Knock Off the Knock-Offs, Part II: SDNY Bankruptcy Court Holds That Defendant’s Judgment Debt on Account of His Company’s Trademark Infringement Is Not Dischargeable Under Section 523(a)(6)

Contributed by Debra McElligott
As we previously reported here at the Weil Bankruptcy Blog, in Burberry Limited and Burberry USA v. RTC Fashion Inc., d/b/a Designers Imports t/a Fashion58.Com and Asher Horowitz, the New York State Supreme Court held that Burberry, as a judgment creditor, could pierce the corporate veil of Designers Imports, a business owned by Asher Horowitz, to hold him personally liable on a judgment against Designers Imports for trademark infringement.  In the latest face-off between Burberry and Horowitz – now a chapter 7 debtor – the United States Bankruptcy Court for the Southern District of New York held that this judgment debt is not dischargeable under section 523(a)(6) of the Bankruptcy Code. 
A Brief History of the Showdown
In 2005, Burberry confronted Horowitz about Designers Imports’ sale of counterfeit Burberry products.  The two parties ultimately entered into a settlement agreement under which Horowitz, on behalf of himself and Designers Imports, agreed to stop infringing upon Burberry’s trademark.  Despite the settlement agreement, Designers Imports continued selling the merchandise, and in 2007, Burberry obtained a judgment for approximately $2.6 million in damages against Designers Imports.  The judgment remained unpaid in 2011, at which time the New York State Supreme Court held that Burberry could pierce Designers Imports’ corporate veil to hold Horowitz personally liable on the judgment.  Finally, in February 2015, Burberry filed a complaint in Horowitz’s chapter 7 case, claiming that the judgment debt is non-dischargeable under section 523(a)(6) of the Bankruptcy Code and seeking summary judgment on collateral estoppel grounds.
The court first noted that under the doctrine of collateral estoppel, an issue of fact or law necessary to a judgment cannot be relitigated in a different case involving the same parties.  The court also highlighted that “a bankruptcy court could properly give collateral estoppel effect to those elements of the claim that are identical to the elements required for discharge and that were actually litigated and determined in the prior action.”
To establish non-dischargeability under section 523(a)(6), a plaintiff must show that the debt in question was for willful and malicious injury by the debtor.  The United States Supreme Court has held that the word “willful” modifies the word “injury.”  In other words, the injury – not simply the act that causes it – must be deliberate or intentional.  Additionally, the Second Circuit has interpreted the word “malicious” to mean “wrongful and without just cause or excuse, even in the absence of personal hatred, spite, or ill will.”  In particular, the bankruptcy court noted that courts have found malice for the purposes of section 523(a)(6) where a defendant was on notice, yet continued to violate a plaintiff’s intellectual property rights.
Here, Burberry sought to use the district court’s decision that Designers Imports infringed upon its trademark to collaterally estop Horowitz from relitigating those issues in the non-dischargeability case.  The court held that Burberry met the four elements for collateral estoppel in federal courts:  first, that the identical issue was raised in a previous proceeding; second, that the issue was actually litigated and decided in that proceeding; third, that the party had a full and fair opportunity to litigate the issue; and fourth, that resolution of the issue was necessary to support a valid and final judgment on the merits.
With respect to the first prong, the court held that the elements of willful trademark infringement present the same issues required to show willful and malicious injury under section 523(a)(6).  In the trademark infringement case, the district court held that Designers Imports willfully infringed Burberry’s trademark.  Under the Lanham Act, this holding requires a finding that “the defendant had knowledge that [his] conduct represented infringement or perhaps recklessly disregarded the possibility.”  The district court also found that Designers had “repeatedly and knowingly violated the settlement agreement with Burberry” and failed to prevent further sales of illegal merchandise.  The bankruptcy court held that these findings satisfied the legal definition for willfulness under section 523(a)(6), as Designers Imports knew it was violating the law and intended to cause injury to Burberry.  Additionally, the court held that the “malice” element of section 523(a)(6) could be inferred from the district court’s determination that Designers Imports had willfully, continually, and deliberately infringed on Burberry’s trademark.
The court also held that Burberry showed the issues of willful and malicious injury were actually litigated in the trademark infringement action, as the judgment issued in that case was the result of a full trial in which the defendant participated.  Similarly, the court held that Burberry met the third prong because Horowitz instructed Designer Imports’ lawyers and made all client decisions for the corporation, thus giving him a full and fair opportunity to litigate the issues relating to willful and malicious injury.  Finally, the court held that the district court’s finding of willfulness in the trademark infringement case was necessary to support the judgment on the merits, as the amount of damages awarded in that case was based on a finding of willful trademark infringement.
A Wrinkle in the Case
The collateral estoppel analysis did not end there.  The bankruptcy court’s task in this case was complicated because section 523(a)(6) requires the debtor to be liable for the willful and malicious injury.  The judgment in the trademark infringement litigation, however, was issued against Designers Imports – not Horowitz.  As a result, the court held that Burberry must also show that Horowitz was collaterally estopped from relitigating the issue of his personal liability based on the New York State Supreme Court’s decision in the veil piercing case.  The court held that Burberry met this burden, as the state court’s piercing of the corporate veil constituted a holding that Horowitz was responsible for the actions of Designers Imports and was sufficient for a finding under section 523(a)(6) that Horowitz was responsible for willful and malicious injury to Burberry.
In the Burberry case, a holding in a trademark infringement suit proved to be determinative of an issue regarding a chapter 7 debtor’s discharge nearly ten years later.  This fact shows the importance that non-bankruptcy court holdings can ultimately have in a bankruptcy scenario and reminds professionals to keep the doctrine of collateral estoppel in mind.  The bankruptcy court’s decision also reinforces the concept that individual principals cannot rely on the legal fiction of a corporation to protect themselves personal liability where, as in this case, they have willfully and knowingly violated the law.