Please note that this writer is not licensed to practice law in Oregon. This means that he is not legally permitted to give any legal advice or perform any legal services. This Bulletin and the entire contents of this website is written only for attorneys. and is not intended for the public. If any non-attorney is reading this, you must consult an attorney about ANYTHING you read here. Nothing in this website is intended to be nor should be read as being legal advice to anyone.
By Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys, Andy@BLSforAttorneys.com9th Circuit Case No. 06-56319
Sept. 23, 2008
Last week the 9th Circuit issued its second opinion in as many months interpreting the "willful and malicious injury" language in § 523(a)(6) of the Bankruptcy Code. The Litigation Report in this website for the week of September 21 - 28 highlighted the 1st of these two opinions, Lockerby.v. Sierra, on the necessary elements for an intentional breach of contract to be a nondischargeable "willful and malicious injury."
Now in Barboza, the 9th Circuit comes back to this same "willful and malicious injury" language, although not in the narrow breach of contract context. Here the Court reversed both the bankruptcy court and the BAP, primarily by finding that neither court applied the 9th Circuit's law on § 523(a)(6)'s "willful and malicious injury" language accurately. Procedurally, the bankruptcy court had granted the plaintiff creditor a motion for summary judgment, and the BAP agreed that summary judgment was appropriate. This Litigation Report summarizes the procedural aspects of this opinion; please see this website's Bulletin of 9/30/08 for a summary of the substantive law.
The issue was the appropriateness of granting a motion for summary judgment in favor of the creditor, that is , whether the pleadings and the evidence before the bankruptcy court "show that there is no genuine issue as to any material fact and that the movant is entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(c). The complication here is that a judgment for willful copyright infringement had been entered against the debtors in federal District Court (for nearly $800,000) before they filed their bankruptcy case, and the bankruptcy judge decided that the trial court's findings would be binding in the adversary proceeding on nondischargeability. Those findings were sufficient to address some but not all of the elements of a § 523(a)(6) "willful and malicious injury." Each of the three courts--the bankruptcy court, BAP, and 9th Circuit--analyzed this interplay between the prior civil judgment against the debtors and the requirements under § 523(a)(6) differently.The Bankruptcy Court
The pertinent jury instruction in the District Court trial was as follows:
To prove willful infringement, the Plaintiff must prove by a preponderance of the evidence that the Defendants knew that they were infringing the Plaintiff’s copyrights or that they acted with reckless disregard as to whether they were doing so. If you conclude that the Defendants reasonably and in good faith believed that they were not infringing the Plaintiff’s copyrights, then you may not find that they willfully infringed those copyrights.The bankruptcy judge recognized that the "willful" in copyright infringement is broader than the "willful" in § 523(a)(6), that, as the above jury instruction shows, the former includes acting "with reckless disregard," not just acting deliberately and intentionally. So in response to the creditor's motion for summary judgment, the judge set the issue of subjective intent for trial. But the creditor persisted, filing a partial motion for summary judgment specifically on the issue of intent, although without any new evidence. In opposition the debtors filed affidavits stating that someone other than debtors had ordered the duplication of the copyrighted movies at issue, and had received and diverted the movies. But the court held that the evidence showing that debtors knew about the copyright, and that, together with the jury's finding of willful infringement, constituted a willful injury , and so it decided after all to grant summary judgment to creditor.
The BAP
The BAP affirmed as to the "willful" prong on the basis that the bankruptcy court appropriately determined that debtors "had the requisite subjective intent to injure another's property interest."
The BAP recognized that the bankruptcy court had failed to make a separate inquiry about the "malicious" prong of "willful and malicious." but its solution: the "BAP implied 'maliciousness' from the Bankruptcy Court’s finding of willfulness. The BAP reasoned that 'an award of statutory damages based on willful copyright infringement is a debt for an injury to the owner’s property interest.' Accordingly, the BAP reasoned that '[t]he only remaining proof required was that Debtors were aware of Appellee’s copyright at the time they infringed it.' ” So the BAP held that debtors' knowledge of the creditor's copyright interest at the time of infringement established the "substantial certainty" of the resulting injury.
