Commercial Litigation and Arbitration

Is Willfulness Judged by an Objective or Subjective Standard? Circuit Split (Bankruptcy/Restatement-Focused; Important for Pending Spoliation Rule 37(e))

Margulies v. Hough (In re Margulies), 2014 U.S. Dist. LEXIS 125843 (S.D.N.Y. Sept. 9, 2014):

On August 3, 2000, Joshua Margulies and Dennis Hough engaged in what has fairly been described as a slow-moving game of chicken on a Manhattan street. Margulies drove forward in his car at a slow rate of speed toward Hough, a pedestrian, expecting him to get out of the way. Instead, Hough stood his ground. When traffic prevented Margulies from veering around Hough, Margulies hit Hough with his car. In 2003, Hough obtained a $4.8 million default judgment after filing a lawsuit accusing Margulies of negligence. Despite more than a decade of legal proceedings between and among Hough, Margulies, and Margulies's insurer at [*2]  the time, USAA Casualty Company ("USAA"), Hough has yet to collect on that judgment.

The instant action arises from an adversary proceeding filed by Hough in Margulies's Chapter 7 bankruptcy proceedings; the proceeding was initiated to prevent Margulies from discharging his debt to Hough, and alternatively to force USAA to indemnify Margulies for the judgment. After trial, the United States Bankruptcy Court for the Southern District of New York (Bernstein, J.) determined that Margulies's debt was not dischargeable pursuant to 11 U.S.C. §523(a)(6), because it arose from his willful and malicious conduct; Margulies appeals from this determination. Hough cross-appeals from the Bankruptcy Court's determination that USAA was not liable for the judgment pursuant to New York Insurance Law § 3420, since Margulies intentionally hit Hough. For the reasons set forth below, the judgment of the Bankruptcy Court is vacated, and the matter is remanded for further proceedings consistent with this Opinion.


B. Analysis

1. The Dischargeability Claim

a. Applicable Law

The Bankruptcy Code precludes discharge for any debt that is the result of a "willful and malicious injury by the debtor to another." 11 U.S.C. § 523(a)(6). "As used in that section, the word 'willful' indicates 'a deliberate or intentional injury, not merely a deliberate or intentional act that leads to injury.'" Ball v. A.O. Smith Corp., 451 F.3d 66, 69 (2d Cir. 2006) (quoting Kawaauhau v. Geiger, 523 U.S. 57, 61 (1998) (emphasis in Geiger)). Next, "[t]he injury caused by the debtor must also be [*19]  malicious, meaning 'wrongful and without just cause or excuse, even in the absence of personal hatred, spite, or ill-will.'" Id. (quoting Navistar Fin. Corp. v. Stelluti (In re Stelluti), 94 F.3d 84, 87 (2d Cir. 1996)). Malice may be implied "by the acts and conduct of the debtor in the context of [the] surrounding circumstances." In re Stelluti, 94 F.3d at 88 (alteration in original) (internal quotation marks omitted). "The terms 'willful' and 'malicious' are separate elements, and both elements must be satisfied." Rupert v. Krautheimer (In re Krautheimer), 241 B.R. 330, 341 (Bankr. S.D.N.Y. 1999) (internal citation omitted).

Hough bears the burden of demonstrating non-dischargeability by a preponderance of the evidence. Grogan v. Garner, 498 U.S. 279, 291 (1991). The Supreme Court has instructed that in order to promote the general goal of the Bankruptcy Code -- providing bankrupt debtors with a fresh start -- any "exceptions to discharge 'should be confined to those plainly expressed.'" Geiger, 523 U.S. at 62 (quoting Gleason v. Thaw, 236 U.S. 558, 562 (1915)).

