First Am. Title Ins. Co. v. Smith (In re Smith), BAP No. UT-19-035

• Decision Date: 18 August 2020
• Docket Number: Bankr. No. 17-22743,BAP No. UT-19-035,Adv. No. 17-02076
• Citation: 618 B.R. 901
• Parties: IN RE Michael M. SMITH, Debtor. First American Title Insurance Company and First American Title Company, LLC, Plaintiffs-Appellees, v. Michael M. Smith, Defendant-Appellant.
• Court: U.S. Bankruptcy Appellate Panel, Tenth Circuit

618 B.R. 901

IN RE Michael M. SMITH, Debtor.First American Title Insurance Company and First American Title Company, LLC, Plaintiffs-Appellees,

v.Michael M. Smith, Defendant-Appellant.

BAP No. UT-19-035

Bankr. No. 17-22743

Adv. No. 17-02076

United States Bankruptcy Appellate Panel of the Tenth Circuit.

Signed August 18, 2020

Mark Clifford Rose of McKay, Burton & Thurman, Salt Lake City Utah for Appellant Michael M. Smith.

Matthew L. Lalli of Snell & Wilmer, Salt Lake City Utah for Appellees First American Title Company, LLC and First American Title Insurance Company.

Before MICHAEL, SOMERS, and JACOBVITZ, Bankruptcy Judges.

OPINION

SOMERS, Bankruptcy Judge.

Michael Smith is an attorney who spent twenty-two years working for Equity Title Insurance Company ("Equity") in Utah, where he rose to the level of Chief Operating Officer and General Counsel. A competitor, First American Title Insurance Company and First American Title Company, LLC (collectively "First American"), purchased a controlling interest in Equity, eventually merging with Equity in 2012, and changed Smith's role to underwriting counsel. Presumably, Smith was no longer happy in his position, and in 2014, Smith and others began to talk of leaving First American to form their own title company.

Smith ultimately resigned from First American in 2015 and opened a competing title agency called Northwest Title. Northwest Title hired twenty-seven former First American employees, who brought with them First American clients. First American then sued Smith and Northwest Title in United States District Court in Utah for breach of contract, breach of fiduciary duty, and tortious interference with contract, and obtained a multi-million-dollar verdict against both. Smith filed a chapter 7 bankruptcy petition and First American sought to have its judgment excepted from discharge under 11 U.S.C. § 523(a)(6) ("willful and malicious injury by the debtor to another entity or to the property of another entity").¹ The Bankruptcy Court entered a judgment excepting the debt owed to First American from Smith's discharge, and he appealed. This Court concludes the Bankruptcy Court did not err in its ultimate entry of judgment and affirms the judgment of the Bankruptcy Court.

I. Factual and Procedural Background²

Smith began his employment with Equity in May 1995, and eventually rose to the position of Chief Operating Officer and General Counsel.³ On August 15, 2004, Smith executed an employment agreement with Equity.⁴ The employment agreement contained a non-compete clause that limited Smith from being employed in the title insurance business, but the clause only applied if Smith was terminated for cause.⁵ The employment agreement also included a clause regarding the non-solicitation of employees.⁶

Four years later, on October 16, 2008, First American, which operated a title insurance agency with approximately twenty locations throughout Utah, acquired a controlling interest in Equity's stock, and Smith became an employee of First American on that acquisition date.⁷ First American changed Smith's title to State Underwriting and Legal Counsel; in that position he served as an attorney for the company and owed it a fiduciary duty.⁸ In mid-2011, Smith emailed Equity's management team about another attorney employed by First American who was leaving to work for another title company.⁹ Smith explained that he believed the employment contract the attorney executed while employed by Equity was enforceable and that First American would seek to enforce the non-compete clause in the attorney's employment contract if the attorney left.¹⁰

First American and Equity officially merged in October 2012.¹¹ First American required all employees to take an online training course that outlined the employee handbook and code of ethics and conduct and electronically acknowledge compliance with the policies therein.¹² Smith does not deny acknowledging the employee handbook and code of ethics.¹³ The record does not include the specific policies set out in either.

In the spring of 2014, three individuals, one of whom was a co-worker at First American, approached Smith about setting up a new title company, which they proposed Smith would run.¹⁴ By the fall of 2014, an additional First American employee was considering a move and Smith and others began preparing the launch of a new company, including setting up the company's ownership, discussing a partnership with a title underwriter that competed with First American, submitting required documents and forms necessary to formalize the relationship, and obtaining licenses and permits from regulatory agencies.¹⁵ Smith did all these things while still employed as legal counsel for First American.

