Judith K. Fitzgerald

The matter before this court is DirecTV's motion for summary judgment regarding its complaint to determine dischargeability of debt. We find summary judgment in favor of DirecTV to be appropriate on this record. Therefore, the District Court judgment awarding DirecTV $70,450 in damages is not dischargeable.

Introduction

On May 21, 2004, DirecTV initiated civil litigation in the United States District Court for the Western District of Pennsylvania, Civ. A. No. 04-773, against Bruce S. Figler ("Debtor"), alleging (1) violations of the Cable Communications Policy Act of 1984, 47 U.S.C. § 605(a) ("unauthorized publication or use of communications"), (2) the Electronic Communications Privacy Act of 1986, 18 U.S.C. § 2511 ("Interception and disclosure of wire, oral, or electronic communications prohibited"), and (3) 18 Pa. Cons.Stat. § 910 (entitled "Manufacture, distribution, use or possession of devices for theft of telecommunications services") regarding use or possession of devices for theft of telecommunications services. After a three day trial, the jury returned a verdict against Debtor totaling $70,450 in statutory damages. Civ. A. Doc. No. 146. An order entering judgment was issued on April 13, 2007. Civ. A. Doc. No. 147. The judgment included an award of $1,000 for each of two violations of § 605(a) (unauthorized interception of radio transmissions), $10,000 for each of two violations of § 605(e)(4),$47,700 for 477 days of violation of § 2511 (§ 2520 sets forth the formula for determining the amount of damages for violations of § 2511), and $750 for three violations of § 910.

The complaint filed in District Court was based on an investigation and subsequent raid of an internet company called White Viper. The Digital Millenium Copyright Act, (Pub.L. 105-304, Title II, § 202(a), Oct. 28, 1998, 112 Stat. 2877, and amended Pub.L. 106-44, § 1(c)(1), 1(d), Aug. 5, 1999, 113 Stat. 221, 222) made it illegal to traffic in any device that was designed to overcome encryption technology. Adv. Doc. No. 36, Tr. 4/9/07 at 29-30. It permitted entities such as DirecTV to apply to a federal judge for a seizure order to go to the location where the devices were being distributed and seize those devices. DirecTV received such an order. A condition of obtaining that order was the filing of a civil lawsuit against the distributor. See 17 U.S.C. § 512. DirecTV received an order authorizing the seizure. Based on records seized during the raid, DirecTV filed a civil suit against Debtor in the District Court. After judgment was entered against him, Debtor filed this bankruptcy case on August 9, 2007. On September 18, 2007, DirecTV filed a complaint objecting to the dischargeability of its judgment on the basis of 11 U.S.C. § 523(a)(2) and (4) and § 1328(a)(2), and filed the motion for summary judgment now at bench on January 7, 2008. Adv. Doc. No. 13.

On March 28, 2008, a hearing was held on the motion for summary judgment at which time the parties were ordered to meet and confer in an effort to settle and, if a settlement agreement was not filed by May 15, 2008, DirecTV was ordered to provide this court with a copy of the District Court trial transcript no later than June 15, 2008. See Adv. Doc. No. 23, Proceeding Memo of March 20, 2008, hearing. Instead, DirecTV filed a motion to have the question of dischargeability determined in the absence of a transcript, which we denied in a Memorandum Opinion published at 391 B.R. 565 (Bankr. W.D.Pa.2008). DirecTV filed the transcript on September 8, 2008, at Adv. Doc. Nos. 36, 37, 38. We have examined the transcript of the hearing and conclude that the elements of § 523(a)(2) are not met but that under § 523(a)(4) the debt to DirecTV is nondischargeable.

The jury found that the Debtor had violated § 605(a) and § 605(e)(4). See Civ. A. Doc. No. 146. Section 605(a) of title 47 of the U.S.Code specifically prohibits certain conduct.

Section 2511(1)(a) of title 18 of the United States Code proscribes, inter alia, the intentional interception or disclosure of, or use of devices to intercept, certain types of communication. Section 2520 provides that "any person whose wire, oral, or electronic communication is intercepted ... may in a civil action recover from the person which engaged in that violation."

