United States Court of Appeals For the First Circuit For the First Circuit
No. 96-2195
DAVID L. PRINTY,
Appellant,
v.
DEAN WITTER REYNOLDS, INC.,
Appellee.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Nancy Gertner, U.S. District Judge]
Before
Boudin, Circuit Judge,
Bownes, Senior Circuit Judge,
and Lynch, Circuit Judge.
Evan Slavitt, with whom Joseph S.U. Bodoff, and Hinckley, Allen,
& Snyder were on brief for appellant.
Mary DeNevi, with whom Bingham, Dana & Gould LLP were on brief
for appellee.
April 10, 1997
BOWNES, Senior Circuit Judge. The overarching BOWNES, Senior Circuit Judge.
issue in this bankruptcy case is whether an arbitration award
of $1,009,820.00, made by a panel of the National Association
of Securities Dealers to appellee Dean Witter Reynolds, Inc.,
against appellant David L. Printy is a non-dischargeable debt
under Chapter 11 of the Bankruptcy Code. The district court
affirmed an opinion of the bankruptcy court holding, on a
summary judgment motion, that the debt was non-dischargeable.
We affirm. There are a number of subsidiary issues which we
address in the course of our opinion.
Because the appeal is from the grant of a motion
for summary judgment, our review is de novo on all issues.
Hope Furnace Assocs., Inc. v. FDIC, 71 F.3d 39, 42-43 (1st
Cir. 1995); Alexis v. McDonald's Restaurants of Mass., 67
F.3d 341, 346 (1st Cir. 1995); In re Varrasso, 37 F.3d 760,
762-63 (1st Cir. 1994).
I. I.
THE FACTS THE FACTS
We start with the facts, keeping in mind the
strictures of Fed. R. Civ. P. 56(c).1 Printy and his two
1. The rule states in pertinent part:
The judgment sought shall be rendered forthwith if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a
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sons were the co-trustees of The Andrea L. Printy Family
Trust, (the Trust) which had been established in 1986 after
the death of Printy's wife. Printy was an experienced
investor and knowledgeable in the finance field. At the time
of discovery in this case he was a business consultant with
eighteen years' experience in financial services. He had
been issued a broker's license and had held management
positions in several financial services companies.
On August 26, 1992, Printy transferred the Trust's
account to the office of Dean Witter in Minneapolis,
Minnesota. The record shows that Printy made all the
decisions about the Trust; the sons play no part in this
case. Dean Witter is a national broker-dealer in securities.
It is registered with the Securities and Exchange Commission
and is a member of the National Association of Securities
Dealers. The account was opened in the name of the Trust and
funded with a deposit of $50,000.00.
The account executive at Dean Witter in charge of
the Trust account was Michael Krmpotich. He and Printy were
acquainted. Printy had tried to persuade Krmpotich to join a
broker-dealer company in New Ulm, Minnesota, with which
Printy had been affiliated. It was Krmpotich who had
solicited the Trust account.
judgment as a matter of law.
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Printy executed an Active Assets Account Agreement
with Dean Witter, effective September 30, 1992. Under the
terms of the agreement, any controversies relative to the
account were subject to arbitration. The Active Assets
Account permitted the holder to buy and sell securities. The
account holder could also write checks on, or receive wire
transfers from, the Account. Additionally, the securities
held in the account could be used as collateral for borrowing
funds from Dean Witter "on margin" in order to purchase
additional securities or for other reasons. The amount of
money Dean Witter would permit an account holder to borrow on
margin was calculated based on the value of the assets held
in the account. Under the agreement, if the Trust owed
money to Dean Witter for margin borrowing or other reasons,
Dean Witter was entitled to a security interest in any
securities or property held in the Trust's account.
In early September of 1992, Dean Witter received
the following assets from the Trust: a U.S. Treasury Note
and stock holdings in: Baxter International, Inc., Marion
Merrill Dow, Inc., Vital Heart Systems, Inc., Eastman Kodak
Co., Weyerhaeuser Co., Bank America Corp., and J. P. Morgan &
Co. In addition to these assets, Dean Witter received
150,000 shares of Health Concepts, Inc. and an interest in
MCI Medical Seed Limited Partnership. Printy was the
president, secretary, and a shareholder of Health Concepts.
