Opinion
KNLCV126018984S
05-31-2019
LBI, INCORPORATED v. Jared SPARKS
UNPUBLISHED OPINION
OPINION
Calmar, J.
Before the court is the defendant, Jay Williams, ’ motion to dismiss all claims made against him in this action. The plaintiff, LBI, Inc., seeks to pursue an action against Williams, who has received a bankruptcy discharge for the plaintiff’s claims, for the sole purpose of collecting from the defendant, Charles River Analytics, Inc. (Charles River), under an indemnification agreement executed by Williams and Charles River.
All subsequent references to the defendants, Williams and Charles Rivers, will be by name.
FACTUAL AND PROCEDURAL HISTORY
The present action arises from a dispute between the plaintiff, LBI, Inc., and the defendants, Williams and Charles River. On April 24, 2013, the plaintiff filed a second amended complaint, the operative complaint, alleging that its former employee, Williams, breached his employment and non-compete agreement as well as his duty of loyalty by joining the plaintiff’s competitor, Charles River. The plaintiff further alleges that Williams misappropriated the plaintiff’s trade secrets in furtherance of a conspiracy with Charles River to obtain work that the plaintiff had been performing for the Office of Naval Research. In 2012, around the time of many of the alleged acts, Williams and Charles River entered into an indemnification agreement which provides in relevant part: "Charles River ... agrees to indemnify you against all expenses (including reasonable attorneys fees), judgments, and amounts paid in settlement that are incurred by you or on your behalf, in the event that you are made a party or are threatened to be made a party to any threatened or pending civil action, suit, or proceeding initiated by LBI, Inc. or its successor or assigns, alleging you violated the attached Exhibit 1 by ‘competing’ with LBI, Inc. by reason of the fact that [you] were employed by [Charles River] as of January 3, 2012." See Def.’s Mot. Dismiss, Ex. A.
Charles River is based in Massachusetts and the indemnification agreement’s choice of law provision designates Massachusetts as the governing jurisdiction. Thus, the indemnification agreement will be construed according to Massachusetts law. See Williams v. State Farm Mutual Auto. Insurance Co., 229 Conn. 359, 366, 641 A.2d 783 (1994).
On January 23, 2017, Williams filed for relief under chapter 7 of the United States Bankruptcy Code in the United States Bankruptcy Court for the District of Connecticut (Bankruptcy Court). Williams also filed a notice of bankruptcy in the present action on January 24, 2017. On his bankruptcy schedule, Williams disclosed and listed the pending claims asserted against him by the plaintiff. On March 20, 2017, the plaintiff filed an amended motion for relief from stay in the Bankruptcy Court. In the motion, the plaintiff sought relief from the stay to pursue the present action against Williams "solely for the purpose of pursuing recovery against" Charles River under the indemnification agreement. On April 14, 2017, the Bankruptcy Court modified the bankruptcy stay imposed by 11 U.S.C. § 362(a) on the present action. The Bankruptcy Court’s order permitted the plaintiff "to continue its prosecution of [this civil action] for the sole purpose of pursing a judgment ... against the [d]ebtor, restricting its monetary recovery on any such judgment to its right, if any, to enforce that judgment against [Charles River]." The Bankruptcy Court then set a deadline of April 25, 2017, for any objections to the discharge. The plaintiff did not object to the discharge of its claims against Williams. On April 26, 2017, Williams received a general discharge in accordance with 11 U.S.C. § 727. The bankruptcy case was formally closed on May 17, 2017, and the deadline for appeals has expired.
Williams filed a request for leave to amend his special defenses to add a bankruptcy defense. The plaintiff did not file an objection to that request, and as such, after 15 days, the defense was deemed added pursuant to Practice Book § 10-60.
On October 3, 2017, Williams filed the present motion to dismiss each count of the plaintiff’s second amended complaint against him, with a memorandum of law in support and supporting exhibits. Williams asserts that the court does not have subject matter jurisdiction because the plaintiff’s claims were discharged as part of his chapter 7 bankruptcy. On October 23, 2017, the plaintiff filed a memorandum in opposition to Williams’ motion to dismiss with supporting exhibits attached. On October 30, 2017, Williams filed a reply brief, responding to the plaintiff’s objection. On January 31, 2019, the court heard oral argument on the matter.
