ anger is directed at their relatives rather than the Defendant, stemming from feelings of betrayal rather than actual grievances.

3. **Unclean Hands Doctrine**: The Defendant argued that the Plaintiffs are not entitled to relief due to potential fraud and tax evasion on their part, alleging they failed to report cash payments received from Ernest Nasif and may have amended tax returns in response to the investigation into Viking Financial. The Defendant emphasized that Kenneth Nasif, a former Assistant U.S. Attorney, should be held to a high standard, yet he allegedly accepted unreported cash for years without concern for its source.

The Fourth Affirmative Defense asserts that the Plaintiffs' action is maliciously motivated, aimed at punishing the Debtor/Defendant, Gregory Palladino, due to his familial connection to Steven Palladino. It argues that the Plaintiffs initiated the adversary proceeding despite knowing that the Debtor/Defendant did not solicit funds from them and was not responsible for their alleged harm. The Plaintiffs and their counsel are accused of acting with malicious intent, leading to unnecessary financial strain on the Debtor/Defendant, who is attempting to recover from this situation. 

The Debtor/Defendant references a related complaint filed in Norfolk Superior Court involving multiple parties, including allegations of breach of contract, fraud, and violations of consumer protection laws. The record indicates familial connections among the parties involved. The Plaintiffs' complaint highlights Steven Palladino’s prior arrest and indictment in 2013 and cites a Securities and Exchange Commission investigation that claimed Ernest Nasif assisted Steven Palladino in business dealings. It also mentions that the Plaintiffs invested a total of $3,230,000 through Ernest Nasif, who allegedly received a commission for these investments.

Affidavits from Kenneth P. Nasif, Ronald Nasif, and Robert J. Ward, attached to the Debtor's Answer, state that Ernest Nasif solicited investments in a company called Viking, misrepresented ownership, and assured investors of the safety of their funds. Additionally, it notes Steven Palladino's prior criminal history and his subsequent bankruptcy filing with his wife, Lori Palladino, which resulted in a denial of discharge.

On May 29, 2016, the Defendant submitted a Motion for Summary Judgment, accompanied by various documents, including affidavits from his attorney Eugene C. Johnson and Kenneth P. Nasif, as well as the Plaintiffs' tax returns for 2011 and 2012. The Plaintiffs contended that an amendment to their 2011 tax return was necessary due to the absence of a Form 1099 INT from Viking. The Defendant further supplemented his motion with a Motion to Set Aside Judgment from a separate Suffolk Superior Court case. He argues that there are no claims of knowingly fraudulent false statements regarding his petition or related documents, implying a focus on 11 U.S.C. § 727(a)(4)(A) rather than § 523(a)(2)(A). The Defendant asserts that any harm suffered by the Plaintiffs stemmed from their own greed and the allure of easy money promised by his brother, Ernest Nasif Jr. (referred to as 'Buzzy'), who allegedly guaranteed substantial tax-free interest payments in exchange for their investments. Kenneth Nasif's affidavit detailed how Buzzy persuaded him to invest in his purported investment company, which engaged in high-interest secured bridge loans. The Plaintiffs, influenced by Buzzy's financial success and substantial gifts to his daughters, ultimately decided to invest, refinancing their home and utilizing their life savings. Initially, Kenneth provided checks for investment and received promissory notes, which later included co-signatures from Steven Palladino, while also receiving cash interest payments.

Kenneth Nasif's Affidavit states that the Ponzi scheme began to collapse in early December 2012, following the Boston Police's seizure of approximately $614,000 from Viking’s accounts, an event unknown to him at that time. In late December 2012, he provided a check for $170,000 to his brother, sourced from a home equity loan. The Debtor highlighted that the Plaintiffs did not report interest income from Viking on their 2011 tax return, despite receiving $2,000-$3,000 monthly from Buzzy from June 2011 to June 2012, followed by interest checks from Viking. The Debtor claimed the Plaintiffs were aware of the wrongdoing, possessed "unclean" hands, and criticized Kenneth Nasif for leveraging his retired judge status for credibility in a related legal action against his brother, noting that Gregory was not a defendant in that case. The Debtor argued that no one has claimed the Defendant solicited funds and asserted that the Plaintiffs should not obstruct the Defendant's discharge. He also characterized the Plaintiffs' efforts to block discharge as "malicious use of process," suggesting that children of wrongdoers should face consequences for their parents' actions and called for the dismissal of the adversary proceeding as frivolous and vindictive.