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He knew that the stock was not traded on any exchange or
over-the-counter market and had very little value, if any.
The bankruptcy judge points out in connection with Printy's
bankruptcy schedules that in Schedule B - Personal Property -
Printy gave a zero value to his holdings in Health Concepts
and did not discuss the stock at all in the liquidation
analysis section of his Disclosure Statement submitted with
his Plan of Reorganization.
As part of its services, Dean Witter sent Printy
monthly statements detailing and summarizing the Trust's
assets. As of September 30, 1992, the Dean Witter statement
showed the market value of the Trust's assets to be
$191,533.33, with a borrowing limit of $141,104.50. The
statement did not reflect the receipt of the Health Concepts
stock or the interest in the MCI Medical Seed Partnership.
Next comes the event that led to this law suit.
The Dean Witter statement for the month of October 1992
showed receipt by the Trust on October 28, 1992 of 150,000
shares of Coastal HealthCare stock with a value of
$3,637,500.00. Coastal HealthCare stock is publicly traded.
In his deposition testimony Printy stated that he did not
authorize the purchase of the Coastal HealthCare stock and
never received stock-purchase confirmation slips. The reason
for this obviously mistaken increase of over three and one
half million dollars in the asset value of the Trust was a
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computer error by Dean Witter. The Trust's virtually
worthless Health Concepts shares had been given the computer
code for Coastal HealthCare shares, thus attributing to the
Trust ownership of Coastal HealthCare stock, which it did not
own.
On November 16, 1992, Printy sent a fax to the
Trust's account broker, Krmpotich, and his assistant, Lynn
Jorgenson, asking that 15,000 shares of Coastal HealthCare be
delivered to him but left in the name of the Trust.
Jorgenson informed Printy that Dean Witter could not deliver
anything but the entire holding of 150,000 shares. Printy
authorized the delivery of the 150,000 shares. In due time,
he received a certificate for 150,000 shares of Health
Concepts, not the Coastal HealthCare shares he had requested.
The computer mix-up between Health Concepts and
Coastal HealthCare continued through November of 1992. The
November 1992 statement showed that 150,000 shares of Coastal
HealthCare valued at $3,712,500.00 had been debited from the
account. As a result, the total asset value of the Trust
shrunk to $100,475.00 from the October value of
$3,775,925.00.
Printy returned the 150,000 shares certificate of
Health Concepts to Dean Witter on December 1, 1992. The
computer continued on its merry way in the wrong direction.
The Dean Witter December 1992 statement showed the Trust's
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receipt on December 2 of 150,000 shares of Coastal
HealthCare, with an increase in asset value from $100,475.00
to $4,984,275.00.
The December statement, however, showed more than
the return of the Coastal HealthCare stock to the Trust
account. It showed that Printy purchased a total of 22,409
shares of stock in twelve companies and withdrew through wire
transfers or checks, $262,501.11 from the account. In
January of 1993, Printy bought a total of 16,763 shares of
stock in eight companies and withdrew $373,670.14 from the
account. In both months, the Coastal HealthCare stock was
used to calculate the authorized limit for margin borrowing
and these purchases and withdrawals were made against these
erroneously inflated margin limits.
It is true, as Printy asserts, that Krmpotich and
other brokers from Dean Witter urged Printy to make stock
purchases on the basis of the Trust's borrowing limits. But
none of the brokers at Dean Witter knew of the error that
inflated the value of the Trust's assets. They assumed that
Dean Witter's monthly statements were accurate. The only one
who knew the monthly statements were grossly inaccurate was
Printy. In his deposition Printy testified that he had
questions about how his account was being handled. But he
never told Krmpotich that he did not own any stock in Coastal
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HealthCare and that the authorized borrowing limits were
wrong.
Dean Witter finally corrected the error in the
February 1993 statement. The 150,000 shares of Coastal
HealthCare, with a value of $2,962,500.00, were debited from
the Trust account, and the 150,000 shares of Health Concepts,
with no value, were credited to it. Dean Witter also made a
margin call. After the margin call, the Trust's account had
a deficit of $600,230.82 that was not repaid to Dean Witter.
