Can a bankruptcy debtor’s copyright violation ever rise to the level of a willful and malicious injury, such that it would be excepted from a bankruptcy discharge under 11 U.S.C. §523(a)(6)?  The answer is yes, according to the Bankruptcy Appellate Panel for the 8^th Circuit (which includes Missouri).  The case here is In Re Walker, decided in August 2014 by the 8^th Circuit B.A.P. (No. 14-6012).

The facts of the case were these.  The debtor (Walker) was a managing member of an establishment called Twister’s Iron Horse Saloon.  Twister’s often played music and hosted musical performances. Some of the music played or performed was included in the repertoire of the American Society of Composers, Authors and Publishers. ASCAP is a professional membership organization of song writers, composers and music publishers.  In accordance with Federal copyright law, ASCAP licenses and promotes the music of its members. It also obtains compensation for the public performances of their works and distributes the royalties based upon on those performances. Several music companies granted ASCAP a nonexclusive right to license public performance rights of their works.

Twister’s did not hold a public performance license. ASCAP became aware of this and promptly contacted the debtor to offer him a license. The debtor did not respond to ASCAP’s offer. ASCAP unsuccessfully attempted to contact the debtor an incredible 44 times: twice in person, 14 times by mail and 28 times by telephone.  None of the mail was returned as undeliverable. The phone calls were made on various days and at various times.  The debtor was often on the Twister’s premises but refused to acknowledge the communications.  An investigator from ASCAP visited Twister’s and noted that unauthorized musical performances were taking place.

ASCAP in 2009 informed the debtor of the violations and offered to settle for a monetary amount. The letter was delivered to Twister’s return receipt requested. The receipt was signed by the debtor and confirmed that delivery was made on September 23, 2009.  The debtor signed for the letter but claimed not to have read it.

In June 2010, the music companies brought an action for copyright infringement against the debtor in the Eastern District of Missouri.  The debtor did not contest the case and lost by default.  A judgment of $41,231 was entered against him.  When the debtor filed a Chapter 7 bankruptcy, the music companies filed an adversary proceeding against him under §523(a)(6), which prevents the discharge of debts incurred through “willful or malicious” injury.  The trial court found that the debtor had willfully failed to obtain an ASCAP license and maliciously disregarded the rights of ASCAP’s members and Federal copyright law. The debtor appealed.

The case is an interesting one, since adversary proceedings under §523(a)(6) are rare.  Proving “malice” and a “willful injury” is not an easy matter.  An intentional tort must be inflicted on some opposing party.  The B.A.P.’s analysis focused on the meaning of the words “willful,” “malicious,” and “injury.”  Under case law in the Eighth Circuit, the terms must be separately analyzed.  Furthermore:

Malice requires more than just reckless behavior by the debtor. Scarborough, 171 F.3d at 641 (citing In re Miera, 926 F.2d at 743). The defendant must have acted with the intent to harm, rather than merely acting intentionally in a way that resulted in harm…

If the debtor was aware of the plaintiff-creditor’s right under law to be free of the invasive conduct of others (conduct of the sort redressed by the law on the underlying tort) and nonetheless proceeded to act to effect the invasion with particular reference to the plaintiff, willfulness is established. If in so doing the debtor intended to bring about a loss in fact that would be detrimental to the plaintiff, whether specific sort of loss the plaintiff actually suffered or not, malice is established. Sells v. Porter (In re Porter), 375 B.R. 822, 828 (B.A.P. 8th Cir. 2007) aff’d, 539 F.3d 889 (8th Cir. 2008) (quoting KYMN, Inc. v. Langeslag (In re Langeslag), 366 B.R. 51, 59 (Bankr. D. Minn 2007)).

The debtor made the rather unconvincing argument that he did not “intentionally” injure the music companies because he was not aware he needed an ASCAP license.  He claimed he was not aware of the violations until suit was filed against him in court.  The court was not persuaded, noting that he had been contacted 44 times, and never responded.  Furthermore, the court found that Walker (the debtor) failed to distinguish between the concepts of injury and harm:

The Supreme Court [has] analyzed willfulness in terms of injury. Injury is the “invasion of any legally protected interest of another.” Restatement (Second) of Torts § 7(1). Under § 523(a)(6), a judgment debt cannot be exempt from discharge unless it is based on an intentional tort, which requires the actor to intend “the consequences of the act rather than the act itself.” Restatement (Second) of Torts § 8A, comment a, at 15; Geiger, 523 U.S. at 61. In effect, Geiger requires that the debtor intend the injury.

The debtor had a duty, the court found, the obtain the required license.  He also signed for a settlement letter from the plaintiffs, but later claimed he had not read it. These types of arguments did little to win the debtor friends among the judges.  The court then turned its attention to the concept of harm:

The Eighth Circuit analyzed maliciousness in terms of harm…Harm is the “existence of loss or detriment in fact of any kind to a person resulting from any case.” Restatement (Second) of Torts § 7(2). In this case, the debtor’s actions were malicious because he intended to harm the appellees. The debtor did not obtain a public performance license yet he continued to play music covered by the license. The district court for the Eastern District of Missouri found the debtor to be in violation of Federal copyright law and entered judgment against him. The Eighth Circuit has held that the bankruptcy court may consider a violation of a statute as evidence of malicious intent. In re Fors, 259 B.R. at 139. And, one court has held that the debtor’s intentional violation of a Federal copyright law was an aggravating feature which evinces a voluntary willingness to inflict injury. Knight Kitchen Music v. Pineau (In re Pineau), 149 B.R. 239 (D. Me. 1993).

The debtor admitted he had a general knowledge of federal copyright law.  When all was said and done, the court plainly could see that the debtor knew he needed to obtain a license, and deliberately avoided doing so because then he would have to pay royalties.  Thus, he intended the financial harm which was the logical consequence of his actions.  Thus, the B.A.P. had no trouble in upholding the ruling of the lower bankruptcy court on making the debt nondischargeable. Presumably, what irked the court most was the repeated and deliberate evasions of the plaintiff creditor’s communications.  At some point, willfulness can be inferred from this sort of extrinsic evidence.

Read More:  Bankruptcy Adversary Proceedings Under Section 523