The jury also concluded that Debtor violated § 910 of title 18 of the Pennsylvania Consolidated Statutes. Civ. A. Doc. No. 146. That section prohibits any conduct that "makes, distributes, possesses, uses ... or modifies, alters, programs or reprograms a telecommunication device designed, adapted or which can be used: (i) for commission of a theft of telecommunication service ..."

Standard of Proof

The evidence submitted is comprised of the jury trial transcript. "[A] bankruptcy court could properly give collateral estoppel effect to those elements of the claim that are identical to the elements required for discharge and that were actually litigated and determined in the prior action." Grogan v. Garner, 498 U.S. 279, 284, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991). "Collateral estoppel is applicable if the facts established by the previous judgment ... meet the requirements of nondischargeability listed in" § 523(a)(2) and (a)(4). In re Docteroff, 133 F.3d 210, 215 (3d Cir.1997). Grogan also noted that "the standard of proof for the dischargeability exceptions in 11 U.S.C. § 523(a) is the ordinary preponderance-of-the-evidence standard." 498 U.S. at 291, 111 S.Ct. 654. See In re Hilley, 124 Fed.Appx. 81, 82 (3d Cir.2005) (noting that "[t]o obtain relief under [§ 523(a)(2)(A)], a creditor must prove its claim by a preponderance of the evidence"); Chao v. Rizzi, 2007 WL 2317335, at *2 (W.D.Pa., Aug. 8, 2007) (noting that "[o]n a claim of nondischargeability under § 523(a)(4), ... the applicable level of proof is a preponderance of the evidence"). The preponderance of the evidence standard applies in civil cases with respect to violations of 47 U.S.C. § 605(a), 18 U.S.C. § 2511(a), and 18 Pa.Cons.Stat. § 910(a). Cf. DIRECTV, Inc. v. Walsh, 2006 WL 3308668, at *1 (M.D.Pa. Oct. 12, 2006) (noting that DirecTV met the preponderance of the evidence standard with respect to 47 U.S.C. § 605(a), 18 U.S.C. § 2511(a), and 18 Pa.Cons.Stat. § 910(a)). Thus, the burden of proof for nondischargeability under § 523(a)(2) and (a)(4) are the same as that for the statutes used in the District Court proceeding. Based upon the District Court trial transcript, we find that the facts, legal standards, and issues actually litigated in the District Court establish that the judgment is nondischargeable under § 523(a)(4) but not under (a)(2).

Facts

DirecTV's complaint against Debtor was filed in the District Court at Civ. A. No. 04-773 after DirecTV, in coordination with law enforcement, conducted a raid of White Viper, an internet company. The raid uncovered records establishing sales to Debtor of certain devices designed for stealing satellite television signals, specifically DirecTV signals.

Larry E. Rissler testified on behalf of DirecTV. He began working for DirecTV in 1994 and served as vice president of its Office of Signal Integrity. At the time of trial, although he had retired from DirecTV in 1995, he continued to serve as a consultant. Prior to taking his position with DirecTV, Mr. Rissler had been deputy director for the Worldwide Anti-Piracy Association for the Motion Picture Association of America and had worked for the Satellite Broadcasting and Communications Association as special counsel for the Associations' anti-piracy task force. Before that he spent 25 years as a special agent for the Federal Bureau of Investigation. Adv. Doc. No. 36, Tr. 4/9/07 at 2-4. He testified that, a few months before he joined the DirecTV Office of Signal Integrity, DirecTV had begun broadcasting its signal and was concerned about theft of programming based on the theft of services experiences of the cable and "big dish" (C-band) satellite industry. He monitored threats to encryption technology which materialized in 1995. Id. at 5. He then worked to identify those who developed the hacking technology and those who trafficked in it. Id. The traffickers were easy to identify because they had to advertise their products. Id. at 6. White Viper was very active in 2000 and 2001 and advertised many items designed to allow interception of DirecTV's programming. DirecTV hired private investigators to buy devices then had electrical engineers examine the devices to confirm that they were used for piracy. DirecTV sued White Viper and obtained White Viper's records.

