Halliburton Energy Servs., Inc. v. McVay (In re McVay)

• Decision Date: 03 January 2012
• Docket Number: Adversary No. 10–8138.,Bankruptcy No. 10–82723.
• Citation: 461 B.R. 735
• Parties: In re Chester Shane McVAY, Debtor.Halliburton Energy Services, Inc., Plaintiff, v. Chester Shane McVay, Defendant.
• Court: U.S. Bankruptcy Court — Central District of Illinois

461 B.R. 735

In re Chester Shane McVAY, Debtor.Halliburton Energy Services, Inc., Plaintiff,

v.Chester Shane McVay, Defendant.

Bankruptcy No. 10–82723.

Adversary No. 10–8138.

United States Bankruptcy Court, C.D. Illinois.

Jan. 3, 2012.

Jeffery D. Carruth, Arlington, TX, for Plaintiff.

Spencer Lee Daniels, Peoria, IL, for Defendant.

OPINION

THOMAS L. PERKINS, Chief Judge.

This matter is before the Court on the motion for summary judgment filed by the Plaintiff, Halliburton Energy Services, Inc. (HES), seeking to give issue preclusive effect to an arbitration award.

HES commenced the arbitration proceeding on January 17, 2006, against its former employee, the Debtor, Chester S. McVay (DEBTOR), before the Employment Arbitration Tribunal of the American Arbitration Association pursuant to an arbitration provision contained in the employment agreement between the parties. In December, 2006, evidence was taken by arbitrator Karen K. Fitzgerald, briefs were submitted, and the arbitrator issued a 20–page written decision entitled “Final Award” on March 21, 2007.

The Final Award identifies the claims asserted by HES as follows:

1. breach of the Intellectual Property Agreement (IPA), and

2. breach of the agreement to arbitrate.

During the arbitration, HES sought to add a claim for the tort of misappropriation of trade secrets, but leave to amend was denied. The specific relief sought by HES included return of property, damages resulting from the DEBTOR'S breach of the IPA, attorney fees, and a permanent injunction. The DEBTOR asserted counterclaims against HES including a declaratory judgment that he, not HES, is the rightful owner of a program identified as the “standard industry software program.”

The claims revolve around the IPA executed by the DEBTOR when he began working for HES in January, 2001, in Dallas, Texas. He resigned in early January, 2006, to take a job with Caterpillar. The arbitrator found that before he left HES, the DEBTOR transferred a large amount of computer stored data to a thumb drive and copied and removed “hundreds of pages of HES documents.” He was asked at his exit interview to return all documents and electronic files in his possession as required by the IPA. During the exit interview, the DEBTOR expressed his belief that he, not HES, owned the disputed software program.

Within days of the exit interview, HES sued for and obtained a Temporary Restraining Order preventing the DEBTOR from removing from the state of Texas any documents or property belonging to HES and ordering their return within five days. Although the DEBTOR turned over both computers and all paper copies of HES documents in his possession, he took the undisclosed thumb drive with him when he moved to Iowa to work for Caterpillar. Ultimately, the DEBTOR turned over the thumb drive to HES in December, 2006. The DEBTOR had deleted the materials off of the thumb drive, but they could be recovered and viewed through a special data recovery software program.

The arbitrator concluded that the DEBTOR “breached the IPA by refusing to return HES property to HES when requested.” She also concluded that the DEBTOR breached the IPA by disclosing confidential HES documents to third parties, including his father. The arbitrator also awarded injunctive relief to prevent the dissemination or use of HES information.

HES attempted to add a claim for breach of fiduciary duty in its Post-hearing Brief, but the arbitrator denied that late addition. The Final Award indicates that HES had also sued the DEBTOR'S father, Leland McVay, in Oklahoma for an injunction against his potential use or dissemination of HES proprietary information. In the arbitration proceeding, HES sought reimbursement of the attorney fees incurred in that action, contending that “it was [the DEBTOR'S] tort that required HES to act to protect its interests by filing the lawsuit against Leland McVay.” The arbitrator determined that the fees were not recoverable as damages against the DEBTOR for his breach of the IPA.

