Bankruptcy: An Examination of the Dischargeability of Debts Regarding Property Damage-Malice

In the last issues I began a multi-issue review of cases that address the dischargeability of debts regarding property damage-malice. The relevant bankruptcy code provision is §523(a)(6). I briefly established the standard used by courts to determine dischargeability of debts involving property damage. The standard is very fact specific so reviewing cases will shed light on how the standard is applied. 

In Appalachian Equipment & Supply Co. v. McDaniel, the United States Bankruptcy Court at Harrisonburg, Virginia, determined that the creditor/plaintiff, a rental company, had satisfied all of the elements necessary to prove its case under Bankruptcy Code §523(a)(6), and thus, its claim for damages from the improper use of the forklift was declared exempt from discharge.

The Court in McDaniel ruled that the physical evidence was the most reliable evidence offered. That evidence showed that the forklift was delivered to the debtor in normal operable condition. It also showed that when the creditor picked up the forklift, it was damaged and displayed light blue paint on the bottom of the carriage. The debtor's evidence showed that one of the vehicles which was placed on the tractor trailer was a light-blue car. To the Court, it appeared more likely than not that the bottom portion of the carriage of the forklift was used in conjunction with attempting to crush the light-blue car such that paint flecks from the car attached themselves to the underside of the carriage. The Court indicated that it was satisfied that the expert testimony of the witness for the creditor established that more likely than not that the carriage of the forklift was used to apply hydraulic pressure in a downward direction with such force that the carriage boon and forks of the forklift were damaged. In conclusion, the Court found that the debtor used the carriage to accomplish his intent to crush cars, such use was inconsistent with the normal usage of the forklift, and such usage led to the damage of the forklift. The Court further found that the creditor proved by a preponderance of the evidence that the debtor's actions in using the forklift were intentional. 

The Court in McDaniel found that the debtor knew that a forklift should not be used to crush cars. The physical evidence and the expert evidence offered by the creditor were more persuasive than the debtor's attempts to deflect blame to another person. It showed that the debtor applied the boon portion of the forklift to employ downward hydraulic pressure to the crush the cars. The Court ruled that it was satisfied that the debtor used the forklift in an improper manner to crush the cars in order to load them onto his flatbed trailer. The Court found that the debtor was an experienced forklift operator. He brought equipment to the site which could have been used to safely crush the cars. He used the forklift in a manner inconsistent with the generally accepted practice for the usage of this type of forklift. In light of these surrounding circumstances, the Court ruled that the debtor knew, or should have known, that his acts would cause damage to the forklift and resulting harm to the creditor. Thus, the Court ruled that the debtor's actions fit the definition of malice as set forth in the case of St. Paul Fire & Marine Ins. Co. v. Vaughn, the standard for denial of discharge.

Collections: Garnishment of Domain Name

The Fairfax County Circuit Court ruled in favor of a creditor in a unique garnishment action. The case was Umbro International, Inc. v. 3263851 Canada Inc. and Network Solutions, Inc. The Court in Umbro ruled that Umbro, an international sporting goods company that won a judgment against a “cybersquatter” who had staked a claim to the Internet domain name “umbro.com”, could garnish other domain names owned by the judgment debtor.

The issue in this case was whether the domain names registered by the judgment debtor with Network Solutions, Inc. (“NSI”) are the kind of property that is subject to garnishment. The court noted that Virginia Code §8.01-501 clearly states that a writ of fieri facias is a lien on all the intangible property of the judgment debtor. The lien, however, only attaches to the extent that the judgment debtor has a possessory interest in the intangible property subject to the writ. The Court, as a result, noted that it was required to determine if the judgment debtor had a possessory interest in the domain names it registered with NSI.

NSI argued that a writ of fieri facias could not extend to domain names because the contract rights set forth in the registration agreement were dependent on unperformed conditions. These conditions included NSI’s rights to indemnification and the registrant’s continuing obligation to maintain an accurate registration record. The Court found that this argument failed on several grounds. First, in the dispute policy NSI undertook to abide by any court order.  Such orders have included mandatory injunctions that a registrant takes all actions necessary to transfer a disputed domain name to a third party. Thus in the dispute policy NSI had agreed to subject to other liens that affect the value of the property. There was no unperformed condition under the registration agreement that could prevent a registrant from the full use of the domain name registration.

