Miller, Matter of

• Decision Date: 24 September 1998
• Docket Number: No. 97-50842,97-50842
• Citation: 156 F.3d 598
• Parties: , Bankr. L. Rep. P 77,805, 48 U.S.P.Q.2d 1293, 12 Tex.Bankr.Ct.Rep. 553 In the Matter of William L. MILLER, Debtor. William L. MILLER, Appellant, v. J.D. ABRAMS INCORPORATED, Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 598

156 F.3d 598

33 Bankr.Ct.Dec. 282, Bankr. L. Rep. P 77,805,

48 U.S.P.Q.2d 1293, 12 Tex.Bankr.Ct.Rep. 553

In the Matter of William L. MILLER, Debtor.

William L. MILLER, Appellant, v. J.D. ABRAMS INCORPORATED, Appellee.

No. 97-50842.

United States Court of Appeals, Fifth Circuit.

Sept. 24, 1998.

C. Daniel Roberts, C. Daniel Roberts & Associates, Austin, TX, for Appellant.

R. Mark Dietz, Jerry Lee Jarrard, Jr., Dietz & Associates, Round Rock, TX, David Howard Donaldson, Jr., George, Donaldson & Ford, Austin, TX, for Appellee.

Appeal from the United States District Court for the Western District of Texas.

Before REYNALDO G. GARZA, HIGGINBOTHAM and EMILIO M. GARZA, Circuit Judges.

PATRICK E. HIGGINBOTHAM, Circuit Judge:

Miller appeals the district court's order holding that the state court judgment debt Miller owes J.D. Abrams, Inc., is nondischargeable in bankruptcy. More specifically, Miller contests the district court's conclusion that he is precluded under the doctrine of collateral estoppel from trying in the bankruptcy court the issue necessary to decide the dischargeability question. We conclude that neither the state court jury nor the state trial judge in entering judgment on the verdict decided Miller's intent in misappropriating or misusing Abrams's proprietary information. We REVERSE the district court's judgment and REMAND for further proceedings.

I

Abrams, a successful Texas highway and road contractor, employed Miller from June 1985 until February 28, 1994, when Miller left his position as vice president and director at Abrams to become manager and chief operations officer of Belfour Beatty, Inc.'s highway division. In his position at Abrams, Miller was privy to proprietary information and trade secrets regarding such matters as management policies, customer lists, pricing and bidding strategies, and profit margins and cost projections on specific projects. Belfour, wanting to start a competing highway division, started recruiting Miller. During a series of meetings concerning his prospective employment, Miller disclosed confidential information and trade secrets of Abrams to Belfour agents. Based on the information Miller divulged and his twenty years of experience in the road construction industry, Belfour offered Miller the COO position. Other employees of Abrams accompanied Miller in his move to Belfour.

On April 18, 1994, Abrams filed suit in Texas state court against Miller and Belfour. The case was tried to a jury in November 1995. The jury found that Miller misappropriated proprietary information or misused trade secrets and awarded Abrams damages of $1 million. The jury also decided that Miller had not breached any fiduciary duties owed Abrams and that punitive damages were not appropriate, since Miller did not act with "malice mean[ing] ill will, evil motive, or flagrant disregard for the rights of others."

Miller filed a voluntary Chapter 7 bankruptcy petition seeking protection from the state court judgment. Abrams instigated an adversary proceeding to obtain a determination that the state court judgment was a nondischargeable debt under 11 U.S.C. §§ 523(a)(4) and 523(a)(6). Based on the doctrine of collateral estoppel, the bankruptcy court granted summary judgment in favor of Abrams. The state court judgment, it found, was nondischargeable under § 523(a)(4) since misappropriation of proprietary information was larceny per se. The bankruptcy court, however, declined to rest its summary judgment on § 523(a)(6), because the court believed that the state court jury had not decided whether Miller had inflicted a "willful and malicious injury," the requirement for nondischargeability under that section. Miller and Abrams both appealed.

The district court affirmed the judgment that the state court judgment was nondischargeable based on principles of collateral estoppel. The district court, after analyzing the § 523(a)(6) issue, stated that "[t]he bankruptcy judge was correct in finding that the judgment debt was nondischargeable on behalf of Miller by collateral estoppel." As we explained, the bankruptcy judge did not rest its grant of summary judgment upon § 523(a)(6). From context, though, it is clear that the district court found that the debt was also nondischargeable under § 523(a)(4). In doing so, the district court pointed to the jury's finding that Miller had misappropriated proprietary information or misused trade secrets for his own advantage to the detriment of Abrams. The district court believed that this finding conclusively determined that Miller had inflicted a "willful and malicious injury" on Abrams for purposes of § 523(a)(6).

