United States District Court, E.D. Virginia, Alexandria Division
TKC AEROSPACE, INC., Appellant.
CHARLES TAYLOR MUHS, Appellee.
MEMORANDUM OPINION AND ORDER
O'GRADY UNITED STATES DISTRICT JUDGE.
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.
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.
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
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.
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.
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.
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.
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.
STANDARD OF REVIEW
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. ...