Dean v. ClavetDean v. Clavet
MEMORANDUM OF DECISION
Kevin Dean intentionally made a false representation of material fact. He made that false representation for the purpose of inducing reliance by his business partner, Emile Clavet, and Clavet justifiably relied on Dean‘s false representation. As a result, Clavet was damaged to the extent of approximately $2.5 million. There is no room to quarrel with any of this here because each of thеse findings was made by a state
By way of background to the parties’ dispute, the state court made the following findings: Dean and Clavet were business partners in a number of enterprises, one of which consisted of a marina in Texas that was originally acquired for $2.5 million. The marina was not owned by Dean and Clavet, but was instead owned by Blue Water, LLC and Covered Marina, LLC. Dean and Clavet each owned 50% membership interests in the two LLCs. Dean, who has roots in Texas, managed the marina.
As for the substance of the parties’ dispute, the state court made the following findings and conclusions: Dean intentionally withheld information consisting of an offer from a third party, TCRG Opportunity X LLC, to purchase the marina for $7.5 million, and did so to prevent Clavet from relying on that information. Dean had a fiduciary duty under Maine law to apprise Clavet of TCRG‘s offer. While Dean kept the offer to himself, he persuaded Clavet to sell his membership interests in both LLCs to Dean for significantly less than half of $7.5 million. Dean executed an agreement to sell the marina to TCRG on the same day that Clavet, without any knowledge of the agreement between Dean and TCRG, sold his membership interests in the LLCs to Dean. Dean “timed and manipulated his buyout of the [LLC] interests from Mr. Clavet in order to keep the proceeds of the sale to TCRG for himself.” [Judgment p. 6.] Dean‘s “scheme to defraud Mr. Clavet of his rightful share of the proceeds of the sale to TCRG” was “brazen.” Id. p. 15. The “inflictiоn of the economic injury . . . was significant, and was done intentionally” and with actual malice sufficient to warrant the imposition of punitive damages under Maine law. Id.
There is no hint of negligence or recklessness in the state court‘s findings. Instead, the judgment conclusively establishes that Dean‘s conduct resulted in an injury that was willfully inflicted on his longtime business partner. See Kawaauhau v. Geiger, 523 U.S. 57, 61 (1998) (“The word ‘willful’ in (a)(6) modifies the word ‘injury,’ indicating that nondischargeability takеs a deliberate or intentional injury, not merely a deliberate or intentional act that leads to injury.“). Dean deliberately injured Clavet by intentionally keeping the $7.5 million offer from TCRG to himself, while simultaneously persuading Clavet to part with his interests in the LLCs for significantly less than half of $7.5 million. The amount of Clavet‘s damages was determined by the state court based on later events, namely, the sale of Clavet‘s interests in the LLCs and the sale of the marina to TCRG. But the injury inflicted was the purpоseful concealment of information that Dean had a duty to share with Clavet. The state court judgment leaves no doubt that Dean committed fraud and breached his fiduciary duties to Clavet, all to prevent Clavet from sharing in the marina sale proceeds. Although Dean now contends
The state court judgment also establishes that Clavet‘s claim arose out of an injury inflicted maliciously within thе meaning of section 523(a)(6). Specifically, the state court found:
Mr. Dean has convinced himself that he deserved to keep the profits of his fraudulent scheme. He implied that he was a better businessman than Mr. Clavet, that he worked longer hours than Mr. Clavet, and that the nature of their relationship had somehow changed that in his view justified concealing the true value of the Marina properties from the person who owned the other half of the [LLCs]. Mr. Dean told Attorney Bell that he did not tell Mr. Clavet about the TCRG transaction because he worked harder than Mr. Clavet. . . . [I]t is clear to the Court that at all pertinent times Mr. Dean had no appreciation or respect for the legal reality that he and Mr. Clavet owned the Marina assets equally[.]
[Judgment p. 14.] These findings, and Dean‘s attempts to keep the TCRG transaction a secret, led the state court to conclude that Dean had acted with actual malice toward Clavet, justifying an award of punitive damages under Tuttle v. Raymond, 494 A.2d 1353 (Me. 1985).
