Opinion
Bankruptcy No. 04-09362, Adversary No. 05-90044.
October 13, 2006
MEMORANDUM DECISION
Michael Barraza ("Barraza") was injured during a construction project. Daniel Davila ("Davila") died in the same accident. Davila's parents, Maria Davila and Ricardo Davila ("Davila's parents"), his children, Carla Esquer, Fernando Esquer and Frank Esquer ("Davila children") and Barraza (collectively the "Plaintiffs") brought suit in state court against multiple defendants. A jury awarded compensatory and punitive damages in favor of the Plaintiffs and against various defendants, including the debtor, Barkut Rumjahn ("Rumjahn").
Rumjahn and his wife then filed for relief under Chapter 7 of the Bankruptcy Code on October 29, 2004. The Plaintiffs filed this nondischargeability action against Rumjahn and his wife. On April 6, 2006, the Court held a hearing on the Plaintiffs' motion for summary judgment ("Motion"). Pursuant to an order of the Court entered on July 27, 2006, the Plaintiffs supplemented the record by filing a copy of the instructions provided to the state court jury.
In their Motion, the Plaintiffs contend that the debt owed by Rumjahn is nondischargeable under Section 523(a)(2) or (a)(6). They further argue that the principle of issue preclusion should apply to the state court judgment such that summary judgment can be granted based on the findings of the state court jury. Issue preclusion bars re-litigation of an issue decided previously in a judicial or administrative proceeding, provided there was a full and fair opportunity to litigate the issues. Allen v. McCurry, 449 U.S. 90, 96 (1980). There are several difficulties with the Plaintiffs' argument.
In determining the preclusive effect of a state court judgment, federal courts must, as a matter of full faith and credit, apply the forum state's law of issue preclusion. In re Nourbakhsh, 67 F.3d 798, 800 (9th Cir. 1995). Under California law, the application of issue preclusion requires that the following elements be met:
(1) The issue sought to be precluded from re-litigation must be identical to that decided in a former proceeding;
(2) The issue must have been actually litigated in the former proceeding;
(3) It must have been necessarily decided in the former proceeding;
(4) The decision in the former proceeding must be final and on the merits; and
(5) The party against whom preclusion is sought must be the same as, or in privity with, the party to the former proceeding.
In re Younie, 211 B.R. 367, 373 (9th Cir. BAP 1997), aff'd, 163 F.3d 609 (9th Cir. 1998).
The party seeking to apply issue preclusion has the burden of proving that each element is satisfied. In re Kelly, 182 B.R., 255, 258 (9th Cir. BAP 1995). To sustain this burden, a party must introduce a record sufficient to reveal the controlling facts and the exact issues litigated in the prior action. Any reasonable doubt as to what was decided in the prior action will weigh against applying issue preclusion. 182 B.R. at 258.
Section 523(a)(2) applies to debts "for money, property, services, extension, renewal, or refinancing of credit." Under this Section, a plaintiff must establish that specific money or property has been obtained by fraud before any debt arising out of the fraud is declared nondischargeable. Cohen v. De La Cruz, 523 U.S. 213 (1998). In this case, the jury found the various state court defendants, including Rumjahn, liable for compensatory damages based on a finding of negligence. The Plaintiffs are not owed a debt "for money, property, services, extension, renewal, or refinancing of credit" arising out of the fraud found by the state court jury. Therefore, Section 523(a)(2) is not applicable to this adversary proceeding.
This leaves the claim under Section 523(a)(6). Under section 523(a)(6), the Plaintiffs must show that the debt owed was the result of a willful and malicious injury. The "willful injury requirement is met only when the debtor has a subjective motive to inflict injury or when the debtor believes that injury is substantially certain to result from his own conduct." In re Su, 290 F.3d 1140, 1142 (9th Cir. 2002). Debts arising from recklessly or negligently inflicted injuries do not fall within the compass of Section 523(a)(6). Kawaahau v. Geiger, 523 U.S. 57, 64 (1998). The state court jury's finding of negligence does not satisfy this requirement, and therefore, it cannot be given preclusive effect.
The next question is whether the jury's findings of oppression, malice and fraud in awarding punitive damages can be given preclusive effect. In In re Derebery, 324 B.R. 349 (C.Cal. 2005), the court explored whether a jury finding of malice and oppression under California Civil Code § 3294 could satisfy the requirements of Bankruptcy Code Section 523(a)(6). The court concluded that the state statute allowed the jury to apply an objective person standard in determining whether a defendant committed his acts with malice or oppression. The court stated that, on the other hand, Section 523(a)(6) required a showing of subjective intent. 324 B.R. at 355 (relying on In re Su, supra). The court ruled that issue preclusion could not be applied because it was not clear whether the jury made a determination that the debtor acted with a subjective intent to cause harm to the plaintiffs.
The result in Derebery is consistent with the holding in In re Su. In that case, a state court jury found that the debtor acted negligently and with malice. In a subsequent nondischargeablity action, ruling on stipulated facts, the bankruptcy court applied an objective standard in examining the issue of willfulness and declared the debt nondischargeable. The Ninth Circuit Court of Appeals reversed and held that courts must apply a subjective standard. The Court stated that applying an objective standard would disregard the debtor's state of mind. 290 F.3d at 1145.
The same issue arises in this case. The jury instruction in the state court proceedings allowed for a finding of malice or oppression based on "despicable conduct," and that term incorporates an objective person standard. As a result, this Court cannot determine if the state court jury based its finding of malice and oppression on elements that would satisfy Section 523(a)(6).
