Horton v. Horton ( 2004 )

UNITED STATES COURT OF APPEALS
For the Fifth Circuit
No. 95-10023
IN THE MATTER OF: JACK RICHARD HORTON,
Debtor.
JACK RICHARD HORTON,
Appellant,
VERSUS
GLEN ROBINSON,
Appellee.
Appeal from the United States District Court
for the Northern District of Texas
(3:91 CV 1248 J)
May 3, 1996
Before POLITZ, Chief Judge, HILL1 and DeMOSS, Circuit Judges.
DeMOSS, Circuit Judge:2
Defendant Jack Richard Horton appeals a summary judgment
entered in favor of his ex-business partner Glen Robinson in this
action, which began as an adversary proceeding in bankruptcy. The
1
Circuit Judge of the Eleventh Circuit, sitting by
designation.
2
Pursuant to Local Rule 47.5, the Court has determined that
this opinion should not be published and is not precedent except
under the limited circumstances set forth in Local Rule 47.5.4.
bankruptcy court found that a state court judgment Robinson had
against Horton (including actual and punitive damages and
attorneys’ fees) was not dischargeable. We affirm the judgment
finding the actual and punitive damages non-dischargeable.
However, we reverse the judgment that found the attorneys’ fees
non-dischargeable.
I. BACKGROUND
Horton and Robinson were school chums and the best of friends
for over twenty years. In the late 1970's, both men settled in
Dallas. In the early 1980’s, Horton and Robinson decided to take
the relationship one step further by starting a business together,
which they dubbed Seville Financial, Inc. Robinson worked for
Security Pacific, a large financial institution, and was
experienced in the area of lease financing. Horton had no
experience in lease financing, but was an attorney and had
available revenue to invest in the business. Shere Griggs, one of
Robinson's co-workers at Security Pacific, joined Seville Financial
as a full partner and a contract was prepared providing that
Horton, Robinson and Griggs would divide equally the corporate
profits from Seville Financial.
Shortly thereafter, the three owners fell into disagreement
about the distribution and division of profits. Robinson
eventually filed suit against Horton and Griggs in Texas state
court, alleging that Horton and Griggs were secretly diverting
income from the business to themselves (and driving around in
company-furnished Jaguars), thereby violating Robinson's rights in
2
the company. Horton and Griggs claimed that Robinson had likewise
diverted income to himself without dividing the profits and that,
in any event, Robinson generated only a very small portion of
Seville Financial's revenue (preferring instead to read the
newspaper at his desk).
The jury believed Robinson and awarded $160,000 in actual
damages, $175,000 in exemplary damages3, and $50,000 in attorneys’
fees.4 The jury charge submitted three causes of action to the
jury: (1) breach of the profit-sharing contract; (2) breach of
Horton's state-law fiduciary duty to Robinson; and (3) civil
conspiracy between Horton and Griggs. As to each theory, the jury
answered that Horton and Griggs were liable and that Robinson had
sustained damages proximately caused by Horton and Grigg's conduct.
On breach of contract, the jury answered that both Griggs and
Horton had breached the profit sharing agreement, proximately
causing Robinson damages. On breach of fiduciary duty, the jury
answered: (1) that a fiduciary relationship existed between Horton
and Robinson based on personal and business transactions during the
relevant time period; (2) that Horton violated his fiduciary duties
to Robinson, which (3) proximately caused Robinson damages; and (4)
that "such violation [was] done willfully and maliciously or in
3
This amount included the sum of $125,000 awarded against
Horton and $50,000 awarded against Griggs. Horton does not dispute
that both amounts may be attributed to him for purposes of this
appeal.
4
This amount included $30,000 for preparation and filing of
the lawsuit, $10,000 for trial, $7,500 for appeal to the Texas
Court of Appeals. The jury also awarded $2,500 for appeal to the
Texas Supreme Court, but Horton never pressed that appeal.
3
conscious indifference to Robinson's rights, if any, in Seville
Financial." On civil conspiracy, the jury answered: (1) that
Griggs entered into a civil conspiracy with Horton to violate
Horton's fiduciary duties to Robinson; (2) that Griggs acted with
malice in the conspiracy; and (3) that the conspiracy proximately
caused damage to Robinson. The interrogatory for designating the
amount of damages, however, was not specific to any of the three
theories and inquired only "[w]hat sum of money, if any, if paid
now would fairly and reasonably compensate Glen Robinson for
damages, if any?" The state trial court reduced the damages
awarded and entered judgment. The Texas Court of Appeals affirmed
the decision in favor of Robinson and adjusted the damages upward
to conform to the jury verdict. Horton v. Robinson, 776 S.W.2d 260
(Tex. App.--El Paso 1989, no writ). No writ was filed with the
Texas Supreme Court.