Under Tuttle, punitive damages express society‘s disapproval of conduct deemed intolerable, id. at 1355, and are reserved for the deterrence of “truly reprehensible conduct[,]” id. at 1361. They may be awarded based upon tortious conduct perpetrated either with actual malice, or by means of deliberate conduct that is so outrageous that malice can be implied. Id. For his part, Dean observes that actual malice under Tuttle is not coterminous with maliciousness under section 523(a)(6). Compare id. (providing that actual malice exists where the tortfeasor‘s conduct “is motivated by ill will” toward another) with Printy v. Dean Witter Reynolds, Inc., 110 F.3d 853, 859 (1st Cir. 1997) (explaining that conduct may be malicious under section 523(a)(6) “if it was wrongful and without just cause or excuse, even in the аbsence of personal hatred, spite, or ill-will“), abrogated in part on other grounds by Geiger. Dean‘s observation may be correct, but it is not helpful to him here. Tuttle sets a standard for actual malice that requires a higher degree of culpability than the standard for maliciousness under section 523(a)(6). See Reynolds-Marshall v. Hallum, 162 B.R. 51, 56 (D. Me. 1993) (observing that malice under section 523(a)(6) requires a lesser showing of wrongfulness than actual malice à la Tuttle), abrogated in part on other
Dean‘s invitation for this Court to look past the state court judgment and focus, instead, on a prior order of the state court finds no traction either. Specifically, Dean contends that his failure to advise Clavet of the TCRG negotiations cannot be considered wrongful because the state court previously determined that Dean did not owe a fiduciary duty to Clavet. However, as explained in the judgment, the state court later revised that determination on Clavet‘s motion, and conclusively determined that Dean was a fiduciary as to Clavet at all relevant times. The state court found that Dean breached his fiduciary duties by failing to inform Clavet of TCRG‘s offer while simultaneously persuading Clavet to sell his interests in the LLCs. The state court further found Dean liable for fraud based uрon that same conduct. This proceeding does not provide Dean with the opportunity to relitigate that outcome.
Like the debtors in Printy and Old Republic National Title Insurance Co. v. Levasseur (In re Levasseur), 737 F.3d 814 (1st Cir. 2013), Dean violated his obligation not to deceive. Perhaps he lacked the specific knowledge that his conduct would constitute a breach of fiduciary duty under Maine law. But there is no question that Dean withheld TCRG‘s offеr from Clavet with the conscious object of preventing Clavet from using that offer when valuing his interests in the LLCs. Dean does not contend that he did not know that his deception was fraudulent, and he does not ask for a trial on the issue of his state of mind. In light of that, on this record, there is only one reasonable inference: Dean had to have known that his scheme was wrongful. His attempts to keep Clavet in the dark about the sаle to TCRG certainly suggest as much, and the judgment contains no hint to the contrary. There is no reason to suppose that Dean, an experienced businessman with a long history of shared enterprises with Clavet, did not know that that his scheme was wrongful. The idea strains credulity at best. In denying Clavet an opportunity to share in the profits of the sale to TCRG, Dean engaged in a “brazen” scheme—one that was specifically calculated to harm Clavet.
The state court‘s award of punitive damages also establishes that there was no just cause or excuse for Dean‘s wrongful conduct and the resulting injury to Clavet (even though Dean had ample opportunity and a powerful incentive to demonstrate just cause or excuse when defending Clavet‘s claims).2 How could any court determine that there was just cause or exсuse for a tort but at the same time impose a significant punitive damages award based on the tortfeasor‘s demonstrated personal animus toward the tort victim? Cf. NBA Props., Inc. v. Moir (In re Moir), 291 B.R. 887, 892 (Bankr. S.D. Ga. 2003) (concluding that “a judgment for conversion enhanced by punitive damages establishes a wrongful
In short, the findings essential to the state court judgment establish that Dean inflicted аn injury that was both wrongful and without just cause or excuse and therefore malicious within the meaning of section 523(a)(6). Because Dean‘s conduct was also willful for purposes of section 523(a)(6)—as discussed above—Clavet is entitled to a judgment excepting his claim from discharge as a matter of law.
Dean attempts to avoid this inescapable conclusion with a roundabout theory about the scope of section 523(a)(6). In Dean‘s view, section “523(a)(6) is not available in this case” because the conduct in question arguably comes close to, but does not quite satisfy, the more specific exceptions to discharge in sections 523(a)(2) or (a)(4). [Dkt. No. 9, p. 8.] This perspective could find a modicum of purchase in the canon against superfluity and the Supreme Court‘s reluctance to adopt an interprеtation of section 523(a)(6) that would render other portions of the statute superfluous. See Geiger, 523 U.S. at 62. Since Geiger, however, the Supreme Court has recognized some inevitable overlap between sections 523(a)(2), (a)(4), and (a)(6), noting that “debtors who make false representations under § 523(a)(2)(A) could . . . also inflict ‘willful and malicious injury’ under § 523(a)(6).” Husky Int‘l Elecs., Inc. v. Ritz, 136 S. Ct. 1581, 1588 (2016). The Supreme Court further observed that section 523(a)(6) “covers debts ‘for willful and malicious injury,’ whether or not that injury is the result of fraud[.]” Id. Moreover, the First Circuit Court of Appeals has squarely rejected an argument similar to Dean‘s, holding that “sections 523(a)(2)(A) and (a)(6) are not mutually exclusive.” Printy, 110 F.3d at 858. In reaching this holding, the Court of Appeals signaled agreement with the view that there “is nothing in the text of section 523(a)(6) which precludes its proper invocation by an aggrieved party whose claim for willful and malicious injury sounds in fraud.” Id. (quotation marks omitted).
