Everett Lopez v. Emergency Service Restoration

Opinion

FILED +CORRECTED June 7, 2011 APR 29 2010

NOT FOR PUBLICATION MOLLY C. DWYER, CLERK U .S. C O U R T OF APPE ALS

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

In re: EVERETT LOPEZ, No. 09-60013 Debtor. __________________________________ BAP No. CC-08-1103+-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.

* 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. Chapter Seven debtor Everett Lopez ("Lopez") appeals from the Bankruptcy

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.

-2- A federal court gives the same preclusive effect to a state-court judgment as

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.

-3- A. Section 523(a)(6)

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.

-4- In the prior state proceeding, the court held that Lopez misappropriated

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).

-5- 2. Malicious injury

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).

-6- Based on these factual findings by the state court, the bankruptcy court

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

-7- collateral estoppel because of (1) the alleged lack of decorum in the state-court

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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