The pirating activities were directed to access "smart" cards, each of which contains a computer chip. At the time of the District Court trial, DirecTV was on the fifth generation of access card, each generation necessitated by successful attempts to hack the prior card. The smart card programming works by the operation of orbiting satellites which deflect a signal to Earth and which DirecTV receivers collect and route to integrated receiver decoders. Id. at 8-10. A customer who subscribes to DirecTV must call the company and relay the card's 12 digit number. DirecTV, via computer, activates the service by communicating with a satellite. Thereafter, the authorized channels can be viewed by the customer. Id. at 9-10. Telephone lines are used to identify the viewing household for billing purposes.

DirecTV has two types of programming: subscription programming, which gives the customer the same channels every month for a set price, and pay-per-view events. Adv. Doc. No. 36, Tr. 4/9/07 at 11. When a pay-per-view event is purchased, a computer chip in the access card records that fact and once a month transmits the information to DirecTV via the telephone wire for billing purposes. Id. at 11-12. Before his service was terminated for nonpayment, Debtor viewed a large number of pay-per-view events. Id. at 51.

In the early days of satellite piracy, hackers used a counterfeit access card. Later on, the pirate community developed technology to reprogram the software that resides in the computer chip and the access card. Id. at 14-15. The second wave of piracy involved the purchase and sale of hacked access cards. Hardware devices became available after that and individual end users could purchase and reprogram the access cards themselves. Evidence at trial established that access cards by design are resistant to reprogramming because that is a fundamental part of DirecTV's copyright protection system. Adv. Doc. No. 37, Tr. of 4/10/07 at 71. Thus, while, in theory, a DirecTV access card could be reprogrammed to serve other non-DirecTV functions, it would be difficult to do so because necessary information such as the memory available on the card and what programs it would be capable of running would not be available. Id. at 71-72.

Typically, the software that was used to reprogram the cards was obtained by downloading it from pirate websites. Adv. Doc. No. 36, Tr. 4/9/07 at 15. One of the hacking devices was a reader/writer (card reader) sold by White Viper. It could be used to reprogram the software that resides in a DirecTV access card. The access card would be taken out of the receiver and inserted in a slot on the front of the reader/writer. On the back of the reader/writer is a place to connect a cable which would be connected to a computer. The access card would be reprogrammed by downloading software. Adv. Doc. No. 36, Tr. 4/9/07 at 14-15. DirecTV attempted to combat piracy by developing new encryption technology with a new access card each time a previous card had been compromised and the encryption technology defeated. Id. at 18. DirecTV's engineering department also routinely ran "electronic counter-measures" (ECMs) to find and disable unauthorized access to its programming. Id. at 20. ECMs were run on a regular basis. Id. at 20-21. In the year 2000 DirecTV engineers began sending software updates or downloads through the datastream, preparing for a major electronic counter-measure and, on January 21, 2001, DirecTV launched an ECM that shut down all of the hacked cards in existence at the time. This became known as the "Black Sunday ECM." Id. at 21.

Immediately after the Black Sunday ECM, DirecTV began receiving reports from retail outlets that people were buying multiple systems. The retailers reported that later they would find the box in the trash and the only thing missing was the access card. Id. at 22. The newer systems contained a different access card and the rush to buy new systems was to get the new access cards which were not subject to the Black Sunday ECM. Id. at 23. Mr. Rissler also testified to the existence of another website, infositeonline.com, Adv. Doc. No. 37, Tr. 4/10/07 at 34-36, a link to which was found on White Viper's site and which advertised the WildThing unlooper software used to reprogram access cards. Adv. Doc. No. 36, Tr. 4/9/07 at 35-36. The smart cards come with a program that, to counter piracy, downloads small programs that run on the card and, if a change in the card is detected that indicates possible piracy, the "little program" will disable the card. Adv. Doc. No. 37, Tr. 4/10/07 at 25. The pirate community refers to that result as the card having been "looped" because of the way the program operates. Adv. Doc. No. 37, Tr. 4/10/07 at 26. Thus, the unlooper was created to return the access card to performing its original function. The unlooper does so by sending an electrical stimulation to the access card that breaks the "loop" function; the unlooper has circuitry that allows the loop to be broken. Id.

