Margulies v. Hough
517 B.R. 441
| S.D.N.Y. | 2014Background
- On Aug. 3, 2000, Margulies slowly drove his car toward Hough (a pedestrian/flagman) after tapping his watch and revving the engine; the car moved 1–2 mph and made contact with Hough. Margulies testified he expected Hough to move and did not subjectively intend to injure him. Margulies later pled guilty to misdemeanor assault (recklessness).
- Hough obtained a default judgment in New York state court (after neither Margulies nor insurer USAA appeared) for roughly $4.8 million based on negligence. Hough has not collected on that judgment.
- Hough sued USAA under N.Y. Ins. Law § 3420 seeking indemnification; USAA argued policy exclusions for intentional acts applied and also failed to timely disclaim coverage under § 3420(d).
- Margulies filed Chapter 7 bankruptcy; Hough brought an adversary proceeding seeking (1) a determination that the debt was nondischargeable under 11 U.S.C. § 523(a)(6) (willful and malicious injury), and alternatively (2) a determination that USAA must indemnify under § 3420.
- The Bankruptcy Court found the debt nondischargeable (willful & malicious) and held USAA not liable under the policymust-exclude-intentional-acts rationale. On appeal the district court vacated and remanded for further factfinding and correct application of legal standards.
Issues
| Issue | Plaintiff's Argument (Hough) | Defendant's Argument (Margulies / USAA) | Held |
|---|---|---|---|
| Whether the Judgment is nondischargeable under § 523(a)(6) (willful and malicious) | Hough: Margulies acted willfully and maliciously; debt not dischargeable. | Margulies: He lacked subjective intent to injure; acted without intent, so dischargeable. | Court: Remanded — Bankruptcy Court applied improper (quasi-objective) standard; must apply subjective standard (intent or belief of substantial certainty) and make factual findings on subjective substantial certainty and malice. |
| Proper standard for "willful" under §523(a)(6): subjective or objective substantial-certainty test | Hough: Willfulness can be found if act was substantially certain to cause injury (court should find willfulness here). | Margulies: Must be judged subjectively; he did not believe injury was substantially certain. | Held: District Court endorses the subjective standard (actor must actually believe injury was substantially certain); remand for factual findings. |
| Whether USAA must indemnify under N.Y. Ins. Law § 3420 (is incident an "accident/occurrence" or an intentional act excluded from coverage) | Hough: Insurer breached duty to disclaim and cannot rely on exclusions; coverage should be found. | USAA: Incident was intentional/not a covered occurrence; exclusions apply; insurer need not disclaim if there was no coverage by inclusion. | Held: Remanded — Bankruptcy Court conflated coverage and exclusion standards and applied incorrect analysis; must determine from insured's perspective whether harm flowed directly & immediately from an intended act or whether the total situation was an accident/fortuitous. |
| Whether res judicata bars USAA from litigating intent | Hough: State-court judgment precludes USAA from relitigating intent; USAA should be estopped. | USAA: Could litigate intent; prior default judgment did not decide intent; insurer not in position to raise intent in underlying negligence action. | Held: Rejected — argument waived on appeal and fails on the merits because intent could not have been litigated in the underlying negligence action; USAA not precluded. |
Key Cases Cited
- Kawaauhau v. Geiger, 523 U.S. 57 (1998) (willful under § 523(a)(6) means deliberate or intentional injury, not merely an intentional act that leads to injury)
- Ball v. A.O. Smith Corp., 451 F.3d 66 (2d Cir.) (defines willful and malicious elements in bankruptcy context)
- Navistar Fin. Corp. v. Stelluti (In re Stelluti), 94 F.3d 84 (2d Cir.) (malice defined as wrongful and without just cause or excuse; malice may be implied)
- Brooklyn Law Sch. v. Aetna Cas. & Sur. Co., 849 F.2d 788 (2d Cir.) (insurance coverage depends on whether injury was intentionally caused or an unintended result of intentional conduct)
- Worcester Ins. Co. v. Bettenhauser, 95 N.Y.2d 185 (1999) (insurer that fails to timely disclaim cannot rely on exclusions to deny coverage when claim would otherwise be within policy)
- Messersmith v. American Fidelity Co., 232 N.Y. 161 (1921) (public policy disfavors indemnifying insureds for intentionally caused injuries)
- Jendusa-Nicolai v. Larsen, 677 F.3d 320 (7th Cir.) (discussion of subjective/ objective substantial-certainty formulations for willfulness)