Star's Edge, Inc. et al v. Braun

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UNITED STATES BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
In re 	) Bankruptcy Case
) No. 04-33139-DM7
ELDON BRAUN 	)
) Chapter 7
)
Debtor. 	) Adversary Proceeding
___________________________________) No. 04-3333 DM
STAR’S EDGE, INC. and 	)
HARRY PALMER, 	)
Plaintiffs, 	)
)
v. 	)
)
ELDON BRAUN, 	)
)
Debtor. 	)
)
___________________________________)
MEMORANDUM DECISION RE NONDISCHARGEABILTY
OF LIABILITY FOR COPYRIGHT INFRINGEMENT
I. 	Introduction
Star’s Edge, Inc. and Harry Palmer (“Plaintiffs”) filed a
Motion for Summary Judgment or Partial Summary Judgment seeking a
determination that a federal district court judgment they
recovered against Eldon Braun (“Debtor”) is nondischargeable under
Signed and Filed: July 26, 2005
________________________________________
DENNIS MONTALI
U.S. Bankruptcy Judge
________________________________________
Entered on Docket
July 27, 2005
GLORIA L. FRANKLIN, CLERK
U.S BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
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1 Unless otherwise indicated, all chapter, section and
rule references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1330,
and to the Federal Rules of Bankruptcy Procedure, Rules 1001-9036.
2 The following discussion constitutes the court's
findings of fact and conclusions of law. 	Fed. R. Bankr. P.
7052(a).
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section 523(a)(6). 1 	The district court judgment against Debtor is
for copyright infringement, libel per se, and attorney fees and
costs. 	At a hearing held on June 17, 2005, this court orally
announced its determination that the portion of the judgment based
on libel per se is nondischargeable. 	For the reasons stated
below, the court concludes that the portion of the judgment for
copyright infringement is also nondischargeable. 	The award of
sanctions, attorney fees and costs is also nondischargeable
because it is ancillary to a nondischargeable debt.
II. 	Issue
Is an award of statutory damages for intentional copyright
infringement a willful and malicious “injury” within the meaning
of section 523(a)(6) even when the district court stated
explicitly that there were no actual damages?
III. 	Facts2
In October or November of 2000, Debtor completed and released
The Source Course, a manuscript designed to help its readers
achieve increased consciousness and enlightenment. 	Prior to
producing The Source Course, Debtor had studied similar self-
improvement techniques through the Avatar course that was produced
and copyrighted by Plaintiffs. 	Debtor had advanced to the level
of Avatar Master and, as such, obtained copies of confidential
Avatar materials. 	Shortly thereafter, Debtor’s relationship with
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3 The attorney fees and costs are yet to be determined.
Sanctions in the amount of $5,740 were awarded to Plaintiffs on
September 17, 2002, and another $24,332.53 was awarded on November
27, 2002.
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Plaintiff Harry Palmer soured due to several disputes over
Palmer’s management of the Avatar program. 	Debtor left the
organization, but never returned his copies of the Avatar course
materials, and Palmer assumed the materials had been destroyed.
After publication of The Source Course, Plaintiffs filed suit
against Debtor alleging copyright infringement and libel per se,
among other claims. 	In a decision filed on July 15, 2003, the
United States District Court for the Middle District of Florida
(the “district court”) found that Debtor had infringed Plaintiffs’
copyright and committed libel per se. 	That court awarded
Plaintiffs $36,000 in damages based on the copyright infringement
claim, including $30,000 of statutory damages and an additional
$6,000 for unjust enrichment reflecting Debtor’s profits from The
Source Course. 	The district court awarded Plaintiffs $20,000 for
the libel per se claim and also ordered Debtor to pay sanctions
and Plaintiffs’ attorney fees and costs. 3
The copyright infringement award was based on 17 U.S.C.A.
