Interamerican Asset Management Fund Ltd. v. Ortega T. (In re Ortega T.)
Docket: Case No. 15-20614-LMI; Adv. Proc. No. 16-01197-LMI
Court: United States Bankruptcy Court, S.D. Florida.; June 22, 2017; Us Bankruptcy; United States Bankruptcy Court
The Chief United States Bankruptcy Judge, Laurel M. Isicoff, issued an Amended Memorandum Opinion and Order regarding motions for summary judgment related to a substantial judgment involving Defendant Leonidas Ortega T (the "Debtor") and Plaintiff Interamerican Asset Management Fund Limited (IAMF). The court held a hearing on January 31, 2017, addressing the Plaintiff's reliance on a ruling from the Privy Council in the UK to argue that a judgment totaling US$191,953,517.50, later adjusted to include compound interest, is non-dischargeable under 11 U.S.C. § 523(a)(2) or § 523(a)(6). Both the Debtor’s and Plaintiff's motions were denied, but summary judgment was granted in favor of the Debtor on Counts I and III of the Complaint.
The background details the Debtor's affiliation with the prominent Ortega Trujillo family in Ecuador, where he served as executive president of several entities, including Conticorp and its banking subsidiaries. The financial context includes BCO Curacao's substantial related-party loans and subsequent regulatory changes in the Netherlands Antilles, leading to the establishment of IAMF. This involved transferring BCO Curacao’s loan portfolio to IAMF to comply with lending restrictions. The financial crisis in mid-1990s Ecuador complicated matters further, prompting the use of global depository receipts (GDRs) for capital raising amid liquidity challenges faced by Banco Continental and BCO Curacao.
Respondents decided to sell Global Depositary Receipts (GDRs) to IAMF in exchange for IAMF's loan portfolio related to Conticorp. Three transactions took place: the first in December 1995, the second in January 1996, and the third in March 1996. IAMF exchanged all its assets, including cash and loan portfolios, for the GDRs, which were not valued comparably to the assets surrendered, raising concerns about the risks involved. Subsequently, Banco Continental and BCO Curacao failed despite government intervention.
IAMF filed a lawsuit against the Debtor in 1996, asserting claims including dishonest assistance, fraud, and fraudulent conveyance. The lower courts ruled in favor of the Debtor on all claims. IAMF appealed, focusing solely on dishonest assistance, a liability under UK trust law for third parties aiding in fiduciary breaches. The Privy Council determined that the lower courts incorrectly applied a subjective standard instead of the required objective standard in assessing dishonest assistance. It reversed the appellate court's decision, finding the Debtor liable to IAMF based on the objective standard and issued a Damages Judgment.
In addition, the Plaintiff filed a complaint asserting that the Damages Judgment is non-dischargeable under 11 U.S.C. § 523(a)(2) and (a)(6), relying on the res judicata effect of the judgment. The Debtor sought summary judgment, arguing that the unappealed lower court rulings collaterally estop the Plaintiff from seeking relief under these sections, as those rulings established that the Debtor did not commit fraud.
The Debtor contends that the Damages Judgment does not justify the relief sought by the Plaintiff, who argues that the judgment on dishonest assistance does provide such entitlement. The Plaintiff asserts that the factual findings from the Privy Council support its claims under sections 523(a)(2) and (a)(6), advocating for collateral estoppel effect despite potential differences in the elements of dishonest assistance and those sections. Summary judgment is deemed appropriate under Rule 56 of the Federal Rules of Civil Procedure and related bankruptcy rules when no genuine issue of material fact exists, allowing the court to decide purely legal questions. Both parties concur that there are no factual disputes, as the Privy Council's findings regarding the Debtor's actions are established. The court's determination will focus on (1) whether to recognize the Privy Council's judgment under comity principles and (2) whether its factual findings warrant collateral estoppel regarding the relief sought in Counts I and III. The analysis will involve interpreting laws from both the U.S. and U.K. to assess if the issues have been fully litigated in a way that renders the judgment non-dischargeable under U.S. bankruptcy law. Recognition of a foreign judgment requires the U.S. court to evaluate factors such as the foreign court's competence, the absence of fraud, alignment with American public policy, and the appropriateness of respecting foreign judgments or deferring to parallel proceedings.
Federal courts should defer to foreign judicial findings when the foreign judiciary is respected and the underlying rule does not conflict with strong U.S. policies. Although the Privy Council made unique factual findings that are not standard in U.S. courts, this does not disqualify the Damages Judgment from being recognized under comity. The Debtor has not requested comity for lower court rulings, which have been superseded by the Damages Judgment, nor would such recognition be significant given the lack of collateral estoppel effect for those earlier judgments.
In discharge proceedings, collateral estoppel applies, barring relitigation of factual issues previously resolved in state court, while the bankruptcy court retains jurisdiction to decide the legal question of dischargeability. U.S. law will govern the preclusive effect of the Damages Judgment, even though typically the law of the jurisdiction issuing the order applies. Federal courts usually apply U.S. law to assess whether to recognize foreign judgments, particularly in bankruptcy cases involving exceptions from discharge.
For collateral estoppel to apply, several criteria must be met: the issues must be identical, the prior issue must have been actually litigated and decided, there must have been a full opportunity to litigate, and the issue must have been necessary for a valid final judgment. Neither party meets these criteria for collateral estoppel in their motions.