II. II.
LEGAL PROCEEDINGS LEGAL PROCEEDINGS
On March 30, 1993, Dean Witter commenced an
arbitration proceeding against Printy, his sons, and the
Trust before the National Association of Securities Dealers.
The Statement of Claim consisted of eight counts, which
included counts for theft and receiving stolen property,
common-law fraud, violations of Minnesota securities law,
common-law conversion, and common-law replevin. Dean Witter
sought $603,548.00 in compensatory damages, plus interest and
attorney's fees, against all respondents. Punitive damages
were sought against Printy only.
Printy responded to the Statement of Claim and
raised a number of affirmative allegations. The defense
consisted of denial of wrongdoing and shifting the blame to
Dean Witter.
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The arbitration award was issued on January 20,
1994. It found Printy, his sons as co-trustees, and the
Trust liable for compensatory damages in the amount of
$634,820.00 plus interest, from February 1, 1993, through the
date of payment of the award. The arbitration panel also
foundPrinty liableforpunitivedamagesintheamountof$375,000.00.
Printy filed a voluntary petition under Chapter 11
of the Bankruptcy Code prior to Dean Witter having the
arbitration award confirmed. Dean Witter obtained relief
from the automatic stay imposed under the Code. On January
30, 1995, the Hennepin County District Court for the Fourth
Judicial District of Minnesota confirmed the arbitration
award. Dean Witter filed an adversary proceeding against
Printy in bankruptcy court on August 24, 1994.
III. III.
ANALYSIS ANALYSIS
The first issue is whether the bankruptcy debt
falls under 523(a)(2)(A) or 523(a)(6) of the Bankruptcy
Code. Section 523 of the Code provides in pertinent part:
523. Exceptions to discharge 523. Exceptions to discharge
(a) A discharge under section 727, (a) 1141, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt--
(2) for money, property, services, (2) or an extension, renewal, or refinancing of credit, to the extent obtained by--
-9- 9
(A) false pretenses, a (A) false representation, or actual fraud, other than a statement respecting the debtor's or an insider's financial condition;
. . .
(6) for willful and malicious injury (6) by the debtor to another entity or to the property of another entity;
(Footnote omitted).
Printy argues that the sections are mutually
exclusive and the district court erred in proceeding under
(a)(6). This is an ingenious argument but it is convincingly
rebutted by the words of the statute and the case law. There
is no indication in 523 that Congress intended these two
sections to be mutually exclusive, nor does the legislative
history of the statute so suggest.
Printy candidly admits that, "[a] number of cases
have either applied both provisions to fraud claims or have
-10- 10
indicated an inclination to do so."2 The cases do hold as
Printy says.
Both parties have referred us to Grogan v. Garner,
498 U.S. 279, 282 n.2 (1991), which states:
We therefore do not consider the question whether 523(a)(2)(A) excepts from discharge that part of a judgment in excess of the actual value of money or property received by a debtor by virtue of fraud. See In re Rubin, 875 F.2d 755,
758, n.1 (CA9 1989). Arguably, fraud judgments in cases in which the defendant did not obtain money, property, or services from the plaintiffs and those judgments that include punitive damages awards are more appropriately governed by 523(a)(6). See 11 U.S.C. 523(a)(6) (excepting from discharge debts "for willful and malicious injury by the debtor to another entity or to the property of another entity"); In re
Rubin, 875 F.2d, at 758, n. 1.
2. Printy cites the following cases for this proposition:
See In re Stokes, 995 F.2d 76 (5th Cir.
1993); In re Britton, 950 F.2d 602 (9th
Cir. 1991); In re Apte, 180 B.R. 223 (BAP
9th Cir. 1995); In re Dorsey, 162 B.R.
150 (Bankr. N.D. Ill. 1993); In re
Berman, 154 B.R. 991 (Bankr. S.D. Fla.
1993); In re Horton, 152 B.R. 912 (Bankr.
S.D. Tex. 1993); In re Iommazzo, 149 B.R.
