Rapid Settlements Ltd v. Scott Shcolnik , 670 F.3d 624 ( 2012 )

Case: 10-20800 Document: 00511752901 Page: 1 Date Filed: 02/08/2012
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit
FILED
February 8, 2012
No. 10-20800 Lyle W. Cayce
Clerk
In the Matter of: SCOTT D. SHCOLNIK,
Debtor
_________________________
SCOTT D. SHCOLNIK,
Appellee
v.
RAPID SETTLEMENTS LTD;
CAPSTONE ASSOCIATED SERVICES, LIMITED,
Appellants
Appeal from the United States District Court
for the Southern District of Texas
Before JONES, Chief Judge, and HAYNES, Circuit Judge, and CRONE, District
Judge.*
EDITH H. JONES, Chief Judge:
The debtor, a former company officer, allegedly attempted to obtain one
million dollars by falsely claiming an ownership interest in the company and
threatening public exposure of alleged illegal activity. After the debtor lost an
*
District Judge of the Eastern District of Texas, sitting by designation.
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arbitration proceeding, he filed for bankruptcy. The question here is whether
the company’s attorneys’ fees for the arbitration represent a nondischargeable
debt under 11 U.S.C. § 523(a)(4) or (a)(6). We reverse and remand the summary
judgment rendered against the creditors. The debt may have arisen for willful
and malicious injury and may therefore be excepted from discharge by
§ 523(a)(6).
Background
Scott Shcolnik, the Appellee/Debtor, was an employee of Capstone
Associated Services (“Capstone”) and Rapid Settlements Ltd. (“Rapid”), creditors
who describe themselves as “alternative risk planning” companies. Shcolnik
became Capstone’s vice-president and Rapid’s president. In 2004, he was offered
an ownership interest in Rapid, but according to Appellants, he rejected the
offer. Shcolnik nevertheless began to claim that he was a partial owner of
Rapid, and he was fired. According to Appellants, he absconded with various
documents from their offices. Shcolnik then began threatening to disclose
alleged criminal and regulatory violations by Rapid and Capstone if they did not
“buy-out” his “ownership interests.” In emails, he referred to a “doomsday plan”
which would be launched if Stewart Feldman, the primary owner of Rapid and
Capstone, did not “properly compensate” him for his “ownership interests . . .
which appear to be worth in excess of $1,000,000.” He threatened a “massive
series of legal attacks . . . which will likely leave you disbarred, broke,
professionally disgraced, and rotting in a prison cell,” and expressed his hope
that Feldman would be the victim of prison rape.
Rapid and Capstone (along with other entities) initiated an arbitration
proceeding seeking a declaratory judgment that Shcolnik did not own an interest
in any of the entities. The arbitrator held in their favor and awarded $50,000
in attorneys’ fees to Rapid, Capstone, and the other entities. A state court
confirmed the award.
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Four days after the state court announced it would confirm the arbitration
award, Shcolnik filed for Chapter 7 bankruptcy. Rapid and Capstone filed a
complaint alleging that the $50,000 attorneys’ fee award was nondischargable
under, inter alia, 11 U.S.C. §§ 523(a)(4) and (a)(6), which except from discharge
debts resulting from certain wrongful conduct. Both parties sought summary
judgment on the non-dischargeability claims; the bankruptcy court granted the
Debtor’s motion without issuing an opinion.1 Rapid and Capstone appealed to
the district court, which affirmed the bankruptcy court’s rulings. Appellants
here contest only the rulings on the § 523 issues.
We address each in turn.
Standard of Review
This court reviews the bankruptcy court’s grant of summary judgment de
novo, using the same standard employed by the district court. In re Ark-La-Tex
Timber Co., Inc., 482 F.3d 319, 328 (5th Cir. 2007). We affirm summary
judgment “if the pleadings, depositions, answers to interrogatories, and
admissions on file, together with the affidavits, if any, show that there is no
genuine issue as to any material fact and that the moving party is entitled to a
judgment as a matter of law. Id. at 328 (citing FED. R. CIV. P. 56(c)). Facts are
in dispute if a jury could find in favor of the nonmovant and are material if they
might affect the outcome of the suit under the law. Id. at 329.
