Zelis, In re

Decision Date15 June 1995
Docket NumberNo. 94-15073,94-15073
Citation66 F.3d 205
PartiesBankr. L. Rep. P 76,645, 95 Cal. Daily Op. Serv. 7281, 95 Daily Journal D.A.R. 12,429 In re Bruce P. ZELIS, Debtor. George PAPADAKIS; Christina Papadakis, Plaintiffs-Appellees, v. Bruce P. ZELIS, Defendant-Appellant.
CourtU.S. Court of Appeals — Ninth Circuit

Jon R. Vaught, Oakland, CA, for defendant-appellant.

Robert E. White, Susan C. Rushakoff, Law Offices of Robert E. White, San Francisco, CA, for plaintiffs-appellees.

Appeal from the Ninth Circuit Bankruptcy Appellate Panel.

Before: HUG, ALARCON, and TROTT, Circuit Judges.

HUG, Circuit Judge:

Appellant, Bruce Zelis, appeals the decision of the Bankruptcy Appellate Panel ("BAP") affirming the bankruptcy court's determination that two sanctions orders against Zelis were nondischargeable debts under 11 U.S.C. Sec. 523(a)(6). For the reasons explained below, we affirm in part and reverse in part.

STANDARD OF REVIEW

We review de novo the bankruptcy court's grant of summary judgment. In re Bullion Reserve of North America, 922 F.2d 544, 546 (9th Cir.1991).

FACTS

In 1974, the Papadakises invested in a partnership with appellant, Zelis, and another partner, Day. In 1979, the Papadakises sued Zelis for wrongful conduct while acting as general partner. In 1986, Zelis and the Papadakises entered into a settlement agreement whereby Zelis stipulated to entry of judgment against him if he breached the agreement. Zelis apparently breached the agreement and the Papadakises sued and obtained a judgment in the stipulated amount. Zelis appealed.

The Papadakises filed a motion to dismiss on December 20, 1990. Zelis responded with a 20-page opposition brief. The California Court of Appeal issued an Order to Show Cause why, given his stipulation to the terms of the judgment against him, it should not sanction Zelis for bringing a frivolous appeal. The court set a February 19 hearing date.

On February 1, 1991, Zelis filed bankruptcy and notified the court that it could not proceed with the sanctions order because of the automatic stay provisions of the Bankruptcy Code. That same day, the Papadakises furnished the court and Zelis with legal authority clearly showing that the automatic stay did not apply in this case. See O'Brien v. Fischel, 74 B.R. 546 (D.Haw.1987). On February 19, the court held the hearing. Zelis did not attend. On February 25, Zelis requested an opportunity to file a response to the Order to Show Cause. On February 26, the court granted Zelis' request, stating that "Zelis is hereby granted another ten days from the date of this letter to respond to the O'Brien case or any other relevant legal issue prior to the submission of this matter for decision."

Zelis did not respond, and on March 8, 1991, he wrote to the court and conceded its jurisdiction to order sanctions and requested another hearing. The court denied his request and, on May 21, 1991, sanctioned Zelis for bringing a frivolous appeal, stating "[t]his frivolous appeal was clearly brought for the improper purpose of delaying the day when Zelis would have to finally pay over the $120,000 he promised to pay in 1986.... We cannot countenance such a shameless effort to unjustifiably prolong litigation."

In related litigation, the bankruptcy court lifted the automatic stay and allowed the Papadakises' other claims to proceed to trial. The court entered a judgment notwithstanding the verdict in favor of the Papadakises. Zelis appealed, arguing that his motion to disqualify the trial judge had been improperly denied and challenging the court's interlocutory On August 24, 1992, the Papadakises filed a complaint in the bankruptcy court to determine the nondischargeability of the sanctions debts against Zelis under 11 U.S.C. Sec. 523(a)(6). On January 25, 1993, the Papadakises filed a motion for summary judgment on this issue. On March 17, 1993, the bankruptcy court granted the Papadakises' motion, finding that both debts were nondischargeable as a matter of law under section 523(a)(6) because they were debts for willful and malicious injury by Zelis to the Papadakises. The bankruptcy court stated:

                order dissolving the partnership.  The Papadakises moved to dismiss because neither of these grounds was based on a final appealable order.  On July 24, 1992, the California Court of Appeal dismissed Zelis' appeal as frivolous and again imposed sanctions "to deter appellants and others from the frauds they continue to visit upon the court system and their adversaries."   The court imposed $20,000 in sanctions against Zelis and Day jointly and severally.  Half of this amount was to be paid to the Papadakises and the other half to the court.  In the fall of 1992, the Papadakises settled with Day, releasing all claims against him in return for his release of all counterclaims against them and other considerations
                

The California Court of Appeal found that Zelis intentionally and wrongfully filed two frivolous Notices of Appeal in bad faith and for abusive litigation tactics; that the Papadakises suffered harm from defendant's actions, including incurring attorneys' fees and costs and suffering delay; and that Zelis's actions were without just cause or excuse.

