Ball v. AO Smith Corp.

• Decision Date: 03 February 2005
• Docket Number: No. 1:04-CV-532(LEK).,1:04-CV-532(LEK).
• Citation: 321 B.R. 100
• Parties: James Jay BALL, Appellant, v. A.O. SMITH CORPORATION, Appellee.
• Court: U.S. District Court — Northern District of New York

321 B.R. 100

James Jay BALL, Appellant, v. A.O. SMITH CORPORATION, Appellee.

No. 1:04-CV-532(LEK).

United States District Court, N.D. New York.

February 3, 2005.

COPYRIGHT MATERIAL OMITTED

James Jay Ball, Meridale, NY, pro se.

Frederick W. Morris, Jeffrey A. Eyres, Leonard, Street Law Firm, Minneapolis, MN, for Appellee.

MEMORANDUM-DECISION AND ORDER ¹

KAHN, District Judge.

I. BACKGROUND

Presently before the Court is an appeal by Debtor James J. Ball ("Debtor"). Debtor, a licensed attorney, appeals from several rulings of the Bankruptcy Court for the Northern District of New York in an action brought by Plaintiff A.O. Smith Corporation ("AOS"). Specifically, he asks this Court to reverse the rulings of the bankruptcy court and now order that (1) Debtor is discharged from paying an award of attorney's fees that was granted by the U.S. District Court in Louisiana because the district court did not conclude that Debtor acted willfully or maliciously as is required under 11 U.S.C. § 523(a)(6); (2) the admission of unauthenticated copies of the transcripts from proceedings in the District Court of Louisiana violated the Federal Rules of Evidence, and therefore they should have been excluded from evidence at the bankruptcy trial; (3) AOS should be held in contempt of court because it violated the automatic stay by filing (a) in the Eastern District of New York, a motion for costs stemming from a scheduled deposition of Debtor and (b) in North Carolina state court, a motion to have Debtor's pro hoc vice status revoked in that jurisdiction;² (4) it was mandatory for AOS's counsel to withdraw from representation of AOS, pursuant to Disciplinary Rule 2-110(b)(2), because they violated Disciplinary Rule 5-102 by appearing as both a witness and legal advocate for their client; and (5) pursuant to Local Bankruptcy Rule 9022.1, the orders of the bankruptcy court are vacated because they were never served on Debtor.

II. DISCUSSION

(a) Standard of Review

In reviewing the rulings of a bankruptcy court, a district court applies the clearly erroneous standard to a bankruptcy court's conclusions of fact, and de novo review to conclusions of law. Yarinsky v. Saratoga Springs Plastic Surgery, 310 B.R. 493, 498 (N.D.N.Y.2004) (Hurd, J.) (citing to In re Manville Forest Prods. Corp., 209 F.3d 125, 128 (2d Cir.2000); In re Petition of Bd. ofDirs. of Hopewell Int'l Ins. Ltd., 275 B.R. 699, 703 (S.D.N.Y. 2002); Fed. R. Bankr.P. 8013). Mixed questions of law and fact are reviewed de novo. Ernst & Young v. Bankr.Servs. (In re CBI Holding Co.), 311 B.R. 350 (S.D.N.Y.2004) (citing to In re Vebeliunas, 332 F.3d 85, 90 (2d Cir.2003); In re Aro-Chem Corp., 176 F.3d 610, 620 (2d Cir. 1999)). Under Rule 8013 of the Federal Bankruptcy Rules, on appeal, "the district court ... may affirm, modify, or reverse a bankruptcy judge's judgment, order, or decree or remand with instructions for further proceedings."

(b) Dischargeability of Attorneys Fees Awarded

(i) Background

The award of attorney's fees that Debtor now seeks to have discharged was ordered by Judge Tucker L. Melancon in Gatreau v. AOS, No. 98-CV-1187 (W.D.La.2001). In that proceeding, Debtor, a licensed attorney, represented a plaintiff who alleged fraud surrounding his purchase of a used silo manufactured by AOS. With respect to the merits of the action, the district court granted AOS's motion for summary judgment and dismissed plaintiffs action with prejudice because it was time barred. W.D. La. Tr. (Dkt. No. 1, Appellant Ex. 6)³ at 4-5. AOS then moved for sanctions against Debtor pursuant to Rule 11, alleging that the frivolous lawsuit was initiated only to harass and cause unnecessary litigation expense. Id. at 6-7. AOS also sought sanctions pursuant to 28 U.S.C. § 1927 which were to be granted, in accordance with Fifth Circuit precedent, only if the factual and legal arguments are "unwarranted." Id. at 9-10.

