TKC Aerospace Inc. v. Charles Muhs , 923 F.3d 377 ( 2019 )

PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 18-1372
In re: CHARLES TAYLOR MUHS,
Debtor.
------------------------------
TKC AEROSPACE INC.,
Plaintiff - Appellee,
v.
CHARLES TAYLOR MUHS,
Defendant - Appellant.
Appeal from the United States District Court for the Eastern District of Virginia, at
Alexandria. Liam O’Grady, District Judge. (1:17-cv-01304-LO-TCB)
Argued: March 19, 2019 Decided: May 8, 2019
Before MOTZ, KING, and THACKER, Circuit Judges.
Reversed and remanded by published opinion. Judge Thacker wrote the opinion, in
which Judge Motz and Judge King joined.
ARGUED: Richard George Hall, Annandale, Virginia, for Appellant. Douglas Clark
Proxmire, VENABLE LLP, Tysons Corner, Virginia, for Appellee. ON BRIEF:
Stephen K. Gallagher, Kevin W. Weigand, VENABLE LLP, Tysons Corner, Virginia, for
Appellee.
2
THACKER, Circuit Judge:
At the root of this appeal is a provision in the United States Bankruptcy Code
stating that a debt “for willful and malicious injury by the debtor to another entity” is
nondischargeable in Chapter 7 bankruptcy. 11 U.S.C. § 523(a)(6) (emphasis supplied).
In 2016, Charles Taylor Muhs (“Appellant”) filed for Chapter 7 bankruptcy and
attempted to discharge a judgment in excess of $20 million entered by an Alaska district
court against him and in favor of TKC Aerospace, Inc. (“TKCA”). TKCA, however,
claims that the judgment is nondischargeable because the damages award was based on
Appellant’s willful and malicious misappropriation of TKCA’s trade secrets.
The bankruptcy court, applying collateral estoppel principles, concluded that
Alaska’s award of damages to TKCA necessarily meant that Appellant willfully and
maliciously injured TKCA for purposes of § 523(a)(6), granted summary judgment in
favor of TKCA, and determined that the entire judgment award was nondischargeable.
The district court affirmed.
We reverse. The Supreme Court has held that § 523(a)(6) requires “a deliberate or
intentional injury, not merely a deliberate or intentional act that leads to injury.”
Kawaauhau v. Geiger, 523 U.S. 57, 61 (1998) (emphases in original). Likewise, this
court has held that a creditor challenging dischargeability under § 523(a)(6) must prove
that the debtor had an “inten[t] to injure.” In re Duncan, 448 F.3d 725, 730 (4th Cir.
2006). Because neither the Alaska district court, nor the bankruptcy court, determined
the precise issue of whether Appellant intended to injure TKCA, collateral estoppel and
3
summary judgment were inappropriate. Therefore, we remand to the district court with
instructions to remand to the bankruptcy court for further proceedings.
I.
A.
Background
In 2007, Appellant became Vice President of Business Development for TKCA,
an Alaska corporation specializing in aircraft procurement, logistics, and support. In that
capacity, Appellant had access to TKCA’s proprietary information, and his contract with
TKCA prohibited him from disclosing confidential information to any third party or
competing with TKCA for six months after his employment terminated. From 2009 to
2011, TKCA competed for and won Department of State (“DOS”) contracts for
Bombardier Dash 8 aircrafts, modified to meet DOS needs. As part of this process,
TKCA would -- with the help of Appellant -- submit proposals to DOS describing how it
would perform such modifications.
On March 28, 2011, Appellant left his position with TKCA to accept a position
with Knowledge International in Alexandria, Virginia, although he continued to work for
TKCA on a part-time basis. Appellant also began to work closely with Phoenix
Heliparts, Inc. (“PHP”), an Arizona corporation and (at the time) a competitor of TKCA,
to secure aircraft and develop bids for possible DOS solicitation. On August 5, 2011,
DOS issued a solicitation for up to two more Dash 8 aircrafts, and PHP submitted a
proposal. DOS awarded the contract to PHP.
4
B.
The Alaska and Arizona Actions
1.
Parallel Litigation
On September 26, 2011, TKCA filed a lawsuit in the District of Alaska against
Appellant, alleging breach of contract, breach of implied covenant of good faith and fair
dealing, breach of fiduciary duty, unjust enrichment, tortious interference with
prospective business, fraud, and violation of the Alaska Uniform Trade Secrets Act (the
“Alaska Action”). See Compl., TKC Aerospace, Inc. v. Muhs, No. 3:11-cv-189 (D.
