Ninth Circuit (“BAP”) has affirmed a judgment excepting debts from discharge under 11 U.S.C. § 523(a)(6) based upon the preclusive effect of a Nevada state court judgment for abuse of process, nuisance, and oppression

June 13, 2013

Dear constituency list members of the Insolvency Law Committee, the following is a recent case update:

Summary

The U.S. Bankruptcy Appellate Panel of the Ninth Circuit (“BAP”) has affirmed a judgment excepting debts from discharge under 11 U.S.C. § 523(a)(6) based upon the preclusive effect of a Nevada state court judgment for abuse of process, nuisance, and oppression. Black v. Bonnie Springs Family Ltd. P’ship (In re Black), Case Nos. 12-1122-DJuKi and 12-1124-DJuKi (related appeals)(9th Cir. BAP Feb. 11, 2013). To read the full decision, click (Black) http://cdn.ca9.uscourts.gov/datastore/bap/2013/02/12/Black12-1122.pdf

Facts and Procedural Background

Debtors and their corporation entered into an agreement to purchase certain real property from Creditor for residential development. Although the parties were still negotiating and escrow had not closed, Debtors took several steps to force Creditor to lower the purchase price: (i) although they did not own the property, Debtors attempted to sell it; (ii) Debtors filed a complaint with the Nevada County Commissioner requesting a health and safety inspection of Creditor’s nearby property (unrelated to the property subject to the agreement); and (iii) Debtors sued Creditor in state court.

Instead of lowering the purchase price, Creditor filed a cross-complaint in the state court litigation for abuse of process and nuisance. Creditor won summary judgment on the claims in Debtors’ complaint and prevailed on its cross-complaint. A jury awarded Creditor $1,250,000 against Debtors for abuse of process, $350,000 for nuisance, and $2,275,000 in punitive damages based upon a finding of “oppression.” The jury found that the Debtors filed their state court litigation and their complaint with the Nevada County Commissioner for the purpose of intimidating Creditor into lowering the sale price.

Debtors filed separate chapter 7 bankruptcy petitions and attempted to discharge the state court judgment. Creditor filed an adversary proceeding to except its judgment from discharge, asserting that the judgment was based on findings that Debtors engaged in harassing conduct that constituted willful and malicious injury within the meaning of Bankruptcy Code section 523(a)(6). The bankruptcy court agreed and granted summary judgment in Creditor’s favor in the adversary proceeding.

Holding and Analysis

On appeal, Debtors argued that, contrary to the bankruptcy court’s ruling, the ‘willfulness’ required to find abuse of abuse and nuisance claims under Nevada law is different from the ‘willfulness’ required under 11 U.S.C. § 523(a)(6). Section 523(a)(6) excerpts from discharge those debts arising from “willful and malicious” injury by a debtor to another person. For an injury to be willful, the debtor must have “a subjective motive to inflict injury or (a subjective belief) that injury was substantially certain to occur as a result of his [or her] conduct.” Petralia v. Jercich (In re Jercich), 238 F.3d 1202, 1208 (9th Cir. 2001). Under Nevada law, abuse of process requires a showing of an ulterior purpose by the defendants other than resolving a legal dispute and a willful act in the use of the legal process not proper in the regular conduct of business. LaMantia v. Redisi, 38 P.3d 877, 879 (Nev. 2002).
Upon application of the relevant case law, the BAP concluded that Debtors’ actions both before and after filing the complaint with the county commissioner constituted attempts to strong-arm Creditor into negotiating a lower purchase price and were intended to injure Creditor by abusing process. The BAP further concluded that the jury’s finding that Debtors acted with oppression − specifically, that Debtors subjected Creditor to cruel and unjust hardship − also supported the conclusion that Debtors held the subjective intent to injure Creditor.
Reasoning that nuisance under Nevada law is an intentional interference with the use and enjoyment of land that is both substantial and unreasonable, the BAP also concluded that willfulness under section 523(a)(6) is similar to the willfulness required by a nuisance claim. The BAP determined that when coupled with the finding of oppression, Debtors specifically directed their conduct to curtail Creditor’s use and enjoyment of its land. Ultimately, the BAP held that the state court judgment had preclusive effect and affirmed the bankruptcy court’s grant of summary judgment in favor of the Creditor.

AUTHOR’S COMMENTARY

Appeal courts will continue to scrutinize creditor efforts use state court judgments for preclusive effect in nondischargeability proceedings. This case illustrates that even with an award of punitive damages, it is often a complex and uncertain analysis. Parties should bear this is mind when litigating state court findings.

These materials were prepared by Tom Phinney (tom@parkinsonphinney.com), of Parkinson Phinney, in Sacramento, California, with editorial contributions from ILC member Everett Green, Trial Attorney for the United States Department of Justice representing the United States Trustee for Region 16. Mr. Phinney is Co-Chair of the Insolvency Law Committee.

Thank you for your continued support of the Committee.

Best regards,

Insolvency Law Committee

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