Opinion
Case No. 08-24463-svk, Adversary No. 08-2181.
April 24, 2009
MEMORANDUM DECISION ON COMPLAINT TO DETERMINE DISCHARGEABILITY
The Plaintiff, Karen Hoff, filed this action under 11 U.S.C. § 523(a)(6) seeking a determination that a debt allegedly owed by the Debtor, Daniel Bellerud, is nondischargeable as a willful and malicious injury. A trial was held at which Ms. Hoff, the Debtor and the principals of Ms. Hoff's present employer testified. At the conclusion of the trial, the Court took under advisement the issue of whether Ms. Hoff had sustained her burden of proof that the Debtor committed a willful and malicious injury. Counsel have submitted letter briefs, and this Decision constitutes the Court's findings of fact and conclusion of law.
FACTS
The Debtor was a principal in and 100% owner of a corporation called Baysurance Financial Service Center, Ltd. ("Baysurance"), which operated an insurance agency. Through a mutual friend, the Debtor met Karen Hoff, a long-time employee of Prudential Insurance Company, and he began recruiting her to join Baysurance to sell personal lines of insurance. She started working at Baysurance in January 2005. According to the Debtor, Ms. Hoff did not produce new business, and did not get along with other employees. In October 2006, the Debtor learned that Ms. Hoff had a heated argument with another employee in which Ms. Hoff said that she was putting together a file to "take down" Baysurance. The other employee threatened to quit if Ms. Hoff remained at the agency, and the Debtor decided to terminate Ms. Hoff.
The Debtor consulted an attorney who advised that, given the circumstances, he should meet with Ms. Hoff off the premises and terminate her. At the meeting, the Debtor reminded Ms. Hoff that she had signed a covenant not to compete with Baysurance. Under the covenant, for a period of two years, she could not solicit any business from clients that Baysurance had in-house. The same day as his termination meeting with Ms. Hoff, the Debtor received a call from a principal of Insurance Service Center ("ISC"), an insurance agency located two blocks from Baysurance, who was considering hiring Ms. Hoff. The ISC principal asked whether Baysurance was interested in selling Ms. Hoff's book of business to ISC, and mentioned a potential purchase price of "one times renewals." The Debtor expressed an interest, and a meeting was held between the Debtor and the ISC partners. At some point, ISC determined to offer only $2,500 for Ms. Hoff's book of business, which was significantly less than the one times renewals that the Debtor expected.
The Debtor was antagonistic concerning Ms. Hoff at the meeting, stating that he intended to enforce the covenant not to compete, and that he would sue ISC in addition to Ms. Hoff if she violated the covenant. He admitted that he said he would use ISC as "leverage" against Ms. Hoff, since ISC had deep pockets. ISC had been involved in a dispute with a former employee, and offered to fire Ms. Hoff rather than become embroiled in another litigation. But the Debtor declined, stating that he was not trying to stop her from making a living, but that he wanted to enforce the covenant. However, in a sarcastic voice, he said, "Good luck getting her to sell any new business." The Debtor testified that he meant that Ms. Hoff did not have a track record of soliciting new clients, and that he did not think she would do so when working for ISC.
The Debtor testified that he had Ms. Hoff's personal belongings delivered to her within days of her termination from Baysurance. On the advice of counsel, he did not deliver any lists of customers containing personal information such as social security numbers. The Debtor consulted three different attorneys with respect to the validity of the covenant not to compete. All three attorneys assured the Debtor that the covenant was enforceable. In reliance on that advice, Baysurance filed suit in the Brown County Circuit Court against Ms. Hoff and ISC for breach of the covenant not to compete. Ms. Hoff filed a counterclaim against Baysurance for tortious interference with Ms. Hoff's contract with ISC. The Debtor was not named personally in the suit.
