Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caed-2_08-cv-00490/USCOURTS-caed-2_08-cv-00490-1/pdf.json

Nature of Suit Code: 422
Nature of Suit: Bankruptcy Appeals Rule 28 USC 158
Cause of Action: 11:101 Bankruptcy

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IN THE UNITED STATES DISTRICT COURT 

FOR THE EASTERN DISTRICT OF CALIFORNIA 

MELANIE HUGHES, 

 Appellant, 

 v. 

CLAYEO C. ARNOLD and CLAYEO C. 

ARNOLD, PROFESSIONAL LAW 

CORPORATION, 

 Appellees. 

______________________________/

No. 2:08-CV-00490 JAM 

ORDER DENYING APPEAL AND 

AFFIRMING BANKRUPTCY COURT’S 

PARTIAL SUMMARY JUDGMENT ORDER

 

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 Appellant/Debtor Melanie Hughes (“Appellant”) appeals the 

bankruptcy court’s granting of partial summary judgment in favor 

of Appellees/Creditors Clayeo C. Arnold and Clayeo C. Arnold, 

Professional Law Corporation (collectively “Appellees”). The 

bankruptcy court ruled that a state court judgment awarding 

attorney’s fees and costs in favor of Appellees and against 

Appellant was nondischargeable debt under 11 U.S.C. § 523(a)(6). 

For the reasons set forth below, the bankruptcy court’s decision 

is AFFIRMED.1

I. PROCEDURAL BACKGROUND 

 On or about March 14, 2005, Appellant filed a petition for 

relief under Chapter 7 of the Bankruptcy Code, thereby 

commencing the underlying bankruptcy case. On June 14, 2005, 

Appellees filed a complaint to determine dischargeability of 

debts and for denial of discharge, thereby commencing an 

adversary action requesting that certain debts owed to Appellees 

be adjudicated as nondischargeable, including a state court 

judgment awarding attorney’s fees and costs (“attorney’s fees” 

1

 Because oral argument will not be of material assistance, 

the Court orders this matter submitted on the briefs. E.D. Cal. 

L.R. 78-230(h). 

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award) to Appellees following a jury verdict in their favor in a 

sexual harassment action brought by Appellant.2 

On May 22, 2007, the parties filed cross-motions for 

summary judgment. On August 24, 2007, Appellees’ summary 

judgment motion was granted to the extent it sought a 

determination that the attorney’s fee award was nondischargeable 

debt under § 523(a)(6) (“Partial Summary Judgment Order”). On 

September 4, 2007, Appellant filed a notice of appeal of the 

Partial Summary Judgment Order and a statement of election to 

have the appeal heard by the district court. The district court 

subsequently granted Appellees’ motion to dismiss the appeal on 

the ground that the Partial Summary Judgment Order was not a 

final judgment because it adjudicated fewer than all the claims 

in the adversary proceeding. 

In the meantime, on October 3, 2007, Appellees filed two 

motions in the adversary proceeding: (1) a motion seeking a 

determination of the amount owed by Appellant on the 

nondischargeable attorney’s fee award; and (2) a motion for 

relief from the automatic stay. On February 19, 2008, the 

2

 Appellees’ first two causes of action in their complaint 

seek a determination that the attorney’s fee award is 

nondischargeable debt under § 523(a)(6) as a willful and 

malicious injury. Appellees’ third and fourth causes of action 

seek to deny Appellant’s discharge, pursuant to 11 U.S.C. § 

727(a), for failure to keep adequate records and for concealing 

property with the intent to hinder, delay, or defraud creditors. 

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bankruptcy court issued an order determining that the amount 

owed on the attorney’s fee award to be $122,702.37 to Clayeo C. 

