Opinion
Case No. 13-12164 Adversary No. 13-1086
04-17-2015
In Re LAWRENCE C. LUDWIG Debtor THEIN FINANCIAL GROUP, INC., ET AL. Plaintiffs v. LAWRENCE C. LUDWIG Defendant
Chapter 7
MEMORANDUM OPINION DISMISSING COMPLAINT
This matter is before this Court on plaintiffs Thein Financial Group, Inc., Michael A. Thein and James P. Thein's (collectively, the "Plaintiffs") Complaint to Determine Dischargeability [Docket Number 1] (the "Complaint"), defendant Lawrence C. Ludwig's (the "Debtor") Answer [Docket Number 6], the parties' Stipulations of Fact [Docket Number 23], and the parties' trial briefs [Docket Numbers 26, 27, 28]. A trial was held on September 25, 2014.
At issue is the dischargeability of a debt under 11 U.S.C. § 523(a)(6) resulting from an alleged breach of a non-compete clause. For the reasons stated below, this Court finds that the debt is dischargeable because the Plaintiffs failed to meet their burden of proof by a preponderance of the evidence that the Debtor's actions were willful and malicious.
Unless otherwise indicated, the terms "Bankruptcy Code," "Section" and "§" refer to Title 11 of the United States Code, 11 U.S.C. § 101 et seq.
I. Jurisdiction
This Court has subject matter jurisdiction over this adversary proceeding pursuant to 28 U.S.C. §§ 157 and 1334 and the general order of reference entered in this district. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(I).
II. Findings of Fact
The Debtor has been in the business of selling securities since 1996. Beginning in 2001, the Debtor was a principal of The Ludwig Financial Group, LLC ("Ludwig Financial"), along with his father. Ludwig Financial's place of business was located at 7926 Clyo Road, Centerville, Ohio (the "Clyo Location"). While at Ludwig Financial, it was the Debtor's practice to meet with his clients 80% of the time at the clients' homes and 20% of the time at the Clyo Location. Around 2006, the Debtor's father wished to retire. As a part of that retirement process, on October 31, 2006, an asset purchase agreement (the "Agreement") was entered into between Ludwig Financial and Thein Financial Group, Inc. ("Thein Financial") whereby Thein Financial purchased "all of [Ludwig Financial's] existing clients and accounts, and including client files" for a purchase price of $250,000. At the time the Agreement was entered into, Ludwig Financial had 55 clients who resided within 35 miles of the Clyo Location. These 55 clients were the basis of the following non-compete clause set forth in the Agreement:
7.1 Restrictions on Competition, Solicitation. Seller, and Robert J. Ludwig, Sr., Lawrence C. Ludwig individually, covenant and agree that for a period of 60 months following the Closing, Seller and Ludwig will not engage, directly or indirectly, whether as a principal or as agent, officer, director, employee, consultant, shareholder, or otherwise, alone or in association with any other person, corporation or other entity, in the business of the sale of securities within a 35 mile radius of the [Clyo Location].(the "Non-Compete Provision"). Any of Ludwig Financial's clients that resided outside the 35 mile radius of the Clyo Location were not covered by the Non-Compete Provision.
The Debtor received $125,000 from the $250,000 purchase price, with the remainder being paid to his father. Also, while not required by the Agreement, the Debtor became an employee of Thein Financial, as part of an "arrangement" with the Debtor's father.
On April 23, 2008, after business hours, the Debtor essentially quit his employment with Thein Financial, removing all his personal belongings, including his personal computer, from his office at Thein Financial. He did not, however, take a client list, which resided on a hard drive that was left at Thein Financial. Relying on memory and using the internet to find telephone numbers and/or addresses, the Debtor promptly contacted the 55 clients to advise them that he had left Thein Financial and that he was now with WRP Investments ("WRP"). The Debtor did not contact any client that was originally a client of Thein Financial. The Debtor's new office with WRP was located at 3540 Blue Rock Road, Suite 2, Cincinnati, Ohio (the "WRP Location"), more than 35 miles away from the Clyo Location.
The Debtor testified that, on the advice of counsel, he interpreted the Non-Compete Provision to prohibit him from having an office within 35 miles of the Clyo Road Location. He testified that it was "up to them" whether or not any of the 55 clients would stay with Thein Financial or stay with him and move their business to WRP. He testified that he "absolutely" wanted the clients to come with him, but that he could not force them to do so. Ultimately, a majority of the 55 clients followed the Debtor to WRP. The Debtor acknowledged that he—not Thein Financial—received the commissions from the clients that followed the Debtor to WRP.
