Menu    3 ABR 462 
UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF ALASKA


Case No. A93-00571-HAR
In Chapter 7

In re MARIE L. BROWN, fka Marie L. Trucks, fka Marie L. Mills,

Debtor     

ADV PROC NO A93-00571-001-HAR
(BANCAP No. 93-3099)

 

MEMORANDUM DECISION GRANTING SUMMARY JUDGMENT TO PLAINTIFF

ALASKA FINANCIAL SERVICES, INC.,

Plaintiff     

v.

MARIE L. BROWN,

Defendant     



Contents Page
1.  INTRODUCTION462
2.  FACTUAL BACKGROUND463
3.  LEGAL ANALYSIS464
 3.1.  Willful and Malicious Injury Under § 523(a)(6)464
 3.2.  Collateral Estoppel in Bankruptcy465
 3.3.  Were Brown's Actions Willful And Malicious?; Attorney Fees In A State Court Case Tried Under A Federal Statute466
4.  CONCLUSION469

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  TOP   1. INTRODUCTION - This is a dischargeability action alleging willful and malicious injury.

The plaintiff, a collection agency, filed a motion for summary judgment on the grounds that the debtor-defendant is collaterally estopped from denying the dischargeability of a state court's award of attorney fees and costs to the collection agency. The award was made to the collection agency in its successful defense against debtor's suit under the Federal Debt Collection Practices Act. Debtor filed a cross-motion for summary judgment.

  TOP    3 ABR 463 

I hold that the debtor is collaterally estopped from denying that the attorney fee award was for a willful and malicious injury, and will enter summary judgment for the collection agency, Alaska Financial Services, Inc.

  TOP   2. FACTUAL BACKGROUND - Alaska Financial Services, Inc., is a collection agency. It sued the debtor in state court for a number of small claims which had been assigned to it for collection in the total amount of $297.27. The suit was filed under an Alaska state court "small claim" procedure. Marie Brown filed a counter-claim under the Federal Debt Collection Practices Act (FDCPA), 15 USC 1692 et seq., a federal law regulating debt collectors to prevent abusive practices. See, Wright v Financial Service of Norwalk, Inc., 22 F3d 647, 650 (6th Cir 1994). Brown alleged 16 counts of harassment, claiming $1,000 additional damages per count in addition to any actual damages proven.(1)

A summary judgment was granted by the District Court for the State of Alaska (Anchorage Superior Court Judge Peter Michalski sitting as a District Court Judge) on the small collection claim of $297.27, and a trial has held on Brown's FDCPA counterclaim. After hearing evidence by Brown, Judge Michalski, directed a verdict in favor of Alaska Financial.

Alaska Financial moved for attorney fees and costs under 15 USC § 1692k(a)(3), which provides:

    . . . On a finding by the court that an action under this section was brought in bad faith or for the purposes of harassment, the court may award to the defendant, attorney fees reasonable in relation to the work expended and costs.
Alaska Financial's motion for costs and attorney fees alleged bad faith on the part of Brown in bringing the FDCPA action. The motion relied on § 1692k(a)(3), and Crook v Mortenson-Neal, 727 P2d 297, 306 (Alaska 1986), which was an Alaska Civil Rule 82 case (affirming an award of 80% of actual attorney fees, which was over the Rule 82 schedule, where the defendants "insisted on litigating weak and incredible defenses to a highly predictable conclusion").

  TOP    3 ABR 464 

    On April 29, 1993, Judge Michalski entered an order stating:

    The court, having fully considered the plaintiff's, Alaska Financial Services, Inc., Motion, Memorandum, Exhibits, and Affidavit and any opposition thereto, that defendant's, Marie L. Trucks, Counterclaim [sic] Filed In Bad Faith And For An Award of Full Attorney Fees, pursuant to the Fair Debt Collection Practices Act,

    NOW HEREBY ORDERS that where the defendant's allegations were incredible, weak and largely unsupported, Alaska Financial's motion is GRANTED and awards full reasonable attorney fees to Alaska Financial Services. Plaintiff must file appropriate documentation.