Alaska filed Sept. 26, 2011), ECF No. 1, at 12–17. Specifically, the complaint alleged
that Appellant “stole a corporate business opportunity from TKCA and delivered it to a
competitor, using TKCA proprietary information.” Id. at 2.
On October 20, 2011, TKCA filed a parallel suit against PHP in the Superior
Court for Maricopa County, Arizona, alleging misappropriation of trade secrets under the
Arizona Uniform Trade Secrets Act, intentional interference with business expectancy,
unfair competition, and conversion. See TKC Aerospace, Inc. v. Phoenix Heliparts, Inc.,
No. CV2011-128889 (Ariz. Sup. Ct. filed Oct. 20, 2011) (the “Arizona Action”).
Although he was a witness in the Arizona Action, Appellant was not named as a party.
The Alaska Action and the Arizona Action carried on simultaneously.
On February 21, 2012, Appellant filed a motion to stay the Alaska Action. In
support of the motion, Appellant’s counsel -- the same counsel representing PHP in the
Arizona Action -- stated that the Arizona Action “involv[ed] the same plaintiff . . . and
5
same factual and legal issues as those in the Alaska Action,” and “[t]he underlying
factual allegations in [both complaints] are virtually verbatim, the gravamen of the claims
are identical, and the relief requested is virtually identical.” J.A. 193. 1 The request for
stay also stated, “this pending action is . . . substantially similar to and significantly
parallels the Arizona Action,” id. at 199, and “[i]f TKCA prevails in the Arizona Action,
. . . then [Appellant] would be collaterally estopped from arguing differently in this
Court,” id. at 214 n.3 (alterations omitted). The Alaska court denied the motion to stay.
After granting summary judgment on some claims, however, on March 8, 2013, the
Alaska court deferred further scheduling until the Arizona Action was complete.
2.
The Arizona Judgment
Meanwhile, from March 2012 to October 2013, the Arizona state court conducted
a bench trial for over 40 days on the issue of PHP’s liability regarding TKCA’s trade
secrets and PHP’s misconduct. Ultimately, on January 30, 2015, the Arizona state court
entered judgment in favor of TKCA and against PHP on the Arizona Uniform Trade
Secrets Act claim, the tortious interference claim, and the common law unfair
competition claim, in the total amount of $20,295,782.58. This amount was broken down
as follows: $2,883,055.86 in lost profits; $3,882,205 in research and development costs;
and $13,530,521.72 in exemplary damages. As to the latter, the Arizona state court
1
Citations to the “J.A.” refer to the Joint Appendix filed by the parties in this
appeal.
6
stated, “PHP [must] pay exemplary damages pursuant to A.R.S. § 44–403(B)[ 2] in an
amount double awarded to TKCA for its lost profit and research and development costs.”
J.A. 105. The Arizona court found that PHP engaged in “willful and malicious
misconduct,” id. at 59, and “PHP willfully and maliciously misappropriated TKCA’s
trade secrets,” id. at 66. It also found that “PHP formed an agency relationship with
[Appellant],” and “[b]ecause of th[is relationship], this court will attribute [Appellant’s]
acts to PHP.” Id. at 74, 75.
But even though the Arizona state court attributed Appellant’s actions to PHP, the
Arizona Action was not based solely on the actions of Appellant. Indeed, the Arizona
court also found the following regarding Tina Cannon, president of PHP at the relevant
time, and her husband Darrin Cannon, who was vice-president:
• “[T]he Cannons wiped their computers after receiving a
litigation hold letter and after trial started. The court has
rarely, if ever in a civil matter, witnessed a party engage in
such flagrant misconduct and act with such disregard for the
truth and such profound disrespect for the law.” J.A. 60;
• “This court finds that Darrin Cannon installed and ran
CCleaner with the intent to delete any evidence that PHP had
misappropriated TKCA’s trade secrets and proprietary and
confidential information and also to conceal PHP’s efforts to
delete relevant and material evidence of its misconduct.” J.A.
60–61;
• “During trial, Tina Cannon and [Appellant] provided
improbable explanations when confronted with overwhelming
2
This statute provides, “If willful and malicious misappropriation exists, the court
may award exemplary damages in an amount not exceeding twice any award [for actual
loss from misappropriation and unjust enrichment].” Ariz. Rev. Stat. Ann. § 44-403(B).
7
evidence of PHP’s efforts to secure the award of the D[O]S
contract.” J.A. 65; and
• Tina Cannon “induced [Appellant] to violate his non-compete
agreement with TKCA and disclose TKCA trade secrets in
further breach of his employment contract.” J.A. 80.
