MAJOR, LINDSEY & AFRICA, LLC v. MahnMAJOR, LINDSEY & AFRICA, LLC v. Mahn
MEMORANDUM OPINION AND ORDER GRANTING IN PART AND DENYING IN PART MOTION TO DISMISS
APPEARANCES:
Attorneys for Defendant Sharon Mahn
260 Madison Avenue
New York, NY 10016-2401
By: Stephen Z. Starr, Esq.
SMITH GAMBRELL & RUSSELL LLP
Attorneys for Plaintiff Major, Lindsey & Africa, LLC
311 South Wacker Drive, Suite 3000
Chicago, Illinois 60606-6677
By: Elizabeth L. Janczak, Esq.
MARTIN GLENN
CHIEF UNITED STATES BANKRUPTCY JUDGE
Pending before the Court is debtor Sharon Mahn‘s (“Debtor” or “Mahn“) motion to dismiss (“Motion” or “MTD,” ECF Doc. ## 15, 16) the complaint (“Complaint,” ECF Doc. # 1) filed against her by Major, Lindsey & Africa, LLC (“MLA“). MLA filed a response (“Response,” ECF Doc. # 21), and Mahn filed a reply (ECF Doc. # 22). Argument on the Motion was heard on February 5, 2025. For the reasons explained below, the Motion is GRANTED IN PART and DENIED IN PART.
I. BACKGROUND
Sharon Mahn is a former commercial litigator and legal recruiter who was hired by MLA to work as a Managing Director. She worked as a legal recruiter for MLA for four years. (Ex. 2 to the Complaint at 2.)
The dispute between Mahn and MLA arose from Mahn‘s behavior during her time at MLA. While an MLA employee, Mahn had access to MLA‘s database containing confidential, nonpublic information. (Complaint ¶ 14.) The terms of Mahn‘s employment contract contained express language identifying this database information as “confidential” and/or a “trade secret.” (Id. ¶ 15.) MLA terminated Mahn in 2009 for disclosing MLA‘s proprietary information to a competitor firm in violation of her employment agreement. (Id. ¶ 16.) Both sides commenced arbitration in front of an AAA panel in 2010. (Id. ¶ 17.) MLA asserted claims against Mahn including breach of the employment agreement, violations of Mahn‘s duty of loyalty, breach of fiduciary duty, misappropriation of confidential information and trade secrets, and unfair competition.
The arbitration, which lasted from May 29 through June 1, 2012, was “highly contentious” and featured seven witnesses (including Mahn) and over 200 exhibits. (Id. ¶¶ 1, 18.) The arbitrator found that, within weeks of joining MLA, Mahn began to disseminate confidential information to MLA‘s competitors. (Ex. 2 to the Complaint at 2.) The arbitrator found that Mahn “breached the clear and express terms of the Employment Agreement,” which barred her from divulging information about MLA candidates to competitors as this information was explicitly designated confidential and/or a trade secret. (Id. at 5.) During the course of her employment, Mahn divulged information from MLA‘s computerized database containing such information to MLA‘s competitors, and was paid kickbacks from the competitors. This behavior stretched over four years. (Id. at 5–6.) The arbitrator also found that Mahn had breached her fiduciary duty and her duty of loyalty to MLA by enabling placement commissions that might have gone to MLA to be paid to competitors instead. (Id. at 6–7.) The arbitrator found that her behavior was “at minimum, overwhelmingly shocking in its scope, duration, and tone. She was stealing her employer‘s assets or property consisting of confidential information and trade secrets, as well as its business good will, while secretly divulging the same to MLA‘s competitors, and receiving financial ‘kickbacks’ after placements by these competitors.” (Id. at 7.) This behavior occurred
On May 7, 2013, the arbitrator issued a partial final award in MLA‘s favor, determining that Mahn had breached her employment and arbitration agreement, along with her duty of loyalty and fiduciary duty owed to MLA, by misappropriating MLA‘s confidential information and trade secrets. (Complaint ¶ 19; Ex. 2 to the Complaint.) The arbitrator concluded that “[t]he scope, depth and audacity of [Mahn‘s] divulging of confidential information and trade secrets are enormous and would shock the conscience of any reasonable person.” (Ex. 2 to the Complaint at 3.) On October 22, 2013, the arbitrator issued a second final interim award which, among other things, denied Mahn‘s motion to reconsider and granted MLA‘s motion to reconsider awarding it reasonable attorneys’ fees and costs. (Complaint ¶ 26.) On July 9, 2014, the arbitrator issued a final opinion and award which awarded MLA (1) $1,767,626 in damages with interest accruing at a rate of 9% per annum, and (2) $945,765.39 in attorneys’ fees and costs. (Id. ¶ 27.)
