Issues in Bankruptcy Law
By Attorney Wayne R. Terry

A California Bankruptcy Court has opined that willful copyright infringement may be so egregious as to give rise to a claim that may be excepted from discharge in a bankruptcy case. This is the first opinion speaking directly to the dischargeability of copyright infringement liability after a landmark 1998 Supreme Court case which set a significant standard for “willful and malicious” injuries for discharge purposes.

In a detailed opinion by the Honorable Leslie Tchaikovsky of the United States Bankruptcy Court for the Northern District of California in In re Chan, 02-44485, Adv. No. 02-7230 , ___ B.R. ___, 2005 WL 1133858, the Court granted summary judgment for Plaintiffs Atlantic Recording et al. against a defendant who incurred $136 million of liability for willful copyright infringement, then attempted to discharge that liability in a Chapter 7 bankruptcy case. Judge Tchaikovsky ruled that the copyright infringement claims survive the debtor’s bankruptcy discharge.

Chan is the first opinion after the Supreme Court’s decision in Kawaauhau v. Geiger, 523 U.S. 527 (1998) to speak to nondischargeability of copyright infringement claims under 11 USC Section 523(a)(6). Geiger was a medical malpractice case in which the Supreme Court investigated whether negligent or reckless acts rise to the level of “willful” conduct for purposes of Section 523(a)(6). Geiger, 523 U.S. at 61. In sum, the Supreme Court ruled that, to except a claim from discharge, “the actor [must] intend ‘the consequences of an act,’ not simply ‘the act itself.’” Id. The Court’s holding was limited to “debts arising from recklessly or negligently inflicted injuries.” Id., 523 U.S. at 64.

Prior to Geiger, Bankruptcy Courts had long evinced their intent that willful copyright infringement damages be treated seriously for bankruptcy discharge purposes. Gordon v. Weir, 111 F. Supp. 117 (E.D. Mich. 1953); In re Massier, 51 B.R. 229, 231 (Bankr. D. Colo. 1985); Dolman v. Agee, 157 F.3d 708, 715 (9th Cir. 1998) (defendant with knowledge that his conduct constituted copyright infringement found to have acted willfully); A&M Records, Inc. v. General Audio Video Cassettes, Inc., 948 F. Supp. 1449, 1457 (C.D. Cal. 1996) (“a defendant acts willfully if he or she knew, [or] had reason to know, . . . the fact that his or her conduct constituted copyright infringement”).

Thus, it was held that where a debtor committed a knowing violation of federal copyright law, or where there was infringement without “just cause or excuse” that necessarily caused harm, such infringement was nondischargeable under 11 U.S.C. § 523(a)(6). Matter of Elms, 112 B.R. 148 (Bankr. E.D. La. 1990); In re Gabaldon, 55 B.R. 431 (Bankr. D.N.Mex. 1985). There was some question in the intellectual rights community, however, whether these cases remained vital after the “intent” standard enunciated in Geiger.

The Chan opinion confirms that injuries to property consisting of copyright interests may be excepted from the bankruptcy discharge. Judge Tchaikovsky further recognized that the debtor’s malice and intent for discharge purposes may be inferred from the surrounding circumstances and from the debtor’s conduct. For the owners of intellectual property rights, the opinion will doubtless be a valuable tool in negotiating with or pursuing infringers who might otherwise have utilized, or threatened to utilize, bankruptcy to evade liability.

---

Attorney Wayne R. Terry is a partner at Mitchell Silberberg and Knupp LLP, Los Angeles. Mr. Terry, a former law clerk to the Honorable Samuel L. Bufford, United States Bankruptcy Judge for the Central District of California, has specialized for nearly two decades in bankruptcy and creditors’ rights, including the treatment of intellectual property rights in bankruptcy.