Accordingly, when assessing whether exemplary damages were appropriate
pursuant to A.R.S. § 44–403(B) for willful and malicious misappropriation, the Arizona
court stated the following, inter alia:
Attempts to conceal wrongful conduct with respect to trade
secrets provide evidence of willful and malicious
misappropriation. . . .
[T]he following are just a few examples that establish PHP
willfully and maliciously engaged in misconduct. Despite
knowing [Appellant’s] contract with TKCA had a non-
compete clause, the Cannons induced [Appellant] to
misappropriate TKCA’s trade secrets in order to compete
directly with TKCA. [Appellant], on behalf of PHP, withheld
vital information from TKCA so that PHP could establish a
material and temporal advantage in preparing a successful
proposal in response to the D[O]S solicitation. Tina Cannon
knew that [Appellant] had uploaded TKCA proprietary
documents to PHP’s servers and PHP knowingly used the
uploaded documents to prepare its bid. PHP further knew
that using the uploaded documents would harm TKCA. . . .
PHP intentionally wip[ed] company servers after learning of a
subpoena, erasing company laptops in the evening and early
morning hours before court-ordered forensic imaging started
....
J.A. 87. After awarding exemplary damages, the Arizona court noted that TKCA also
satisfied its burden of proof on punitive damages, explaining, “This court finds by clear
and convincing evidence that PHP engaged in outrageous conduct and acted with an evil
mind intending to injure TKCA by intentionally interfering with TKCA’s contracts and
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opportunities and then using TKCA’s proprietary information to misappropriate those
opportunities.” Id. at 88–89 (emphases supplied). The court made no specific finding,
however, that Appellant (who, again, was not a party to the Arizona Action) intended to
injure TKCA. 3
3.
The Alaska Judgment
Based on the Arizona judgment, on June 12, 2015, TKCA filed a motion for
summary judgment in the Alaska Action. Without holding a hearing, the Alaska court
granted the motion on October 22, 2015. It reasoned that, even though Appellant was not
a party to the Arizona Action, the Arizona court’s conclusion and award of damages were
based on “findings that [Appellant] worked with PHP to compete for the D[O]S contract,
that [Appellant] provided TKCA documents to PHP, and that [Appellant] worked on
PHP’s D[O]S Dash 8 proposal.” J.A. 30–31. Then the Alaska court applied principles of
equitable estoppel and quasi-estoppel to reach the conclusion that “[Appellant] agreed to
be bound by the decision in the Arizona Action and thus he was in privity with PHP.
Because [Appellant] was in privity with PHP, [he] is collaterally estopped from
relitigating TKCA’s claims against him.” Id. at 38.
3
PHP filed for Chapter 11 bankruptcy on September 18, 2015, staying any
potential appeal of the Arizona Action. See 11 U.S.C. § 362(a)(1) (bankruptcy petition
acts as a stay to the “continuation . . . of a judicial . . . proceeding against the debtor” that
was commenced before bankruptcy).
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Accordingly, the Alaska court held that TKCA was entitled to judgment against
Appellant for breach of contract, breach of implied covenant of good faith and fair
dealing, breach of fiduciary duty, tortious interference with prospective economic benefit,
and violation of the Alaska Trade Secrets Act. Per the Alaska court, TKCA was entitled
to the following:
a. Lost Profits: $2,883,055.86
b. Research and Development: $3,882,205.00
c. Exemplary Damages: $13,530,521.72.
J.A. 42. Thus, Appellant was liable for $20,295,782.58, the same amount imposed on
PHP in the Arizona Action.
As noted above under “c.,” the Alaska court awarded exemplary damages in the
amount of $13,530,521.72 to TKCA. In awarding these damages, the Alaska court
dropped a footnote that stated, “Per AS 45.50.915(b),” with no further analysis. J.A. 42
n.37. Section 45.50.915(b) is part of the Alaska Uniform Trade Secrets Act and provides:
(a) In addition to or in lieu of injunctive relief, a complainant
may recover damages for the actual loss caused by
misappropriation. A complainant also may recover for the
unjust enrichment caused by misappropriation that is not
taken into account in computing damages for actual loss.
(b) If wilful and malicious misappropriation exists, the court
may award exemplary damages in an amount not exceeding
twice the damages awarded under (a) of this section.
10
AS § 45.50.915 (emphasis supplied). Like the Arizona court, the Alaska court made no
specific finding that Appellant intended to injure TKCA. 4
C.
