Lockerby v. Sierra ( 2008 )

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
GLENN LOCKERBY,  No. 06-15928
Plaintiff-Appellee,
v.  D.C. No.
CV-03-00578-CKJ
ALEXANDER L. SIERRA,
OPINION
Defendant-Appellant.

Appeal from the United States District Court
for the District of Arizona
Cindy K. Jorgenson, District Judge, Presiding
Argued and Submitted
March 10, 2008—Phoenix, Arizona
Filed August 7, 2008
Before: Michael Daly Hawkins, Sidney R. Thomas, and
Richard R. Clifton, Circuit Judges.
Opinion by Judge Hawkins
10021
10024 LOCKERBY v. SIERRA
COUNSEL
Alexander L. Sierra, Pro Se, Tucson, Arizona, for the
defendant-appellant.
Walter F. Wood, Walter F. Wood, Ltd., Tucson, Arizona, for
the plaintiff-appellee.
OPINION
HAWKINS, Circuit Judge:
Sierra appeals the district court’s order and judgment
affirming the bankruptcy court’s determination that Locker-
by’s breach of contract claim against Sierra was non-
dischargeable under 11 U.S.C. § 523(a)(6). We hold that an
intentional breach of contract cannot give rise to non-
dischargeability under § 523(a)(6) unless it is accompanied by
conduct that constitutes a tort under state law.
FACTUAL AND PROCEDURAL HISTORY
Sierra was Lockerby’s attorney in a previous matter. When
Lockerby sued Sierra for malpractice, the parties entered into
LOCKERBY v. SIERRA 10025
a settlement agreement, in which Sierra assigned to Lockerby
50% of the attorney’s fees from the proceeds of four of Sier-
ra’s then-pending personal injury cases. Concluding for him-
self that Lockerby did not have a legitimate malpractice
action, Sierra decided to breach the settlement agreement.
After Sierra filed a Chapter 7 Petition, Lockerby filed a com-
plaint seeking to except his pre-petition claim for the breach
of the settlement agreement from discharge under 11 U.S.C.
§ 523(a)(4) and (6).
The bankruptcy court concluded the claim failed under
§ 523(a)(4)1 because the parties were not in a fiduciary rela-
tionship with respect to the settlement agreement, but also
concluded that the debt was nondischargeable as arising from
“willful and malicious injury” under § 523(a)(6) because
Sierra possessed the “subjective intent of harming Lockerby.”
Relying on the bankruptcy court’s finding that Sierra’s con-
duct constituted intentional harm “without any legitimate
cause,” the district court affirmed. Citing Petralia v. Jercich
(In re Jercich), 238 F.3d 1202, 1205 (9th Cir. 2001), the dis-
trict court expressly concluded that tortious conduct was not
required for a claim under § 523(a)(6). Sierra timely appealed.
STANDARD OF REVIEW
We “review the bankruptcy court’s conclusions of law de
novo and its factual findings for clear error.” Carillo v. Su (In
re Su), 290 F.3d 1140, 1142 (9th Cir. 2002). “Whether a claim
is nondischargeable presents mixed issues of law and fact and
is reviewed de novo.” Id.
1
Section 523(a)(4) renders nondischargeable debt for fraud while acting
in a fiduciary capacity.
10026 LOCKERBY v. SIERRA
DISCUSSION
1. Tortious Conduct Requirement
[1] Debtors who file for bankruptcy under Chapter 7 are
normally entitled to discharge unsecured debts. Certain types
of debt may not be discharged, including any debt “for willful
and malicious injury by the debtor to another entity.” 11
U.S.C. § 523(a)(6).
[2] We begin from the proposition that tortious conduct is
a required element for a finding of nondischargeability under
§ 523(a)(6). Jercich, 238 F.3d at 1205 (“[a]n intentional
breach of contract is excepted from discharge under
§ 523(a)(6) only when it is accompanied by malicious and
willful tortious conduct.”) (emphasis in Jercich). The Jercich
court undertook a two-part inquiry to determine whether the
breach of contract rendered the debt excepted from discharge,
first examining whether the debtor’s conduct was “tortious,”
and then asking whether the debtor’s conduct was both “will-
ful” and “malicious.” See id. at 1206-09.
