Court: United States Bankruptcy Court, E.D. Arkansas; December 3, 2012; Us Bankruptcy; United States Bankruptcy Court
Blake Roussel and Amanda Roussel filed for Chapter 7 bankruptcy on July 11, 2011. Clear Sky Properties, LLC and Luanne Deere initiated an adversary proceeding to determine if Roussel’s debt to them was dischargeable, based on a judgment against Roussel in Faulkner County. On March 20, 2012, the plaintiffs filed for summary judgment, which Roussel opposed with a cross motion for partial summary judgment. A hearing on the motions occurred on June 15, 2012, leading to their denial and the scheduling of a trial on July 17-18, 2012, after which both parties submitted additional briefs. The court has jurisdiction under 28 U.S.C. 1334 and 157(b)(2) and will issue a final judgment.
Clear Sky was established in August 2006 by Deere and Roussel to operate an Exit Realty franchise. Both parties were equal members. In June 2007, they signed an operating agreement outlining member rights regarding the sale of interests. Roussel expressed interest in selling his share in early 2007 and attempted to sell it to real estate agents Bletsh and Hutchins. After an unsuccessful negotiation in June 2008, Roussel offered to sell his entire share to Deere for $115,000, which she declined. Later, Deere purchased two-thirds of Roussel’s interest for $52,000, increasing her ownership to 84% while Roussel retained 16%. Unknown to Deere, Roussel was planning to open a competing office with Bletsh and Hutchins. Following the establishment of Select Group Investments, LLC on September 12, 2008, Roussel informed Deere of his new venture via text on October 8, 2008. Upon visiting the Clear Sky office, Deere discovered that company files and equipment had been removed, and many employees had followed Roussel to his new franchise, Exit Realty Select. Discussions about Deere buying out Roussel's remaining interest did not result in an agreement.
Deere and Clear Sky filed a complaint on February 13, 2009, in Faulkner County, alleging multiple claims against Roussel, including breach of fiduciary duty, breach of loyalty, fraud, breach of contract, and violation of the Arkansas Franchise Practice Act. The complaint asserted that Roussel, as a managing member, violated his fiduciary duty by opening a competing office and damaging Clear Sky’s computers prior to his departure, as well as recruiting agents to leave Clear Sky. Although the fraud claim was dismissed pre-trial, the jury examined Deere’s loan history to Clear Sky, totaling $58,800.
The jury found that Roussel breached his fiduciary duty to both Clear Sky and Deere, resulting in damages. The final verdict awarded Clear Sky $300,000, itemized as $111,280.60 for past lost revenue, $73,403.00 for future lost revenue, $1,480.00 for property damage, and $113,836.40 in punitive damages. Additionally, Deere was awarded $58,800 for breach of fiduciary duty and $40,000 for breach of contract. Roussel was also ordered to pay $82,611.25 in attorneys' fees and $4,912.00 in expenses.
During the trial, Bletsh, Hutchins, and Roussel testified that they did not intend to harm Clear Sky by establishing Exit Select, believing it would strengthen the Exit brand. They maintained that Deere would continue to receive residuals from agents regardless of their office affiliation. Testimonies indicated that concerns over competition were addressed positively, and any items allegedly taken during the transition were returned mistakenly. Deere, however, claimed that the exodus of her agents to Exit Select was financially damaging, while the defendants contended that no solicitation occurred; agents left voluntarily.
Plaintiffs assert that a judgment debt in Faulkner County, including awarded attorneys' fees, is nondischargeable under 11 U.S.C. §§ 523(a)(4) and 523(a)(6). They argue that the court is collaterally estopped from re-examining the facts, focusing instead on the complaints, the judgment, and jury instructions from the state case. Roussel contends that the debts are dischargeable, claiming that the state court's finding of breach of fiduciary duty does not meet the requisite standard for nondischargeability under § 523(a)(4). He argues that absent a qualifying breach, punitive damages are also dischargeable, as they lack a basis for attachment. Roussel further claims his actions constituted ordinary competition, not the willful and malicious conduct required by § 523(a)(6). He challenges the applicability of collateral estoppel, asserting it cannot be determined what was litigated in state court and argues that the attorneys' fees, rooted in breach of contract, are dischargeable.
