In re: Paul Newman v.

By order of the Bankruptcy Appellate Panel, the precedential effect
of this decision is limited to the case and parties pursuant to 6th
Cir. BAP LBR 8013-1(b). See also 6th Cir. BAP LBR 8010-1(c).
File Name: 08b0004n.06
BANKRUPTCY APPELLATE PANEL OF THE SIXTH CIRCUIT
In re: PAUL M. NEWMAN, )
Debtor. )
______________________________________ )
)
EILEEN M. OLMSTEAD, )
)
Plaintiff-Appellant, )
) No. 07-8050
)
v. )
)
PAUL M. NEWMAN, )
)
Defendant-Appellee. )
)
______________________________________ )
Appeal from the United States Bankruptcy Court
for the Middle District of Tennessee, at Nashville.
No. 3:05-14139, 3:06-0181A.
Argued: February 5, 2008
Decided and Filed: March 28, 2008
Before: FULTON, RHODES, and SHEA-STONUM, Bankruptcy Appellate Panel Judges.
____________________
COUNSEL
ARGUED: James D. R. Roberts, Jr., ROBERTS & LAYMAN, Nashville, Tennessee, for Appellant.
Steven L. Lefkovitz, LEFKOVITZ & LEFKOVITZ, Nashville, Tennessee, for Appellee. ON
BRIEF: James D. R. Roberts, Jr., Janet L. Layman, ROBERTS & LAYMAN, Nashville, Tennessee,
for Appellant. Steven L. Lefkovitz, LEFKOVITZ & LEFKOVITZ, Nashville, Tennessee, for
Appellee.
____________________
OPINION
____________________
MARILYN SHEA-STONUM, Bankruptcy Appellate Panel Judge. Eileen Olmstead
(“Olmstead”) appeals from an order of the bankruptcy court finding that a debt owed to her by her
former employer, Paul Newman (the “Debtor”), is not excepted from discharge pursuant to 11 U.S.C.
§ 523(a)(6). Specifically, Olmstead challenges the bankruptcy court’s finding that the Debtor’s
failure to pay accrued vacation benefits to her was not malicious. For the reasons stated below, we
AFFIRM the bankruptcy court’s decision.
I. ISSUES ON APPEAL
The issue before the Panel is whether the bankruptcy court’s finding that the Debtor’s conduct
was not malicious is clearly erroneous.
II. JURISDICTION AND STANDARD OF REVIEW
The Bankruptcy Appellate Panel of the Sixth Circuit has jurisdiction to decide this appeal. The
United States District Court for the Middle District of Tennessee has authorized appeals to the Panel,
and a final order of the bankruptcy court may be appealed as of right pursuant to 28 U.S.C.
§ 158(a)(1). For purposes of appeal, a final order “ends the litigation on the merits and leaves nothing
for the court to do but execute the judgment.” Midland Asphalt Corp. v. United States, 489 U.S. 794,
798, 109 S. Ct. 1494, 1497 (1989) (citations omitted). “A bankruptcy court’s judgment determining
dischargeability is a final and appealable order.” Cash Am. Fin. Servs., Inc. v. Fox (In re Fox), 370
B.R. 104, 109 (B.A.P. 6th Cir. 2007) (quoting Hertzel v. Educ. Credit Mgmt. Corp. (In re Hertzel),
329 B.R. 221, 224-25 (B.A.P. 6th Cir. 2005)).
Determinations of dischargeability under 11 U.S.C. § 523 are conclusions of law reviewed
de novo. In re Fox, 370 B.R. at 109 (citing Bailey v. Bailey (In re Bailey), 254 B.R. 901, 903 (B.A.P.
6th Cir. 2000)). De novo review requires the “appellate court [to determine] the law independently
of the trial court’s determination.” Id. (quoting O’Brien v. Ravenswood Apartments, Ltd. (In re
Ravenswood Apartments, Ltd.), 338 B.R. 307, 310 (B.A.P. 6th Cir. 2006)).
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However, “[t]he factual findings underlying the bankruptcy court’s dischargeability ruling are
upheld on appeal unless they are clearly erroneous.” Id. (citing In re Hertzel, 329 B.R. at 225 and Van
Aken v. Van Aken (In re Van Aken), 320 B.R. 620, 622 (B.A.P. 6th Cir. 2005) (dischargeability
determinations present mixed questions of law and fact; the bankruptcy court’s conclusions of law
are reviewed de novo, while findings of fact are reviewed for clear error)). A bankruptcy court’s
findings of fact should not be disturbed simply because another trier of fact might construe the facts
differently or reach a different conclusion. See Andersen v. City of Bessemer City, N.C., 470 U.S.