Discussion
A.
11 U.S.C. § 523(a)(4) provides that a discharge does not discharge an
individual debtor from any debt “for fraud or defalcation while acting in a
fiduciary capacity, embezzlement, or larceny.” 11 U.S.C. §523(a)(4). Appellants
allege that Debtor engaged in fraud or defalcation while acting in a fiduciary
1
The bankruptcy court held a trial on the remaining issues, which are not relevant to
this appeal, then ruled in Debtor’s favor on those issues.
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capacity. The district court concluded that Appellants failed to raise a genuine
issue of material fact as to whether the Debtor acted in a fiduciary capacity for
the purposes of §523(a)(4).2
Under § 523(a)(4), the term “fiduciary” is distinct from the concept of a
“fiduciary” under the common law; it is “limited to instances involving express
or technical trusts. The purported trustee’s duties must . . . arise independent
of any contractual obligation.” Matter of Tran, 151 F.3d 339, 342 (5th Cir. 1998)
(citations omitted). See also In re Hickman, 260 F.3d 400, 404-05 (5th Cir. 2001).
However, state law may create a fiduciary relationship whose breach leads to
nondischargeability under § 523(a)(4). See In re Gupta, 394 F.3d 347, 350 (5th
Cir. 2004) (“This court has, on the other hand, not hesitated to conclude that
debts arising from misappropriation by persons serving in a traditional, pre-
existing fiduciary capacity, as understood by state law principles, are non-
dischargeable.”) (collecting cases). More precisely, we held a debt
nondischargeable under § 523(a)(4) where the debtor, who did not deny that he
was a fiduciary under the provision, was an officer of the creditor. See Matter
of Moreno, 892 F.2d 417, 421 (5th Cir. 1990).
Even if a corporate officer may be a fiduciary for purposes of § 523(a)(4),
the debt at issue here is not a debt “for fraud or defalcation while acting in a
fiduciary capacity.” 11 U.S.C. § 523(a)(4) (emphasis added). Appellants argue
that Shcolnik violated his fiduciary duty by taking files belonging to them, which
constitutes “defalcation.” It is true that defalcation does not require fraud or
embezzlement, but only willful neglect of duty. Schwager v. Fallas, 121 F.3d
2In one paragraph, Appellants now additionally contend that Shcolnik’s purloining of
company records also violated § 523(a)(4). They made no such argument at the district court,
which properly deemed any arguments regarding “embezzlement” and “larceny” waived. This
court does not consider arguments an appellant failed to raise in the district court absent
exceptional circumstances, even if those issues were raised in the bankruptcy court. In re
Bradley, 501 F.3d 421, 433 (5th Cir. 2007) (collecting cases).
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177, 182 (5th Cir. 1997). But the debt here is not based on Shcolnik’s absconding
with the documents; nor is it contended that Shcolnik owes Appellants the
documents or their monetary equivalent. The only debt at issue here is the
$50,000 in attorneys’ fees awarded in the arbitration proceeding, which resolved
Shcolnik’s allegations that he owned an interest in the company. Appellants
presumably would have pursued arbitration irrespective of Shcolnik’s threats
relating to the documents. (“Due to Shcolnik’s false claims of ownership . . .
these entities were forced to institute an arbitration proceeding against
Shcolnik. . . . Rapid and Capstone had actually incurred approximately $70,000
in attorney’s fees and costs in their efforts to disavow Shcolnik’s falsely claimed
ownership.” In re Shcolnik, Ch. 7 Case No. 06-33328, Adv. No. 07-3124, slip op.
at ¶¶ 10-11 (Bankr. S.D. Tex. Mar. 29, 2008) (emphasis added)). On this basis,
we affirm the district and bankruptcy courts’ determination that Appellants
failed to create a genuine issue of material fact regarding their § 523(a)(4) claim.
B.
