Smith v. Avalos

UNITED STATES BANKRUPTCY COURT
DISTRICT OF NEW MEXICO
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06/10/06
Don Smith v. Lori Avalos, et al.
04-01233
Memorandum Opinion re: [8-1] Motion For Summary Judgment by Plaintiff Don Smith
.
Received on: 2005-12-13 12:06:29.000
2005-12-13 00:00:00.000
2005-12-13 00:00:00.000
Patti Hennessy
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UNITED STATES BANKRUPTCY COURT
DISTRICT OF NEW MEXICO
In re: LORI AVALOS and No. 7-04-16176 MF
JOE AVALOS,
Debtors.
____________________________________________________________________________
DON SMITH,
Plaintiff,
v. Adv. No. 04-1233 M
LORI AVALOS,
Defendant.
MEMORANDUM
THIS MATTER is before the Court on the Motion for Summary Judgment filed by Plaintiff,
Don Smith, by and through his attorney of record, Zachary Cook. Also before the Court is the
Defendant’s Motion to Dismiss. At the final hearing on Plaintiff’s Motion for Summary Judgment and
Defendant’s Motion to Dismiss, the Court permitted Defendant Lori Avalos to supplement her Motion
to Dismiss with a letter, and allowed Plaintiff time within which to file a response to the supplement.
Plaintiff filed his response to Defendant’s supplemental letter on August 23, 2005. Having reviewed
Plaintiff’s Motion for Summary Judgment, the Court finds that the judgment obtained by the Plaintiff in
state court precludes re-litigation of the issues before this Court and satisfies the requirements for
finding the debt at issue non-dischargeable under 11 U.S.C. § 523(a)(6). The Court will, therefore,
grant Plaintiff’s Motion for Summary Judgment and deny Defendant’s request to dismiss this adversary
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proceeding.
DISCUSSION
Plaintiff filed a Complaint Objecting to Dischargeability of Debt (“Complaint”) under 11 U.S.C.
§ 523(a)(6). The basis of Plaintiff’s complaint is a judgment obtained against Defendant Lori Avalos in
the Twelfth Judicial District Court, County of Lincoln, State of New Mexico entered in Case No. CV-
00-216 on February 21, 2003 (“State Court Judgment”). The State Court Judgment awarded Plaintiff
his taxable costs of suit, damages for loss of business in the amount of $5,000.00, and punitive damages
in the amount of $7,500.00 based on a finding of Defendant’s “willful and reckless disregard of the truth
of the matter giving rise to Plaintiff’s claim on the part of the Defendant with no lawful authority or
purpose to defame Plaintiff and a lack of remorse sufficient to award punitive damages.” See Exhibit A,
attached to the Motion for Summary Judgment. Plaintiff asserts that the State Court Judgment
determines that the debt represented thereby was the result of Defendant’s willful and malicious injury,
rendering the debt non-dischargeable pursuant to 11 U.S.C. § 523(a)(6).
Defendant’s Motion to Dismiss, and the supplement thereto, recite the events that led up to the
state court proceeding, allege that the State Court Judgment was obtained by default and that she had
inadequate representation in the state court proceeding, and request that the adversary proceeding be
dismissed because Defendant believed that she was telling the truth, and that truth was a defense to the
claims for defamation filed against her in the state court proceeding. Finally, Defendant requests
dismissal of this adversary proceeding because declaring the judgment non-dischargeable will prevent
her from recovering from her financial troubles.
Summary judgment is governed by Federal Rule of Civil Procedure 56, made applicable to
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bankruptcy proceedings by Federal Rule of Bankruptcy Procedure 7056. Summary judgment is
appropriate when “the pleadings, depositions, answers to interrogatories and admissions on file,
together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the
moving party is entitled to judgment as a matter of law.” Rule 56(c), Fed.R.Civ.P. Principles of
collateral estoppel apply to actions for non-dischargeability of debt filed in connection with bankruptcy
proceedings, provided the standard of proof and the elements of the cause of action are identical to
those required for non-dischargeability under the Bankruptcy Code. Grogan v. Garner, 498 U.S.
279, 284-85, 111 S.Ct. 654, 658, 112 L.Ed.2d 755 (1991). The standard of proof required for non-
dischargeability actions is the preponderance of evidence. Id. at 291; In re Edie, 314 B.R. 6, 14
(Bankr.D.Utah 2004) (standard of proof for a non-dischargeability action brought under 11 U.S.C.
