Syncom Indus., Inc. v. Wood (In re Wood)

• Decision Date: 08 March 2013
• Docket Number: Adversary No. 08–02021.,Bankruptcy No. 07–21810 (ASD).
• Citation: 488 B.R. 265
• Court: U.S. Bankruptcy Court — District of Connecticut
• Parties: In re Harry Eldon WOOD, Jr., Debtor. Syncom Industries, Inc., Plaintiff v. Harry Eldon Wood, Jr., Defendant.

488 B.R. 265

In re Harry Eldon WOOD, Jr., Debtor.

Syncom Industries, Inc., Plaintiff

v.Harry Eldon Wood, Jr., Defendant.

Bankruptcy No. 07–21810 (ASD).

Adversary No. 08–02021.

United States Bankruptcy Court,

D. Connecticut.

March 8, 2013.

Lee N. Johnson, Esq., Wethersfield, CT, for Plaintiff.

William S. Gannon, Esq., William S. Gannon, PLLC, Manchester, NH, Gary J. Greene, Esq., Greene Law PC, Farmington, CT, for Defendant.

MEMORANDUM OF DECISION ON COMPLAINT TO DETERMINE DISCHARGEABILITY OF DEBT

ALBERT S. DABROWSKI, Bankruptcy Judge.

I. INTRODUCTION

In the captioned adversary proceeding, the Plaintiff, Syncom Industries, Inc. (hereinafter, “Syncom”), requests the Court to find its claim against the Debtor, Harry Eldon Wood, Jr. (hereinafter, “Wood” or the “Debtor”) nondischargeable under Bankruptcy Code § 523(a)(2) (false representations/fraud), (4) (defalcation of a fiduciary), and (6) (willful and malicious injury).¹ In support of its request Syncom relies on the alleged preclusive effect of a prior New Hampshire state court judgment it obtained against Wood for breach of contract, breach of fiduciary duty, and loss of business reputation and goodwill, as well as evidence presented at a hearing before this Court. For the reasons discussed hereinafter, the Court finds that Syncom's claim is subject to the Debtor's discharge in this bankruptcy case.

II. JURISDICTION

The United States District Court for the District of Connecticut has jurisdiction over the instant adversary proceeding by virtue of 28 U.S.C. § 1334(b); and this Court derives its authority to hear and determine this proceeding on reference from the District Court pursuant to 28 U.S.C. § 157(a), (b)(1) and the District Court's General Order of Reference dated September 21, 1984. This is a “core proceeding” pursuant to 28 U.S.C. § 157(b)(2)(I).

III. BACKGROUND

The Court assumes familiarity with the relevant factual background between Syncom and Wood that is thoroughly discussed in the pre-petition proceedings before the New Hampshire Superior Court (hereinafter, the “Superior Court”) in Syncom Industries, Inc. d/b/a Syncom Industries v. Eldon Wood, Fabio Flores, and William Hogan, Docket No. 02–E–188, Rockingham County Superior Court for the State of New Hampshire (hereinafter, the “Superior Court Decision”), and the New Hampshire Supreme Court (hereinafter, the “Supreme Court”) in Syncom Industries, Inc. v. Wood, 155 N.H. 73, 920 A.2d 1178 (2007) (hereinafter, the “Supreme Court Decision”).

Syncom operates a movie theater cleaning business. Matthew Sinopoli (hereinafter, “Sinopoli”), the owner and chief executive officer of Syncom, hired the Debtor in 2001 as Vice President of Sales. The Debtor, who at that time was a district manager for Regal Cinemas, had been employed since 1983 in various positions that included management of both individual theaters and regional operations of several large theater chains. The Debtor and Sinopoli entered into an employment agreement on June 13, 2001 (hereinafter, the “Employment Agreement”), the terms of which included the following non-compete clause (hereinafter, the “Non–Compete Clause” or “Restrictive Covenant”):

The Manager [Wood] further agrees that for a period of three (3) years (36 months) after termination of his employment, whether with or without cause, the Manager will not directly or indirectly solicit business from any of the Company's customers located in any territory serviced by the Company while he was in the employment of the Company. The Manager also agrees that during such period the Manager will not become interested in or associated, directly or indirectly, as principal, agent or employee, with any person, firm or corporation which may solicit business from such customers. Manager shall not disclose the private affairs of the Company or any secrets or confidential information of the Company which he may learn while in the Company's employ.

Employment Agreement, Exh. E at ¶ 3(C).

The Employment Agreement further provided for the Debtor to receive a weekly salary of $1,000 plus a “commission once sales level is exceeded per discussion with [Sinopoli].” Exh. E at 1. By December, 2001, there was still no agreement as to when commissions would become payable and, following Syncom's refusal to discuss commissions, the Debtor began making plans to leave Syncom and form a similar company of his own. In early January, 2002, Syncom demoted the Debtor and suspended him for a week without pay. Shortly thereafter, on January 14, 2002, the Debtor resigned from Syncom. Two days later, the Debtor, with a $30,000 loan from his father to cover his initial operating expenses, formed his own company, Big E Theatre Cleaning, LLC (hereinafter, “Big E”), a Connecticut limited liability company. Fabio Flores, another employee of Syncom, also resigned in January, 2002 and was hired by Big E. A third employee of Syncom, William Hogan (hereinafter, “Hogan”), was terminated by Syncom in February, 2002. In May, 2003, Hogan was also hired by Big E.

