Vazquez v. AAA Blueprint & Digital Reprographics (In re Vazquez)
SUMMARY:
Vazquez v. AAA Blueprint & Digital Reprographics (In re Vazquez), 2013 WL 6571693 (9th Cir. BAP December 13, 2013): The Ninth Circuit Bankruptcy Appellate Panel ("BAP") recently upheld summary judgment in favor of a creditor under Bankruptcy Code Section 523(a)(6), excepting from discharge debts for willful and malicious injury, in which the bankruptcy court applied issue preclusion to a California trial court’s findings of actual fraudulent transfer.
Factual Background
Dennis Adrian Vazquez (the "Debtor") owned a document printing, copying and digital reproduction business known as Alliance Reprographics ("Alliance"). A former employee of AAA Blueprint & Digital Reprographics ("AAA") left AAA and immediately went to work for Alliance, taking with him a confidential customer list that he then used to solicit AAA’s customers. AAA sued the employee and Alliance (but not Vazquez) in state court for misappropriation of trade secrets, conversion and several other causes of action. AAA prevailed upon all causes of action except conversion, and the court awarded approximately $280,000 in compensatory and exemplary damages and attorney’s fees.
In post-judgment settlement discussions, Vazquez stated that he would close Alliance and open a new business across the street if AAA would not accept $100,000 in full satisfaction of the judgment. Shortly thereafter, Vazquez wound down most of the operations and transferred virtually all of the business to a new company, named All Blueprint, Inc. ("All Blueprint"). AAA sued All Blueprint, Vazquez and his live-in girlfriend Melissa Huerta in state court for actual and constructive fraudulent transfers. After trial, the court entered its findings in a minute order, as follows:
Dennis Adrian Vazquez and Melissa Huerta conspired to fraudulently transfer assets from Alliance Reprographics Inc to All Blueprint Inc for the purpose of hindering judgment creditor AAA from collecting its judgment against Alliance.
The court also found, among other findings, that (1) Huerta and Vazquez formed All Blueprint and transferred the assets "for the sole purpose of hindering [AAA’s] efforts to collect its judgment" and (2) "by conducting himself in this manner, ‘Vazquez committed the wrongful act of hindering AAA in trying to collect the judgment.’" Vazquez appealed the second judgment.
Thereafter, Vazquez commenced a chapter 13 bankruptcy case. AAA filed an adversary proceeding to except the second judgment from discharge under Bankruptcy Code Section 523(a)(6). AAA filed a motion for summary judgment, relying upon issue preclusion and the findings in both state court lawsuits. Bankruptcy Judge Catherine E. Bauer granted the motion over the Debtor’s opposition, holding that the state court’s actual fraudulent transfer findings establish that the debt arose from willful and malicious injury.
Reasoning
The BAP reviewed de novo the bankruptcy court’s grant of summary judgment as well as the non-dischargeability of a particular debt as this is a mixed question of law and fact. The BAP reviewed de novo the determination that issue preclusion was available and, upon making that determination, the panel reviewed the bankruptcy court’s decision to apply it under an abuse of discretion standard. Lopez v. Emergency Serv. Restoration, Inc. (In re Lopez), 367 B.R. 99, 103 (9th Cir. 2007).
Bankruptcy Code Section 523(a)(6) excepts from discharge debts "for willful and malicious injury by the debtor to another entity or to the property of another entity…" California’s issue preclusion law requires that:
1) the issue sought to be precluded . . . must be identical to that decided in the 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 being sought must be the same as the party to the former proceeding.
Honkanen v. Hopper (In re Honkanen), 446 B.R. 373, 382 (9th Cir. BAP 2011); Lucido v. Super. Ct., 51 Cal.3d 335, 341 (1990). The court must also determine "whether imposition of issue preclusion in the particular setting would be fair and consistent with sound public policy." Khaligh v. Hadaegh (In re Khaligh), 338 B.R. 817, 824-825 (9th Cir. BAP 2006).
The Debtor argued that the issues decided in the state court were not identical to the elements of section 523(a)(6), which requires that his conduct be both "willful" and "malicious." The BAP disagreed.