Appellants also seek to exempt the $50,000 award as 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). They argue that Shcolnik used the stolen
documents, threats of criminal reports, and claims of ownership in the company
in tandem as a scheme to extract $1,000,000 from them in the guise of a “buyout”
of his pretended “ownership interests.”3
The district court held that Appellants could not establish a genuine issue
of material fact as to willfulness, because they did not actually pay Shcolnik the
million dollars he demanded. The court interpreted the Supreme Court to
3
In addition to the arbitration action regarding Shcolnik’s purported ownership
interest, Appellants pursued injunctive relief regarding documents he claimed to possess and
his threats to disclose secrets. They obtained temporary restraining orders preventing
Shcolnik from disclosing trade secrets or confidential information. The state court found that
Shcolnik had “threatened a wide range of unlawful and improper actions.”
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require that a debtor intend “the alleged injury itself” in order to fulfill the
willfulness component of 11 U.S.C. § 523(a)(6). Kawaauhau v. Geiger, 523 U.S.
57, 118 S. Ct. 974 (1988). Kawaauhau held that a willful injury, in this context,
is a “deliberate or intentional injury, not merely a deliberate or intentional act
that leads to injury.” 533 U.S. at 61, 118 S. Ct. at 977. Appellants have neither
alleged nor offered evidence that Shcolnik intended to inflict litigation costs on
them, which is the debt for which they urge nondischargeability.
Unfortunately, the district court failed to consult this court’s opinions
interpreting Kawaauhau. First, we have held that an injury is “ ‘willful and
malicious’ where there is either an objective substantial certainty of harm or a
subjective motive to cause harm.” In re Miller, 156 F.3d 598, 606 (5th Cir. 1998);
In re Williams, 337 F.3d 504, 508-09 (5th Cir. 2003). Second, we noted that “it
would seem peculiar to deem an action causing injury not ‘willful’ when the
tortfeasor’s action was in fact motivated by a desire to cause injury.” Miller,
156 F.3d at 604. In an opinion nearly contemporaneous with Miller, this court
stated that “ ‘the debtor must have intended the actual injury that resulted. ’ ”
State of Texas v. Walker, 142 F.3d 813, 823 (5th Cir. 1998) (quoting In re
Delaney, 97 F.3d 800, 802 (5th Cir. 1996)). This statement, however, arose in the
course of distinguishing willful and malicious injury, as understood in
Kawaauhau, from claims for breach of contract or conversion, neither of which
“necessarily involves an intentional injury.” Id.More recently, this court held that a debt for sanctions imposed because
of the debtors’ litigation tactics arose from willful and malicious injury under
§ 523(a)(6). In re Keaty, 397 F.3d 264 (5th Cir. 2005). The debtors’ intended
injury was “harassment” through baseless litigation, but their actions were
“substantially certain to . . . cause . . . financial injury.” Id. at 274. The
relationship between the debtor’s motivation and the injury in this case is
slightly different from that in Keaty: Shcolnik allegedly engaged in a course of
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contumacious conduct that required the Appellants to file meritorious litigation
against him, resulting in the instant fee award; whereas in Keaty, the debtors
pursued the burdensome suit that provoked a sanctions award against them.
This is a distinction without a difference, however. It would make no sense for
the infliction of expense in litigating a meritless legal claim to constitute willful
and malicious injury to the creditor, as in Keaty, while denying the same
treatment here to the infliction of expense by a debtor’s attempt to leverage an
equally baseless claim through a campaign of coercion. That Texas law may
allow the arbitrator to assess attorneys’ fees in favor of a party without
specifically finding a willful and malicious injury is not conclusive.4 If the facts
are as Appellants allege, Shcolnik either had the motive to inflict harm or acted
so as to create “an objective substantial certainty of harm” to the Appellants. Id.Viewed in light of our precedents, there is a genuine, material fact issue
for trial. Shcolnik’s behavior resulted in willful and malicious injury if his
claims of ownership were made in bad faith as a pretense to extract money from
the Appellants. See Keaty, 397 F.3d at 273 (willful and malicious injury to
intentionally “pursu[e] meritless litigation for the purpose of harassment[.]”).