In response, the Plaintiffs opposed the Defendant's Motion for Summary Judgment, submitting six exhibits: 1) correspondence from the Defendant to Ronald Nasif about investments in Viking, 2) a deposition transcript where the Debtor admitted to being a signatory on Viking accounts and sharing a bank account with his father, 3) Viking's Articles of Organization listing the Defendant as Vice President and Director, 4) a criminal case docket against Gregory Palladino, 5) Form W-2 statements showing the Defendant's earnings from Viking, and 6) findings of fact and a judgment order from a Suffolk Superior Court case. The Plaintiffs also included nine checks totaling $28,000 from Ernest and Jenay Nasif's bank account made out to the Defendant.

Plaintiffs argue against the Debtor's Motion for Summary Judgment by highlighting that the Debtor served as Vice President and was listed as Director of Viking since its establishment in May 2007. The Debtor admitted during deposition to being a signatory on Viking's financial accounts and having a joint bank account with his father, but frequently claimed he could not recall details about his role or responsibilities. His deposition behavior was described as uncooperative and evasive. 

The Plaintiffs also noted that the Debtor pled guilty in January 2014 to multiple charges: Larceny over $250 (two counts), Conspiracy, Tampering with a Record, and Usury, resulting in a two-year prison sentence and five years of probation. They contend that genuine issues of material fact exist regarding the dischargeability of their claims against the Debtor, asserting that his affirmative defenses, including claims of unclean hands, do not preclude their relief.

Additionally, Plaintiffs' counsel suggested the Debtor should be collaterally estopped from contesting the entry of judgment under 11 U.S.C. § 523(a)(4) due to his guilty pleas. Following the court's directive, Plaintiffs submitted relevant documents, including indictments stemming from a grand jury investigation. The indictments detail the Debtor's theft of over $250 from multiple victims, including elderly individuals, and outline a conspiracy with two co-defendants. Notably, Teresa Nasif is not listed as a victim in these indictments.

On January 14, 2014, during a status conference, Assistant District Attorney Benjamin Goldberger detailed the involvement of Steven Palladino, along with Gregory and Lori Palladino, in a Ponzi scheme. He indicated that both Gregory and Lori were active participants, with Lori handling bookkeeping and check payments to investors and Gregory managing investor relations and handling funds. Defense counsel acknowledged Gregory's significant role as an employee rather than a principal. Judge Sanders expressed concern over the impact of the scheme on vulnerable groups, noting Gregory's more active involvement compared to Lori, and observed that he benefited financially from the scheme. Following this conference, another hearing was held on January 21, 2014, where the Debtor pled guilty to seven charges, including larceny and conspiracy. Attorney Goldberger outlined the facts, revealing that in May 2007, Gregory and Lori formed Viking, with Gregory serving as Director. It was disclosed that investor funds were misappropriated, not deposited into Viking accounts but instead into accounts held by Steven and Gregory Palladino, which were used to fund personal expenses and pay interest to new investors. The scheme misled investors about the use of their funds, with over $10 million collected in total.

Attorney Goldberger stated that funds from investors intended for Viking Financial were deposited into accounts held by Steven and Gregory Palladino, rather than a Viking account. These deposits occurred at both Citizens Bank and Eastern Bank, structured as operating and separate accounts. The funds were misrepresented to investors and used for various purposes, including paying interest to new investors, personal expenses, casino transactions, cash withdrawals for family vacations, vehicle purchases, and educational costs for the Palladino children. Following a hearing, the Superior Court sentenced the Debtor to two years in the House of Correction and five years of probation after confirming his understanding of his guilty plea and waiver of the right to a jury trial.