DISCUSSION
"[A] motion to dismiss ... properly attacks the jurisdiction of the court, essentially asserting that the plaintiff cannot as a matter of law and fact state a cause of action that should be heard by the court." (Internal quotation marks omitted.) Santorso v. Bristol Hospital, 308 Conn. 338, 350, 63 A.3d 940 (2013). "Pursuant to the rules of practice, a motion to dismiss is the appropriate motion for raising a lack of subject matter jurisdiction." (Internal quotation marks omitted.) Mark v. Neundorf, 147 Conn.App. 485, 489, 83 A.3d 685 (2014). "A court deciding a motion to dismiss must determine not the merits of the claim or even its legal sufficiency, but rather, whether the claim is one that the court has jurisdiction to hear and decide." (Internal quotation marks omitted.) Hinde v. Specialized Education of Connecticut, Inc., 147 Conn.App. 730, 740-41, 84 A.3d 895 (2014).
"[The plaintiff bears the burden of proving subject matter jurisdiction, whenever and however raised." (Internal quotation marks omitted.) Fort Trumbull Conservancy, LLC v. New London, 265 Conn. 423, 430 n.12, 829 A.2d 801 (2003). "[I]t is the burden of the party who seeks the exercise of jurisdiction in his favor ... clearly to allege facts demonstrating that he is a proper party to invoke judicial resolution of the dispute ... It is well established that, in determining whether a court has subject matter jurisdiction, every presumption favoring jurisdiction should be indulged." (Internal quotation marks omitted.) Financial Consulting, LLC v. Commissioner of Insurance, 315 Conn. 196, 226, 105 A.3d 210 (2014).
"Trial courts addressing motions to dismiss for lack of subject matter jurisdiction ... may encounter different situations, depending on the status of the record in the case ... [L]ack of subject matter jurisdiction may be found in any one of three instances: (1) the complaint alone; (2) the complaint supplemented by undisputed facts evidenced in the record; or (3) the complaint supplemented by undisputed facts plus the court’s resolution of disputed facts." (Footnote omitted; internal quotation marks omitted.) Conboy v. State, 292 Conn. 642, 650-51, 974 A.2d 669 (2009). "When a trial court decides a jurisdictional question raised by a pretrial motion to dismiss on the basis of the complaint alone, it must consider the allegations of the complaint in their most favorable light ... In this regard, a court must take the facts to be those alleged in the complaint, including those facts necessarily implied from the allegations, construing them in a manner most favorable to the pleader." (Internal quotation marks omitted.) Id., 651. In contrast, if the complaint is supplemented by undisputed facts established by affidavits submitted in support of the motion to dismiss ... the trial court, in determining the jurisdictional issue, may consider these supplementary undisputed facts and need not conclusively presume the validity of the allegations of the complaint ... Rather, those allegations are tempered by the light shed on them by the [supplementary undisputed facts] ... If affidavits and/or other evidence submitted in support of defendant’s motion to dismiss conclusively establish that jurisdiction is lacking, and the plaintiff fails to undermine this conclusion with ... other evidence, the trial court may dismiss the action without further proceedings." (Citations omitted, emphasis omitted; footnote omitted; internal quotation marks omitted.) Id., 651-52.
In the present case, Williams moves to dismiss all claims against him on the ground that the court lacks subject matter jurisdiction because the bankruptcy discharge prohibits the plaintiff’s claims against him. Williams asserts that the plaintiff was well aware of the potential for discharge of its claims against Williams because the plaintiff had been identified as a creditor and participated in the bankruptcy proceeding by obtaining a modification to the automatic stay under § 362(a). Specifically, Williams argues that because the plaintiff failed to object to the discharge of their claims and no claims were carved out of the discharge, the automatic stay that § 362(a) provides terminated, and the permanent discharge under § 524 took effect, prohibiting the plaintiff’s claims against him and divesting this court of subject matter jurisdiction. In response, the plaintiff argues that this court retains subject matter jurisdiction entitling it to continue the present action against Williams solely for the purpose of collecting from Charles River under the indemnification agreement. Further, the plaintiff argues that the collateral estoppel effect of the Bankruptcy Court’s ruling modifying the automatic stay mandates denial of Williams’ motion to dismiss.