Mahn unsuccessfully appealed the arbitral award to the New York Supreme Court. (Id. ¶ 1.) On May 26, 2015, the New York Supreme Court for New York County entered an order confirming MLA‘s final arbitration award and granting judgment in favor of MLA in the amount of $2,863,760.67 (the “Judgment“). (Id. ¶ 29.)
MLA alleges that it pursued collection efforts against Mahn for years until, on the eve of the deposition of her father and “just prior to MLA obtaining turnover of Mahn‘s retirement account,” she filed for bankruptcy. (Id. ¶ 2.) On November 4, 2022, Mahn filed a voluntary petition pursuant to Chapter 7 of the Code (In re Mahn, case no. 22-11466). On April 7, 2023, MLA filed a proof of claim against Mahn for $4,766,788.63 based on the Judgment. (Id. ¶ 32.) MLA filed this Complaint on July 5, 2024. (ECF Doc. # 1.)
In Count I, MLA argues that Mahn‘s debt to MLA is not dischargeable under
In Count II, MLA argues that Mahn‘s debt is not dischargeable under
Mahn moved to dismiss the adversary complaint against her. In her view, the Complaint fails to establish that she engaged in fraud or defalcation while acting
MLA responded by pointing to the arbitrator‘s ruling, and arguing that each of the counts in its Complaint is based on that ruling. Specifically, the arbitrator found that Mahn “divulged information from MLA‘s computerized Recruit database containing the names of active candidates and other non-public information, such as candidates’ personal e-mail addresses, cell phone numbers, interest in named law firms, past interviews and results, estimated books of portable billables/hourly billables, clients, family member information, and details on specialties.” (Reply at 2.) MLA points to allegations that Mahn was a managing director of MLA, expressly acknowledged in her employment agreement that she was in a position of trust and confidence within MLA, was entrusted with confidential and proprietary information, and acknowledged that she owed a fiduciary duty to MLA as a managing director to argue that there are sufficient allegations in the Complaint supporting a finding of a fiduciary duty owing from Mahn to MLA. (Id. at 4.) Per MLA, she was not a “mere employee” but instead had special access to the information which she misappropriated. (Id. at 5.) MLA also argues that Mahn is barred from contesting that she acted in a fiduciary capacity with respect to MLA, since the arbitrator already found that she did. (Id.) MLA claims that intangible property is treated by New York law as identical to physical property, in that they can both underlie an embezzlement or larceny claim. (Id. at 6-7.) And again, since the arbitrator‘s ruling in favor of MLA on the unfair competition claim necessarily required a finding that Mahn misappropriated MLA‘s property, the issue of whether property was involved was already decided in the arbitration and should not be overturned; Mahn is collaterally estopped from arguing otherwise. (Id. at 8.) Finally, MLA argues that the Complaint sufficiently alleged that Mahn acted maliciously. (Id. at 9-10.)
