In an unusual move last month, a bankruptcy judge awarded a plaintiff nearly $380,000 in a defamation action — an amount the court determined could not be discharged in bankruptcy.

After successfully building several homes together, the two parties agreed to incorporate their home-building venture. But when financial problems arose and business started going downhill, the defendant began a letter-writing campaign in which he attacked the plaintiff’s business practices, accusing the plaintiff of theft, fraud and other unethical behavior.

The plaintiff brought a defamation action in state District Court against the defendant, who eventually sought refuge in Bankruptcy Court.

Judge Nancy C. Dreher, in a 49-page decision, ordered the defendant to pay $300,000 in damages to the plaintiff for defamation per se, and more than $73,000 to the corporation for misappropriating funds — all of which the Bankruptcy Court excepted from discharge.

Minneapolis attorney Phillip Gainsley, who represented the plaintiff, said the case is unique for a couple of reasons.

“[It] was a pretty significant amount for a judge to award,” Gainsley stated. “A jury might award that or more, but the judge, I think, was so irked by [the defendant’s] conduct. [Further], it is very difficult … to get a debt [classified as] nondischargeable in bankruptcy.”

Minnetonka attorney Richard I. Diamond, who represented the defendant, acknowledged the case was unique. “[But] from my perspective, it was a case of two business partners whose business failed,” Diamond observed. “They started calling each other names and one stepped over the line further than the other.”

Building tension

Late in 1996, the two parties, plaintiff Michael Burton and defendant John Blumentritt, started up a home-building business, forming a corporation. Prior to this time, they had built two or three very successful houses. Shortly after incorporating, however, the business began going downhill, and by the summer of 1997, it was in serious financial trouble. The parties soon realized that they couldn’t rely on the corporation to make enough money to support themselves and their respective families.

According to Gainsley, the plaintiff asked the defendant if it would be OK if he went off on his own. “[The defendant] said OK, although at trial he denied it,” Gainsley stated.

The plaintiff tried to resume a previously owned business as a home-builder, but when the defendant learned of it, he set out on a letter-writing campaign to destroy the plaintiff’s business, according to Gainsley. “Those letters formed the basis of the lawsuit,” said Gainsley, adding that, “in one letter, he attempted to fire my client, but as the court found, he had no authority to do that.”

In another letter, the defendant wrote to the plaintiff’s suppliers and subcontractors — people with whom the plaintiff did business every day — saying that the plaintiff had defrauded him and stole money from the corporation.

Similarly, in a third letter — addressed to the Builder’s Association and copied to the licensing division of the Minnesota Department of Commerce and the Residential Warranty Corporation — the defendant accused the plaintiff of fraud and unethical behavior.

“My client could not build houses unless he was licensed by the state of Minnesota,” Gainsley explained. “He [also] needed a license from the city [of Minneapolis], but you can’t get a license from the city unless you get a license from the state.”

Contending that none of the defendant’s statements were true, the plaintiff sued, alleging defamation per se and seeking dissolution of the corporation. While the case was originally brought in Hennepin County District Court, the defendant filed for bankruptcy shortly before trial, forcing the entire matter into Bankruptcy Court.

At trial, Gainsley argued the court should not allow the defendant to avoid a judgment simply by filing bankruptcy. Gainsley asserted throughout the 10-day trial that the defendant’s conduct was particularly egregious because the defendant had actually stolen the money that he accused the plaintiff of stealing.

“I said to the judge in my closing argument that I wanted [the defendant] to wake up to this judgment every morning, go to bed with this judgment every night until it’s paid, and that there [be] no way for him to have that judgment satisfied other than to pay it,” Gainsley said.

Signficant damages

Gainsley’s trial tactic apparently worked. The Bankruptcy Court found that the plaintiff had proven the elements of the intentional tort of defamation. Further, the court concluded that the statements were defamatory per se because they pertained to the plaintiff’s business. Therefore, damages were presumed. The court went on to award the plaintiff $300,000 for the defamation.

The court also determined that the defendant’s acts were “willful and malicious” and therefore the debt could not be discharged in bankruptcy.

“[The defendant’s] letters caused Burton personal humiliation, mental anguish, and suffering,” wrote Dreher. “The letters were sent intentionally, were intended to cause harm, and were targeted at [the plaintiff]. … [The defendant] testified at trial that by circulating these letters to outsiders, he intended to cause [the plaintiff] commercial harm. They had [the] desired effect.”

The judge also found that the defendant acted contrary to the best interests of the corporation by embezzling corporate funds and by acting fraudulently despite his fiduciary duty to the company.

“He knowingly put his own selfish interests ahead of all others: he did not pay subcontractors and suppliers even as he paid himself and his spouse comparatively generous salaries; diverted corporate funds to his personal … account; and used corporate funds to pay off personal attorneys’ fees bills,” Dreher wrote.

The judge awarded damages of more than $73,000 to the corporation and also concluded that those damages were nondischargeable.

Diamond acknowledged that he believed there would be some damages awarded to the corporation in this case, but said he was surprised by the amount awarded.

Diamond also said the $300,000 awarded to the plaintiff was “a real surprise.” However, he pointed out, the amount was still significantly less than the $3.5 million that the plaintiff had requested.

Unusual result

Gainsley noted that in order to make the victory on the defamation claim meaningful, he had to rebut the traditional assumption that the debt was dischargeable in bankruptcy.

The presumption — that a debt is dischargeable — is designed to give people a second chance, Gainsley explained. “That’s what Congress intended,” he said. “What Congress didn’t intend is an abuse of the process by which someone could maliciously and willfully harm a person and then have the consequences of that action be discharged. That flies against public policy.”

Gainsley believes his success on the dischargeability issue was due to his ability to show, through depositions and at trial, that it was the defendant’s stated mission to keep the plaintiff from doing b
usiness and to intentionally cause the plaintiff harm.

In addition, Gainsley said he was able to demonstrate the defendant’s untruthfulness by using tape recordings of telephone conversations that the defendant had with his client, showing that he did indeed say things that he later denied having said.

In her opinion, Judge Dreher repeatedly stated that the defendant was not a credible witness at trial, referring to his tactics as “dirty tricks” and calling him “crafty and devious.”

“[The defendant] was contentious and evasive and was repeatedly impeached with documentary evidence and his extensive prior deposition testimony,” wrote Dreher. “I discredit most of his testimony. He simply could not seem to make a truthful statement.”

Gainsley also called in about 10 suppliers and subcontractors who said they received the letter and took it very seriously. The defendant made them believe that it was the plaintiff who took the money that caused them to not be paid — money owed them by the corporation, they testified.

Gainsley also emphasized that the very person who sent on these letters was the one who had actually taken the money.

“All of that added up to willfulness and malice, and that’s what the judge needed to find to make the debt nondischargeable,” Gainsley observed. The defendant’s only recourse at this point, he said, is to “pay up.”

Diamond said that realistically the debt may never be paid — despite the finding that it is not dischargeable.

“[My client] does not have $300,000 to $400,000, so I’ll be surprised if it’s collected,” Diamond stated.

— Michelle Lore