An award of treble damages in arbitration for a willful violation of state law doesn’t mean that the debt is automatically excepted from discharge under Section 523(a)(2)(A), for reasons explained by Bankruptcy Judge Robert E. Grossman of Central Islip, N.Y.
Before bankruptcy, creditors initiated an arbitration against the counterparty on a contract. They made multiple allegations of breach of contract, alongside claims for fraud, fraudulent inducement, false pretenses and misrepresentation. They sought punitive and treble damages under Virginia law.
Also before bankruptcy, the arbitrator awarded the creditors more than $160,000, including an award of treble damages under Virginia law. The New York state court confirmed the award before the individual debtor filed a chapter 7 petition.
The creditors filed a complaint seeking to declare the judgment nondischargeable under Section 523(a)(2)(A) as a debt obtained by “false pretenses, a false representation, or actual fraud.” Finding disputed issues of fact, Judge Grossman initially denied the creditors’ motion for summary judgment based on a contention that collateral estoppel made the debt nondischargeable.
The parties allowed Judge Grossman to try the case based on the principle of collateral estoppel applied to the written record from the arbitration. Collateral estoppel is also known as issue preclusion.
Because the award was confirmed in New York, that state’s law on collateral estoppel applied. To invoke the doctrine, the “identical issue” must have been necessarily decided in the prior action, and the debtor must have had a full and fair opportunity to litigate in the prior action.
The debtor had been given an opportunity to litigate in the arbitration, but Judge Grossman concluded that “the identity requirement of the first prong is not met.”
Judge Grossman explained that the arbitration award “made no specific findings as to the Debtor’s conduct” and did not state the statute or legal principle on which the award was based. The creditors nonetheless argued that the treble damage award established willfulness.
In that regard, Judge Grossman said that there must be “clear and unequivocal factual and/or legal findings in the prepetition judgment which would satisfy the requisite elements of section 523(a).”
However, the lack of specific findings by the arbitrator didn’t end the inquiry. As the Collier treatise explained, the bankruptcy court can inferentially reconstruct the foundation for the arbitrator’s award to determine whether it “was necessarily based on a finding of false pretenses, false representation, or actual fraud” under the Virginia statute.
The Virginia consumer protection statute lists 66 “fraudulent acts or practices” that can result in treble damages. Judge Grossman said he had “no way of knowing” which one underlay the arbitrator’s award.
There are three subdivisions in the Virginia statute that do not require fraud or misrepresentation. For instance, the statute allows treble damages for willful breach of contract. If that were the basis for the award, it “would not rise to the level of conduct proscribed by section 523(a)(2)(A),” Judge Grossman said.
Conceding that the arbitrator no doubt “had good reasons to impose treble damages based on a ‘willful’ violation” of the Virginia statute, Judge Grossman said he could not “determine whether the Debtor’s ‘willfulness’ related to a false representation by the Debtor, false pretenses, actual fraud, or just was related to a willful breach of the [contract].”
Judge Grossman entered judgment for the debtor declaring that the debt was discharged.
An award of treble damages in arbitration for a willful violation of state law doesn’t mean that the debt is automatically excepted from discharge under Section 523(a)(2)(A), for reasons explained by Bankruptcy Judge Robert E. Grossman of Central Islip, N.Y.
Before bankruptcy, creditors initiated an arbitration against the counterparty on a contract. They made multiple allegations of breach of contract, alongside claims for fraud, fraudulent inducement, false pretenses and misrepresentation. They sought punitive and treble damages under Virginia law.
Also before bankruptcy, the arbitrator awarded the creditors more than $160,000, including an award of treble damages under Virginia law. The New York state court confirmed the award before the individual debtor filed a chapter 7 petition.
The creditors filed a complaint seeking to declare the judgment nondischargeable under Section 523(a)(2)(A) as a debt obtained by “false pretenses, a false representation, or actual fraud.” Finding disputed issues of fact, Judge Grossman initially denied the creditors’ motion for summary judgment based on a contention that collateral estoppel made the debt nondischargeable.