Rapid Settlements Ltd v. Scott ShcolnikRapid Settlements Ltd v. Scott Shcolnik
- Reporters:
- Before:
- Jones
Lead Opinion
The debtor, a former company officer, allegedly attempted to obtain one million dollars by falsely claiming an ownership interest in the company and threatening public exposure of alleged illegal activity. After the debtor lost an arbitration proceeding, he filed for bankruptcy. The question here is whether the company’s attorneys’ fees for the arbitration represent a nondischargeable debt under
Background
Scott Shcolnik, the Appellee/Debtor, was an employee of Capstone Associated Services (“Capstone”) and Rapid Settlements Ltd. (“Rapid”), creditors who describe themselves as “alternative risk planning” companies. Shcolnik became Capstone’s vice-president and Rapid’s president. In 2004, he was offered an ownership interest in Rapid, but according to Appellants, he rejected the offer. Shcolnik nevertheless began to claim that he was a partial owner of Rapid, and he was fired. According to Appellants, he absconded with various documents from their offices. Shcolnik then
Rapid and Capstone (along with other entities) initiated an arbitration proceeding seeking a declaratory judgment that Shcolnik did not own an interest in any of the entities. The arbitrator held in their favor and awarded $50,000 in attorneys’ fees to Rapid, Capstone, and the other entities. A state court confirmed the award.
Four days after the state court announced it would confirm the arbitration award, Shcolnik filed for Chapter 7 bankruptcy. Rapid and Capstone filed a complaint alleging that the $50,000 attorneys’ fee award was nondischargeable under, inter alia,
We address each in turn.
Standard of Review
This court reviews the bankruptcy court’s grant of summary judgment de novo, using the same standard employed by the district court. In re Ark-La-Tex Timber Co., Inc., 482 F.3d 319, 328 (5th Cir.2007). We affirm summary judgment “if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.” Id. at 328 (citing
Discussion
A.
Even if a corporate officer may be a fiduciary for purposes of
B.
Appellants also seek to exempt the $50,000 award as a debt “for willful and malicious injury by the debtor to another entity or to the property of another entity.”
Unfortunately, the district court failed to consult this court’s opinions interpreting Kawaauhau. First, we have held that an injury is “‘willful and malicious’ where there is either an objective substantial certainty of harm or a subjective motive to cause harm.” In re Miller, 156 F.3d 598, 606 (5th Cir.1998); In re Williams, 337 F.3d 504, 508-09 (5th Cir.2003). Second, we noted that “it would seem peculiar to deem an action causing injury not ‘willful’ when the tortfeasor’s action was in fact motivated by a desire to cause injury.” Miller, 156 F.3d at 604. In an opinion nearly contemporaneous with Miller, this court stated that “ ‘the debtor must have intended the actual injury that resulted.’ ” State of Texas v. Walker, 142 F.3d 813, 823 (5th Cir.1998) (quoting In re Delaney, 97 F.3d 800, 802 (5th Cir.1996)). This statement, however, arose in the course of distinguishing willful and malicious injury, as understood in Kawaauhau, from claims for breach of contract or conversion, neither of which “necessarily involves an intentional injury.” Id.
More recently, this court held that a debt for sanctions imposed because of the debtors’ litigation tactics arose from willful and malicious injury under
Viewed in light of our precedents, there is a genuine, material fact issue for trial. Shcolnik’s behavior resulted in willful and malicious injury if his claims of ownership were made in bad faith as a pretense to extract money from the Appellants. See Keaty, 397 F.3d at 273 (willful and malicious injury to intentionally “pursu[e] meritless litigation for the purpose of harassment[.]”). The litigation costs he forced upon them are different from the million dollar claim he made against them, but they were neither attenuated nor unforeseeable from his alleged intentionally injurious conduct.
CONCLUSION
For the foregoing reasons, we reverse and remand this case for trial on the merits under
REVERSED and REMANDED.
Notes
. The bankruptcy court held a trial on the remaining issues, which are not relevant to this appeal, then ruled in Debtor‘s favor on those issues.