Federal Bankruptcy Proceedings
On July 1, 2016, Appellant filed a petition for Chapter 7 bankruptcy in the
Bankruptcy Court for the Eastern District of Virginia and sought to discharge the Alaska
judgment. See Petition, In re Muhs, No. 16-12288 (Bankr. E.D. Va. filed July 1, 2016),
ECF No. 1. TKCA then filed an adversary complaint in the bankruptcy court, alleging
that the Alaska judgment was nondischargeable pursuant to 11 U.S.C. § 523(a)(2) (any
debt for “money . . . to the extent obtained by . . . false pretenses [or] actual fraud” is
nondischargeable in Chapter 11 proceedings); § 523(a)(4) (same for any debt “for fraud
or defalcation while acting in a fiduciary capacity, embezzlement, or larceny”); and
§ 523(a)(6) (same for any debt “for willful and malicious injury by the debtor to another
entity or to the property of another entity”). See Compl., In re Muhs, No. 16-01192
(Bankr. E.D. Va. filed Oct. 11, 2016).
1.
TKCA’s First Motion
On December 19, 2016, TKCA filed a motion for judgment on the pleadings based
on the Alaska judgment. It contended:
4
The Alaska judgment has been appealed to the Court of Appeals for the Ninth
Circuit, but the appeal was administratively closed in May 2017 pending bankruptcy
proceedings.
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This court should estop [Appellant] from re-litigating the
same facts and issues that two other courts have already
addressed. To do so, the Court should apply collateral
estoppel to the findings of the Arizona and Alaska Courts and
hold that [Appellant’s] debt from the Alaska Judgment is not
dischargeable under 11 U.S.C. §§ 523(a)(2) [false pretenses
or fraud], (a)(4) [fraud or defalcation in a fiduciary capacity,
embezzlement, or larceny], and (a)(6) [willful and malicious
injury].
Mot. J. Pleadings, In re Muhs, No. 16-01192 (Bankr. E.D. Va. filed Dec. 19, 2016), ECF
No. 7, at 9. The bankruptcy court held a hearing on this motion. There, TKCA
contended, “[The] Alaska and Arizona [courts] awarded exemplary damages, which
under their statutes . . . exemplary damages can only be awarded if there is willful and
malicious misappropriation.” Trans., In re Muhs, No. 16-01192 (Bankr. E.D. Va. March
9, 2017), ECF No. 22, at 10–11. The bankruptcy court denied the motion, explaining in
open court:
[T]his is a Court of equity, so I am going to use my power to
apply equitable estoppel in this case in order for a trial to go
on. I’m not saying that [Appellant] has a prayer of winning.
What I am saying is that it is clear by the judgment in the
Arizona Court that [Appellant’s] attorney was not working in
the best interests from time to time of either of its clients,
PHP or [Appellant]. . . . I think that there definitely are some
disputed facts, and I want to know what they are. I want to
hear both sides.
Id. at 37–38.
TKCA then moved for leave to appeal the bankruptcy court’s interlocutory order
to the district court. See Mot. Leave to Appeal, TKC Aerospace, Inc., No. 1:17-cv-372
(E.D. Va. Mar. 29, 2017), ECF No. 1. The district court granted the motion for leave to
appeal and reversed the bankruptcy court, explaining that it erred in “finding that
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collateral estoppel did not apply to [the Alaska court’s] grant of summary judgment.”
J.A. 222. The district court explained that the issues in the Alaska Action and bankruptcy
proceeding were “identical,” but it did not determine whether the Alaska court found that
Appellant had an intent to injure TKCA. Id. at 227. Instead, the district court made the
general proclamation that a judgment “resulting from . . . willful and malicious injury
against another [is] barred from discharge in a bankruptcy proceeding.” Id. (citing 11
U.S.C. § 523). Thus, it concluded “[t]he doctrine of collateral estoppel bars re-litigation
of the facts in the Alaska case.” Id. at 229. The district court remanded for further
proceedings.
2.
TKCA’s Second Motion
On November 2, 2017, in the bankruptcy court once again, TKCA filed a renewed
motion for judgment on the pleadings. The very next day, the bankruptcy court entered
an order granting summary judgment to TKCA, concluding that the Alaska judgment was
nondischargeable pursuant to § 523(a)(6) only. It explained, “With the district court’s
guidance in mind, applying principles of collateral estoppel, this Court finds that the
Alaska court’s findings satisfy the standard for nondischargeability under 11 U.S.C.
§ 523(a)(6).” J.A. 236. It did not address § 523(a)(2) or (a)(4).
Appellant appealed to the district court. See Notice of Appeal, Muhs v. TKC
Aerospace Inc., 1:17-cv-1304 (E.D. Va. filed Nov. 16, 2017), ECF No. 1. The district
court affirmed the bankruptcy court as to nondischargeability under § 523(a)(6). It held
that because the Alaska judgment “awarded exemplary damages to [TKCA] for
13
Appellant’s violation of Alaska’s Uniform Trade Secrets Act,” which are “only for
willful and malicious conduct,” then the Alaska judgment is nondischargeable under
§ 523(a)(6). J.A. 310. Appellant timely noted this appeal. We possess jurisdiction
pursuant to 28 U.S.C. § 1291 and § 158(d).