Baysurance's claim against Ms. Hoff was dismissed (the Debtor's attorney suggested that the Brown County Circuit Court Judge found there was no consideration for the covenant not to compete), and Baysurance's claim against ISC was settled before trial in a confidential settlement. Ms. Hoff's counterclaim against Baysurance was submitted to the jury, who found Baysurance liable for intentional interference with Ms. Hoff's contractual relationship with ISC, and awarded her damages against Baysurance in the amount of $50,000. The jury specifically found that Baysurance's conduct was "not justified." The state court entered a judgment against Baysurance for $50,945.20, and required Baysurance to return Ms. Hoff's personal property. The judgment specifically ordered Baysurance to return the "Prudential client list" to Ms. Hoff.
On April 29, 2008, the Debtor filed a Chapter 7 petition in this Court. He listed Ms. Hoff as a creditor for a "business debt." Ms. Hoff filed a timely Complaint to determine dischargeability of her $50,920.45 judgment, alleging alternatively that this Court could pierce the corporate veil of Baysurance or that the Debtor was jointly and severally liable with Baysurance for willful and malicious conduct.
At the trial, Ms. Hoff testified concerning her claims against the Debtor. She related the circumstances of employment with Baysurance, including an initial misunderstanding about her compensation. Ms. Hoff also testified that during her employment, the Debtor was advertising to replace her (the Debtor explained that an on-line ad he placed simply never expired). She alluded to incidents when she had problems with other employees, but faulted the Debtor for not giving her fair warning before terminating her. She also said that he never returned certain personal property, consisting of two lists of leads she had purchased for $300 to $400 each, and a list of contact information from clients and potential clients she developed when working for Prudential. She stated that she found a position with ISC, where she had worked since being terminated by Baysurance, and where she was working at the time of the nondischargeability trial. She admitted that she had signed a covenant not to compete with Baysurance, and knew that her employers at ISC had met with the Debtor concerning her situation prior to the state court lawsuit. Other than the lawsuit to enforce the covenant not to compete, the evidence at the trial concerning the intentional interference with the contract was slim. The principals of ISC testified about the unpleasant meeting that they had with the Debtor before the suit was filed, but ISC continued to employ the Debtor after that meeting, and indeed throughout the lawsuit and the Debtor's bankruptcy.
ANALYSIS
Ms. Hoff seeks a declaration that the debt represented by the state court judgment is non-dischargeable pursuant to 11 U.S.C. § 523(a)(6), which provides that an individual debtor may not obtain a discharge for a debt "for willful and malicious injury by the debtor to another entity or to the property of another entity." The Supreme Court addressed this provision in Kawaauhau v. Geiger, 523 U.S. 57 (1998), a medical malpractice case with a gross level of negligence committed by an uninsured physician. The Court held the debt dischargeable, because it was based on negligent or reckless conduct, not "the category `intentional torts,'" which "generally require that the actor intend `the consequences of an act,' not simply `the act itself.'" Id. at 61-62. Post- Geiger, proving that the debtor acted with intent to cause injury or an objective certainty that injury would occur is critical. Miller v. J.D. Abrams, Inc. (In re Miller), 156 F.3d 598, 606 (5th Cir. 1998), cert. denied, 526 U.S. 1016 (1999); Bukowski v. Patel, 266 B.R. 838, 844 (E.D. Wis. 2001) (conduct intended to injure or that the debtor knew was substantially certain to cause injury is willful under Geiger).
In this case, there are two impediments to Ms. Hoff's proof that the debt evidenced by the $50,000 was willful and malicious: (1) the jury's verdict was directed at Baysurance, not the Debtor; and (2) the evidence supports that the Debtor did not act with the requisite intent or knowledge. With respect to the first issue, the Court remarked at trial that the bankruptcy court is not to act as an appeals court from a jury verdict. See Worldwide Prosthetic Supply, Inc. v. Mikulksy (In re Mikulsky), 301 B.R. 726 (Bankr. E.D. Wis. 2003) (state court jury's finding that debtor's action in misappropriating trade secrets was "outrageous" was given collateral estoppel effect). In Mikulsky, this Court recognized the elements for granting a jury verdict preclusive effect are those that would be recognized in the courts of the state in which the jury verdict was rendered.
