In re: Jercich v. Petralia

• Decision Date: 23 January 2001
• Docket Number: No. 00-15300,00-15300
• Citation: 238 F.3d 1202
• Parties: (9th Cir. 2001) In re: GEORGE JERCICH, Debtor. JAMES A. PETRALIA, Appellant, v. GEORGE JERCICH, Appellee
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1202

238 F.3d 1202 (9th Cir. 2001)

In re: GEORGE JERCICH, Debtor.

JAMES A. PETRALIA, Appellant, v. GEORGE JERCICH, Appellee.

No. 00-15300

UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT

Argued and Submitted December 13, 2000

Filed January 23, 2001

Thomas R. Duffy and Ralph P. Guenther, Duffy & Guenther,Monterey, California, for the appellant.

Thomas D. Patrick, Redding, California, for the appellee.

Appeal from the Ninth Circuit Bankruptcy Appellate Panel Perris, Ryan and Meyers, Judges, Presiding. BAP No. NC-98-01724-PRyMe

Before: Pamela Ann Rymer, Thomas G. Nelson and Kim McLane Wardlaw, Circuit Judges.

T.G. NELSON, Circuit Judge:

James A. Petralia appeals the Bankruptcy Appellate Panel ("BAP") affirmance of the Bankruptcy Court's order granting judgment in favor of debtor George Jercich in Petralia's action seeking to have a debt excepted from discharge under 11 U.S.C. 523(a)(6). We have jurisdiction under 28 U.S.C. 158(d). We reverse.

I.

The underlying facts of this case are undisputed. From June 1981 to January 1983, Petralia was employed by George Jercich, Inc., a real estate company wholly owned and operated by debtor Jercich. The company performed mortgage broker services, and Petralia's primary duty was to obtain investors to fund loans arranged by Jercich. Pursuant to an employment agreement between Petralia and Jercich, Petralia was to be paid a salary plus a commission for loans which were funded through his efforts. The commissions were to be paid on a monthly basis.

Jercich failed to pay Petralia his commissions as required under the employment agreement. Petralia quit his employment with Jercich in January 1983 and in February 1983 filed an action against Jercich in California state court. In this action, Petralia sought to recover, among other things, unpaid wages, "waiting time penalties" (penalties imposed on employers under California law for failure to timely pay employees), and punitive damages.

After a bench trial, the state court granted judgment in favor of Petralia. The court found that Jercich had not paid Petralia commissions and vacation pay as required under the employment contract; that "Jercich had the clear ability to make these payments to Petralia, but chose not to"; that instead of paying Petralia and other employees the money owed to them, "Jercich utilized the funds from his company to pay for a wide variety of personal investments, including a horse ranch"; and that Jercich's behavior was willful and amounted to oppression within the meaning of California Civil Code 3294.¹ The state court held, in relevant part, (1) that Petralia was entitled to his unpaid wages; (2) that Jercich owed Petralia waiting time penalties; and (3) that because Jercich's failure to pay was willful and deliberate and "constituted substantial oppression," punitive damages would be assessed against Jercich in the amount of $20,000.00. The state trial court's judgment against Jercich was affirmed by the California Court of Appeal in an opinion filed in May 1986.

While the appeal of the state trial court judgment was pending, Jercich filed a Chapter 7 bankruptcy petition. In November 1986, after the state trial court judgment had been affirmed on appeal, Petralia initiated the present adversary proceeding seeking to have the state court judgment excepted from discharge under 11 U.S.C. 523(a)(6). ²

The bankruptcy court resolved the adversary proceeding in favor of Jercich. The court found that under the U.S. Supreme Court's decision in Kawaauhau v. Geiger, ³ "the state court . . . would have had to find that Mr. Jercich . . . did what he did with a specific intent, to use a criminal law term, of harming [Petralia]. But no such finding was made, nor can that conclusion be inferred from the findings that were made by the state court." The bankruptcy court therefore held that the debt was dischargeable.

BAP affirmed in a published opinion, but for different reasons than stated by the bankruptcy court. BAP held that "where a debtor's conduct constitutes both a breach of contract and a tort, the debt resulting from that conduct does not fit within 523(a)(6) unless the liability for the tort is independent of the liability on the contract."⁴ Defining a tort as "independent" only "if the conduct at issue would be tortious even if a contract between the parties did not exist," BAP concluded that there was not a tort independent of the contract and that the debt was not, therefore, excepted from discharge under 523(a)(6).⁵

II.

