After selling his business to Evapco, Mr. Peterson continued to work for Evapco subject to a non-compete agreement. Despite this, Mr. Peterson formed other entities which Evapco asserted violated such agreement and defrauded Evapco. Evapco brought suit in Maryland, with the court there entering a default judgment as a sanction against Mr. Peterson following a hearing on his spoliation of discoverable documents. The Maryland court subsequently took evidence and denied Evapco’s request for injunctive relief against Mr. Peterson, but did award compensatory and punitive damages.
Mr. Peterson filed Chapter 7 and Evapco sought a denial of discharge under both 11 U.S.C. § 727(a) (3) and (4) (A). As to whether Mr. Peterson had concealed or destroyed records, the bankruptcy court denied the motion for summary judgment, holding that § 727(a) (3) requires a “fact intensive inquiry” rarely suited for summary judgment. As to whether Mr. Peterson made false oaths and accounts in his bankruptcy petition, the court found that he had responded to such allegations with sufficient particularities that summary judgment was not appropriate either.
Evapco also sought a determination that Mr. Peterson’s obligation to it was nondischargeable under 11 U.S.C. § 523(a) (6) as the Maryland Court had found his actions to be willful and malicious, with collateral estoppel precluding re-litigation of the question. The bankruptcy court found that Pursuant to Maryland law, the factors of collateral estoppel are:
(1) The issue or fact is identical to the one previously litigated;
(2) The issue or fact was actually resolved in the prior proceeding;
(3) The issue or fact was critical and necessary to the judgment in the prior proceeding;
(4) The judgment in the prior proceeding is final and valid; and
(5) The party to be foreclosed by the prior resolution of the issue or fact had a full and fair opportunity to litigate the issue or fact in the prior proceeding.
Mr. Peterson’s argument that the Mary Court had entered a default judgment was unavailing, as that court had found the amount of damages at question after a full and contested hearing. Further, while the judgment did not explicitly state that Mr. Peterson had acted willfully, it had stated that he acted with “actual malice”, which, under Maryland law requires willfulness. Similarly, under Maryland law, punitive damages require the same finding of “actual malice” and thus also willfulness. Accordingly, the claim by Evapco against Mr. Peterson was subject to collateral estoppel and nondischargeable.
It is never clear why a creditor with a strong nondischargability argument would also seek to deny the debtor a discharge. A discharge of other debts leaves a debtor better able to pay the nondischargeable claim after bankruptcy, whether voluntarily or through seizure of assets. Use of § 727 as a leverage is severely problematic, as once bankruptcy court latch onto concerns they are loathe to let a debtor “buy” a discharge by settling the matter, especially with one creditor, either because such smacks of continued dishonesty by a debtor or of strong-arm extortion by a creditor.