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Jared C. Walters, Trustee v. Jeanne A. Gallegos, et al.

Summarizing by David Treacy

TKC Aerospace Inc. v. Charles Muhs (In re Muhs)

Case Type:
Case Status:
Reversed and Remanded
18-1372 (4th Circuit, May 08,2019) Published
A judgment against a debtor for violating the Alaska Uniform Trade Secrets Act (the UTSA) for the willful an malicious misappropriation of the judgment creditor’s trade secrets was insufficient to collaterally estop the debtor from challenging the judgment creditor’s objection to discharge of the judgment debt under 11 U.S.C. § 523(a)(6) because the judgment did not include a necessary holding that the debtor intended to cause a delivered intentional injury to the judgment creditor.
Procedural context:
The debtor appealed the District Court's decision affirming the Bankruptcy Court's judgment that the debtor's judgment debt was non dischargeable under 11 U.S.C. § 523(a)(6).
The judgment creditor, TKC Aerospace, Inc. (TKCA), sued a competitor in Maricopa County, Arizona, state court, and against the defendant in the United States District Court for the district of Alaska. The cases proceeded in parallel. Ultimately, the Arizona case reach judgment first, and the Arizona court ruled that the corporate defendant was liable to TKCA for lost profits, research and development costs, and exemplary damages and twice the sum of the lost profits in research and development costs. In its findings, the Arizona court found that the corporate defendant “formed an agency relationship with the [debtor],” and “[b]ecause of th[is relationship], this court will attribute [the debtor’s] acts to [the corporate defendant].” The Arizona court also found that the principals of the corporate defendant engaged in separate bad acts, such as intentionally deleting data from their computers immediately before forensic copies of their hard drives were to be made. The Arizona court did not attribute these actions to the debtor. The Arizona court made no specific funding that the debtor, who is not a party to the Arizona action, intended to injure TKCA. TKCA used the Arizona state court judgment as the basis for a summary judgment motion in the Alaska action against the debtor. Without holding a hearing, the Alaska court granted the motion, and reasoned that the Arizona courts conclusion an award of damages were sufficient for applying estoppel and quasi-estoppel against the debtor so that the debtor was bound by the Arizona judgment even though he was not a party to the Arizona litigation. The Alaska court entered damages for TKCA in the same amounts as were granted by the Arizona state court against the corporate defendant, indicating that the exemplary damages were proper under Alaska’s version of the Uniform Trade Secrets Act (the UTSA). The UTSA includes a clause stating that the court may award exempt exemplary damages if “wilful [sic] and malicious misappropriation exists.” On July 1, 2016, the debtor filed a chapter 7 bankruptcy petition in the Eastern District of Virginia. TKCA filed an adversary proceeding alleging that the Alaska judgment was non dischargeable under 11 U.S.C. § 523(a)(2), (a)(4) and (a)(6). TKCA moved for judgment on the pleadings, which the Bankruptcy Court denied. TKCA obtained leave to appeal, and the District Court reversed, concluding that the “doctrine of collateral estoppel bars re-litigation of the facts and the Alaska case.” TKCA again moved for judgment on the pleadings, which the Bankruptcy Court granted, concluding that the Alaska judgment was non dischargeable under 11 U.S.C. § 523(a)(6) only. The debtor appealed.

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