This case involves an individual Chapter 13 debtor and his former employer. The bankruptcy court rendered summary judgment in favor of the debtor's former employer under Sections 523(a)(2)(A) and 523(a)(4) on the basis of the issue preclusive effect of an arbitral award. We vacate the bankruptcy court's judgment and remand.
Mehran Shahverdi, the debtor/Appellant ("Debtor") came to the United States from Iran on a student visa in 1984. As early as 1988, Debtor had done architectural design work for Daniel Elihu. The Elihu family owned a construction company, Amir Construction. Debtor testified
In 1997, Debtor received his Bachelor of Architecture from the University of Southern California, and became an American citizen.
Appellee WHA is an architecture firm that designs and supervises the construction of high-end custom homes. In approximately May 2000, WHA hired the Debtor as a "Job Captain." Debtor's job involved production and low level management activities. When WHA hired Debtor, the firm required him to sign the firm's Employee Handbook. The Employee Handbook contained articles that addressed the following: (1) conflicts of interest, secondary employment,
The Job Captain position required that Debtor work under a Project Manager's supervision while assisting in the production of construction drawings, coordinating with consultants, and developing the project's ultimate details. In order to facilitate this process, WHA employs a computer system that allows its employees to develop a full set of documents for use by all parties to a project, including consultants. Thus, employees such as Debtor would use the computer system to generate and then transmit parts of designs and drawings to various consultants. In order to send work documents to third parties, a Job Captain needed a supervisor's prior authorization.
WHA gave Debtor access to the firm's project design software, AutoCADD, and WHA's servers. Because Debtor had access to WHA's servers, Debtor also had access to WHA's company files, including its computer design library files ("Design Library"). The Design Library provided its users with a resource that: (1) could help identify for clients a variety of certain design styles and characteristics, (2) had books on a variety of styles of architecture, and (3) contained AutoCADD proprietary files, drawings, hard copy drawings, and designs from WHA's previous projects. WHA considers the Design Library to be an internal document that is not available to anyone outside the firm. Indeed, William Hablinski testified that the Design Library was a trade secret because its contents were not known to competitors, and would be of economic value to WHA's competitors were they known.
Among other projects,
One month after WHA hired Debtor in May 2000, Debtor contacted the Elihus seeking a profit sharing arrangement on any design projects the Elihus might send him. On January 1, 2001, one of the Elihus asked Debtor to submit a proposal to build the Marilyn Drive house. On March 1, 2001, Debtor submitted a proposal and was selected to do the design. In a letter to the Elihus, Debtor wrote, "I see this project as a 12,500 square foot high-end Tuscany Villa in Beverly Hills." Arbitration Award (Sept. 7, 2010) at 38. Over seven to eight months, Debtor spent approximately 850 hours on the Marilyn Drive house. Debtor testified that without access to the WHA library, he would have spent an additional 50 to 100 hours.
In April 2003, WHA became aware that Debtor was involved in another project. Apparently, Debtor's immediate supervisor, David Michael Hogan, along with another WHA employee, discovered the "Marilyn Way house" when they were on their way to showrooms in nearby Hollywood. Mr. Hogan testified that the Marilyn Way house was strikingly similar to that of the Unity Family Trust project. After subsequently obtaining a permitted set of drawings from the city of Beverly Hills, Mr. Hogan noted a number of similarities. Among them were: (1) the copyright statement which was identical to the WHA copyright statement; (2) the project used the same title sheet WHA uses; (3) the Unity Family Trust label which is unique to the Unity Family Trust; and (4) a reference to another WHA project that WHA included on the Sands project designs so builders could see the qualifications detail that WHA required. The Marilyn Way house featured a number of design elements that were essentially the same as used on the Sands project, in addition to design elements taken from other WHA projects. The Marilyn Way house drawings indicated that Debtor authored the project.
Following WHA's discovery of the Marilyn Way house, and the similarities it shared with the Unity Family Trust Project, WHA asked all of the employees to bring their personal laptop computers into work. WHA told its employees that they wanted to update their employees' computers. Debtor complied, and it was then that WHA searched his hard drive to find, among other things, the following items: (1) the same directory structure that the WHA firm used to organize its library, (2) job numbers that matched the WHA job numbers, (3) twenty to thirty projects that WHA had completed years earlier, and (4) certain design features of the Sands project. WHA also discovered time sheets on Debtor's hard drive indicating that Debtor was spending significant amounts of time on the Marilyn Way house along with other non-WHA projects. Indeed one of WHA's partners concluded that the "time sheets reflected that [Debtor was either] not sleeping or was superhuman."