523(a)(6) is the preponderance of evidence) (citing Grogan, 498 U.S. at 291). Here, Plaintiff asserts
that the State Court Judgment is sufficient to grant summary judgment, implicating the application of
collateral estoppel. Collateral estoppel has been applied to grant summary judgment in non-
dischargeability actions premised upon a state court judgment for defamation. See, e.g., In re Warren,
204 B.R. 66 (Bankr.N.D.Okla. 1996) and In re Cline, 227 B.R. 828 (Bankr.S.D.Ind. 1998).
In applying collateral estoppel principles to state court judgments, a federal court must apply
the state law governing collateral estoppel for the state where the judgment was rendered. In re Shore,
317 B.R. 536, 541 (10th Cir. BAP 2004) (citing Marrese v. Am. Acad. of Orthopaedic Surgeons,
470 U.S. 373, 380, 105 S.Ct. 1327, 84 L.Ed.2d 174 (1985) (holding that unless an exception to the
Full Faith and Credit Statute applies, state law will determine the preclusive effect of a prior state court
judgment in cases exclusively within federal jurisdiction)). In New Mexico, the elements of collateral
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estoppel are: “(1) the party to be estopped was a party [or privy] to the prior proceeding, (2) the cause
of action in the case presently before the court is different from the cause of action in the prior
adjudication, (3) the issue was actually litigated in the prior adjudication, and (4) the issue was
necessarily determined in the prior litigation.” Rex, Inc. v. Manufactured Hous. Comm. 119 N.M.
500, 504, 892 P.2d 947, 951 (1995) (citation omitted). Once these elements are met, the Court must
also “determine whether the non-moving party ‘had a full and fair opportunity to litigate the issue in
prior litigation.’” Id. (quoting Shovelin v. Central New Mexico Electric Cooperative, Inc., 115
N.M. 293, 297, 850 P.2d 996,1000 (1993)). These elements have all been satisfied. Plaintiff and
Defendant were parties to the state court proceeding; this adversary proceeding is a different action
than the state court proceeding; Plaintiff and Defendant litigated the issue of defamation, including
damages, as part of the state court proceeding; and the issue of whether Defendant defamed Plaintiff
was necessarily determined by the State Court Judgment entered against her.
Although Defendant complains that her attorney failed to represent her adequately, and that the
State Court Judgment was obtained by default, the State Court Judgment plainly states that the matter
came on for trial, and that Defendant appeared and was represented by counsel. See Exhibit A to
Motion for Summary Judgment. Thus, the State Court Judgment was not obtained by default, and the
Court cannot conclude that the Defendant was not afforded a full and fair opportunity to litigate. If
Defendant was dissatisfied with the outcome of the state court proceeding, she could have pursued her
right to appeal. If Defendant was dissatisfied with the representation she received from her attorney in
the state court proceeding, she could have taken some other action. The question remains, however,
whether the elements necessary for the state court to enter judgment against Defendant based on a
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claim for defamation are sufficient to sustain a claim for non-dischargeability of debt under 11 U.S.C. §
523(a)(6). Grogan v. Garner, 498 U.S. 279, 284-85, 111 S.Ct. 654, 658, 112 L.Ed.2d 755 (1991)
(collateral estoppel applies to non-dischargeability matters only if the elements and the standard of
proof established in the prior action are equivalent to the requirements under the non-dischargeability
statute). See also In re Ellerbee, 177 B.R. 731, 737 (Bankr.N.D.Ga. 1995) (finding that the definition
of “actual malice” under Georgia law governing defamation was not the equivalent to the definition of
“willful and malicious” under 11 U.S.C. § 523(a)(6)).
Pursuant to 11 U.S.C. § 523(a)(6), a debt “for willful and malicious injury by the debtor to
another entity or to the property of another entity” cannot be discharged through bankruptcy. 11
U.S.C. § 523(a)(6). In order for a debt to be declared non-dischargeable under 11 U.S.C. §
523(a)(6), the debtor must have acted both willfully and maliciously. Panalis v. Moore, (In re Moore),
357 F.3d 1125, 1129 (10th Cir. 2004) (nondishargeability under § 523(a)(6) requires proof of both a
“willful act” and “malicious injury.”); In re Gagle, 230 B.R. 174, 179 (Bankr.D.Utah 1999) (“Because
they are distinct elements, . . . [Plaintiff] must establish that the Debtors’ conduct was both willful and
malicious.”)(citation omitted). Willfulness requires a “deliberate or intentional injury, not merely a
deliberate or intentional act that leads to injury.” Kawaauhau v. Geiger, 523 U.S. 57, 61, 118 S.Ct.