Accordingly, the question can be framed as whether the Wisconsin courts would estop the Debtor from arguing that the jury's findings about Baysurance do not apply to him. In Wisconsin, collateral estoppel or issue preclusion prevents re-litigation of an issue of fact or law previously determined by a valid final judgment in an action between the same parties. Heggy v. Grutzner, 156 Wis. 2d 186, 456 N.W.2d 845 (Ct.App. 1990). Although the requirement of mutuality has been relaxed in certain scenarios, see Michelle T. v. Crozier, 173 Wis. 2d 681, 495 N.W. 2d 327 (1993) (conviction for criminal sexual assault could be used as collateral estoppel in civil action for damages by victim), usually these cases involve the defensive assertion of collateral estoppel to prevent a party from relitigating an issue which has been conclusively resolved against that party in a prior case. See Kichefski v. Am. Family Mut. Ins. Co., 132 Wis. 2d 74, 79 (Ct.App. 1986). As the court stated in Hernke v. Coronet Ins. Co., 72 Wis. 2d 170, 174, 240 N.W.2d 382 (1976): "According to the Restatement of Judgments, a person who is not a party or privy to an action in which a valid judgment was rendered is neither bound by nor entitled to claim the benefits of such an adjudication upon any matter decided in the action." Examples of a person in privity with a party include an insurer and an insured, and a husband and wife claiming injuries from the same accident. Id. See also Grafton v. Hinkley, 111 Wis. 46, 58 (1901) (where individual was not a party to a suit involving his corporation, he was not estopped by judgment and could nor could he invoke estoppel in his favor). Here, although he was the president of the corporation that was a party to the suit, and allegedly acted on behalf of the corporation in seeking to enforce the covenant not to compete, the Debtor was not a party to the suit, Ms. Hoff did not assert her counterclaim against the Debtor individually, and he is not bound by the jury's findings in a suit to which he was not a party.
Even if the Debtor is not bound by the principles of collateral estoppel to the jury's findings against Baysurance, a corporate director or officer is individually liable for fraudulent acts of his own in which he participates, even though his actions may be in furtherance of the corporate business. See AGP Grain Coop. v. White (In re White), 315 B.R. 741 (Bankr. D. Neb. 2004). Moreover, "The corporate veil may be pierced to hold a shareholder liable when the shareholder has used the corporation to commit fraud, violate a legal duty, or perpetrate a dishonest or unjust act in contravention of the rights of another." Fauss v. Zwygart (In re Zwygart), 2003 Bankr. LEXIS 1523 (Bankr. D. Neb. Oct. 7, 2003). Clearly in this case, the Debtor acted on behalf of Baysurance in attempting to enforce the covenant not to compete against Ms. Hoff. If this action was an unjust act toward her, as the jury determined it was, the Debtor cannot hide behind Baysurance's corporate shield. The question remains whether the Debtor's conduct meets the elements of "willful and malicious" injury defined by § 523(a)(6) of the Bankruptcy Code.
As noted above, the Supreme Court in Geiger held that intentional torts, not negligence, fall within the definition, and there was an intentional interference with Ms. Hoff's and Baysurance's contract. However, as the court noted in Garoutte v. Damax, Inc., 2009 U.S. Dist. LEXIS 18967 (S.D. Ind. Mar. 3, 2009):
There is a temptation in this case to generalize and conclude that any intentional tort, or even any intentional crime, meets the "willful and malicious" standard. That would make the law simpler, but that is not what the bankruptcy statute requires. Courts applying collateral estoppel in bankruptcy proceedings must look beyond the label "intentional tort" and compare the tort judgment in question with the "willful and malicious" standard. See In re Schlessinger, 208 Fed. Appx. 131, 134 (3d Cir. 2006) ("Not all intentional torts are willful and malicious.") . . .
