FNA Group, Inc. v. Arvanitis (In re Arvanitis)FNA Group, Inc. v. Arvanitis (In re Arvanitis)
MEMORANDUM OPINION ON FNA’S MOTION FOR SUMMARY JUDGMENT
This adversary proceeding was brought by FNA Group, Inc. (“FNA”) against Debtor Demetrios Arvanitis (“Arvanitis”). It relates to the Debtor’s Chapter 7 case, and seeks to except a debt from discharge under 11 U.S.C. §§ 523(a)(4) and 523(a)(6). After an Answer was filed, FNA Group moved for summary judgment based on asserted issue preclusion arising from a state court order imposing a temporary restraining order (“TRO”) and an order finding civil contempt.
Arvаnitis formerly worked at FNA from 1996 through 2012, rising to the title of
UNCONTESTED FACTS
The following background facts are drawn from the Plaintiffs Statement of Uncontested Facts, which was filed as required by Local Bankruptcy Rule 7056-1, and the Defendant’s response as required by Local Bankruptcy 7056-2. The statements of uncontested facts are nearly all verbatim copies of the allegations contained in the complaint. “The facts are viewed in the light most favorable to the non-moving party and all reasonable inferences are drawn in [his] favor.” Ault v. Speicher,
FNA аlleges that: FNA is an Illinois corporation which manufactures and sells pressure washers. (Complaint ¶ 5; 7056-1 ¶ 1.) Arvanitis admits this fact. (7056-2 ¶ 1.) Arvanitis was an employee of FNA for 16 years from September, 1996 to August 2012. (Answer ¶ 6; 7056 ¶ 2.) On the date of his departure, Arvanitis held the title of Direct of Operations and Logistics, and his job responsibilities included supervising FNA facilities and the operation and security of FNA’s buildings. (Answer ¶ 6; 7056-2 ¶ 3.)
FNA alleges that Arvanitis signed a “Trade Secret/Non-Disclosure Agreement” and received an “Employee Handbook,” which included a “Confidentiality Agreement” and signed an acknowledgement form'relating to the Employee Handbook during his employment. (Complaint ¶¶ 7, 10, 12; 7056-1 ¶¶ 5, 8, 9.) Arvanitis denies that he ever executed any of those documents (7056-2 ¶¶ 5, 8, 9.), but does not contest the contents of the documents (7056-2 ¶ 6-7,10.). Strangely enough, even though Arvanitis deniеs ever signing those documents, he admits as an uncontested fact that he was “at all times bound by the terms of the Trade-Secret/Non-Disclosure Agreement, the Employee Handbook and the Confidentiality Agreement.” (7056-2 ¶1.)
FNA alleges, and Arvanitis denies,- that Arvanitis collected proprietary and confidential information from FNA, including using secret audio-visual recording devices. (Complaint ¶¶ 15-18; 7056-1 ¶¶ 12-15.) After his employmеnt ended, Arvanitis allegedly refused to return the confidential materials to FNA, and threatened to reveal the confidential and proprietary information, and even revealed some to third parties. (Complaint ¶ 9;7056-l ¶¶ 7, 19.) Arvanitis denies these facts.
FNA sued in state court, seeking damages and an injunction for the alleged theft of proprietary and confidential information, under various theories, including breach of contract, breach of fiduciary duty, conversion, and intrusion upon seclusion. (Complaint ¶ 21;7065-1 ¶ 20.) The following history of the litigation in state court is uncontested by Arvanitis. That is, he admits that the events in state court took place, even as he contests the substance of what was alleged in the state court proceeding. (7052-2 ¶¶ 21-49.) FNA moved for a temporary restraining order and prеliminary injunction. (Complaint
The state court then found that, “Mr. Arvanitis has possession of documents, materials, hardware or software as set forth in the TRO which he has failed to turn over as ordered. Therefore, Mr. Ar-vanitis is in indirect civil contempt of court.” (Dkt. 25 Exh. F at 7-8.) Accordingly, the court ordered “Arvanitis is adjudicated in indirect civil contempt for not complying with the TRO entered October 2, 2013.” and Arvanitis was ordered to pay a 'fine of $2500 per day to the court until he complied with the TRO. (Id. at 8.) Ar-vanitis moved for reconsideration of the contempt order, and the state court judge entered an order halting the accumulation of fines in excess of $32,500 until a further evidentiary hearing. (Complaint ¶¶ 40-41; 7056-1 ¶¶ 40-41.)