The jury also found that Rumjahn participated in fraudulent activity. The question is whether that finding of fraud could satisfy the elements of a claim under Section 523(a)(6). In its argument regarding Section 523(a)(2), the Plaintiffs contended that the "Rumjahns willfully and maliciously perpetrated fraud on Plaintiffs by fraudulently failing to provide safety devices/equipment per California Labor Code section 3706." This statement is not consistent with the opinion of the state appellate court. That court indicated that the fraud was perpetrated after the accident at which time various parties took actions to make it appear that another entity owned the building under construction. They did this because they did not have workers' compensation insurance.
Furthermore, the Plaintiffs' statement is confusing, whether it is viewed with Section 523(a)(2) or (a)(6) in mind. California Labor Code § 3706 simply provides that if an employer fails to obtain workers' compensation insurance, then an injured employee can sue the employer directly for damages without being limited to seeking compensation under the workers' compensation statute. Section 3706 has nothing to do with safety equipment. Additionally, the failure to obtain workers' compensation generally is not a basis for declaring a resulting debt nondischargeable.
The failure to provide proper safety equipment can certainly be viewed as despicable conduct for purposes of assessing punitive damages. However, as far as the Court can determine, the actual fraud involved in this case took place after the accident, and involved attempts to make it appear as if there was workers' compensation insurance available.
It is also unclear if the jury found that Rumjahn participated directly in the fraud, or whether the fraud was imputed to him. The Bankruptcy Appellate Panel has held that "vicarious liability" can be the basis for a claim under Section 523(a)(2).In re Tsurukawa, 287 B.R. 515 (9th Cir. BAP 2002). On the other hand, in a case decided under Section 523(a)(6), the Bankruptcy Appellate Panel questioned whether nondischargeability of a debt should be imputed to a debtor where there was no evidence that the debtor knowingly participated in a fraudulent scheme. In re Tobin, 258 B.R. 199 (9th Cir. BAP 2001). Although not discussed by the Panel in either decision, Section 523(a)(6), unlike Section 523(a)(2) makes specific reference to a "willful and malicious injury by the debtor." This difference arguably justifies a different application of imputed liability to Sections 523(a)(2) and (a)(6). See, e.g., In re Austin, 36 B.R. 306 (M.Tenn. 1984) ("application of vicarious liability would effectively vitiate the § 523(a)(6) requirement that only debts resulting from willful acts committed by the debtor be nondischargeable").
Even assuming imputed or vicarious liability is still applicable under Section 523(a)(6), a further difficulty in this case is that the Court cannot determine how the Plaintiffs were harmed by the fraudulent actions that were taken after the accident. The jury awarded punitive damages, but it is impossible to determine how those damages would apportioned. In other words, were the punitive damages primarily awarded for the despicable conduct of not providing proper safety equipment, or were punitive damages awarded for fraudulent actions after the accident? Based on the record as it presently stands, the Court cannot apply issue preclusion to the state court judgment as to the claims of nondischargeability.
The Court also notes that the state appellate court determined that the Davila Children were not entitled to punitive damages as part of their wrongful death claim. The appellate court also stated that the Davila children would need to establish their standing to sue. Assuming they establish their standing, they still would not be able to use the state court judgment for preclusive effects because as to them, the finding of fraud, malice and oppression were not necessary to their claims.
The Court recognizes that an argument was raised at the hearing that the state court judgment was against Barkut Rumjahn personally and his community property, and therefore, Mrs. Rumjahn should also be liable for the debt in question. The Court does not reach that question at this time.
The Court is mindful of the extent of harm that resulted from this tragic accident. However, regardless of the extent of the damages, the Court's task has been to determine if the findings of the jury satisfy the elements of a claim for nondischargeability such that summary judgment could be granted. On this record, the Court cannot grant summary judgment in favor of the Plaintiffs.
Furthermore, given how courts have interpreted Section 523(a)(6), there is a question as to whether the Plaintiffs would be able to meet their burden of proof at trial. As a result, the Court will require the Plaintiffs to file points and authorities of no more than 20 pages addressing the issue of whether granting summary judgment in favor of the Rumjahns is appropriate. See Ramsey v. Coughlin, 94 F.3d 71, 74 (9th Cir. 1996) (court has authority to grant summary judgment in favor of the nonmoving party, but the losing party must be given an opportunity to demonstrate that there are genuine material issues for trial.) In responding to this question, the Plaintiffs will need to thoroughly examine the elements of a claim under Section 523(a)(6). See Geiger, supra, 523 U.S. 57; In re Su, 290 F.3d 1140 (9th Cir. 2002); In re Jercich, 238 F.3d 1202 (9th Cir. 2001).
More specifically, the Plaintiffs will need to show that the injury herein was willful and malicious. In order to meet the willfulness requirement, the Plaintiffs must show that Rumjahn had a subjective motive to inflict injury or that he believed injury was substantially certain to result from his conduct. Maliciousness is separate from the requirement of willfulness. A malicious injury involves: 1) a wrongful act; 2) done intentionally; 3) which necessarily causes injury; and 4) is done without just cause of excuse. Su, 290 F.3d at 1146-47. Finally, if the Plaintiffs intend to rely on imputing a third-party's action to Rumjahn, then they will need to address whether that is allowed for purposes of Section 523(a)(6).
The Motion will be DENIED.