The automatic stay under § 362 arises upon the filing of a bankruptcy petition. See CCT Communications, Inc. v. Zone Telecom, Inc., 327 Conn. 114, 122, 172 A.3d 1228 (2017). The automatic stay serves, until further notice of the bankruptcy court, as an absolute bar to "the commencement or continuation ... of a judicial, administrative, or other proceeding against the debtor that was or could have been commenced before the commencement of the [bankruptcy case] ..." See § 362(a)(1). The automatic stay, however, is not incontestable, and a party in interest may file a motion in the bankruptcy court for relief from the stay under § 362(d). Section 362(d) empowers the bankruptcy court to "grant relief from the stay ... by terminating, annulling, modifying, or conditioning such stay ... for cause ..." Subject to § § 362(d), (e) and (f), the stay of an act against property of the estate continues in effect until the property is no longer property of the estate, and the stay of any other act continues in effect until the case is either closed, dismissed, or "if the case is a case under chapter 7 of this title concerning an individual ... the time a discharge is granted or denied." Thus, once a discharge is granted, the automatic stay terminates, and the discharge injunction permanently takes its place. See Green v. Welsh, 956 F.2d 30, 32 (2d Cir. 1992).
Section 524(a)(2) provides in relevant part that a discharge "operates as an injunction against the commencement or continuation of an action ... to collect, recover, or offset any such debt as a personal liability of the debtor." "A discharge in bankruptcy relieves the debtor of personal liability for all [prepetition] debts but those excepted under the Bankruptcy Code." River Place E. Hous. Corp. v. Rosenfeld, 23 F.3d 833, 836 (4th Cir.), cert. denied, 513 U.S. 874, 115 S.Ct. 200, 130 L.Ed.2d 131 (1994). Section 524(a)(2) "operates to permanently stay any attempt to hold the debtor personally liable for discharged debts." Id. This protection "furthers one of the primary purposes of the Bankruptcy Code- that the debtor have the opportunity to make a financial fresh start." (Internal quotation marks omitted.) Green v. Welsh, supra, 956 F.2d 33.
The discharge itself and the permanent injunction arising therefrom, however, are "exclusive to the debtor, and do not otherwise affect the enforcement of any underlying debt, or any nondebtor liability thereon." In re Jason Pharmaceuticals, Inc., 224 B.R. 315, 321 (Bankr.D.Md. 1998); see also Green v. Welsh, supra, 956 F.2d 33; see also § 524(e) ("discharge of a debt of the debtor does not affect the liability of any other entity on, or the property of any other entity for, such debt"). Courts have generally held that § 542(a)(2) does not bar the maintenance of an action against a discharged debtor solely for the purpose of establishing liability of a third party, such as an insurer or guarantor, in accordance with § 524(e). Green v. Welsh, supra, 956 F.2d 33-34; see also Chapman v. Bituminous Ins. Co., 345 F.3d 338, 343 (5th Cir. 2003) ("courts are in near unanimous agreement that § 524(e) permits a creditor to bring, and proceed in, an action nominally directed against a discharged debtor for the sole purpose of proving liability on its part as a prerequisite to recovering from its insurer" [footnote omitted; internal quotation mark omitted]).
In Green v. Welsh, supra, 956 F.2d 35, tort claimants who had been injured in a fire on premises owned by the debtors sought, post-discharge, to continue litigation against the debtors solely to establish liability so that they could collect under an insurance policy. The United States Court of Appeals for the Second Circuit rejected the debtor’s argument that by failing to seek relief from the stay during the pendency of the bankruptcy or by exception in discharge, the tort claimants waived the right to pursue its claims in state court under § 524(e). Id. Similarly, in Lightowler v. Continental Ins. Co., 255 Conn. 639, 650-51, 739 A.2d 49 (2001), our Supreme Court affirmed a judgment allowing a legal malpractice action to continue against an attorney whose personal liability had been discharged in bankruptcy, solely for the purpose of seeking to recover from the defendant’s insurer by way of General Statutes § 38a-321. The Lightowler court observed, however, that the exception to the discharge injunction is a limited one, recognizing that while "a claimant is not barred from obtaining a judgment against a discharged debtor solely for the purpose of establishing the debtor’s liability when ... a judgment against the debtor is a prerequisite to recovering from the debtor’s insurer," it emphasized that "[t]his exception to the permanent injunction under [§ ]524(a) is necessarily conditioned upon the debtor being exempted from any exposure to personal expense or liability, resulting from the creditor’s action, which would imperil [his or her] fresh start." (Internal quotation marks omitted.) Id., 645-47.
