No Discharge for Bonnie, No Discharge for Clyde.
March 10, 2023
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Alex Jones, the despicable, chest-thumping, conspiracy-peddling radio host, for years, blabbered on his radio show that the Sandy Hook Elementary School shooting was a hoax.
When the families of the murdered children sued him in state court, tough-guy Jones high-tailed it to bankruptcy court like a coward, looking for sanctuary from his day of reckoning. But the Texas Bankruptcy Court held that Jones could not use the Bankruptcy Code to wipe away his $1 billion liability to the families. The decision is instructional for creditors who want state-court judgments to hold up in bankruptcy court without having to litigate a new lawsuit fully.
The Bankruptcy Code provides honest but unfortunate debtors with an avenue for a fresh start in their financial life by discharging, or forgiving, their debts. But not all debts are created equal, and some debts cannot be discharged in bankruptcy. These debts tend to involve fraudulent conduct or egregious behavior pre-petition. The bankruptcy court decides whether a debt is dischargeable.
In Alex Jones's case, the families sued him in Connecticut state court for repeatedly accusing them on-air of faking their children’s death and being crisis actors. They alleged claims for defamation and intentional infliction of emotional distress and, because Jones would not cooperate in discovery, obtained a default judgment on liability. The families tried the damages portion before a jury, which awarded them $1.4 billion. Jones then filed bankruptcy, so the families filed an adversary proceeding (a lawsuit in the bankruptcy case) asking the bankruptcy court to rule that the Connecticut judgment was non-dischargeable because Jones had committed a "willful and malicious injury" against them.
What is instructional about the case is that the families sought a quick summary judgment on their claim. Often, a plaintiff must start from scratch in the bankruptcy court to determine the nondischargeability of a claim or judgment. But the families theorized that the damages opinion, jury verdict, and admitted allegations from the Connecticut lawsuit satisfied the requirements of collateral estoppel on the issue of willful and malicious injury under the Bankruptcy Code. They argued that the bankruptcy court could rely on the record from state court – without the need for another full-blown lawsuit. The bankruptcy court agreed.
In appropriate circumstances, a plaintiff can invoke collateral estoppel to establish that a debt is nondischargeable. Collateral estoppel is a legal concept that prevents parties from relitigating issues of fact already determined by a valid and final judgment in a prior lawsuit in any future lawsuit involving the same parties. The issue must have been actually litigated and ruled on in the prior action. The decision must also have been necessary to the judgment.
Recall that the families obtained a default judgment on liability against Jones for discovery abuse. Even though there was no trial on liability, the outcome did not change. Under Connecticut law, like North Carolina law, the allegations in a petition are deemed admitted, and the defendant’s liability is established if a default judgment is entered against a defendant based on discovery abuse. Jones had the opportunity to participate in the state court litigation for three years before the state court entered default judgment. Jones did participate in the damages trial. The bankruptcy court concluded that the issues were fully and fairly adjudicated.
Jones argued that the state court did not consider the specific issue of "willful and malicious injury" under the Bankruptcy Code. The bankruptcy court rejected the argument, pointing out that the facts determined in state court established the claim. The bankruptcy court focuses on whether a state court made specific findings about an injury to a plaintiff that meets the test for willful and maliciousness under the Bankruptcy Code, and not the specific label of “willful and malicious.” The families had alleged and pled that Jones engaged in intentional, willful, and malicious conduct to establish their defamation and emotional distress claims, and those allegations were deemed admitted when default judgment was entered.
The upshot for creditors is to litigate pre-bankruptcy claims with an eye toward a possible bankruptcy filing by the defendant. If an obligor has defaulted on a loan and committed fraud, don't limit your claim to breach of contract. Allege the fraud claim. If the facts establish an exception to discharge, then by alleging and proving them outside of bankruptcy, you may save yourself the time and expense of a new lawsuit in bankruptcy. And that even goes for cases involving default judgments.
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