In an order dated May 20, 1993, the court awarded $11,000 attorney fees and $95 in costs. The plaintiff had requested $14,000, and was thus awarded about 78½% of the requested attorney fees.

The debtor filed a chapter 7 bankruptcy on August 4, 1993. Alaska Financial filed this adversary proceeding challenging the dischargeability of the state court award of $11,095 under § 523(a)(6) of the Bankruptcy Code.

Alaska Financial filed a motion for summary judgment in this adversary, alleging that Brown is collaterally estopped from challenging the dischargeability of Judge Michalski's judgment. Brown filed a cross-motion, saying no action for dischargeability exists for "bad faith" and, in any event, Judge Michalski did not find that Brown was in bad faith, only that she was not in good faith.

  TOP   3. LEGAL ANALYSIS -

  TOP   3.1. Willful and Malicious Injury Under § 523(a)(6) - -11 USC § 523(a)(6) provides that dischargeability should be denied for a claim arising out of a "willful and malicious injury by the debtor to another entity or to the property of another entity." The leading cases defining this section in the 9th Circuit are In re Cecchini, 780 F2d 1440, 1443 (9th Cir 1986):

    When a wrongful act, such as conversion, done intentionally, necessarily produces harm and is without just cause or excuse, it is "wilful and malicious" even absent proof of a specific intent to injure. . . . ,

  TOP    3 ABR 465  and, In re Littleton, 942 F2d 551, 555 (9th Cir 1991):
    The BAP read "the words 'necessarily produces harm' to mean that the act must be targeted at the creditor, at least in the sense that the act is certain or almost certain to cause financial harm." [citation omitted; emphasis added in the original quote] This interpretation of "necessarily produces harm" is consistent with the standard formulated by the court in Cecchini.

    . . . Under the ruling of the BAP, an act is targeted at the creditor, if the predictable result of debtors' intentional act would almost certainly be harmful to the creditor. It does not mean that the purpose of an intentional act must be to cause harm to a creditor. As set forth in Cecchini, the act must necessarily cause harm to the creditor, but creditor need not show that the debtor acted with an intent to harm the creditor.

§ 523(a)(6) is targeted at tortious types of conduct, not those acts that are simple breaches of contract. In re Riso, 978 F2d 1151, 1154 (9th Cir 1992).

The principal questions in this case are: (a) whether the award of attorney fees against Brown by a state court judge was an award for a "willful and malicious" injury to Alaska Financial and (b) must the state court judgment be accorded collateral estoppel effect by the bankruptcy court.

  TOP   3.2. Collateral Estoppel in Bankruptcy - A bankruptcy court is bound to give collateral estoppel effect, where appropriate, to a state court judgment in a dischargeability action. Grogan v. Garner, 111 SCt 654, 658 n. 11 (1991).

In applying this ruling, a bankruptcy court must look to the law to the state involved regarding the application of the doctrine of collateral estoppel to a state court judgment. 28 USC § 1738 regarding full faith and credit; In re Nourbakhsh, 162 BR 841, 843 (9th Cir BAP 1994); In re Apfel-Wilson, 165 BR 939, 940 (Bankr WD Wash 1994); In re Tapper, 123 BR 594, 601 (Bankr ND Ill 1991), citing Kremer v Chemical Constr. Corp., 456 US 461, 482 (1983). Thus, I must look to the law of Alaska regarding collateral estoppel.

The Supreme Court of Alaska has recently reiterated its position on collateral estoppel in In the Matter of Pacific Marine Insurance Co., _____P2d_____, 1994 WL 195514 (Alaska 1994), which cites   TOP    3 ABR 466  Rapoport v Tesoro Alaska Petroleum Co., 749 P2d 949 (Alaska 1990), and McKean v Municipality of Anchorage, 783 P2d 1169, 1171 (Alaska 1989). The McKean case said at 1171:

    1)  the plea of collateral estoppel must be asserted against a party or one in privity with a party to the first action;

    2)  the issue to be precluded from relitigation by operation of the doctrine must be identical to that decided in the first action;

    3)  the issue in the first action must have been resolved by a final judgment on the merits.