In bankruptcy proceedings, summary judgment is governed by Bankruptcy Rule 7066, which aligns with Rule 56 of the Federal Rules of Civil Procedure. Summary judgment is granted only when no genuine issue of material fact exists, and the movant demonstrates entitlement to judgment as a matter of law. For issues where the nonmovant bears the burden of proof, the movant must show an absence of evidence supporting the nonmoving party's case, shifting the burden to the nonmovant to establish a genuine and material question of fact. A mere disagreement over some facts does not suffice to defeat a properly supported motion for summary judgment; there must be no genuine issue of material fact.

Collateral estoppel principles are applicable in bankruptcy proceedings to assess the dischargeability of debts under 11 U.S.C. § 523(a). The preclusive effect of a state court judgment in bankruptcy nondischargeability cases is determined by the collateral estoppel law of the state where the judgment originated, as governed by 28 U.S.C. § 1738. In Massachusetts, collateral estoppel prevents relitigation of issues that were previously adjudicated and resulted in a final judgment on the merits, provided the parties involved are the same or in privity. The criteria for applying collateral estoppel include: 1) a valid and final judgment on the merits in the prior case, 2) the opposing party being involved in the earlier litigation, 3) the issue being identical in both cases, and 4) the issue being essential to the earlier judgment. The Massachusetts Supreme Judicial Court emphasizes that the key consideration is whether the party against whom estoppel is invoked had a full and fair opportunity to litigate the issue previously. 

Furthermore, Massachusetts law allows the invocation of collateral estoppel only for issues that were actually litigated prior. The court also holds that a guilty plea in a criminal case does not bar the defendant from litigating related issues in subsequent civil cases, although such a plea is admissible as an admission of material facts. This position is consistent with the views of courts in at least thirty-nine other states, which recognize a guilty plea as admissible evidence but not as conclusive regarding the factual matters admitted.

The Court denies the Defendant's Motion for Summary Judgment, noting that the Plaintiffs seek an exception to the Defendant's discharge under 11 U.S.C. § 523(a)(4) related to their investments in a Ponzi scheme, rather than a complete denial of discharge under 11 U.S.C. § 727(a). The Defendant’s arguments rely heavily on his affirmative defenses, particularly unclean hands and malicious prosecution. He challenges the Plaintiffs' standing by asserting that bona fide creditors should have legitimate claims free of fraud or deceit. The Defendant claims the Plaintiffs concealed evidence in a prior Suffolk Superior Court action, where they obtained a judgment against him, and argues that this contradicts their claims against another party in a separate Norfolk Superior action. The Plaintiffs hold a judgment with statutory interest from March 1, 2013, through October 22, 2013, and there is no evidence that the Defendant’s motion to set aside this judgment has been successful.

The Court finds that the Defendant's assertions regarding his guilty plea to larceny do not establish material issues of fact relevant to the Plaintiffs' cross-motion for an exception to discharge. The Defendant disputes the evidence of larceny but does not provide sufficient facts to demonstrate that he was not guilty, as the Commonwealth did not have evidence against him. Additionally, the Defendant’s defenses do not create genuine issues of material fact that would prevent the Plaintiffs from prevailing on their motion for summary judgment. His reliance on the doctrine of unclean hands and claims of malicious prosecution lacks substantive support and is primarily based on unfounded allegations regarding the Plaintiffs' motivations.

The doctrine of unclean hands serves as a defense in actions under 11 U.S.C. § 523, requiring that the alleged misconduct by the party asserting the defense must be directly related to the transaction at issue. Courts have emphasized that unclean hands does not pertain to misconduct in general but must connect specifically to the claim being made. For a party to successfully invoke this defense, there must be a clear nexus between their alleged wrongdoing and the transaction in question; the party's hands must be clean concerning that specific transaction, though not necessarily overall.