Section 38a-321 allows for the recovering party to collect directly from the insurer: "Each insurance company which issues a policy to any person, firm or corporation, insuring against loss or damage on account of the bodily injury or death by accident of any person, or damage to the property of any person, for which loss or damage such person, firm or corporation is legally responsible, shall, whenever a loss occurs under such policy, become absolutely liable, and the payment of such loss shall not depend upon the satisfaction by the assured of a final judgment against him for loss, damage or death occasioned by such casualty ... Upon the recovery of a final judgment against any person, firm or corporation by any person, including administrators or executors, for loss or damage on account of bodily injury or death or damage to property, if the defendant in such action was insured against such loss or damage at the time when the right of action arose and if such judgment is not satisfied within thirty days after the date when it was rendered, such judgment creditor shall be subrogated to all the rights of the defendant and shall have a right of action against the insurer to the same extent that the defendant in such action could have enforced his claim against such insurer had such defendant paid such judgment."
I
Williams argues that indemnification agreements, in contrast to insurance or surety agreements, do not generally fall within the scope of § 524(e). Williams argues that this stems from the nature of indemnification. More specifically, Williams argues that an agreement to indemnify does not create a liability for the indemnitor until the indemnitee has an actual out-of-pocket cost or loss, and, thus, indemnification is in nature of reimbursement, not insurance. Williams asserts that because of the bankruptcy discharge, however, no judgment can ever enter against Williams and the plaintiff cannot collect anything from Williams without there being actual loss and thus, there is no way for the indemnification agreement to be triggered. In response, the plaintiff argues that Williams ignores the fundamental distinction in the law between an indemnification against loss and an indemnification against liability. The plaintiff argues that when an indemnity agreement indemnifies against liability, the indemnitee does not have to wait until loss occurs, but may sue on the agreement as soon as liability is incurred. The plaintiff argues that because Charles River’s promise to indemnify Williams against "judgments" incurred by him is a promise to indemnify Williams from liability, Williams does not have to incur any loss in order to have a judgment entered against him. The plaintiff argues that the discharge injunction under § 524(e) does apply to the present action because Charles River promised indemnity is in the form of indemnification against liability, just like insurance.
The exception under § 524(e) has never been applied by a court in the context of an indemnification agreement. A series of cases out of the United States District Court for the Southern District of New York have held that § 524(e) does not extend to claims against a debtor whose indemnification does not arise before the debtor is required to pay. See Broadhurst ex rel. Broadhurst v. County of Rockland, United States District Court, Docket No. 07-CV-9511 (CS) (S.D.N.Y. October 31, 2011); see also Bank of India v. Trendi Sportswear, Inc., United States District Court, Docket No. 89-CIV-5996 (JSM) (S.D.N.Y. January 18, 2002), aff’d, 64 Fed.App’x. 827 (2d Cir. 2003). In Broadhurst ex rel. Broadhurst v. County of Rockland, supra, United States District Court, Docket No. 07-CV-9511 (CS), the plaintiff sued the defendant who subsequently filed for bankruptcy. The plaintiff’s claims were disclosed in the bankruptcy court and the defendant received a general discharge in bankruptcy. See id. Following the discharge, the plaintiff sought to continue its claims against the defendant, "solely to determine his liability in order to recover damages from the [co-defendant] via indemnification." Id. The Broadhurst court found that allowing the plaintiff to pursue its claims would violate the "fresh start policy" provided by a bankruptcy discharge because under New York law, an indemnification claim does not arise until the indemnitee suffers an out-of-pocket loss. See id. The court also distinguished the indemnification agreement at issue in that case from cases where a creditor seeks to recover against the debtor’s insurer noting that "while Section 3420 of the New York Insurance Law requires insurance policies or contracts to allow for claims against an insolvent insured, this provision applies only to insurance policies, and is thus inapplicable here." Id.
