Moreno v. Basl (In re Basl)

In Re: Michael Josef Basl, Debtor.

William Robert Moreno and Sharon Kay Moreno, Plaintiffs, v. Michael Josef Basl, Defendant.

Case No. 17-32341-KLP

Adv. Pro. No. 17-04495-KLP

UNITED STATES BANKRUPTCY COURT EASTERN DISTRICT OF VIRGINIA Richmond Division

April 18, 2018

Chapter 7

MEMORANDUM OPINION

Plaintiffs William Robert Moreno and Sharon Kay Moreno (the "Plaintiffs") bring this action asserting that the debt owed to them by Defendant Michael Josef Basl (the "Defendant"), the debtor in this chapter 7 case, is not dischargeable pursuant to § 523(a)(6) of the Bankruptcy Code, 11 U.S.C. § 523(a)(6).¹ Section 523(a)(6) excepts from a debtor's discharge any debt "for willful and malicious injury by the debtor to another entity or to the property of another entity." The Plaintiffs maintain that the elements of § 523(a)(6) have been proven in litigation already concluded in the Circuit Court of Loudon County, Virginia, and that the doctrine of collateral estoppel requires this Court to find the Plaintiffs' damages nondischargeable as a matter of law. In addition, the Plaintiffs ask the Court to find that anydamages that may be awarded to them in their action for malicious prosecution currently pending in the Circuit Court of Henrico County, Virginia, are also nondischargeable pursuant to § 523(a)(6).

The Court has reviewed the pleadings and considered the parties' oral argument. For the reasons set forth in this Memorandum Opinion, the Court holds that the debt owed to the Plaintiffs by the Defendant based upon the Loudon County, Virginia, litigation is dischargeable and dismisses that portion of the complaint relative to the pending Henrico County, Virginia, litigation.

Jurisdiction

The Court has jurisdiction over this matter under 28 U.S.C §§ 157(a) and 1334(a) and the general order of reference entered by the U.S. District Court for the Eastern District of Virginia on August 15, 1984. This matter is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(I).

Factual and Procedural Background

The Defendant filed a voluntary petition for relief under chapter 7 of the Bankruptcy Code on May 5, 2017, and the Plaintiffs initiated this adversary proceeding by a complaint (the "Complaint") filed on August 10, 2017. The Plaintiffs allege that the Defendant is indebted to them in the amount of $1,415,282.08 (the "Debt"), awarded in connection with prior litigation between the parties in the Circuit Court of Loudon County, Virginia (the "Virginia Action"). In the Virginia Action, the Loudon County CircuitCourt (the "Virginia Court") held a multi-day jury trial at which the Defendant represented himself. On October 27, 2016, at the conclusion of the trial, the Virginia Court entered, pursuant to the jury's verdict, a final order (the "Order") awarding the following damages:

(1) for defamation per se, $75,000 to Plaintiff William Moreno for both presumed and actual damages;

(2) for stalking, $100,000 to Plaintiff William Moreno for compensatory damages and $105,907.08 for costs and legal fees;

(3) for intentional infliction of emotional distress, $200,000 to Plaintiff William Moreno for compensatory damages and $50,000 to Plaintiff Sharon Moreno for compensatory damages;

(4) $625,000 to William Moreno in punitive damages; and

(5) $200,000 to Sharon Moreno in punitive damages.

The Plaintiffs argue that the Order establishes that the Debt is nondischargeable and that the doctrine of collateral estoppel precludes relitigation of that issue. They contend that the elements proven in the Virginia Action are identical to the elements necessary to establish nondischargeability under § 523(a)(6).

The Defendant argues that collateral estoppel does not apply because the elements necessary to establish nondischargeability under § 523(a)(6) are different from the elements litigated in the Virginia Action. More specifically, he maintains that the elements of malice and willfulness,requisites to a finding of nondischargeability under § 523(a)(6), were not litigated in the Virginia Action. In short, the Defendant contends that the Order does not preclusively establish the elements of § 523(a)(6).

On February 13, 2017, this Court conducted a trial at which it heard the argument of the parties and received evidence. The only evidence admitted at the trial was the Order. At the conclusion of the trial, the Court gave both parties the opportunity to file further memoranda supporting their positions. In their memorandum,² the Plaintiffs concede that the portions of the Debt representing the awards of damages for defamation per se and intentional infliction of emotional distress, as well as the related punitive damages, are dischargeable.³ However, they ask the Court to find the $205,907.08 awarded to Plaintiff William Moreno for stalking and $166,666.67 of the $625,000 punitive damages awarded to be nondischargeable.⁴

Discussion

Section 523(a)(6). A primary purpose of the Bankruptcy Code is to give honest debtors a fresh financial start. Local Loan Co. v. Hunt, 292 U.S. 234, 244 (1934). In an effort to balance the benefits of allowing debtors to receive a fresh start with the right of creditors to collect the debts owed to them, the Bankruptcy Code specifies certain situations in which public policy demands that particular debts be nondischargeable. Beckett v. Bundick (In re Bundick), 303 B.R. 90, 104 (Bankr. E.D. Va. 2003).⁵ One of those situations is when a debt has been incurred as a result of the debtor's bad acts. For example, it has long been the policy of bankruptcy courts that "perpetrators of fraud are not allowed to hide behind the skirts of the Bankruptcy Code." Id. at 104 (quoting Foley & Lardner v. Biondo (In re Biondo), 180 F.3d 126, 130 (4th Cir. 1999)).⁶ At issue in this case is § 523(a)(6), which excepts from discharge a debt that has been incurred as a result of a debtor's willful and malicious actions.

