Saturday, August 07, 2010

All About Emails, Texts, Blogs and Non-Dischargeability

On February 3, 2010, Judge Jeff Bohm released his opinion in Wallace v. Perry, 423 B.R. 215 (Bankr. S.D. Tex. 2/3/10), opinion available with PACER access here. Following a twelve day trial, the court penned a 118 page opinion. The opinion is an interesting study in how to try a dischargeability case and just how bizarre relations between partners can get. I was going to do several short posts on this opinion. However, the subject matter is so inter-related that I am going to do it in one long article. The topics that I will be focusing on are getting the right parties, creative use of Sec. 523(a)(6) and dischargeability in the electronic age.


Judge Bohm made extensive fact findings, some of which are summarized here.

Will Perry, Costa Bajjali and the Wallace Trusts became partners in W.C. Perry Partners, L.P. in 2004 and 2005. The Wallace Trusts were two trusts formed for the daughters of David Wallace. Perry, Bajjali and Wallace all worked in different aspects of the partnership. Wallace also served as mayor of Sugar Land. The partnership received substantial investments from third parties, including the clients of a talk radio host.

The relationship between the partners did not go well. Bajjali and Wallace were unhappy that Perry would spend his afternoons at the movies instead of working and that he often made decisions without consulting them. Perry complained that Wallace's political activities had become a liability to the partnership and accused Bajjali of lurching at him in the office kitchen. Perry decided that he needed a bodyguard to protect him from his partner. Perry sent an email canceling all partnership meetings.

In an attempt to smoke out his partners, who he thought were secretly reading his emails, he sent his assistant an email stating that he intended to file bankruptcy and leave them with nothing.

Subsequently, he agreed to buy out his partners and indemnify them from any liabilities. He also agreed to a liquidated damages clause if he did not use his best efforts to get them released from their guarantees.

Having parted ways with his partners, Mr. Perry started a smear campaign against them. He told others that he had removed them from the partnership because they were dishonest and incompetent. He also asserted that they were receiving kickbacks and stealing funds from the partnership. Perry sent a mass email to the Sugarland Rotary Club telling them not to associate with Bajjali or Wallace. Perry also had his assistant print out copies of a blog accusing Wallace of unethical conduct and distribute them anonymously.

The allegations took a toll on Wallace who was then running for Congress. The Fort Bend Republican Party returned a contribution he made and forbade him from introducing the speaker at the Lincoln-Reagan Dinner. He was also asked not to speak at the Gathering of Men, a faith-based men's group. Wallace was unsuccessful in his Congressional race.

After Perry Properties crashed and burned, Bajjali and Wallace spent $3.78 million to restructure the debts they had guaranteed.

Perry filed for chapter 11 bankruptcy and a non-dischargeability action ensued.

It's Hard to Party Without the Right Parties

David Wallace, Costa Bajjali and the Wallace Trusts each brought non-dischargeability claims based upon failure to honor the indemnification and non-disparagement clauses of the Purchase Agreement. However, Wallace and the Trusts found themselves in a catch-22 situation.

The Trusts were parties to the Purchase Agreement. However, Judge Bohm ruled that under Texas law, a trust lacks capacity to sue or be sued. Instead, only the trustee may sue or be sued on behalf of the trust. If the trustee abrogates his duty, a beneficiary may sue. However, David Wallace, the only natural person named was neither the trustee of the trusts nor a beneficiary. Thus, he could not sue on behalf of the trusts and the trusts could not sue on their own behalf.

Wallace also was unable to recover under the non-disparagement clause. The clause applied to the parties to the agreement and their "affiliates." The Court found that an affiliate was a person who controlled or was controlled by a party or an officer, director, partner, employee or relative of a party. Wallace did not control the trusts nor was he controlled by them. While he was a relative of the beneficiaries of the trusts, he was not a relative of the trusts themselves. Therefore, he was not an affiliate and could not recover.

The problems with parties here raise several important points. When the Purchase Agreement was drafted, it referred to the "Sellers," being Bajjali and the Trusts. However, despite the fact that the trusts were the partners, Wallace had a very direct involvement in the partnership. Careful drafting could have prevented this problem.

The difficulty with the trusts is more baffling. While the capacity of a trust to sue or be sued is not obvious, it must have been raised in the pleadings in order for the court to have addressed it in the opinion. If the issue was raised prior to trial, it should have been possible to substitute the trustee in as the real party in interest.

Creative Use of Section 523(a)(6)

Section 523(a)(6) allows non-dischargeability of debts for willful and malicious injury. While the language used suggests physical injury or at least tort claims, the statute is much broader and can be applied to a wide variety of injuries, including injuries arising from breach of contract.