. In one paragraph, Appellants now additionally contend that Shcolnik’s purloining of company records also violated
. In addition to the arbitration action regarding Shcolnik‘s purported ownership interest, Appellants pursued injunctive relief regarding documents he claimed to possess and his threats to disclose secrets. They obtained temporary restraining orders preventing Shcolnik from disclosing trade secrets or confidential information. The state court found that Shcolnik had “threatened a wide range of unlawful and improper actions.”
. The arbitrator awarded the $50,000 in attorneys’ fees which it found to be “reasonable and necessary and appropriate pursuant to
Concurrence Opinion
concurring and dissenting:
I respectfully dissent from the decision to reverse and remand.1 The effect of the majority opinion is to transform all litigation precipitated by aggressive demand letters into potential “malicious” acts for purposes of non-dischargeability. Additionally, the effect of the majority opinion is to allow an end-run around an arbitration proceeding in which both parties willingly participated. Finally, the majority opinion glosses over the lack of connection between the allegedly malicious acts and the arbitration award of attorneys’ fees now sought to be rendered non-discharge-able. Because the bankruptcy and district courts reached the correct result under our existing precedents, I would affirm.
Non-dischargeability is the exception, not the rule. Exceptions to the “fresh start” for debtors are narrowly construed, with doubts resolved in favor of the debtors. See Gleason v. Thaw, 236 U.S. 558, 562, 35 S.Ct. 287, 59 L.Ed. 717 (1915) (“In view of the well-known purposes of the bankruptcy] law, exceptions to the operation of a discharge thereunder should be confined to those plainly expressed[.]”); State v. Soileau (In re Soileau), 488 F.3d 302, 311 (5th Cir.2007); Tex. Lottery Comm’n v. Tran (In re Tran), 151 F.3d 339, 342 (5th Cir.1998); Hudson v. Raggio & Raggio, Inc. (In re Hudson), 107 F.3d 355, 356 (5th Cir.1997) (“[E]xceptions to discharge must be strictly construed against a creditor and liberally construed in favor of a debtor so that the debtor may be afforded a fresh start.” (citation omitted)); Citizens Bank & Trust Co. v. Case (In re Case), 937 F.2d 1014, 1024 (5th Cir.1991) (“Any exception to the general discharge of a debtor’s debts is strictly governed by the Code and construed narrowly in favor of the debtor and against the creditor requesting the determination.” (citation omitted)).
Debtors often come to bankruptcy with judgments against them. It is certainly not an unusual occurrence for parties to make claims in litigation or arbitration that do not carry the day. Nonetheless, the majority opinion transforms the ordinary litigation loser into one who has
No doubt the e-mail letters Shcolnik wrote are insulting and demeaning.2 I would not write such a document nor countenance another to do so. However, we are not here to teach a course in professionalism or civility. The majority opinion transforms incivility into “a campaign of coercion” or “contumacious conduct” by ipse dixit. The question arises — were these “nasty demand letters,” in fact, “coercive” or “contumacious?” We do not have a case setting out a test for where the quintessential demand letter ends and the parade of horribles suggested by the majority opinion begins. Wherever that line is, it is not crossed here, and I disagree with transforming the regrettable unpleasantness and aggressiveness that often attend the prelude to litigation into “coercive” or “contumacious” conduct so easily. Shcolnik’s e-mail letters, however reprehensible they undeniably are, do not constitute either.
In addition, I am concerned that the majority opinion fails to recognize the strong federal policy favoring arbitration. See Pers. Sec. & Safety Sys. Inc. v. Motorola Inc., 297 F.3d 388, 392 (5th Cir.2002) (citation omitted). The arbitrator did not award attorneys’ fees for wrongdoing, malice, bad faith, or even “prevailing party” status, but simply as “equitable and just.” Indeed, the arbitrator did not even award all the fees Appellants sought — shaving $20,000 off of the $70,000 they requested. The Texas Uniform Declaratory Judgments Act,
This distinction is key when we consider the prior precedents of this court. Raspanti v. Keaty (In re Keaty), 397 F.3d 264 (5th Cir.2005), upon which the majority opinion rests, did not involve a garden-variety award of attorneys’ fees. Instead, it involved sanctions against attorneys. In Keaty, the state appellate court assessed sanctions, making particular findings that “the Keatys knew their claims had prescribed, that their answers to Raspanti’s request for admissions were disingenuous, and that the proceedings by the Keatys were knowingly without foundation, crafted for the purposes of harassment, and designed to prolong the proceedings deliberately and needlessly.” Id. at 268 (citing Keaty v. Raspanti, 781 So.2d 607, 612 (La.Ct.App.2001)). Accordingly, the state appellate court found the Keatys’ conduct sanctionable under Louisiana law governing the effect of signing pleadings for an improper purpose. Id.
