National Sign and Signal v. Livingston

• Decision Date: 28 December 2009
• Docket Number: No. 1:08-cv-155.,1:08-cv-155.
• Citation: 422 B.R. 645
• Parties: NATIONAL SIGN AND SIGNAL, Appellant, v. James R. LIVINGSTON, Appellee.
• Court: U.S. District Court — Western District of Michigan

422 B.R. 645

NATIONAL SIGN AND SIGNAL, Appellant, v. James R. LIVINGSTON, Appellee.

No. 1:08-cv-155.

United States District Court, W.D. Michigan, Southern Division.

December 28, 2009.

COPYRIGHT MATERIAL OMITTED

National Sign and Signal Company, Battle Creek, MI, pro se.

Mark A. Kehoe, Mika Meyers Beckett & Jones PLC, Grand Rapids, MI, Stephen L. Langeland, Stephen L. Langeland PC, Kalamazoo, MI, for Appellant.

James R. Livingston, Battle Creek, MI, pro se.

Cody H. Knight, Steven L. Rayman, Rayman & Stone, Kalamazoo, MI, for Appellee.

AMENDED^* OPINION AND ORDER REVERSING JUDGMENT OF BANKRUPTCY COURT

PAUL L. MALONEY, Chief Judge.

National Sign and Signal appeals an adverse decision in favor of James Livingston rendered in the bankruptcy court.

JURISDICTION AND STANDARD OF REVIEW

The district court has jurisdiction over this appeal under 28 U.S.C. § 158(a)(1) and (c)(1). National Sign and Signal timely filed a notice of appeal and elected to have the district court, rather than the bankruptcy appellate panel, hear the appeal. When considering an appeal of a decision issued by a bankruptcy court, the district court applies the clearly erroneous standard when reviewing findings of fact. In re Gardner, 360 F.3d 551, 557 (6th Cir.2004); In re Federated Dep't Stores, Inc., 270 F.3d 994, 999 (6th Cir.2001). A factual finding is clearly erroneous when, although there is evidence to support the finding, "`the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed'". Anderson v. City of Bessemer City, 470 U.S. 564, 573, 105 S.Ct. 1504, 84 L.Ed.2d 518 (1985) (quoting United States v. United States Gypsum Co., 333 U.S. 364, 395, 68 S.Ct. 525, 92 L.Ed. 746 (1948)). Questions of law are reviewed under the de novo standard. In re Gardner, 360 F.3d at 557; In re Federated Dep't Stores, Inc., 270 F.3d at 999. On appeal, the district court may affirm, modify, or reverse a bankruptcy judge's judgment, order, or decree or remand with instructions for further proceedings. FED. R. BANKR.P. 8013.

BACKGROUND

The bankruptcy court included findings of fact in its opinion. In re Livingston, 379 B.R. 711, 715-16 (Bankr.W.D.Mich. 2007). National Sign and Signal (NSS or Appellant) manufactures illuminated street and traffic signs. Most of its products are used in public projects. NSS generates sales by working with the consultants, who compete for those public projects. NSS relies upon consultants to incorporate its products into their bids. NSS had particularly close ties with three consulting firms: Carrier & Gable, C.J. Hood Company, and Traffic Products. NSS had written agreements with two of the three consultants. The contracts were terminable at will, by either party, with 30 days notice. By 1995, Carrier and Gable and Traffic Products had been incorporating NSS products into their bids for 15 years and C.J. Hood Company had been incorporating NSS products into its bids for 10 years.

James Livingston was a longtime employee of NSS and eventually became a vice president. Included among his responsibilities was the management of the business generated by the consultants. In 1995, Mr. Livingston and NSS parted ways. Mr. Livingston and several others, who also left NSS, promptly started a new company, Traffic Sign Technology, Inc., which competed with NSS.

On October 31, 1995, NSS filed suit in Circuit Court of Calhoun County, Michigan, against Livingston and the other former employees, as well as their new company. The complaint alleged, during their employment with NSS,

the individual Defendants had access to Plaintiff's trade secrets and confidential and proprietary business information, including but not limited to, Plaintiff's customer lists, marketing strategies and techniques, pricing lists, vendor and supplier lists, manufacturing techniques, blueprints and designs, and financial information.

(Verified Compl. ¶ 6.) The complaint further alleged

8. Upon information and belief, Defendants have made and will make use of Plaintiff's confidential and proprietary information, and Plaintiff's trade secrets, to market and sell Plaintiff's traffic signs and signals and to compete against Plaintiff.

9. By the aformentioned intentional and willful course of conduct, Defendants have and will injure Plaintiff and its business and property, cause Plaintiff to lose profitable sales and customers, cause Plaintiff to lose the value of its trade secrets and confidential and proprietary information and cause Plaintiff to lose customers.

