LOUIS VUITTON MALLETIER v. ORTIZ et al

1
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF PUERTO RICO
In re: :
:
PEDRO L. ORTIZ, : Case No. 08-03055 (GAC)
MARIA V. RAMOS, :
:
Debtor : Chapter 7
___________________________________:
:
LOUIS VUITTON MALLETIER, :
:
Plaintiff, :
:
v. : Adv. No. 08-00123
:
PEDRO L. ORTIZ, :
MARIA V. RAMOS, :
:
Defendants :
___________________________________:
DECISION AND ORDER
The debtors filed a voluntary petition under Chapter 7 on May
13, 2008. Louis Vuitton Malletier (“LVM”) filed this adversary
proceeding on August 18, 2008, seeking to except a debt from
discharge pursuant to 11 U.S.C. § 523(a)(6). LVM is in the
business of manufacturing and selling luxury leather goods. LVM’s
claim against the debtors is based on a judgment, in a trademark
counterfeit action under the Lanham Act (15 U.S.C. § 1127, Et
Seq.), issued by the United States District Court for the District
of Puerto Rico in Civil Action 03-2277. The debtors filed a motion
to dismiss the complaint for lack of service and “lack of cause”
(dkt. #6). LVM opposed the motion to dismiss (dkt. #9). The
debtors also filed a motion for summary judgment (dkt. #17) and LVM
Case:08-00123-BKT Doc#:29 Filed:06/04/09 Entered:06/04/09 15:21:31 Desc: Main
Document Page 1 of 12

Prior to the issuance of judgment, a Report and	1
Recommendation granting LVM’s Motion for Summary Judgment was
signed by then Magistrate Judge Gustavo Gelphi on November 22,
2005. Judge Jay Garcia-Gregory adopted the Report and
Recommendation on January 4, 2006 and judgment was entered
thereafter on July 27, 2006.
2
filed a cross-motion for summary judgment (dkt. #18), to which the
debtors filed a reply (dkt. #19). For the reasons set forth below,
the debtors’ motion to dismiss will be denied and LVM’s cross-
motion for summary judgment will be granted and the debt owed to it
by the debtors will be excepted from discharge pursuant to 11
U.S.C. § 523(a)(6).
BACKGROUND
On July 27, 2006, prior to the filing of this bankruptcy
petition, a corporation, Peluet of Puerto Rico Corp. (“Peleut”), of
which the debtor, Pedro Ortiz (“Ortiz”) was the sole shareholder,
was found liable for $100,000 in damages, plus costs, reasonable
attorney’s fees and post judgment interest, for infringing
(counterfeiting) the trademark of LVM. Peleut manufactured,	1
distributed, offered for sale and sold counterfeit LVM branded
merchandise. U.S. Marshals seized 170 counterfeited items. T h e
court found that Peluet had a long history of counterfeiting
activities involving LVM trademarks.
Part of that history includes that on July 26, 2002, U.S.
Customs notified Peluet that at the Port of San Juan, it had seized
200 cartons with different quantities of LVM fake handbags that
Case:08-00123-BKT Doc#:29 Filed:06/04/09 Entered:06/04/09 15:21:31 Desc: Main
Document Page 2 of 12

3
totaled 3,000 individual pieces. On December 2, 2003, Peluet was
temporarily restrained from counterfeiting LVM’s trademarks and
ordered to show cause as to why a preliminary injunction should not
be issued. On December 23, 2003, Peluet and LVM entered into a
stipulation and informed the court that Peluet agreed to be subject
to the preliminary injunction. Peluet, its officers, directors,
stockholders and others, in privity or acting in concert with it,
were all enjoined from importing, marketing, selling and otherwise
trading in goods bearing counterfeit copies of LVM’s trademarks.
In spite of the injunction, Peluet twice tried to introduce
through the Port of San Juan, fake goods with counterfeit copies of
LVM’s trademarks. The first attempt occurred on May 4, 2004 and
the shipment contained eleven counterfeit handbags, which the U.S.
Customs Service seized and impounded at entry. The second attempt
occurred on May 26, 2004 and the U.S. Customs Service seized 120
counterfeit wallets. The shipping documents demonstrated that the
fake goods were consigned to Peluet’s address. The court found
that Peluet was caught red-handed attempting to introduce
counterfeit LVM goods into U.S. Territory while it was subject to
the preliminary injunction. The court concluded that it was clear
that Peluet had shown a “gross disregard to the authority of the
Court and of the Federal Judiciary.”
The district court specifically concluded that Peluet engaged
in the willful distribution and sale of goods labeled with
Case:08-00123-BKT Doc#:29 Filed:06/04/09 Entered:06/04/09 15:21:31 Desc: Main
Document Page 3 of 12