§ 504(c), which states in pertinent part that plaintiff is
entitled to “recover, instead of actual damages and profits, an
award of statutory damages for all infringements involved in the
action, with respect to any one work, for which any one infringer
is liable individually . . . a sum of not less than $750 or more
than $30,000 as the court considers just.” 	The district court
went on to state that its award of $36,000 “reflects the Court’s
conclusion that Palmer has suffered no actual damages as a result
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of the infringement.” 	The district court’s conclusion that there
were no actual damages seems to be based on Palmer’s admission
that his sales and enrollment in Avatar courses had not declined
because of availability of The Source Course. 	This court does not
know whether Plaintiffs attempted to prove actual damages, only
that Plaintiffs did seek statutory damages.
IV. 	Discussion
Under section 523(a)(6), a discharge under section 727 does
not discharge an individual debtor from any debt – “(6) for
willful and malicious injury by the debtor to another entity or to
the property of another entity”. 	Debtor concedes that the
district court found his infringement conduct to be willful and
malicious. 	However, he claims that Plaintiffs suffered no injury
as a result of his conduct, and that the debt should be
discharged.
One Ninth Circuit Court of Appeals decision has held that a
debt owed for court-ordered sanctions is nondischargeable under
section 523(a)(6). 	Papadakis v. Zelis (In re Zelis), 66 F.3d 205,
210 (9th Cir. 1995). 	In Zelis, the California Court of Appeal had
ordered the debtor to pay sanctions to the plaintiffs and to the
court due to the debtor’s filing of frivolous appeals. 	The Ninth
Circuit affirmed the bankruptcy appellate panel’s decision to give
collateral estoppel effect to the California Court of Appeal’s
findings regarding the imposition of sanctions. 	While part of the
sanctions award compensated the plaintiffs for attorney fees and
costs, the California Court of Appeal ordered the debtor to pay an
additional $4,000 to that court. 	Zelis v. Papadakis (In re
Zelis), 161 B.R. 469, 471 (B.A.P. 9th Cir. 1993). 	In addition,
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the state court sanctioned the debtor $20,000 for filing a
subsequent frivolous appeal. 	Id. 	These sanctions do not appear
to serve as compensation for any ascertained amount of actual
damages suffered by the court or by the plaintiffs. 	Instead, they
were imposed because “filing a frivolous appeal necessarily causes
harm to the opposing parties . . .” 	Zelis, 66 F.3d at 209.
Despite the lack of a finding of specific injury to the
plaintiffs, the Ninth Circuit held that the sanctions were imposed
due to a willful and malicious injury and were thus
nondischargeable.
An award of statutory damages for copyright infringement
resembles the court-ordered sanctions of Zelis, not because of who
received the sanctions, but because some portion of the sanctions
did not serve as compensation for actual injury. 	Congress
presumably allows recovery of statutory damages in lieu of actual
damages in copyright infringement actions because it recognizes
that the existence of financial harm caused by a copyright
infringer is difficult to prove and difficult to quantify
accurately. 	See Peter Pan Fabrics, Inc. v. Jobela Fabrics, Inc.,
329 F.2d 194, 195-96 (2d Cir. 1964) (stating that statutory
damages allow “the owner of a copyright some recompense for injury
done him, in a case where the rules of law render difficult or
impossible proof of damages or discovery of profits”). 	Additional
motives for imposing statutory damages might include deterring
future infringements or punishing infringers. 	However, Congress
labeled these damages as “statutory” rather than “punitive” which
suggests that they are not solely awarded for the sake of
punishment, but also as compensation for unproven harm. 	By
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allowing the recovery of statutory damages, Congress decided that
it is appropriate to award damages in the absence of proven
injury. 	This decision signals that an act of copyright
infringement causes harm by its very nature. 	The court based its
award of sanctions in Zelis on the similar premise that frivolous
lawsuits necessarily cause harm, and the bankruptcy court found
that the debt was attributed to a willful and malicious injury.
Statutory damages for copyright infringement are also indicative
of injury and, therefore, are nondischargeable in bankruptcy.
