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In re Muhs

United States Court of Appeals, Fourth Circuit

May 8, 2019

In re: CHARLES TAYLOR MUHS, Debtor.
v.
CHARLES TAYLOR MUHS, Defendant-Appellant. TKC AEROSPACE INC., Plaintiff - Appellee,

          Argued: March 19, 2019

          Appeal from the United States District Court for the Eastern District of Virginia, at Alexandria. Liam O'Grady, District Judge. (1:17-cv-01304-LO-TCB)

          Reversed and remanded by published opinion. Judge Thacker wrote the opinion, in which Judge Motz and Judge King joined.

          ARGUED: Richard George Hall, Annandale, Virginia, for Appellant. Douglas Clark Proxmire, VENABLE LLP, Tysons Corner, Virginia, for Appellee. ON BRIEF:

          Stephen K. Gallagher, Kevin W. Weigand, VENABLE LLP, Tysons Corner, Virginia, for Appellee.

          Before MOTZ, KING, and THACKER, Circuit Judges.

          Thacker, Circuit Judge.

         At the root of this appeal is a provision in the United States Bankruptcy Code stating that a debt "for willful and malicious injury by the debtor to another entity" is nondischargeable in Chapter 7 bankruptcy. 11 U.S.C. § 523(a)(6) (emphasis supplied). In 2016, Charles Taylor Muhs ("Appellant") filed for Chapter 7 bankruptcy and attempted to discharge a judgment in excess of $20 million entered by an Alaska district court against him and in favor of TKC Aerospace, Inc. ("TKCA"). TKCA, however, claims that the judgment is nondischargeable because the damages award was based on Appellant's willful and malicious misappropriation of TKCA's trade secrets.

         The bankruptcy court, applying collateral estoppel principles, concluded that Alaska's award of damages to TKCA necessarily meant that Appellant willfully and maliciously injured TKCA for purposes of § 523(a)(6), granted summary judgment in favor of TKCA, and determined that the entire judgment award was nondischargeable. The district court affirmed.

         We reverse. The Supreme Court has held that § 523(a)(6) requires "a deliberate or intentional injury, not merely a deliberate or intentional act that leads to injury." Kawaauhau v. Geiger, 523 U.S. 57, 61 (1998) (emphases in original). Likewise, this court has held that a creditor challenging dischargeability under § 523(a)(6) must prove that the debtor had an "inten[t] to injure." In re Duncan, 448 F.3d 725, 730 (4th Cir. 2006). Because neither the Alaska district court, nor the bankruptcy court, determined the precise issue of whether Appellant intended to injure TKCA, collateral estoppel and summary judgment were inappropriate. Therefore, we remand to the district court with instructions to remand to the bankruptcy court for further proceedings.

         I.

         A.

         Background

         In 2007, Appellant became Vice President of Business Development for TKCA, an Alaska corporation specializing in aircraft procurement, logistics, and support. In that capacity, Appellant had access to TKCA's proprietary information, and his contract with TKCA prohibited him from disclosing confidential information to any third party or competing with TKCA for six months after his employment terminated. From 2009 to 2011, TKCA competed for and won Department of State ("DOS") contracts for Bombardier Dash 8 aircrafts, modified to meet DOS needs. As part of this process, TKCA would -- with the help of Appellant -- submit proposals to DOS describing how it would perform such modifications.

         On March 28, 2011, Appellant left his position with TKCA to accept a position with Knowledge International in Alexandria, Virginia, although he continued to work for TKCA on a part-time basis. Appellant also began to work closely with Phoenix Heliparts, Inc. ("PHP"), an Arizona corporation and (at the time) a competitor of TKCA, to secure aircraft and develop bids for possible DOS solicitation. On August 5, 2011, DOS issued a solicitation for up to two more Dash 8 aircrafts, and PHP submitted a proposal. DOS awarded the contract to PHP.

         B.

         The Alaska and Arizona Actions

         1.

         Parallel Litigation

         On September 26, 2011, TKCA filed a lawsuit in the District of Alaska against Appellant, alleging breach of contract, breach of implied covenant of good faith and fair dealing, breach of fiduciary duty, unjust enrichment, tortious interference with prospective business, fraud, and violation of the Alaska Uniform Trade Secrets Act (the "Alaska Action"). See Compl., TKC Aerospace, Inc. v. Muhs, No. 3:11-cv-189 (D. Alaska filed Sept. 26, 2011), ECF No. 1, at 12-17. Specifically, the complaint alleged that Appellant "stole a corporate business opportunity from TKCA and delivered it to a competitor, using TKCA proprietary information." Id. at 2.

         On October 20, 2011, TKCA filed a parallel suit against PHP in the Superior Court for Maricopa County, Arizona, alleging misappropriation of trade secrets under the Arizona Uniform Trade Secrets Act, intentional interference with business expectancy, unfair competition, and conversion. See TKC Aerospace, Inc. v. Phoenix Heliparts, Inc., No. CV2011-128889 (Ariz. Sup. Ct. filed Oct. 20, 2011) (the "Arizona Action"). Although he was a witness in the Arizona Action, Appellant was not named as a party. The Alaska Action and the Arizona Action carried on simultaneously.