The unclean hands doctrine acts as a barrier for parties seeking equitable relief if they have acted in bad faith or inequitable behavior regarding the matter at hand. This principle allows courts discretion in determining whether to impose sanctions based on a party's conduct.

In the context of the case discussed, the evidence—including guilty pleas and related court documents—establishes that the Plaintiffs have valid claims against the Debtor for involvement in a Ponzi scheme. The fact that the Plaintiffs have taken action against another individual does not eliminate their claims against the Debtor, as all involved parties, including Steven Palladino and others, participated in extracting funds from vulnerable individuals for personal gain.

The Court finds that the Plaintiffs are unlikely to recover fully from funds seized in criminal proceedings or through restitution orders against Viking and the Palladinos. Consequently, the Debtor's assertion that the Norfolk Superior action against Ernest Nasif impacts this adversary proceeding lacks merit. The election of remedies doctrine, aimed at preventing double recovery, does not apply here as the remedies sought are not inconsistent. 

Regarding the Debtor's claim of malicious prosecution, the Court outlines that this tort involves interference with the right to be free from unjustifiable litigation, applicable to both civil and criminal proceedings. To succeed in a malicious prosecution claim, a plaintiff must demonstrate damages from the original action’s initiation without probable cause and with malice, which must also terminate in the plaintiff’s favor. The Debtor did not adequately address these elements in his Motion for Summary Judgment, relying instead on a vague assertion about the Plaintiffs' motivations. Hence, the Court denies the Debtor's motion due to failure to show a lack of genuine material fact regarding his defenses.

The Plaintiffs did not file a cross-motion for summary judgment before the September 13, 2016 hearing but claimed they were entitled to it regarding Count II of their Complaint. The Court concludes that the necessary material facts for Count II are undisputed: the Debtor was indicted for larceny and conspiracy, pled guilty, and received a sentence involving incarceration and probation. Relevant to this, Chapter 266, Section 30 outlines the criminal penalties for larceny, specifying that theft of property valued over $250 can lead to imprisonment of up to five years or a fine of up to $25,000, along with potential jail time.

Whoever steals or fraudulently obtains property from an individual aged sixty or older, or from a person with a disability, is guilty of larceny if the property value exceeds $250. The punishment can include imprisonment for up to ten years or a fine up to $50,000, or both. To secure a larceny conviction under Massachusetts General Laws, the Commonwealth must demonstrate the unlawful taking of property with the intent to permanently deprive the owner. Conspiracy, defined at common law, involves two or more persons working together for an unlawful purpose. 

In bankruptcy proceedings, certain debts, including those for larceny, are non-dischargeable under Section 523(a)(4) of the Bankruptcy Code, irrespective of the debtor's fiduciary status. Larceny, for bankruptcy purposes, is defined by federal common law as requiring proof of the debtor's fraudulent intent in obtaining the property. The distinction between larceny and embezzlement lies in the original taking of the property being unlawful in larceny cases.

A bankruptcy court is not constrained by state law definitions of larceny and may apply federal common law, which characterizes larceny as the felonious taking of another's personal property with the intent to convert or deprive the owner. Under section 523(a)(4), debts arising from the fraudulent appropriation of property, regardless of whether the initial appropriation was lawful or unlawful, are non-dischargeable. The court outlines that larceny involves the wrongful taking of another's property without consent and with intent to convert it. To establish non-dischargeability under 523(a)(4), a creditor must prove all elements by a preponderance of the evidence. The court finds that the definitions of larceny in state and federal law are consistent, and the debtor's guilty pleas to larceny and conspiracy, along with statements made during the change of plea hearing, satisfy the requirements for non-dischargeability. The court emphasizes that a guilty plea serves as an admission of material facts relevant in civil cases. The debtor's reliance on inconsistent statements in an affidavit is undermined by his admissions in court. Furthermore, establishing non-dischargeability for larceny does not necessitate false representations or the solicitation of funds. The debtor's acknowledgment of his involvement in a Ponzi scheme, including his connection to a joint bank account receiving stolen funds, solidifies his culpability, irrespective of whether he solicited funds or executed promissory notes.