Arnold and $190,237.01 to Clayeo Arnold, Professional Law 

Corporation (“Order Determining Amounts”). On March 3, 2008, 

the bankruptcy court entered an order certifying the Partial 

Summary Judgment Order as a final order, as supplemented by the 

Order Determining the Amounts, pursuant to Rule 54(b) of the 

Federal Rules of Civil Procedure.3 Upon entry of the final 

appealable judgment, the bankruptcy court lifted the automatic 

stay precluding execution on the nondischargeable attorney’s fee 

award. Appellant then filed a notice of appeal. On March 24, 

2008, the bankruptcy court denied Appellant’s motion to stay 

proceedings pending appeal. Appellant then sought an order from 

this Court staying the proceedings pending appeal. On May 14, 

2008, Appellant filed her opening brief with this Court. On May 

22, 2008, this Court denied Appellant’s motion to stay 

3

 Rule 54(b) provides in relevant part: 

When an action presents more than one claim for 

relief--whether as a claim, counterclaim, crossclaim, 

or third-party claim--or when multiple parties are 

involved, the court may direct entry of a final 

judgment as to one or more, but fewer than all, 

claims or parties only if the court expressly 

determines that there is no just reason for delay. 

Fed.R.Civ.P. § 54(b). 

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proceedings pending appeal. On May 29, 2008, Appellees filed 

their opening brief. 

II. OPINION 

A. Standard of Review

 An appellant may petition the district court for review of 

a bankruptcy court’s decision. Fed.R.Bankr.P. 8013. A district 

court has jurisdiction to review a bankruptcy court’s decision 

pursuant to 28 U.S.C. § 158(a). A district court’s standard of 

review over a bankruptcy court’s decision is the same as that 

used by an appellate court over a district court’s decision. 

Towers v. Boyd (In re Boyd), 243 B.R. 756, 759 (N.D. Cal. 2000). 

Whether a particular type of debt is nondischargeable presents 

mixed issues of law and fact and is reviewed de novo. Carrillo 

v. Sue (In re Su), 290 F.3d 1140, 1142 (9th Cir. 2002). Legal 

conclusions are reviewed on a de novo basis, and factual 

determinations are assessed pursuant to a “clearly erroneous” 

standard. Murray v. Brammer (In re Bammer), 131 F.3d 788, 792 

(9th Cir. 1997) (en banc). 

B. Analysis

This appeal presents two issues. The first question is 

whether the attorney’s fees award is nondischargeable debt under 

§ 523(a)(6). The second question is whether the bankruptcy 

court properly relied on the state court’s factual findings in 

determining that the attorney’s fees award is nondischargeable 

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debt under § 523(a)(6). These questions are addressed 

individually below. 

1. Nondischargeable Debt Under § 523(a)(6)

 As to whether the attorney’s fees award is nondischargeable 

debt under § 523(a)(6), the question is whether the debt arising 

from the state court judgment falls within the ambit of § 

523(a)(6). As to be expected, the parties advance opposing 

positions. Appellant contends that the attorney’s fees award is 

dischargeable debt under § 523(a)(6) because the state court 

judgment was not based upon an intentional tort. Appellees, on 

the other hand, contend that the attorney’s fee award is 

nondischargeable debt under § 523(a)(6) because Appellant 

initiated and prosecuted the state court action with the intent 

to injure, and therefore the attorney’s fees award arose out of 

“willful and malicious injury” within the meaning of § 

523(a)(6). 

 Section 523(a)(6) excepts from discharge any debt “for 

willful and malicious injury by the debtor to another entity or 

to the property of another entity.” “In order to qualify for 

the § 523(a)(6) ‘willful and malicious’ exception to discharge . 

. . the debtor must have acted with either the desire to injure 

or a belief that injury was substantially certain to occur.” 

Ditto v. McCurdy, 510 F.3d 1070, 1078 (9th Cir. 2007). The 

“willfulness” and “maliciousness” prongs of § 523(a)(6) are 

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analyzed separately. In re Su, 290 F.3d at 1146. A creditor 

must demonstrate nondischargeability by a preponderance of the 

evidence. Jett v. Sicroff (In re Sicroff), 401 F.3d 1101, 1106

(9th Cir. 2005). 