II. LEGAL STANDARD
A. Motion to Dismiss
Following the Supreme Court‘s decision in Ashcroft v. Iqbal, courts use a two-prong approach when considering a motion to dismiss. See, e.g., Weston v. Optima Commc‘ns Sys., Inc., No. 09 Civ. 3732(DC), 2009 WL 3200653, at *2 (S.D.N.Y. Oct. 7, 2009) (Chin, J.) (acknowledging a “two-pronged” approach to deciding motions to dismiss); S. Ill. Laborers’ and Employers Health and Welfare Fund v. Pfizer, Inc., No. 08 CV 5175(KMW), 2009 WL 3151807, at *3 (S.D.N.Y. Sept. 30, 2009) (Wood, J.) (same); Inst. for Dev. of Earth Awareness v. People for the Ethical Treatment of Animals, No. 08 Civ. 6195(PKC), 2009 WL 2850230, at *3 (S.D.N.Y. Aug. 28, 2009) (Castel, J.) (same). First, the court must accept all factual allegations in the complaint as true, discounting legal conclusions clothed in factual garb. Iqbal, 556 U.S. at 678–79; Boykin v. KeyCorp, 521 F.3d 202, 204 (2d Cir. 2008); Spool v. World Child Int‘l Adoption Agency, 520 F.3d 178, 183 (2d Cir. 2008). Second, the court must determine if these well-pleaded factual allegations “plausibly suggest an entitlement to relief.” Iqbal, 556 U.S. at 681.
Courts do not make plausibility determinations in a vacuum; it is a “context-specific task that requires the reviewing court to draw on its judicial experience and common sense.” Id. at 679. A claim is plausible when the factual allegations permit “the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Id. at 663. Meeting the plausibility standard requires a complaint to plead facts that show “more than a sheer possibility that a defendant has acted unlawfully.” Id. (citing Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 557 (2007)). A complaint that only pleads facts that are “merely consistent with a defendant‘s liability” does not meet the plausibility requirement. Id. (quoting Twombly, 550 U.S. at 557) (quotation marks omitted). “A pleading that offers labels and conclusions or a formulaic recitation of the elements of a cause of action will not do.” Id. (quoting Twombly, 550 U.S. at 555 (internal quotation marks omitted)). “Threadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice.” Id. (citation omitted). “The pleadings must create the possibility of a right to relief that is more than speculative.” Spool, 520 F.3d at 183 (citation omitted).
The Court‘s responsibility is to “assess the legal feasibility of the complaint, not to assay the weight of the evidence which might be offered in support thereof.” Liu v. Credit Suisse First Bos. Corp. (In re Initial Pub. Offering Sec. Litig.), 383 F. Supp. 2d 566, 574 (S.D.N.Y. 2005) (internal quotation makers and citation omitted); see also Koppel v. 4987 Corp., 167 F.3d 125, 133 (2d Cir. 1999) (plaintiff need only allege, not prove, sufficient facts to survive a motion to dismiss). Dismissal is only warranted where it appears beyond doubt that the plaintiff can prove no sets of facts in
B. Collateral Estoppel
Collateral estoppel, or issue preclusion, forecloses relitigation of factual matters that have previously been litigated and decided. Parklane Hosiery Co. Inc. v. Shore, 439 U.S. 322, 337 (1979). The Supreme Court held that the doctrine applies in nondischargeability proceedings in Grogan v. Garner, 498 U.S. 279, 285 n.11 (1991) (“We now clarify that collateral estoppel principles do indeed apply in discharge exception proceedings pursuant to
[i]n giving collateral estoppel effect to a pre-petition judgment in a non-dischargeability action, the bankruptcy court must be able, based upon the findings made in the pre-petition judgment, to make an independent determination that the elements of
§ 523(a) have been satisfied. In other words, the bankruptcy court must be able to identify clear and specific findings in the pre-petition judgment which correlate to, and are decisive as to, the elements to be proven in the§ 523(a) cause of action.
In re Wisell, 494 B.R. 23, 35 (Bankr. E.D.N.Y. 2011).
