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Counterfeit Equipment Manufacturer’s Just Award – A Nondischargeability Judgment

By: Peter C. Califano, ESQ - Partner Cooper, White & Cooper, LLP

In Chunchai Yu v. Nautilus, Inc. (In re Chunchai Yu) No. 16-1045 (BAP 9th Cir. August 11, 2016) the Ninth Circuit Bankruptcy Appellate Panel affirmed the bankruptcy court’s determination that a $4 million default judgment in favor of Nautilus, Inc. was nondischargeable as a willful and malicious injury pursuant to 11 USC § 523 (a)(6) by giving issue preclusion effect to an underlying federal court default judgment.  To read the unpublished decision click here: [Link to case].  This case was appealed on August 16th to the Ninth Circuit as Case No. 16-60067.

Yu was convicted in federal court for trafficking in counterfeit exercise equipment.  Before Yu was indicted, Nautilus commenced a federal civil infringement lawsuit.  After a year in participating in the civil litigation, the court issued an order to show cause when Yu’s failed to appear at a scheduling conference, resulting in a default judgment in favor of Nautilus.  Yu subsequently filed a Chapter 7 bankruptcy case in an attempt to discharge $4 million in statutory damages.  In Yu’s bankruptcy, Nautilus brought an adversary proceeding seeking a determination that the default judgment was nondischargeable.  Nautilus successfully resolved that case when it prevailed on summary judgment.

The BAP affirmed the bankruptcy court’s ruling, weaving findings and admissions from the underlying civil case to arrive at the willful and malicious elements required for Section 523 (a)(6).  Critical to the BAP’s decision was Yu’s active participation in the civil litigation, along with the federal court’s recitation of the facts establishing “the knowing, deliberate and calculated nature of the infringement” (Id., p. 9) and “calculated attempts to obtain personal gain by trading on Nautilus’ goodwill were substantially certain to cause injury” (Id., p. 11).

This case illustrates how a default judgment can be used by a skilled creditor’s counsel in a subsequent bankruptcy case to quickly secure nondischargeability of a judgment against the debtor.

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These materials were written by Peter Califano of Cooper, White & Cooper LLP in San Francisco, California (pcalifano@cwclaw.com).  Mr. Califano is a current LEAN member. He can be reached at (415)765-0363