         On February 21, 2012, Appellant filed a motion to stay the Alaska Action. In support of the motion, Appellant's counsel -- the same counsel representing PHP in the Arizona Action ___ ___ stated that the Arizona Action "involv[ed] the same plaintiff . . . and same factual and legal issues as those in the Alaska Action," and "[t]he underlying factual allegations in [both complaints] are virtually verbatim, the gravamen of the claims are identical, and the relief requested is virtually identical." J.A. 193.[1] The request for stay also stated, "this pending action is . . . substantially similar to and significantly parallels the Arizona Action," id. at 199, and "[i]f TKCA prevails in the Arizona Action, . . . then [Appellant] would be collaterally estopped from arguing differently in this Court," id. at 214 n.3 (alterations omitted). The Alaska court denied the motion to stay. After granting summary judgment on some claims, however, on March 8, 2013, the Alaska court deferred further scheduling until the Arizona Action was complete.

         2.

         The Arizona Judgment

         Meanwhile, from March 2012 to October 2013, the Arizona state court conducted a bench trial for over 40 days on the issue of PHP's liability regarding TKCA's trade secrets and PHP's misconduct. Ultimately, on January 30, 2015, the Arizona state court entered judgment in favor of TKCA and against PHP on the Arizona Uniform Trade Secrets Act claim, the tortious interference claim, and the common law unfair competition claim, in the total amount of $20, 295, 782.58. This amount was broken down as follows: $2, 883, 055.86 in lost profits; $3, 882, 205 in research and development costs; and $13, 530, 521.72 in exemplary damages. As to the latter, the Arizona state court stated, "PHP [must] pay exemplary damages pursuant to A.R.S. § 44-403(B)[[2] in an amount double awarded to TKCA for its lost profit and research and development costs." J.A. 105. The Arizona court found that PHP engaged in "willful and malicious misconduct," id. at 59, and "PHP willfully and maliciously misappropriated TKCA's trade secrets," id. at 66. It also found that "PHP formed an agency relationship with [Appellant]," and "[b]ecause of th[is relationship], this court will attribute [Appellant's] acts to PHP." Id. at 74, 75.

         But even though the Arizona state court attributed Appellant's actions to PHP, the Arizona Action was not based solely on the actions of Appellant. Indeed, the Arizona court also found the following regarding Tina Cannon, president of PHP at the relevant time, and her husband Darrin Cannon, who was vice-president:

• "[T]he Cannons wiped their computers after receiving a litigation hold letter and after trial started. The court has rarely, if ever in a civil matter, witnessed a party engage in such flagrant misconduct and act with such disregard for the truth and such profound disrespect for the law." J.A. 60;
• "This court finds that Darrin Cannon installed and ran CCleaner with the intent to delete any evidence that PHP had misappropriated TKCA's trade secrets and proprietary and confidential information and also to conceal PHP's efforts to delete relevant and material evidence of its misconduct." J.A. 60-61;
• "During trial, Tina Cannon and [Appellant] provided improbable explanations when confronted with overwhelming evidence of PHP's efforts to secure the award of the D[O]S contract." J.A. 65; and
• Tina Cannon "induced [Appellant] to violate his non-compete agreement with TKCA and disclose TKCA trade secrets in further breach of his employment contract." J.A. 80.

         Accordingly, when assessing whether exemplary damages were appropriate pursuant to A.R.S. § 44-403(B) for willful and malicious misappropriation, the Arizona court stated the following, inter alia:

Attempts to conceal wrongful conduct with respect to trade secrets provide evidence of willful and malicious misappropriation. . . .
[T]he following are just a few examples that establish PHP willfully and maliciously engaged in misconduct. Despite knowing [Appellant's] contract with TKCA had a non-compete clause, the Cannons induced [Appellant] to misappropriate TKCA's trade secrets in order to compete directly with TKCA. [Appellant], on behalf of PHP, withheld vital information from TKCA so that PHP could establish a material and temporal advantage in preparing a successful proposal in response to the D[O]S solicitation. Tina Cannon knew that [Appellant] had uploaded TKCA proprietary documents to PHP's servers and PHP knowingly used the uploaded documents to prepare its bid. PHP further knew that using the uploaded documents would harm TKCA. . . .
PHP intentionally wip[ed] company servers after learning of a subpoena, erasing company laptops in the evening and early morning hours before court-ordered forensic imaging started . . . .

J.A. 87. After awarding exemplary damages, the Arizona court noted that TKCA also satisfied its burden of proof on punitive damages, explaining, "This court finds by clear and convincing evidence that PHP engaged in outrageous conduct and acted with an evilmind intending to injure TKCA by intentionally interfering with TKCA's contracts and opportunities and then using TKCA's proprietary information to misappropriate those opportunities." Id. at 88-89 (emphases supplied). The court made no ...


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