After holding several days of hearings, Judge Melancon issued his oral decision on January 31, 2001 that Debtor was to be sanctioned because he filed the suit against AOS even though "tjhere was not a colorable claim when the lawsuit was filed." Id. at 10. Judge Melancon explained that "the prescription issue as to the state law claim ... and the statute of limitations issue as to the RICO claim were so obviously abar sic that under the circumstances it was unreasonable to bring the suit in the first place for a reasonably competent attorney, which Debtor should be ...." Id. at 11. The Fifth Circuit affirmed the imposition of sanctions holding that "the district court gave sufficient reasons for the sanctions award, including the type and amount of sanctions." Gautreau v. AO.Smith Corp., 34 Fed.Appx. 962 (5th Cir.2002).⁴

Once Debtor filed for Chapter 7 bankruptcy, the parties disputed whether the debt arising from the imposition of sanctions should be discharged. The bankruptcy court held that it is non-dischargeable pursuant to § 523(a)(6) which states that "a discharge under Chapter 7 ... does not discharge an individual debtor from any debt ... for willful and malicious injury by the debtor to another entity 11 U.S.C. § 523(a)(6); In re Ball, No. 02-60810 (Bankr.N.D.N.Y. Feb. 10, 2004).⁵ Debtor contends that the bankruptcy court erred when it invoked this exception and held that the sanctions would not be discharged. Debtor explains that the sanctions were imposed because Judge Melancon concluded only that Debtor's conduct was "unreasonable." Debtor claims that because Judge Melancon did not hold that Debtor's conduct was "willful and malicious," the debt is dischargeable and the exception to discharge for debt's incurred willfully or maliciously, as set forth in § 523(a)(6), is not applicable.

(ii) Standard of Review

Whether the factual findings satisfy the statutory requirements of non-dischargeability pursuant to § 523(a)(6) is properly characterized as a mixed question of law and fact which the court reviews de novo. See Golant v. Care Comm, Inc., 216 B.R. 248, 252 (N.D.Ill.1997).

(Hi) Willful Nature of Debtor's Actions

Based on the record before the Court, the bankruptcy court properly ruled that the award of attorney's fees was not to be discharged pursuant to the exception in § 523(a)(6). Collateral estoppel prevents Debtor from relitigating Judge Melancon's decision to impose sanctions. See Grogan v. Garner, 498 U.S. 279, 284 n. 11, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991) (stating that "collateral estoppel principles do indeed apply in discharge exception proceedings pursuant to section 523(a)"). Under principles of collateral estoppel, therefore, this Court is bound by the district court's "factual finding ... that the filing of the lawsuit initially was unwarranted and should never have been commenced, had a reasonable investigation been made by Mr. Ball ...." W.D. La. Tr. (Dkt. No. 1, Appellant Ex. 6) at 16.

Judge Melancon explained that Debtor's actions were "a clear violation under Rule 11." Id. at 13. Moreover, Debtor's actions in the course of representing plaintiff were so egregious that even though the Fifth Circuit "sparingly applies" the imposition of sanctions under 28 U.S.C. § 1927, Judge Melancon thought such an award was appropriate because "the proceedings were unwarranted and should never have been commenced ...." Id. at 13. Although it did not rely on it, the district court also explained that it "has the authority under its inherent power to sanction Debtor." Id. at 14. Therefore, pursuant to Rule 11 and § 1927, the district court "shifted ... the entire financial burden of the action ... from the defendant AOS to the plaintiff Debtor." Id. at 13.

The question before this Court is whether Debtor's actions in Louisiana district court were willful and malicious, such that the attorney's fees debt should not be discharged under the exception of § 523(a)(6). All attorneys must act reasonably when operating within the confines of our judicial system, and the statements of Judge Melancon certainly demonstrate that the Debtor did not. While Judge Melancon did not state on the record that Debtor's actions were "willful and malicious," that is inherent based on the imposition of sanctions under Rule 11 and § 1927. Under Fifth Circuit precedent, sanctions under § 1927 that are imposed for an "`unreasonable' and `vexatious' multiplicative proceeding!, necessitates `evidence of bad faith, improper motive, or reckless disregard of the duty owed to the court.'" Mercury Air Group, Inc. v. Mansour, 237 F.3d 542, 549 (5th Cir.2001) (quoting Edwards v. General Motors Corp., 153 F.3d 242, 246 (5th Cir.1998)); see also, State St. Bank & Trust Co. v. Inversiones Errazuriz Limitada, 374 F.3d 158, 180 (2d Cir. 2004) ("Section 1927 authorizes the imposition of sanctions only when there is a finding of conduct constituting or akin to bad faith.") (internal quotations and citations omitted); Morelli v. Service Am. Dining Servs., 1998 WL 166878, at *2, 1998 U.S. Dist. LEXIS 5058, at *5 (N.D.N.Y. Apr. 3, 1998) (Scullin, J.) ("`The term `willful,' as expressed in 523(a)(6), is synonymous with intentional .... The statute requires not only intentional conduct on the part of the debtor, but also intentional or deliberate injury.'") (internal quotations and citations omitted).

Debtor even admitted that his conduct was found by Judge Melancon to be "intentional conduct that was in bad faith." July 17, 2003 Bank. Tr. (Dkt. No. 1, Appellant Ex. 5)⁶ at 34. Therefore, based upon the statements of Judge Melancon and the assessment of fees under § 1927, Debtor's conduct is properly characterized as "willful and malicious." Although the district court did not use the terminology found in § 523(a)(6), namely that his conduct be "willful and malicious," it is clear from the record that his actions rise to that level. The bankruptcy court correctly held that this debt fits within the exception of § 523(a)(6) and should therefore not be discharged.

(c) Admission of...