Memorandum of Decision Re: Malicious Prosecution

FOR THE NORTHERN DISTRICT OF CALIFORNIA In re GUITY DEYHIMY,                                                       No. 91-11031      Debtor. ___________________________/ WILLIAM G. PRIEST,      Plaintiff,    v.                                                                               A.P. No. 93-1009 GUITY DEYHIMY,      Defendant. ______________________________/
Memorandum of Decision
I. Introduction      Plaintiff William Priest and defendant Guity Deyhimy are both attorneys. In this adversary proceeding, Priest seeks to establish a nondischargeable claim against Deyhimy for malicious prosecution arising out of a lawsuit she filed against Priest on behalf of her client in 1986.      Deyhimy's complaint against Priest was based on a theory which was somewhat novel at the time. Her client was a guarantor on a loan made to Priest's client. She in essence alleged that Priest had conducted the defense of his client negligently, resulting in damage to her client. She also alleged that Priest and his client had conspired to stick her client with the ultimate loss on the defaulted loan, and that Priest had destroyed evidence which would have aided her client.      Deyhimy had very little facts upon which to base her complaint against Priest. It was primarily based on the answer which Priest had signed and verified on behalf oh his client in the initial action against Priest's client. The answer alleged viable defenses. Deyhimy concluded that since the evidence to support those defenses no longer existed when her client was being sued, Priest must have destroyed it. Deyhimy also based her decision to sue on Priest's uncooperative attitude, which convinced her that he was hiding something.      The state trial court sustained Priest's demurrer to the complaint. Deyhimy appealed, but while the appeal was pending it was abandoned by Dehimy's client and dismissed. Thus, Priest prevailed in the action.      Priest filed a complaint for malicious prosecution against Deyhimy in state court in 1988. On September 6, 1990, the state court granted summary judgment in favor of Deyhimy. Priest appealed.      Deyhimy filed her Chapter 7 petition on May 13, 1991, while the appeal was pending. She failed schedule Priest as a creditor or notify him of the bankruptcy until the appellate court reversed the summary judgment in her favor. At that time, the bankruptcy had been closed as a no-asset case.      On December 11, 1992, the Honorable Robert Eisen granted Deyhimy's motion to reopen the case for the purpose of determining the dischargeability of Priest's claim. He reserved the issue of any expenses to be awarded to Priest as a result of Deyhimy's failure to timley notify him to be heard in conjunction with the dischargeability action.
II. Failure to Notify
     It was gross negligence on Deyhimy's part to fail to list Priest as a creditor. Since the judgment of the state court was not final, Priest should have been listed as a disputed creditor. Since he never learned of the bankruptcy in time to file an action under section 523(a)(6) of the Bankruptcy Code, his claim is nondischargeable under section 523(a)(3)(B) if the court finds that he had a valid claim under section 523(a)(6). See In re Lochrie, 78 B.R. 257 (9th Cir.BAP 1987).      Priest seeks reimbursement for $16,000.00 in attorneys' fees and litigation expenses incurred in prosecuting his appeal without knowledge of Deyhimy's bankruptcy. However, the court is almost certain that if Priest had been informed of the bankruptcy and filed a timely dischargeability action, the court would have directed the appeal to go forward and delayed trial until the appellate court ruled; the appeal was already pending, and affirmance would have mooted the need for a trial. Thus, Priest would have incurred most or all of the $16,000.00 in any event.      Nonetheless, Priest did suffer some inconvenience and expense as a result of Deyhimy's negligent failure to schedule him. The court resolves any doubt on this issue in favor of Priest, since he was entirely blameless and Deyhimy falsely represented that she had listed all her creditors. To compensate Priest, as well as to sanction Deyhimy, the court will award Priest $2,000.00.
III. Malicious Prosecution
     At the trial, one fact was clear and undisputed: however poor her judgment may have been, Deyhimy was motivated solely by a desire to do her best for her client. There was not the slightest hint of an improper motive on her part. She had fully researched the law and determined that her action was justified by either the law as it was then or a good faith argument for the extension of the law.      Deyhimy has been a defendant in malicious prosecution proceedings for the past five years because of poor judgment. At the time she sued Priest, her legal theories were somewhat novel. Where the law is questionable, it is unwise to bring a suit unless the facts are clear. Factually, Deyhimy had little to go on except suspicions and questionable conclusions drawn from the answer Priest had verified. Thus, she filed a lawsuit which was very weak from both a legal and a factual standpoint. Most lawyers would not have brought the suit under these circumstances.      Nonetheless, debts arising out of negligence are dischargeable. Under both state law and federal bankruptcy law, malice must be found before the intentional tort of malicious prosecution is established. Sheldon Appel Co. v. Albert & Oliker, 47 Cal.3d 863, 874 (1989); In re Braen, 94 B.R. 35, 41 (D.N.J.1988). While the finder of fact may infer malice from lack of probable cause, it is not bound to do so; malicious prosecution is more than filing a suit a reasonable attorney would not have filed.      In this case, the court finds that Deyhimy used poor judgment in bringing the action against Priest, in that a reasonable attorney would not have brought the action. However, there is absolutely no evidence justifying a finding of actual malice. Deyhimy had only the best motive, the zealous representation of her client. Deyhimy represented an elderly Chinese man whom she believed had been manipulated into guaranteeing an obligation and had suffered serious financial loss as a result. That Deyhimey was willing to represent him to the best of her abilities is to her credit, as is the fact that she had the courage to urge a new or expanded interpretation of the law. Lacking the wisdom to temper her zeal, she filed suit against Priest. Because this action was in a just cause, it was not malicious and does not give rise to a nondischargeable debt.
IV. Conclusion
     For the foregoing reasons, Priest shall have judgment against Deyhimy in the amount of $2,000.00 due to her failure to promptly notify him of the filing of her bankruptcy and schedule him as a creditor. Priest shall take nothing on his malicious prosecution claim because the court finds no malice. Each side shall bear his or her own costs.      This memorandum constitutes the court's findings and conclusions pursuant to FRCP 52(a) and FRBP 7052.
Dated: May 23, 1993                                                                              _______________________                                                                                                                      Alan Jaroslovsky                                                                                                                      U.S. Bankruptcy