CMCO Mortg., LLC v. Hill (In re Hill)

• Decision Date: 04 May 2020
• Docket Number: No. 19-5861,19-5861
• Citation: 957 F.3d 704
• Parties: IN RE: Aaron K. HILL, Debtor. CMCO Mortgage, LLC, Plaintiff-Appellee, v. Aaron K. Hill, Defendant-Appellant.
• Court: U.S. Court of Appeals — Sixth Circuit

957 F.3d 704

IN RE: Aaron K. HILL, Debtor.CMCO Mortgage, LLC, Plaintiff-Appellee,

v.Aaron K. Hill, Defendant-Appellant.

No. 19-5861

United States Court of Appeals, Sixth Circuit.

Argued: March 12, 2020

Decided and Filed: May 4, 2020

ARGUED: Christopher B. Madden, DENTONS BINGHAM GREENEBAUM LLP, Louisville, Kentucky, for Appellant. Elisabeth S. Gray, MIDDLETON REUTLINGER, Louisville, Kentucky, for Appellee. ON BRIEF: James R. Irving, BINGHAM GREENEBAUM DOLL LLP, Louisville, Kentucky, for Appellant. Elisabeth S. Gray, Katherine T. Reisz, Matthew P. Dearmond, MIDDLETON REUTLINGER, Louisville, Kentucky, for Appellee.

Before: SUTTON, McKEAGUE, and DONALD, Circuit Judges.

BERNICE BOUIE DONALD, Circuit Judge.

Aaron Hill, whether on his own accord or due to poor legal advice, decided not to attend a state court damages trial after being admonished by the state court judge that, if he failed to appear, "adverse things [were] likely [to] happen." The judge was right. The court entered a final judgment against Hill in the amount of $3,417,477 and a finding that Hill's actions "caused a willful and malicious injury." Hill now seeks relief from the bankruptcy court's holding that the debt is nondischargeable in his Chapter 7 bankruptcy proceeding because he is collaterally estopped from contending that the debt was not the result of "willful and malicious injury." The bankruptcy court was correct to find that the state court damages judgment provides preclusive effect to the determination of the nondischargeability of Hill's debt. We AFFIRM .

I.

Prior to November 2010, Aaron Hill was a principal of First Meridian Mortgage Corporation ("First Meridian"). That month, he and the other three First Meridian principals agreed to sell the company to CMCO Mortgage, LLC ("CMCO"), an Ohio based mortgage company. According to Hill, the parties agreed that after the sale the former First Meridian principals would build and manage an internet division of CMCO. The sale was consummated as a stock purchase agreement and also involved the execution of two promissory notes evidencing loans to First Meridian.

On January 15, 2012, Hill received an offer of employment from CMCO's competitor, Peoples Bank, which he accepted. On February 17, 2012, CMCO terminated Hill, alleging that he breached his contract, provided trade secrets to Peoples Bank, and unlawfully recruited and hired nearly all CMCO's Louisville, Kentucky, and Indianapolis, Indiana, employees over to Peoples Bank. Hill contends that he discussed the possibility of joining Peoples Bank with CMCO as early as December 2011 and was informed that he should "do what's best for [himself] and [his] family." On February 27, 2012, CMCO filed a complaint in Jefferson County Circuit Court (the "state court") against Peoples Bank, Hill, and other former employees of CMCO. Eight of the claims named Hill as a defendant: (1) breach of contract; (2) breach of fiduciary duty; (3) interference with actual or prospective business advantage; (4) unfair competition; (5) usurpation of corporate business opportunities; (6) trade secret misappropriation; (7) conversion; and (8) unjust enrichment.

At the start of the state court action, Peoples Bank paid for Hill and other employees' legal representation, but following a July 2013 mediation, wherein CMCO settled all of its claims against Peoples Bank and most of the other defendants, Peoples Bank informed Hill that it could no longer fund his representation. After a brief period wherein Hill's previous attorney represented him gratis , the attorney withdrew, and Hill proceeded pro se. Hill, however, generally declined to participate in the action. Most importantly, Hill failed to attend the pretrial conference on August 19, 2014, resulting in the state court granting CMCO's motions for sanctions and entry of a default judgment on the claims set forth in its complaint. Making matters worse, Hill also declined to appear for the damages trial that took place on September 22, 2014.

Hill asserts that he never received the state court's trial order scheduling a pretrial conference because many of the state court filings were mailed to the incorrect address.¹ He admits that he was initially aware of the pretrial conference through correspondence with opposing counsel in February 2014, but states that he was unaware that the August 19, 2014 date was finalized and that he was expecting a trial order to be sent to him from the state court. Hill further acknowledges that he knew of the trial date because he spoke with the state court judge on the phone and was warned that if he did not appear "adverse things [were] likely [to] happen." He contends, however, that a bankruptcy attorney he was consulting at the time advised him that he need not participate in the action because any judgments obtained against him would "go away" if he sought bankruptcy relief.