Robinson collected about $42,000 on the state court judgment
before Horton filed for bankruptcy. Robinson then filed the
instant adversary proceeding in Horton's bankruptcy, seeking a
judgment excepting the amount of the outstanding state court
judgment ($417,002 with interest) from discharge pursuant to 11
U.S.C. § 523(a). Robinson filed the state court record, including
the record on appeal, in Horton's bankruptcy and then moved for
summary judgment, arguing that the issues controlling
dischargeability under § 523(a) were actually litigated in the
state court proceeding. Robinson claimed that the state court
judgment against Horton was excepted from discharge under §
4
523(a)(2)(A),5 § 523(a)(4)6 or § 523(a)(6).7
The bankruptcy court issued an oral ruling granting Robinson's
summary judgment motion. In the bankruptcy court's view, the state
court judgment that Horton acted "willfully and maliciously or with
conscious indifference" to Robinson's rights in Seville Financial
collaterally estopped Horton from contesting the factual basis for
excepting the judgment debt under § 523(a)(6).8 Looking behind the
judgment and the jury's findings, the bankruptcy court stated that
Horton "knowingly and intentionally" deprived Robinson of his share
of Seville Financial profits "without just cause or excuse."
Subsequently, the bankruptcy court denied Horton's motion for
reconsideration of the summary judgment ruling and entered a
judgment providing that the state court judgment would be excepted
from discharge in Horton's bankruptcy. Horton appealed to the
district court. See 28 U.S.C. § 158(a). The district court
5
Excepting from discharge any debt "for money, property,
services, or an extension , renewal, refinancing of credit, to the
extent obtained by false pretenses, a false representation, or
actual fraud, other than a statement respecting the debtor's or an
insider's financial condition."
6
Excepting from discharge any debt "for fraud or defalcation
while acting in a fiduciary capacity, embezzlement, or larceny."
7
Excepting from discharge any debt "for willful or malicious
injury by the debtor to another entity or to the property of
another entity."
8
The bankruptcy court rejected Robinson's § 523(a)(2)(A)
claim, finding that the record did "not support a finding that
Horton entered the agreement with the intent to deceive Horton."
The bankruptcy court also rejected Robinson's § 523(a)(4) claim,
holding that notwithstanding the jury's finding that Horton and
Robinson had a fiduciary relationship under state law, there was no
fiduciary relationship under the more stringent federal standards
governing § 523(a)(6).
5
affirmed, and Horton appealed to this court. Jurisdiction is proper
pursuant to 28 U.S.C. § 158(c).
II. STANDARD OF REVIEW
In its summary judgment order, the bankruptcy court ruled that
Horton's judgment-debt was non-dischargeable, pursuant to §
523(a)(6). The bankruptcy court applied the doctrine of collateral
estoppel, or issue preclusion, to estop Horton from relitigating
whether the judgment-debt was the result of Horton's own willful
and malicious conduct, which caused injury to Robinson.9 The
district court affirmed that ruling. The Court's review is de
novo. In re Garner, 56 F.3d 677, 679 (5th Cir. 1995). The
decision will be affirmed if there are no genuine issues of fact as
to the required elements of collateral estoppel, and Robinson is
entitled to judgment as a matter of law.
III. DISCUSSION
Horton argues that the bankruptcy court's application of
collateral estoppel was inappropriate for three reasons. First,
Horton argues that the issue presented in the state court action
was not identical to the issue presented in the adversary
proceeding because § 523(a)(6) provides that willful and malicious
conduct is excepted from discharge, while the state court jury
instructions allowed a finding of liability based upon the lesser
9
Robinson argues briefly that the bankruptcy court made an
independent finding that Horton's conduct was willful and
malicious, which does not require reliance on the doctrine of
collateral estoppel. Robinson's own motion for summary judgment
and the relevant orders belie his contention. In addition, such a
fact finding would have been inappropriate on summary judgment in
the face of conflicting evidence.