The litigation costs he forced upon them are different from the million dollar
claim he made against them, but they were neither attenuated nor
unforeseeable from his alleged intentionally injurious conduct.
4
The arbitrator awarded the $50,000 in attorneys’ fees which it found to be “reasonable
and necessary and appropriate pursuant to TEX. CIV. PROC. & REM. CODE ANN. § 37.001, et
seq.” Section 37.009 provides for “costs and reasonable and necessary attorney’s fees as are
equitable and just.” While the arbitrator made no specific finding of the wrongfulness of
Shcolnik’s behavior, or of whether his claims of ownership were made in bad faith, this is not
dispositive evidence that his claims were made in good faith. Such findings were not required
for an award of attorneys’ fees under § 37.009. We note that the arbitrator did specifically
find, however, that Shcolnik had never been part owner of either Appellant under any of the
theories he pled.
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CONCLUSION
For the foregoing reasons, we reverse and remand this case for trial on the
merits under 11 U.S.C. § 523(a)(6).
REVERSED and REMANDED.
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HAYNES, Circuit Judge, concurring and dissenting:
I respectfully dissent from the decision to reverse and remand.5 The effect
of the majority opinion is to transform all litigation precipitated by aggressive
demand letters into potential “malicious” acts for purposes of non-
dischargeability. Additionally, the effect of the majority opinion is to allow an
end-run around an arbitration proceeding in which both parties willingly
participated. Finally, the majority opinion glosses over the lack of connection
between the allegedly malicious acts and the arbitration award of attorneys’ fees
now sought to be rendered non-dischargeable. Because the bankruptcy and
district courts reached the correct result under our existing precedents, I would
affirm.
Non-dischargeability is the exception, not the rule. Exceptions to the
“fresh start” for debtors are narrowly construed, with doubts resolved in favor
of the debtors. See Gleason v. Thaw, 236 U.S. 558, 562 (1915) (“In view of the
well-known purposes of the bankrupt[cy] law, exceptions to the operation of a
discharge thereunder should be confined to those plainly expressed[.]”); State v.
Soileau (In re Soileau), 488 F.3d 302, 311 (5th Cir. 2007); Tex. Lottery Comm’n
v. Tran (In re Tran), 151 F.3d 339, 342 (5th Cir. 1998); Hudson v. Raggio &
Raggio, Inc. (In re Hudson), 107 F.3d 355, 356 (5th Cir. 1997) (“[E]xceptions to
discharge must be strictly construed against a creditor and liberally construed
in favor of a debtor so that the debtor may be afforded a fresh start.” (citation
omitted)); Citizens Bank & Trust Co. v. Case (In re Case), 937 F.2d 1014, 1024
(5th Cir. 1991) (“Any exception to the general discharge of a debtor’s debts is
5
I agree with the majority opinion’s analysis of the § 523(a)(4) argument and thus
concur in Section A. I dissent from the holding of the majority opinion and the underlying
reasoning in Section B with respect to § 523(a)(6).
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strictly governed by the Code and construed narrowly in favor of the debtor and
against the creditor requesting the determination.” (citation omitted)).
Debtors often come to bankruptcy with judgments against them. It is
certainly not an unusual occurrence for parties to make claims in litigation or
arbitration that do not carry the day. Nonetheless, the majority opinion
transforms the ordinary litigation loser into one who has caused “willful and
malicious injury” to another. It does so, apparently, because of the colorful
language used by Shcolnik, without the assistance of legal counsel, in his e-
mailed demand letters that preceded litigation which in turn was followed by the
arbitration proceeding in question. So, I start there.
No doubt the e-mail letters Shcolnik wrote are insulting and demeaning.6
I would not write such a document nor countenance another to do so. However,
we are not here to teach a course in professionalism or civility. The majority
opinion transforms incivility into “a campaign of coercion” or “contumacious
conduct” by ipse dixit. The question arises – were these “nasty demand letters,”
in fact, “coercive” or “contumacious?” We do not have a case setting out a test
for where the quintessential demand letter ends and the parade of horribles
suggested by the majority opinion begins. Wherever that line is, it is not crossed
here, and I disagree with transforming the regrettable unpleasantness and
aggressiveness that often attend the prelude to litigation into “coercive” or
“contumacious” conduct so easily. Shcolnick’s e-mail letters, however
reprehensible they undeniably are, do not constitute either.