After the second evidentiary hearing on Arvanitis’s motion for reconsideration was set, but before the hearing itself, Arvanitis filed for relief under Chapter 7 in the above captioned bankruptcy case. (Complaint ¶ 43; 7056-1 ¶ 43.) FNA sought and was granted relief from the automatic stay in order to pursue its cоntempt proceeding in state court. (Bankruptcy Dkts. 11, 44.) In state court, the contempt order was reinstated, and Arvanitis did not appeal. (Complaint ¶¶ 45-46;7056-l ¶¶45-46.) FNA sought in this court further relief from the automatic stay in order to pursue its case in state court to final judgment and to seek incarceration of the debt- or for contempt, and that relief was granted, except that FNA was not authorized tо attempt collection of any monetary judgment. (Bankruptcy Dks. 26.) In state court, FNA moved to incarcerate Arvanitis for civil contempt. (7056-1 ¶ 49.) Arvanitis was incarcerated for two weeks, then released, although nothing is said about how Arvanitis secured his release. (Id.) The state court case has not reached final judgment.
FNA also filed this adversary proceeding to determine the dischargeability of the debt owed by Arvanitis as a result of Arvanitis’s acts comрlained of in the state court case. After an Answer was filed, FNA moved for summary judgment.
In its adversary complaint for nondis-chargeability, FNA alleges that Arvanitis recorded private conversations between FNA officers and employees with customers, (¶ 17.), and also took copies of customer lists (¶ 19.), and other proprietary information. Further, the complaint seeks relief for threatening tо disclose and actually disclosing confidential information to third parties. (¶ 22.) While the conduct FNA complains of includes taking proprie
In his response to the motion for summary judgment, Arvanitis attached an “affidavit” that had a space for a notary’s signature, but was never notarized, and was undated.
Upon FNA’s motion for summary judgment, a briefing schedule was established. To its reply brief, FNA attached, as Exhibit A, a three or four-inch stack of transcripts from the state court proceeding. Exhibit A was not accompanied by an affidavit regarding its authenticity and completeness, and FNA did not supply an abstract of that long transcript or state in its reply brief what parts of the transcript it wished to rely upon and what pertinence each part might have. Moreover, it was filed with the reply brief and thereby sought to expand the factual basis for relief originally sought. This had the effect of surprising the defendant with new issues after he had responded to the motion. Exhibit A was therefore stricken by motion of court sua sponte. See United States v. Dunkel,
DISCUSSION
Jurisdiction
Subject matter jurisdiction lies under 28 U.S.C. § 1334. Under 28 U.S.C. § 157 and District Court Operating Procedure 15(a) of the United States District
SummaRY Judgment
Summary judgment should only be-granted “if the pleadings, the discovery and disclosure materials on file, and any affidavits show that there is no genuine issue as to any material fact and that the movant is entitled to judgmеnt as a matter of law.” F.R.C.P. 56(a) (made applicable in bankruptcy by Fed. R. Bankr.P. 7056). “The moving party bears the initial burden of demonstrating the absence of a genuine issue of material fact.” Roger v. Yellow Freight Sys., Inc.,
§ 523(a)(4) Embezzlement & Larceny (COUNT 1)
In Count I, FNA Group seeks a declaration that its clаim against Arvanitis is not dischargeable on grounds of embezzlement. Section 523(a)(4) provides that certain debts incurred by embezzlement or larceny are not dischargeable. In its complaint, FNA Group only seeks nondis-chargeability on grounds of embezzlement. In its motion for summary judgment, however, it also argues that larceny may apply.
Embezzlement under § 523(a)(4) has been defined as the “fraudulent apprоpriation of property by a person to whom such property was entrusted or into whose hands it has lawfully come.” Matter of Weber,
“Larceny is proven for § 523(a)(4) purposes if the debtor has wrongfully and with fraudulent intent taken property from its owner.” Matter of Rose,
§ 523(a)(6) Willful & Malicious Injury (COUNT 2)
In Count II, nondischargeability is sought under § 523(a)(6). A debt is nondischargeable under § 523(a)(6) for willful and malicious injury when there is “(1) an injury caused by the debtor -(2) willfully and (3) maliciously.” First Weber Group, Inc. v. Horsfall,
Availability of Issue Preclusion
A state court judgment is entitled to the same preclusive effect in federal court as that judgment would have in
Under Illinois state law, collateral estoppel, also known as issue preclusion, applies when:
(1) the issue decided in the prior adjudication is identical with the one presented in the suit in question,
there was a final judgment on the merits in the prior adjudication, and
the party against whom estoppel is asserted was a party or in privity with a party to the prior adjudication.
