The following is a case update written by the Hon. Meredith Jury (U.S. Bankruptcy Judge, C.D. CA., Ret.), analyzing a recent decision of interest:
The United States District Court for the Southern District of Texas (the Court), ruling on a Bankruptcy Code § 523(a)(6) nondischargeability issue arising from a California judgment, agreed with bankruptcy courts in the Ninth Circuit that a jury finding that a plaintiff is entitled to punitive damages does not automatically mean the debt arose from willful and malicious conduct. Mahadevan v Bikkina (In re Mahadevan), 2022 WL 2979726 (S.D. Tex. July 26, 2022).
To view the opinion, click here.
Debtor Jagannathan Mahadevan was a professor and Prem Bikkina was a graduate student at the University of Tulsa (the University), with Mahadevan assigned as Bikkina’s dissertation advisor from 2007-2010. After a different professor was assigned as advisor in 2010 due to Bikkina’s complaints, in 2011 Mahadevan claimed Bikkina was plagiarizing his work and infringing his copyright. He filed a complaint against Bikkina with the University and contacted Bikkina’s coworkers and employer, claiming infringements by him. After the University investigated and concluded that Mahadevan’s allegations were unfounded, Bikkina sued Mahadevan in California state court, asserting claims of negligence, defamation, and intentional infliction of emotional distress, seeking compensatory and punitive damages. After trial a jury awarded Bikkina $776,000 in compensatory damages and on the verdict form indicated he was entitled to punitive damages. However, before the jury determined the amount of such damages, the parties settled, with Bikkina waiving his right to punitive damages in exchange for Mahadevan’s agreement to not appeal the judgment.
In February 2018, after the jury verdict but before the judgment was entered, Mahadevan filed a chapter 13 bankruptcy. A few hours after the filing, the California state court entered the judgment, unaware of any automatic stay. After Mahadevan dismissed the chapter 13, an amended judgment which included costs and interest was entered. Despite his promise to not appeal, Mahadevan did so, claiming the judgment was void as a stay violation. The state court rejected that argument and affirmed the verdict and judgment. More litigation between the parties ensued, with some still pending when Mahadevan filed a chapter 7 in Texas. To the extent Mahadevan had affirmative claims, the chapter 7 trustee settled them. Bikkina then filed an adversary case, asserting the judgment was nondischargeable as a debt arising from willful and malicious conduct under § 523(a)(6). The parties filed cross motions for summary judgment, arguing among other things the preclusive effect of the jury verdict on the question of whether the claim arose from willful and malicious conduct. The bankruptcy court granted Bikkina’s summary judgment motion; it relied upon collateral estoppel (issue preclusion) based on the jury finding that Bikkina was entitled to punitive damages as the basis for the necessary willful and malicious conduct.
Mahadevan appealed to the District Court, which reversed.
The Supreme Court set the standard for determining whether conduct is willful and malicious, as required for nondischargeability under § 523(a)(6), in Kawaauhau v Geiger, 523 U.S. 57, 59 (1998), concluding that the acts at issue must be “done with actual intent to cause injury…. indicating that nondischargeability takes a deliberate or intentional injury, not merely a deliberate or intentional act that leads to injury.” Id. at 61-62. (emphasis in original). In the Fifth Circuit “the test for willful and malicious injury under Section 523(a)(6) …is condensed into a single inquiry of whether there exists ‘either an objective substantial certainty of harm or a subjective motive to cause harm’ on the part of the debtor.” In re Williams, 337 F. 3d 504, 509 (5th Cir. 2003).
Bikkina’s issue preclusion argument boiled down to his assertion that in the verdict, the jury found Mahadevan was engaged in conduct “with malice, opression [sic] and fraud.” He relied on the amended judgment, special verdict form, and jury instructions for the wording of that specific finding and argued that the willful and malicious issue was actually litigated and necessarily decided in his favor, as required for the application of issue preclusion under California law. The bankruptcy court had agreed with Bikkina, but the District Court dug deeper and concluded the jury instructions and verdict form were insufficient. This conclusion turned on the definitions of malice and oppression in California Civil Code § 3294 which allows for the imposition punitive damages. The key was that Civil Code § 3294 uses those terms in the disjunctive.
The statutory definition of “malice” is “(1) conduct that the defendant intends to cause injury to the plaintiff (‘Intentional Malice’); or (2) despicable conduct carried on by the defendant with a willful and conscious disregard of the right or safety of others (‘Despicable Malice’). Civil Code § 3294(c)(1). “Oppression” is defined as “despicable conduct that subjects a person to cruel and unjust hardship in conscious disregard of that persons’ rights.” Civil Code § 3294(c)(2). “Fraud” means “an intentional misrepresentation, deceit, or concealment of a material fact known to the person with the intention on the part of the defendant of thereby depriving a person of property or legal rights or otherwise causing injury.” Civil Code § 3294(c)(3). The Court reasoned that of these definitions, only Intentional Malice and Fraud expressly require an intent to injure, as mandated for nondischargeability under Kawaauhau and Williams. Because the jury decision that Bikkina was entitled to punitive damages could have been based on conscious disregard, that conclusion alone could not support nondischargeability.
The Court also rejected that any of the underlying torts of defamation or intentional infliction of emotional distress, without more, preclusively turned on intent to harm. In reversing, the Court noted that the Ninth Circuit Bankruptcy Appellate Panel in In re Plyam, 530 B.R. 456, 465 (9th Cir. BAP 2015) had similarly rejected that an award of punitive damages under California law had conclusively determined that an intent to injure existed.
As concluded by the District Court in Houston, Texas, an award of punitive damages under California law, without more, does not mean a judgment is nondischargeable under § 523(a)(6). This is a trap for the unwary attorney, as happened not only in Mahadevan but also in Plyam, where the Ninth Circuit BAP looked at the exact same Civil Code definitions of malice and oppression and found the “or” in the statute meant a jury’s verdict could turn on “conscious disregard,” not intent to injure. Full confession: I decided this issue the same way ten years before the BAP in In re Derebery, 324 B.R. 349 (Bankr. C.D.Ca. 2005), a case cited with favor by the BAP. The attorney for the creditor in my case was dumbfounded, as he thought he had sure bang winner. Not so.
This review was written by the Hon. Meredith Jury (U.S. Bankruptcy Judge, C.D. CA., Ret.), a member of the ad hoc group. Thomson Reuters holds the copyright to these materials and has permitted the Insolvency Law Committee to reprint them. This material may not be further transmitted without the consent of Thomson Reuters.