In re Sarff
| Decision Date | 10 January 2000 |
| Docket Number | No. 99-8035,99-8036.,99-8035 |
| Citation | 242 BR 620 |
| Parties | In re Gregory S. SARFF, Debtor. The Spring Works, Inc., Plaintiff-Appellant, Cross-Appellee, v. Gregory S. Sarff, Defendant-Appellee, Cross-Appellant. |
| Court | U.S. Bankruptcy Appellate Panel, Sixth Circuit |
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Eugene R. Butler, Baker & Hostetler, Columbus, OH, argued and on brief, for Appellant.
Mark Ditullio, Columbus, OH, argued and on brief for Appellee.
Before MORGENSTERN-CLARREN, RHODES, and STOSBERG, Bankruptcy Appellate Panel Judges.
The state court awarded damages against Gregory Sarff and in favor of Spring Works, Sarff's former employer, for breach of a covenant not to compete, breach of contract, breach of duty of loyalty, misappropriation of trade secrets, and intentional interference with business relations. The state court also sanctioned Sarff for discovery violations and contempt for violating an injunction. After Sarff filed a chapter 7 bankruptcy petition, Spring Works filed this dischargeability proceeding under 11 U.S.C. § 523(a)(6). Applying collateral estoppel, the bankruptcy court granted partial summary judgment for Spring Works and partial summary judgment for Sarff, declaring parts of the state court judgment nondischargeable, but other parts dischargeable. In this appeal, both parties argue that the bankruptcy court's judgment was internally inconsistent. The Panel concludes that all of the state court judgment arose from the same conduct which the state court found was willful and malicious, and that the entire judgment is nondischargeable. Accordingly, the bankruptcy court's judgment is affirmed in part and reversed in part.
The issue on appeal is which parts of the state court judgment are nondischargeable under § 523(a)(6).
The Bankruptcy Appellate Panel of the Sixth Circuit has jurisdiction to decide this appeal. The United States District Court for the Southern District of Ohio has authorized appeals to the BAP. A "final order" of a bankruptcy court may be appealed by right under 28 U.S.C. § 158(a)(1). For purposes of appeal, an order is final if it "ends the litigation on the merits and leaves nothing for the court to do but execute the judgment." Midland Asphalt Corp. v. United States, 489 U.S. 794, 798, 109 S.Ct. 1494, 1497, 103 L.Ed.2d 879 (1989) (citations omitted). The bankruptcy court's order granting in parting and denying in part motions for summary judgment by both parties is a final order. Belfance v. Bushey (In re Bushey), 210 B.R. 95, 98 (6th Cir. BAP 1997).
Conclusions of law are reviewed de novo. Nicholson v. Isaacman (In re Isaacman), 26 F.3d 629 (6th Cir.1994). "De novo review requires the Panel to review questions of law independent of the bankruptcy court's determination." First Union Mortgage Corp. v. Eubanks (In re Eubanks), 219 B.R. 468, 469 (6th Cir. BAP 1998) (citing In re Schaffrath, 214 B.R. 153, 154 (6th Cir. BAP 1997)). A bankruptcy court's order granting summary judgment is reviewed de novo. Myers v. IRS (In re Myers), 216 B.R. 402, 403 (6th Cir. BAP 1997), aff'd, 196 F.3d 622 (6th Cir.1999). The determination of the applicability of collateral estoppel is also reviewed de novo. Markowitz v. Campbell (In re Markowitz), 190 F.3d 455, 461 (6th Cir.1999).
Spring Works holds a patent for and manufactures a specially designed spring. Sarff was employed by Spring Works as a sales person from February 2, 1993, through February 3, 1995, when Spring Works terminated his employment for aiding a competitor, National Spring. On February 9, 1995, Spring Works filed a complaint against Sarff in Franklin County Common Pleas Court, alleging breach of a non-competition agreement, breach of employment duties under common law, misappropriation of trade secrets and intentional interference with business relations. On February 16, 1995, Sarff consented to the entry of an injunction prohibiting him from violating the non-competition agreement for two years and preventing him from disclosing any trade secrets.