A Report and Recommendation holding the debtors personally	2
liable for counterfeiting LVM’s trademark was signed by
Magistrate Judge Justo Arenas on July 9, 2007 and adopted by
Judge Jay Garcia-Gregory on July 24, 2007.
4
counterfeit LVM trademarks. The court also concluded that the case
was exceptional because the acts of infringement were malicious,
fraudulent, deliberate or willful. The court also stated that the
defendant’s illegal activities were willful and with knowledge of
the fact that the goods they were selling were counterfeit.
The judgment was originally against Peluet, but after it
became final and Peluet did not pay, LVM sought to enforce the
judgment against Ortiz and the District Court held Ortiz jointly
and severally liable. In holding Ortiz liable, the District Court	2
determined that Peluet’s disappearance was in most part due to the
actions taken by Ortiz to impede LVM from collecting the judgment
in its favor. The court found that Ortiz conducted all of Peluet’s
business activity and was the mastermind in the counterfeiting
scheme. Finally, the court found that the interests of Ortiz and
Peluet were so intertwined that they are virtually one person.
LVM claims that the debt is excepted from discharge as a debt
for willful and malicious injury to LVM or LVM’s property. The
debtors contend that the judgment against them does not represent
“willful and malicious” conduct under the Bankruptcy Code, because
the judgment is not based on an intentional tort and LVM has failed
to prove maliciousness. The debtors also argue that a Lanham Act
Case:08-00123-BKT Doc#:29 Filed:06/04/09 Entered:06/04/09 15:21:31 Desc: Main
Document Page 4 of 12

5
claimant need not prove intent or knowledge of the infringement to
prevail in an action for violation of trademark. The debtors claim
that LVM exaggerates the process which resulted in the judgment
against the debtors, since they were one of seventy-four defendants
and were not represented by an attorney in the proceedings.
Moreover, the debtors contend that the damages awarded were
statutory damages, which do not represent an actual injury.
DISCUSSION
The debtors initially argued that the action should be
dismissed for lack of service and lack of cause. The debtors argue
that the summons and complaint were not served within ten days of
issuance of the summons as required by Fed. R. Bankr. P. 7004. As
to service, the complaint was filed on August 18, 2008. Summons
were issued on August 19, 2008 and the Certificate of Service,
filed on September 3, 2008 (dkt. #5), shows that service was
perfected on August 29, 2008. Thus, the Court concludes that
service was accomplished within ten days of issuance of the summons
and the motion to dismiss for lack of proper service will be
denied. As to lack of cause, the Court will consider this basis,
in the context of the cross-motions for summary judgment.
A motion for summary judgment in an adversary proceeding under
§ 523(a)(6) to have a debt declared nondischargeable is governed by
the same standards applicable to motions under Fed. R. Civ. P. 56.
See Fed. R. Bankr. P. 7056. Summary judgment is appropriate “if
Case:08-00123-BKT Doc#:29 Filed:06/04/09 Entered:06/04/09 15:21:31 Desc: Main
Document Page 5 of 12

6
the pleadings, depositions, answers to interrogatories, and
admissions on file, together with the affidavits, if any, show that
there is no genuine issue as to any material fact and that the
moving party is entitled to a judgment as a matter of law.” Fed.
R. Civ. P. 56(c). In this case, the parties agree that there are
no genuine issues of material fact and each claims to be entitled
to judgment as a matter of law.
The doctrine of collateral estoppel applies in bankruptcy
dischargeability proceedings. See Grogan v. Garner, 498 U.S. 279,
285 n.11 (1991). Collateral estoppel “forecloses relitigation in
a subsequent action of a fact essential for rendering a judgment in
a prior action between the same parties, even when different causes
of action are involved.” Puerto Ricans for Puerto Rico Party v.
Dalmau, 544 F.3d 58, 69 (1st Cir. 2008). To apply the doctrine,
the following factors must be met:
(1) an identity of issues (that is, that the issue sought
to be precluded is the same as that which was involved in
the prior proceeding), (2) actuality of litigation (that
is, that the point was actually litigated in the earlier
proceeding), (3) finality of the earlier resolution (that
is, that the issue was determined by a valid and binding
final judgment or order), and (4) the centrality of the
adjudication (that is, that the determination of the
issue in the prior proceeding was essential to the final
judgment or order).
Gonzalez-Pina v. Rodriguez, 407 F.3d 425, 430 (1st Cir.
2005)(quoting Faigin v. Kelly, 184 F.3d 67, 78 (1st Cir. 1999)).
As the First Circuit Court of Appeals reiterated, in
considering whether a debt based on violation of the Consumer
Case:08-00123-BKT Doc#:29 Filed:06/04/09 Entered:06/04/09 15:21:31 Desc: Main
Document Page 6 of 12

