Sierra Chemicals, LLC v. Mosley (In re Mosley)Sierra Chemicals, LLC v. Mosley (In re Mosley)
MEMORANDUM OPINION
In this adversary proceeding Plaintiff seeks to have Defendant’s debt declared nondischargeable under 11 U.S.C. §§ 523(a)(4) and (a)(6), and to deny his discharge under 11 U.S.C. § 727(a)(4)(A). The Court conducted a trial on November 5, 2013 and took the matter under advisement. This is a core matter. For the reasons set forth below, the Court declares the amount of $30,000 nondischargeable under § 523(a)(4).
I.FACTS
The Court finds the following facts:
1. Plaintiff does business in the oil and gas industry in various parts of the United States. Among other things, Plaintiff cleans heat exchangers used to heat or cool natural gas, which are sometimes called “fin fans.” In 2009, Plaintiffs total revenue was about $2.5 million. This figure increased to about $5 million in 2012.
2. Plaintiff employed Defendant from September 2005 until his termination in January 2009.
3. Defendant started with Plaintiff as an administrative assistant and was eventually promoted to Health and Safety
4. Defendant had access to Plaintiffs intellectual property, including health, safety and operating manuals and proprietary information regarding the techniques used by Plaintiff to build and use its specialized equipment.
5. On or about January 25, 2008, Plaintiff entered into an employment contract with Defendant (the “Employment Contract”).
6. The Employment Contract prohibited Defendant from using or removing any of Plaintiffs confidential or proprietary trade secret information. The prohibitions are broad and unambiguous. Defendant agreed he would not take or use manuals, financial information, costs, pricing information, client lists, or other confidential information.
7. The Employment Contract also prohibited Defendant from competing in the fin fan cleaning business within a 75 mile radius of San Juan County, New Mexico for one year after employment termination.
8. On December 15, 2008, Defendant disclosed to Plaintiff an employment infraction that occurred several days earlier.
9. On the same day, Defendant emailed the Safety Manual and an employee policy handbook (“Employee Handbook”) to his personal Yahoo account without Plaintiffs knowledge or consent. He wanted to retain a copy of the documents in the event he was terminated and subsequently started his own fin fan cleaning business.
10. Plaintiff terminated Defendant in January 2009.
11. Sometime thereafter, Defendant informed Plaintiffs employee, Mike Dodds, that he planned to start his own fin fan cleaning business. Mr. Dodds sent Defendant information about how Plaintiff bid on fin fan cleaning jobs.
12. After waiting a year after termination, Defendant formed Fintech, LLC (“Fintech”). He built a fin fan cleaning trailer using materials he purchased from the internet, recruited investors and financing, and began cleaning fin fans.
13. Fintech had between four and seven employees.
14. When Defendant formed Fintech, between three and five companies cleaned fin fans in the San Juan area.
15. Fintech operated in the San Juan area because Defendant had lived there for many years with his family.
16. Most customers in the oil and gas industry require industrial cleaning companies to have a written safety manual. Using Plaintiffs confidential materials, Defendant created an employee handbook and a safety manual for Fintech.
17. Defendant continued to operate Fintech through at least the end of 2010.
18. Fintech’s gross revenue in 2010 was about $120,000, $110,000 of which came from one customer, Enterprise.
19. In 2011, Defendant closed Fintech and began working for MACC Services (“MACC”), another industrial cleaning company.
20. Fintech and/or MACC had gross revenue of roughly $120,000 in 2011, about
21. In 2012, MACC had gross revenue of about $60,000 from customers in the San Juan area.
22. Between January 1, 2013 and November 5, 2013, MACC earned roughly $15,000 from customers in the San Juan area.
23. It is unclear the extent to which Fintech or MACC solicited Plaintiffs customers.
24. Between 2009 and 2013, Plaintiffs gross revenue in the four corners region,
25. On or about April 15, 2010, Plaintiff brought suit against Defendant in the United States District Court, District of New Mexico, commencing Sierra Chemicals, L.C. v. Mitchell Mosley, et al., Civil No. 10-CV-00362-BB-DJS (“District Court Action”).