Finally, the determination of whether a particular debt should be excepted from discharge under § 523(a)(6) is a legal conclusion that falls within the exclusive jurisdiction of the bankruptcy courts. See 11 U.S.C. § 523(c). Accordingly, res judicata does not bar the bankruptcy court from deciding the issue of whether a debt is dischargeable, even when similar issues have already been decided by a state court of competent jurisdiction. Brown v. Felsen, 442 U.S. 127, 138-39 (1979).

b. Willfulness  

Margulies contends principally that the Bankruptcy Court improperly applied an objective standard in determining that his actions were willful and not subject to discharge. (Margulies Br. 12-16). He is correct.

The Supreme Court has instructed that

[t]he word "willful" in [§ 523(a)(6)] modifies the word "injury," indicating that nondischargeability takes a deliberate or intentional injury, not merely a deliberate or intentional act that leads to injury. Had Congress meant to exempt debts resulting from unintentionally inflicted injuries, it might have described instead "willful acts that cause injury."

Geiger, 523 U.S. at 61-62 (emphasis in original). In Geiger, the Supreme Court considered whether, in the context of § 523(a)(6), "willfulness" encompassed "acts, done intentionally, that cause injury..., or only acts done with the actual intent to cause injury." 523 U.S. at 61. Citing the Restatement (Second) of Torts (1964) (the "Restatement"), the Court held that § 523(a)(6) encompassed '"intentional torts,' as distinguished from negligent or reckless torts. Intentional torts generally require that the actor intend 'the consequences of an act,' not simply 'the act itself.'" Id. at 61-62 (emphasis in Geiger) (quoting Restatement § 8A, cmt. a).

The section of the Restatement cited favorably in Geiger [*21]  provides further that intent is found when "the actor desires to cause consequences of his act, or that he believes that the consequences are substantially certain to result from it." Restatement § 8A, cmt. a. Comment b continues,

   If the actor knows that the consequences are certain, or substantially certain, to result from his act, and still goes ahead, he is treated by the law as if he had in fact desired to produce the result. As the probability that the consequences will follow decreases, and becomes less than substantial certainty, the actor's conduct loses the character of intent, and becomes mere recklessness.... As the probability decreases further, and amounts only to a risk that the result will follow, it becomes ordinary negligence.... All three have their important place in the law of torts, but the liability attached to them will differ.

Id., cmt. b. Although Geiger did not specifically incorporate the Restatement's "substantial certainty" test, courts that have considered this issue post-Geiger have relied upon Geiger's favorable reference to that section of the Restatement in defining intent -- for the purposes of § 523(a)(6) -- as either a deliberate intent to cause the injury, or a substantial certainty [*22]  that the injury will occur.

There remains, however, a long-standing split among the Circuits as to whether that substantial certainly must be judged subjectively or objectively. Compare In re Markowitz, 190 F.3d 455, 464 (6th Cir. 1999) ("[W]e now hold that unless 'the actor desires to cause the consequences of his act, or ... believes that the consequences are substantially certain to result from it,' he has not committed a 'willful and malicious injury' as defined under § 523(a)(6)." (internal citations omitted)); In re Thoms, 505 F. App'x 603, 605 (8th Cir. 2013) (summary order) (noting that "[w]e construe the § 523(a)(6) exception narrowly," and holding that "[i]f the debtor knows that the consequences are certain, or substantially certain, to result from his conduct, the debtor is treated as if he had, in fact, desired to produce those consequences" (internal citations omitted)); In re Ormsby, 591 F.3d 1199, 1206 (9th Cir. 2010) (requiring creditor to show that "debtor believes that injury is substantially certain to result from his own conduct"); In re Englehart, 229 F.3d 1163 (10th Cir. 2000) (applying the subjective standard, and rejecting the objective standard as "at odds with the considerations discussed [in Geiger]" (internal citations omitted)), with In re Shcolnik, 670 F.3d 624, 630 (5th Cir. 2012) (finding willfulness where creditor showed an "objective substantial certainty of harm" (internal citations omitted)); see also In re Kane, 755 F.3d 1285, 1293 (11th Cir. 2014) (recognizing the [*23]  Circuit split, and applying the subjective standard as "more stringent," without deciding which standard applies).

