Everett Lopez v. Emergency Service Restoration

FILED
NOT FOR PUBLICATION APR 29 2010
MOLLY C. DWYER, CLERK
UNITED STATES COURT OF APPEALS U .S. C O U R T OF APPE ALS
FOR THE NINTH CIRCUIT
In re: EVERETT LOPEZ, No. 09-60013
Debtor.
__________________________________ BAP No. CC-08-1183-PaHM
EVERETT LOPEZ,
*
MEMORANDUM
Appellant,
v.
EMERGENCY SERVICE
RESTORATION, INC.,
Appellee.
Appeal from the Ninth Circuit
Bankruptcy Appellate Panel
Pappas, Hollowell and Montali, Bankruptcy Judges, Presiding
Argued and Submitted April 9, 2010
Pasadena, California
Before: SILVERMAN and GRABER, Circuit Judges, and SCULLIN,** District
Judge.
Chapter Seven debtor Everett Lopez ("Lopez") appeals from the Bankruptcy
*
This disposition is not appropriate for publication and is not precedent except as
provided by 9th Cir. R. 36-3.
**
The Honorable Frederick J. Scullin, Jr., Senior United States District Judge for
the Northern District of New York, sitting by designation.
Appellate Panel's ("BAP") affirmance of the bankruptcy court's grant of summary
judgment in an adversary proceeding that Emergency Service Restoration, Inc.
("ESR"), filed, seeking the non-dischargeability of a judgment debt. ESR obtained
the judgment debt against Lopez and his company, FiberTech, in a state-court
action for willful and malicious misappropriation of trade secrets. The bankruptcy
court held that, pursuant to 11 U.S.C. § 523(a)(6), the debt was non-dischargeable
because the issue whether Lopez had a willful and malicious intent to injure ESR
had already been decided in the state-court action and, therefore, that collateral
estoppel precluded relitigation of this issue. We have jurisdiction pursuant to 28
U.S.C. § 158(d) and affirm.
"This court reviews decisions of the BAP de novo, and thus reviews the
bankruptcy court's decisions under the same standards used by the BAP." Arrow
Elecs., Inc. v. Justus (In re Kaypro), 218 F.3d 1070, 1073 (9th Cir. 2000). We
review the bankruptcy court's findings of fact for clear error and conclusions of law
de novo. See id. Whether collateral estoppel is available is a question of law,
subject to de novo review. See Dias v. Elique, 436 F.3d 1125, 1128 (9th Cir.
2006). If collateral estoppel is available, however, we review the bankruptcy
court's decision to apply it for abuse of discretion. See id.A federal court gives the same preclusive effect to a state-court judgment as
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would be given that judgment under the law of the state in which the judgment was
rendered. See 28 U.S.C. § 1738; see also Marrese v. Am. Acad. of Orthopaedic
Surgeons, 470 U.S. 373, 380 (1985). California courts will apply collateral
estoppel only if certain threshold requirements are met, and then only when its
application furthers the public policies underlying the doctrine. See Harmon v.
Kobrin (In re Harmon), 250 F.3d 1240, 1245 (9th Cir. 2001). Pursuant to
California law, courts may apply collateral estoppel if the following threshold
requirements are met:
First, the issue sought to be precluded from relitigation must be
identical to that decided in a former proceeding. Second, this issue
must have been actually litigated in the former proceeding. Third, it
must have been necessarily decided in the former proceeding. Fourth,
the decision in the former proceeding must be final and on the merits.
Finally, the party against whom preclusion is sought must be the same
as, or in privity with, the party to the former proceeding.
Id. (internal quotation marks omitted).
Both the bankruptcy court and the BAP held that a finding of willful and
malicious appropriation of trade secrets in the state-court action presented the same
issues as those necessary to determine the non-dischargeability of a debt pursuant
to § 523(a)(6) of the Bankruptcy Code; therefore, the BAP affirmed the bankruptcy
court's determination that collateral estoppel was available.
A. Section 523(a)(6)
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Section 523(a)(6) of the Bankruptcy Code provides that an individual debtor
may not discharge a debt "for willful and malicious injury by the debtor to another
entity or to the property of another entity." 11 U.S.C. § 523(a)(6). We analyze the
malicious injury requirement and the willful injury requirement separately. See
Barboza v. New Form, Inc. (In re Barboza), 545 F.3d 702, 706 (9th Cir. 2008).
Although we do not decide whether a finding of willful and malicious
misappropriation of trade secrets under California law will always meet the
requirements of 11 U.S.C. § 523(a)(6), it is clear that the requirements were met in
this case.