II.
This court “review[s] the judgment of a district court sitting in review of a
bankruptcy court de novo, applying the same standards of review that were applied in the
district court.” In Re Biondo, 180 F.3d 126, 130 (4th Cir. 1999). Specifically, we review
the factual findings of the bankruptcy court for clear error, while we review questions of
law de novo. See id. “Although collateral estoppel may well preclude a bankruptcy court
from relitigating previously-decided issues, the ultimate issue of dischargeability is a
legal issue, and exceptions to discharge are narrowly construed.” In re McNallen, 62
F.3d 619, 625 (4th Cir. 1995) (citations omitted).
III.
In this appeal, we are asked to decide whether Appellant is collaterally estopped
from arguing in bankruptcy court that the Alaska judgment is dischargeable under
§ 523(a)(6), because the Alaska court awarded exemplary damages to TKCA based on
willful and malicious misappropriation under Alaska law. As the party challenging the
dischargeability of a debt, TKCA bears the burden of proving the debt nondischargeable
by a preponderance of the evidence. See Grogan v. Garner, 498 U.S. 279, 287, 291
(1991).
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TKCA contends that the “Alaska court’s findings satisfy all the requisite elements
for ‘willful and malicious’ injury to TKCA under 11 U.S.C. § 523(a)(6),” and “[t]here is
no meaningful difference in the definition of ‘willful and malicious’ under Alaska law
and [§ 523(a)(6)].” Appellee’s Br. 9–10. Appellant, however, maintains that “in a
proceeding involving 11 U.S.C. § 523(a)(6), ‘willful and malicious’ conduct requires a
finding of a specific intent to injure,” and there was no such finding made in the Alaska
Action. Appellant’s Br. 9. We agree with Appellant.
A.
Collateral Estoppel
In Grogan v. Garner, the Supreme Court concluded that principles of collateral
estoppel apply in dischargeability proceedings in bankruptcy. 498 U.S. at 284 & n.11.
But we must first address which jurisdiction’s estoppel rules apply. As a general matter,
“[t]he preclusive effect of a federal-court judgment is determined by federal common
law.” Taylor v. Sturgell, 553 U.S. 880, 891 (2008). When a federal court exercises
diversity jurisdiction over a state law claim, as in the Alaska Action, the federal rule “is
to apply ‘the law that would be applied by state courts in the State in which the federal
diversity court sits’ as long as the state rule is not ‘incompatible with federal interests.’”
Hately v. Watts, 917 F.3d 770, 777 (4th Cir. 2019) (quoting Semtek Int’l, Inc. v. Lockheed
Martin Corp., 531 U.S. 497, 509 (2001)). Finding no reason why Alaska collateral
estoppel law would be incompatible with federal interests, we apply the following test:
Collateral estoppel prohibits relitigation of issues actually
decided in earlier proceedings where: (1) the party against
whom the preclusion is employed was a party to or in privity
15
with a party to the first action; (2) the issue precluded from
relitigation is identical to the issue decided in the first action;
(3) the issue was resolved in the first action by a final
judgment on the merits; and (4) the determination of the issue
was essential to the final judgment.
Strong v. Williams, 435 P.3d 872, 875 (Alaska 2018) (emphases supplied). Accordingly,
first, we will assess the issue Appellant wants to litigate in the bankruptcy court (i.e.,
whether the debt is for a willful and malicious injury for purposes of § 523(a)(6)). Next,
we will evaluate whether collateral estoppel precludes litigation of that issue in
bankruptcy court.
B.
Bankruptcy Requirement: Intent to Injure
The statue at issue here -- § 523(a)(6) -- provides that a debt is not dischargeable
in a Chapter 7 proceeding if it is a debt “for willful and malicious injury by the debtor to
another entity or to the property of another entity.” 11 U.S.C. § 523(a)(6). The Supreme
Court and this court have decided that a debt arising from an injury attributable to mere
negligent or reckless conduct does not satisfy the “willful and malicious” requirement of
(a)(6); in addition, it is not enough that the conduct underlying the injury was intentional.
Rather, the debtor must have engaged in such conduct with the actual intent to cause
injury. See Kawaauhau v. Geiger, 523 U.S. 57, 61 (1998); In re Duncan, 448 F.3d 725,
729 (4th Cir. 2006).
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1.