6
legal standard of conscious indifference. Next, Horton argues
that, notwithstanding the jury's express finding and the Texas
Court of Appeals discussion in its decision affirming the trial
court judgment, the liability imposed on him in state court was
actually based on breach of contract, rather than breach of a
fiduciary duty owed to Robinson. Therefore, the jury's finding
that he had breached his fiduciary duty and maliciously conspired
with Griggs to do so, which is asserted in this action as
collateral estoppel, was not an essential part of the state court's
judgment. Finally, Horton argues that the state trial court's
submission of only one general damage issue makes it impossible to
determine what percentage of the total damages were attributable to
each theory upon which liability was found.10
Horton also argues that even if the judgment-debt was non-
dischargeable to the extent of actual damages, the state court's
award of punitive damages and attorneys’ fees should not have been
excepted from discharge.
A. Collateral Estoppel
Collateral estoppel may be invoked in § 523(a) discharge
exception proceedings, although the bankruptcy court retains
exclusive jurisdiction to determine the ultimate question of
dischargeability under bankruptcy law, based upon the evidence
10
Horton also argues that the court erred in applying §
523(a)(6), and instead should have used § 523(a)(4), which excepts
from discharge debts for “fraud or defalcation while acting in a
fiduciary capacity.” Horton’s argument is without merit. As we
held in In re Stokes, 995 F.2d 76, 77 (5th Cir. 1993), the same
conduct can give rise to causes of action under multiple sections.
7
before the bankruptcy court. Grogan v. Garner, 111 S. Ct. 654, 658
n.11 (1991) ("We now clarify that collateral estoppel principles do
indeed apply in discharge exception proceedings pursuant to §
523(a)"); Garner, 56 F.3d at 681; In re Foreman, 906 F.2d 123, 126
(5th Cir. 1990). Pursuant to the full faith and credit statute, 28
U.S.C. § 1738, we give Robinson's prior state court judgment the
same preclusive effect that it would have in a Texas state court.
Garner, 56 F.3d at 679. Texas' version of collateral estoppel bars
relitigation of (1) identical issues of fact or law; (2) that were
actually litigated; and (3) essential to the judgment in the prior
suit. Van Dyke v. Boswell O'Toole, Davis & Pickering, 697 S.W.2d
381 (Tex. 1985); see also Garner, 56 F.3d at 679-80 (quoting
Bonniwell v. Beech Aircraft Corp., 663 S.W.2d 816, 818 (Tex.
1984)).
1. Identical Issues
Section 523(a)(6) of the Bankruptcy Code excepts from
discharge any 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). "Willful and malicious," under § 523(a), has been
interpreted to mean "intentionally, and without just cause."
Garner, 56 F.3d at 681.
The state jury charge first asked whether Horton violated his
fiduciary duties to Glen Robinson and whether that violation
proximately caused damages to Glen Robinson. Next, in Question 9,
the jury was asked: "Was such violation done willfully and
maliciously or in conscious indifference to Robinson's rights, if
8
any, in Seville Financial, Inc.?" Immediately preceding Question
9, the jury was instructed that "[m]alice means the intentional
doing of a wrongful act without just cause or excuse or acting with
such entire want of care as would raise the belief that the act or
omission complained of was the result of conscious indifference to
the rights or welfare of the person to be affected by it."
Horton argues that because the jury charge allowed a finding
of liability on a showing of conscious indifference, the state
court judgment can not be asserted as collateral estoppel on the
issue of whether he acted "willfully and maliciously" for the
purposes of § 523(a)(6). Horton maintains that, under Texas law,
conscious indifference is functionally equivalent to a finding of
reckless disregard or gross negligence, citing Williams v. Steeves
Indust., Inc., 678 S.W.2d 205, 211 (Tex. App.--Austin 1984), aff’d,
699 S.W.2d 570 (Tex. 1985). Congress expressly rejected the
reckless disregard standard for excepting debt from discharge under
§ 523(a)(6). H.R. Rep. No. 95-595, 95th Cong., 1st Sess. 365
(1977); S. Rep. No. 95-989, 95th Cong., 2d Sess. 79 (1978), 1978
U.S.C.C.A.N. 5787, 6320.
However, the Texas Court of Appeals held that "[a]ll of the
evidence shows that Horton acted willfully and maliciously and in
total disregard for Robinson's rights." Horton v. Robinson, 776
S.W.2d 260, 265-66 (Tex. App.--El Paso 1989, no writ). In
discussing Horton's conduct, the appellate court also stated that
"legal malice exists when wrongful conduct is intentional and
without just cause or excuse," and that, "a person who
9
intentionally misrepresents facts for the purpose of injuring
another is guilty of wanton and malicious conduct". Id. The Court
concluded that the evidence was essentially uncontradicted that
Horton intentionally cut Robinson out for the purpose of obtaining
an additional benefit for himself. Id. at 264 ("the record is
devoid of any proof that the three were paid equally) and id. at
267 ("the one with a fiduciary duty intended to gain an additional
benefit for himself").