In a recent Seventh Circuit opinion, Judge Posner recognized the divergence among Circuit courts on this issue, observing ultimately that

   whatever the semantic confusion, we imagine that all courts would agree that a willful and malicious injury, precluding discharge in bankruptcy of the debt created by the injury, is one that the injurer inflicted knowing he had no legal justification and either desiring to inflict the injury or knowing it was highly likely to result from his act.

Jendusa-Nicolai v. Larsen, 677 F.3d 320, 324 (7th Cir. 2012). Though the Second Circuit has yet to opine on the issue, courts within this Circuit have largely applied the subjective standard. See, e.g., Citik Ka Wah Bank Ltd. N.Y. Branch v. Wong (In re Wong), 291 B.R. 266, 280 (Bankr. S.D.N.Y. 2003) ("An act is willful when the debtor intends to inflict the injury or knew that the injury was substantially certain to result." (internal citations omitted)); In re Alicea, 230 B.R. 492, 507 (Bankr. S.D.N.Y. 1999) ('"Willful,' as used in § 523(a)(6), means 'a deliberate or intentional injury, not merely a deliberate or intentional act that leads to injury,' and includes conduct that the actor is substantially certain will cause injury." (internal citations omitted)); In re Mitchell, 227 B.R. 45, 51 (Bankr. S.D.N.Y. 1998) (willfulness "includes conduct that the actor is [*24]  substantially certain will cause injury" (internal citations omitted)).

This Court joins in endorsing the subjective standard. It accords better with the Supreme Court's directive in Geiger, see 523 U.S. at 61 ("nondischargeability takes a deliberate or intentional injury" (emphasis in original)), as well as the Restatement definition that is cited favorably in Geiger, see Restatement § 8A ("the actor ... believes that the consequences are substantially certain to result from [his action]"). A subjective standard is also in keeping with the Bankruptcy Code's focus on intentional conduct by the debtor. An objective standard, by contrast, looks past the actual will or intent of the debtor, and instead considers an objective observer's understanding of whether the injury was substantially certain to occur. This inquiry sounds more in recklessness than intent. Cf. Geiger, 523 U.S. at 61 (willfulness encompasses intentional, not reckless, torts).

The Bankruptcy Court erred by collapsing the distinction between the objective and subjective standards of intent, and thereby applying a quasi-objective standard. Specifically, the Bankruptcy Court cited decisions from, among others, both the Fifth and the Ninth Circuits, in holding that a plaintiff [*25]  must prove "that the debtor actually intended to injure the victim, or engaged in conduct that was substantially certain to cause injury." Margulies III, 2013 WL 2149610, at *3-4 (emphasis added). As discussed above, the Ninth Circuit advocates a subjective standard, while the Fifth Circuit advocates an objective standard. Compare In re Ormsby, 591 F.3d at 1206 (requiring creditor to show that "debtor believes that injury is substantially certain to result from his own conduct"), with In re Shcolnik, 670 F.3d at 630 (finding willfulness where creditor showed an "objective substantial certainty of harm"). Thus, while the Bankruptcy Court found that Margulies had no subjective intent to harm Hough, see 2013 WL 2149610, at *4, it applied an objective standard in finding that Margulies's actions were substantially certain to cause injury to Hough, see id. ("Margulies drove at Hough and it was substantially certain he would injure Hough if Hough did not get out of the way of his car. Margulies therefore acted willfully.").

While Margulies's testimony at trial indicated that he did not anticipate hitting Hough (see Tr. 256-57 ("I'm not defending that I continued to move the car, but I was very certain that he would move out of the way"), 238 (Margulies "really didn't" anticipate hitting Hough), 139 (Margulies [*26]  did not expect that he would hit Hough when Margulies's car began "rolling" forward)), the Bankruptcy Court made no specific factual findings as to whether Margulies himself was substantially certain that his actions would injure Hough. Accordingly, the matter is remanded for further factual development on this issue and application of a subjective standard.

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