Kawaauhau v. Geiger
In Geiger, Margaret Kawaauhau sought treatment from Dr. Paul Geiger for a foot
injury. See 523 U.S. at 59. Dr. Geiger knew intravenous penicillin would be most
effective to decrease the risk of infection, but he prescribed oral penicillin because
Kawaauhau wished to keep the cost down. Then, he left town and placed her in the care
of other physicians, who decided she should be transferred to a specialist. But when Dr.
Geiger returned, he disagreed and cancelled her transfer because he thought the infection
had subsided; however, Kawaauhau’s condition worsened, resulting in the amputation of
her right leg below the knee. See id.
Kawaauhau and her husband sued Dr. Geiger for malpractice, and a jury awarded
them $355,000 in damages. Dr. Geiger did not carry malpractice insurance and ended up
filing for bankruptcy and seeking to discharge the judgment against him under
§ 523(a)(6). See Geiger, 523 U.S. at 59–60. The bankruptcy court decided the debt was
nondischargeable because the doctor’s “treatment fell far below the appropriate standard
of care and therefore ranked as ‘willful and malicious.’” Id. at 60.
The Eighth Circuit, sitting en banc, reversed the bankruptcy court and held that the
debt was dischargeable, and the Supreme Court affirmed. The Supreme Court explained:
We confront this pivotal question concerning the scope of the
“willful and malicious injury” exception: Does § 523(a)(6)’s
compass cover acts, done intentionally, that cause injury (as
[the Kawaauhaus] urge), or only acts done with the actual
intent to cause injury (as the Eighth Circuit ruled)? The
words of the statute strongly support the Eighth Circuit’s
reading.
17
Geiger, 523 U.S. at 61 (emphasis supplied). The Court reasoned, “The word ‘willful’ in
(a)(6) modifies the word ‘injury,’ indicating that nondischargeability takes a deliberate or
intentional injury, not merely a deliberate or intentional act that leads to injury.” Id.
(emphases supplied). Moreover, “the (a)(6) formulation triggers in the lawyer’s mind the
category ‘intentional torts,’ as distinguished from negligent or reckless torts. Intentional
torts generally require that the actor intend ‘the consequences of an act,’ not simply ‘the
act itself.’” Id. at 61–62 (quoting Restatement (Second) of Torts § 8A) (emphasis in
Geiger). The Court rejected the notion that a willful and malicious injury should
encompass “a wide range of situations in which an act is intentional, but injury is
unintended, i.e., neither desired nor in fact anticipated by the debtor,” such as a “knowing
breach of contract.” Id. at 62. In the end, “to be nondischargeable, the judgment debt
must be for willful and malicious injury,” and “[n]egligent or reckless acts . . . do not
suffice to establish that a resulting injury is willful and malicious.” Id. at 63–64
(emphasis in original).
2.
In re Duncan
This court has applied the Geiger principle in only one published decision, In re
Duncan, 448 F.3d 725 (4th Cir. 2006). There, a mother (“Jacqueline”) was found liable
for the wrongful death of her adopted child, after her child drowned in the bathtub while
in Jacqueline’s care. Because the child had subdural hemorrhaging and cerebral edema,
the wrongful death lawsuit filed by the child’s father alleged that Jacqueline either abused
18
and assaulted the child and then left her in the bathtub unattended to drown, or
intentionally drowned her to obscure evidence of the abuse. See id. at 727. The jury in
the wrongful death suit awarded the child’s estate (the “Estate”) $15,000 in compensatory
damages, and $500,000 in punitive damages, which was later reduced. See id. Because
the jury awarded punitive damages, it necessarily decided that Jacqueline engaged in
“willful and wanton” conduct, which was defined as:
acting consciously in disregard of [the child] or acting with a
reckless indifference to the consequences to [the child] when
the Defendant is aware of her conduct and is also aware, from
her knowledge of existing circumstances and conditions, that
her conduct would probably result in injury to [the child].
Id. at 729 (emphasis supplied).
Jacqueline thereafter filed a Chapter 7 bankruptcy petition and listed the wrongful
death award as a dischargeable debt. See Duncan, 448 F.3d at 727. The Estate argued
that it was not dischargeable under § 523(a)(6), and, based on the wrongful death
judgment and punitive damages award, Jaqueline was collaterally estopped from arguing
that the injury was not willful or malicious. See id.
Applying Virginia law (because the wrongful death judgment originated in
Virginia state court), we held that collateral estoppel did not apply to the willful and
malicious issue because whether Jacqueline “intended to injure” her daughter was neither
identical to, nor necessary to, the issue litigated in the wrongful death proceedings.