An injury is “willful” under § 523(a)(6) if the debtor 

intends the consequences of his action. Kawaauhau v. Geiger,

523 U.S. 57, 61 (1998). The word “willful” indicates “a 

deliberate or intentional injury, not merely a deliberate or 

intentional act that leads to injury.” Id. (emphasis in 

original). The willful injury requirement under § 523(a)(6) is 

met “only when the debtor has a subjective motive to inflict 

injury or when the debtor believes that injury is substantially 

certain to result from his own conduct.” In re Su, 290 F.3d at 

1142. The focus is on the debtor’s state of mind at the time 

the injurious action is taken: either the debtor must have the 

subjective intent to cause harm, or have the subjective belief, 

i.e., actual knowledge, that harm is substantially certain to 

result. In re Su, 290 F.3d at 1145-46 (“The subjective standard 

correctly focuses on the debtor’s state of mind and precludes 

application of § 523(a)(6)’s nondischargeability provision short 

of the debtor’s actual knowledge that harm to the creditor was 

substantially certain.”). Subjective intent or substantial 

certainty may be inferred from all of the facts and 

circumstances established. Nahman v. Jacks (In re Jacks), 266 

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B.R. 728, 742 (9th Cir. BAP 2001); see also In re Su, 290 F.3d 

at 1146 n. 6 (“[T]he bankruptcy court may consider 

circumstantial evidence that tends to establish what the debtor 

must have actually known when taking the injury-producing 

action.”). 

The malicious prong of § 523(a)(6) is separate and distinct 

from the willful prong. In re Su, 290 F.3d at 1146. The 

“maliciousness” prong requires proof of “(1) a wrongful act, (2) 

done intentionally, (3) which necessarily causes injury, and (4) 

is done without just cause or excuse.” Petralia v. Jercich (In 

re Jercich), 238 F.3d 1202, 1209 (9th Cir. 2001). “[I]t is the 

wrongful act that must be committed intentionally rather than 

the injury itself.” In re Sicroff, 401 F.3d at 1106. 

 In the present case, the bankruptcy court found that the 

state court judgment awarding attorney’s fees is 

nondischargeable debt under § 523(a)(6). In so finding, the 

bankruptcy court concluded that Appellant’s conduct in 

initiating and prosecuting her sexual harassment claim against 

Appellees was willful and malicious insofar as her conduct was 

unreasonable, frivolous, vexatious and in bad faith. In 

reaching this conclusion, the bankruptcy court relied upon the 

state court’s finding that Appellant brought her sexual 

harassment claim “in bad faith and with the [Debtor’s] declared 

objective ‘to bring Clay [Arnold] down,’ ” and that she knew 

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from the outset that “there was no reasonable basis” for this 

claim. The bankruptcy court further relied upon the state 

court’s finding that Appellant’s “claim was so patently 

groundless from the outset that it has been obvious throughout 

the litigation that her motivation was a malicious desire to 

harm Arnold.” Appellant maintains that the bankruptcy court 

erred in reaching this conclusion because nondischargeable debt 

under § 523(a)(6) is confined to debt arising out of an 

intentional tort. The Court disagrees. Nondischargeable debt 

under § 523(a)(6) is not limited to debt arising out of an 

intentional tort; rather, § 523(a)(6) excepts from discharge any 

debt for “willful and malicious injury by the debtor.” See

e.g., In re Jercich, 238 F.3d at 1208-09 (debt owed to employee 

arising out of state court judgment for unpaid wages was 

nondischargeable debt under § 523(a)(6) because employer’s 

nonpayment of wages constituted tortious conduct insofar as he 

both knew that he owed wages to his employee and that his 

failure to pay those wages would, with substantial certainty, 

harm his employee); Ball v. A.O. Smith Corp., 451 F.3d 66 (2d 

Cir. 2006) (debt arising out of sanction award against debtorattorney in an underlying action was nondischargeable debt under 

§ 523(a)(6) because the conduct giving rise to the sanction 

award was willful and malicious insofar as the debtor-attorney 

initiated that action unreasonably and for an improper purpose). 