Collateral estoppel is also applicable to factual findings made in arbitration proceedings. See Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 223 (1985) (acknowledging that courts may give preclusive effect to arbitration proceedings to protect federal interests); see also Munoz v. Boyard (In re Boyard), 538 B.R. 645, 653 (Bankr. E.D.N.Y. 2015) (confirmation of an arbitration award is “a summary proceeding that merely makes what is already a final arbitration award a judgment of the court“) (internal citation omitted).
Since the final judgment confirming the arbitral award in this case was issued by a New York court, the full faith and credit statute,
New York uses a two-step analysis in applying collateral estoppel. First, there must be an identity of issue which has necessarily been decided in the prior action and is determinative in the present action; and second, there must have been a full and fair opportunity to litigate in the prior action. See Schwartz v. Public Administrator, 24 N.Y.2d 65, 71, 298 N.Y.S.2d 955, 960, 246 N.E.2d 725, 729 (1969); see also Denton v. Hyman (In re Hyman), 502 F.3d 61, 65 (2d Cir. 2007) (setting out two-step test for collateral estoppel, requiring that “(1) the identical issue necessarily was decided in the prior action and is decisive of the present action, and (2) the party to be precluded from
III. DISCUSSION
A. Count I
Count I invokes
1. Defalcation while acting in a fiduciary capacity
“To sustain a cause of action for fraud or defalcation under [section] 523(a)(4), the plaintiff must first establish that the debtor acted while in a fiduciary capacity.” Zohlman v. Zoldan, 226 B.R. 767, 772 (S.D.N.Y. 1998). “The mere existence of a fiduciary relationship is not sufficient to deny dischargeability under section 523(a)(4).” Id. at 87. Rather, the court must find that the defendant “was ‘acting in a fiduciary capacity’ with respect to the particular conduct giving rise to the liability which is claimed to be non-dischargeable.” Id. (emphasis in original).
The meaning of “fiduciary” in this context is a matter of federal law, and the term “fiduciary capacity” is narrowly construed. See id. at 772; see also Sandak v. Dobrayel (In re Dobrayel), 287 B.R. 3, 14 (Bankr. S.D.N.Y. 2002) (“The meaning of ‘fiduciary capacity’ under Federal laws is more restricted than under the more general common law or state definitions.“); In re West, 339 B.R. 557, 566 (Bankr. E.D.N.Y. 2006) (“Whether a debtor acts in a fiduciary capacity under
One type of fiduciary relationship contemplated by
The requisite fiduciary relationship needed for
“If the defendant was acting in a fiduciary capacity, courts then examine whether the acts undertaken constitute fraud or defalcation under
Mahn challenges the applicability of
Mahn is explicitly identified as an “at-will employee” in her employment contract. (Ex. 1 to the Complaint at 4.) The arbitrator also identified her as such. (Ex. 2 to the Complaint at 2.) It is true that she was given the title of “managing director,” along with special access to trade secrets and proprietary information of MLA‘s. (Complaint ¶¶ 14-15, 38-39, 52-54.) And it is clear, from the pattern of behavior she exhibited during her four years of employment with MLA, that MLA was not able to adequately monitor her performance, and that MLA did not know the malfeasance she was engaged in. However, these facts alone are insufficient to support a finding of a fiduciary relationship of the kind contemplated by the Code. If a mere inability to monitor moved a standard employer-employee relationship into the realm of
Moreover, collateral estoppel does not apply here, and MLA cannot rely on the arbitrator‘s finding that Mahn breached her fiduciary duty to MLA to support its argument that the “right” kind of fiduciary relationship existed. While the arbitrator found that Mahn had breached her fiduciary duties owing to MLA as an employee under New York law (Ex. 2 to the Complaint at 6 (citing Hadden v. Consolidated Edison, 45 N.Y. 2d 466, 470 (1978)), she did not find that Mahn committed defalcation, nor did she find a trust relationship between Mahn and MLA – she did not have to, in order to resolve the questions before her. Nor did the arbitrator find that Mahn had an informational advantage over MLA “by reason of her professional status,” that MLA placed “special confidence in” Mahn, or that the two parties were otherwise not in a “relation at arm‘s length between equals.” Marchiando, 13 F.3d at 1116. (See id. at 6-9.) As discussed above, the fiduciary relationships between employees and employers created by state law are not the kinds of fiduciary relationships which can support a finding of defalcation while acting in a fiduciary capacity pursuant to
The Court therefore DISMISSES Count I insofar as it pleads defalcation while acting in a fiduciary capacity.