Although the Ninth Circuit’s decision in Zelis predates the
United States Supreme Court’s decision in Kawaauhau v. Geiger, 523
U.S. 57 (1998), and the Ninth Circuit’s decision in Carillo v. Su
(In re Su), 290 F.3d 1140 (9th Cir. 2002), these more recent
decisions do not undermine the reasoning of Zelis. 	Geiger holds
that a debt attributable to an injury that results from
recklessness or negligence is dischargeable even if the act that
caused the injury was performed intentionally. 	Su holds that the
court must apply either a subjective test when determining whether
an act was performed with the intent to injure, or determine with
substantial certainty that injury would occur. 	Geiger and Su both
involve conduct that can result in more than one outcome. 	Geiger
determines the dischargeability of a debt incurred in a medical
malpractice judgment while Su involves a debt for a personal
injury resulting from an auto accident. 	Performing a medical
procedure and driving an automobile are activities that can be
executed intentionally, but in a manner that is reckless or
negligent with regard to the outcome. 	On the other hand,
activities such as filing a frivolous lawsuit (as the debtor did
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in Zelis) or infringing a copyright (as Debtor did here) do not
have uncertain or variable outcomes. 	While a medical procedure
can result in either healing or harm, and a physician may cause
harm by negligence, copyright infringement is a categorically
harmful activity. 	One cannot commit intentional copyright
infringement and, through his negligence, cause financial harm to
the copyright holder. 	Rather, harm necessarily follows from the
act of infringing regardless of the infringer’s state of mind when
creating the infringing material. 	Therefore, the decision reached
in Zelis and the decision reached today do not conflict with the
holdings of the Geiger court or the Su court.
In another quite recent decision, the Ninth Circuit held that
a judgment for libel could be attributed to a willful and
malicious injury within the meaning of section 523(a)(6). 	Jett v.
Sicroff (In re Sicroff), 401 F.3d 1101, 1107 (9th Cir. 2005).
Since the debtor conceded that his actions were willful, the
Sicroff court only determined that the debtor had caused a
malicious injury to plaintiff. 	Id. 	In its findings, the court
did not explicitly ascertain the existence of an actual, proven
injury to the plaintiff. 	The court stated that, for an action to
be malicious, it must necessarily cause injury, and that, since
“Sicroff’s statements were directed at Jett’s professional
reputation” they would “necessarily harm him in his occupation.”
Id. at 1106. 	The Ninth Circuit must have reasoned that if conduct
necessarily causes harm, an independent finding of injury is
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4 In fact, the debt was declared nondischargeable before
the state court trial had been completed and before damages had
been quantified.
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unnecessary. 4
Other bankruptcy courts have held that statutory damages for
copyright infringement result in nondischargeable debts without
expressly addressing the question of whether an award of statutory
damages implies the existence of an injury. 	In Continental Map,
Inc. v. Massier (In re Massier), 51 B.R. 229 (Bankr. D. Colo.
1985), a district court had awarded statutory damages to plaintiff
for copyright infringement based on 17 U.S.C. § 504(c). 	The
bankruptcy court stated that “[t]he mere fact that the district
Court awarded ‘damages’ is proof that Plaintiff sustained injury
and it matters not that these damages are labeled as ‘actual’ or
‘statutory’.” 	Id. at 231. 	The court also stated that “[w]here
there has been a willful copyright infringement, the [d]ebt
occasioned thereby is not dischargeable.” 	Id. (citing Gordon v.
Weir, 111 F. Supp. 117 (E.D. Mich. 1953)).
Two other bankruptcy courts have held that a debt incurred
from statutory damages is nondischargeable even though the court
awarding the damages acknowledged that no actual damages were
established. 	In Brzys v. Lubanski (In re Lubanski), 186 B.R. 160
(Bankr. D. Mass. 1995), the court held that a debt incurred in a
right to privacy suit was nondischargeable. 	A state court had
awarded liquidated damages to plaintiff based on Massachusetts
General Laws, chapter 272, § 99 because the debtor had placed an
eavesdropping device in plaintiff’s office, thereby violating her
privacy rights. 	The state court awarded these damages even though
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“no actual damages were established.” 	Id. at 162. The Lubanski
court interpreted the liquidated damages provision of the
Massachusetts right to privacy statute as providing a remedy for
“an injury that existed but could not be proven.” 	Id. at 167.
The court was “satisfied that, for the purposes of § 523(a)(6),
the damages awarded by the State Court were designed to remedy an
actual injury.” 	Statutory damages for copyright infringement are
similar to unproven damages for violation of privacy in that
actual damages resulting from such a wrong are difficult to prove,
and legislatures have created a statutory remedy for this reason.