The Debtor requests reliance on the findings and rulings of lower courts, which were not appealed by IAMF. IAMF contests the applicability of collateral estoppel, asserting that judgments reversed by the Privy Council lose their conclusive effect, a position supported by U.S. rules that nullify collateral estoppel when prior judgments have been reversed. Consequently, the court will not apply collateral estoppel to the lower court judgments. IAMF seeks a determination that the Judgment is non-dischargeable under sections 523(a)(2) and 523(a)(6), which address debts arising from actual fraud or willful and malicious injury by the debtor. To adjudicate Counts I and III of the Complaint, the court must assess whether the elements of collateral estoppel are satisfied regarding the Debtor's actions. Should the court rule in favor of the Debtor, summary judgment would follow on these counts, contingent on the Damages Judgment.
The case involves evaluating the collateral estoppel effect of an appellate court judgment. IAMF contends that "dishonest assistance" constitutes civil fraud under UK law, implying a finding of fraud in the Damages Judgment, despite the Privy Council's explicit absence of the term "fraud." The Privy Council clarified that assessing dishonest assistance does not necessitate a finding of intent to harm and that a dishonest state of mind can be inferred from objective standards of conduct. The legal determination of dishonesty relies on whether an honest person would consider the actions as such, irrespective of the actor's subjective awareness.
A defendant's mental state may be deemed dishonest by ordinary standards, regardless of their personal judgment. To be liable under section 523(a)(2)(A), which addresses non-dischargeable debts obtained through false pretenses or fraud, the following elements must be established: (1) the debtor made false representations, (2) knew they were false at the time, (3) intended to deceive the creditor, (4) the creditor relied on these representations, and (5) the creditor suffered a loss as a result. In a recent Supreme Court case, Husky International, the Court broadened the interpretation of "actual fraud" to include fraudulent conveyances, even in the absence of false representations or reliance, provided the fraud involved moral turpitude or intentional wrongdoing. The Privy Council found that the Debtor and Respondents acted dishonestly regarding transactions that did not benefit IAMF, but did not establish that the Debtor committed fraud, as the term "fraud" was not mentioned in the Damages Judgment. The Privy Council focused on dishonest assistance rather than actual fraud, indicating that the Debtor did not need to recognize their actions as dishonest to be held liable. IAMF's argument that the Privy Council's findings indicate actual intent to defraud is disputed, as the findings supported an objective standard of liability rather than a subjective intent, which is required for a debt to be excluded from discharge under section 523(a)(2)(A).
The elements of dishonest assistance do not necessitate a finding of actual intent to wrong, only that no honest person could have believed otherwise, distinguishing them from the requirements for a claim under section 523(a)(6). The Privy Council made no findings of actual fraud or intent to defraud, leading to the conclusion that collateral estoppel does not apply to the Plaintiff's claims under section 523(a)(2)(A), thereby denying the Plaintiff's motion for summary judgment on Count I of the Complaint.
In addressing the definition of “willful and malicious injury” under 11 U.S.C. § 523(a)(6), the Supreme Court clarified that nondischargeability requires a deliberate or intentional injury, not merely an act that leads to injury. The Eleventh Circuit has ruled that a debtor is liable for a ‘willful’ injury if the intentional act is meant to cause or is substantially certain to cause injury. When alleging financial harm, it must be demonstrated that the debtor knew at the time of the act that injury was substantially certain to result.
There is a dispute regarding whether the "substantial certainty" requirement is an objective or subjective standard, with the Eleventh Circuit yet to resolve this circuit split. IAMF contends that the standard is objective, aligning with dishonest assistance, and thus does not necessitate a finding of the Debtor's intent to harm. Conversely, IAMF also argues that the Privy Council's findings indicate that the Debtor intended to cause harm or was aware that injury was substantially certain. The Debtor asserts that the proper standard is subjective and that the Privy Council did not find intent to harm or certainty of injury. The ruling concludes that the subjective standard is the appropriate measure for assessing non-dischargeability under section 523(a)(6) based on willful and malicious injury.
In financial tort cases, a purely objective substantial certainty standard risks aligning too closely with recklessness; therefore, a subjective standard is preferred to avoid this issue (Drewes v. Levin). The Privy Council emphasized that the Debtor's intent was not relevant in establishing dishonest assistance, noting that the Debtor failed to consider potential harm to IAMF rather than knowing it would occur. Although the objective standard was deemed appropriate under English law for finding dishonest assistance, the subjective standard is necessary for determining if a judgment for such assistance is non-dischargeable as a willful and malicious injury under section 523(a)(6). The issues addressed by the Privy Council differ from those required for non-dischargeability, leading to the conclusion that the Plaintiff cannot obtain summary judgment on Count III of the Complaint. Exceptions to discharge are interpreted strictly against the complaining party and favorably towards the debtor to support the fresh start policy of the Bankruptcy Code. Despite the Debtor and his brothers being found liable for contributing to a breach of fiduciary duty, this liability does not equate to non-dischargeability under U.S. Bankruptcy law, as the elements necessary for liability differ.
The Plaintiff's Motion is denied due to insufficient evidence demonstrating the Debtor's actual fraud or knowledge of actions likely to harm the Plaintiff. The Debtor's Motion is also denied; however, Summary Judgment is granted in favor of the Debtor concerning Counts I and III of the Complaint. The Damages Judgment awards approximately US$191 million and includes a separate Interest Judgment. The term "Respondents" refers collectively to the Debtor, Jaime Ortega Trujillo, and Luis Ortega Trujillo. The excerpt references the legal precedent set in Barnes v. Addy regarding constructive trusteeship, emphasizing that mere agency does not impose liability unless the agents assist in fraudulent activities. The Plaintiff acknowledged that collateral estoppel, not res judicata, applies to non-dischargeability actions. Appellate courts may make factual findings in certain cases, as noted in relevant case law. The ruling does not reflect the court's stance on the dischargeability of the Judgment but focuses solely on the relief sought by the Plaintiff based on the Damages Judgment's preclusive effect. The court also indicates that it may grant summary judgment in favor of a nonmoving party with proper notice.