In applying the three prerequisites to collateral estoppel in this dischargeability action, the first and third criteria are satisfied without question. The same parties are involved, Brown and Alaska Financial. There is a final state court judgment.

The only close question in this case is whether the issue decided by Judge Michalski in his fee award (whether there was "bad faith" or "harassment" by Brown) is identical to the issue regarding nondischargeability under 11 USC § 523(a)(6) (whether Brown's conduct was "willful and malicious").

  TOP   3.3. Were Brown's Actions Willful And Malicious?; Attorney Fees In A State Court Case Tried Under A Federal Statute -

15 USC § 1692k(a)(3) is targeted against those consumers who abuse the FDCPA's liberal tools for protecting consumers by filing suit as an improper means of avoiding or harassing legitimate collection efforts.

Senate Report 95-382 for P.L. 95-109, the Consumer Credit Protection Act, provides in its discussion of § 813 (which is 15 USC § 1692k): "Where a court finds that a suit was brought by a consumer in bad faith and for harassment, the court may award reasonable attorney fees to the defendant." 1977 USCCAN 1695, 1977 WL 16047 (Leg.Hist.)

Activities which are done in "bad faith" or for the purposes of "harassment" can result in a "willful and malicious" injury which is nondischargeable under § 523(a)(6). In a case which is very similar to this adversary proceeding between Brown and Alaska Financial, the Bankruptcy Appellate Panel held that a state appellate court award of attorney fees and costs as sanctions for prosecuting frivolous appeals would be given collateral estoppel effect in a § 523(a)(6)   TOP    3 ABR 467  nondischargeability action. In re Zelis, 161 BR 469 (9th Cir BAP 1993). The state appellate court held, variously, that one of the appeals was frivolous and brought for an improper purpose of delay, and with respect to the other, "[t]he Court of Appeals found Zelis's conduct in filing the appeal abusive, frivolous and in bad faith." Id at 471.

The BAP held that the sanctions awarded by the state appellate court were nondischargeable, and the debtor was collaterally estopped from denying dischargeability on § 523(a)(6) grounds. The court said in Zelis at 472-73:

    We have previously held that "willful and malicious," as stated in § 523(a)(6) means an intentional wrongful act which necessarily produces harm and is without just cause or excuse "even absent proof of a specific intent to injure." In re Karlin, 112 B.R. 319, 322 (9th Cir. BAP 1989) aff'd mem., 940 F.2d 1534 (9th Cir.1991) (emphasis supplied) (quoting In re Cecchini, 780 F.2d 1440, 1443 (9th Cir.1986)). The test under § 523(a)(6) is whether: (1) the appellant committed an act which was wrongful and intentional; (2) the appellant's action produced harm; (3) the appellant's action was without just cause or excuse. In re Manser, 99 B.R. 434, 436 (9th Cir. BAP 1989).

    The bankruptcy court found no triable issue of fact regarding the elements of dischargeability and gave collateral estoppel effect to the Court of Appeal's orders against Zelis. The bankruptcy court correctly found that the Papadakises had shown that all three elements of the willful and malicious test were met by the sanction orders. First, Zelis' filing of the appeal established an intentional act which the Court of Appeal found to be abusive and in bad faith. Second, the Court of Appeal found that Zelis' conduct caused harm to the Papadakises by forcing them to expend attorney's fees and costs and causing them to suffer from additional delay. Third, there was no cause or excuse for Zelis' conduct and each purported excuse that Zelis offered was rejected by the Court of Appeal. [footnote omitted]

Brown argues that Judge Michalski's findings were not specific enough to equate them with a "willful and malicious" injury. She argues that some Alaska Supreme Court cases have awarded substantial attorney fees in cases in which there is no finding equivalent to a willful or malicious injury. E.g., Malvo v J.C. Penney, 512 P2d 575, 588 (Alaska 1973 (78% fees; 100% should only be awarded in cases of bad faith litigation).