974, 977, 140 L.Ed.2d 90 (1998) (emphasis in original). Malice, which is a separate and distinct
requirement under 11 U.S.C. § 523(a)(6), requires a showing that the debtor acted “without
justification or excuse.” Gagle, 230 B.R. at 181. See also In re Tinkler, 311 B.R. 869, 880
(Bankr.D.Colo. 2004) (malice requires a showing of a wrongful, intentional act taken without just cause
or excuse) (relying on Tinker v. Colwell, 193 U.S. 473, 24 S.Ct. 505, 48 L.Ed. 754 (1904)); In re
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Cline, 227 B.R. at 830 (“an act is ‘malicious’ if it is done ‘in conscious disregard of one’s duties or
without just cause.’”) (quoting Matter of Thirtyacre, 36 F.3d 697, 700 (7th Cir. 1994) (quoting
Wheeler v. Laudani, 783 F.2d 610, 615 (6th Cir. 1986)).
Under New Mexico law, the elements of an action for defamation are: “a defamatory
communication, published by the defendant, to a third person, of an asserted fact, of and concerning the
plaintiff, and proximately causing actual injury to the plaintiff.” Newberry v. Allied Stores, Inc., 108
N.M. 424, 429, 773 P.2d 1231, 1236 (1989) (citing SCRA 1986, 13-1002). Punitive damages are
warranted when there has been a showing that the publication was made with actual malice. Id. at 430
(citing Marchiondo v. Brown, 98 NM 394, 403, 649 P.2d 462, 471 (1982)). Actual malice “requires
proof by clear and convincing evidence that publication of the communication by the defendant was
made with knowledge of its falsity or with reckless disregard of the truth.” Id.
The State Court Judgment includes the following findings:
THE COURT FINDS the Plaintiff did establish damages for loss of business in the
amount of $5,000.00 and the Plaintiff failed to establish damages to reputation or for
emotional distress by the preponderance of the evidence.
THE COURT FINDS the testimony and evidence in this case evidences a willful and
reckless disregard of the truth of the matter giving rise to Plaintiff’s claim on the part of
Defendant with no lawful authority or purpose to defame Plaintiff and a lack of remorse
sufficient to award punitive damages.
THE COURT FINDS the actions of Defendant support an award of punitive damages
in the amount of $7,500.00.
There is no question that Defendant intended the act which caused the harm, nor does Defendant deny
in her Motion to Dismiss that she made the statements which formed the basis of Plaintiff’s defamation
claim. The sticking point for the Plaintiff’s claim of non-dischargeability under 11 U.S.C. § 523(a)(6)
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is whether the findings in State Court Judgment satisfy the second inquiry relevant to the willfulness
requirement: that Defendant intended the harm. In Wheeler v. Laudani, 783 F.2d 610, 615 (6th Cir.
1986), the Sixth Circuit held that where a defamation claim can be satisfied by a showing of reckless
disregard for the truth or knowledge that the statement is false, a judgment or verdict finding the
defendant liable for defamation is insufficient to sustain a claim under 11 U.S.C. § 523(a)(6). See also,
In re Kennedy, 243 B.R. 1, 9 (Bankr.W.D.Ky. 1997) (concluding that because a defamation claim
could be sustained under applicable Michigan law upon a finding of fault “at least amounting to
negligence” the intent requirement under § 523(a)(6) was not satisfied). The Wheeler court reached
this result by reasoning that a mere reckless disregard of the truth is insufficient to show willfulness.
Wheeler, 783 F.2d at 615. See also, Ellerbee, 177 B.R. at 739 (“‘Willful means intentional or
deliberate and can not be established merely by applying a recklessness standard.’”) (quoting Lee v.
Ikner (In re Ikner), 883 F.2d 986, 989 (11th Cir. 1989)).