Duncan, 448 F.3d at 730. Indeed, Virginia law allowed for an award of punitive
damages for conscious disregard or reckless indifference, neither of which rose to the
level of intent to injure under Geiger. And because the Estate was not required “to prove
19
that Jacqueline Duncan intended to injure [the child] . . . , the wrongful death judgment
did not involve an identical issue to the controlling issue here.” Id. at 730. We
concluded, “At bottom, neither the wrongful death nor the punitive damages award in the
state court involved the issue of whether Jacqueline Duncan intended to injure [the child]
that controls resolution of this adversary proceeding.” Id. Thus, we held that collateral
estoppel did not apply in the bankruptcy proceedings.
Therefore, based on this case law, the controlling issue in the adversary
bankruptcy proceeding has to be whether Appellant intended to injure TKCA. With this
in mind, we turn to an analysis of the Alaska court’s decision.
C.
Alaska Judgment
We now determine whether, based on the Alaska judgment, Appellant is
collaterally estopped in the adversary proceeding from arguing that the debt to TKCA is
not for a willful and malicious injury for purposes of § 523(a)(6). Under Alaska law,
collateral estoppel prohibits relitigation of an issue “actually decided in earlier
proceedings” if TKCA can demonstrate that (1) Appellant was a party to the Alaska
Action; (2) the issue precluded from relitigation is identical to the issue decided in the
Alaska Action; (3) the issue was resolved by a final judgment on the merits; and (4) the
determination of the issue was essential to the final judgment. Strong, 435 P.3d at 875.
Because Appellant was a party in Alaska, and the Alaska judgment was final, we turn to
an analysis of whether the issues are identical, were actually decided in Alaska, and were
essential to the Alaska judgment.
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1.
Identical Issues
First, Alaska law requires that the issue to be precluded from relitigation “is
identical to the issue decided in the first action.” Strong, 435 P.3d at 875. However,
TKCA has not demonstrated -- and we cannot conclude -- that the meaning of “willful
and malicious” under Alaska law is identical to the meaning of “willful and malicious”
under the Bankruptcy Code.
As explained above, § 523(a)(6) requires intent to injure, and does not encompass
mere negligent or reckless conduct. Alaska has adopted the Uniform Trade Secrets Act
(“UTSA”), and neither Alaska’s version of the UTSA, nor the UTSA itself, defines the
terms willful and malicious. We cannot conclude that just because the words are the
same, the meaning is also the same. In fact, many states adopting the UTSA have
developed definitions of willful and malicious that fall below the Geiger standard. See,
e.g., Mattern & Assocs., L.L.C. v. Seidel, 678 F. Supp. 2d 256, 271 (D. Del. 2010)
(analyzing award of exemplary damages under the Delaware UTSA, explaining,
“Delaware courts have defined willfulness as an awareness, either actual or constructive,
of one’s conduct and a realization of its probable consequences, and malice as ill-will,
hatred or intent to cause injury.” (citation and internal quotation marks omitted)
(emphases supplied)); Mangren Research & Dev. Corp. v. Nat’l Chem. Co., 87 F.3d 937,
946 (7th Cir. 1996) (analyzing award of exemplary damages under the Illinois UTSA,
reasoning that the definition of willful and malicious “surely must include an intentional
misappropriation as well as a misappropriation resulting from the conscious disregard of
21
the rights of another” (emphasis supplied)); 12 Pa. C.S.A. § 5302 (Pennsylvania UTSA
defining “willful and malicious” as “[s]uch intentional acts or gross neglect of duty as to
evince a reckless indifference to the rights of others on the part of the wrongdoer, and an
entire want of care so as to raise the presumption that the person at fault is conscious of
the consequences of his carelessness” (emphasis supplied)); see also HTS, Inc. v. Boley,
954 F. Supp. 2d 927, 959 (D. Ariz. 2013) (noting that the Arizona UTSA does not define
“willful and malicious” but adopting Pennsylvania’s definition, explaining “the Court
considers as instructive decisions from other jurisdictions that have adopted substantially
the same provision of the UTSA”).
Indeed, TKCA’s attempts to define “willful and malicious” in Alaska’s version of
the UTSA as identical to § 523(a)(6) fall short of its burden. It refers to an Alaska
Supreme Court decision stating, “[a]n act is willful if it is done intentionally and
purposefully, rather than accidentally or inadvertently.” Walt’s Sheet Metal v. Debler,
826 P.2d 333, 336 (Alaska 1992). It then contends that the Alaska court necessarily
determined that Appellant “intentionally and purposefully misappropriated TKCA’s trade
secrets, which is sufficient to meet the Fourth Circuit standard for willfulness.”