10. Defendants' continuing course of conduct has inflicted, and will continue to inflict, irreparable injury to Plaintiff's business and property unless preliminary and permanent injunctive relief is obtained.

(Id. ¶¶ 8-10.)

The complaint alleged five claims: (1) breach of fiduciary duty, (2) misappropriation of trade secrets, (3) grossly negligent mismanagement, (4) tortious interference with a business relationship, and (5) unfair competition. Three counts were presented to the jury: (1) breach of fiduciary duty, (2) interference with a business relationship, and (3) misappropriation of trade secrets. On October 20, 1997, the jury found in favor of NSS and against Mr. Livingston on all three counts. (Verdict Form.) Although the jury found Mr. Livingston misappropriated trade secrets, the jury also found NSS did not suffer any economic damage from the misappropriation. (Id.) The jury awarded NSS $1,800,000.00 in damages.¹ (Id.)

Eight years later, on October 25, 2007, Livingston filed for voluntary Chapter 7 bankruptcy. NSS filed a complaint asserting the non-dischargeability of debt. The complaint asserts Mr. Livingston owes NSS $1,800,000.00 as the result of the judgment in state court. (Nondischargeability Compl. ¶ 30.) NSS claims the debt owed to it by Livingston is nondischargeable under 11 U.S.C. § 523(a)(2)(A), (4), and (6). (Id. ¶¶ 31-34.) NSS filed a motion for summary judgment, which was denied. At trial, the parties presented no witnesses and instead relied on testimony given by the witnesses in the underlying prior state court action. The bankruptcy judge found in favor of Mr. Livingston, holding the debt was dischargeable and did not fall under any of the exceptions alleged by NSS. In re Livingston, 379 B.R. at 728. NSS appeals that decision.

ANALYSIS

The Bankruptcy Code contains exceptions limiting debts that may be discharged as part of the bankruptcy process. NSS argues the money Livingston owes falls under several of those exceptions. NSS asserts Livingston's financial obligation falls under three of the exceptions found under 11 U.S.C. § 523. Under § 523(a), an individual's debt may not be discharged if the debt is

(2) for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by—

(A) false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor's or insider's financial condition;

(4) for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny;

(6) for willful and malicious injury by the debtor to another entity or to the property of another entity;

11 U.S.C. § 523(a). In order for a debt to be nondischargeable, the debt must fall under one of the exceptions alleged by NSS. Creditors bear the burden of proving, by a preponderance of the evidence, that a debt is excepted from discharge under § 523(a). In re Meyers, 196 F.3d 622, 624 (6th Cir.1999). "As a general matter, exceptions to discharge are narrowly construed to promote the central purpose of discharge: relief for the `honest but unfortunate debtor.'" Id. (quoting Grogan v. Garner, 498 U.S. 279, 287, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991) (quoting Local Loan Co. v. Hunt, 292 U.S. 234, 244, 54 S.Ct. 695, 78 L.Ed. 1230 (1934))).

The bankruptcy judge found the debt did not fall under any of the three exceptions. In re Livingston, 379 B.R. at 728. The court concluded subsection (a)(2) did not apply because Livingston did not obtain any property as the result of his fraudulent conduct. Id. at 716-17. Subsection (a)(4) did not apply because the record lacked evidence that Mr. Livingston embezzled the relationships or contracts NSS had with its consultants. Id. at 717. Finally, the court concluded subsection (a)(6) did not apply under either the entity or the property prong of the subsection. Id. at 717-21. In his (a)(c) analysis, the bankruptcy judge held that Mr. Livingston did not cause an injury to NSS' property because NSS had no enforceable rights in the object of Livingston's tortious conduct. Id. at 718-19. The court explained the jury in the underlying case found Livingston guilty of the tort of interfering with a business relationship, not tortious interference with a contract. Id. Second, the court concluded Mr. Livingston's conduct did not injure NSS. Id. at 719-21.

NSS alleges five errors in the bankruptcy judge's decision. Each alleged error is addressed below.

A. Did NSS' business relationships with Carrier & Gable, C.J. Hood Company, and Traffic Products constitute property obtained by fraud?

Under § 523(a)(2)(A), a debt is not dischargeable if that debt is for property obtained by fraud.² The bankruptcy judge concluded "there is no evidence that Mr. Livingston gained any property from NSS as the result of his deceit. At most, the record establishes that two consultants, Carrier & Gable and Traffic Products, terminated their relationship with NSS because of solicitations made by Mr. Livingston while he was still employed by NSS." In re Livingston, 379 B.R. at 717. NSS argues this conclusion is erroneous. NSS asserts the business relationships NSS had with the two consultants constitute property. NSS also claims the record establishes that the consultants left NSS as a result of Mr. Livingston's fraudulent solicitations.

NSS has not established that Livingston obtained any property as the result of his fraudulent behavior.³ The...