On January 26, 2015, Northwest Title incorporated, and on February 18, 2015, Northwest Title applied for and received title escrow and title search licenses.¹⁶ Smith "wanted to limit the time between when he resigned and when other First American employees could start at Northwest [Title] so as to maximize the chance that First American employees would come to work for Northwest [Title] and to minimize the opportunity for First American to try and keep the employees at First American."¹⁷ Smith delayed his departure from First American by about a week to give Northwest Title more time to secure leased space for its operations.¹⁸

On March 9, 2015, Smith resigned from First American.¹⁹ While Smith left no unresolved work at First American, on the day he resigned he took documents from the company with the help of his assistant.²⁰ The very next day, on March 10, 2015, Northwest Title opened for business in offices next door to First American.²¹ Between March 9 and March 23, 2015, twenty-seven First American employees resigned with the intent to begin jobs at Northwest Title.²² Many of the Northwest Title employees immediately began contacting First American's customers explaining they were moving to Northwest Title, and within three weeks of opening, Northwest Title had 600 orders.²³ Northwest Title profited from at least 150 transactions that were opened at First American but later closed at Northwest Title.²⁴

The Bankruptcy Court made findings of fact concerning Smith's intent and state of mind while he was planning to leave First American. The Bankruptcy Court noted Smith alleged that he (1) believed the employment agreement with Equity was no longer binding; and (2) he did not have an employment agreement with First American.²⁵ But the Bankruptcy Court found Smith understood First American would not be happy with his departure and anticipated a lawsuit upon his departure and starting a competing title company.²⁶ Smith recognized that he was a lawyer for First American and that First American was his client.²⁷ Smith also recognized that as its attorney, he owed a fiduciary duty and a duty of undivided loyalty to First American relating to the scope of his representation up until the time he resigned.²⁸

Smith took steps to conceal his involvement in the formation of Northwest Title to compete with First American.²⁹ Smith "intentionally concealed his Northwest [Title] business formation activities for the following reasons: (1) [Smith] knew his actions were inconsistent with his legal and ethical duties to First American as its counsel; (2) [Smith] knew that First American would view his actions to set up Northwest [Title] as a threat because of the impact on First American's business and reputation; and (3) [Smith] knew he had to keep his plans secret from First American so he could take twenty-seven employees before First American could respond in a meaningful way to retain such employees."³⁰ Smith "subjectively knew of the substantial certainty of injury to First American as a result of opening Northwest Title offices in First American's business locations and taking First American's employees and their customer contacts."³¹

On April 3, 2015, First American sued Smith, Northwest Title, and other co-defendants in federal district court for breach of contract, tortious interference with contract, breach of fiduciary duty, misappropriation of trade secrets, and unfair competition.³² Smith admitted in several emails sent at the time that he was neither surprised nor concerned about the lawsuit.³³ When ruling on First American's motion for summary judgment in the District Court suit, the District Court judge found that Smith's Equity employment agreement remained in force after the Equity/First American merger; Smith breached the non-solicitation provision in the Equity employment contract; the non-compete clause in the Equity contract was only triggered if First American terminated Smith and thus did not apply; and First American's employee handbook and code of ethics were enforceable contracts.³⁴

At conclusion of the District Court trial, the judgment ultimately entered on December 30, 2016, found that Smith had breached three contracts: (1) the non-solicitation agreement in the August 2004 employment agreement that Smith entered with First American's predecessor in interest (Equity), (2) the First American employee handbook, and (3) First American's code of ethics.³⁵ First American was awarded compensatory damages of $500,000 for these breaches.³⁶ The jury also found that Smith breached fiduciary duties owed to First American while employed by First American, and the jury found the breach of fiduciary duty was willful and malicious or with knowing and reckless indifference.³⁷ For these wrongs, the jury awarded $600,000 in compensatory damages.³⁸ And finally, the jury found Smith tortiously interfered with First American's contracts in a way that was willful and malicious or with knowing and reckless indifference and awarded $525,000 in compensatory damages against Smith.³⁹ Various additional judgments were entered against Northwest Title and the co-defendants.⁴⁰ An award of attorneys' fees and costs was also awarded to First American for $3,097,816.36.⁴¹

On April 4,...