Debtor admitted that he downloaded certain software and files to facilitate his working on WHA projects from his home. Apparently, WHA did allow its employees to do work at home with permission, but that would not justify the scope of projects Debtor had on his hard drive — Debtor had no prior association with most of them. Further, employees were not permitted to keep designs on their computers.
After concluding that Debtor had violated several of WHA's Employee Handbook policies, including those dealing with conflicts of interest, secondary employment, and confidentiality, WHA terminated him. William Hablinski testified that regardless of the fact that the Employee Handbook allowed an employee to opt for arbitration over litigation, Mr. Hablinski wanted to file a lawsuit against Debtor. Mr. Hablinski further testified that he wanted to go public with his claims against Debtor. Apparently, when Debtor's supervisors at WHA terminated him, one of WHA's partners reassured him that WHA was "going to keep it private and won't tell anyone if you want to look for a job." Arbitration Award (Sept. 7, 2010) at 28:15-16.
Following Debtor's termination, the police contacted him, though ultimately no criminal complaint was filed; WHA, however, filed a complaint with the California State Architectural Board; and the facts surrounding Debtor's termination were featured in the press.
On June 18, 2003, WHA filed a lawsuit against Debtor for tortious interference with contract, trespass to chattels, conversion, misappropriation of trade secrets, and negligent misrepresentation, among other claims, in the Los Angeles Superior Court (the "State Court Proceeding"). All of the participating parties were represented by counsel. On August 20, 2003, Debtor filed a motion to compel arbitration. On September 20, 2003, the State Court granted the motion, dismissing the State Court Proceeding with prejudice. On appeal, the California Court of Appeals ruled that notwithstanding the dismissal with prejudice, the State Court could later confirm any arbitration award issued from the private contractual arbitration.
The arbitration hearing commenced on December 16, 2008 (stayed later that same day due to Debtor's filing of bankruptcy) and continued for several sessions until final submission in late July 30, 2010.
Arbitration Award(Sept. 7, 2010) at 47:14-17.
Within the Arbitrator's discussion of damages, he pointed to several possible bases for WHA's damages. Those included the following:
Finally, the Arbitrator awarded damages as follows:
The Arbitrator then netted the offsetting awards, granting WHA a total award of $950,000. Finally, the Arbitrator added that he did "not intend to entertain any request for additional attorney's fees from either side...the Arbitrator requires submission of authority for the award of any additional fees."
On November 18, 2010, the California Superior Court granted WHA's petition to confirm the arbitration award against Debtor, and a Judgment issued in conformity with the arbitration award as follows:
California Superior Court Confirmation of Arbitration Award (Nov. 18, 2010) at 1-2.
No appeal was taken, and the time to appeal the state court Judgment against Debtor has passed.
On December 16, 2008, Debtor filed a Chapter 13 bankruptcy petition. On April 16, 2009, WHA filed an adversary complaint against Debtor seeking a judgment of nondischargeability under Sections 523(a)(2) and (a)(4). On May 4, 2009, the bankruptcy court granted WHA's motion for relief from the automatic stay to continue the Arbitration. Following the conclusion of the Arbitration proceedings, on March 19, 2011, WHA filed its Motion for Summary Judgment against Debtor based on WHA's Sections 523(a)(2) and (a)(4) claims.
On July 6, 2011, the bankruptcy court held a hearing on Appellant's Motion for Summary Judgment. During that hearing the bankruptcy court indicated that it was prepared to find that the Arbitration Award was issue preclusive as to Appellee's Section 523(a)(4) embezzlement claim. However, the bankruptcy court also had reservations about finding that the Arbitration Award was issue preclusive as to both the Appellee's Section 523(a)(2) fraud claim and the Arbitral Award of Damages.
The Section 523(a)(2) claim troubled the bankruptcy court because, as a matter of California law, fraud is a broad concept, whereas under Section 523(a)(2) fraud "is a very narrow, very clearly defined cause of action." Tr. of Oral Arg. (Nov. 18, 2010) at 8:19-22. The bankruptcy court emphasized that while fraud under Section 523(a)(2) requires a misrepresentation and then a reliance on that misrepresentation, the Arbitrator's findings did not appear to anywhere identify that Debtor actually represented to WHA that by signing the Employment Agreement, "I'm not going to take these secret designs but I'm really planning on doing it...."
