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A Chapter 7 debtor appealed a bankruptcy court’s decision that an arbitration judgment against him as an alter ego of a corporation was not dischargeable. In re Houng, No. 8:12-cv-01341, order (C.D. Cal., Sep. 11, 2013). The debtor challenged whether the arbitration award could be considered a final judgment in the bankruptcy context, which would affect whether or not the award could be ruled nondischargeable. The district court found that a state court confirmed the amount of the judgment, and that the arbitrator’s findings were sufficient to make the judgment final. It therefore affirmed the bankruptcy court’s order ruling the debt nondischargeable.

The debtor was the CEO of Westinghouse Digital Electronics (WDE) from 2003 to 2010. The company had a product assembly agreement (PSA) with Tatung, a Taiwanese television-assembly company, from 2007 to 2008. WDE ceased making payments owed to Tatung under the PSA in late 2008, and it ceased all operations in 2010. The PSA provided for arbitration of disputes, and Tatung made an arbitration demand against WDE and individually against the debtor. The arbitrator eventually found that the debtor owed a fiduciary duty and was liable to Tatung as an alter ego of WDE, meaning that the arbitrator concluded that the debtor was using the company to shield himself from acts for which he would ordinarily be personally liable. This included, according to the arbitrator, fraud and diversion of assets for personal gain. The arbitrator’s order awarded Tatung $25.7 million. The Orange County Superior Court confirmed the award.

The debtor filed for Chapter 11 bankruptcy, which the court later converted to Chapter 7, while the arbitration matter was still pending. Tatung moved the bankruptcy court to rule that the judgment was nondischargeable because it arose from “fraud or defalcation while acting in a fiduciary capacity.” 11 U.S.C. § 523(a)(4). The bankruptcy court essentially confirmed the arbitrator’s findings, noting that WDE was insolvent while the PSA was in effect and that the debtor breached a fiduciary duty to Tatung. The debtor appealed to the district court.

The main argument on appeal was whether the arbitrator’s award was subject to issue preclusion, also known as collateral estoppel. This is a legal doctrine that prevents a party from re-litigating an issue on which another court has made a final ruling. If it did not apply, then the debtor could ask the court to consider de novo the question of whether § 523(a)(4) should apply. The debtor argued that preclusion should not apply to an arbitration award at the state level. The court noted, however, that a state court had confirmed the award and entered a judgment. It held that this met the requirement, under Ninth Circuit precedent, that an issue actually be litigated before preclusion applies. The arbitration award therefore had the effect of a final judgment, and the debt was nondischargeable.

Since 1997, bankruptcy attorney Devin Sawdayi has handled Chapter 7 and Chapter 13 cases in the Los Angeles and surrounding area. We represent clients who find themselves without enough income to continue paying their debts, and we help them create plans to either pay some or all of their debts on a manageable schedule, or obtain a final bankruptcy discharge of some or all of their remaining debts. For a free and confidential consultation to see how we may help you, please contact us today online or at (310) 475-9399.

More Blog Posts:

Court Addresses Dischargeability of Debts Resulting from “Willful and Malicious Injury” by the Debtor, Los Angeles Bankruptcy Lawyer Blawg, October 3, 2013

California Bankruptcy Court Rules on Discharge of Debt Allegedly Incurred Through Fraud, Los Angeles Bankruptcy Lawyer Blawg, September 7, 2013

Payroll Debts Ruled Nondischargeable in Chapter 7 Bankruptcy, Los Angeles Bankruptcy Lawyer Blawg, July 23, 2013