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In re Braen

filed: March 30, 1990.

IN RE SAMUEL BRAEN, JR., DEBTOR. NICHOLAS LAGANELLA AND PT & L CONSTRUCTION CO., INC., APPELLANTS,
v.
SAMUEL BRAEN, JR.



On Appeal From the United States District Court. For the District of New Jersey (Newark), D.C. Civil Action No. 88-3473.

Higginbotham, Chief Judge, and Stapleton and Scirica, Circuit Judges.

Author: Stapleton

Opinion OF THE COURT

STAPLETON, Circuit Judge:

In this appeal, we review the district court's holding that a state court malicious prosecution judgment awarded against the debtor, Samuel Braen, Jr., did not collaterally estop consideration of whether Braen had been willful and malicious within the meaning of § 523(a)(6) of the Bankruptcy Code. We conclude that the appellants have demonstrated that collateral estoppel is appropriate in this case and will therefore reverse the district court's decision.

I.

Appellants Laganella and P.T. & L. filed suit in a New Jersey state court against Braen for malicious prosecution, alleging that Braen had deliberately misinformed New Jersey authorities that Laganella and his construction firm P.T. & L. had rigged the bids on a state construction project. In response to special interrogatories given by the trial judge, the jury found that the appellees had proved, by a preponderance of the evidence, that: (1) Braen was responsible for the institution of criminal proceedings against Laganella; (2) there was a lack of probable cause for the criminal prosecution; and (3) Braen was activated by a malicious motive in prosecuting the criminal complaint. Accordingly, the jury awarded Laganella compensatory damages of over $10 million and punitive damages of $150,000. The Superior Court of New Jersey, Appellate Division, affirmed the judgment of the trial court and the Supreme Court of New Jersey denied Braen's petition for certification.

Roughly one month after the denial of certification, Braen filed a Chapter 11 bankruptcy petition with the United States District Court for the District of New Jersey. Later that year, Laganella asked the bankruptcy court to declare the state court judgment nondischargeable under 11 U.S.C. § 523(a)(6), which provides that a creditor can avoid the discharge of a debt incurred "for willful and malicious injury by the debtor. . . ." Laganella contended that since Braen was found to have acted willfully and with malicious intent in the New Jersey proceeding, collateral estoppel barred reconsideration by the bankruptcy court of whether Braen's conduct satisfied § 523(a)(6)'s culpability requirement. Braen responded that issue preclusion was not justified in this case for three reasons: (1) Laganella was required to shoulder a less onerous burden of proof in the state proceeding than is required by § 523; (2) the state trial judge's instructions permitted the jury to find Braen liable based on a finding that Braen had acted only negligently or recklessly; and (3) that, because Braen was ill and his lawyer was negligent during the state court action, the application of issue preclusion to this case would be unfair.

The bankruptcy court rejected each of Braen's contentions and consequently held the malicious prosecution judgment nondischargeable. The district court reversed and remanded for an evidentiary hearing on whether Braen had been "willful and malicious" within the meaning of § 523(a)(6). We have jurisdiction under 28 U.S.C. § 1292(b).

II.

A.

The jury in the malicious prosecution suit found that Laganella established Braen's malicious motive by a preponderance of the evidence. Braen asserts that a creditor seeking to avoid discharge in bankruptcy must prove one of the grounds listed in § 523 -- in this case a willful and malicious injury -- by clear and convincing evidence. Accordingly, Braen argues that because Laganella bore a lesser burden of proof in the malicious prosecution suit than is required by § 523, collateral estoppel does not apply.

We agree that disparate burdens of proof foreclose application of the issue preclusion doctrine.*fn1 We disagree, however, with Braen's contention that a creditor seeking to avoid discharge under § 523(a)(6) must prove malice by more than a preponderance of the evidence.

Debts arising out of "willful and malicious injury by the debtor" are not the only obligations that § 523 excepts from discharge. Subsection (a) lists nine categories of nondischargeable debts, most of which contain a number of subcategories. The excepted debts arise in many disparate circumstances. Included as nondischargeable obligations, among others, are debts arising out of: (1) taxes or customs duties; (2) obtaining money, property, or services by false pretenses; (3) claims that were not timely filed; (4) fraud while acting in a fiduciary capacity, embezzlement, or larceny; (5) alimony or support; (6) fines, penalties and forfeitures; (7) education loans; and (8) judgments or consent decrees in suits based on the debtor's operation of a vehicle while intoxicated. Because Section 523 covers so many disparate circumstances, we doubt that Congress, without so stipulating, expected bankruptcy courts to apply a single standard of proof in all instances where a creditor asks for a declaration of ...


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