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ColeMichael Investments, L.L.C v. Burke

September 1, 2010


The opinion of the court was delivered by: Virginia M. Kendall United States District Court Judge Northern District of Illinois

Judge Virginia M. Kendall


Debtor-Appellant Barry E. Burke ("Burke") appeals to this Court, which has jurisdiction to hear the appeal pursuant to 28 U.S.C. § 158(a)(1), from a decision of the United States Bankruptcy Court for the Northern District Court of Illinois ("the bankruptcy court") holding that his judgment debt arising from a Texas state-court default judgment is non-dischargeable in bankruptcy under 11 U.S.C. § 523(a)(4). See In re Burke, 405 B.R. 626 (Bankr. N.D. Ill. June 10, 2009). Bankruptcy plaintiff and appellant ColeMichael Investments, LLC ("ColeMichael") filed a cross-appeal in order to preserve its argument that, as an alternative ground for upholding the bankruptcy court's holding of nondischargeability, the doctrine of collateral estoppel should apply to the Texas judgment. For the reasons stated below, the Court affirms the decision below in its entirety.


This Court has jurisdiction to review final bankruptcy court decisions. 28 U.S.C. § 158(a)(1); Fed. R. Bankr. P. 8001 and 8002. On appeal, a district court reviews a bankruptcy court's factual findings for clear error, and its legal conclusions de novo. See Meyer v. Rigdon, 36 F.3d 1375, 1378 (7th Cir. 1994); In re Mayer, 173 B.R. 373, 377 (N.D. Ill. 1994).

In order for a debt to be non-dischargeable under any of the subsections of 11 U.S.C. § 523, the creditor bears the burden of proving the applicability of one of the statutory provisions by a preponderance of the evidence. Grogan v. Garner, 498 U.S. 279 (1991); Matter of Bero, 110 F.3d 462 (7th Cir. 1997). "[E]xceptions to discharge of a debt are construed strictly against a creditor and liberally in the debtor's favor." Kolodziej v. Reines (In re Reines), 142 F.3d 970, 972-73 (7th Cir. 1998).


The Court adopts the relevant facts as set forth by the bankruptcy court. See Fed. R. Bankr. P. 8013 ("Findings of fact, whether based on oral or documentary evidence, shall not be set aside unless clearly erroneous . . . ."). The facts summarized below were presented to the bankruptcy court by stipulation of the parties.

I. The Joint Venture Funds

ColeMichael is a Nevada limited liability company with its principal place of business in Dallas, Texas. Burke, an individual Illinois resident, was a licensed Illinois attorney from 1976 until his disbarrment in 2006. Burke was also a member of the bar of this District.

On October 2, 1996, ColeMichael entered into a joint venture participation agreement ("the joint venture agreement") with Bayvest Capital Funding Limited ("Bayvest") for the purposes of investing in a "high yield capital enhancement strategy." Burke agreed to serve as legal counsel for the joint venture. The joint venture agreement provided in relevant parts that the venture would be managed, directed, and administered by Bayvest acting as a fiduciary for the venture; that the funder for the plan (that is, ColeMichael) would invest $300,000 in addition to a $1,000 retainer and expense fund for Burke's use; and that Burke would comply with the detailed provisions of a Letter of Instructions with regard to his handling of the investment fund. Pursuant to the joint venture agreement, ColeMichael transferred the sum of $301,000 into Burke's client trust account. Burke accepted the funds and agreed to the instructions he had been given, which required that he ensure that ColeMichael did not suffer any loss or diminution of the funds and that he obtain a bank guarantee in exchange for any release or transfer of the funds.

Burke then proceeded to transfer the funds to an account at a foreign financial institution without prior notice to ColeMichael and without ColeMichael's approval, authorization, or consent. On June 13, 1997, Burke sent ColeMichael a letter in which he "assumed full responsibility and authority for the disbursement of funds to ColeMichael pursuant to" the joint venture agreement, and informed ColeMichael that it could expect disbursement of the funds no later than June 27, 1997.

ColeMichael did not receive its funds. Over the next several years, Burke provided numerous colorful explanations for his failure to pay ColeMichael, which at various times featured anonymous "Arab principals," feuding oil companies, British arbitrators, Singaporean thieves, and assorted mysterious "investors." At one point, Burke and Bayvest told ColeMichael that they had obtained an interest in another investment "that would ultimately result in ColeMichael receiving a total return of over $20,000,000." On May 2, 1998, Bayvest represented to ColeMichael that it would receive a guaranteed minimum payment of $3,695,652 as a return on its investment, and that under Burke's management it could expect to receive a total of $18,478,261 over a one-year period from its continued investment. On May 29, 1998, Burke represented to ColeMichael that he had control of a European-based fund of which ColeMichael's share was $3,200,000. As of the ...

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