Nondischargeability Based on Collateral Estoppel

Posted by NCBRC - May 24, 2016

Issue preclusion provided a short-cut to finding that the debtor’s liability for the costs and penalties incurred under state consumer protection laws was nondischargeable in bankruptcy under section 523(a)(6). O’Rorke v. Porcaro (In re Porcaro), No. 15-26 (B.A.P. 1st Cir. Feb. 3, 2016).

The O’Rorke’s hired the debtor, Peter Porcaro, to install custom-made windows in their home. Porcaro subcontracted the installation to Meredith. When Meredith tried to perform the work he found the windows provided by Porcaro were too small for the space. Porcaro told him to install the windows anyway. The O’Rorkes paid Porcaro and, when Porcaro failed to pay Meredith, Meredith told the O’Rorkes about the problem with the windows. The O’Rorkes took Porcaro to arbitration and won a judgment of $9,000 for replacement work and $2,300 for “patchwork.” Porcaro appealed and, in accordance with state law, obtained a hearing on all issues in the form of a trial de novo. Testimony at trial supported a finding that the windows were improperly installed and that it would cost approximately $20,000 to place the O’Rorkes in the position they would have been in had the windows been installed properly. The court awarded $20,000, which it trebled to $60,000 in accordance with state consumer protection laws, and over $20,000 in attorney fees and costs. The decision was upheld on appeal. Porcaro v. O’Rorke, 918 N.E.2d 97 (2009).

After exhausting his appeals in state court, Porcaro filed for bankruptcy listing the O’Rorkes as creditors with a $100,000.00 disputed judicial lien. The O’Rorkes filed an adversary complaint objecting to discharge of the debt under section 523(a)(6), arguing that the decision of the state court established the elements of nondischargeability under that section and was binding on the bankruptcy court under the doctrine of collateral estoppel. Porcaro responded that the “willing and knowing” standard for the state consumer protection laws was less stringent than the “intentional, willful or malicious injury” requirement in section 523 and, therefore, issue preclusion did not apply. The parties filed cross-motions for summary judgment. The bankruptcy court granted summary judgment in favor of the O’Rorkes.

Under the doctrine of issue preclusion “where there has been a prior state court judgment, the bankruptcy court’s ultimate dischargeability determination will be governed by any factual issues that were actually and necessarily decided by the state court.” In applying the doctrine, Massachusetts law (which is followed by the bankruptcy court) looks to whether “(1) there was a final judgment on the merits in the prior adjudication; (2) the party against whom preclusion is asserted was a party (or in privity with a party) to the prior adjudication; and (3) the issue in the prior adjudication was identical to the issue in the current adjudication. Additionally, the issue decided in the prior adjudication must have been essential to the earlier judgment.” The burden of demonstrating the applicability of issue preclusion is on the party claiming it.

To establish that a debt should be excepted from discharge under section 523(a) the creditor must show “(1) the debtor injured him or his property; (2) the debtor’s actions were willful; and (3) the debtor’s actions were malicious.” Willfulness requires that the debtor intended the injurious consequences of his act or knew that the injury was substantially certain to occur. “Malice” may be demonstrated by the lack of just cause for the debtor’s actions.

The panel turned to the state court decision to determine whether the facts necessary to a finding of nondischargeability were necessarily established in that forum. Ch. 93A prohibits unfair or deceptive acts in the conduct of trade or business. Specifically, the complainant must show “conduct that (1) falls within the penumbra of some common-law, statutory, or other established concept of unfairness; (2) is immoral, unethical, oppressive, or unscrupulous; and (3) causes substantial injury to consumers or other business persons.” Treble damages may be justified by a showing of “a willful or knowing violation of . . . section two . . . .” The “willful or knowing” requirement “is directed against callous and intentional violations of the law . . . .”

Applying these precepts to the case before it, the bankruptcy panel found that the elements of nondischargeability were established by the state court’s findings that Mr. Porcaro not only knew the windows were not the right size, but knew that installation of the windows would cause injury to the O’Rorkes. The trial court found that Mr. Porcaro’s conduct was “as egregious a violation of consumer protection laws as there can be” and trebled the damage award based on this conclusion. Mr. Porcaro conceded that the findings were essential to the state court decision and he raised no legitimate argument to counter the finding of malice. Additionally, injury was established by the trial court’s finding of breach of contract.

The BAP affirmed the judgment below.

This case is currently on appeal in the First Circuit, No. 16-9005.

Porcaro BAP 1st Cir opinion


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