The Plaintiffs bear the burden of proving nondischargeability by a preponderance of the evidence. Grogan v. Garner, 498 U.S. 279, 291 (1991).⁷The Fourth Circuit has held that the preponderance of the evidence standard has been met when a court "believe[s] that the existence of a fact is more probable than its nonexistence." United States v. Manigan, 592 F.3d 621, 631 (4th Cir. 2010) (quoting Concrete Pipe & Prods. of Cal., Inc. v. Constr. Laborers Pension Tr. for S. Cal., 508 U.S. 602, 622 (1993)). Chief Judge St. John has noted that

"Preponderance of the evidence" has been defined as "evidence which, when weighed with that opposed to it, has more convincing force and is more probably true and accurate. [When] the evidence appears to be equally balanced, or if it cannot be said upon which side it weighs heavier, then plaintiff has not met his or her burden of proof."

Brickhouse v. Orts (In re Orts), Adv. No. 08-07075-SCS, 2009 WL 903259, at *11 (Bankr. E.D. Va. Feb. 24, 2009) (alterations in original) (quoting Smith v. United States, 726 F.2d 428, 430 (8th Cir. 1984)).

To establish nondischargeability under § 523(a)(6) "a creditor must ultimately prove three elements: '(1) the debtor caused an injury; (2) the debtor's actions were willful; and (3) that the debtor's actions were malicious.'" Ocean Equity Grp., Inc. v. Wooten (In re Wooten), 423 B.R. 108, 128 (Bankr. E.D. Va. 2010) (quoting E.L. Hamm & Assocs., Inc. v. Sparrow (In re Sparrow), 306 B.R. 812, 834 (Bankr. E.D. Va. 2003)).

To establish the element of injury is a fairly straightforward inquiry, but determining the elements of willfulness and malice is less so. Addressing the element of willfulness, the Supreme Court in Kawaauhau v. Geiger, 523 U.S. 57 (1998), held that the willfulness language of § 523(a)(6) encompassesonly acts done with actual intent to cause injury and not merely intentional acts that happen to cause an injury.

The word "willful" in (a)(6) modifies the word "injury," indicating that nondischargeability takes a deliberate or intentional injury, not merely a deliberate or intentional act that leads to injury. Had Congress meant to exempt debts resulting from unintentionally inflicted injuries, it might have described instead "willful acts that cause injury." Or, Congress might have selected an additional word or words, i.e., "reckless" or "negligent," to modify "injury." Moreover, as the Eighth Circuit observed, the (a)(6) formulation triggers in the lawyer's mind the category "intentional torts," as distinguished from negligent or reckless torts. Intentional torts generally require that the actor intend "the consequences of an act," not simply "the act itself."

Id. at 61-62 (emphasis in original) (citing Restatement (Second) of Torts § 8A cmt. a (1964)). For purposes of § 523(a)(6), "willfulness" is defined as an act taken with "substantial certainty [that] harm [would result] or a subjective motive to cause harm." Parsons v. Parks (In re Parks), 91 F. App'x 817, 819 (4th Cir. 2003) (alterations in original) (quoting Miller v. J.D. Abrams Inc. (In re Miller), 156 F.3d 598 (5th Cir. 1998)); Singh v. Sohail (In re Sohail), Adv. No. 08-03059-KRH, 2009 WL 1851247, at *7 (Bankr. E.D. Va. June 25, 2009); see also In re Wooten, 423 B.R. at 129; Haas v. Trammell (In re Trammell), 388 B.R. 182, 187 (Bankr. E.D. Va. 2008) (confirming that this Court has previously adopted the "objective substantial certainty" or "subjective motive" test to satisfy the willfulness requirement); Lewis v. Long (In re Long), 504 B.R. 424, 425 (Bankr. W.D. Va. 2014).

The term "malice" may not mean the same thing in a nondischargeability action as it would in a non-bankruptcy context. Johnson v. Davis (In re Davis), 262 B.R. 663, 670 (Bankr. E.D. Va. 2001). For purposes of § 523(a)(6), a debtor acts with malice when "[the] debtor's injurious act was done deliberately, intentionally and with knowing disregard for [the] plaintiff's rights." Reed v. Owens (In re Owens), 449 B.R. 239, 255 (Bankr. E.D. Va. 2011) (alterations in original) (quoting In re Davis, 262 B.R. at 670-71); see also First Nat'l Bk...