The individual attempted to downplay his involvement in a Ponzi scheme, claiming to be merely a subordinate to his father and Ernest Nasif, yet did not assert ignorance of the scheme or lack of profit from it. The facts indicate otherwise, particularly regarding his Affidavit's focus on the absence of misrepresentation to investors. The court notes that under 11 U.S.C. § 523(a)(4), proof of misrepresentation is not necessary for establishing larceny, which can be proven through evidence warranting a conviction for theft, embezzlement, or false pretense. The guilty pleas confirm larceny by theft, contradicting his claims of not taking money, as funds from the Ponzi scheme were deposited into a joint account with his father. 

The court references the sham affidavit rule, which prevents a party from contradicting prior deposition testimony through a later affidavit unless the contradictions are minor or honest discrepancies. While not necessary to invoke this rule in this case, the court finds that the Debtor’s Affidavit confirms his significant involvement in the Ponzi scheme through actions such as document handling and bank deposits. Consequently, the court denied the Debtor’s Motion for Summary Judgment and granted the Plaintiff Kenneth Nasif’s Cross-Motion for Summary Judgment concerning Count II, ruling that the Debtor's debt of $470,000 is not dischargeable. Count I was deemed moot. The court also emphasized the necessity for concise statements of material facts when filing motions for summary judgment.

Opposition to summary judgment motions must be filed within 21 days of service unless otherwise directed by the court. Such opposition must include a concise statement of material facts that indicate genuine issues for trial, with references to supporting documentation. Any material facts presented by the moving party will be deemed admitted unless explicitly contradicted by the opposing party’s statement. The moving party may reply within 14 days after the opposition is served unless the court specifies otherwise. The court may take judicial notice of its own docket records, as established in LeBlanc v. Salem. The plaintiffs' complaints are notably similar to previous complaints against the Debtor by Ronald Nasif and others, differing only in the amounts sought for discharge exceptions. Marion Ward, the mother of Robert Ward, alleged a combined investment totaling $800,000 in 2012. The defendant sought to supplement his summary judgment exhibits with documents related to a motion to set aside a judgment from a prior case. The court noted that a guilty plea does not constitute an actual litigation of issues, hence collateral estoppel does not prevent a defendant from contesting those issues in subsequent civil litigation. Aetna's argument that a judicial determination from a guilty plea should invoke collateral estoppel was disagreed upon by the court, emphasizing the need for a hearing on the plea's voluntariness and factual basis.

Before accepting a guilty plea, judges in Massachusetts must ensure the plea has a factual basis, as outlined in Mass. R. Crim. P. 12(c)(5)(A) and supported by case law. However, a guilty plea does not equate to an adjudication on the merits, meaning the judge does not need to determine that the defendant actually committed the crime. This approach conserves judicial resources and allows for the possibility that a guilty plea may be treated differently from a conviction following a trial, particularly concerning collateral estoppel. Notably, a defendant's guilty plea and admissions during the plea colloquy can be used as evidence in subsequent civil litigation.

Mass. R. Civ. P. 60(b)(3) allows a party to be relieved from a judgment for fraud or misconduct by an opposing party. A "fraud on the court" is defined as egregious conduct that undermines the judicial process, such as bribery or collusion. An affidavit from the Debtor details his administrative role at Viking Financial, clarifying he did not solicit investments, negotiate terms, or manage funds, which were controlled by others. The Court notes that the Debtor's arguments about embezzlement and misrepresentation are not relevant to the current issue of larceny. In addition, the Court granted a motion to attach a document about a summary judgment against Ernest Nasif, while also entering a summary judgment in favor of Teresa Nasif, who was not indicted.