In re: Lee, No. 09-5033 SLJ (Bankr. ND Calif., March 7, 2011)
What happens to an award of damages in bankruptcy court? This question was addressed in a recent 9th Circuit bankruptcy decision.
Janet Redd filed a lawsuit in 2007 against Maria Lee for intentional infliction of emotional distress based on a series of harassing and intimidating phone calls she made. After a jury trial, the jury returned a verdict for Redd, finding that Lee's conduct was outrageous and led to severe emotional distress, and awarded damages of $500,000.
Meanwhile, Lee had filed for Chapter 7 bankruptcy. Redd moved for relief from the automatic stay in order to obtain her recently-awarded damages. The court permitted her recovery. Redd then sought to have the court determine that the $500,000 was non-dischargeable. She claimed that Lee could not relitigate whether the emotional distress action was the result of "willful or malicious" conduct because that was already determined in state court, according to the doctrine of issue preclusion.
The court agreed that the issue could not be relitigated in the bankruptcy proceeding, because Redd had established that the civil claim and the non-dischargeability claim were substantive equivalents, meaning that they were so similar that the court could not make a decision on the issue a second time. As a result, the court found that Redd was entitled to her $500,000 damages, and that they were not dischargeable in bankruptcy because they were the result of "willful or malicious" conduct on the part of Lee.
It is important to note that a bankruptcy court cannot decide an issue that was decided previously by another court. In this case, that resulted in an award against the debtor, but the result could come out in favor of the debtor in another situation.