Appellee’s Br. 11. But Geiger and Duncan specifically instruct that it is not enough to
have “a deliberate or intentional act that leads to injury.” Geiger, 523 U.S. at 61. Rather,
a bankruptcy court must specifically find a deliberate and intentional injury. Therefore,
even if TKCA is correct that the Alaska court decided Appellant intentionally and
purposefully misappropriated TKCA’s trade secrets, that is still not enough. It must have
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taken the additional step of finding that Appellant, in so doing, intended for TKCA to be
injured by that misappropriation.
Therefore, we simply cannot affirm the district court and bankruptcy court’s
conclusion that the issue Appellant seeks to argue in bankruptcy court is identical to the
issue presented in the Alaska Action.
2.
Actually Decided and Essential
Moreover, the issue of whether Appellant intended to injure TKCA was neither
“actually decided in,” nor “essential to” the Alaska Action. Strong, 435 P.3d at 875. The
Alaska court never decided whether Appellant intended to injure TKCA, as required by
Geiger and Duncan. Indeed, the only critical determination the Alaska court made was
that Appellant was in privity with PHP based on equitable and quasi-estoppel, and
therefore, he was collaterally estopped from “relitigating TKCA’s claims against him” in
Alaska. J.A. 38. TKCA maintains that the Alaska court necessarily made a
determination of willfulness and maliciousness in its award of exemplary damages,
indicated in a footnote with no analysis. But as mentioned above, the Alaska court made
no decision whatsoever that it based those damages on a finding that Appellant intended
to injure TKCA. Indeed, the district court’s decision on appeal here recognizes this fact.
It states that the Alaska judgment awarded exemplary damages for violation of Alaska’s
UTSA, which can “only [be awarded] for willful and malicious conduct.” J.A. 310
(emphasis supplied). As explained above, Appellant’s conduct is not the issue; rather, it
is his intent to injure that matters.
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TKCA also points to a portion of the Arizona court’s decision regarding the award
of punitive damages, which states, “This court finds by clear and convincing evidence
that PHP engaged in outrageous conduct and acted with an evil mind intending to injure
TKCA by intentionally interfering with TKCA’s contracts and opportunities and then
using TKCA’s proprietary information to misappropriate those opportunities.” J.A. 88–
89 (emphasis supplied). Then, TKCA contends that although Appellant was not a party
to the Arizona Action, this “evil mind” is attributable solely to Appellant because in the
Alaska Action, Appellant’s counsel acknowledged “TKCA’s claims of wrongdoing by
PHP are entirely based on the alleged wrongdoing of [Appellant].” Appellee’s Br. 16 n.2
(quoting J.A. 200 (motion to stay Alaska Action)).
But crucially, the Alaska court did not take the additional step of finding that
Appellant had the requisite intent to injure (or was estopped from arguing to the contrary)
in the Alaska Action. Nor would such a finding have been essential to the Alaska court’s
decision that Appellant was in privity with PHP and thus, he was collaterally estopped
from relitigating the issues determined in the Arizona Action.
Therefore, whether Appellant specifically had the requisite intent to injure TKCA
was neither actually decided in, nor essential to, the Alaska Action.
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3.
For these reasons, collateral estoppel was inappropriate in this case. We reverse
the district court and bankruptcy court’s reliance on collateral estoppel to determine the
nondischargeability of the Alaska judgment, and remand for further proceedings. 5
IV.
For the foregoing reasons, we reverse the judgment of the district court, with
instructions to remand to the bankruptcy court for proceedings consistent with this
opinion.
REVERSED AND REMANDED
5
TKCA argues in its response brief that we could affirm based on other
nondischargeability provisions in the Bankruptcy Code, specifically, § 523(a)(2) and
(a)(4). These arguments were raised to the bankruptcy court; however, the bankruptcy
and district courts relied only on (a)(6) in the immediate judgments on appeal. These are
determinations best left to the bankruptcy court in the first instance. See In re FirstPay,
Inc., 391 F. App’x 259, 269 n.7 (4th Cir. 2010) (“Whether FirstPay converted and
misappropriated some of its clients’ funds in order to make payments to the IRS on
behalf of other clients, among other issues, will have to be determined by the bankruptcy
court in the first instance.”); In re Biondo, 180 F.3d 126, 134 (4th Cir. 1999) (“The
Biondos’ state of mind is a question of fact to be determined in the first instance by the
bankruptcy court . . . .”); In re Pucci Shoes, Inc., 120 F.3d 38, 42 (4th Cir. 1997)
(remanding to bankruptcy court for determination of the value of a line of credit because
“neither this court nor the district court is authorized to make . . . factual determinations
in the first instance”). On remand, the bankruptcy court is free to entertain these
possibilities.
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