2. Embezzlement
Next, Mahn argues in the alternative that there was no “embezzlement” because no “property” was involved, only corporate opportunities. (MTD at 7-8.) “The question of what constitutes embezzlement or larceny within the meaning of
Elements one and two require the existence of property. Despite MLA‘s argument to the contrary, the arbitrator did not explicitly and squarely determine that the definition of property, as defined by New York law, was at issue in the case; there is no indication in the record presently before the Court that the presence of “property” as defined in New York was raised by the pleadings or otherwise placed in issue and actually determined at the arbitration. (See Complaint Ex. 2 at 14-15 (unfair competition claim hinged on the existence of a “benefit or property right belonging to another“), 24 (no clear finding that property rights as defined by New York law were at issue).) Therefore, the Court must look at the Complaint to see whether it adequately alleges embezzlement, including alleging that MLA entrusted its property to Mahn.
Courts in the Second Circuit look to state law when determining what constitutes property for purposes of an embezzlement claim. See Gasson v. Premier Cap., LLC, 43 F.4th 37, 41–42 (2d Cir. 2022). “Under New York law, intangible property with any similarity to its physical counterpart is considered property.” In re Sesum, 662 B.R. at 847; see also Spa World Corp. v. Lipschik, No. 09-CV-1711, 2010 WL 11632681, at *7, 17 (E.D.N.Y. Sept. 9, 2010) (holding that customer documents and records that could be deleted from a computer system are property under New York state law); Salonclick LLC v. SuperEgo Mgmt. LLC, No. 16 Civ. 2555, 2017 WL 239379, at *4 (S.D.N.Y. Jan. 18, 2017) (finding an exception to the rule that intangible property alone is insufficient to satisfy the definition of property where the rightful owner of the intangible property is prevented from creating or enjoying a legally recognizable and protectable property interest in his idea). “Generally, under New York law, trade secrets are treated as intangible property . . . . Cases in this circuit, applying New York law, have made it clear that for intangible property to constitute property for a claim of embezzlement, the intangible property must have some tangible form. This requirement similarly applies to trade secrets.” In re Sesum, 662 B.R. at 848-49 (collecting cases). Intangible property “stored on [a] computer but likely shared in some tangible, documentary form” is considered “property” under New York law. Kraus USA, Inc. v. Magarik, No. 17-CV-6541, 2020 WL 2415670, at *11 (S.D.N.Y. May 12, 2020); see also People v. Aleynikov, 31 N.Y.3d 383, 403, 104 N.E.3d 687 (2018) (holding that a source code was property when copied onto a physical medium such as a hard drive).
MLA has sufficiently alleged that Mahn misappropriated “property” as defined by New York law by pointing to her misuse of information on MLA‘s “computerized database of active candidate information.” (Complaint ¶ 38.) From the face of the Complaint, it appears that Mahn misused more than mere corporate opportunities. The Court finds that MLA sufficiently pleaded embezzlement.
