Opinion ID: 2709058
Heading Depth: 2
Heading Rank: 1

Heading: issues

Text: A state court judgment is entitled to the same preclusive effect in federal court as that judgment would have in state court. Allen v. McCurry, 449 U.S. 90, 96 (1980); see 28 U.S.C. § 1738. This rule applies with equal force to bankruptcy cas‐ es. Klingman v. Levinson, 831 F.2d 1292, 1295 (7th Cir. 1987). We review determinations of the preclusive effect of state law de novo. In re Davis, 638 F.3d 549, 553 (7th Cir. 2011) (bankruptcy appeal); Donald v. Polk Cnty., 836 F.2d 376, 382– 83 (7th Cir. 1988) (applying Wisconsin law). Under Wisconsin law, “[c]ollateral estoppel, or issue pre‐ clusion, is a doctrine designed to limit the relitigation of is‐ sues that have been contested in a previous action between the same or different parties.” Michelle T. by Sumpter v. Cro‐ zier, 495 N.W.2d 327, 329 (Wis. 1993). Wisconsin courts apply the following general rule: “When an issue of fact or law is actually litigated and determined by a valid and final judg‐ ment, and the determination is essential to the judgment, the determination is conclusive in a subsequent action between the parties, whether on the same or a different claim.” Hlavinka v. Blunt, Ellis & Loewi, Inc., 497 N.W.2d 756, 762 (Wis. Ct. App. 1993) (quoting RESTATEMENT (SECOND) OF JUDGMENTS § 27 (1980)). In Wisconsin (as in most states), the question whether is‐ sue preclusion applies depends on two criteria. The first (the “actually litigated step”) requires that “the question of fact or law that is sought to be precluded actually must have been litigated in a previous action and [have been] necessary 6 No. 13‐1026 to the judgment.” Mrozek v. Intra Fin. Corp., 699 N.W.2d 54, 61 (Wis. 2005). The second (the “fundamental fairness step”) requires the court to “determine whether it is fundamentally fair to employ issue preclusion given the circumstances of the particular case at hand.” Id. Relevant factors for the latter inquiry include the availability of review of the first judg‐ ment, differences in the quality or extensiveness of the pro‐ ceedings, shifts in the burden of persuasion, and the adequa‐ cy of the loser’s incentive to obtain a full and fair adjudica‐ tion of the issue. Id. at 61–62. The fundamental fairness step eschews formalistic requirements in favor of “a looser, equi‐ ties‐based interpretation of the doctrine.” Michelle T., 495 N.W.2d at 330. In order to know what was “actually litigated,” we must take a closer look at what the state court decided. The parties agree that First Weber’s complaint in state court put forth only three theories of recovery: breach of contract, tortious interference, and unjust enrichment. Notably, the pleadings did not raise a claim for conversion, but First Weber’s motion for summary judgment included that theory as a fourth basis for recovery. There are hints that the state court was aware that conversion was at issue: it did not undertake a detailed analysis of a conversion claim, but the transcript reflects that the court twice said that Horsfall “converted” money be‐ longing to First Weber. Although this is a thin reed, we will assume for present purposes that the state court did make a finding of liability on a conversion claim. This is important for First Weber’s position in the bank‐ ruptcy case because, of the four theories it raised in the state court, only the intentional torts of interference and conver‐ sion could plausibly constitute willful and malicious injury. No. 13‐1026 7 In order to find liability on the tortious interference claim, the state court had to find: (1) First Weber had a contract with a third party; (2) Horsfall interfered with that contract; (3) Horsfall’s interference was intentional; (4) the interference caused First Weber damages; and (5) Horsfall was not justi‐ fied or privileged to interfere. See Briesemeister v. Lehner, 720 N.W.2d 531, 542 (Wis. Ct. App. 2006). For the conversion claim, the court had to find: (1) intentional control or taking of property belonging to First Weber; (2) without First We‐ ber’s consent; which (3) resulted in serious interference with First Weber’s right to possess the property. See H.A. Friend & Co. v. Prof. Stationery, Inc., 720 N.W.2d 96, 100 (Wis. Ct. App. 2006); Methodist Manor of Waukesha, Inc. v. Martin, 647 N.W.2d 409, 412 (Wis. Ct. App. 2002) (“[M]oney may also be converted.”). The question for us is what effect these findings have on the bankruptcy issue of non‐dischargeability for willful and malicious injury under 11 U.S.C. § 523(a)(6). See Bukowski v. Patel, 266 B.R. 838 (E.D. Wis. 2001) (applying Wisconsin issue preclusion in inquiry regarding willful and malicious inju‐ ry). The bankruptcy and district courts concluded that the state judgment had no effect on the bankruptcy inquiry be‐ cause the state court did not find—and was not required to find—willful and malicious injury as that term is used in the Bankruptcy Code. If that were all we had, we would find that analysis to be insufficient, because issue preclusion could apply to the elements of the willful and malicious in‐ quiry even if the state court was addressing a different ulti‐ mate question. See Klingman, 831 F.2d at 1295 (“Where a state court determines factual questions using the same standards as the bankruptcy court would use, collateral es‐ toppel should be applied[.]”). 