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Fee Awards Are Only Non-Dischargeable Only If The Applicable Statute Proscribes Conduct That Violates § 523

CITATION:

Kaplan v. Wasko, Case No. CC-12-1118-PaMkBe (9th Cir. B.A.P. Mar. 6, 2013) (unpublished).

RULING:

The Ninth Circuit B.A.P. remanded this case and directed the bankruptcy court to apply the issue preclusion factors identified in Harmon v. Kobrin (In re Harmon), 250 F.3d 1240, 1245 (9th Cir. 2001). In applying those factors to the state court’s attorney fee award, the Ninth Circuit B.A.P. found that the underlying discovery sanction could only be excepted from discharge if the statute at issue proscribes conduct that violates one of the provision of 11 U.S.C. § 523(a).

PROCEDURAL CONTEXT:

Appeal from the bankruptcy court for the Central District of California, which denied a creditor’s motion to amend summary judgment and determined that the state court’s fee award was not exempt from discharge because it found that issue preclusion did not apply to the state court’s fee award. The bankruptcy court order was reviewed de novo.

FACTS:

Kaplan invested in the Debtors’ failed night club. And he sued the Debtors in California state court alleging eleven causes of action, including fraud and breach of fiduciary duty. The state court was permitted to adjudicate the claims post-petition and entered a judgment in Kaplan’s favor. Thereafter, Kaplan filed a motion in the state court proceedings seeking discovery sanctions available pursuant to a California statute. The state court entered an order granting the motion and imposing sanctions. Kaplan brought an adversary proceeding in the bankruptcy case and argued that the state court judgment and sanction order were non-dischargeable. With respect to the underlying debt, the bankruptcy court granted summary judgment and held that it could not be discharged. With respect to the fee award, however, the bankruptcy court declined to find those sums non-dischargeable because public policy did not support the application of issue preclusion. The Ninth Circuit B.A.P. articulated the standards that must be applied in deciding issue preclusion and remanded the case for that purpose. In addition, the Ninth Circuit B.A.P. clarified that the fee award could only be non-dischargeable if the California statute proscribed conduct that violates one of the provisions of 11 U.S.C. § 523(a).

JUDGE(S):

Pappas, Markell and Beesley

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