The Ninth Circuit
Question of Material Fact about Willfulness
The Court held that the creditor did not meet its burden of showing the absence of a genuine issue of material fact about whether debtors' acted willfully. Based on the evidence before it on the two motions for summary judgment, the bankruptcy court " had no way to determine whether the jury found the willful infringement based on a reckless disregard or a knowing violation of [creditor's] copyright." Citing the U.S. Supreme Court opinion Kawaauhau v. Geiger, 523 U.S. 57 (1998), willful injuries under § 523(a)(6) are specifically limited to "deliberate or intentional" injuries.
The 9th Circuit instead found a genuine issue of material fact in evidence that someone else other than the debtors had ordered the pirated movies and therefore summary judgment on the willfulness element was in error.
Lack of Finding About Maliciousness
As to the bankruptcy court and its adoption of the trial court's findings, the 9th Circuit stated: "Because the District Court ... did not address the “malicious” prong of § 523(a)(6), and the jury made no findings in this regard, we cannot discover any separate findings of uncontroverted fact of maliciousness by the Bankruptcy Court." The 9th Circuit held that this lack of a separate finding on maliciousness was reversible error.
The BAP's reversible error was in implying maliciousness from willfulness. Although acknowledging
that
1) If a bankruptcy court adopts the findings of a trial court in an adversary proceeding on nondischargeability of a "willful and malicious injury" claim under § 523(a)(6), the bankruptcy court must take care that the elements of the trial court's findings match the elements required for nondischargeability. Particularly, summary judgment for creditor is not appropriate if the definition of willfulness is broader in the trial court findings than under § 523(a)(6), such as when that definition included injuries from recklessness, leaving a genuine issue of material fact about whether the underlying judgment was based on conduct which is not adequate to determine nondischargeablity. Under that circumstance, the adversary proceeding must go to trial to establish if the conduct was intentional and deliberate, not just reckless.
2) A bankruptcy court must make separate findings as to the "willful" and "malicious" prongs under § 523(a)(6). One can not be inferred from the other.
The BAP's reversible error was in implying maliciousness from willfulness. Although acknowledging
that
there may be some overlap between the test for “willfulness” and the test for “malice,” [citation omitted] the overlap does not mean that the Bankruptcy Court can ignore entirely the malice inquiry. We require a separate analysis for each of the “willful” and “malicious” prongs. [Citations omitted.] The BAP’s conclusion that the Appellants’ actions were malicious under § 523(a)(6) rested entirely on its conclusion that the Appellants’ actions were willful under § 523(a)(6).The Bottom Line
1) If a bankruptcy court adopts the findings of a trial court in an adversary proceeding on nondischargeability of a "willful and malicious injury" claim under § 523(a)(6), the bankruptcy court must take care that the elements of the trial court's findings match the elements required for nondischargeability. Particularly, summary judgment for creditor is not appropriate if the definition of willfulness is broader in the trial court findings than under § 523(a)(6), such as when that definition included injuries from recklessness, leaving a genuine issue of material fact about whether the underlying judgment was based on conduct which is not adequate to determine nondischargeablity. Under that circumstance, the adversary proceeding must go to trial to establish if the conduct was intentional and deliberate, not just reckless.
2) A bankruptcy court must make separate findings as to the "willful" and "malicious" prongs under § 523(a)(6). One can not be inferred from the other.
Bankruptcy Litigation Support for Attorneys
Andy@BLSforAttorneys.com
Please note that this writer is not licensed to practice law in Oregon. This means that he is not legally permitted to give any legal advice or provide and legal services. This Bulletin and the entire contents of this website is written only for attorneys. and is not intended for the public. If any non-attorney is reading this, you must consult an attorney about ANYTHING you read here. Nothing in this website is intended to be nor should be read as being legal advice to anyone.
© 2008 Bankruptcy Litigation Support for Attorneys
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