767 (Bankr. D.N.J. 1993); In re Sims, 148
B.R. 553 (Bankr. E.D. Ark. 1992); In re
Day, 137 B.R. 335 (Bankr. W.D. Mo. 1992);
In re Powell, 95 B.R. 236 (Bankr. S.D.
Fla.), aff'd, 108 B.R. 343 (S.D. Fla.
1989), aff'd sub nom., Powell v. Bear,
Stearns & Co., 914 F.2d 268 (11th Cir.
1990).
Appellant's Br. at 11.
-11- 11
We realize that this is not a precedential holding, but it
surely does not undercut the bankruptcy court's choice of
523(a)(6) as the relevant section under which to assess
Printy's conduct.
The bankruptcy court found that Printy "was using,
indeed converting Dean Witter's assets, not assets of the
Trust, to finance his trades and personal and family
expenditures." We agree. Viewing Printy's actions as the
tort of conversion, there are cases holding that conversion
falls within the ambit of 523(a)(6). See In re Stanley, 66
F.3d 664, 668 (4th Cir. 1995); In re Lindberg, 49 B.R. 228
(Bankr. D. Mass. 1985); In re Cardillo, 39 B.R. 548 (Bankr.
D. Mass. 1984).
In In re Dorsey, 162 B.R. 150 (Bankr. N.D. Ill.
1993), the bankruptcy court framed the issue as we see it:
[T]here is nothing in the text of section 523(a)(6) which precludes its proper invocation by an aggrieved party whose claim for willful and malicious injury sounds in fraud. The critical focus for relief under section 523(a)(6) for an aggrieved creditor is the conduct committed by the debtor, if found willful and malicious under the facts, whether or not such conduct might also fit within one or more of the other exceptions to discharge under section 523(a).
162 B.R. at 155-56.
Printy cites to In re Price, 123 B.R. 42 (Bankr.
N.D. Ill. 1991), as precedent for its mutually exclusive
argument. Price, however, is the only case so holding and we
-12- 12
decline to follow it. We hold that sections 523(a)(2)(A) and
(a)(6) are not mutually exclusive. It follows that the
bankruptcy court did not err in using 523(a)(6) as the
section applicable to Printy's conduct.
The next issue is whether there were sufficient
uncontroverted facts to establish that Printy's conduct
violated 523(a)(6). We start our analysis with an attempt
to determine the meaning of the words "willful and
malicious." The House Judiciary Committee's Report that
accompanied the passage of the 1978 Bankruptcy Code defined
"willful" as "deliberate or intentional" and stated that
"recklessness" was no longer the standard for "willfulness."
H.R. Rep. No. 95-595, at 365 (1977), reprinted in 1978
U.S.C.C.A.N. 5787, 5963, 6320-21. This, however, is only the
beginning of our task.
As the bankruptcy court pointed out, there is
disagreement among the circuits as to whether the statute
requires an intentional act that results in an injury or one
done with the intention of causing an injury, with variations
on this theme. In Piccicuto v. Dwyer, 39 F.3d 37, 41 n.3
(1st Cir. 1994), we noted "this difficult and controversial
issue." We declined to enter the fray, however, because the
parties had agreed on a definition which we used to decide
the case: "for an act to be willful and malicious under
523(a)(6), it must be 'deliberate,' 'wrongful,' and 'done
-13- 13
without regard to its consequences'. . . ." Id. at 41.
That option is not available in this case.
We start with a survey of the cases. The rule in
the Eleventh Circuit is that "willful" means an intentional
or deliberate act, not done merely in reckless disregard of
the rights of another. In re Walker, 48 F.3d 1161, 1163
(11th Cir. 1995). "Malicious" was defined as "wrongful and
without just cause or excessive even in the absence of
personal hatred, spite or ill-will." Id. at 1164 (internal
quotation marks and citation omitted). Malice could be
implied or constructive; the specific intent to harm is not
necessary. Id.
The Third Circuit in In re Conte, 33 F.3d 303, 305
(3d Cir. 1994), held: "An injury is willful and malicious
under the Code only if the actor purposefully inflicted the
injury or acted with substantial certainty that injury would
result."