[3] Jercich holds that liability for a breach of contract need
not be wholly independent from liability for the tort in order
for the tortious conduct to give rise to nondischargeability
under § 523(a)(6). Id. at 1206. Jercich rejects a definition of
tortious conduct that would permit a finding of nondischar-
geability under § 523(a)(6) only “if the conduct at issue would
be tortious even if a contract between the parties did not
exist.” Id. at 1204. But far from doing away with the tortious
conduct requirement, Jercich affirms it. Id. at 1206 (“We . . .
hold that to be excepted from discharge under § 523(a)(6), a
breach of contract must be accompanied by some form of
‘tortious conduct’ that gives rise to ‘willful and malicious inju-
ry.’ ”).2
2
Several other cases confirm that tortious conduct is a required element
for a finding of willful and malicious conduct. See, e.g., Peklar v. Ikerd
LOCKERBY v. SIERRA 10027
The Supreme Court’s reasoning in Kawaauhau v. Geiger
also appears to mandate a tortious conduct requirement. 523
U.S. 57, 62 (1998). Although the holding there was limited to
a determination that only intentional torts, rather than negli-
gent or reckless acts, can constitute willful and malicious
injury, the Court affirmed the Eighth Circuit’s holding that
“523(a)(6)’s exemption from discharge . . . is confined to
debts ‘based on what the law has for generations called an
intentional tort.’ ” Id. at 60 (citing Geiger v. Kawaauhau (In
re Geiger), 113 F.3d 848, 852 (8th Cir. 1997) (en banc)). The
Supreme Court noted that “[i]ntentional torts generally
require that the actor intend ‘the consequences of an act,’ not
simply ‘the act itself,’ ” id. at 61-62 (quoting Restatement
(Second) of Torts § 8A, cmt. a, at 15 (1964) (emphasis in Gei-
ger)), and then rejected the expansion of § 523(a)(6) to “a
wide range of situations in which an act is intentional, but
injury is unintended.” Id. at 62. The Court then specifically
rejected the notion that a “knowing breach of contract” could
trigger exception from discharge under § 523(a)(6). Id.
Something more than a knowing breach of contract is
required before conduct comes within the ambit of
§ 523(a)(6), and Jercich defined that “something more” as
tortious conduct.
(In re Peklar), 260 F.3d 1035, 1038 (9th Cir. 2001) (citing bankruptcy
cases that hold § 523(a)(6) is limited to intentional torts); Del Bino v. Bai-
ley (In re Bailey), 197 F.3d 997, 1001-02 (9th Cir. 1999) (considering
whether act constitutes tort of conversion in determining nondischargea-
bility under § 523(a)(6)); Snoke v. Riso (In re Riso), 978 F.2d 1151, 1154
(9th Cir. 1992) (“It is well settled that a simple breach of contract is not
the type of injury addressed by § 523(a)(6)”) (citing bankruptcy case hold-
ing that “debts that are excepted from discharge under § 523(a)(6) relate
solely to tortious liabilities”)). Other bankruptcy courts within this Circuit
have also held that intentional breaches of contract cannot give rise to dis-
chargeability under § 523(a)(6). See, e.g., Donaldson v. Hayes (In re
Hayes), 315 B.R. 579, 590 (Bankr. C.D. Cal. 2004) (Section 523(a)(6)
“applies only to intentional torts . . . when an intentional breach of contract
is accompanied by tortious conduct which results in willful and malicious
injury, the resulting debt is excepted from discharge under § 523(a)(6)”).
10028 LOCKERBY v. SIERRA
2. Definition of Tortious Conduct
[4] Contrary to Lockerby’s argument, conduct is not tor-
tious under § 523(a)(6) simply because injury is intended or
“substantially likely to occur,” but rather is only tortious if it
constitutes a tort under state law. See Jercich, 238 F.3d at
1206 (“To determine whether Jercich’s conduct was tortious,
we look to California state law.”); Bailey, 197 F.3d at 1000
(“While bankruptcy law governs whether a claim is nondis-
chargeable under § 523(a)(6), this court looks to state law to
determine whether an act falls within the tort of conversion.”).3
[5] This approach is consistent with basic principles of tort
and contract law. Historically, injuries resulting from
breaches of contract are treated very differently from injuries
resulting from torts. In contract law, “[t]he motive for the
breach commonly is immaterial in an action on the contract.”
