In re Christopher Stump Middendorf, Case No. 01-20625 DK;
Adversary Proceeding Richard C. Hedreen vs. Christopher Stump Middendorf, Adversary Case No. 01-1474 DK

Plaintiff’s Attorney

Marc C. Forsythe, Esq.
Goe & Forsythe, LLP
3 Civic Plaza, Suite 267
Newport Beach, California 92660
Tel: 949-467-3780
Fax: 949-721-0409

Defendant’s Attorney

Jeffrey M. Orenstein, Esq.
Goren, Wolf & Orenstein
11300 Rockville Pike
Rockville, Maryland 21852
Tel: 301-694-8414

Result/Trial Notes

October 21 -22, 2002 Trial conducted
Non-dischargeability action in Bankruptcy Court, District of Maryland pursuant to on 11 U.S.C. Section 523(a)(2)(A), (4) & (6).
Judgment in favor of Plaintiff for 1992 State Court Consent Judgment for $660,000, which has increased to approximately $1,000,000 due to accruing interest.

Issues

Whether the judgment entered in favor of Plaintiff Richard C. Hedreen and against Defendant Christopher Stump Middendorf was nondischargeable due to Defendant’s fraud? Whether the judgment entered in favor of Plaintiff Richard C. Hedreen and against Defendant Christopher Stump Middendorf was nondischargeable due to Defendant’s fraud in a fiduciary capacity, embezzlement or larceny? Whether the judgment entered in favor of Plaintiff Richard C. Hedreen and against Defendant Christopher Stump Middendorf was nondischargeable due to Defendant’s causing a willful and malicious injury?

Expert Testimony

None.

Judge Arbitrator/Mediator

Honorable Duncan W. Keir
United States Bankruptcy Court
District of Maryland
6500 Cherry Wood Lane
Greenblet, MD 20770

Experts

None.