The district court also stated that "[t]he bankruptcy judge was further correct in failing to find the nondischargeability of the judgment debt pursuant to 11 U.S.C. § 523(a)(4) and was correct in overruling all of the contentions with the appellant Miller with regard to his contentions on finding the judgment debt dischargeable based upon collateral estoppel." The efforts to parse the language of the district court aside, it is clear that the judgment entered by the district court found the state court judgment to be a nondischargeable debt.

We have jurisdiction under 28 U.S.C. § 158(d).

II

We review summary judgment rulings de novo applying the same standards as did the lower courts. See In re Hudson, 107 F.3d 355, 356 (5th Cir.1997). We also review de novo a " 'court's decision to give full faith and credit to [a] state court judgment.' " In re Garner, 56 F.3d 677, 679 (5th Cir.1995) (quoting Sanders v. City of Brady, 936 F.2d 212, 217 (5th Cir.), cert. denied, 502 U.S. 1013, 112 S.Ct. 657, 116 L.Ed.2d 748 (1991)).

Since the judgment against Miller was rendered by a Texas state court, this court must apply Texas rules of preclusion. See 28 U.S.C. § 1738 (full faith and credit statute); Matsushita Elec. Indus. Co. v. Epstein, 516 U.S. 367, 373, 116 S.Ct. 873, 134 L.Ed.2d 6 (1996); In re Garner, 56 F.3d at 679. "Under Texas law, collateral estoppel 'bars relitigation of any ultimate issue of fact actually litigated and essential to the judgment in a prior suit, regardless of whether the second suit is based upon the same cause of action.' " In re Garner, 56 F.3d at 679 (quoting Bonniwell v. Beech Aircraft Corp., 663 S.W.2d 816, 818 (Tex.1984)).

Further, Texas law requires that:

A party seeking to invoke the doctrine of collateral estoppel must establish (1) the facts sought to be litigated in the second action were fully and fairly litigated in the prior action; (2) those facts were essential to the judgment in the first action; and (3) the parties were cast as adversaries in the first action.

Id. at 680 (quoting Bonniwell, 663 S.W.2d at 818). Miller and Abrams agree that requirement (3) is met, but disagree on the degree to which the issue of Miller's intent was litigated in and essential to the state court action.

The scope of the collateral estoppel doctrine is circumscribed by the particularized findings of the jury. See Marine Shale Processors, Inc. v. EPA, 81 F.3d 1371, 1379 (5th Cir.1996) (Higginbotham, J.). In this case, the jury specifically answered in the affirmative, with respect to Miller, the question: "Did any of the defendants misappropriate proprietary information or make an improper use of the trade secrets of J.D. Abrams, Inc.?" Misappropriation was defined as the "wrongful taking and use of another's property." The jury answered in the negative whether Miller had acted with "malice mean[ing] ill will, spite, evil motive, or flagrant disregard for the rights of others." Based on these answers, we must decide whether the jury decided whether Miller acted with the mental state required to satisfy either § 523(a)(4) or § 523(a)(6). We conclude that it made no such decision.

III

Under 11 U.S.C. § 523(a)(4), a debt "for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny" may not be discharged in bankruptcy. In construing this section, this court has stated that this discharge exception "was intended to reach those debts incurred through abuses of fiduciary positions and through active misconduct whereby a debtor has deprived others of their property by criminal acts; both classes of conduct involve debts arising from the debtor's acquisition or use of property that is not the debtor's." In re Boyle, 819 F.2d 583, 588 (5th Cir.1987).

The jury found that Miller had not breached any fiduciary duty owed Abrams. While the definition of "fiduciary" under § 523(a)(4) is controlled by federal common law rather than Texas law, it is clear that the federal common law definition is even narrower than the Texas definition. As this court noted recently, "[T]he concept of fiduciary under § 523(a)(4) is narrower than it is under the general common law. Under § 523(a)(4), 'fiduciary' is limited to instances involving express or technical trusts." Texas Lottery Comm'n v. Tran, 151 F.3d 339, 342 (5th Cir.1998). The instruction given to the jury in the state case here was far broader, noting that "implicit in this duty is that an officer or director may not serve his own personal interest at the expense of the corporation and its stockholders." Because the federal standard will never identify a "fiduciary" where Texas law would not, the state court judgment is issue preclusive with respect to whether there was "fraud or defalcation while acting in a fiduciary capacity."

The § 523(a)(4) exception to discharge, however, may still apply here if Miller's actions constitute "embezzlement" or "larceny." Since Miller came into possession of Abrams's proprietary information and trade secrets lawfully, embezzlement, rather than larceny, is the § 523(a)(4) term which applies. See Great Am. Ins. Co. v. Graziano (In re Graziano), 35 B.R. 589, 594 (Bkrtcy.E.D.N.Y.1983). Embezzlement is defined for purposes of § 523(a)(4) as the " 'fraudulent appropriation of property by a person to whom such property...