Syncom's attorney sent the Debtor a letter shortly after his resignation, reminding him of the Non–Compete Clause. However, the Debtor testified that, in light of Syncom's refusal to negotiate a commission arrangement, and his suspension, he believed, on the advice of his attorney, that the Non–Compete Clause was not enforceable. The four Regal theaters whose business the Debtor had obtained for Syncom quickly transferred their business to Big E. Shortly thereafter, the Debtor obtained as a client AMC Empire 25, a large multiplex theater in New York, as well as several other theaters which also had not been customers of Syncom.

Syncom, in May, 2002, filed a complaint in the Superior Court against Hogan, Flores ², and the Debtor, alleging breach of the Restrictive Covenant of their employment agreements (hereinafter, the “State Court Action”). During the trial of the State Court Action, the complaint was amended to add a second count alleging that the defendants breached their fiduciary duties to Syncom. “[D]etermin[ing] that the plaintiff's claims for breach of contract, breach of fiduciary duty, and loss of business reputation and good will should all be considered together,” Superior Court Decision, Exh. A at 12, the Superior Court ruled in favor of Syncom on both counts, but discussed only the breach of contract issues; finding that the defendants had breached the Non–Compete Clauses of their Employment Agreements, the Superior Court held Wood and Hogan liable to Syncom for compensatory damages in the amount of $1,145,700, enhanced compensatory damages in the amount of $250,000, and attorney's fees in the amount of $100,000.

Wood and Syncom both appealed the Superior Court Decision to the New Hampshire Supreme Court. On March 16, 2007, the Supreme Court issued the Supreme Court Decision, in which it held:

(1) “As a matter of law, the two restrictive covenants at issue are unenforceable because they are unreasonably broad in their scope. Thus, we hold that the trial court erred by ruling to the contrary. Accordingly, we reverse that ruling.” Id. at 81.

(2) Although noting that the trial court had the power to reform an overly broad restrictive covenant to limit its geographical and/or temporal scope if the Plaintiff shows that it acted in good faith, the Supreme Court “express[ed] no opinion on whether the covenants should be reformed.... as resolution of that issue will require factual determinations, it is for the trial court to consider on remand.” Id.

(3) “[B]ecause a proper calculation of damages will depend upon the scope [and enforceability] of the restrictive covenants, we vacate the award of compensatory damages and remand for such further proceedings as the trial court deems necessary.” Id. at 88.

(4) “We vacate the award of attorney's fees for further consideration after the trial court has ruled upon the other remanded issues.” Id. at 88–89.

Syncom Industries, Inc. v. Wood, supra, 155 N.H. at 73, 920 A.2d at 1178.

Before the Superior Court held a hearing on remand, Wood, on December 20, 2007, commenced the instant bankruptcy case by filing a petition under Chapter 7 of the Bankruptcy Code, thereby staying the New Hampshire state court proceedings pursuant to the automatic stay of § 362(a). Syncom, on March 25, 2008, commenced the captioned adversary proceeding against Wood by filing a complaint (hereinafter, the “Complaint”), ECF No. 1, claiming that the Superior Court judgment award against Wood, to the extent redetermined upon remand, is nondischargeable pursuant to Bankruptcy Code section 523(a)(2), (a)(4), and (a)(6). The Debtor received a discharge on December 22, 2008.

The Court, on July 27, 2009, held a hearing (hereinafter, the “Hearing”) at which the parties presented documentary evidence and the testimony of Sinopoli and the Debtor. Subsequently, the parties filed memoranda of law in support of their respective positions and the Court took the matter under consideration.

IV. DISCUSSION

A. Collateral Estoppel

Syncom argues that the doctrine of collateral estoppel ³, as applied to the New Hampshire state court proceedings, conclusively establishes all of the facts necessary to a determination by this Court that its claim against the Debtor is nondischargeable, thereby barring the Debtor from relitigating those issues in the instant adversary proceeding.

Collateral estoppel, or issue preclusion, is that doctrine which holds that “an issue of law or fact actually litigated and decided by a court of competent jurisdiction in a prior action may not be relitigated in a subsequent suit between the same parties or their privies.” Ali v. Mukasey, 529 F.3d 478, 489 (2d Cir.2008). “The United States Supreme Court has confirmed that the doctrine of collateral estoppel is available to litigants in bankruptcy matters, and specifically in the context of dischargeability proceedings under 11 U.S.C. § 523(a).” In re Bugnacki, 439 B.R. 12, 23 (Bankr.D.C...