With respect to the counterclaim that he be awarded ownership of the disputed software program, the DEBTOR argued that he developed the basic program on his own time and not as an employee of HES. The arbitrator agreed, finding that he developed the original program “on his own time in the evenings at his house,” that he “never shared this program with HES,” and that this work was not done as part of his job duties for HES. The arbitrator determined the evidence established, however, that over time the DEBTOR did begin to work on the software as part of his job duties for HES. Eventually, he shared the program with HES and made changes and modifications to it as instructed or requested by HES. The arbitrator determined that the final, modified version (the November, 2004, version) was substantially developed by the DEBTOR as part of his employment with HES. The IPA provides that any original work of authorship under the Copyright Act of 1976 that the DEBTOR creates as an HES employee shall be considered a work made for hire, to which HES shall have the sole and exclusive right, title and interest (including trade secret and copyright interests). Based on that contract provision, the arbitrator determined that HES, not the DEBTOR, owned the November, 2004, version of the software program.

The arbitrator awarded HES injunctive relief, a declaratory judgment that it owned the disputed program, damages for breach of contract in the amount of $24,047.27, attorney fees of $150,000 for pursuit of the breach of contract claim and expert witness costs of $20,944.15. The monetary awards total $194,991.42. On the DEBTOR'S counterclaims, the arbitrator found that the DEBTOR was entitled to a “take nothing judgment.” Except for the limited application of the federal copyright laws, the arbitrator looked to Texas state law to provide the substantive rules of decision.

Following issuance of the Final Award, the DEBTOR brought an action in the U.S. District Court for the Northern District of Texas to vacate the arbitrator's decision. On November 13, 2009, the magistrate judge issued recommended findings and conclusions that the arbitration award be confirmed, not vacated. On January 22, 2010, the district court adopted the magistrate's recommendation and entered a judgment confirming the award. The DEBTOR filed an appeal with the Court of Appeals for the Fifth Circuit, which remains pending.

The DEBTOR filed his voluntary Chapter 7 petition in this Court on August 30, 2010, listing HES as an unsecured creditor. After investigating the DEBTOR'S financial situation, the Chapter 7 Trustee filed a no asset report meaning the estate has no assets with which to make a distribution to creditors.

HES filed a timely adversary complaint on December 20, 2010, seeking a determination that the debt evidenced by the Final Award is not dischargeable, first, under section 523(a)(4) of the Bankruptcy Code, as a debt for fraud or defalcation while acting in a fiduciary capacity or as one arising from embezzlement; and second, under section 523(a)(6), as a debt for willful and malicious injury to another entity or to the property of another entity.

The complaint also seeks to have the DEBTOR'S discharge denied entirely, first, under section 727(a)(2), alleging that the DEBTOR, with intent to hinder, delay or defraud, has transferred, removed, destroyed, mutilated, or concealed his property within one year before bankruptcy or permitted same, or property of the estate after the filing; second, under section 727(a)(4), alleging that he knowingly and fraudulently made false oaths in the course of this bankruptcy proceeding by failing to disclose the existence or transfer of assets; and, third, under section 727(a)(3), alleging that the DEBTOR, without justification, concealed, destroyed, mutilated, falsified, or failed to keep or preserve any recorded information, including books, documents, records, and papers, from which his financial condition or business transactions might be ascertained.

The motion for summary judgment filed by HES seeks judgment only as to the two nondischargeability claims brought under section 523, and not as to the three denial of discharge claims brought under section 727. The motion is premised entirely on the issue preclusive effect of the Final Award issued by the arbitrator and confirmed by the district court. HES contends that the findings of fact made by the arbitrator, by themselves, entitle it to summary judgment on the nondischargeability claims. HES argues that the same issues of fact are at issue here and that the DEBTOR is collaterally estopped from relitigating them.

Under Federal Rule of Civil Procedure 56, made applicable to adversary proceedings in bankruptcy by Federal Rule of Bankruptcy Procedure 7056, summary judgment is proper if the pleadings, depositions, answers to interrogatories, and admissions on file, together with any affidavits, show that there is no genuine issue of material fact and that the moving party is entitled to judgment as a matter of law. Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). In order to prevail on a motion for summary judgment, the moving party must establish there is no genuine issue of material fact as to any essential element of the claim. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). When a moving party has met its initial burden of showing there is no genuine issue of material fact, the burden shifts to the non-movant to go beyond the pleadings and come forward with specific facts showing that there is a genuine issue for trial. Inferences to be drawn from underlying facts must be viewed in the light most favorable to parties opposing the motion. In re Chambers, 348 F.3d 650 (7th Cir.2003). A material factual dispute is sufficient to prevent summary judgment only when the disputed fact is determinative of the...