Northern District of California Judges' Decisions
Subject: Memorandum of Decision Re: Discharge of Injunction
Judge's Name: Judge Alan Jaroslovsky
Date: 02/16/96

DO NOT PUBLISH This case disposition has no value as precedent and is not intended for publication.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.

IN THE UNITED STATES BANKRUPTCY COURT
FOR THE NORTHERN DISTRICT OF CALIFORNIA

Memorandum of Decision

I. Introduction
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 him.

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 omitted it.

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 case.

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 Cir.BAP 1994). 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. VI. Conclusion 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 _______________________
Alan Jaroslovsky
U.S. Bankruptcy Judge

CANB Documents
Northern District of California