The rule of the Tenth Circuit is that "'willful and
malicious injury' occurs when the debtor, without
justification or excuse, and with full knowledge of the
specific consequences of his conduct, acts notwithstanding,
knowing full well that his conduct will cause particularized
injury." In re Pasek, 983 F.2d 1524, 1527 (10th Cir. 1993).
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The Sixth Circuit rule has been set forth in Vulcan
Coals v. Howard, 946 F.2d 1226, 1228-29 (6th Cir. 1991):
This court, when interpreting the terms "willful" and "malicious" in 523(a)(6), has held that a wrongful act done intentionally, which necessarily produces harm and is without just cause or excuse, may constitute a willful and malicious injury. We rejected the stricter standard that "willful" and "malicious" requires an act with intent to cause injury.
(Citation omitted).
In re Littleton, 942 F.2d 551, 554 (9th Cir. 1991),
states the Ninth Circuit standard: "Our court has adopted
the concept that 'the conversion of another's property
without his knowledge or consent, done intentionally and
without justification and excuse, to the other's injury,'
constitutes a willful and malicious injury within the meaning
of the 523(a)(6)." (Citations omitted).
The Fifth Circuit, in Chrysler Credit Corp. v.
Perry Chrysler Plymouth, 783 F.2d 480, 486 (5th Cir. 1986),
defined the words tersely: "'Willful' means intentional and
'malicious' means without just cause or excuse." (Footnote
omitted).
In St. Paul Fire & Marine Ins. Co. v. Vaughn, 779
F.2d 1003 (4th Cir. 1985), the Fourth Circuit enunciated its
rule as follows. "[S]pecific or 'special' malice is not
required on the part of the debtor: 'if the act of
conversion is done deliberately and intentionally in knowing
-15- 15
disregard of the rights of another, it falls within the
statutory exclusion [from discharge in bankruptcy].'" Id. at
1008 (citation omitted).
We have chosen not to go back further than 1985 in
our review of circuit court cases. Our final case is,
therefore, In re Long, 774 F.2d 875, 881 (8th Cir. 1985), in
which the Eighth Circuit stated: "When transfers in breach
of security agreements are in issue, we believe
nondischargeability turns on whether the conduct is (1)
headstrong and knowing ('willful') and, (2) targeted at the
creditor ('malicious'), at least in the sense that the
conduct is certain or almost certain to cause financial
harm."
The majority rule followed by the bankruptcy courts
for the District of Massachusetts can be stated as follows:
"[M]alicious" means an act done in conscious disregard of one's duties. No special malice toward the creditor need be shown.
. . .
[T]he term "willful and malicious" in 523(a)(6) means an act intentionally committed, without just cause or excuse, in conscious disregard of one's duty and that necessarily produces an injury.
See In re Lubanski, 186 B.R. 160, 165 (Bankr. D. Mass. 1995).
We adopt the rule of the Massachusetts bankruptcy
courts and the further refinement of it in Collier's
treatise on bankruptcy:
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To fall within the exception of section 523(a)(6), the injury to an entity or property must have been willful and malicious. An injury to an entity or property may be a malicious injury within this provision if it was wrongful and without just cause or excuse, even in the absence of personal hatred, spite or ill- will.
The word "willfull" [sic] means "deliberate or intentional," referring to a deliberate and intentional act that necessarily leads to injury. Therefore, a wrongful act done intentionally, which necessarily produces harm or which has a substantial certainty of causing harm and is without just cause or excuse, may be a willful and malicious injury. While something more than a mere voluntary act is necessary to satisfy the scienter requirement of section 523(a)(6), specific intent to injure is not necessary.
The malice element of section 523(a)(6) requires an intent to cause the harm, and the fact that the injury was caused through negligence or recklessness does not satisfy that standard of proof. An injury inflicted willfully and with malice under section 523(a)(6) is one inflicted intentionally and deliberately, and either with the intent to cause the harm complained of, or in circumstances in which the harm was certain or almost certain to result from the debtor's act.
4 Collier on Bankruptcy 523.12 (15th ed. 1996) (footnotes
omitted).