In addition, I am concerned that the majority opinion fails to recognize the
strong federal policy favoring arbitration. See Pers. Sec. & Safety Sys. Inc. v.
6
For a bit of context, it is worth noting that there is plenty of nastiness to go around
in this case. For example, during the course of Shcolnik’s bankruptcy proceeding, Shcolnik
had to obtain the return of the engagement ring he had given to his fiancée. When the
engagement ring was put up for sale by the bankruptcy trustee, Appellant Capstone outbid
a jeweler to buy the engagement ring.
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Motorola Inc., 297 F.3d 388, 392 (5th Cir. 2002) (citation omitted). The
arbitrator did not award attorneys’ fees for wrongdoing, malice, bad faith, or
even “prevailing party” status, but simply as “equitable and just.” Indeed, the
arbitrator did not even award all the fees Appellants sought – shaving $20,000
off of the $70,000 they requested. The Texas Uniform Declaratory Judgments
Act, TEX. CIV. PRAC. & REM. CODE § 37.001 et seq., sets a very low threshold for
attorneys’ fees awards. Prevailing party status is not required, and the matter
is left to the discretion of the court (here, the arbitrator). Id. § 37.009; Boerschig
v. Sw. Holdings, Inc., 322 S.W.3d 752, 767-68 (Tex. App.—El Paso 2010, no pet.)
(“[T]he award is not dependent on a finding that a party prevailed in the action.”
(citations omitted)); McCarthy Bros. v. Cont’l Lloyds Ins. Co., 7 S.W.3d 725, 731
(Tex. App.—Austin 1999, no pet.).
This distinction is key when we consider the prior precedents of this court.
Raspanti v. Keaty (In re Keaty), 397 F.3d 264 (5th Cir. 2005), upon which the
majority opinion rests, did not involve a garden-variety award of attorneys’ fees.
Instead, it involved sanctions against attorneys. In Keaty, the state appellate
court assessed sanctions, making particular findings that “the Keatys knew their
claims had prescribed, that their answers to Raspanti’s request for admissions
were disingenuous, and that the proceedings by the Keatys were knowingly
without foundation, crafted for the purposes of harassment, and designed to
prolong the proceedings deliberately and needlessly.” Id. at 268 (citing Keaty v.
Raspanti, 781 So. 2d 607, 612 (La. Ct. App. 2001)). Accordingly, the state
appellate court found the Keatys’ conduct sanctionable under Louisiana law
governing the effect of signing pleadings for an improper purpose. Id.Thus, in Keaty we gave effect to the state court ruling rather than turning
it into something it was not.7 That distinction makes a difference. If we do not
7
In Keaty, Raspanti brought an adversary proceeding against the Keatys in bankruptcy
court seeking a determination that the state court sanctions award against the Keatys was not
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care what the prior tribunal (in Keaty, the state court, here, the arbitrator) found
or whether the attorneys’ fees were caused by the alleged coercive or
contumacious act, then we greatly broaden § 523(a)(6), contrary to congressional
intent that bankruptcy be a “fresh start.” See Local Loan Co. v. Hunt, 292 U.S.
234, 244-45 (1934) (“One of the primary purposes of the Bankruptcy Act is to
relieve the honest debtor from the weight of oppressive indebtedness, and permit
him to start afresh free from the obligations and responsibilities consequent
upon business misfortunes. . . . The various provisions of the Bankruptcy Act
were adopted in the light of that view and are to be construed when reasonably
possible in harmony with it so as to effectuate the general purpose and policy of
the act.” (internal quotation marks and citations omitted)).