The plaintiff has not cited a single case and the court is not aware of any cases in Connecticut or any other jurisdiction where the discharge exception under § 524(e) has been applied in the context of an indemnification agreement.
Under Massachusetts law, a duty to indemnify contemplates reimbursement of loss suffered, and thus, does not support distinction between "loss" and "liability" that the plaintiff attempts to make. See Starbrands Capital, LLC v. Original MW, Inc., United States District Court, Docket No. 14-CV-1227 (ADB) (D.Mass. September 11, 2015) ("indemnify means to reimburse (another) for a loss suffered because of a third party’s or one’s own act or default" [internal quotation marks omitted]); see also Arvest Bank v. RSA Security, Inc., United States District Court, Docket No. 1:15-CV-11798 (IT) (D.Mass. September 27, 2017) ("a duty to indemnify contemplates reimbursement of loss suffered"). Because Charles River’s indemnification obligation would be in the nature of a reimbursement and § 524(e) does not extend to claims against a debtor whose right to indemnification does not arise before the debtor is required to pay, the plaintiff’s claims are precluded by Williams’ discharge. But even assuming that the indemnification agreement requires Charles River to indemnify Williams against liability, the court would still be left with the fact that the plaintiff has initiated this action by pleadings and a prayer for relief where if judgment enters against Williams on the plaintiff’s claims, it enters against Williams alone. The plaintiff relies on cases where courts have permitted actions to proceed against a discharged debtor to establish liability in order to collect from the debtor’s liability insurer, however, in those cases, the debtor’s insurer was a named defendant in the lawsuit. See Lightowler v. Continental Ins. Co., supra, 255 Conn. 645-47. Further, insurers have liability to the injured tort victim and the insurance proceeds are payable directly to the injured tort victim. See id.; see also § 38a-321. In the present case, the plaintiff cannot obtain in the present action a judgment against Charles River on the claims against Williams and any disagreement as to the scope of the indemnification agreement is not the subject of any claims in the present case. Thus, the result of the present action would be a judgment against Williams alone and further litigation postjudgment would be necessary to interpret the indemnification agreement. For these reasons, the court finds that Williams’ discharge precludes the plaintiff from bringing claims against Williams.
The plaintiff cites to Fillipone v. Mayor of Newton, 16 Mass.App. 417, 423, 452 N.E.2d 239 (1983), rev’d on other grounds, 392 Mass . 622, 467 N.E.2d. 182 (1984), in support of his argument that Massachusetts law recognizes the distinction between indemnification against loss and indemnification against liability. The court in Fillipone merely noted the fact that "there is, in the law of other jurisdictions, a clear, pervasive and well-established distinction between obligations of indemnity from loss and from liability." (Emphasis added; internal quotation marks omitted.)
In light of this conclusion, the court will not address the other grounds upon which Williams relies for dismissal of the action against him.
II
The court will next address the plaintiff’s argument that the collateral estoppel effect of the Bankruptcy Court’s ruling modifying the automatic stay mandates denial of Williams’ motion to dismiss. The plaintiff argues that the Bankruptcy Court’s order modifying the automatic stay constitutes a determination that the present action could proceed because it would not interfere with Williams’ "fresh start."
The plaintiff’s argument fails to appreciate the temporal nature of the automatic stay. See Green v. Welsh, supra, 956 F.2d 32. Even if the court were to accept the plaintiff’s interpretation of the Bankruptcy Court’s order as a determination that the present action would not interfere with the "fresh start policy" underlying the bankruptcy statutes and could proceed, the automatic stay that entered as a result of Williams filing his bankruptcy petition, and the order modifying the stay, remained in effect only until the discharge was entered. See id. Thus, while ordinarily "an order modifying an automatic stay must be strictly construed," Citigroup Mortgage, Inc. v. Mehta, 39 Conn.App. 822, 827, 668 A.2d 729 (1995), the relief from the stay order is no longer in effect, and as such, does not mandate denial of Williams’ motion to dismiss.
CONCLUSION
For the foregoing reasons, the plaintiff’s motion to dismiss all claims against him in this action is granted.