"We review independently the decision of the bankruptcy court, showing no deference to the decision of the BAP. We review de novo the bankruptcy court's conclusions of law, and we review for clear error the bankruptcy court's findings of fact."⁶

III.

Section 523(a)(6) excepts from discharge debts resulting from "willful and malicious injury by the debtor to another entity or to the property of another entity."⁷ In In re Riso, we recognized that "a simple breach of contract is not the type of injury addressed by 523(a)(6)"⁸ and held that "[a]n intentional breach of contract is excepted from discharge under 523(a)(6) only when it is accompanied by malicious and willful tortious conduct." ⁹

By holding, in the present case, that the debt was not excepted from discharge under 523(a)(6), BAP imposed an additional requirement: not only must there be tortious conduct, but according to BAP, this conduct must be "tortious even if a contract between the parties did not exist."¹⁰ We disagree with the imposition of this additional requirement.

First, there is nothing in the language of 523(a)(6) to indicate that a debt arising from a breach of contract is excepted from discharge only if the debtor's conduct would be tortious even if no contract existed.¹¹ To the contrary, although 523(a)(6) generally applies to torts rather than to contracts¹² and an intentional breach of contract generally will not give rise to a nondischargeable debt, where an intentional breach of contract is accompanied by tortious conduct which results in willful and malicious injury, the resulting debt is excepted from discharge under 523(a)(6).¹³

Moreover, one of the fundamental policies of bankruptcy law is to give a fresh start only to the "honest but unfortunate debtor."¹⁴ In fact, Congress's decision to make the debts listed under 523(a) nondischargeable "reflect[s] a decision by Congress that the fresh start policy is not always paramount. For example, some of the exceptions to discharge inS 523(a) are based on a corollary of the policy of giving honest debtors a fresh start, which would be to deny dishonest debtors a fresh start. See e.g., 11 U.S.C. 523(a)(1), (2), (4), (6), and (12)."¹⁵ Allowing discharge of debts simply because the tortious conduct at issue would not be tortious in the absence of a contract would negate this fundamental policy.

We therefore hold that to be excepted from discharge under 523(a)(6), a breach of contract must be accompanied by some form of "tortious conduct" that gives rise to "willful and malicious injury." In so holding, we reject BAP's imposition of a requirement that the conduct at issue be tortious even if a contract between the parties did not exist.

IV.

A. Tortious Conduct

To determine whether Jercich's conduct was tortious, we look to California state law.¹⁶ Under California law, "[c]onduct amounting to a breach of contract becomes tortious only when it also violates an independent duty arising from principles of tort law."¹⁷

Outside the area of insurance contracts, tort recovery for the bad faith breach of a contract is permitted only when, "in addition to the breach of the covenant [of good faith and fair dealing] a defendant's conduct violates a fundamental public policy of the state."¹⁸ The California Court of Appeal has held that "the prompt payment of wages due an employee is a fundamental public policy" in California.¹⁹ As that court explained:

Public policy has long favored the full and prompt payment of wages due an employee. Wages are not ordinary debts. Because of the economic position of the average worker and, in particular, his family, it is essential to the public welfare that he receive his pay promptly. Thus, the prompt payment of wages serves society's interest through a more stable job market, in which its most important policies are safe guarded.

Labor Code section 216, subdivision (a) provides any employer who, having the ability to pay, will fully refuses to pay wages due and payable after demand has been made is guilty of a misdemeanor. The Legislature's decision to criminalize violations of the prompt payment policy also supports [the conclusion that the policy for full and prompt payment of wages] involves a broad public interest, not merely the interest of the employee.²⁰

In the present case, the state trial court found that Jercich had the "clear ability" to pay Petralia his wages when they were due, but willfully "chose not to" in violation of California law.²¹ The court also found that Jercich's acts amounted to oppression under California Civil Code 3294, which by definition must involve "despicable conduct that subjects a person to cruel and unjust hardship in conscious disregard of that person's rights.")²² As the court explained: "Few, if any, areas of the law are more important than an employer's obligation to pay his employee's wages. California courts agree, and have time and again underscored the significance of an employer's failure to pay wages."

Based on these state court findings, we hold that Jercich's nonpayment of wages under the particular circumstances of this case constituted tortious conduct.

B. Willful and Malicious Injury

1. Willfulness

Citing Kawaauhau v. Geiger,²³ Jercich argues, and the district court held, that to meet the willfulness prong of 523(a)(6), Jercich had to have withheld the wages with the "specific intent" of harming Petralia. We disagree.

In Geiger, the U.S. Supreme...