Here, beсause the injury that Dean inflicted on Clavet was both willful and malicious, Clavet‘s claim is excepted from Dean‘s discharge under section 523(a)(6). This is true even though the state court judgment sounds in fraud and breach of fiduciary duty. In addition to section 523(a)(6), the parties were invited to brief the dischargeability of Clavet‘s claim under
As for the amount of the nondischargeable debt, Dean insists that the state court judgment should not carry preclusive effect. He emphasizes that the state court found him liable for breach of fiduciary duty and fraud and imposed both compensatory and punitive damages, without allocating either component of the award to fraud or breach of fiduciary duty specifically. That is of no moment. The state court analyzed fraud and breach of fiduciary duty together because the factual findings germane to the claims overlapped to a significant, if not complete, degree. Dean‘s fraud vis-à-vis Clavet was the very same conduct that violated the fiduciary duty that he owed to Clavet. There was no need for the state court to apportion damages between two aspects of Dеan‘s conduct or between the two LLCs, which were governed by different state laws. On this score, the judgment can be read in only one way: the state court found that Dean breached his fiduciary duty and engaged in intentional misrepresentation as to his purchase of Clavet‘s interest in Blue Water (an LLC governed by Maine law) and that the breach and misrepresentation caused Clavet to relinquish his interests in both LLCs (one of whiсh was governed by Texas law). See [Judgment p. 5 n.3.] The state court further found that “the profit Mr. Dean made and kept to himself at the time TCRG purchased the Marina properties was the ‘proximate consequence’ of the fraudulent misrepresentation that Clavet has proven by clear and convincing evidence.” Id. p. 12. Both the compensatory and the punitive damages were awarded as a result оf Dean‘s fraudulent scheme. There was no need for a more detailed claim-by-claim or LLC-by-LLC allocation there, and there is none here because that singular fraudulent scheme was willful and malicious.
This case is not like Spagnuolo v. Brooke-Petit, 506 B.R. 1 (D. Mass. 2014), where the District Court concluded that a jury verdict was not dispositive as to the amount of a claim excepted from discharge when the jury found liability on multiple claims, only some of which met the standard of nondischargeability, and where the jury did not allocate damages to specified conduct supporting various claims. See id. at 7. This case is also distinguishable from cases where a state court jury verdict did not establish the requirements for section 523(a)(6) because of the particular state law requirements for punitive damages. See, e.g., Goins v. Day (In re Day), 137 B.R. 335, 342 & n.10 (Bankr. W.D. Mo. 1992) (concluding that the punitive damages portion of a state court jury verdict did not fit within section 523(a)(6) because the jury instructions did not require findings of willfulness and maliciousness to support an award of punitive damages).
The entire amount of Clavet‘s claim is nondischargeable. As the District Court held previously, section 523(a)(6) encompasses both punitive and compensatory damages that arise from willful and malicious conduct. Reynolds-Marshall, 162 B.R. at 60. Although neither the Supreme Court nor the First Circuit Court of Appeals have explicitly ruled on the dischargeability of punitive damages under section 523(a)(6), Supreme Court dicta supports the holding of Reynolds-Marshall. See Grogan, 498 U.S. at 282 n.2 (1991) (suggesting that “judgments that include punitive damages are more appropriately governed by § 523(a)(6)” than by section 523(a)(2)(A)). So does the weight of
The Court will, on its own initiative, enter summary judgment for Clavet. The procedure may be uncommon, but it is expressly authorized by Fed. R. Civ. P. 56(f)(3). Dean was afforded an opportunity file a brief opposing summary judgment along with a concise statement of additional material facts (beyond the existence and terms of the statе court judgment and the decision affirming that judgment). [Dkt. No. 4.] As authorized, Dean submitted a brief and a statement of undisputed material facts. [Dkt. Nos. 9-10.] He did not contend that there were disputes of material fact or ask for a trial; he asked for the entry of summary judgment in his favor.3
The state court judgment is binding on the parties and outcome-determinative here. Dean and Clavet may have legitimate disputes, including disputes about the value of various assets included in the estate and the requirements for confirmation of a plan in Dean‘s chapter 11 case. The particular dispute in this adversary proceeding, however, is not a close call in light of the state court judgment. Summary judgment will issue in Clavet‘s favor on Dean‘s complaint because the record “compel[s] a determination of nondischargeability as a matter of law.” Seе Gray v. Tacason (In re Tacason), 537 B.R. 41, 50 (B.A.P. 1st Cir. 2015).
Date: May 7, 2021
Michael A. Fagone
United States Bankruptcy Judge
District of Maine