NSI also argued that the contract right to the performance of a service was not garnishable because, among other things, it would force NSI to perform services for those with whom it may not desire to do business. The Court found that this assertion was entitled to little weight, as in the short time of its existence, NSI had registered some 3.5 million domain names, and registration applications were made by e-mail without human intervention in 90 percent of registration transactions.

The Court noted that until Umbro, domain names apparently had not been subjected to garnishment. Nevertheless, the court ruled that there was no reason to conclude that this new form of intellectual property was thus immune. The Court found no reason why a judgment creditor should be precluded from satisfying a valid judgment just because its creditor had a possessory interest in intangible intellectual property resulting from technology of recent vintage.

The lesson of Umbro - sometimes you have to be inventive and think outside the box in order to collect on judgments.

Foreclosure: Deed in lieu of Foreclosure

In certain cases it may be more practical for the lender to seek or accept from the borrower a deed in lieu of foreclosure rather than incur the expense of foreclosure – this is at the lender’s discretion. If the lender agrees, in return for voluntarily surrendering the property, the borrower will seek either partial or complete satisfaction of the debt.

Considerations. Before accepting the deed in lieu of foreclosure, the lender must consider many matters:

• Value of the property vs. the amount of the debt.
• Other debts on the property. A deed in lieu of foreclosure does not extinguish prior or junior liens or encumbrances. Thus the lender, in accepting the deed, accepts the property with the liens. It is possible for the lender to structure the deed in lieu of foreclosure so that it does not release the deed of trust so as to preserve a future foreclosure to extinguish subordinate liens.

Real Estate: Former Homeowners’ Association President’s Emails were Defamatory

In the Fairfax Circuit Court case of Cornwell v. Ruggieri, the trial judge and jury found that the plaintiff homeowner was defamed by four emails written and published by a former association president and awarded $9,000.00 in damages. These emails alleged that the homeowner had stolen association funds five years earlier. The former association president tried to defend the case on the basis that the statements were simply a matter “of opinion”, not a matter of fact (as required under Virginia case law to recover damages), but the trial judge disagreed.

The trial judge instructed the jury that under Virginia law the defendant, in his role as association president, had a “limited privilege” to make defamatory statements without being liable for damages. However, if it was proved by “clear and convincing evidence” that the defendant had “abused” the privilege, the defamatory statements were not protected. The trial judge instructed the jury that there were six possible ways (outlined below) that the homeowner could prove that the former association president abused the limited privilege.

The homeowner presented evidence that the defendant made statements (1) with reckless disregard; (2) that were unnecessarily insulting; (3) that the language was stronger than was necessary; (4) were made because of hatred, ill will, or a desire to hurt the homeowner rather than a fair comment on the subject; and (5) were made because of personal spite, or ill will, independent of the occasion on which the communications were made.

The jury was given a specific interrogatory with regard to each of the four defamatory statements:

(1) Did the defendant make the following statements?

(2) Were they about the plaintiff?

(3) Were they heard by someone other than the plaintiff?

(4) Are the statements false?

(5) Did the defendant make the statements knowing them to be false, or, believing them to be true, did he lack reasonable grounds for such belief or act negligently in failing to ascertain the facts on which the statements were based?

(6) Did the defendant abuse a limited privilege to make the statement?

For each question as to all four emails, the jury answered “yes”. After a three-day trial, the verdict was rendered in favor of the plaintiff -- $9,000.00 in damages.

This case gives a good reminder that homeowner association board members must be knowledgeable, professional and well-advised when serving their communities.

Bankruptcy: An Examination of the Dischargeability of Debts Regarding Property Damage-Malice

Several cases illustrate well the dischargeability of debts involving property damage. In all cases, the trial and appellate courts are required to adhere to Bankruptcy Code §523(a)(6), which states that a debt causing willful and malicious injury to another entity is not exempt from discharge.

The standard established by the courts to prove willful and malicious injury is described by the court in St. Paul Fire & Marine Ins. Co. v. Vaughn. In Vaughn, the Court of Appeals for the Fourth Circuit stated that the debtor must be shows by contradicted and unimpeached evidence to have committed a willful and malicious injury to the creditor’s property. There is no requirement of specific malice on the part of the debtor, however. The court held that “willful and malicious” injury means injury that is wrongful and without cause or excuse, but the debtor does not necessarily need to have ill will. 

However, this is a very general definition. Courts have applied this standard to many different situations and it is clear that this standard is very fact specific.