The Ninth Circuit Court of Appeals demonstrated extraordinary deference to its Bankruptcy Appellate Panel in making bankruptcy law for the circuit.
The Ninth Circuit BAP typically writes lengthy opinions comprehensively laying out the facts and examining the law, assuring the circuit court, if there is another appeal, that the panel left no stone unturned. With remarkable frequency, the circuit court can issue brief memoranda affirmances that do little more than say there was no error in the BAP’s analysis.
In an unsigned, unpublished memorandum on Feb. 24, the Ninth Circuit upheld the BAP, in substance citing and relying on a recent BAP opinion as though it were law in the circuit.
Aside from revealing the circuit’s regard for the BAP, the opinion shows why bankruptcy courts must proceed with caution before declaring that a California judgment for punitive damages based on “malice in fact” is nondischargeable.
The case involved the invocation of issue preclusion in the context of an objection to discharge of a debt for “willful and malicious” injury under Section 523(a)(6). Having won a default judgment for punitive damages based on allegations of “malice in fact,” the creditor contended it was automatically entitled to a declaration of nondischargeability.
Because federal courts must give “full faith and credit” to state court judgments, the bankruptcy court was obliged to employ issue preclusion standards in California, the forum state. California is among those states where a default judgment can form the basis for collateral estoppel, or issue preclusion.
The bankruptcy court had ruled that the debt was excepted from discharge based on issue preclusion, but the BAP reversed and was upheld in the Ninth Circuit, relying on the BAP’s 2015 opinion in Plyam v. Precision Dev., LLC (In re Plyam), 530 B.R. 456 (B.A.P. 9th Cir. 2015).
In Plyam, the BAP had analyzed California law and concluded that the state’s formulation of “malice in fact” can be based on malice, oppression or fraud. The BAP said that only intentional malice or fraud “require an intent to cause injury.”
On the other hand, the BAP said in Plyam that “despicable malice and oppression” do not “satisfy the requisite state of mind for § 523(a)(6)” because they entail only “conscious disregard of another’s rights or safety,” thus not rising to the level of “deliberate or intentional” required by the Supreme Court in Kawaauhau v. Geiger, 523 U.S. 57 (1998).
Since punitive damages in California could have been based on factors not rising to the level required by Section 523(a)(6), the BAP held that judgment was not entitled to preclusive effect.
Although the Ninth Circuit’s opinion was nonprecedential, it appears that the appeals court has functionally adopted Plyam as law of the circuit. In short, California judgments for malice in fact are not automatically nondischargeable because state law is based on the disjunctive use of “or,” as in “malice, oppression or fraud.”
The Ninth Circuit Court of Appeals demonstrated extraordinary deference to its Bankruptcy Appellate Panel in making bankruptcy law for the circuit.