In Cablevision Sys. Corp. v. Cohen (In re Cohen), 121 B.R.
267 (Bankr. E.D.N.Y. 1990), the court declared a debt based on
statutory damages nondischargeable as a matter of law on a summary
judgment motion. 	Cohen involved a debtor who had distributed
illegal decoders that intercept free cable television channels.
The debtor’s actions violated 47 U.S.C. § 553, the Cable Act,
which allows plaintiffs to recover either actual or statutory
damages as the court considers just. 	In the district court suit,
plaintiffs sought and won statutory damages because of the
difficulty of proving actual damages. 	Id. at 269. 	The bankruptcy
court stated that “[a]n award of statutory damages is not
indicative of a lack of injury,” and noted that statutory damages
are “specifically intended for situations where it is virtually
impossible to quantify the extent of an individual’s injury and
resultant monetary damages.” 	Id. 	In rejecting the debtor’s claim
that no injury existed, the bankruptcy court stated that “under
section 523(a)(6), the proper focus is not upon the injury but
rather the focus is upon the nature of the conduct that gives rise
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to the injury.” 	Id. at 272. 	Copyright infringement, like
distribution of illegal cable television decoders, is harmful to
the copyright holder by its very nature, and an award of statutory
damages indicates that the court found the violation to be
significant.
In addition, a bankruptcy court in Herman v. Remick (In re
Remick), 96 B.R. 935 (Bankr. W.D. Mo. 1987), tried a copyright
infringement action on the merits, awarded statutory damages, and
deemed the damages nondischargeable. 	The Remick court noted that
“[i]n determining whether an injury to property has been
committed, the standard is whether the defendants have committed
an act against the plaintiffs’ property rights which is actionable
under the general law.” 	Id. at 939. 	Under this standard,
Debtor’s copyright infringement was indeed actionable under law
and, therefore, constitutes an injury to Plaintiffs’ property.
Each of these cases supports the conclusion that statutory
damages exist for the purpose of compensating plaintiffs for
actual injuries that are difficult to prove. 	This court
interprets the district court’s statement that “[Plaintiff] has
suffered no actual damages” merely to mean that Plaintiffs did not
establish actual damages. 	Regardless of this distinction, an
award of statutory damages for copyright infringement is
indicative of an injury. 	For this reason, Debtor’s willful and
malicious copyright infringement results in a nondischargeable
debt under section 523(a)(6).
Throughout section 523(a), the term “debt for”, as found in
“debt for willful and malicious injury” in section 523(a)(6),
refers to any debt incurred as a result of that injury and does
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not limit the nondischargeable debt to liability for the injury.
Cohen v. de la Cruz, 523 U.S. 213, 220 (1998). 	Cohen v. de la
Cruz held that a judgment awarding attorney fees and costs in a
suit for fraudulently obtained rent money resulted in a
nondischargeable debt under section 523(a)(2)(A). 	Id. at 223.
The Court based its judgment on the reasonable meaning of the
various exceptions to discharge set forth in section 523(a) and on
the policy concerns underlying these exceptions. 	This court
concludes that, under Cohen v. de la Cruz, Debtor’s obligation to
pay sanctions, attorney fees and cost to Plaintiffs is also
nondischargeable under section 523(a)(6).
V. 	Conclusion
For the reasons stated above, Plaintiffs’ Motion for Summary
Judgment will be GRANTED. 	The debts for copyright infringement,
libel per se, and sanctions, attorney fees and costs are
nondischargeable under section 523(a)(6). 	Counsel for Plaintiffs
should submit a separate order granting the motion for the reasons
stated herein, and a judgment declaring the district court
judgment nondischargeable. 	Counsel should comply with B.L.R.
9021-1.
**END OF MEMORANDUM DECISION**
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COURT SERVICE LIST
William F. Abbott, Esq.
211 Gough St., Ste. 201
San Francisco, CA 94102
Neil Rosenbaum, Esq.
Rosenbaum & Associates
247 Hartford St., Ste. 200
San Francisco, CA 94114
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