Malice, on the other hand, “does not require ill-will or specific intent to do harm” and is satisfied
upon a showing of “conscious disregard of one’s duties or without just cause or excuse.” Wheeler,
783 F.2d at 615 (citing Tinker, 193 U.S. at 486, 24 S.Ct. at 508) (remaining citations omitted). See
also Ellerbee, 177 B.R. at 739 (“Malicious means ‘wrongful and without just cause or excessive [sic.]
even in the absence of personal hatred, spite or ill-will.”) (quoting Sunco Sales, Inc., v. Latch (In re
Latch), 820 F.2d 1163, 1164 n.4 (11th Cir. 1987)). In this case, the finding included as part of the
State Court Judgment that Defendant acted “with no lawful purpose” is equivalent to finding that
Defendant acted “without just cause or excuse” and, therefore, satisfies the malice requirement under
11 U.S.C. § 523(a)(6).
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1Ellerbee held that a state court judgment for defamation did not collaterally estop debtor from
contesting dischargeability under 11 U.S.C. § 523(a)(6) because the definition for “actual malice”
under applicable state law governing defamation was not equivalent to the “willful and malicious”
standard in 11 U.S.C. § 523(a)(6) and because the jury did not make a specific finding concerning the
willful nature of the debtor’s conduct, but nevertheless granted summary judgment in favor of the
creditor because defendant admitted that he published the defamatory statements for the purpose of
striking back at his employer, evidencing the requisite intent to harm necessary under 11 U.S.C. §
523(a)(6). 177 B.R. at 737 and 742
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The State Court Judgment also contains a finding that Defendant acted with “willful and
reckless disregard for the truth of the matter giving rise to Plaintiff’s claim . . . and a lack of remorse
sufficient to award punitive damages.” This finding is sufficient to show that the Defendant acted with
the requisite intent to harm. Not only did the state court find that she acted with a reckless disregard
for the truth, it also found that she acted with a willful disregard for the truth. By willfully disregarding
the truth, the Court can infer that she intended to cause harm. As noted by the court in Ellerbee,
The juxtaposition of “willful” and reckless” permits the easy assumption that what is
reckless cannot be willful . . . . Ironically, . . . in the case of the tort of defamation, an
injury may be willful even though the speaker’s attitude toward the truth is merely
reckless.
177 B.R. at 742.1
In Ellerbee, because the debtor intended harm by making the statements for the purpose of wanting to
strike back at his employer and to have him removed from his position, the Court found that whether
the statements debtor made were true or false, the debtor knew they would lead to injury; thus, even
though the debtor may have been reckless about the truth, he was nevertheless deliberate about causing
the harm. Id. Here, although Defendant’s Motion to Dismiss asserts that she thought her statements
were true, and that truth is a defense to defamation, the Motion to Dismiss also states that she made the
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statements because “most of the members of the Fire Dept. wanted to do something to fight back” and
that she had “had enough of [Plaintiff’s] harassment . . . and just wanted him to stop.” See Motion to
Dismiss, p. 2; Supplement, p. 3. These statements indicate that Defendant intended her statements to
cause Plaintiff harm. Thus, because the State Court Judgment includes a finding of both willfulness and
recklessness with regard to whether her statements were true, and because Defendant admits that she
made the statements to fight back at the Plaintiff, the Court concludes that Plaintiff has satisfied the
second prong of the willfulness requirement necessary for a determination of non-dischargeability under
11 U.S.C. § 523(a)(6).
Based on the foregoing, the Court finds that summary judgment on Plaintiff’s claim for non-
dischargeability of debt under 11 U.S.C. § 523(a)(6) is appropriate. the Court will enter an order in
accordance with this Memorandum granting summary judgment in favor of Plaintiff. Defendant’s
Motion to Dismiss is denied.
_____________________________________________
MARK B. McFEELEY
United States Bankruptcy Court
I certify that on the date shown on the attached document verification, a true and correct copy of
the foregoing was either electronically transmitted, faxed, delivered or mailed to the listed counsel
and/or parties.
Zachary Cook
Attorney for Plaintiff
1221 Mechem Ste 5
Ruidoso, NM 88345 -7224
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Lori Avalos
#56 CR 2770
Aztec, NM 87410
________________________________
Patti G. Hennessy
Law Clerk
(505) 348-2525
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