Globe Refining Co. v. Landa Cotton Oil Co., 190 U.S. 540,
547 (1903) (Holmes, J.). The concept of “efficient breach” is
built into our system of contracts, with the understanding that
people will sometimes intentionally break their contracts for
no other reason than that it benefits them financially. The def-
inition of intent to injure as the commission of an act “sub-
stantially certain” to cause harm was born from tort
principles, not contract law principles. Restatement (Second)
3
See also Hayes, 315 B.R. at 590 (“Whether conduct is tortious is deter-
mined by state law.”); Communications Workers of America v. Allen (In
re Allen), 75 B.R. 742, 746 (Bankr. C.D. Cal. 1987) (“Neither the legisla-
tive history nor case precedent justify expanding [§ 523(a)(6)] to include
garden variety breaches of contract . . . . A foreseeable injury . . . may
have resulted from Debtor’s conduct, but it is not ‘malicious’ in the sense
that it warrants exception from discharge.”). Although Banks v. Gill Dist.
Ctrs. (In re Banks) upholds a finding of nondischargeability for breach of
a settlement agreement, the case deals only with the “intent to injure”
requirement, and does not discuss whether the conduct meets the “tortious
conduct” requirement. 263 F.3d 862, 869 (9th Cir. 2001). However, the
Banks court also recognizes that tortious conduct is required, and cites Jer-
cich as holding that a nondischargeability finding is appropriate where
conduct “rose to the level of tort.” Id. at 869 n.6.
LOCKERBY v. SIERRA 10029
of Torts, § 8A, cmt. b (1965) (“If the actor knows that the
consequences are certain, or substantially certain, to result
from his act, and still goes ahead, he is treated by the law as
if he had in fact desired to produce the result.”).
The Supreme Court’s reasoning in Geiger also supports this
conclusion. 523 U.S. at 62. That the Supreme Court in Geiger
assumed that § 523(a)(6) encompassed only intentional torts,
not intentional breaches of contract, strongly suggests the
Court would not approve of a definition of “tortious conduct”
that would include intentional breaches of contract whenever
it is substantially certain that the breach will cause injury.
[6] Conflating tortious conduct with intent to injure also
conflicts with core principles of bankruptcy law and its under-
lying legislative scheme. A fundamental policy of bankruptcy
law is to “relieve the honest debtor from the weight of oppres-
sive indebtedness, and permit him to start afresh free from the
obligations and responsibilities consequent upon business
misfortunes.” Local Loan Co. v. Hunt, 292 U.S. 234, 244
(1934) (citation omitted). Expanding the scope of § 523(a)(6)
to include contracts that are intentionally breached whenever
it is substantially certain that injury will occur would severely
circumscribe the ability of debtors to “start afresh.”
[7] Such an interpretation would conflict not only with the
“fresh start” policy at the heart of the Bankruptcy Code, but
also with the statutory scheme itself. The Bankruptcy Code
expressly permits intentional breaches of contract that are
substantially certain to result in injury. Under 11 U.S.C.
§ 365(a), bankruptcy trustees are permitted to reject executory
contracts and unexpired leases that do not produce a benefit
for the debtor’s estate. Section 365(g) expressly refers to this
rejection as a breach. Courts must interpret various sections
of a statute as consistent with one another in order to comport
with legislative purpose. See Kokoszka v. Belford, 417 U.S.
642, 650 (1974). Since the Code expressly permits intentional
breaches of contract (making no qualifications with respect to
10030 LOCKERBY v. SIERRA
the motive of the breaching party), it would be inconsistent to
interpret § 523(a)(6) to render nondischargeable debts stem-
ming from intentional breaches substantially certain to cause
injury.4
3. Tortious Conduct Under Arizona Law
Having determined that state-specific tortious conduct is
required under § 523(a)(6), we can only affirm the district
court if Sierra engaged in conduct that would constitute a tort
under Arizona law. See Jercich, 238 F.3d at 1206; Bailey, 197
F.3d at 1000.
In Jercich, the court held that the breach of contract vio-
lated California law because, in California, tort recovery was
permitted when “in addition to the breach of the covenant [of
good faith and fair dealing] a defendant’s conduct violates a
fundamental public policy of the state.” 238 F.3d at 1206. At
issue was a state court judgment awarding punitive damages
for the nonpayment of employee wages despite ability to pay.