On June 12, 1995, Spring Works filed a motion for contempt against Sarff for violating the injunction. On October 4, 1995, a state court magistrate conducted a trial on the contempt and injunctive relief issues and made specific findings of fact regarding Sarff's conduct. The magistrate found that Sarff had violated the injunction, misappropriated trade secrets, interfered with Spring Work's business relationships and breached his duty of loyalty. The state common pleas court adopted the magistrate's findings on January 9, 1996. These findings were upheld by the state appellate court. Spring Works v. Sarff, 1996 WL 339991, 1996 Ohio App. Lexis 2560 (June 20, 1996).
Sarff filed bankruptcy on January 17, 1997. In February, 1997, Spring Works filed an adversary proceeding under 11 U.S.C. § 523(a)(4) and (6). The bankruptcy court terminated the automatic stay to allow Spring Works to proceed with the state court action to determine damages. The state court then entered a judgment in favor of Spring Works. This judgment consisted of: $20,789.79 in compensatory damages for breach of the covenant not to compete, interference with business relationships and misappropriation of trade secrets; $5,000 in punitive damages for the theft of springs and other overt acts; a $250 fine for violating the injunction; a $2,000 sanction for redacting information from discovery documents; and $38,708.22 in compensatory damages for breach of the duty of loyalty.
Both Spring Works and Sarff moved for summary judgment in the bankruptcy court based on the state court findings. The court awarded partial summary judgment to both Spring Works and Sarff. The bankruptcy court held that the award of compensatory damages for breach of the duty of loyalty was dischargeable but that the balance of the judgment was non-dischargeable under 11 U.S.C. § 523(a)(6). Both Spring Works and Sarff appealed the bankruptcy court's determination. Spring Works argues that the bankruptcy court erred in holding that the compensatory damages are nondischargeable but correctly found that the balance of the state court judgment is nondischargeable. Sarff argues that the bankruptcy court correctly found that the compensatory damages are dischargeable but erred in finding that the remainder of the judgment is nondischargeable.
The Supreme Court has held that the doctrine of collateral estoppel is applicable in dischargeability proceedings. Grogan v. Garner, 498 U.S. 279, 284, 111 S.Ct. 654, 658, 112 L.Ed.2d 755 (1991). "The doctrine of collateral estoppel `precludes relitigation of issues of fact or law actually litigated and decided in a prior action between the same parties and necessary to the judgment, even if decided as part of a different claim or cause of action.'" Markowitz, 190 F.3d at 461 (quoting Sanders Confectionery Prods., Inc. v. Heller Fin. Inc., 973 F.2d 474, 480 (6th Cir.1992)).
Ed Schory & Sons, Inc. v. Francis (In re Francis), 226 B.R. 385, 388 (6th Cir. BAP 1998). Both Sarff and Spring Works were parties in the state court action and it was fully litigated. Neither party has asserted that any of the magistrate's factual findings or conclusions of law were not necessary to the state court judgment. The bankruptcy court properly determined that it was precluded from relitigating any of the facts and conclusions of law involved in the state court judgment to the extent that they are identical in a dischargeability proceeding.
Section 523(a)(6) provides that a debtor is not discharged from any debt "for willful and malicious injury by the debtor to another entity or to the property of another entity." The Supreme Court has held that a debt is nondischargeable under § 523(a)(6) if it results from an act with "intent to cause injury." Kawaauhau v. Geiger, 523 U.S. 57, 61, 118 S.Ct. 974, 977, 140 L.Ed.2d 90 (1998). The Sixth Circuit recently interpreted Geiger, holding "that unless `the actor desires to cause consequences of his act, or . . . believes that the consequences are substantially certain to result from it', he has not committed a `willful and malicious injury' as defined under § 523(a)(6)." Markowitz, 190 F.3d at 464 (internal citation omitted). Therefore, if the state court found that Sarff intentionally injured Spring Works, the bankruptcy court was required under the doctrine of collateral estoppel to hold the debt nondischargeable. Abbo v. Rossi, McCreery & Assocs. (In re Abbo), 168 F.3d 930, 932 (6th Cir.1999).
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