564, 574 (1985). A factual determination should be upheld unless “although there is evidence to
support it, the reviewing court on the entire evidence is left with the definite and firm conviction that
a mistake has been committed.” In re Bailey, 254 B.R. at 903.
III. FACTS
The Debtor owned and operated an animal hospital in California and Olmstead began working
for the Debtor at the animal hospital in 1984. (Apx. at 4, 13.) In February 2001, Olmstead was paid
$250 per day and had accrued 23.66 unused vacation days. (Apx. at 273.) The Debtor’s vacation
policy required employees to use their vacation time and did not allow employees to receive payment
in lieu of taking vacation. (Apx. at 192.)
In February 2001, pursuant to a written agreement (the “Sale Contract”), Debtor sold
substantially all of the assets of the animal hospital to Dr. Makar and Dr. Guirgis (collectively, the
“Buyer”). (Apx. at 238.) Paragraph 18 of the Sale Contract gave the Buyer the option of re-hiring
any employees of the Debtor who were terminated as a result of the sale. (See Apx. at 98.) However,
paragraph 18 of the “Final Draft” of the Sale Contract required the Buyer to be responsible for
accrued benefits. (Apx. at 98.) The Debtor testified that he negotiated for the Buyer’s assuming
responsibility for all employee benefits in exchange for a reduced sale price for the business (Apx.
at 191 - “I gave money to Dr. Makar to disburse to my employees over the following year as they took
their vacation.”).
The sale closed on or about February 21, 2001 and Olmstead was terminated as an employee
of the Debtor. (Apx. at 116, 228, 238.) It is undisputed that Olmstead was rehired immediately by
the Buyer. At some point following the sale, Olmstead became concerned about her vacation benefits
and she inquired of the Debtor. (Apx. at 121.) The Debtor suggested she speak with the Buyer
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because “Dr. Makar had agreed, by contract, to assume all the accrued benefits so that employees
could take their vacations that they had accrued and get paid for them, instead of receiving payment
in lieu of vacation.” (Apx. at 121, 185.) When the Buyer refused to pay her for the vacation days,
Olmstead, at the Debtor’s suggestion, filed a complaint with the California Labor Commissioner (the
“Commissioner”). (Apx. at 121-24.)
The Commissioner held a preliminary hearing on the complaint in July 2001. (Apx. at 125.)
The Commissioner stayed the matter because there was pending litigation between the Debtor and
the Buyer and because Olmstead was employed by the Buyer. (Apx. at 128.) In October 2002, the
Debtor wrote a letter to the Commissioner indicating that there was no pending litigation over the
responsibility for employee benefits. (Apx. at 244.) In March 2003, for health reasons, Olmstead
terminated her employment with the Buyer. (Apx. at 139.) She again spoke with the Buyer about
being paid for unpaid vacation days and he suggested she take the matter to the Commissioner. (Apx.
at 140.) Olmstead sent the Debtor an email informing him that she had terminated her employment
with the Buyer and that she was going back to the Commissioner regarding the unpaid vacation days.
(Apx. at 139-40.)
The Commissioner re-opened Olmstead’s case and scheduled a hearing. The hearing was held
on December 12, 2003. (Apx. at 271.) A representative of the Buyer attended that hearing. (Apx. at
271.) Although the Debtor did not attend the hearing, he had sent a letter to the Commissioner
attaching an affidavit regarding the facts of the case and copies of the two contracts associated with
the sale of the hospital. (Apx. at 273.)
The Commissioner rendered his decision on December 15, 2003, which was mailed to
Olmstead on December 23, 2003. (Apx. at 271-77.) In the decision, the Commissioner found that
pursuant to § 202 of the California Labor Code (the “Labor Code”), the Debtor was responsible for
paying “all wages due at the time of termination,” which the Commissioner calculated by multiplying
Olmstead’s 23.66 days of unused vacation at the time of her termination by the Debtor by her $250.00
per day pay rate and adding interest. (Apx. at 271-75.) The Commissioner also awarded penalties
pursuant to Labor Code § 203 for “willful” failure to pay wages. (Apx. at 274.) In doing so, the
Commissioner specifically noted that “the term ‘willful’ as used in Labor Code § 203, does not
require malice. (Apx. at 274.) It requires only that “the employer knew or should have known of the
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duty to act and volitionally failed to perform the act.” (Apx. at 274.) The Commissioner further noted
that the Debtor did not appear at the hearing to present a “good faith argument.” (Apx. at 274.) In
total, the Commissioner assessed liability for $13,914.12 against the Debtor. (Apx. at 268, 271-75.)
Olmstead sent an email to the Debtor on December 26, 2003, informing him of the
Commissioner’s decision. (Apx. at 255-56.) The Debtor responded by email later that day. He told
Olmstead that he would not “pay for something that Makar is responsible for” and that he planned
to appeal the decision. (Apx. at 255.) He also told Olmstead that he had moved from California
“because I am going broke,” indicated that he could not afford to pay her and outlined certain details
of his poor financial situation, including that he had consulted a bankruptcy attorney. (Apx. at 255.)