7
Protection Act, Mass. Gen. Laws ch. 93A, could be excepted from
discharge under 523(a)(2) for fraud, “[a]n issue may be actually
decided for purposes of collateral estoppel, even if it is not
explicitly decided, if it ‘constituted, logically or practically,
a necessary component of the decision reached in the prior
litigation.’” Stoehr v. Mohammed, 244 F.3d 206, 208 (1st Cir. 2001)
(quoting Grella v. Salem Five Cent Sav. Bank, 42 F.3d 26, 30-31
(1st Cir. 1994)). And as the Bankruptcy Appellate Panel recently
stated, in considering the same two statutes,
in determining whether an issue was actually litigated
and decided, a federal court is “free to go beyond the
judgment . . . and examine the pleadings and evidence in
the prior action.” Nissan v. Weiss (In re Weiss), 235
B.R. 349 (Bankr. S.D.N.Y. 1999) (stating that the judge
“may look beyond the [judgment] and examine the parties’
pleadings as well as the evidence in the [prior action]
to determine whether the [identical issue] was actually
litigated”), aff’d, 255 B.R. 115 (S.D.N.Y. 2000).
In re Stanley-Snow, 2009 WL 1219943, *8 (B.A.P. 1st Cir. 2009).
The debtors argue that the first element of collateral
estoppel -- whether the issues in the two proceedings are identical
-- was not met. Specifically, they assert that the district court
judgment cannot have preclusive effect in this proceeding as the
essential elements of an exception to discharge under § 523(a)(6)
-- namely, willful and malicious injury -- were not litigated nor
determined by the district court. The debtors contend that the
judgment against them merely represents a finding that the LVM
trademark was used by them without permission and that consumers
Case:08-00123-BKT Doc#:29 Filed:06/04/09 Entered:06/04/09 15:21:31 Desc: Main
Document Page 7 of 12

8
were likely confused. LVM argues that the district court’s
specific findings and conclusions on the Lanham Act violation are
determinative of the nature of the injury for purposes of
§ 523(a)(6).
In general, the First Circuit Court of Appeals has held that:
[t]o establish trademark infringement under the Lanham
Act, [a claimant is] required to prove that: (1) it owns
and uses the . . . marks; (2)[the defendant] used the
same or similar marks without [the holder’s] permission;
and (3) [the defendant’s] use of the . . . marks likely
confused . . . consumers thereby causing [the holder]
harm.
Venture Tape Corp. v. McGills Glass Warehouse, 540 F.3d 56, 60 (1st
Cir. 2008). Yet, willfulness “arises when an infringer proceeds
despite knowledge of the senior user’s trademark.” Visible Systems
Corp. v. Unisys Corp., 551 F.3d 65 (1st Cir. 2008).
Comparing this to § 523(a)(6), a debt is nondischargeable
“for willful and malicious injury by the debtor to another entity
or the property of another entity.” 11 U.S.C. § 523(a)(6). To
establish that a debt is nondischargeable under this section, a
creditor must show that the debtor perpetrated an intentional act
and intended the consequences of the act, not simply the act
itself. Kawaauhau v. Geiger, 523 U.S. 57, 61-62 (1998). Merely
negligent or even reckless acts do not meet the “willful and
malicious” standard. Roumeliotis v. Popa (In re Popa), 140 F.3d
317, 318 (1st Cir. 1998). “‘[M]alice’ under 523(a)(6) requires ‘a
showing that the debtor’s willful, injurious conduct was undertaken
Case:08-00123-BKT Doc#:29 Filed:06/04/09 Entered:06/04/09 15:21:31 Desc: Main
Document Page 8 of 12

9
without just cause or excuse.’” Gomes v. Limieux (In re Limieux),
306 B.R. 433, 440 (Bankr. D.Mass. 2004)(quoting McAlister v.
Slosberg (In re Slosberg), 225 B.R. 9, 21 (Bankr. D.Me. 1998)).
Thus, to show a willful and malicious injury under 523(a)(6), the
creditor must show that “1) the injuries complained of were the
result of an act of the debtor done without justification or
excuse; and 2) the debtor acted either intending to cause an injury
or with substantial certainty that the injury would occur.” In re
Limieux, 306 B.R. at 440.
Accordingly, simply by definition, this Court agrees that a
violation of the Lanham Act and a willful and malicious injury are
not necessarily synonymous, and that Lanham Act liability may be
premised on conduct that is not willful and malicious. Therefore,
the principle of collateral estoppel does not automatically operate
to render a Lanham Act judgment nondischargeable because it would
be possible under the same set of facts to find a violation of the
Lanham Act, which does not satisfy the elements of
nondischargeability under 11 U.S.C. § 523(a)(6).
Notwithstanding, this does not mean that a Lanham Act judgment
can never have preclusive effect in a § 523(a)(6)
nondischargeability proceeding. Rather, collateral estoppel may be
appropriate where there is ample support in the record for
concluding that the district court based its Lanham Act judgment on
the defendant’s willful and malicious conduct. Where defendants
Case:08-00123-BKT Doc#:29 Filed:06/04/09 Entered:06/04/09 15:21:31 Desc: Main
Document Page 9 of 12