In Garoutte, the debtor had been convicted of criminal conversion of an airplane belonging to the creditor under an Indiana statute that defined the offense as knowingly or intentionally exerting unauthorized control over another's property. The debtor had disassembled the airplane in anticipation that a potential buyer's financing would pay for needed repairs. When the financing did not materialize, the owner of the airplane demanded that the airplane be returned in airworthy condition, which the debtor could not afford to do. The owner of the airplane sued in state court for criminal conversion, and the state court found the debtor committed criminal conversion and awarded treble damages of over $2.8 million. The bankruptcy court held that collateral estoppel applied and granted summary judgment to the creditor, but the district court reversed, stating that the record did not show that the debtor had the requisite intent to injure the creditor. Instead, the district court noted that the debtor may have been guilty of "poor judgment" and "painted himself into a corner."
This case is similar in that the Debtor made a mistake in seeking the enforcement of a covenant not to compete that was later determined to be invalid. The Debtor testified credibly that he consulted three different lawyers before attempting to enforce the covenant not to compete, and all offered the advice that the covenant appeared enforceable. Baysurance was able to hire an attorney to file and prosecute the suit, more evidence of the validity of the covenant. The covenant was then determined to be unenforceable, and Ms. Hoff's counterclaim for interference with contract went to the jury, who found that Baysurance intentionally interfered with Ms. Hoff's contract with ISC. Although the jury found that the interference was not "justified," the evidence in this Court fails to show that the Debtor acted with intent to injure Ms. Hoff or with certainty that injury would flow from his conduct. The evidence here is that the Debtor acted with intent to enforce a contract that three attorneys had blessed in order to protect his company, Baysurance. He could not be certain that she would be "injured" because he thought his actions were legal and valid. Moreover, when the ISC principals asked whether they should fire Ms. Hoff (which would appear to be the ultimate interference with the contractual relationship), the Debtor said "no." He stated that he was not interested in preventing her from making a living, but rather simply wanted to enforce the covenant. In his meeting with ISC, he was sarcastically skeptical about her ability to generate new business, but that does not demonstrate an intent to injure her or her contract with ISC. It merely corroborates the reason that he terminated her rather than the employee that Ms. Hoff argued with.
The case cited by the Debtor, In re Kraft, 197 B.R. 660 (Bankr. W.D. Mo. 1996), also supports his position. In Kraft, a jury found the debtor guilty of tortious interference with contract, and awarded damages to the creditor, but the bankruptcy court did not find the requisite intent to except the debt from discharge as a willful and malicious injury. In this case, although the technical requirements for intentional interference with contract were apparently met in the state court case, there was no evidence about contractual interference presented in this Court to show that the Debtor acted with an intent to injure Ms. Hoff or with certainty that injury would occur. Instead, the evidence showed that the Debtor terminated an at-will employee, reminded her of her covenant not to compete and then, when he could not come to an agreement to sell the book of business she was working on to her new employer, sued her to enforce the covenant. His motivations were aimed at protecting his business not at injuring her. It is not clear what evidence was presented to the jury to prove that the Debtor's intentional interference with Ms. Hoff's contract was not justified, but there was inadequate evidence presented in this Court to show that he acted willfully and maliciously against her. Since Ms. Hoff did not sustain her burden of proof, the jury's $50,000 judgment against Baysurance will not be excepted from the Debtor's discharge.