The state court entered judgment in favor of CMCO on "all claims asserted by and against Hill in [the state court] action based on Hill's repeated and intentional failures to comply with the Court's Second Civil Jury Trial Order dated February 11, 2014, and his failure to appear at the final pretrial conference." As part of its findings of fact, the court stated that

Hill's actions ... were willful, intentional, in bad faith, egregious, and done with malice. Hill's actions caused a willful and malicious injury to [CMCO]. Hill's actions further constitute fraud and defalcation while acting in a fiduciary capacity given his intentional misrepresentations made to conceal his wrongful actions from [CMCO], and his failure to meet his fiduciary obligations to [CMCO]. Hill intended the consequences of his actions, namely the destruction of [CMCO's] internet division. Hill's actions were done in reckless disregard of [CMCO's] economic interests and expectancies.

State Court Judgment, Bankr. R.1-7, Page 6/8. The court held a damages trial on September 22, 2014, and on October 3, 2014, entered a final judgment against Hill in the amount of $3,417,477 in compensatory damages.

On September 29, 2014, seven days after the trial and four days before the state court entered its final judgment in favor of CMCO, Hill filed his Chapter 7 bankruptcy petition in the United States Bankruptcy Court for the Western District of Kentucky. Hill notified CMCO of his bankruptcy case the next day. On October 29, 2014, CMCO filed a timely proof of claim for the $3,147,477 judgment against Hill in the bankruptcy court. On June 8, 2015, the bankruptcy court entered an order annulling the automatic stay pursuant to 11 U.S.C. § 362(d) —lifting the injunction which prevents creditors from collecting debts from a debtor who has declared bankruptcy—with respect to CMCO's damages judgment against Hill. On January 5, 2015, CMCO filed an adversary proceeding against Hill (now represented by counsel), seeking a determination that the debt owed by Hill to CMCO is nondischargeable under 11 U.S.C. § 523(a)(2)(A), (a)(4), and (a)(6) (excepting discharge of debts obtained through fraud, fraud committed in a fiduciary capacity, and conduct for willful and malicious injury) and a denial of Hill's Chapter 7 discharge pursuant to 11 U.S.C. § 727 (a)(4)(A) (denying discharge to a debtor who knowingly and fraudulently made a false oath or account in their bankruptcy case).

Finally, on July 21, 2015, CMCO filed the motion now before this Court, seeking summary judgment only on its claim of nondischargeability under § 523(a)(6) (excepting discharge "for willful and malicious injury by the debtor to another entity or to the property of another entity"). On November 2, 2015, the bankruptcy court entered its order granting CMCO's motion for summary judgment and holding the damages judgment nondischargeable by application of collateral estoppel based on the state court judgment finding Hill's actions caused "willful and malicious injury." In re Hill , 540 B.R. 331, 342 (W.D. Ky. 2015). Hill filed a motion to vacate the order, arguing that the state court's default judgment could not be given preclusive effect, but on April 20, 2016, the bankruptcy court denied the motion.

While the bankruptcy case was pending, Hill filed an unsuccessful motion to vacate the damages judgment in the state court. Hill appealed the denial to the Kentucky Court of Appeals, but on January 12, 2018, the appellate court affirmed the lower court's denial, finding his appeal to be "nothing more than a frivolous attempt to circumvent Hill's utter failure to participate in the underlying litigation."² Hill v. CMCO Mortg., LLC , No. 2016-CA-000400-MR, 2018 WL 385551, at *5, 2018 Ky. App. Unpub. LEXIS 21, at *13-14 (Ky. App. Jan. 12, 2018). The appellate court also granted CMCO's motion for sanctions, finding Hill's appeal "so totally lacking in merit that it appears to have been taken in bad faith." Ky. App. Order, R. 28-1, PageID 234. Hill sought further review before the Kentucky Supreme Court, but the court denied his motion for discretionary review. Hill v. CMCO Mortg., LLC , N. 2018-SC-000068-D, 2018 Ky. LEXIS 237, at *1 (Ky. June 6, 2018).

On April 28, 2016, Hill timely appealed the grant of summary judgment to CMCO to the district court. On July 3, 2019, the district court entered its order denying Hill's appeal and affirming the bankruptcy court's grant of summary judgment to CMCO through the application of collateral estoppel. On August 1, 2019, Hill appealed the district court's denial of his appeal and affirmance of the bankruptcy court's grant of summary judgment to this Court.

II.

Under the Bankruptcy Code, the filing of a petition creates an automatic stay as to most proceedings against the debtor. 11 U.S.C. § 362(a). This provision was enacted to protect the "class of ‘honest but unfortunate debtor[s].’ " Marrama v. Citizens Bank of Mass. , 549 U.S. 365, 374, 127 S.Ct. 1105, 166 L.Ed.2d 956 (2007) (quoting Grogan v. Garner , 498 U.S. 279, 287, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991) ). However, "[o]...