10
continue to infringe upon a trademark after entry of a federal
injunction against them, the infringement may be found to be
willful and without just excuse, and therefore malicious. See
Vuitton v. Klayminc (In re Klayminc), 37 B.R. 728 (Bankr. S.D.Fla.
1984).
In the present case, the district court adopted the specific
findings and conclusions of the magistrate regarding the debtors’
conduct. The district court found that the debtors’ distribution
of the counterfeit goods was willful and that the case was
exceptional because the acts of infringement were malicious,
fraudulent, deliberate or willful. The court later stated that the
illegal activities were willful and with knowledge of the fact that
the goods they were selling were counterfeit.
And while a Lanham Act claimant need not prove intent or
knowledge of an infringement to prevail, the debtors engaged in
counterfeiting. “Counterfeiting is the act of producing or selling
a product with a sham trademark that is an intentional and
calculated reproduction of the genuine trademark.” J. Thomas
McCarthy, McCarthy on Trademarks and Unfair Competition, § 25:10
(4th Ed. 2009). “Often, counterfeit merchandise is made so as to
imitate a well-known product in all details of construction and
appearance so as to deceive customers into thinking that they are
getting genuine merchandise. Thus, counterfeiting is hard core or
‘first degree’ trademark infringement and is the most blatant and
Case:08-00123-BKT Doc#:29 Filed:06/04/09 Entered:06/04/09 15:21:31 Desc: Main
Document Page 10 of 12

The fact that the debtors were one of many defendants and	3
that they were not represented by counsel in the district court
proceedings does not affect this outcome. The debtors continued
to defend the action and actively participated at hearings,
including the hearing on damages.
11
egregious form of ‘passing off.’ Id.
This Court concludes that this is a particularly reprehensible
case because the debtors repeatedly violated LVM’s trademark, even
after being enjoined from doing so. The debtors’ acts were
intentional (willful) and without justification or excuse
(malicious). The debtors’ acts were committed with substantial
certainty that the injury would occur. The debtors were fully
aware that they were importing and selling counterfeit goods and
that their acts were causing damage to LVM and its property.
This Court concludes that the district court’s findings of
willful and malicious injury were sufficient to support a ruling
that the debt owed by the debtors to LVM is nondischargeable under
§ 523(a)(6) and the debtors are collaterally estopped from
relitigating those issues here.3
Finally, the debtors indicate that the Lanham Act allows up to
$100,000 in damages per trademark infringed and up to $1M per mark
infringed if the infringement was willful and claim that since LVM
was only awarded statutory damages of $100,000, the district
court’s judgment does not represent a finding of willful
infringement. Moreover, the debtors contend that the allowance of
statutory damages is not a measure of actual damages or actual
Case:08-00123-BKT Doc#:29 Filed:06/04/09 Entered:06/04/09 15:21:31 Desc: Main
Document Page 11 of 12

12
injury.
The Court rejects this argument as well. While statutory
damages are available in lieu of actual damages, this is largely
due to the difficulty of proving and accurately quantifying the
financial injury. The Court concludes that the award of statutory
damages, where the debtors’ actions caused a willful and malicious
injury, are nondischargeable in bankruptcy.
ORDER
WHEREFORE IT IS ORDERED that the debtors’ motion to dismiss
(dkt. #6) shall be, and it hereby is, DENIED. The debtors’ motion
for summary judgment (dkt. #17) is also DENIED.
IT IS FURTHER ORDERED that Louis Vuitton Malletier’s cross-
motion for summary judgment (dkt. #18) shall be, and it hereby is,
GRANTED. The district court’s judgment against the debtors in the
amount of $100,000, plus costs, reasonable attorney’s fees and post
judgment interest is excepted from discharge pursuant to 11 U.S.C.
§ 523(a)(6).
SO ORDERED.
San Juan, Puerto Rico, this 2nd day of June, 2009.
BY THE COURT:
s/ Gerardo A. Carlo
_______________________
GERARDO A. CARLO
U.S. Bankruptcy Judge
Case:08-00123-BKT Doc#:29 Filed:06/04/09 Entered:06/04/09 15:21:31 Desc: Main
Document Page 12 of 12