The bankruptcy court therefore gave collateral estoppel effect to the California Court of Appeal's orders. The bankruptcy court also found that the Papadakises' settlement with Day did not affect Zelis's obligation to pay the second sanction.

On November 29, 1993, the BAP affirmed the bankruptcy court's orders. Zelis now appeals to this court. We have jurisdiction under 28 U.S.C. Sec. 158(d).

DISCUSSION
I. Nondischargeability

Section 523(a) of the Bankruptcy Code provides that a bankruptcy shall not discharge an individual debtor from certain kinds of obligations. 11 U.S.C Sec. 523(a). Subsection (a)(6), in particular, states that a debtor is not entitled to discharge of pre-petition debts for "willful and malicious injury by the debtor to another entity or to the property of another entity." Id. We have held that an act is "willful and malicious" when done intentionally and the act necessarily produces harm and is without just cause or excuse. In re Cecchini, 780 F.2d 1440, 1443 (9th Cir.1986). The act may be "willful and malicious" even absent proof of specific intent to injure. Id.

In the present case, the BAP and the bankruptcy court gave collateral estoppel effect to the California Court of Appeal's findings and orders regarding sanctions and the characterization of Zelis' conduct. In Grogan v. Garner, 498 U.S. 279, 284-85 n. 11, 111 S.Ct. 654, 658 n. 11, 112 L.Ed.2d 755 (1991), the Supreme Court recognized that a creditor who successfully obtained a fraud judgment in state court could invoke collateral estoppel in an action under section 523(a). The same reasoning applies to the present case where the requirements for collateral estoppel have been met, i.e., actual litigation of the issue and a determination in a prior action of those elements of the claim that are the same as the elements required for nondischargeability. See id.

Zelis argues that to give collateral estoppel effect, there must have been litigation over the merits of whether his conduct was willful and malicious. In this case, the record is clear that the issues were litigated, and that Zelis had the opportunity to fully litigate them. With respect to the May 21, 1991 sanction, the fact that Zelis chose not to appear at various hearings or file opposition briefs after requesting and being granted time in which to do so does not, as Zelis contends, preclude a finding that the issue was litigated. The court received briefing on the issues and held various hearings. In fact, it was Zelis' briefing and filing of frivolous Likewise, the July 24, 1992 sanction was litigated. The Papadakises alleged in their Motion for Dismissal every ground necessary for the court to conclude that Zelis had intentionally filed another frivolous appeal. The Papadakises specifically requested sanctions for Zelis' conduct. Zelis had an opportunity to respond in his answer to the Papadakises' motion. This is litigation. Thus, to give collateral estoppel effect to the California Court of Appeal's rulings, we need only decide whether the findings of that court are sufficient to establish the elements of nondischargeability under section 523(a)(6) for each of the sanctions.

appeals that formed the grounds for the sanctions orders.

A. The May 21, 1991 Sanctions

The California Court of Appeal found that Zelis had acted intentionally in filing his frivolous appeal of the stipulated judgment. The court ordered sanctions because filing a frivolous appeal necessarily causes harm to the opposing parties by requiring them to incur unnecessary litigation costs and attorneys' fees, and by delaying final resolution of the dispute. Likewise, a court generally orders sanctions only when the party's conduct has been particularly abusive and there is no justification or excuse for the behavior. Thus, the BAP's conclusion that the California Court of Appeal found Zelis' conduct to be willful and malicious is fully supported. The BAP correctly concluded that the sanction is nondischargeable under section 523(a)(6).

B. The July 24, 1992 Sanctions

The BAP's conclusion that the July 24, 1992 debt was a pre-petition debt is correct. Zelis converted his bankruptcy to Chapter 7 on May 14, 1992, and the sanctions were ordered thereafter. Claims in bankruptcy arise from the debtor's conduct. See In re Jensen, 127 B.R. 27, 32-33 (9th Cir. BAP 1991). Because Zelis filed his appeal on January 31, 1992, and that conduct was the basis for the sanction, the sanction is a pre-petition obligation.

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