Case Facts

In 1990, Plaintiff was the owner of two paintings: “Hill Street (Day City)” by Wayne Thiebaud (the “Thiebaud”) and “IXI” by Susan Rothenberg (the “Rothenberg”) (the two paintings are collectively referred to as the “Paintings”). By letter dated October 30, 1990, Plaintiff sent a letter to Mr. Anthony d’Offay (“d’Offay”), an art dealer in London, England, offering to exchange the Paintings, and other consideration, for a Willem deKooning painting owned by d’Offay (the “deKooning”). d’Offay accepted the terms of the exchange on or about November 9, 1990 by executing on the “Agreed to” line on the October 30, 1990 letter and facsimileing the same back to Plaintiff (the “d’Offay Agreement”). Prior to the October 30, 1990 letter, Plaintiff had discussed with d’Offay structuring the proposed exchange as a Section 1031 tax-free exchange. In furtherance of consummating the d’Offay Agreement, Plaintiff was referred to Defendant in late October, early November of 1990 as someone who knew of potential purchasers for both the Rothenberg and the Thiebaud. Upon contacting Defendant, Defendant informed Plaintiff that he did know of two potential buyers. Thereafter, Defendant informed Plaintiff that the Hirshhorn Museum and Sculpture Garden (the “Hirshhorn”) was interested in purchasing the Rothenberg for $585,000 (Defendant would retain $50,000 with $535,000 net to Plaintiff) and that Robert Lehrman (“Lehrman”) would purchase the Thiebaud for a price of $550,000 net to Plaintiff. In reliance upon the representations of Defendant, Plaintiff caused the Rothenberg to be shipped to the Hirshhorn and for the Thiebaud to be shipped to Defendant, both on approval. In further reliance on these representations, and in order to complete the exchange, Plaintiff also guaranteed to d’Offay full payment of the proceeds of the two sales by the indicated dates.By letter facsimiled and dated November 7, 1990, from Defendant to Plaintiff, Defendant proposed payment terms for “our” purchase of the Paintings. The purchaser of the Thiebaud (Lehrman) proposed to pay $450,000 by November 13, 1990 and the remaining $100,000 by January 13, 1991. By letter dated November 7, 1990, from Plaintiff to Defendant, Plaintiff responded that the purchase price for each of the Paintings was agreeable, but specifically noted the proceeds from the sale of the Paintings be placed in an escrow account and distributed from such escrow pursuant to Plaintiff’s instructions that would follow. Plaintiff also noted that he would lend into escrow the $100,000 due from Lehrman by January 13, 1991 so as to consummate the d’Offay Agreement. Defendant did not send any written communication to Plaintiff in response to Plaintiff’s November 7, 1990 letter that Defendant did not agree to place the proceeds from the sale of the Paintings into an escrow account. By letter dated November 9, 1990, Plaintiff gave Defendant explicit wire instructions regarding the distribution of the sales proceeds of both the Rothenberg and the Thiebaud. Defendant executed the November 9, 1990 letter noting his agreement to such wire instructions. On November 9, 1990, Lehrman wired $450,000 into the escrow account as partial payment for the Thiebaud. On November 13, 1990, Plaintiff wired $100,000 into the escrow account. Notwithstanding Defendant’s agreement to transfer $550,000 to d’Offay by no later than November 13, 1990, only $450,000 was wired to d’Offay, and not until November 16, 1990. On November 20, 1990, Defendant received $585,000 from the Hirshhorn in payment for the Rothenberg. Defendant did not disclose this payment to Plaintiff, nor did he deposit it in the escrow account. On November 21, 1990, Defendant wired d’Offay an additional $100,000. This money was not wired from the escrow account. Despite Defendant’s agreement in the November 9, 1990 letter from Plaintiff, Defendant did not deposit the Rothenberg sales proceeds of $535,000 into the escrow account or pay to d’Offay such monies by December 23, 1990. On December 26, 1990, Defendant wired d’Offay only $150,000 from the escrow account. When the full proceeds from both sales had not been wired to d’Offay by December 23, 1990, as Defendant had agreed to do in the November 9, 1990 letter from Plaintiff, Plaintiff, as guarantor, subsequently paid d’Offay the full balance of $385,000 due d’Offay. Defendant was required to remit to d’Offay a total of $1,085,000 for the sale of the Thiebaud and the Rothenberg. Defendant also was required to repay Plaintiff, or cause Plaintiff to be repaid, the $100,000 loan. Defendant received or controlled $1,135,000 in cash from the sale of the Paintings, plus the $100,000 loan from Plaintiff. Defendant knew that this money was to be paid into the escrow account and disbursed as follows: $1,085,000 to d’Offay, $100,000 to Plaintiff (as repayment of the loan), and $50,000 to Defendant. Defendant did not disburse all of these funds according to who was entitled to them. Rather, Defendant intentionally converted some of those funds, in the amount of $485,000 to his own use in order to pay other debts in knowing violation of the rights of Plaintiff and d’Offay. Alternatively, Defendant intentionally converted to its own use the Thiebaud, the Rothenberg, or both, in violation of the rights of Plaintiff and d’Offay by selling both the Thiebaud and the Rothenberg as if Defendant were the owner. In addition, Defendant converted to its own use the $50,000 commission, to which he was not entitled to until payment was made in full for the paintings pursuant to the November 9, 1990 letter agreement. After filing a lawsuit against Defendant in 1991, a Consent Order of Judgment was entered on or about June 15, 1992, in Case No. 91-2069, in the United States District Court, District of Columbia, awarding Plaintiff a judgment in the amount of $660,000 plus interest. Plaintiff and Defendant agreed to the relevant facts as stated above and memorialized the same in a Stipulated Findings of Fact and Settlement Agreement. Defendant executed the Settlement Agreement which specifically refers to the Stipulated Findings of Fact and incorporates them in by reference. In the Settlement Agreement and Stipulated Findings of Fact, Defendant admits to conversion, willful and intentional tortuous acts, Plaintiff’s right to punitive damages against Defendant, facts that support fraud, and his non-opposition to the non-dischargeability of the debt evidenced by the Consent Order.

Contentions

Plaintiff contended that although he attempted to structure the transaction as a tax-free Section 1031 exchange, the transaction failed due to Defendant’s conversion of the sales proceeds from the Paintings. Defendant argued that he entered into a contract to buy the Paintings from d’Offay such that any failure to pay such monies was a breach of contract and not conversion/embezzlement. Defendant also asserted that only d’Offay (and not Plaintiff) had standing to sue Defendants.

Award Amounts

• Economic: $535,000.00
• Non-Economic 0.00
• Punitive: $125,000.00
• Total Award: $660,000.00
• Total to Plaintiff: $660,000.00 plus interest since 1992

Settlement Discussions:

Defendant offered $25,000. Plaintiff offered $150,000 cash.

Injuries/Damages:

Plaintiff alleged he suffered monetary damages in the amount of $535,000.00 for payments he had to make in 1991 as a result of Defendant’s theft of the paintings.

Result

The Court in pre-trial motions ruled that the Settlement Agreement and Stipulated Facts would be used as additional evidence, but not used as collateral estoppel on the non-dischargeability issues. After a one-day trial, the Bankruptcy Court found that the entire 1992 District of Columbia Consent Judgment for $660,000.00 was non-dischargeable pursuant to 11 U.S.C. Sections 523 (a)(4) and (6). Pursuant to the accrual of interest authorized by the District of Columbia, Official Code Section 15-109, the 1992 Judgment has accrued to approximately $1,000,000.