ROBERT D. BERGER, Bankruptcy Judge.
Plaintiff IBD, Inc., and Defendant/Debtor Thomas Scott Jenkins both seek summary judgment in this proceeding to determine the dischargeability of a
Debtor filed for bankruptcy on June 21, 2010. Prior to filing, Debtor and IBD litigated in state court over the demise of Debtor's former employer, IBD. IBD successfully sued Debtor for conversion of IBD's property and breach of fiduciary duty. The judgment includes an award for punitive damages. Debtor paid IBD approximately $415,000 after losing a state court appeal. Debtor owed IBD approximately $575,000 as of the petition date.
IBD developed computer software for the agricultural industry. Debtor was IBD's chief executive officer, a shareholder, and a member of the board of directors. IBD provided services to an estimated 40 customers, including customer website hosting.
In 2001, IBD began to experience financial difficulties. Debtor, as IBD's CEO, was charged with finding new investors or purchasers for IBD's assets. However, Debtor and other IBD employees began to discuss forming a new company to serve IBD's customers. Debtor resigned from IBD on September 28, 2001. Debtor did not disclose his plans to form a new company (named EBS) to IBD's remaining board member.
In October 2001, former IBD employees, at Debtor's direction, copied IBD servers and transferred the information to EBS's servers. They then erased IBD's servers. EBS did not pay IBD for the software. EBS informed IBD customers EBS would service their contracts. Some IBD customers opted to terminate their contracts and paid EBS the IBD termination fee. EBS continued to serve most of the customers previously served by IBD. EBS represented to IBD customers EBS was the same company operating under a new name. EBS did not assume or pay any of IBD's debts.
By the time the remaining IBD board member realized Debtor had started EBS, it was too late to salvage IBD's assets for IBD's creditors. IBD filed the state court suit against both Debtor and EBS in 2004 which culminated in a jury trial in 2006. The jury found against EBS and Debtor, jointly and severally, for conversion and awarded IBD $508,288 in damages. The jury also awarded IBD $400,000 in damages against Debtor for breach of fiduciary duty. The jury found punitive damages were appropriate because Debtor acted in a willful, fraudulent, or malicious manner. The trial court awarded IBD $162,623 in punitive damages. The appellate court upheld the judgments.
This is a core proceeding over which this Court has jurisdiction pursuant to 28 U.S.C. § 157(b) and 1334.
Summary judgment is appropriate when a moving party illustrates there is no genuine issue of material fact, and the moving party is entitled to judgment as a matter of law. The court should construe all required inferences in favor of the non-moving party. Only when a reasonable person could not differ as to the import of the proffered evidence is summary judgment proper. The moving party carries the burden to establish that he or she is entitled to summary judgment.
Collateral estoppel applies in § 523 actions to determine the dischargeability
Debtor argues IBD's statement of uncontroverted facts, which relies on the facts recounted in the Kansas Court of Appeals unpublished opinion, does not comply with D. Kan. LBR 7056.1. The judgment relied on by IBD is final, was affirmed by the Kansas Court of Appeals, and is entitled to full faith and credit.
An exception to discharge is narrowly construed with deference given to the fresh-start policy of the Bankruptcy Code.
A claim under § 523(a)(4) requires fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny. Fiduciary is narrowly defined to except a debt from discharge.
While federal law controls, state law is also important to the determination of a fiduciary relationship.
Debtor moves for judgment arguing a corporate officer cannot be found to act in a fiduciary capacity under § 523(a)(4) without an express or technical trust. Debtor's motion is denied because while a corporate officer may not always stand in a fiduciary capacity in relation to a corporate creditor or an individual shareholder, the corporate officer is the steward of the corporation's property and stands in a fiduciary capacity when the corporation itself objects to the officer's mishandling of corporate property. IBD prevails on this issue as a matter of law.
IBD moves for summary judgment based on its state court judgment. Debtor argues the state court breach of fiduciary duty claim is not identical to a § 523(a)(4) claim. However, if the state court determined factual issues using § 523(a)(4) standards in the course of adjudicating the state-law question, then collateral estoppel bars relitigation of those facts.
The jury issued a general verdict without specific findings of fact. The Kansas Court of Appeals reviewed the trial court record for sufficient evidence to support the jury verdict and found the following. Breach of fiduciary duty is a tort and an injured party may recover such damages as will fairly and justly compensate the
A review of the appellate court decision leaves nothing for this Court to determine under § 523(a)(4). The state courts have already determined Debtor's misrepresentations caused IBD's revenues to be misdirected to EBS. Under these facts, misrepresentation is fraud. Debtor stood in a fiduciary capacity with regard to IBD's revenues by virtue of his position of control over IBD's assets. The appellate court found the evidence supported the conclusion Debtor's actions amounted to an intentional tort compensable by an award against him, in his capacity as IBD's fiduciary, in an amount equal to one year of IBD revenues misdirected to EBS. IBD prevails as a matter of law.
In order to establish a debt is nondischargeable under § 523(a)(6), a plaintiff must prove debtor intended to cause the injury suffered by the plaintiff through his actions. The willful and malicious standard is stringent, and debts arising from recklessness or negligence fail to qualify for exception. Willful requires a deliberate or intentional injury, not merely a deliberate or intentional act that results in an injury. Malice requires proof the debtor knew or was substantially certain his actions would cause harm to the creditor.
Debtor argues the state court did not determine his conduct was willful and malicious. Debtor notes the punitive damages jury instruction was written in the disjunctive, allowing the jury to find punitive damages proper if they found Debtor acted either in a willful, fraudulent, or malicious manner. Regardless, all three standards except a debt from discharge under § 523(a).
The state courts determined all elements necessary to sustain a § 523(a)(6)
For these reasons, judgment shall be entered in favor of Plaintiff IBD, Inc., and against Debtor Scott Thomas Jenkins. The debt is not discharged pursuant to 11 U.S.C. §§ 523(a)(4) and (a)(6).
Plaintiff's motion for summary judgment is GRANTED.
Debtor's motion for partial summary judgment is DENIED.