26. Pursuant to the Employment Contract, the matter was referred to binding arbitration.
27. On September 20, 2011, the arbitrator entered an Interim Award (the “Interim Award”).
28. As set forth in the Interim Award, the arbitrator found and/or concluded:
a. Defendant lied during the arbitration;
b. Defendant intentionally breached the Employment Contract and knew the breach was wrong when he did it;
c. Defendant did not violate the New Mexico Uniform Trade Secrets Act; and
d. Plaintiff did not prove the requisite elements of its common law tort theories.
29. In his final award, the arbitrator awarded Plaintiff $352,997.19 in breach of contract damages, broken down as follows:
Breach of contract damages: $ 10,000.00
Punitive damages: $ 15,000.00
Sanctions (net): $ 10,636.00
Attorney fees: $244,182.30
Costs: $ 18,138.28
Arbitration fees and costs: $ 55.040.61
Total: $352.997.19
30. On December 7, 2011, the District Court entered an Order for Final Judgment in the District Court Action, granting Plaintiff a money judgment against Defendant in the amount of $352,997.19 (“District Court Judgment”).
31. Defendant filed the above-captioned bankruptcy case on December 12, 2011.
32. On September 25, 2013, Defendant filed a declaration attached to a summary judgment response which stated “I did not email or otherwise copy the employment handbook.” The declaration was untrue.
II. DISCUSSION
A. Denial of Discharge Under § 727(a)a)(A)
Plaintiff argued that Defendant’s discharge should be denied under 11 U.S.C. § 727(a)(4)(A), which provides:
(a) The court shall grant the debtor a discharge, unless—
(4) the debtor knowingly and fraudulently, in or in connection with the case
(A) made a false oath or account.
“The purpose behind this subsection is to enforce a debtor’s duty of disclosure and ensure that the debtor provides reliable information to those who have an interest in the administration of the estate.” Manning v. Watkins (In re Watkins),
“To prevail under § 727(a)(4)(A), the [creditor] must show the following elements: (1) that the Debtor made a false statement under oath; (2) that the Debtor knew the statement was false; (3) that she made the statement with fraudulent intent; and (4) that the statement was material.” Rajala v. Majors (In re Majors),
“The subject matter of a false oath is ‘material,’ and thus sufficient to bar discharge, if it bears a relationship to the bankrupt’s business transactions or estate, or concerns the discovery of assets, business dealings, or the existence and disposition of his property.” In re Garland,
Section 747(a)(4)(A) cases almost invariably involve allegations that debtors failed to disclose valuable assets, undervalued assets, underreported income, or failed to disclose transfers. See e.g. In re Warren,
Denial of discharge is a harsh remedy to be reserved for a truly pernicious debtor. Soft Sheen Products, Inc. (In re Johnson),
The Court holds that this statement, while apparently false, is not “material” for § 727(a)(4)(A) purposes. Not every false statement warrants denial of the discharge. Defendant’s assertion about emailing an employment handbook bears no relationship “to the debtor’s financial transactions or to the bankruptcy estate, concern the disclosure of assets, or relate to the disposition of assets.” Leonard,
B. Dischargeability of the Judgment for Breach of Contract Under § 523(a)(6)
Debts arising from a willful and malicious injury by the debtor are excepted from the general discharge. 11 U.S.C. § 523(a)(6). To satisfy his burden under § 523(a)(6), a plaintiff must prove: (1) either he or his property sustained an injury; (2) the injury was caused by debtor; (3) debtor’s actions were “willful,” and (4) debtor’s actions were “malicious.” In re Deerman,
To be willful, a debtor must have intended the act and intended the harm. Kawaaukau v. Geiger,
The Tenth Circuit uses a subjective standard in determining whether a defendant desired to cause injury or believed the injury was substantially certain to occur. Via Christi Regional Medical Ctr. v. Englehart (In re Englehart),
Under some circumstances, damages caused by an intentional breach of contract may be nondischargeable under § 523(a)(6). See Sanders v. Vaughn (In re
As the Court explained in its Memorandum Opinion entered October 15, 2013, the Arbitrator’s findings were sufficient to establish the “malicious” element of § 523(a)(6), but not to establish the “willfulness” element.
Defendant waited a year, as required by the Employment Contract, before starting Fintech’s operations. Further, Plaintiff is a much larger business, with annual revenues ranging from $2.5 to $5 million. In contrast, Fintech generated only $120,000 in revenue during its first year.