  TOP    3 ABR 468  This argument fails because, by statutory definition, the attorney award must be for a suit filed in bad faith or for the purposes of harassment. 11 USC § 1692k(a)(3). When an Alaska Court tries a matter using a federal statute as the basis, it must use the federal law or rules regarding attorney fees, instead of Alaska Civil Rule 82. Lyman v State 824 P2d 703, 707 (Alaska 1992) and Cameron v Hughes, 825 P2d 882, 887 (Alaska 1993).

Thus, Judge Michalski was bound to apply 15 USC § 1692k(a)(3) in determining whether or not to award attorney fees. And, his order indicates that the award was based on § 1692k(a)(3), even though Alaska Financial cited Alaska Civil Rule 82 cases in its memorandum in support of fees.

To recover an award under this § 1692k(a)(3), a defendant debt collector must show more than just the dismissal of the action. Mendez v Apple Bank for Savings, 541 NYS2d 920, 924 (NY City Civ Ct 1989). Judge Michalski must have determined that either Brown filed her suit against Alaska Financial in bad faith or that it was filed to harass Alaska Financial. He specifically found that the allegations in the complaint were "incredible, weak and largely unsupported."

I have reviewed the cases cited by Brown in support of her argument that collateral estoppel should not apply to this case. None of them persuade me to adopt Brown's position. The cases are Wrenn v American Cast Iron Pipe Co., 791 F2d 1542 (11th Cir 1986) (where attorney fees were denied for a frivolous appeal, but the court noted that a frivolous appeal did not necessarily denote bad faith), In re Corbly, 61 BR 851, 856 (Bankr DSD 1986) (a contempt case in which the act alleged in the complaint, a zoning violation, was not itself grounds for a § 523(a)(6) complaint, and the contempt was collateral), and In re Allen, 75 BR 742 (Bankr CD Cal 1987) (indicating that a § 523(a)(6) action should not be used in a garden variety breach of contract action).

I have found several other cases in my own research which are more favorable to Brown than Zelis. In re Apfel-Wilson, 165 BR at 941 held that collateral estoppel will not bar discharge where it cannot be said with certainty that the state court judgment was based on the conduct proscribed in 11 USC § 523(a)(2)(A), another nondischargeability section.

  TOP    3 ABR 469  See, also, Norrell Health Care, Inc. v Clayton (In re Clayton), _____ BR _____, 1994 WL 288458 at p*7-8 (Bankr ND Cal 06/28/94), involving an arbitration award which was confirmed by a U.S. District Court judgment. The bankruptcy court refused to grant collateral estoppel effect to the arbitrator's award because it was based on a Georgia statute which assessed liability on various grounds, some of which could be considered "willful and malicious" activity, but others were more in the nature of lack of care.

Brown's case is distinguishable from both Apfel-Wilson and Clayton, given the narrow grounds for awarding attorney fees and costs under § 1692k(a)(3).

Brown argues that her state court FDCPA action was brought in good faith. She claims that Alaska Financial had a phone log showing a number of harassing calls by Alaska Financial to her, but that she was not able to get this into evidence due to a change of testimony by one of the collection agency's employees. Brown argues that Judge Michalski's award of fees was erroneous since she had filed her claim in good faith.

The purpose of collateral estoppel, however, is to conserve judicial resources and avoid relitigating these issues once they have been adequately adjudicated by a state court. In re Graham, 131 BR 275, 280 (ED Pa 1991). Even if I see merit in Brown's contentions, it is not my prerogative to revisit these settled matters. A state judge has ruled and I am bound.

  TOP   4. CONCLUSION - I must give collateral estoppel effect to Judge Michalski's award of fees and costs. The facts of this case are very close to those in the Zelis case in which the BAP approved a bankruptcy judge's ruling that fees awarded by a state court for frivolous, bad faith, or vexatious litigation are nondischargeable. Therefore, I find that I must give the summary judgment to plaintiff, Alaska Financial Services, Inc.

    DATED: July 13, 1994
                HERBERT A. ROSS
                U.S. Bankruptcy Judge

1.   TOP    3 ABR 463  But, see, Wright v Financial Service of Norwalk which held that the $1,000 of additional damages is "per proceeding" and not "per violation."