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Here, because the conduct giving rise to the attorney’s fees 

award against Appellant was willful and malicious, the 

attorney’s fee award is excepted from discharge under § 

523(a)(6). As the bankruptcy court found, the underlying 

attorney’s fee award rested on the Appellant’s bad faith conduct 

in knowingly initiating and prosecuting a groundless sexual 

harassment claim against Appellees motivated by the malicious 

desire to cause harm. In so finding, the bankruptcy court 

relied upon the state court’s specific factual findings, namely 

that Appellant violated Government Code § 12965(b), which 

required a finding that Appellant’s sexual harassment claim was 

unreasonable, frivolous, meritless, vexatious or in bad faith. 

Rosenman v. Christensen, Miller, Fink, Jacobs, Glaser, Weil & 

Shapiro, 91 Cal.App.4th 859, 865-66 (2001); see also Bond v. 

Pulsar Video Productions, 50 Cal.App.4th 918, 925 (1996) 

(attorney’s fees under § 12965(b) can be awarded upon a finding 

of bad faith). In this Court’s opinion, the state court’s 

factual findings are sufficient to show that Appellant’s conduct 

in initiating and prosecuting her sexual harassment claim 

constituted tortious conduct, resulting in willful and malicious 

// 

// 

// 

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injury.4 Accordingly, because the debt in this case arose from 

willful and malicious injury caused by the Appellant’s tortious 

conduct, it is excepted from discharge under § 523(a)(6). This 

determination is consistent with the fundamental policy of 

bankruptcy law to only grant discharges to the honest but 

unfortunate debtor. See In re Jercich, 238 F.3d at 1206. 

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2. Bankruptcy Court’s Reliance on the State Court’s 

 Factual Findings 

As to whether the bankruptcy court properly relied on the 

state court’s factual findings in determining that the 

attorney’s fee award is nondischargeable debt under § 523(a)(6), 

the question before the Court is whether the bankruptcy court 

properly applied the doctrine of collateral estoppel. 

Principals of collateral estoppel apply in discharge 

exception proceedings under § 523(a). Cal-Micro, Inc. v. 

Cantrell (In re Cantrell), 329 F.3d 1119, 1123 (9th Cir. 2003); 

see also Grogan v. Garner, 498 U.S. 279, 284 n. 11 (1991) (a 

 

4

 An action for the tort of malicious prosecution lies where 

a prior action (1) was commenced by or at the direction of the 

defendant and was pursued to a legal termination favorable to 

the plaintiff; (2) was brought without probable cause; and (3) 

was initiated with malice. Soukup v. Law Offices of Herbert 

Hafif, 39 Cal.4th 260, 292 (2006). Here, the record indicates 

that Appellant commenced the underlying action and it was 

pursued to a legal termination favorable to Appellees. The 

record also indicates that Appellant commenced the underlying 

action unreasonably for the improper purpose of causing harm. 

Accordingly, the Court finds that the record contains sufficient 

evidence demonstrating that Appellant engaged in tortious 

conduct. 

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party may invoke collateral estoppel to preclude relitigation of 

the elements necessary to meet a § 523(a) exception). 

“Collateral estoppel is applicable if the facts established by 

the previous judgment”--in this case, a state court judgment—

“meet the requirements of nondischargeability.” Wolstein v. 

Docteroff (In re Docteroff), 133 F.3d 210, 215 (3d Cir. 1997). 

“Under the Full Faith and Credit Act, 28 U.S.C. § 1738, the 

preclusive effect of a state court judgment in a subsequent 

bankruptcy proceeding is determined by the preclusion law of the 

state in which the judgment was issued.” Harmon v. Kobrin (In 

re Harmon), 250 F.3d 1240, 1245 (9th Cir. 2001). 

In California, “[c]ollateral estoppel precludes 

relitigation of issues argued and decided in prior proceedings.” 