Thus, in Keaty we gave effect to the state court ruling rather than turning it
The arbitration proceeding giving rise to the attorneys’ fees award was limited to the resolution of issues surrounding the ownership/partnership dispute. The arbitrator had before him all of the good, bad, and ugly of this ill-fated business relationship. He ruled. He did not find coercion, contempt, fraud, or any other of the allegedly bad acts. He found in a simple business dispute that the Appellants should win and Shcolnik should lose. “All other relief of the parties [was] denied.” Furthermore, although the arbitrator found for Appellants on the ownership claims, he referenced the fact that they had held Shcolnik out as a partner (calling those events “excusable mistakes”). Thus, far from finding that Shcolnik’s claims were malicious, the arbitrator’s findings show that the claims had some basis. That Shcolnik ultimately lost on his ownership claims (even if he did not have the best of intentions in making those claims) is not tantamount to “willful” or “malicious” injury unless all losing litigation is “willful” or “malicious” injury. Certainly Congress could easily make non-dischargeable attorneys’ fees awarded in litigation or arbitration, but the fact that it has not done so speaks volumes.
Indeed, even if the e-mail letters were “coercive” or “contumacious” and even if we ignore the lack of arbitration findings to support the majority opinion, the undisputed facts show that any burden imposed on Appellants by the e-mail letters was quickly removed — the purportedly wrongful documents were sent on May 25 and 27, 2005. On May 27, 2005, the state district court granted a temporary restraining order that was later extended and continued by agreement throughout
Moreover, the lack of causal connection is precisely why the arbitrator made no specific finding of wrongfulness. Indeed, either the allegedly wrongful acts caused the arbitration of the ownership/partnership dispute, in which case, the arbitrator’s lack of a specific finding to that effect (and findings inconsistent with that) is meaningful, or they did not, in which case, the alleged “campaign of coercion” or “contumacious conduct” did not cause the attorneys’ fees award.
The majority opinion concludes that “Shcolnik’s behavior resulted in willful and malicious injury if his claims of ownership were made in bad faith as a pretense to extract money from the Appellants.” Maj. Op. at 630. The opinion rests on a misconstruction of Keaty. Moreover, it is undeniable that the majority opinion’s conclusion is not supported by the record, the arbitrator’s decision, or, indeed, the events that actually transpired below. As we gave effect to the sanctions in Keaty, we should give effect to the arbitrator’s ruling here. The attorneys’ fees awarded as equitable and just in the arbitration were for resolution of the ownership/partnership dispute, not for anything else.
Given the foregoing and in light of the narrowness of exceptions to discharge, we should not reach out to transform an arbitration award of attorneys’ fees for the resolution of a mere business dispute into a non-dischargeable debt for willful and malicious injury (or remand for the bankruptcy court to do so). Applying our existing precedents, I would affirm. Because the majority opinion extends our precedents too far, I respectfully dissent.
. I agree with the majority opinion’s analysis of the
. For a bit of context, it is worth noting that there is plenty of nastiness to go around in this case. For example, during the course of Shcolnik’s bankruptcy proceeding, Shcolnik had to obtain the return of the engagement ring he had given to his fiancee. When the engagement ring was put up for sale by the bankruptcy trustee, Appellant Capstone outbid a jeweler to buy the engagement ring.
. In Keaty, Raspanti brought an adversary proceeding against the Keatys in bankruptcy court seeking a determination that the state court sanctions award against the Keatys was not dischargeable under