Although Plaintiffs revenues in the four corners region declined by roughly $800,000 between 2009 and 2013, there is no evidence that Defendant caused any substantial portion of the decline. Instead, the uncontroverted evidence shows that Defendant generated only modest revenues in the San Juan area during that period.
Plaintiff argues that because Defendant used Plaintiffs manuals, processes, and pricing information in Fintech’s business, Defendant necessarily intended to injure Plaintiff. Like the Arbitrator, the Court is unwilling to ascribe such a motive to Defendant. Rather, the Court finds that, like most entrepreneurs, Defendant set out to earn a livelihood rather than to harm competitors.
Further, even if Defendant knew or reasonably suspected that his breach of contract could affect Plaintiff adversely, the Court is “not automatically required ... to find ‘willful and malicious injury.’ ” Dorr, Bentley & Pecha, CPA’s P.C. v. Pasek (In re Pasek),
Based on the evidence presented at trial, the Court concludes that Defendant neither intended to harm Plaintiff nor thought his conduct would have that result. The District Court Judgment, which is based solely on breach of contract, therefore does not come within the § 523(a)(6) exception to dischargeability.
C. Dischargeability of the Debt for Embezzlement Under § 523(a) (If)
Debts arising from “fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny” are excepted from the general discharge.
A creditor may prove embezzlement by showing: (1) his property was entrusted to the debtor; (2) the debtor appropriated the property for a use other than the use for which it was entrusted; and (3) the circumstances indicate fraud. Bd. of Trustees v. Bucci (In re Bucci),
A number of courts have held that under federal law, intangible property can be embezzled. See, e.g., Digital Commerce, Ltd. v. Sullivan (In re Sullivan),
It is worth noting that while “conversion of property of another can serve as grounds for nondischargeability under § 523(a)(6), not every conversion constitutes a willful and malicious injury.” Hernandez v. Musgrave (In re Musgrave),
D. Damages
Although the Arbitrator did not address embezzlement specifically, his fact findings are entitled to preclusive effect. The Arbitrator found that Defendant’s removal of the Safety Manual, Employee Handbook, and other documents caused Plaintiff $10,000 in actual damages. The Court therefore concludes that Plaintiff suffered $10,000 in actual damages as a result of Defendant’s embezzlement.
III. CONCLUSION
Defendant’s obligations to Plaintiffs will be declared nondischargeable under § 523(a)(4), to the extent of $30,000. This Memorandum Opinion shall constitute the Court’s findings of fact and conclusions of law under Fed.R.Bankr.P. 7052. An appropriate judgment will be entered.
Notes
. Before working for Plaintiff, Defendant worked in the oil and gas industry for a company called Enterprise. It seems likely that it is the same company.
. The "four corners” region is compromised of the southwestern corner of Colorado, the northwestern corner of New Mexico, the northeastern corner of Arizona, and the southeastern corner of Utah.
. Plaintiff’s § 727(a)(4)(A) claim was originally founded on statements Defendant allegedly made prepetition and at his § 341 meeting concerning allegedly "concealed or transferred equipment.” Plaintiff introduced no evidence at trial about these matters, instead focusing solely on the September 25 statement about the Employee Handbook. Based on this apparent last-minute shift in focus, it appears that, by the time of trial, Plaintiff had little or no evidence to support its § 727(a)(4)(A) claim.
. The other elements, i.e., an injury suffered by Plaintiff that was caused by Defendant, clearly are established.
. $110,000 of the gross revenue was from one customer' — Enterprise. There is no evidence Enterprise was Plaintiffs former customer.
.While the evidence regarding Plaintiffs losses related to the entire four corners region, the evidence regarding Defendant's revenues related to the San Juan area. It is possible that Fintech and/or MACC’s revenue in the four corners region was higher than their revenue in the San Juan area.
. As Plaintiff did not argue that Defendant held the Safety Manual and other documents pursuant to an express or technical trust, the Court will not address defalcation while acting in a fiduciary duty. Fowler Bros. v. Young (In re Young),
. Plaintiff contends that the entire District Court Judgment amount is nondischargeable under either § 523(a)(4) or (a)(6). This argument fails. When a debt is nondischargeable under § 523(a), the accompanying interest and fees generally are nondischargeable as well. See, e.g., Gober v. Terra + Corp. (In re Gober),