Understand the complexities and nuances of the Bankruptcy Code to better advise clients and prepare for court.
By Stephanie Cumings
Nov. 12 — A group of bar patrons who were awarded over $1 million from a state court after an altercation with a bouncer weren't able to protect their judgment from discharge in the bouncer's bankruptcy.
Even though the state court found the bouncer's conduct in ejecting the patrons from Jellybeans Southside Jam was “outrageous,” the bankruptcy court found that the matter wasn't “actually litigated” because the bouncer had been relying on the bar's insurance company to defend him, which it didn't.
Judge Gerald Austin McHugh agreed with the bankruptcy court and further found that even if the case had been actually litigated, a finding of “outrageous” conduct didn't necessarily equate to a “willful and malicious” injury, as required by the Bankruptcy Code. The court said the bar patrons “dug their own hole” by failing to comply with the bankruptcy court's rules of procedure.
After an altercation with bouncer Grady Cunningham, three bar patrons sued Cunningham and the bar for assault and battery, among other claims. Cunningham didn't respond to the complaint based on assurances from his employer that the bar's insurance carrier would defend him.
The defendants didn't show up to the hearing, and based on the plaintiffs' testimony, the court found Cunningham's conduct “outrageous” and awarded the plaintiffs over $1 million in damages. Cunningham subsequently filed for bankruptcy.
The plaintiffs filed a proceeding in the bankruptcy court seeking to have the $1 million judgment declared non-dischargeable under Section 523(a)(6) of the Bankruptcy Code as a debt arising from a “willful and malicious injury.” But the plaintiffs flouted the court's rules of procedure by being uncooperative with discovery requests and allowing their counsel to be inexplicably absent at a pre-trial conference, among other transgressions.
At a hearing on the parties' motions for summary judgment, the bankruptcy court found that because the debtor's requests for admissions had never been answered, the facts set forth by the debtor were admitted as a matter of law. This meant that the plaintiffs were deemed to have admitted they had no evidence of the debtor's state of mind, making it impossible to prove the debtor acted with “willful and malicious” intent. Therefore, the bankruptcy court granted summary judgment to the debtor, finding that the plaintiffs had an “almost total disregard for the rules of procedure” and had engaged in “unabashedly cavalier misconduct.”
On appeal, the plaintiffs argued that the bankruptcy court violated the doctrine of collateral estoppel. Under collateral estoppel, a court may be precluded from relitigating an issue that was previously decided by another court. In order to prove collateral estoppel was applicable in this case under Pennsylvania law, the debtor must have had a full and fair opportunity to actually litigate the issue.
The bankruptcy court found that this requirement wasn't met. The district court said that the bankruptcy court based this on “a finding that the [d]ebtor's failure to appear at the state court trial or answer the [c]omplaint was not motivated by bad faith; the fact that the findings essential to the state court judgment were based only on the [p]laintiff's presentation of evidence, with testimony un-tested by cross-examination; a finding that the [d]ebtor did not appear or answer because his former employer assured him that insurance would cover the claims; a finding that the [d]ebtor did not possess the legal sophistication to know whether the employer's representation should have been relied on; and the fact that the [d]ebtor immediately retained legal counsel when it became apparent to him that his employer's representation was not true.”
Having found that the issue of whether or not the debtor had committed a “willful and malicious injury” has not been actually litigated, the bankruptcy court said it wasn't bound by any of the state court's findings based on collateral estoppel. The district court agreed.
The district court went on to say that even if the issue had been actually litigated, “outrageous” conduct isn't necessarily the same as “willful and malicious” conduct. The court said that Section 523(a)(6) must be “applied very precisely.” In Kawaauhau v. Geiger, 523 U.S. 57 (1998), the Supreme Court held that “debts arising from recklessly or negligently inflicted injuries do not fall within the compass of § 523(a)(6).”
The court said that under Pennsylvania law, “outrageous” conduct can encompass conduct with an “evil motive” or a “reckless mental state.” Therefore, the court said it was not clear whether or not the state court actually found Cunningham's conduct to be “willful and malicious.”
The court also rejected the plaintiffs' arguments regarding the Rooker-Feldman doctrine, which the court said “prevents federal courts other than the Supreme Court from sitting as appellate courts for state court judgments.” The court said this is a jurisdictional doctrine that only applies in “very narrow circumstances,” and that it applies differently to bankruptcy courts because they have the power to discharge state court judgments.
Finally, the court had no problem with the bankruptcy court's treatment of the request for admissions, and how it effectively sank the plaintiffs' case. The court said that while it did not “take great pleasure in the outcome,” the plaintiffs “dug their own hole” with their numerous procedural mistakes.
Stephen G. Bresset of Bresset & Santora, Honesdale, Pa., represented the plaintiffs.
Patrick J. Best of Anders Riegel & Masington LLC, Stroudsburg, Pa., represented the debtor.
To contact the reporter on this story: Stephanie Cumings in Washington at firstname.lastname@example.org
To contact the editor responsible for this story: Jay Horowitz at email@example.com
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