In response, Debtor's counsel sought to distinguish the facts the Arbitrator found with respect to the elements of embezzlement under Section 523(a)(4) from those of fraud under Section 523(a)(2). He did this on the basis of the Arbitrator's lack of a finding that Debtor knowingly misrepresented his intentions respecting use of the Design Library when Debtor signed the Employment Agreement. The problem with the "ongoing misrepresentation" theory, he argued, was that such a theory failed to distinguish between Debtor's broken promise and Debtor's false promise:
(
The bankruptcy court determined that Debtor had knowingly engaged in deceptive conduct at the time he signed his employment agreement based on two facts: (1) at the time he signed his employment agreement, he had already been in contact with the Elihus with the hope of getting a contract to build a "high-end Tuscany villa,"
During the July 6, 2012, hearing on WHA's Motion for Summary Judgment, the bankruptcy court also indicated that it was having significant trouble finding that the Arbitration Award had issue preclusive effect as to damages. The bankruptcy court stated that "whatever the arbitrator found were the damages, that's it. He doesn't have to explain how he broke it down." Tr. of Oral Arg. (Nov. 18, 2010) at 10:18-20. Further, the bankruptcy court emphasized that:
In response, WHA stated: "Well, obviously, the...arbitrator wasn't clear enough."
Plaintiff's Supplemental Brief on Damages (Aug. 17, 2011) at 2:9-14 (quotations and citations omitted). WHA essentially reasoned that the "single theory" was embezzlement which "subsumed" fraud.
In contrast, Debtor argued that one of the problems with the causes of action before the Arbitrator was that one of those causes was for negligent misrepresentation which could also be construed as fraud. Later in his Supplemental Brief on Damages, Debtor emphasized that the Arbitrator failed to specify his measure of damages allocation based on each of WHA's causes of action. On this basis, Debtor argued that it was therefore impossible to determine that amount of damages which would fall within the realm of nondischargeability.
Ultimately, the bankruptcy court granted summary judgment in favor of WHA on the basis of the Arbitration Award's finding of damages. After briefly reviewing the California Uniform Trade Secrets Act's damages provisions as a basis for awarding summary judgment in favor of WHA the bankruptcy court stated:
Memorandum of Decision (Apr. 24, 2012) at 12-13. Thus, the bankruptcy court found that $900,000 was nondischargeable. Debtor timely filed his appeal.
The bankruptcy court had jurisdiction pursuant to 28 U.S.C. §§ 1334 and 157(b)(2)(I). We have jurisdiction under 28 U.S.C. § 158(a)(1).
1. Did the bankruptcy court commit reversible error when it found that the $900,000 of the Arbitration Award's lump sum damages against Debtor was issue preclusive as to nondischargeability?
2. Did the bankruptcy court commit reversible error when it found the measure of damages for the misappropriation of a trade secret includes the value of the property misappropriated, where the Plaintiff was never deprived of the use or title of the property?
We review de novo the bankruptcy court's decision to grant summary judgment.
The availability of issue preclusion is a question of law the BAP reviews
When state preclusion law controls, such discretion is exercised in accordance with applicable state law.
To the extent that questions of fact cannot be separated from questions of law, we review these questions as mixed questions of law and fact, applying a de novo standard.
For the reasons set forth below, we reverse the bankruptcy court's entry of summary judgment in favor of the WHA, and remand with instructions.
Our efforts to substantively review this case are hampered by the failure of both parties to fully comply with the Federal Rules of Appellate Procedure and the Bankruptcy Appellate Panel Rules. Fed. R. App. P. 10(b)(2) provides that,
(Emphasis added).
Stated simply, an appellant has the burden of ensuring the record provided to the Panel is adequate to support the Panel's consideration and determination of the issues presented by the appeal.