One troubling issue remains. Ms. Hoff testified, and the evidence shows, that Baysurance refused to turn over certain personal property belonging to Ms. Hoff. Ms. Hoff said that this property consisted of two lists of leads that she had purchased for $400 each as well as a list of contacts from her previous employment with Prudential. The Debtor testified that on the advice of counsel, he did not turn over any documents to Ms. Hoff that contained social security numbers or similar information. Presumably, the Debtor believed that the leads were protected by the covenant not to compete. This belief may have been reasonable until the covenant not to compete was invalidated by the state court and Baysurance was ordered to turn over the property to Ms. Hoff. The judgment entered on May 19, 2008 expressly states that in the addition to the $50,000 in damages plus costs, judgment is entered "For the return of the `Prudential client' list retained by Baysurance Financial Group, Ltd." Yet, in violation of this court order, the Debtor never returned this list or the other lists of leads to Ms. Hoff. Failure to obey a court order constitutes willful and malicious conduct, and a judgment against a defiant debtor is excepted from discharge. Williams v. IBEW Local 520 (In re Williams), 337 F.3d 504, 512 (5th Cir. 2003) (citing PRP Wine Int'l v. Allison (In re Allison), 176 B.R. 60, 64 (Bankr. S.D. Fla. 1994) (denying discharge to a debtor who continued to breach a non-competition clause in an employment agreement after a state court issued a temporary injunction).
The Williams court explained:
When a court of the United States . . . issues an injunction or other protective order telling a specific individual what actions will cross the line into injury to others, then damages resulting from an intentional violation of that order as is proven . . . [is] ipso facto the result of a "willful and malicious injury."
Id. (quoting Buffalo Gyn Womenservices, Inc. v. Behn (In re Behn), 242 B.R. 229, 238 (Bankr. W.D.N.Y. 1999). In this case, the Debtor, through his solely owned corporation, Baysurance, was ordered to return the Prudential client list and other personal property to Ms. Hoff, and did not do so. There is no excuse for his failure to follow this Order, and there is no doubt that Ms. Hoff has been damaged by the Debtor's failure to return the lists.
Baysurance is out of business, and its assets apparently have been sold to another agency. To the extent the Debtor still has access to the Prudential client list and the two lists of leads that Ms. Hoff identified at the trial, those should immediately be turned over to her attorney. Whether or not the lists are turned over now (the Court assumes that the lists are gone, whether transferred to the new agency, lost or discarded in the demise of Baysurance), the Court estimates that the damages from the Debtor's willful and malicious injury caused by failure to turn over the lists in compliance with the state court order is $3,300. This amount is based on Ms. Hoff's testimony that the two lists of leads cost $400 each, and the Court's estimate of the value of the Prudential client list to be $2,500.
CONCLUSION
Although collateral estoppel does not apply to prevent the Debtor from challenging the jury's verdict against Baysurance, the Debtor cannot hide behind the corporate shield if he committed a willful and malicious injury on behalf of the corporation. The burden of proof rests squarely on Ms. Hoff to prove that the Debtor acted with an intent to cause her injury or with knowledge that his conduct would cause that injury. With respect to the tortious interference with her contract with Insurance Service Center, Ms. Hoff has not carried that burden. She has not demonstrated that the Debtor intended to injure her or knew that his conduct would injure her. The evidence instead shows that he acted with an intent to protect his business and to enforce a contract that three attorneys had declared enforceable. The decision to treat the covenant as enforceable turned out to be a mistake in judgment, like that made by the debtor in the Garoutte case who disassembled an airplane on the promise that a potential buyer could obtain financing to put it back together. That the Debtor behaved in an arrogant manner and made sarcastic comments in a meeting with Ms. Hoff's present employer is regrettable, but this proof does not rise to the level needed to show an intent to injure Ms. Hoff. There simply was no other evidence of the requisite intent to satisfy the Court that the money judgment should be excepted from the discharge. On the other hand, the Debtor's failure to turn over Ms. Hoff's personal contact lists after being ordered to do so by the state court judge is different. The state court defined the Debtor's duty, and put the Debtor on notice that Ms. Hoff was entitled to her property, and the Debtor simply refused to return the property. Ms. Hoff has carried her burden of proof that the Debtor's conduct in violating the state court order was willful and malicious. Although the testimony concerning the value of the lists was scant, the Court has made a reasonable estimate.
A separate Order will be issued declaring that the Debtor should return the lists to Ms. Hoff's attorney, and that the sum of $3,300 is awarded to her as a nondischargeable judgment against the Debtor for the value of the loss of the lists.