The Debtor had in fact moved from California to Tennessee in November 2003, purchasing a home
with a down payment of approximately $144,000.00 cash received from the sale of the Debtor’s home
in California. (Apx. at 202.) At the time that he purchased the home in Tennessee, the Debtor also
obtained a home equity line of credit for $119,000.00. (Apx. at 203.) The Debtor also testified that
he had, by the time the Commissioner rendered his decision, spent most of the money that he obtained
from the sale of his animal hospitals or lost it in the stock market. (Apx. at 206-09.) He also testified
that he still owed approximately $400,000.00 to a Dr. Reichold, his former partner in one of his
hospitals, for buying that partner out in 2001, and that he was required to make payments of $5,500.00
per month on that debt. (Apx. at 207.) The Debtor also testified that he was no longer actively
engaged in veterinary practice at the time–“I was not making the kind of money I made when I
worked, and – which is one of the reasons we had to sell.” (Apx. at 208.)
Later the same day, the Debtor sent another email to Olmstead informing her that he had now
received and read a copy of the Commissioner’s decision and that he was not going to appeal the
decision for a variety of reasons, including his present financial difficulties. (Apx. at 259.) Thereafter,
the Debtor and Olmstead communicated by email several more times, with the tone of the Debtor’s
emails becoming less and less cordial. (Apx. at 262-64.)
In accordance with California law, the Commissioner’s decision was filed as a judgment with
the California Superior Court on April 30, 2004. (Apx. at 10.) Olmstead filed a motion with the
California Superior Court asking that the damages set forth in that judgment be tripled because of the
Debtor’s willful failure to pay them. (Apx. at 7.) That court granted Olmstead’s motion on July 27,
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2005, making the amount owed by the Debtor to Olmstead approximately $48,000.00 plus interest
at 10% per year. (Apx. at 7-8.)
The Debtor filed his Chapter 7 petition on October 14, 2005. Olmstead filed her adversary
proceeding against the Debtor on May 15, 2006. A trial on the merits was held on July 13, 2007, and
the bankruptcy court entered its Order dismissing Olmstead’s case with prejudice on August 3, 2007.
Olmstead timely filed her notice of appeal on August 10, 2007.
IV. DISCUSSION
Section 523(a)(6) excepts from discharge “any debt – for willful and malicious injury by the
debtor to another entity or to the property of another entity[.]” The requirements of willful and
malicious are distinct and both must be met. See Markowitz v. Campbell (In re Markowitz), 190 F.3d
455, 463 (6th Cir. 1999); South Atlanta Neurology & Pain Clinic P.C. v. Lupo (In re Lupo), 353 B.R.
534, 550 (Bankr. N.D. Ohio 2006). Olmstead, as the objecting party, bears the burden of proving
both requirements by a preponderance of the evidence. Grogan v. Garner, 498 U.S. 279, 291, 111
S. Ct. 654, 661 (1991).
For a debt to fall within the purview of “willful and malicious injury,” § 523(a)(6) requires
more than an intentional act that causes injury; it requires an act done with the intent to injure, e.g.,
a deliberate injury akin to an intentional tort. See Kawaauhau v. Geiger, 523 U.S. 57, 118 S. Ct. 974
(1998). As used in § 523(a)(6),
The word “willful” ... modifies the word “injury,” indicating that nondischargeability
takes a deliberate or intentional injury, not merely a deliberate or intentional act that
leads to injury. ... [A] more encompassing interpretation could place within the
excepted category a wide range of situations in which an act is intentional, but injury
is unintended. ... Every traffic accident stemming from an intentional act. ... A
“knowing breach of contract” could also qualify. See ibid. A construction so broad
would be incompatible with the “well known” guide that exceptions to discharge
should be confined to those plainly expressed.
Id. at 977 (citations omitted). At trial, the parties stipulated that the Debtor’s “actions were willful”
based on the findings of the Superior Court of California. The bankruptcy court accepted the parties’
stipulation and did not address this element further.
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The injury must not only be willful, but it must be malicious as well. Olmstead has the burden
of proving malicious injury. For purposes of § 523(a)(6), an injury is malicious when the debtor
“acts in conscious disregard of his duties or without just cause or excuse.” Gonzalez v. Moffitt (In re
Moffitt), 252 B.R. 916, 923 (B.A.P. 6th Cir. 2000). That is, an injury is “malicious” under
§ 523(a)(6), when it is: “(1) a wrongful act, (2) done intentionally, (3) which necessarily causes injury,
and (4) is done without just cause or excuse.” Petralia v. Jercich (In re Jercich), 238 F.3d 1202, 1209
(9th Cir. 2001); Jett v. Sicroff (In re Sicroff), 401 F.3d 1101, 1106 (9th Cir. 2005). “[T]he definition
of malice requires a heightened level of culpability transcending mere willfulness.” Superior Metal
Prods. v. Martin (In re Martin), 321 B.R. 437, 442 (Bankr. N.D. Ohio 2004). Behavior can be
willful, but fall short of being malicious. Id., 321 B.R. at 442 (citing John Deere Credit Service v.
