618 B.R. 901
10th Cir. BAP2020Background
- Michael Smith was longtime COO and general counsel at Equity Title; after First American acquired Equity, Smith became First American underwriting/legal counsel.
- While still employed, Smith covertly formed Northwest Title, recruited 27 First American employees, opened next door, and moved customers and orders to Northwest.
- First American sued in federal district court for breach of contract, breach of fiduciary duty, tortious interference, and related claims; the jury awarded multi-million dollar damages and fees, affirmed on appeal to the Tenth Circuit.
- Smith filed Chapter 7; First American sought to except its judgment from discharge under 11 U.S.C. § 523(a)(6) (willful and malicious injury).
- The Bankruptcy Court found Smith’s debt nondischargeable under § 523(a)(6); Smith appealed to the BAP, which affirmed based on separate willfulness and malice findings and extensive factual findings supporting Smith’s subjective knowledge and culpability.
Issues
| Issue | Plaintiff's Argument (First American) | Defendant's Argument (Smith) | Held |
|---|---|---|---|
| Whether debt is nondischargeable under § 523(a)(6) (willful and malicious) | Smith deliberately formed competitor, solicited employees and clients, breached fiduciary duties and contracts, and subjectively knew harm was substantially certain — so debt nondischargeable | Conduct was ordinary market competition or based on a reasonable belief agreements were unenforceable; lacked specific intent to cause legal injury | Court treated willful and malicious as separate elements, found ample record support for both, and affirmed nondischargeability |
| Whether District Court findings are issue-preclusive and may be applied | Prior adjudication established enforceability of agreements and tortious interference, supporting willfulness/malice | Preclusion was erroneously applied or insufficient to prove malice; factual issues remain | BAP held issue preclusion was available under Utah law but the Bankruptcy Court did not rely solely on it and permissibly considered the totality of evidence |
| Whether Bankruptcy Court misapplied the "malice" standard or shifted burden to Smith | Malice shown by wrongful acts without justification; creditor bears burden to prove absence of justification | Court improperly placed burden on Smith to disprove malice or mis-stated malice test | Court concluded the Bankruptcy Court considered debtor’s justifications as part of the totality and did not impermissibly shift the burden; malice finding upheld |
Key Cases Cited
- Kawaauhau v. Geiger, 523 U.S. 57 (1998) (§ 523(a)(6) excludes debts from negligent or reckless conduct; clarifies "willful" element)
- Panalis v. Moore (In re Moore), 357 F.3d 1125 (10th Cir. 2004) (discusses willful element and cites other circuits on malice)
- Dorr, Bentley & Pecha v. Pasek (In re Pasek), 983 F.2d 1524 (10th Cir. 1993) (requires examining totality, debtor justification, and knowledge for willful-and-malicious inquiry)
- Grogan v. Garner, 498 U.S. 279 (1991) (creditor bears burden by preponderance to prove nondischargeability)
- Old Republic Nat'l Title Ins. Co. v. Levasseur (In re Levasseur), 737 F.3d 814 (1st Cir. 2013) (defines "malicious" as wrongful and without just cause or excuse)
- MarketGraphics Research Grp., Inc. v. Berge (In re Berge), 953 F.3d 907 (6th Cir. 2020) (adopts two-pronged willful-and-malicious approach and defines malice as conscious disregard of duties)