As a preliminary matter, it is difficult to determine from the record precisely the number of causes of action that WHA brought before the Arbitrator. In its Memorandum of Decision on Summary Judgment, the bankruptcy court indicated that "WHA pursued
Debtor's Opening Brief on appeal is similarly lacking in that while it asserts that "WHA arbitrated claims under 13 different causes of action...", Appellant's Opening Brief (Aug. 14, 2012) at 4, it cites only to the bankruptcy court's Memorandum of Decision, which in turn does not cite to the Arbitration Award or any other document in the record. Moreover, a look further back in the record reveals that in Debtor's Opposition to Motion for Summary Judgment, Debtor asserted that "
On mere cursory inspection of WHA's Complaint for Determination of Nondischargeability, we note that it lists seventeen causes of action. However, the last three causes of action are as follows: (15) Exception to Discharge-Fraud [11 U.S.C. Section 523(a)(2)]; (16) Exception to Discharge-Embezzlement [Cal. Penal Code § 508; 11 U.S.C. Section 523(a)(4)]; and (17) Petition to Compel the Continuation of the Arbitration. It is difficult to imagine that an arbitrator would "consider" these causes of action, given the bankruptcy court's exclusive jurisdiction to determine nondischargeability, and the mootness of the cause of action seeking to compel the very arbitration the Arbitrator was considering.
WHA sheds very little additional light in that its Reply to Defendant's Opposition to Motion for Summary Judgment states that:
Opposition (June 8, 2011) at 3-4. Counts one through fourteen in WHA's Adversary Complaint track precisely those in WHA's State Court Proceeding Complaint.
Finally, the Arbitration Award does not expressly identify all of the causes of action WHA brought before the Arbitrator. Instead, it lists only ten causes of action — the very same ten causes of action the bankruptcy court enumerated in its Memorandum of Decision. Moreover, the tenth cause of action the Arbitration Award enumerated was the thirteenth cause, Negligent Misrepresentation, in what one may only assume was included in the original complaint before the Arbitrator.
Because the bankruptcy court appears to have found that the arbitrator considered only thirteen causes of action, and because the bankruptcy court enumerated only ten of them, we cannot adequately determine the precise nature of the causes of action the Arbitrator considered when he determined that "all remaining Causes of Action are subsumed in a single legal theory which encompasses Fraud." Arbitration Award (Sept. 7, 2010) at 52:27-28.
Appellant argues the bankruptcy court improperly applied issue preclusion concepts below when it gave deference to the Arbitration Award findings related to the damage calculation. For reasons discussed below, we hold that issue preclusion applies as to the finding of non-dischargeability under Sections 523(a)(2) and (a)(4). We determine, however, that issue preclusion cannot be used to establish the damages allocable to these non-dischargeable claims.
The doctrine of issue preclusion applies to dischargeability proceedings under Section 523(a).
"To meet this burden, the moving party must have pinpointed the exact issues litigated in the prior action and introduced a record revealing the controlling facts. Reasonable doubts about what was decided in the prior action should be resolved against the party seeking to assert preclusion."
When determining the preclusive effect of a state court judgment, we must apply, as a matter of full faith and credit,
Under California law, issue preclusion applies only if all of the following elements have been satisfied:
Here, four of the elements of issue preclusion are undisputably satisfied: (1) the issues of fraud and embezzlement were actually litigated in the Arbitration, (2) the issues of fraud and embezzlement were necessarily decided in the Arbitration, (3) the parties in the Arbitration and in the nondischargeability action are the same, and (4) the bankruptcy court gave adequate consideration in its finding that the Arbitration met the adjudicatory standards required in order to be fair and consistent with sound public policy.
Debtor contends that the damages finding was not on the merits. However, this argument is incorrect. The Ninth Circuit has expressly provided that "[a] final judgment is an order by the court and is
In this case, Debtor compelled arbitration in the first instance, and neither party disputes that the Arbitrator considered all of the available evidence, the parties' arguments, and the law applicable to the parties' respective claims. The Arbitration Award is a fifty-five page decision, conducted in an inherently adjudicatory fashion, and, as discussed above, was confirmed in the California Superior Court. Therefore, the decision is final and on the merits.
The remaining element in dispute is whether the issue sought to be precluded from litigation in the adversarial proceeding is identical to that decided in the Arbitration Award.
Section 523(a)(2)(A) provides that a discharge does not include any debt for money, property, or services "to the extent obtained by false pretenses, a false representation, or actual fraud...." 11 U.S.C. § 523(a)(2)(A). In order to establish that the debt had been obtained through fraud and is nondischargeable under Section 523(a)(2)(A), the plaintiff must demonstrate that:
The elements of fraud under Section 523(a)(2)(A) "`mirror the elements of common law fraud' and match those for actual fraud under California law, which requires that the plaintiff show: (1) misrepresentation; (2) knowledge of the falsity of the representation; (3) intent to induce reliance; (4) justifiable reliance; and (5) damages."