McLaughlin (In re McLaughlin), 109 B.R. 14, 18 (Bankr. N.D. N.H. 1989) (finding conversion to be
willful, but not malicious)).
Olmstead argues that there were two instances that gave rise to malicious injury. First, the
Debtor’s failure to pay accrued vacation benefits at the time he sold his practice. Second, the Debtor’s
failure to pay the judgment against him. The bankruptcy court found with respect to the first, that the
Debtor “earnestly believed Dr. Makar had assumed responsibility for payment of plaintiff’s benefits.
[fn omitted] ... The fact that ... [the Debtor] turned out to be incorrect does not convert his actions to
malicious conduct.” Regarding the second, the bankruptcy court found the Debtor did not have the
ability to pay the judgment and therefore, his conduct was not malicious.
Olmstead relies primarily on the Ninth Circuit decision in Jercich, 238 F.3d 1202, for the
proposition that the bankruptcy court erred in finding the Debtor did not act maliciously. However,
Jercich is distinguishable from the present case. First, the state court judgment in Jercich is based
on a section of the California Civil Code that provides for the award of punitive damages upon proof
“by clear and convincing evidence that the defendant has been guilty of oppression, fraud or malice.”
Id. at 1204. In Jercich, the court found that the debtor’s conduct was “willful and deliberate” and
“constituted substantial oppression.” Id. In this case, the state court award is for “willful” conduct
only. There are no findings of oppression, fraud or malice. Second, the Ninth Circuit found that the
debtor pointed to “no just cause or excuse” for his behavior. Jercich, 238 F.3d at 1209. The Ninth
Circuit in Jercich did not address what facts would constitute “just cause or excuse.” In this case, the
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Debtor pointed to his sincere belief that he did not owe the money and his inability to pay the money,
by the time the judgment was rendered against him as just cause.
To determine whether there is “just cause or excuse”, a court “must look ... to the surrounding
circumstances to divine whether there was some legitimate (or equitable) justification for the debtor's
conduct.” American Honda Fin. Corp. v. Grier (In re Grier), 124 B.R. 229, 232 (Bankr. W.D. Tx.
1991). Black's Law Dictionary (6th ed.) defines “just cause” as “cause outside legal cause, which
must be based on reasonable grounds, and there must be a fair and honest cause or reason, regulated
by good faith.” Similarly, the dictionary definition of just includes “honorable and fair in dealings
and actions.” Murray v. Bammer (In re Bammer), 131 F.3d 788, 792 (9th Cir. 1997).
In this instance, the bankruptcy court found the Debtor held an “earnest belief” that Buyer was
responsible for the vacation benefits owed to Olmstead and that Debtor “had acted in good faith” in
his dealings with Olmstead. (Apx. at 27.) Olmstead, through various email exchanges (as noted by
the bankruptcy court) agreed with the Debtor's position with respect to liability for accrued vacation
benefits. Further, Olmstead went to work for Buyer and continued to receive wages and vacation
benefits from them. It was not until her employment with Buyer had terminated that she was able to
pursue her claim with the Labor Board. Because the Debtor did not appear at the hearing before the
Commissioner, the decision did not address any defense the Debtor may have had under Labor Code
§ 203. Olmstead has not pointed to anything in the record or the law to support a finding that the
attempt to make Buyer contractually responsible for payment of accrued vacation benefits was
impermissible or that the Debtor’s reliance on it caused “malicious injury” to Olmstead.
Based on the record before us, we are not left with the definite and firm conviction that the
bankruptcy court’s finding that, based on paragraph 18 of the Sale Contract, the Debtor had a
legitimate justification at the time the debt was incurred (the sale of the animal hospitals) for not
paying the debt was clearly erroneous.
Further, we are not left with the definite and firm conviction that the bankruptcy court erred
in finding that, by the time the Commissioner entered his decision, the Debtor did not have the ability
to pay it. The Debtor’s testimony regarding his financial situation at the end of 2003 was
uncontradicted. Olmstead has not pointed to anything in the record that makes the bankruptcy court’s
finding clearly erroneous.
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V. CONCLUSION
Based on the foregoing, the Panel AFFIRMS the bankruptcy court’s opinion and order finding
the debt dischargeable and dismissing Olmstead’s complaint.
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