The Debtor described his reason for leaving Thein Financial as "a difference of opinion on how the business should be run, I guess."
On January 8, 2009, the Plaintiffs filed an action in state court against the Debtor, which was subsequently dismissed. On November 29, 2011, the Plaintiffs filed a second action in state court against the Debtor, alleging breach of contract, including breach of the Non-Compete Provision. On February 8, 2013, on the eve of trial, the parties entered into an agreed judgment entry (the "Agreed Judgment Entry") granting judgment in favor of the Plaintiffs and against the Debtor in the amount of $150,000. On May 3, 2013, the Debtor filed his bankruptcy petition.
The Agreed Judgment Entry states in its entirety:
Upon agreement of the parties and for good cause shown, IT IS HEREBY ORDERED that judgment is rendered in favor of Plaintiffs on Plaintiffs' First Amended Complaint for Money Damages against Defendant Lawrence C. Ludwig in the amount of One Hundred and Fifty Thousand Dollars ($150,000), plus interest at the rate of four percent (4%) per annum until paid pursuant to the discussions made on the record.
Costs of this action are to be divided equally between the parties.
III. Discussion and Legal Conclusions
The issue in this adversary proceeding is whether the Debtor owes a nondischargeable debt to the Plaintiffs pursuant to § 523(a)(6) for inflicting a "willful and malicious injury" to the Plaintiffs. "Although the 'willful' and 'malicious' requirements will be found concurrently in most cases, the terms are distinct, and both requirements must be met under § 523(a)(6)." S. Atl. Neurology and Pain Clinic, P.C. v. Lupo (In re Lupo), 353 B.R. 534, 550 (Bankr. N.D. Ohio 2006) (citations omitted).
The Plaintiffs have the burden to establish by a preponderance of the evidence both the "willful" and the "malicious" elements to prevail on a claim of nondischargeability under §523(a)(6). Grogan v. Garner, 498 U.S. 279, 291 (1991).
As interpreted by the United States Supreme Court, a "willful" injury requires "a deliberate or intentional injury, not merely a deliberate or intentional act that leads to injury." Kawaauhau v. Geiger, 523 U.S. 57, 61 (1998). Accordingly, a court must find that "the debtor intended his actions, and the debtor either intended his actions to cause injury to the creditor or the debtor believed that injury to the creditor was substantially certain to follow." Tomlin v. Crownover (In re Crownover), 417 B.R. 45, 57 (Bankr. E.D. Tenn. 2009) (citing Markowitz v. Campbell (In re Markowitz), 190 F.3d 455, 464-65 (6th Cir. 1999)). Because a debtor will rarely admit to a subjective intent to cause injury, "in addition to what a debtor may admit to knowing, a bankruptcy court may consider circumstantial evidence that tends to establish what the debtor may have actually known when taking the injury-producing action." In re Lupo, 353 B.R. at 550 (citing Jett v. Sicroff (In re Sicroff), 401 F.3d 1101, 1106 (9th Cir. 2005)).
The term "malicious" is construed in the context of § 523(a)(6) to mean actions taken "in conscious disregard of one's duties or without just cause or excuse; it does not require ill-will or specific intent." Monsanto Co. v. Trantham (In re Trantham), 304 B.R. 298, 308 (B.A.P. 6th Cir. 2004) (quoting Wheeler v. Laudani, 783 F.2d 610, 615 (6th Cir. 1986) (internal quotation marks omitted)). While "in [the] great majority of cases, the same factual events that give rise to a finding of 'willful' conduct, will likewise be indicative as to whether the debtor acted with malice, . . . the definition of malice requires a heightened level of culpability transcending mere willfulness." Superior Metal Prods. v. Martin (In re Martin), 321 B.R. 437, 442 (Bankr. N.D. Ohio 2004).