Id. at 1204. The state trial court had concluded that this inten-
tional nonpayment was “willful and deliberate” and “consti-
tuted substantial oppression” under California law. Id. The
state trial court also emphasized California courts’ strong pol-
icy regarding employers’ obligation to pay their employees.
Id. at 1206-07. The Jercich court based its finding of “tortious
conduct” on the state court findings of oppression and the
public policy violation, finding that the conduct was tortious
under state law. Id. The Jercich court also emphasized that
“[w]ages are not ordinary debts.” Id. at 1207.
[8] The conduct at issue here involves an “ordinary debt,”
4
While an intentional breach of contract followed by a bankruptcy filing
may strike us as unfair, bankruptcy law already wards against system-
gaming, for example, by rendering non-dischargeable purchases for “luxu-
ry” items made within ninety days of bankruptcy filing. 11 U.S.C.
§ 523(a)(2)(C)(i)(I).
LOCKERBY v. SIERRA 10031
and the conduct would not be tortious under Arizona law.
Sierra decided not to pay Lockerby, thereby breaching the set-
tlement agreement; in doing so, he knew that this action
would injure Lockerby. Lockerby does not even allege that
Sierra engaged in tortious conduct, instead asserting, “[w]hile
a simple breach of contract may not be the basis for an excep-
tion to discharge, absent more, an intentional breach of con-
tract provides the more that is necessary when it is
accompanied with knowledge that a person is bound by an
agreement and without just cause chooses to ignore it with
consequent harm to the [other] party.”
[9] However, there is no indication that lack of just cause
alone renders a breach of contract tortious under the law of
Arizona (or any state, for that matter). Again, parties often
breach contracts simply because it is to their financial benefit.
Such a reason may not be “just,” but that does not render it
tortious. Sierra’s breach of contract would not give rise to a
tort action under Arizona law, and it is not “willful and mali-
cious” under § 523(a)(6).5
5
Lockerby does not allege any specific tort, such as a breach of good
faith and fair dealing, but the breach would not constitute this tort under
Arizona law in any event. In Arizona, “no tort claim for breach of good
faith and fair dealing is cognizable . . . outside of the insurance context
unless it involves a violation of public policy.” Nelson v. Phoenix Resort
Corp., 888 P.2d 1375, 1383 (Ariz. Ct. App. 1994). No violation of public
policy has been alleged here. Arizona law also constrains tort recovery for
breach of good faith and fair dealing to situations in which “there is a ‘spe-
cial relationship arising from elements of public interest, adhesion, and
fiduciary responsibility.’ ” Enyart v. Transamerica Ins. Co., 985 P.2d 556,
561 (Ariz. Ct. App. 1998) (citing Burkons v. Ticor Title Ins. Co. of Cal.,
813 P.2d 710, 720 (Ariz. 1991)). These “special relationships” include
“those undertaken for something more than or other than commercial
advantage, such as the procurement of service, professional help, security,
or other intangibles.” Id. Although Sierra was Lockerby’s lawyer, the par-
ties did not enter the settlement agreement in a lawyer-client relationship.
The bankruptcy court also concluded that the settlement agreement was
insufficient to create a fiduciary relationship within the meaning of
§ 523(a)(4). Accordingly, no special relationship existed that would give
10032 LOCKERBY v. SIERRA
CONCLUSION
A breach of contract is not “willful and malicious conduct”
under § 523(a)(6) unless accompanied by conduct that would
give rise to a tort action under state law. We REVERSE the
district court’s decision, VACATE the judgment of the Bank-
ruptcy Court, and REMAND for further proceedings. Each
party shall bear its own costs on appeal.
rise to a tort claim for a breach of the covenant of good faith and fair
dealing—even if such a breach were alleged. Lockerby also does not
allege that Sierra’s conduct amounts to the tort of conversion, and, in any
event, the conduct would not constitute conversion under Arizona law.
“[A]n action for conversion will not lie for money that is simply a debt.”
Universal Mktg. and Ent., Inc. v. Bank One of Arizona, 53 P.3d 191, 195
(Ariz. Ct. App. 2002). If the money that Sierra owed Lockerby was the
proceeds of the sale of an item in which Lockerby held a possessory inter-
est, a conversion action would lie. See id. However, Lockerby has not
alleged that the settlement agreement gives him a possessory interest in
the proceeds of the four cases specified in the agreement.