8 No. 13‐1026 In order to compare the essential state‐court findings with the requirements for willful and malicious injury, we need a better understanding of the latter term. Unfortunate‐ ly, the case law is “all over the lot” when it comes to defining it. See Jendusa‐Nicolai v. Larsen, 677 F.3d 320, 322 (7th Cir. 2012) (recounting similar but different tests from the Second, Fifth, Sixth, Eighth, Ninth, Tenth, and Eleventh Circuits). Bankruptcy courts in this circuit have focused on three points: (1) an injury caused by the debtor (2) willfully and (3) maliciously. In re Carlson, 224 B.R. 659, 662 (Bankr. N.D. Ill. 1998), aff’d 2000 WL 226706 (N.D. Ill. 2000), aff’d 2001 WL 1313652 (7th Cir. 2001). As with all exceptions to discharge, the burden is on the creditor to establish these facts by a preponderance of the evidence. Grogan v. Garner, 498 U.S. 279, 287 (1991). Looking more closely at these three elements—injury, willfulness, and malice—a few points are worth making. The term “injury,” while not defined in the Code, is understood to mean a “violation of another’s legal right, for which the law provides a remedy.” In re Lymberopoulos, 453 B.R. 340, 343 (Bankr. N.D. Ill. 2011) (citation omitted). The injury need not have been suffered directly by the creditor asserting the claim. Larsen v. Jendusa‐Nicolai, 442 B.R. 905, 917 (E.D. Wis. 2010), aff’d 677 F.3d 320 (7th Cir. 2012). The creditor’s claim must, however, derive from the other’s injury. Willfulness requires “a deliberate or intentional injury, not merely a deliberate or intentional act that leads to inju‐ ry.” Kawaauhau v. Geiger, 523 U.S. 57, 61 (1998) (emphasis in original). Although Geiger refers to intentional torts to help explain the federal standard, it does not hold that all state‐ law intentional torts are “willful” for purposes of section No. 13‐1026 9 523(a)(6). See Jendusa‐Nicolai, 677 F.3d at 322 (“[A]n inten‐ tional tort needn’t involve an intent to cause injury.”). “Will‐ fulness” can be found either if the “debtor’s motive was to inflict the injury, or the debtor’s act was substantially certain to result in injury.” See Bukowski, 266 B.R. at 844 (noting sub‐ stantially similar standards for willfulness in the Fifth, Sixth, Eighth, and Ninth Circuits). Lastly there is maliciousness, which requires that the debtor acted “in conscious disregard of [his] duties or with‐ out just cause or excuse; it does not require ill‐will or specific intent to do harm.” Matter of Thirtyacre, 36 F.3d 697, 700 (7th Cir. 1994) (citation omitted). We recently commented that we had not had the occasion to revisit the Thirtyacre definition since the Supreme Court’s decision in Geiger. See Jendusa‐ Nicolai, 677 F.3d at 323. Understanding that the definition of willfulness must incorporate Geiger’s admonition that the requisite intent for purposes of § 523(a)(6) is the intent to in‐ jure rather than the intent to act, we reaffirm today that our definition of maliciousness from Thirtyacre remains good law. See id. at 323 (noting substantially similar definitions of maliciousness in the Second, Sixth, Ninth, and Eleventh Cir‐ cuits). Returning to the present case, we conclude that the bank‐ ruptcy and district courts erred in failing to apply issue pre‐ clusion to the first and third elements of the § 523(a)(6) in‐ quiry (injury and maliciousness). The state court necessarily and actually found injury on each intentional tort claim. The tortious interference claim rested on the finding that Hors‐ fall’s interference caused First Weber damages. See Briesemeister, 720 N.W.2d at 542. Similarly, the conversion claim required the finding that Horsfall’s taking of property 10 No. 13‐1026 resulted in serious interference with First Weber’s rights. See H.A. Friend & Co., 720 N.W.2d at 100. Because injury was a required element of the claims, the state court’s injury find‐ ings were actually litigated and necessary to the judgment. Mrozek, 699 N.W.2d at 61. We also find nothing fundamental‐ ly unfair in holding Horsfall to the state court’s decision on injury. The state court judgment also precluded relitigation of the issue of maliciousness. For purposes of section 523(a)(6), maliciousness exists when one acts in “conscious disregard of one’s duties or without just cause or excuse.” Thirtyacre, 36 F.3d at 700. First Weber’s state‐law tortious interference claim required a finding that Horsfall was “not justified or privileged to interfere” with its contractual rights. Briesemeister, 720 N.W.2d at 542. The state court thus determined that Horsfall’s interference was intentional and that he was neither justified nor privileged to interfere with First Weber’s rights. In order to reach this conclusion, the state court had to find that Horsfall’s actions were not reasonable or taken in good faith. This inquiry substantially mirrored the federal test for maliciousness. As before, there is nothing fundamentally unfair about holding Horsfall to this finding. Only one element of the § 523(a)(6) inquiry remains be‐ tween First Weber and the result it wants: willfulness, mean‐ ing either a motive to inflict injury or an act substantially certain to result in injury. The first element of conversion re‐ quires “intentional control or taking of property belonging to another;” the third element of tortious interference re‐ quires that the interference was intentional. Both of these necessarily require only intent to act, not intent to injure. Cf. No. 13‐1026 11 Geiger, 523 U.S. at 61 (requiring for § 523(a)(6) purposes a “deliberate or intentional injury, not merely a deliberate or intentional act that leads to injury”) (emphasis removed). Neither of the state‐law claims requires showing intent to injure, and thus that finding was not necessary to the state court’s judgment. If accepted, First Weber’s position would risk transform‐ ing every state‐law intentional tort into a non‐dischargeable debt, contrary to the Supreme Court’s opinion in Geiger. That problem, added to “the strong policy of the Bankruptcy Code of providing a debtor with a ‘fresh start,’” see Meyer v. Rigdon, 36 F.3d 1375, 1385 (7th Cir. 1994), leads us to con‐ clude that the state court’s decision did not preclude Horsfall from litigating the issue of willfulness in the bankruptcy case.