The Plaintiffs contend that the Debtor's violation of the Non-Compete Provision was willful and malicious and that the resulting damages to the Plaintiffs in the amount of $150,000, as evidenced by the Agreed Judgment Entry, are nondischargeable under § 523(a)(6). Relying on In re Trantham, 304 B.R. at 307, the crux of the Plaintiffs' legal argument is that the dual intent requirement of willful and malicious is satisfied as long as a "zero sum" situation can be shown. A "zero sum" situation arises "where a pecuniary gain is only possible by a loss to another." Elza v. United States, 335 B.R. 654, 659 (E.D. Ky. 2006). In other words, the Plaintiffs contend that their burden of proof has been met because after April 28, 2008, the Debtor received commissions from the clients that followed the Debtor to WRP and that the Plaintiffs did not receive those commissions.
The Plaintiffs interpret In re Trantham to stand for the proposition that any "zero sum" situation will result in a finding of non-dischargeability under § 523(a)(6). This Court does not agree. As did the court in Elza v. United States, this Court holds that "a more thorough reading of Trantham indicates that its holding is limited by the fact that the action of the debtor (patent infringement) was analogous to an intentional tort, and that a broader reading, taking into account Markowitz v. Campbell, narrows the holding to cases of intentional and other analogous torts." Elza, 335 B.R. at 659.
The Plaintiffs presented no legal authority to support the proposition that breach of a contract, including breach of a non-compete agreement, constitutes an intentional tort under Ohio law. Such an interpretation is contradictory to well-settled Ohio law that a breach of contract is not a tort, regardless of motive. Ketcham v. Miller, 136 N.E. 145 (1922). Also, such an interpretation is also contradictory to the plethora of cases holding that a breach of a contract does not render a debt nondischargeable under § 523(a)(6). Kawauhau v. Geiger, 523 U.S. 57, 62 (1998)(a "knowing breach of contract" does not qualify as an exception to discharge under § 523(a)(6)); Spring Works, Inc. v. Sarff (In re Sarff), 242 B.R. 620, 626 (B.A.P. 6th Cir. 2000)("An ordinary tort or breach of contractual or statutory duty generally is not sufficient to deny discharge under subsection (6) without some aggravating circumstance evidencing conduct so reprehensible as to warrant denial of the 'fresh start' to which the 'honest but unfortunate' debtor would normally be entitled under the Bankruptcy Code.")(quoting Novartis v. Luppino (In re Luppino), 221 B.R. 693, 700 (Bankr. S.D.N.Y. 1998)); Salem Bend Condominium Ass'n Section One v. Bullock-Williams (In re Bullock-Williams), 220 B.R. 345, 347 (B.A.P. 6th Cir. 1998)("more than just the knowing breach of contract" is necessary to prove debtor intended to cause harm)(internal quotations omitted). Accordingly, this Court finds as a matter of law that the Plaintiffs' argument that the Debtor created a "zero-sum" situation with Thein Financial does not satisfy the Plaintiffs' burden of proof under § 523(a)(6) to show that the Debtor's actions were both willful and malicious.
This Court's analysis assumes without deciding that the Debtor did breach the Agreement. Because this Court finds the debt to be dischargeable, it is not necessary for this Court to address the Debtor's contention that he did not violate the Non-Compete Provision because his office at the WRP Location was more than 35 miles away from the Clyo Location. Further, it is not necessary for this Court to address the Debtor's argument that the Agreement placed a value of only $1,000 on the Non-Compete Provision. --------
Moreover, this Court finds that the Plaintiffs presented no evidence at the trial that the Debtor's actions were "willful." That is, while the Debtor surely intended his actions, the Plaintiffs presented no evidence that the Debtor intended his actions to harm Thein Financial or that injury to Thein Financial was substantially certain to follow. The Debtor merely informed the 55 clients that he had left Thein Financial and that he was now working for WRP. There was no substantial certainty that any of the 55 clients would follow the Debtor to WRP. There was no evidence that any of the clients who had not previously been a client of the Debtor's followed the Debtor to WRP. Because the Plaintiffs have failed to prove the "willful" element under § 523(a)(6), it is not necessary for this Court to address whether or not the Debtor's actions were "malicious."
Accordingly, this Court finds that the debt is DISCHARGEABLE.
IT IS SO ORDERED.
This document has been electronically entered in the records of the United States Bankruptcy Court for the Southern District of Ohio.
IT IS SO ORDERED.
/s/_________
Beth A. Buchanan
United States Bankruptcy Judge Dated: April 17, 2015 Distribution list:
Laura R. Faulkner, Esq.
Elaine M. Landis, Esq.