With respect to willfulness, the BAP held that a debtor’s conduct is "willful" under section 523(a)(6) "only if he or she actually intended to cause injury or actually believed that injury was substantially certain to occur." See Ormsby v. First Am. Title Co. of Nev. (In re Ormsby), 591 F.3d 1199, 1206 (9th Cir. 2010). The BAP found that AAA alleged in state court that the Debtor actually intended to hinder its efforts to collect, consistent with the elements of California Civil Code Section 3439.04(a)(1) requiring that the debtor acted "[w]ith actual intent to hinder, delay, or defraud" a creditor. Moreover, the state court determined that the Debtor and Huerta transferred the business "for the sole purpose of hindering" AAA’s collection efforts. The BAP agreed with the bankruptcy court’s determination that these findings satisfied the willfulness requirement of section 523(a)(6) as they were "tantamount to a finding that Vazquez intended to harm AAA by transferring" the assets.
Malice is present when the debtor’s conduct "involves (1) a wrongful act, (2) done intentionally, (3) which necessarily causes injury, and (4) is done without just cause or excuse." In re Ormsby, 591 F.3d at 1207. "Malice may be inferred based on the nature of the wrongful act." Id. The BAP found malice based upon the state court’s finding that the Debtor’s conduct was wrongful. As discussed above, the state court found that "by conducting himself in this manner, ‘Vazquez committed the wrongful act of hindering AAA in trying to collect the judgment.’" The BAP further found that wrongfulness "is self-evident given the very nature of Vazquez’s conduct in transferring Alliance’s assets for the purpose of hindering AAA." Finally, the BAP found support for malice in the state court’s determination that the Debtor’s conduct was intentional, commenting that "[t]he intentional nature of Vazquez’s conduct is reflected in the state court’s account of Vazquez conspiring and plotting with Huerta to interfere with AAA’s collection efforts. That the act of hindering AAA’s collection efforts necessarily harmed AAA also is self-evident."
The Debtor argued that he had a just cause or excuse in that he desired to set up Huerta with her own reprographics business independent from Alliance. However, the state court previously rejected this assertion, and the BAP found that it does not constitute a just cause or excuse in light of the Debtor’s specific intent to harm AAA. See In re Sicroff, 401 F.3d 1101, 1107 (9th Cir. 2005) (specific intent to injure negated proffered just cause or excuse); see also Murray v. Bammer (In re Bammer), 131 F.3d 788 (9th Cir. 1997) (debtor’s subjective desire to help mother with financial difficulties was not just cause or excuse for knowing participation in fraud against her creditors).
The Debtor’s final argument was that he was not aware that the fraudulent transfer findings could serve as a basis for a section 523(a)(6) judgment. The panel was perplexed by this, noting that the Debtor was represented by counsel and the findings featured prominently in the complaint and summary judgment pleadings. Although the Debtor raised no public policy concerns against applying issue preclusion, the BAP commented that "the bankruptcy court’s application of issue preclusion here strikes us as a commonplace and appropriate usage of the doctrine."
Commentary
It appears that the panel considers a California state court actual fraudulent transfer judgment to be per se non-dischargeable under section 523(a)(6). It is hard to imagine a judgment under California Civil Code Section 3439.04(a)(1), which requires that a debtor act with "actual intent to hinder, delay, or defraud" a creditor, that does not imply willfulness as construed by the panel. In turn, this necessarily suggests that the debtor "committed the wrongful act of hindering" collection efforts. In fact, the BAP found malice to be "self-evident" by virtue of the Debtor’s conduct in transferring assets for the purpose of hindering collection. Accordingly, the BAP’s decision appears to allow creditors to extract the elements of willfulness and malice as having been decided in any California state court judgment of actual fraudulent transfer.
The BAP focused upon whether the state court judgment satisfied the elements of section 523(a)(6) and gave very little attention to the elements of issue preclusion. The author suggests that the Debtor may have consumed his resources in briefing and arguing his appeal from a related order denying his motion for reconsideration, which was subject to several problems, including his failure to include it in his notice of appeal and to order transcripts.
The BAP’s opinion appears to be in line with at least two courts in other circuits. In In re Kovler, 249 B.R. 238 (Bankr. S.D.N.Y. 2000), corrected, 329 B.R. 17 (2005), the court found (after a relatively terse analysis) that a transfer from the chapter 7 debtor to his wife with intent to hinder, delay or default his creditor supported a judgment of non-dischargeability under Section 523(a)(6). Id. at 261-262. Likewise, in In re Shore, 317 B.R. 536 (10th Cir. BAP (Kan.) 2004), the court applied issue preclusion and ruled that a state court’s findings of "willful conduct and fraud" in awarding punitive damages awarded in a judgment for actual fraudulent transfer under the UFTA supported both willfulness and malice. Id. at 542-544.
This analysis is from the California State Bar Insolvency Section e-newsletter of 1/28/14