"The `identical issue' requirement addresses whether `identical factual allegations' are at stake in the two proceedings, not whether the ultimate issues or dispositions are the same."
Here, the bankruptcy court found that WHA sustained damage resulting from its reliance that Debtor would follow the provisions in the Employee Handbook. However, the amount of damages the bankruptcy court found was limited only to the Arbitration Award of "punitive damages for fraud because [the Arbitrator] found that [Debtor's] actions damaged [WHA's] reputation." Memorandum of Decision (Apr. 24, 2012) at 7:20-21. The bankruptcy court did not make any additional findings of fact suggesting the amount of damages, if any, the Arbitration Award allocated to fraud.
As discussed above, the Arbitration Award of punitive damages for fraud was limited to $50,000. This suggests that the remaining $850,000 in damages would have to flow from nondischargeability under Subsection 523(a)(4) for embezzlement.
As the bankruptcy court noted, federal law and not state law controls the definition of embezzlement for purposes of Section 523(a)(4).
The bankruptcy court found that the Arbitration Award met all of the facts establishing the elements of embezzlement under Section 523(a)(4). Specifically, the bankruptcy court found that "[t]he facts establishing elements of conversion and embezzlement were raised as the second and seventeenth causes of action in the adversary complaint." Memorandum of Decision (Apr. 24, 2012) at 11:20-21. As discussed above, the seventeenth cause of action in the Adversary Complaint was a "Petition To Compel The Continuation Of The Arbitration" ("Seventeenth Cause of Action"). Adversary Complaint (Apr. 16, 2009) at 38. Contrary to the bankruptcy court's finding, we can find no facts in the Seventeenth Cause of Action establishing any of the elements of embezzlement.
The second cause of action was for "Conversion."
Moreover, as a measure of the damages of the property Debtor embezzled, the bankruptcy court found only that the "...arbitrator awarded punitive damages based on these causes of actions." Memorandum of Decision (Apr. 24, 2012) at 11:27-28 (emphasis added).
Thus, the bankruptcy court specifically allocated $100,000 in punitive damages as between its finding of non-dischargeability under Sections 523(a)(2) and (a)(4). However, $800,000 of the damages the bankruptcy court found nondischargeable still remains without any identifiable allocation to specific factual issues giving rise to nondischargeability.
The sufficiency of a court's factual findings are assessed under Rule 52(a).
In
We have reviewed the record and nothing there establishes that the bankruptcy court's finding that $900,000 in damages necessarily flows from factual issues giving rise to nondischargeability. Like the court in
Illustrative of the bankruptcy court's error is its dismissal of
Thus, the bankruptcy court in its own terms identified a cause of action at issue in the Arbitration, while failing to recognize its significance in identifying the amount of damages allocable to dischargeable debt. The record is consistent with the bankruptcy court's holding that the Arbitrator combined the trespass to chattel cause with the other causes of action at issue, including fraud and conversion, and then awarded lump sum "damages [] for each cause of action. ..."
For reasons that are not entirely clear, the bankruptcy court's damages discussion begins with a reference to the California Uniform Trade Secrets Act ("CUTSA") Cal. Civ. Code § 3426.3 (West) as an apparently independent cause of action giving rise to nondischargeability. Memorandum of Decision (Apr. 24, 2012) at 12:16-17. This is the first time the CUTSA was mentioned by the bankruptcy court. After giving a brief recitation of the elements of CUTSA, the bankruptcy court concluded the following:
Even if the CUTSA references are ignored, however, the bankruptcy court's analysis provided no connection between its summary judgment analysis and its conclusions of nondischargeability under Sections 523(a)(2) and (a)(4). Moreover, this analysis provide no guidance as to whether the inclusion of attorney's fees in the damages award flowed only from the arbitrator's factual findings giving rise to nondischargeable debt. In short, as a reviewing court, we cannot connect the many types of damages discussed (unjust enrichment, conversion, attorney's fees and the like) to the nondischargeable claims for relief alleged. This requires reversal.
The bankruptcy court'S findings did not adequately support its decision to allocate the damages awarded to WHA to the debts excepted from discharge. We therefore must VACATE the bankruptcy court's judgment and REMAND this matter with instructions that the bankruptcy court determine the proper allocation of the Arbitrator's damage award between dischargeable and nondischargeable claims.
Arbitration Award (Sept. 07, 2010) at 62:17-20 (emphasis added).
