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TKC Aerospace, Inc v. Muhs

United States District Court, E.D. Virginia, Alexandria Division

October 16, 2017




         This matter comes before the Court on appeal from the United States Bankruptcy Court for the Eastern District of Virginia. Appellant assigns error to the bankruptcy court's denial of Appellant's motion for judgment on the papers. That denial was based on the bankruptcy court's finding that collateral estoppel did not apply to a district court's grant of summary judgment that led to the final judgment at issue before the court. For the reasons stated below, the Court finds that collateral estoppel applies. Accordingly, the decision of the Bankruptcy Court for the Eastern District of Virginia is REVERSED and REMANDED for further disposition consistent with this opinion.

         I. BACKGROUND

         In September 2011, TKC Aerospace, Inc. (TKC) sued Charles Taylor Muhs, a former employee, in United States District Court in the District of Alaska (the Alaska case) for theft of trade secrets. Appellant Br. 4. In October 2011, TKC sued Phoenix Heliparts, Inc. (PHP) in the Superior Court of Arizona for Maricopa County (the Arizona case), based on Muhs1 provision of those trade secrets to PHP, his new employer. Id. at 5. Muhs moved for and was granted a stay in the Alaska case until the Arizona case was resolved, asserting that the cases raised the same factual and legal issues, claims, and prayers for relief, and would ultimately collaterally estop the Alaska case. Id.

         The Arizona case resolved in favor of TKC, with the court finding that PI IP had willfully and maliciously misappropriated TKC's trade secrets through Muhs. Id. at 6. The Arizona case resolved, the district court in Alaska found that Muhs was equitably estopped from denying the preclusive effect of the Arizona case because of his assertions in his motion to stay. Consequently, the court found Muhs collaterally estopped from re-litigating the Arizona case, granted summary judgment for TKC, and entered a judgment against Muhs in the amount of $20, 726, 198.35, a figure that included exemplary damages. Id. Specifically, the district court found Muhs liable for breach of contract, breach of implied covenant of good faith and fair dealing, breach of fiduciary duty, tortious interference with prospective economic benefits, and violation of the Alaska Uniform Trade Secrets Act. Appellant Br. Ex. E, at 17. The court dismissed counts for unjust enrichment and common-law fraud. Id.

         Importantly, by applying collateral estoppel to the Alaska case, the district court adopted the findings of the Superior Court of Arizona. Appellant Br. Ex. E, at 15. These included findings that Muhs committed conversion by stealing TKC confidential documents and uploading them to PHP servers, and that the trade secret theft clearly and convincingly rose to the level of "willful and malicious" under the Uniform Trade Secret Act, justifying an award of exemplary damages. Appellant Br. Ex. F.

         Shortly after the district court entered the judgment against Muhs, Muhs filed for Chapter 7 bankruptcy protection and attempted to discharge the judgment. TKC timely filed an adversary complaint against Muhs to preclude discharge of the judgment, arguing that 11 U.S.C, § 523 bars discharge of a judgment that resulted from a) fraud, b) breach of fiduciary duty, or c) willful and malicious conduct. Appellant Br. Ex. A. TKC moved for judgment on the pleadings/summary judgment on the basis that Muhs is collaterally estopped from re-litigating the facts underlying the judgment and that the findings of the District Court for the District of Alaska settle the question of whether the judgment stemmed from conduct barring discharge under 11 U.S.C. § 523. Appellant Br. Ex. I.

         In his response to the Motion for Summary Judgment Muhs attacked the performance of his counsel in the Arizona case and the application of collateral estoppel by the district court, arguing that the district court erred in estopping Muhs from re-litigating issues settled by the Arizona case. Appelliant Br. Ex. J. Muhs also denied that any of the bars enumerated in 11 U.S.C. § 523 were applicable. Id.

         On March 9, 2017, the bankruptcy court held a hearing on TKC's Motion for Judgment on the Pleadings/Summary Judgment. The court denied the motion. In ruling from the bench, the Court stated:

. . . [T]his is a Court of equity, so 1 am going to use my power to apply equitable estoppel in this case in order for a trial to go on. I'm not saying that Mr. Muhs has a prayer of winning. What I am saying is that it is clear by the judgment in the Arizona Court that Mr. Muhs's attorney was not working in the best interests from time to time of either of its clients, PHP or Mr. Muhs. I think that there are facts that arc in dispute here, and they cannot be addressed at this stage on a Summary Judgment motion, so I think we should just proceed as though we're going to have a trial. . . I think that there definitely are some disputed facts, and 1 want to know what they are.

Appellant Br. Ex. C. at 96-97. The court subsequently issued a written order denying summary judgment, citing to the reasons stated in the record. Appellant Br. Ex. D.

         TKC has timely appealed the bankruptcy court's denial to this Court. The appeal is proper under 28 U.S.C. §§ 158(a)(3) and (c)(1) and Rules 8002 and 8004 of the Federal Rules of Bankruptcy Procedure.


         Bankruptcy courts' legal conclusions are reviewed de novo and findings of fact arc reviewed for clear error. Wells Fargo Bank, N.A. v. AMH Roman Two NC, LLC,859 F.3d 295, 299 (4th Cir. 2017). Application of collateral estoppel is a question of law. L&R Assocs. v. Curtis, 194 B.R. 407, 409 (E.D. Va. ...

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