We agree with the bankruptcy court that, whatever
standard is applied here, summary judgment was warranted on
the uncontroverted facts. There can be no question that
Printy willfully and maliciously injured Dean Witter by not
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informing it that a mistake had been made by crediting to the
Trust account the Coastal HealthCare stock that Printy knew
he did not own. Printy took advantage of Dean Witter's
computer error by borrowing against and withdrawing funds
from the false margin account that derived its value from
shares of stock that Printy knew he did not own. Such
conduct by Printy translates easily into an intent to
willfully and maliciously cause harm.
Printy attempts to blunt or obscure what he did by
arguing that Dean Witter did not prove that "its own conduct
was not an intervening cause in the creation of the debt."
Appellant's Br. at 21. Printy mischaracterizes what
happened. There is no question that Dean Witter's error gave
Printy the opportunity to use Dean Witter's assets for his
own gain. Printy saw the mistaken transfer of Coastal
HealthCare shares as a way to make some money quickly. To
put it bluntly, Printy saw a chance to make a killing at Dean
Witter's expense and he took it. There was no intervening
cause. The sole proximate cause was Printy's greed.
The final issue we discuss is whether the
bankruptcy court erred in ruling that Printy's counterclaims
were barred by res judicata because they were decided against
Printy in the arbitration proceedings.
Count I of the counterclaim asserts breach of
contract by Dean Witter. The essence of the claim is that
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Dean Witter agreed that it would accurately administer the
Trust account and failed to do so. It is specifically
alleged that Dean Witter refused to correct the statements in
the Trust account when "its errors were called to its
attention." And it is alleged that Dean Witter's broker,
Krmpotich, "induced and recommended that the Family Trust
engage in transactions based on the statements as provided by
Dean Witter." There are four other allegations in this count
that do not warrant further discussion.3
The specific allegation in the counterclaim that
Dean Witter refused to correct the statements in the Trust
account "when its errors were called to its attention" has no
support in the record. In fact, the record is directly to
the contrary. At his deposition Printy admitted that at no
time did he tell Krmpotich or his assistant that he did not
own any stock in Coastal HealthCare, and that the stock the
Trust held was Health Concepts, whose value was de minimis
compared to the three to four million dollar value of Coastal
HealthCare. We find that there is no basis in the record for
Count I of the counterclaim.
3. "(9) Failure by Dean Witter to supervise its Midwest Operations Center; (10) failure to supervise broker Krmpotich; (11) breach of the implied covenant of good faith and fair dealing; and (12) that as a result, Printy was damaged."
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Count II of the counterclaim sounds in negligence.
It alleges that because of Dean Witter's negligence Printy
incurred damages. We have already disposed of the negligence
claim of Printy. It has no merit either legally or
factually.
Count III alleges a breach by Dean Witter of its
duty of good faith and fair dealing. This claim is based on
the following assertions:
16. As part of the arbitration with Printy, Dean Witter sought punitive damages.
17. Dean Witter has taken the position throughout the country in other arbitrations pursuant to its customer agreements that punitive damages are not available under New York law or any other law.
18. Dean Witter has stated publicly its view that punitive damages are not available in arbitrations pursuant to its customer agreements.
19. Having taken this position as a matter of its consistent practice, Dean Witter is acting in bad faith to seek punitive damages against Printy. Its attempt to recover such damages is fundamentally unfair and discriminatory.
20. As a result of Dean Witter's actions, Printy has been damaged.
Printy has cited no cases supporting this novel
claim. We have not looked for any. We have found nothing in
the record that would factually support the statements made
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in paragraphs 17 and 18. We find that this claim, like the
others asserted in the counterclaim, has no merit.
We also agree with the bankruptcy court that the
doctrine of res judicata bars consideration of the
counterclaim because the issues asserted in the counterclaim
were also raised as affirmative allegations in the
arbitration proceedings. In Pujol v. Shearson/American Exp.,
829 F.2d 1201, 1208 (1st Cir. 1987), we held that where a
party had the "full power" to press its claim in the
arbitration proceeding, "[t]he arbitration decision,
therefore, stands as a res judicata bar to these claims."
See also Aunyx Corp. v. Canon U.S.A., 978 F.2d 3, 6-7 (1st
Cir. 1992).
The summary judgment issued by the bankruptcy court
and affirmed by the district court is Affirmed. Affirmed
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