There was never any question whether Horton’s and Grigg’s
conduct was intentional. There are no allegations that they merely
forgot to pay Robinson or were unaware of his claims. Therefore,
Horton’s argument on this point is unavailing.
2. State Court Finding Essential to Judgment
Horton maintains that the state court's finding that Horton
willfully and maliciously breached his fiduciary duties to Robinson
was not essential to the state court judgment because the jury's
separate finding of liability on breach of contract could have
independently supported the judgment.11 Citing the Restatement
(Second) of Judgments § 27, Comment i (1981), Horton argues that
decisions based on multiple findings that are independently
sufficient to support the judgment should not be used to preclude
relitigation in a subsequent case which involves only one of the
11
Actually, Horton frames the issue as whether the finding was
a "critical and necessary" part of the state court's judgment.
"Critical and necessary" has been used primarily when applying the
federal court formulation of the doctrine of collateral estoppel.
As discussed above, the preclusive effect of the prior judgment is
measured by Texas law. The Texas formulation usually employs the
term "essential,” rather than "critical or necessary."
10
independently sufficient grounds.
Horton’s reliance on comment i is misplaced, however, because
it concerns only judgments that are not appealed. Comment o makes
clear that:
If the judgment of the court of first instance was
based on a determination of two issues, either of
which standing independently would be sufficient to
support the result, and the appellate court upholds
both of these determinations as sufficient, and
accordingly affirms the judgment, the judgment is
conclusive as to both determinations. In contrast
to the case discussed in Comment I, the losing
party has here obtained an appellate decision on
the issue, and thus the balance weighs in favor of
preclusion.
RESTATEMENT (SECOND) OF JUDGMENTS § 27, Comment o (1981).12 Horton's
liability for breach of fiduciary duty was discussed at length in
the Texas Court of Appeals decision. Therefore, collateral
estoppel applies.
3. Single Damage Issue
Horton argues that the state court's submission of a single
damage issue makes it impossible to allocate damages between the
different theories of liability submitted to the jury. Horton's
liability for each theory was premised upon exactly the same
conduct, as well as the same injury. Therefore, the full amount of
damages could be attributed to both theories and no allocation is
possible or required. Thus, collateral estoppel applies.
B. Punitive Damages and Attorneys’ Fees
Horton contends that the district court erred in finding the
12
Texas follows § 27 of the Restatement (Second) of Judgments.
Eagle Properties, Ltd. v. Scharbauer, 807 S.W.2d 714, 722 (Tex.
1990).
11
punitive damages non-dischargeable. He argues that punitives are
dischargeable. We disagree. Punitive damages based on willful and
malicious injury are non-dischargeable under § 523(a)(6). In re
Stokes, 150 B.R. 388, 391 (W.D. Tex. 1992), aff’d. 995 F.2d 76, 77
(5th Cir. 1993) (“We affirm, essentially for the reason stated, and
the analysis made, by the district court.”).
Attorneys’ fees are non-dischargeable under § 523 when they
"stem from the same basis" as the non-dischargeable debt. The
attorneys’ fees do not stem from the same basis as the debt in this
case because the exception to dischargeability is sought on the
basis of Horton's liability on the breach of fiduciary duty claim,
while the Texas Court of Appeals affirmed the award of attorneys’
fees on the basis of TEX. CIV. PRAC. & REM. CODE 38.001, which allows
attorneys’ fees on a claim for breach of contract. Under Texas
law, attorneys’ fees are not recoverable in tort or contract,
unless provided for by contract or statute. Melson v. Stemma
Exploration & Prod. Co., 801 S.W.2d 601, 603 (Tex. App.--Dallas
1990, no writ). Because the state court could not have awarded
attorneys’ fees on the basis of the breach of fiduciary duty claim,
the damages are dischargeable.
IV. CONCLUSION
For the foregoing reasons, the judgment is affirmed in part
and reversed in part. The judgment finding non-dischargeable the
actual and punitive damages is AFFIRMED. The judgment finding the
attorneys’ fees non-dischargeable is REVERSED and the case is
REMANDED for further proceedings consistent with this opinion.
12