One of the records DirecTV obtained in the White Viper raid showed that Debtor bought a type of WildThing unlooper and Debtor admitted he had purchased one. Adv. Doc. No. 36, Tr. 4/9/07 at 42. See Adv. Doc. No. 38, Tr. 4/11/07 at 3, 4. The purchase occurred in July of 2000 and a credit card record of the purchase existed. Adv. Doc. No. 36, Tr. 4/9/07 at 44. Debtor testified that he bought it because he was inventing something that would use ammonia tanks to compress air which would provide cooling and heating to buildings. Adv. Doc. No. 37, Tr. 4/10/07 at 38.

William Gatliff also testified. He is a computer designer who works with embedded computer systems. Adv. Doc. No. 37, Tr. 4/10/07 at 3-5. DirecTV is one of his clients and is an embedded system, as are smart cards and unloopers. Id. at 6. Some, but not all, card readers/writers are embedded systems but all unloopers are embedded systems. Id. Mr. Gatliff analyzed the White Viper reader and unlooper and concluded that their only use was to hack DirecTV's signals. Id. at 22. Mr. Gatliff testified that the WildThing unlooper was designed specifically for hacking DirecTV signals because the device is so tied to the unlooping operation it is not useful for anything else. Adv. Doc. No. 37, Tr. 4/10/07 at 29. The unlooping operation is so specific to piracy that, according to Mr. Gatliff, there are authoritative texts that apply a term, "glitching," to the operation. Id. at 30. When an access card is plugged into an unlooper a glitch or power interruption is created which induces a malfunction in the access card's computer and, in turn, defeats the card's security features. The unlooper has no utility with any other cards. Id. at 32. In response to the question, "The only places you see unloopers is within the DirecTV piracy community?" Mr. Gatliff answered, "That's correct," id. at 34, and that the unlooper is "designed specifically for modifying the behavior of a DirecTV access card." Id. The White Viper website contained specific references to DirecTV and its equipment. Id.

According to Mr. Gatliff's testimony in the District Court, Debtor asserted in a deposition that he purchased the unlooper to use in an electromechanical device that he had not yet built. Adv. Doc. No. 37, Tr. 4/10/07 at 40-42. At trial Debtor testified that he needed the unlooper to work with an electronic unlocking device that would use a smart card. Adv. Doc. No. 38, Tr. 4/11/07 at 5. When he ordered the unlooper he admitted he had nothing to use it with in connection with what he said he was inventing. Id. at 6. Mr. Gatliff testified that the records he examined established that Debtor had purchased the unlooper "quite a bit earlier" than the other materials. Adv. Doc. No. 37, Tr. 4/10/07 at 38-39.

The credible testimony established that the only use for the items Debtor bought was to hack DirecTV's signals and that others had claimed legitimate uses for the same or similar materials but these items in fact had no other use. For example, all the ECMs in use from the year 2000 and after required the use of an unlooper to defeat the ECM. Adv. Doc. No. 37, Tr. 4/10/07 at 45-46. Mr. Gatliff's testimony established that a person who needs an unlooper to fix a DirecTV access card that was disabled by an ECM was engaged in the theft of DirecTV services because "the way the electronic counter-measures work is these mini programs are looking for signatures, data bytes in the access card that are consistent with what DirecTV identified at that time as being a piracy technique. To get those bytes into the card in the first place, you needed a tool like an unlooper, or in some cases, a reader/writer, which is the other White Viper device." Id. at 46-47. The card of a DirecTV subscriber would not have those bytes and so would not be affected by the ECM. Id. at 47. That is, purchase of an unlooper is not only an indication of a desire to continue hacking DirecTV, it indicates that an individual had previously been hacking into DirecTV. Id.