In re Owens,
Trial courts have broad discretion to make sure that application of offensive collateral estoppel is not fundamentally unfair to the defendant, even though the threshold requirements for collateral es-toppel are otherwise satisfied. Id. at 399,
In a recent case, another bankruptcy judge in this district granted summary judgment based on collateral еstoppel for defalcation by one in a fiduciary capacity under § 523(a)(4), demonstrating that offensive summary judgment based on collateral estoppel may succeed in the nondis-chargeability context. Wain v. Wain, 13-bk-38147, 14-ap-177 (Bankr.N.D.Ill. Dec. 17, 2014). But in Wain, the state court case had reached final judgment and the state court judge had made specific factual findings that satisfied the legal requirements for nondischargeability. As will be seen below, however the factual findings of the state court contempt order applicable here do not satisfy legal requirements for nondischargeability in this proceeding.
Applicability of Collateral Estoppel Here
FNA Group argues that both the TRO order and the contempt order give rise to collateral estoppel. The TRO order cannot not give rise to collateral estoppel because by its own terms, it only found a likeliness of success on the merits and was thus not a judgment on the merits. See Wilson v. Hinsdale Elementary School District 181,
Under Illinois state law, a judgment for contempt is a final judgment. “The imposition of a sanction for contempt is final and appealable because, although occurring within the context of another proceeding and thus having the appearance of being interlocutory, it is an original special proceeding, collateral to and independent of, the case in which the contempt arises.” People ex rel. Scott v. Silverstein,
In the state court contempt order, it was found that “Mr. Arvanitis has possession of documents, materials, hardware or software as set forth in the TRO which he has fаiled to turn over as ordered. Therefore, Mr. Arvanitis is in indirect civil contempt of court.” (Dkt. 25 Exh. F at 7-8.) The items “set forth in the TRO” were “any and all documents and materials of any nature pertaining to any work performed for or elated to FNA Group, Inc., ...” and “any computer hardware and software containing any of the information contained in Paragraph 1 ...” (Dkt. 25 Exh. D at 2.) However, the state court
The opinion in First Weber Group v. Horsfall is instructive.
Likewise here, willfulness required under § 523(a)(6) to prove a willful and malicious injury has not been established by the state court’s contempt order. What has been established is only that at some point, Arvаnitis gained possession of some of plaintiffs property, and at some point that possession was determined by court order to have become wrongful. The language in the contempt order did not find that Arvanitis acted with the intent to injure FNA, nor did the contempt order find that Arvanitis took or kept FNA’s property knowing that he did not have authorization at any time prior to entry of the TRO. Nor has intеnt to deceive been established as required under § 523(a)(4) for embezzlement or larceny. Accordingly, there remain genuine issues of material fact, and so summary judgment will be denied.
It may be that all of these questions could have been answered had a transcript of any evidentiary hearing on which the state court judge relied had been properly presented here. “While collateral estoppel applies only to issues that have been necessarily and unambiguously decided, express factual findings are not required because an issue may be decided from findings implicit in the judgment.” Leventhal v. Schenberg (In re Leventhal),
For the foregoing reasons, FNA Group’s motion for summary judgment'will be denied by separate order.
Notes
. Nor might the "affidavit” be considered a declaration under 28 U.S.C. § 1746, which provides that an unsworn declaration may be used in рlace of an affidavit when "in writing of such person which is subscribed by him, as true under penalty of perjury, and dated, in substantially the following form ... (2) ... 'I declare (or certify, verify, or state) under penalty of perjury that the foregoing is true and correct. Executed on (date). (Signature)’.” However, Rule 56(e)(1), F.R. Civ. P., Rule 7065 F.R. Bankr.P. provides that the court "may give an opportunity to properly support or address that fаct.” In any case, FNA has not objected to the affidavit as improper, and the facts averred to therein are not necessary to deny summary judgment, so no there is no need to submit a proper affidavit.
. Nor did the second contempt order add more. After Arvanitis moved for reconsideration of the contempt order, the state court judge entered an order halting any further аccumulation of fines, and set the matter for a hearing. After the hearing, the judge entered a second contempt order. It only stated, “For the reasons set forth in open court, the finding of Indirect Civil Contempt against Demetrios Arvanitis is re-instated. ...” (emphasis in the original.) The motion for summary judgment did not include or quote the judge’s "reasons set forth in open court” referred to in the second contempt order.