The Bankruptcy Hotline

The Bankruptcy Appellate Panel for the Sixth Circuit has ruled that a judgment in a patent infringement action was nondischargeable as “willful and malicious injury” under ' 523(a)(6). The panel reasoned that the district court had already concluded that the debtor “deliberately” infringed the patent for the sole purpose of avoiding payment of the license fee and then undertook to conceal his actions. Monsanto Co. v. Trantham (In re Trantham), No. 03-8010 (Jan 30, 2004).

The judgment holder owned a patent on seed technology that required a retailer or grower to obtain a license before selling or using the affected seed. Because the debtor was using the seed without obtaining a license, the patent holder brought a lawsuit for infringement. The district court upheld a jury's finding of willful infringement and awarded treble damages and 50% of the plaintiff's attorneys' fees. The district court found there was intent to harm, that the debtor deliberately used the patented technology without obtaining a license, and that he attempted to conceal his infringement. The debtor sought to discharge this debt in a Chapter 7, but the patent holder argued that the district court's judgment should have collateral estoppel effect and moved to have the debt declared nondischargeable under ' 523(a)(6). The debtor argued that collateral estoppel did not apply because the district court did not make a finding that he acted with malice.

The BAP disagreed, finding that the Supreme Court's ruling in Grogan v. Garner, 498 U.S. 279 (1991) stands for the proposition that collateral estoppel applies in dischargeability proceedings. In addition, the panel also found that the jury and district court findings supporting the conclusion that the debtor acted willfully, similarly supporting a finding of a “malicious' injury” under ' 523(a)(6). The court reasoned that under Kawaauhau v. Geiger, 523 U.S. 57 (1988), ' 523(a)(6) requires a deliberate or intentional injury, not merely a deliberate or intentional act that leads to injury. Further, Sixth Circuit Case law states that “unless 'the actor desires to cause the consequences of his act … or believes that the consequences are substantially certain to result from it,' he has not committed a 'willful and malicious injury' as defined under ' 523(a)(6).” Here, the debtor stated at trial that his only motive was to avoid paying for a license and abiding by its terms. Therefore, the panel reasoned, the deprivation of the patent holder's funds was the only like consequence of the debtor's actions, making the injury “willful.”

D&O Policy Is Property of the Estate

The Bankruptcy Court for the Eastern District of Pennsylvania has ruled that the proceeds of a directors and officers liability insurance policy are property of a Chapter 11 debtor's bankruptcy estate. Under the policy, the debtor corporation was indemnified for losses resulting stemming from securities claims, and here, a creditor was suing the debtor for violations of securities laws. The bankruptcy court found that because the debtor was covered for this type of claim, the trustee, as successor to the debtor, could properly claim an interest in the proceeds of the policy. Morris v. National Union Fire Insurance Co. of Pittsburgh (In re Eastwind Group Inc.), No. 00-33372 (Jan. 14, 2004).

Judgment for Patent Infringement Nondischargeable

The Bankruptcy Appellate Panel for the Sixth Circuit has ruled that a judgment in a patent infringement action was nondischargeable as “willful and malicious injury” under ' 523(a)(6). The panel reasoned that the district court had already concluded that the debtor “deliberately” infringed the patent for the sole purpose of avoiding payment of the license fee and then undertook to conceal his actions. Monsanto Co. v. Trantham (In re Trantham), No. 03-8010 (Jan 30, 2004).

The judgment holder owned a patent on seed technology that required a retailer or grower to obtain a license before selling or using the affected seed. Because the debtor was using the seed without obtaining a license, the patent holder brought a lawsuit for infringement. The district court upheld a jury's finding of willful infringement and awarded treble damages and 50% of the plaintiff's attorneys' fees. The district court found there was intent to harm, that the debtor deliberately used the patented technology without obtaining a license, and that he attempted to conceal his infringement. The debtor sought to discharge this debt in a Chapter 7, but the patent holder argued that the district court's judgment should have collateral estoppel effect and moved to have the debt declared nondischargeable under ' 523(a)(6). The debtor argued that collateral estoppel did not apply because the district court did not make a finding that he acted with malice.

The BAP disagreed, finding that the Supreme Court's ruling in Grogan v. Garner , 498 U.S. 279 (1991) stands for the proposition that collateral estoppel applies in dischargeability proceedings. In addition, the panel also found that the jury and district court findings supporting the conclusion that the debtor acted willfully, similarly supporting a finding of a “malicious' injury” under ' 523(a)(6). The court reasoned that under Kawaauhau v. Geiger , 523 U.S. 57 (1988), ' 523(a)(6) requires a deliberate or intentional injury, not merely a deliberate or intentional act that leads to injury. Further, Sixth Circuit Case law states that “unless 'the actor desires to cause the consequences of his act … or believes that the consequences are substantially certain to result from it,' he has not committed a 'willful and malicious injury' as defined under ' 523(a)(6).” Here, the debtor stated at trial that his only motive was to avoid paying for a license and abiding by its terms. Therefore, the panel reasoned, the deprivation of the patent holder's funds was the only like consequence of the debtor's actions, making the injury “willful.”