IN THE UNITED STATES BANKRUPTCY COURT
FOR THE NORTHERN DISTRICT OF CALIFORNIA
|DO NOT PUBLISH
This case disposition has no value as precedent and is not intended for publication. Any publication, either in print or electronically, is contrary to the intent and wishes of the court.
GERALD ARMSTRONG, No. 95-10911
CHURCH OF SCIENTOLOGY
v. A.P. No. 95-1164
Memorandum of Decision
Debtor and defendant Gerald Armstrong is a former member and official of plaintiff Church
of Scientology. The two have been at odds with each other for many years, with Armstrong on a crusade to discredit Scientology and Scientology bent on discrediting Armstrong in return.
In 1986, the parties settled a state court lawsuit in which Armstrong claimed damages for harassment by Scientology. Pursuant to the terms of the
settlement, Armstrong received $800,000.00. In return, he agreed to cease his activities against
Scientology. The settlement contained a liquidated damages provision calling for $50,000.00
in damages for each breach by Armstrong.
In the early 1990's, Armstrong began to violate the terms of the settlement by voluntarily
resuming his crusade against Scientology. Scientology commenced a lawsuit to enforce the
agreement, and has obtained a judgment from the state court in the amount of $300,000.00 in
liquidated damages and a permanent injunction prohibiting Armstrong from continuing his
activities against Scientology.
By this adversary proceeding, Scientology seeks a determination that its $300,000.00
liquidated damages claim is nondischargeable and that Armstrong's obligation under the
settlement to refrain from acting against Scientology is nondischargeable and continues to be
enforceable after Armstrong's Chapter 7 bankruptcy, which Armstrong filed on April 19, 1995.
Scientology also seeks to deny Armstrong's discharge on the grounds that he has failed to explain
the dissipation of his assets and failed to schedule an interest in a corporation wholly owned by
II. Objection to Discharge
Scientology argues that Armstrong should not be granted a discharge because he has failed
to explain the disposition of the settlement proceeds and because he failed to schedule as an asset
an interest in the Gerald Armstrong Corporation. Scientology has not met its burden of proof
as to either ground.
Given the 10 years between the payment of the settlement and the bankruptcy, as well as
Armstrong's mental state as evidenced by his testimony, it is not surprising in the least that he
has none of the settlement proceeds left, nor is its dissipation any great mystery. The fact he has
nothing left is not a basis for denial of his discharge.
The argument concerning Armstrong's failure to schedule as an asset his interest in the Gerald
Armstrong Corporation is equally meritless for several reasons. First, despite Armstrong's
testimony in 1993 that he valued the corporation at $1 billion, it is clear that the stock is
worthless to anyone other than him. Second, there can have been no intent to conceal it because
Scientology knew all about it. Third, the existence of the corporation was in fact scheduled,
albeit in the wrong place. Fourth, Armstrong voluntarily brought up his interest in the
corporation at his meeting of creditors without any suggestion on anyone's part that he had
III. Dischargeability of Liquidated Damages for Prepetition Conduct
Scientology did not address the issue of dischargeability of the liquidated damages in its
evidence or its brief, although it did ask in closing argument that these damages be declared
nondischargeable along with associated attorneys' fees. The court sees no basis for this claim.
Damages for breach of contract, even when the contract was intentionally breached, are fully
dischargeable. In re Risco
, 978 F.2d 1151 (9th Cir.1992). The term "liquidated damages" is
itself a contract term. Scientology did not establish that anything Armstrong did was inherently
wrongful or tortious, aside from breaching his agreement not to do them. In order for a breach
of contract to be nondischargeable under section 523(a)(6) of the Code, it must be accompanied
by malicious and willful tortious conduct. Id.
at 1154. No such conduct has been shown in this
IV. Dischargeability of Permanent Injunction
While a literal reading of section 101(5)(B) of the Bankruptcy Code seems to indicate that the
right to seek injunctive relief to enforce the settlement is dischargeable because breach gives rise
to a right to liquidated damages, it is clear from the subsequent acts of the state court that
liquidated damages are not Scientology's exclusive remedy for breach. The state court has issued
a permanent injunction, and it is clear from case law that the right to such injunctive relief
survives bankruptcy. In re Udell
, 18 F.3d 403 (7th Cir.1994); In re Irizarry
, 171 B.R. 874 (9th
V. Dischargeability of Sanctions for Violation of Permanent Injunction
It does not appear that the state court has up to this point issued and monetary sanctions for
violation of its injunction. Any such monetary sanctions are a lawful exercise of the court's
contempt powers, and would be nondischargeable. See In re Allison
, 176 B.R. 60, 64
(Bkrtcy.S.D.Fla.1994), and cases therein cited. While Scientology may not at this late date go
back and seek to turn liquidated damages to contempt sanctions, any postpetition violation of the
permanent injunction may be enforced by the state court pursuant to its contempt powers without
violating the bankruptcy discharge.
Armstrong is entitled to a discharge. Liquidated damages for his prepetition conduct are
dischargeable. However, the permanent injunction remains enforceable notwithstanding the
discharge and may be enforced by the state court as it sees fit notwithstanding Armstrong's
bankruptcy. The court will enter a judgment to that effect. Each side shall bear its own
attorneys' fees and costs. This memorandum constitutes the court's findings and conclusions
pursuant to FRCP 52(a) and FRBP 7052. Counsel for Scientology shall submit an appropriate
form of judgment forthwith.
Dated: February 16, 1996 _______________________