In this case, the plaintiffs brought suit under Sec. 523(a)(2), (a)(4) and (a)(6). However, the court struck the claims under 523(a)(2) and (4) based on misconduct of the plaintiff's original counsel, leaving them to proceed solely under Sec. 523(a)(6).* The plaintiffs had two types of claims: claims for failure to honor the indemnification clause and claims for defamation. While it is easy to see how defamation can fall under Sec. 523(a)(6), a claim for willful and malicious breach of a contractual obligation to indemnify seems like more of a reach.

*Note: The Court was quick to point out that Plaintiff's trial counsel Johnnie Patterson was not responsible for the conduct that led to the pleadings being struck. The court stated, "Mr. Patterson's conduct throughout his representation of the plaintiffs was exemplary, as was the conduct of counsel for the defendant, John W. Wauson."

In this case, the plaintiff provided the defendants with evidence that his breach of contract was not just inadvertent, but was intended to harm the defendants.

In the "trick" email which Perry sent to his administrative assistant prior to execution of the Purchase Agreement, he stated:

I wanted to let you know that I am going filing bankruptcy per my attorneys advice. Please do not worry as this is part ofmy big plan I am going to be hatching this week. Dave [Wallace] and Costa [Bajjali] think they can pull the wool over my eyes they have no idea what is about to happen and I just love it. They [Wallace and Bajjali] will walk away with nothing after this week and oh Dave [Wallace] can kiss his political career goodbye. Costa [Bajjali] will be getting all the blame plus a hell of a lot of debt. The master is at work and I have them by there balls. Costa should have never sided with Dave.
While Perry later claimed that he sent this email in order to catch his partners reading his email, the court found that it betrayed his true intentions.

He also told another business associate "don't **** with me, I will destroy you like I did David Wallace."

He also stated that he wanted to cause Bajjali to incur a lot of debt and did not intend to pay him a dime.

Based on this evidence, the court found that Perry had actual subjective intent to harm Bajjali and knew with substantial certainty that his actions would cause harm. As a result, Bajjali was entitled to recover $3.78 million in damages incurred with regard to the indemnification clause.

The plaintiffs also brought defamation claims which were a more traditional use of Sec. 523(a)(6). The most interesting facet of the defamation claims concerned Perry's distribution of a blog written by someone else. The Rhymes With Right blog ( wrote a post about Wallace which described him as "unethical, corrupt and not fit to represent the GOP." The blog post amounted to disorganized ramblings which imputed that Wallace was involved in arms dealing and attempts to overthrow governments. The Court found that the blog posting was defamatory. However, the Court also found that Perry did not write the blog or contribute to it.

However, the Court found that under Texas law, a person is liable for defamation if he "publishes" the defamatory statement. A statement in an email constitutes a publication. The Court found that emailing a link to the blog to a third party and instructing his assistant to print out the blog and distribute it constituted publication.

The court also found that statements with regard to kickbacks, "gross fraud," "serious crimes" and extortion were defamatory.

The Court found that the statements constituted defamation per se. As a result, the plaintiffs were able to recover without proof of specific damages. The Court awarded both actual and exemplary damages.

A Few Thoughts About Evidence in the Electronic Age

In this case, Will Perry got into trouble by shooting off his mouth. However, the evidence included texts, emails and blogs. The risk posed by electronic communications is that (i) the speaker will unleash his raw, unvarnished thoughts without any self-censorship and (ii) there will be a tangible record of those statements.

The "trick" email was probably the most damaging piece of evidence against Perry. This was an act of macho boasting to his administrative assistant. If it hadn't been sent in email form, there would not have been any record of it. The Court's extensive discussion of the credibility of the witnesses (discussed here) illustrates the fallibility of human memory. However, by incriminating himself in an email, Perry placed himself in the position of having to invent an unbelievable rationalization for his words.

The blog also deserves some discussion. Rhymes With Right is written by "Greg," a 40-something teacher from Seabrook, Texas according to his profile. Much of it consists of right-wing rants. However, for some reason, "Greg" developed a deep dislike for Dave Wallace. According to Judge Bohm, his writings were defamatory. When Perry distributed it, he probably didn't think that he was making a defamatory statement. Instead, he was merely providing third party confirmation. The irony here is that the anonymous blog poster escaped liability while the passer-on did not. However, Perry would not have been held liable were it not for the raft of other evidence concerning his irrational hatred toward his former partner. The lesson here is that just because you read something on the internet doesn't make it safe for publication.

Final Thoughts

It is said that the most dangerous cases are those with Exes, ex-spouses, ex-partners and so on. A bad break-up triggers enough negative emotions to overwhelm rational thought. That is not a good thing when the person on the other side knows where the bodies are buried. This was just such a case. Despite the other side's failure to name the right parties and failure to cooperate in discovery, the defendant still ended up with a non-dischargeable judgment for $4 million give or take. The debtor's self-righteous anger fueled by excessive testosterone ultimately proved to be destructive for him.

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