In a §523(a)(6) Dischargeability Proceeding, the 4th Circuit Rules Collateral Estoppel Does Not Apply When State Court Judgment Did Not Make Specific Findings of Intent

In a §523(a)(6) Dischargeability Proceeding, the 4th Circuit Rules Collateral Estoppel Does Not Apply When State Court Judgment Did Not Make Specific Findings of Intent

On May 8, 2019, the Fourth Circuit Court of Appeals reversed and remanded an award of summary judgment concerning a dischargeability proceeding under 11 U.S.C. § 523(a)(6).

In 2016, Charles Taylor Muhs (“Appellant”) filed for Chapter 7 bankruptcy and attempted to discharge a judgment in excess of $20 million entered by an Alaska district court against him and in favor of TKC Aerospace, Inc. (“TKCA”).

This judgment was the result of two state court trials. One was in Alaska where Appellant was a named defendant and another in Arizona where Appellant’s employer was the defendant and Appellant was a witness. Both complaints essentially allege that Appellant stole a corporate business opportunity from TKCA (his former employer) and delivered it to a competitor, using TKCA proprietary information.

In the Arizona litigation TKCA was successful and obtained a judgment in the total amount of $20,295,782.58. This judgment included $2,883,055.86 in lost profits; $3,882,205 in research and development costs; and $13,530,521.72 in exemplary damages. TKCA returned to Alaska and filed a motion for summary judgment based on the Arizona judgment.

The Alaska court, applying principles of equitable estoppel, reached the conclusion that Appellant agreed to be bound by the Arizona judgment and therefore was collaterally estopped from relitigating TKCA’s claims against him in Alaska. Alaska entered judgment against the Appellant in the same amounts as the Arizona judgment. The Alaska court noted that the exemplary damages award of $13,530.521.72 was based on Alaska statute AS 45.50.915(b) without further explanation. AS 45.50.915(b) states “If willful and malicious misappropriation exists, the court may award exemplary damages in an amount not exceeding twice the damages awarded under (a) of this section.”

In the Appellant’s bankruptcy, TKCA filed an adversary proceeding arguing that the judgment is non-dischargeable under 11 U.S.C. § 523(a)(6) because the damages award was based on Appellant’s willful and malicious misappropriation of TKCA’s trade secrets.

Ultimately, the bankruptcy court, applying collateral estoppel principles, concluded that Alaska’s award of damages to TKCA necessarily meant that Appellant willfully and maliciously injured TKCA for purposes of § 523(a)(6), granted summary judgment in favor of TKCA, and determined that the entire judgment award was nondischargeable. The district court affirmed.

On the appeal, the court had to determine whether Appellant is collaterally estopped from arguing in bankruptcy court that the Alaska judgment is dischargeable under § 523(a)(6), because the Alaska court awarded exemplary damages to TKCA based on willful and malicious misappropriation under Alaska law.

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