The evidence established that Debtor bought various equipment from White Viper. Although he denied some purchases and contended that an email address and phone number associated with some purchases were not his, his bank records and the White Viper invoices indisputably connect him directly to the purchases, the use of which has been described above as only pertinent to hacking DirecTV signals. The credible evidence clearly established that the equipment Debtor bought could only be used for piracy of DirecTV's signals. It is equally clear from the trial transcript that Debtor purchased items whose only purpose and function is to pirate DirecTV signals. The testimony of other witnesses belies his assertion that he was engaged in a legitimate activity. We find DirecTV has proven to a preponderance that Debtor knowingly and intentionally orchestrated theft of its signal.

We now turn to a discussion of the standards for dischargeability and whether DirecTV's judgment is nondischargeable.

I. Requirements for Nondischargeability Under § 523(a)(2)

Section 523(a)(2) provides that a debt is nondischargeable if it is

for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by

(A) false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor's ... financial condition;

(B) use of a statement in writing

(i) that is materially false;

(ii) respecting the debtor's ... financial condition;

(iii) on which the creditor to whom the debtor is liable for such money, property, services, or credit reasonably relied; and

(iv) that the debtor caused to be made or published with intent to deceive

In re Ozarowski, 2006 WL 3694547 at *4 (Bankr.D.N.J., Dec. 12, 2006), held

for a debt to be nondischargeable under § 523(a)(2)(A) the creditor must prove that: (1) the debtor presented a fact, opinion, intention or law; (2) the representation was false; (3) the representation was material; (4) the debtor obtained money, property or services through the misrepresentation; (5) the debtor knew at the time that the statement was false (or made with reckless disregard for its truth); (6) the debtor intended the creditor rely on the statement; (7) the creditor actually relied on the statement; (8) the reliance was justified; (9) the creditor sustained damage; and (10) the damages were the proximate cause of the representation.

2006 WL 3694547 at *11-12. The trial transcript establishes that Debtor bought certain devices that enabled theft of DirecTV signals and in fact could be used only for that purpose. Although his conduct was fraudulent it did not involve a representation to DirecTV on which DirecTV relied. Until DirecTV investigated and conducted a raid of White Viper, there was no connection with Debtor with respect to piracy whatsoever. Debtor bought DirecTV systems through a retailer. DirecTV knew only that a system had been purchased. However, a subscription could be activated by anyone. See Adv. Doc. No. 37, Tr. 4/10/07 at 87-88.

To determine whether the jury's findings also satisfy § 523(a)(2), we must "examine the record of the [district] court proceeding." In re Halperin, 215 B.R. 321, 336 (Bankr.E.D.N.Y.1997). We must determine whether the requisite elements applicable under § 523(a) were decided in the prior proceeding. Id. In this regard, we examine the District Court trial record for the sufficiency of evidence regarding the controlling facts and to identify the issues that were litigated. Id. We conclude that in this case those requirements have been met. See In re Cowden, 337 B.R. 512, 530 (Bankr.W.D.Pa.2006).

Section 2511(1)(a) of title 18 of the United States Code provides penalties for intentional interception or use of devices to intercept certain types of communication and subsection (1)(b) includes the intentional use (or attempt to use) a device that transmits a signal. Section 910 of title 18 of the Pennsylvania Statutes makes it a crime to possess, use or assemble "an unlawful telecommunication device" or one that "modifies, alters, programs or reprograms" one that could be used for commission of theft of telecommunication services. Section 605(e)(4) provides penalties for anyone who, inter alia, assembles or modifies any device or equipment "knowing or hav[ing] reason to know that the device or equipment is primarily of assistance in the unauthorized decryption of satellite cable programming, or direct-to-home satellite services." The elements for nondischargeability under § 523(a)(2)(A) are not identical to the requirements under the statutes resulting in the judgment at issue. Section 523(a)(2)(A) deals primarily with obtaining money, property or services through false pretenses, false representations, or actual fraud, and requires reliance by the creditor. Section 523(a)(2)(B) concerns use of a written materially false statement regarding a debtor's financial condition on which the creditor relied and with respect to which the debtor had an intent to deceive. It is clear from the District Court transcript that Debtor engaged in fraud but there is no evidence of DirecTV's reliance on Debtor's conduct. Section 523(a)(2)(B) does not apply inasmuch as there was no written statement regarding Debtor's financial condition and therefore there could be no reliance by DirecTV.