The arbitration proceeding giving rise to the attorneys’ fees award was
limited to the resolution of issues surrounding the ownership/partnership
dispute. The arbitrator had before him all of the good, bad, and ugly of this ill-
fated business relationship. He ruled. He did not find coercion, contempt, fraud,
or any other of the allegedly bad acts. He found in a simple business dispute
that the Appellants should win and Shcolnik should lose. “All other relief of the
parties [was] denied.” Furthermore, although the arbitrator found for
Appellants on the ownership claims, he referenced the fact that they had held
Shcolnik out as a partner (calling those events “excusable mistakes”). Thus, far
dischargeable under § 523(a)(6). Id. Although the state court had made findings on the issue
of whether the debt arose from a willful and malicious injury as required under § 523(a)(6),
the bankruptcy court refused to give preclusive effect to the state court’s findings, on the
grounds that the issue had not been “actually litigated” with an evidentiary hearing regarding
the Keatys’ conduct at the state court level. Id. at 268-69. We found that the findings made
by the state court had preclusive effect on the § 523(a)(6) issue of non-dischargeability of the
debt from the sanctions award because, inter alia, (1) the state court had made clear and
specific findings that the Keatys had acted willfully and maliciously to injure the creditor, (2)
the Keatys’ “motive in filing the frivolous claim for attorney’s fees was to injure Raspanti (by
harassing him),” and (3) the Keatys’ “actions were substantially certain to injure Raspanti,
since deliberately and needlessly prolonging the proceedings would necessarily cause Raspanti
financial injury.” Id. at 273-74. Thus, in finding the sanctions award non-dischargeable, we
gave effect to the state court’s ruling. Id. at 273.
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from finding that Shcolnik’s claims were malicious, the arbitrator’s findings
show that the claims had some basis. That Shcolnik ultimately lost on his
ownership claims (even if he did not have the best of intentions in making those
claims) is not tantamount to “willful” or “malicious” injury unless all losing
litigation is “willful” or “malicious” injury. Certainly Congress could easily make
non-dischargeable attorneys’ fees awarded in litigation or arbitration, but the
fact that it has not done so speaks volumes.
Indeed, even if the e-mail letters were “coercive” or “contumacious” and
even if we ignore the lack of arbitration findings to support the majority opinion,
the undisputed facts show that any burden imposed on Appellants by the e-mail
letters was quickly removed – the purportedly wrongful documents were sent on
May 25 and 27, 2005. On May 27, 2005, the state district court granted a
temporary restraining order that was later extended and continued by
agreement throughout the litigation and arbitration, barring Shcolnik from
taking the actions Appellants claimed put them in immediate fear. It was not
until six months later that the matter was referred to the arbitration at issue
here, breaking any purported causal connection between the claimed wrongful
behavior and the fee award here at issue.
Moreover, the lack of causal connection is precisely why the arbitrator
made no specific finding of wrongfulness. Indeed, either the allegedly wrongful
acts caused the arbitration of the ownership/partnership dispute, in which case,
the arbitrator’s lack of a specific finding to that effect (and findings inconsistent
with that) is meaningful, or they did not, in which case, the alleged “campaign
of coercion” or “contumacious conduct” did not cause the attorneys’ fees award.
The majority opinion concludes that “Shcolnik’s behavior resulted in
willful and malicious injury if his claims of ownership were made in bad faith as
a pretense to extract money from the Appellants.” Maj. Op. at 7. The opinion
rests on a misconstruction of Keaty. Moreover, it is undeniable that the majority
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opinion’s conclusion is not supported by the record, the arbitrator’s decision, or,
indeed, the events that actually transpired below. As we gave effect to the
sanctions in Keaty, we should give effect to the arbitrator’s ruling here. The
attorneys’ fees awarded as equitable and just in the arbitration were for
resolution of the ownership/partnership dispute, not for anything else.
Given the foregoing and in light of the narrowness of exceptions to
discharge, we should not reach out to transform an arbitration award of
attorneys’ fees for the resolution of a mere business dispute into a non-
dischargeable debt for willful and malicious injury (or remand for the
bankruptcy court to do so). Applying our existing precedents, I would affirm.
Because the majority opinion extends our precedents too far, I respectfully
dissent.
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