3. Larceny
Mahn also objects to Count I on the grounds that MLA did not adequately plead larceny, relying again on her argument that no “property” was at stake. Under federal law in this Circuit, “[l]arceny is the (1) wrongful taking of (2) property (3) of another (4) without the owner‘s
B. Count II
“The terms willful and malicious are separate elements, and both elements must be satisfied.” Soliman v. Vyshedsky (In re Soliman), 539 B.R. 692, 698 (Bankr. S.D.N.Y. 2015) (internal citation and quotation marks omitted). “To establish that a debtor acted willfully under
To establish that a debtor acted maliciously, the plaintiff must prove that the debtor‘s act was “wrongful and without just cause or excuse, even in the absence of personal hatred, spite, or ill-will.” Navistar Fin. Corp. v. Stelluti (In re Stelluti), 94 F.3d 84, 87 (2d Cir. 1996); see also Ball v. A.O. Smith Corp., 451 F.3d 66, 69 (2d Cir. 2006) (“The injury caused by the debtor must also be malicious, meaning wrongful and without just cause or excuse, even in the absence of personal hatred, spite, or ill-will.“) (internal citation and quotation marks omitted). In determining whether a debtor acted maliciously, courts will consider the totality of the circumstances. Id. at 88 (stating that “[i]mplied malice may be demonstrated ‘by the acts and conduct of the debtor in the context of [the] surrounding circumstances‘” (quoting First Nat‘l Bank of Md. v. Stanley (In re Stanley), 66 F.3d 664, 668 (4th Cir. 1995))). Malice is implied when “anyone of reasonable intelligence knows that the act
“Typically implied malice is found where the behavior is of a type that the court cannot justify on any level . . . . Where the debtor is motivated by some potential profit or gain, however, malice will only be implied where there is additional, aggravating conduct on the part of the debtor to warrant an inference of actual malice.” In re Rosenfeld, 543 B.R. 60, 76 (Bankr. S.D.N.Y. 2015) (citing In re Luppino, 221 B.R. at 700); see also In re Orly, No. 15-11650(JLG), 2016 WL 4376947, at *6 (Bankr. S.D.N.Y. Aug. 10, 2016) (“As a general rule, an intentional breach of statutory duties by a debtor, whose conduct is clearly motivated by the prospect of financial gain, is not sufficient alone to imply malice . . . Plaintiffs must also allege that there was some aggravating circumstances evidencing conduct by the Debtor 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.“) (cleaned up). That additional, aggravating conduct in the presence of a profit motive can look like “conduct which is certain or almost certain to cause financial harm to the creditor,” so long as the debtor also knows “that he or she is violating the creditor[‘]s legal rights,” In re Orly, 2016 WL 4376947, at *7 (internal citation omitted).
Mahn‘s willfulness is not contested, and the Court finds that MLA adequately pleaded willfulness.
Mahn claims that there was no “malicious injury” because she was motivated solely by “potential profit or gain,” and MLA did not allege additional aggravating conduct. (MTD at 10-11.) The Court disagrees and finds that MLA adequately pleaded facts indicating that Mahn acted at least in part in order to inflict injury on the company, and was aware that she was violating MLA‘s rights. The Complaint alleges that Mahn “was aware her involvement with outside competitors was improper and that Mahn took care to ensure that her actions were not discovered.” (Complaint ¶ 24.) The arbitral award specifies that Mahn‘s emails to MLA‘s competitors “contained admissions that she was violating her [employment] Agreement,” and that Mahn “coached the competitors on how to sever [a] candidate‘s relationship with MLA” and “continually encouraged [competitors] to place MLA‘s candidates before MLA did.” (Ex. 2 to the Complaint at 5-8.) For 12(b)(6) purposes, the Court finds that MLA has met its burden. The presence of malice is a question of fact, not one fit for resolution on a motion to dismiss when the Complaint alleges sufficient facts. Mahn‘s motion to dismiss Count II is DENIED.
IV. CONCLUSION
For the foregoing reasons, Mahn‘s Motion to Dismiss is GRANTED IN PART and DENIED IN PART.
IT IS SO ORDERED. A separate Scheduling Order will also be entered.
Dated: February 10, 2025
New York, New York
Martin Glenn
MARTIN GLENN
Chief United States Bankruptcy Judge