II. Requirements for Nondischargeability Under § 523(a)(4)

Section 523(a)(4), in pertinent part, excepts from discharge a debt for larceny. Larceny is defined as "the unlawful taking and carrying away of someone else's property with the intent to deprive the possessor of it permanently." In re Giarratano, 358 B.R. 106, 110 (D.Del. 2004), citing Black's Law Dictionary (8th Ed.2004). With respect to DirecTV's assertion that the debt is nondischargeable under § 523(a)(4) inasmuch as it constituted larceny, we note that fraudulent intent is essential to a finding of larceny and can be inferred from circumstances. In re Dawley, 312 B.R. 765, 779 (Bankr.E.D.Pa. 2004), appeal denied 2005 WL 2396489 (E.D.Pa., Sept. 28, 2005). We find the evidence at trial to be sufficient to establish the requisite intent and misappropriation. Debtor had been a DirecTV subscriber but his account was closed in 1999 for failure to pay, around the same time that his purchases of DirecTV systems, card readers and unloopers began. He made other purchases four days after the Black Sunday ECM. Purchases of systems were under Debtor's name and White Viper's and Debtor's records show that he bought equipment which the testimony established had no purpose other than piracy of DirecTV's satellite transmissions. To establish a claim of larceny, DirecTV must show that: (1) the Debtor misappropriated the services for his own benefit and (2) that he did so with fraudulent intent. In re Giarratano, 358 B.R. 106, 110 (D.Del.2004).

At the time Debtor was alleged to have purchased a DirecTV system in 1999 (for which service was never activated) he admitted that his name was on the receipt and that he lived at the address listed on the receipt but asserted that the telephone number on the receipt was one he had not had for the past two years. Adv. Doc. No. 37, Tr. 4/10/07 at 8-10. Immediately after denying that he made the purchase, id. at 9, he testified that had bought the system for a friend who was getting married. Id. at 11. He later said it was a Christmas gift for someone. Id. at 19. Debtor attempted to excuse his failure to disclose the purchase in an earlier deposition on the fact that he was nervous. Id. at 11.

The record in the District Court contains ample evidence of Debtor's intentional and larcenous conduct with respect to interception of transmissions from DirecTV. This evidence includes Debtor's multiple purchases of DirecTV systems, card readers and an unlooper, Debtor's dealings with www.whiteviper.com, bank records reflecting transactions with that company, the strikingly similar email addresses associated with the White Viper orders, the use on purchase orders of a telephone number that at one time was Debtor's, Debtor's inconsistent and incredible testimony regarding his purchases and his intended use of the prohibited devices and DirecTV's credible evidence concerning the only purpose which the devices could serve. The debt in the amount of $70,450 is nondischargeable.

An appropriate order will be entered.

ORDER

AND NOW, this 25th day of June, 2009, for the reasons expressed in the foregoing Memorandum Opinion, it is ORDERED that DirecTV's Motion for Summary Judgment is granted in part and denied in part.

It is FURTHER ORDERED that the motion to hold the judgment in favor of DirecTV nondischargeable under 11 U.S.C. § 523(a)(2) is denied. It is ORDERED that the motion to hold the judgment nondischargeable under 11 U.S.C. § 523(a)(4) is granted. Therefore, it is ORDERED that the debt owed to DirecTV by Debtor in the amount of $70,450 is nondischargeable.

It is FURTHER ORDERED that Debtor shall file and serve an amended plan on or before July 27, 2009.