Lucido v. Superior Court, 51 Cal.3d 335, 341 (1990). Courts 

will only apply collateral estoppel if the following threshold 

requirements are met: (1) the issue sought to be precluded from 

relitigation must be identical to that decided in a former 

proceeding; (2) this issue must have been actually litigated in 

the former proceeding; (3) it must have been necessarily decided 

in the former proceeding; (4) the decision in the former 

proceeding must be final and on the merits; and (5) the party 

against whom preclusion is sought must be the same as, or in 

privity with, the party to the former proceeding. Id. In 

addition to these factors courts consider whether the party 

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against whom the earlier decision is asserted had a “full and 

fair” opportunity to litigate the issue. Roos v. Red, 130 

Cal.App.4th 870, 880 (2005). If all of the threshold 

requirements are met, the court then must decide whether 

application of collateral estoppel would “further the policy 

interests underlying the doctrine.” Lucido, 51 Cal.3d at 342-

343. “Those policies are (1) to promote judicial economy by 

minimizing repetitive litigation; (2) to prevent inconsistent 

judgments which undermine the integrity of the judicial system; 

and (3) to provide repose by preventing a person from being 

harassed by vexatious litigation. Murphy v. Murphy, 164 

Cal.App.4th 376, 404 (2008) (internal quotation marks omitted). 

 In the present case, Appellant only contends that the 

first, second and third requirements have not been met. 

Specifically, Appellant maintains that collateral estoppel does 

not apply because the issue of whether her conduct in initiating 

and prosecuting her sexual harassment claim resulted in willful 

and malicious injury was never actually litigated or necessarily 

decided by the state court. The Court disagrees. The propriety 

of Appellant’s conduct in pursuing her sexual harassment claim 

was squarely before the state court on Appellees’ motion for 

attorney’s fees under § 12965(b), which required the court to 

determine whether Appellant’s conduct was unreasonable, 

frivolous, meritless, vexatious or in bad faith. See People v. 

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Carter, 36 Cal.4th 1215, 1240 (2005) (an issue is actually 

litigated when it is properly raised, by the pleadings or 

otherwise, and is submitted for determination, and is 

determined). Appellant appealed the attorney’s fee award, and 

thus had a “full and fair opportunity” to litigate this issue. 

As to the policy interests underlying the doctrine of collateral 

estoppel, the Court finds that the bankruptcy court properly 

precluded relitigation of the elements necessary to except a 

debt from discharge under § 523(a)(6). The application of 

collateral estoppel under the circumstances furthers the 

doctrine’s underlying fundamental principles by promoting 

judicial economy, preventing the possibility of inconsistent 

judgments and avoiding harassment of Appellees with repeated 

litigation. Indeed, the very same conduct that was fully 

assessed by the state court and resulted in a judgment in favor 

of Appellees is the basis for the debt Appellees sought to 

except from discharge in the bankruptcy court. Accordingly, the 

Court finds that the bankruptcy court properly gave preclusive 

effect to the state court’s factual findings underlying the 

attorney’s fee award. To the extent Appellant argues that the 

bankruptcy court erred in determining the amount of debt 

excepted from discharge under § 523(a)(6) by improperly giving 

preclusive effect to the state court’s factual findings, the 

Court disagrees. See Sasson v. Sokoloff (In re Sasson), 424 

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F.3d 864, 872 (9th Cir. 2005) (“The classic example of the 

proper use of issue preclusion in discharge proceeding is when 

the amount of the debt has been determined by the state court 

and reduced to judgment.”).5 

III. ORDER 

 For the reasons set forth above, the bankruptcy court’s 

partial summary judgment order is AFFIRMED. 

IT IS SO ORDERED. 

Dated: August 11, 2008 

 

5

 Finally, to the extent Appellant argues that the state 

court did not have jurisdiction to determine the amount of debt 

excepted from discharge under § 523(a)(6), the Court finds this 

argument to lack merit. The record reveals that the bankruptcy 

court, not the state court, made this determination. 

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