1. Willful injury
"A 'willful' injury is a 'deliberate or intentional injury, not merely a
deliberate or intentional act that leads to injury.'" In re Barboza, 545 F.3d at 706(quoting Kawaauhau v. Geiger, 523 U.S. 57, 61 (1998)). "[Section] 523(a)(6)'s
willful injury requirement is met only when the debtor has a subjective motive to
inflict injury or when the debtor believes that injury is substantially certain to result
from his own conduct." Ormsby v. First Am. Title Co. of Nev. (In re Ormsby), 591
F.3d 1199, 1206 (9th Cir. 2010) (internal quotation marks omitted). The debtor is,
however, charged with the knowledge of his actions' natural consequences. Id.In the prior state proceeding, the court held that Lopez misappropriated
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ESR's trade secrets pursuant to California Civil Code § 3426.1; and, finding that
this conduct was "willful and malicious," the court awarded ESR attorney's fees
pursuant to California Civil Code § 3426.4. The state court found that Lopez
improperly targeted ESR's customers after acquiring ESR's customer list through
several former ESR independent contractors. Moreover, the court found that,
during this improper solicitation of ESR's customers, Lopez "badmouthed" ESR
and used "marketing techniques [that] went beyond simply making professional
announcements," thereby damaging ESR.
Although the state court did not expressly state that Lopez believed that
injury was substantially certain to result, Ormsby allows us to infer from the state
court's findings that Lopez had a subjective belief that his actions would cause
injury to ESR. See In re Ormsby, 591 F.3d at 1207. The state court's finding that
Lopez was badmouthing ESR to ESR's customers, after misappropriating ESR's
customer list, supports the inference that Lopez knew that his conduct was
substantially certain to injure ESR. Lopez was not merely promoting his business
to ESR's customers, but was simultaneously besmirching ESR's reputation — an
undeniably willful action meant to cause injury to ESR and thereby establishing
the willful injury prong under § 523(a)(6).
2. Malicious injury
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Pursuant to § 523(a)(6), "[a] malicious injury 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 (internal quotation marks
omitted). We may infer malice based on the wrongful act's nature. See id.Pursuant to California law, misappropriation of trade secrets requires the
defendant to commit a wrongful act. See Cal. Civ. Code § 3426.1(a), (b); see also
On Command Video Corp. v. LodgeNet Entm't Corp., 976 F. Supp. 917, 932 (N.D.
Cal. 1997).
As stated above, the state court found that Lopez misappropriated ESR's
confidential customer list and used it to actively solicit ESR's customers while
simultaneously badmouthing ESR. Such actions were intentional and calculated to
cause harm to ESR. The state court found that ESR suffered an injury as a result of
Lopez' use of its customer list, and Lopez has offered no just cause or excuse for
his conduct.
Finally, in awarding attorney's fees, the state court necessarily had to find
that the misappropriation was willful and malicious. See Cal. Civ. Code § 3426.4(requiring a court to find that the misappropriation was willful and malicious
before it may award attorney's fees).
Based on these factual findings by the state court, the bankruptcy court
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properly concluded that Lopez' conduct met both the willful and malicious prongs
of § 523(a)(6).
B. Did the bankruptcy court abuse its discretion by applying collateral
estoppel?
Trial courts have "broad discretion" in determining when to apply issue
preclusion. See Parklane Hosiery Co. v. Shore, 439 U.S. 322, 331 (1979). In
California, courts do not apply issue preclusion automatically or rigidly; rather,
they are permitted to decline to give issue preclusive effect to prior judgments in
deference to countervailing considerations of fairness. See Lucido v. Superior
Court, 795 P.2d 1223, 1226 (Cal. 1990); see also People v. Seltzer, 101 Cal. Rptr.
260, 262 (App. Dep't Super. Ct. 1972) (collecting cases). The courts balance the
need to limit litigation against other factors to determine whether the application of
collateral estoppel is fair. See Lucido, 795 P.2d at 1226-27. "Accordingly, the
public policies underlying collateral estoppel – preservation of the integrity of the
judicial system, promotion of judicial economy, and protection of litigants from
harassment by vexatious litigation – strongly influence whether its application in a
particular circumstance would be fair to the parties and constitute sound judicial
policy." Id. at 1227.
Lopez argued before the bankruptcy court that it should decline to apply
collateral estoppel because of (1) the alleged lack of decorum in the state-court
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trial; (2) the alleged denial of a right to a jury; (3) the fact that the findings in the
state court's written statement of decision drafted by ESR's counsel went beyond
those that the court made orally; (4) the incompetence of pretrial counsel; (5) the
incompetence of trial counsel; (6) the state-court judge's suicide three years after
the trial at a time when the state-court judge was under investigation for child
molestation; (7) Lopez' depression and emotional distress as a result of the state-
court judgment and the bankruptcy proceedings; and (8) the intense animus of
ESR's principal towards Lopez.
The bankruptcy court did not abuse its broad discretion in giving the state
court's judgment preclusive effect. The bankruptcy court discussed each factor that
Lopez raised and provided sound reasons why those factors did not militate against
precluding relitigation of this issue. Further, the bankruptcy court correctly found
that there had been no change in the law that would potentially alter the result of
the underlying action and that the incentive to litigate was equally present in both
the state-court action and the bankruptcy proceeding.
AFFIRMED.
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