To apply collateral estoppel in bankruptcy court, four elements must be satisfied: 1) the issue must be the same as in the prior action; 2) it must have been litigated; 3) a valid and final judgment must have been made; and 4) the determination must be essential to the prior judgment. The case of In re Cochrane establishes that collateral estoppel can bar the relitigation of factual or legal issues determined in state court.
Under § 523(a)(4), debts resulting from fraud or defalcation while in a fiduciary capacity are nondischargeable, with the burden on the opposing party. Two elements must be proven: the existence of a fiduciary relationship and the involvement of fraud or defalcation. The court first evaluates whether collateral estoppel applies to the fiduciary relationship. The determination of a 'fiduciary' relationship is governed by federal law, though state law is consulted to establish when a trust relationship exists. The state court found Roussel had a fiduciary duty to Clear Sky and Deere, which he breached, resulting in damages. While the court acknowledges it cannot relitigate state court issues, it notes that the specific fiduciary duty required under § 523(a)(4) was not litigated in state court. Therefore, it must assess whether the fiduciary duty found aligns with the definition necessary for nondischargeability, which requires an express or technical trust established prior to any wrongdoing, typically arising from a contract.
Arkansas law allows for the establishment of a fiduciary relationship even without an express trust, particularly for managing members of limited liability companies (LLCs). Such members have fiduciary duties to the LLC as dictated by Arkansas statutes, specifically under Ark. Code Ann. § 4-32-301, which mandates that members and managers account for any profits or benefits derived from their position as trustees for the LLC. However, the existence of a fiduciary relationship for bankruptcy discharge purposes is determined by the substance of the transaction rather than the terminology used by the parties involved.
To meet the requirements of 11 U.S.C. § 523(a)(4), a statutory trust must involve a definable res and impose trust-like duties, which are not satisfied merely by labeling a relationship as fiduciary. The common law definition of a trust requires an ascertainable interest in property as the trust res. The court concluded that the jury's award for breach of fiduciary duty related to lost revenue is dischargeable under § 523(a)(4) because the plaintiffs did not establish a valid definable res, as the relationships and efforts cited do not qualify.
However, the court noted that damages to Clear Sky property could be considered a definable res, raising the question of whether Roussel's actions concerning this property constituted defalcation—a failure to account for entrusted property. As a managing member, Roussel had a duty to care for Clear Sky’s property, reinforcing the potential for liability under the definition of defalcation.
Roussel was found to have committed defalcation regarding Clear Sky's property, resulting in a nondischargeable debt of $1,480 under 11 U.S.C. § 523(a)(4). Additionally, for debts classified under § 523(a)(6) as resulting from willful and malicious injury to another's property, the court noted that the plaintiffs' argument failed because the jury instructions did not necessitate a finding of both willfulness and malice for punitive damages. The relevant case cited, In re Harper, was distinguished due to its inclusion of additional jury instructions. Given the record, the court could not establish that the jury necessarily found both elements present in awarding punitive damages.
Under § 523(a)(6), "willful" implies intentional conduct, while "malicious" refers to actions specifically aimed at causing harm to the creditor. The court emphasized that recklessness or negligence does not meet the standard for nondischargeability. The plaintiffs did not provide sufficient evidence that Roussel intended to inflict deliberate harm or that harm was substantially certain to result from his actions. Furthermore, there was no indication that Roussel intentionally invaded Deere's legally protected interests or sought to harm Deere's business. Consequently, the plaintiffs failed to prove by a preponderance of the evidence that the punitive damages award of $113,886.40 stemmed from a willful and malicious injury, rendering this amount dischargeable.
Plaintiffs were awarded $82,611.25 in attorneys’ fees and $4,912.00 in costs in state court, based on an Operating Agreement stipulating that the losing party would cover dispute-related expenses, and Arkansas Code Annotated 16-22-308, which allows for attorneys’ fees to the prevailing party in breach of contract cases. The court noted that awarding fees under 16-22-308 is discretionary. The total amount awarded by the state court ($87,523.25) is deemed dischargeable in bankruptcy due to its basis in contract law. Additionally, the court determined that the Plaintiffs' state court judgment of $1,480.00 against the Defendant is nondischargeable, while the amount of $444,843.25 is dischargeable. A final judgment reflecting these findings will be issued. Furthermore, both parties agree that a $40,000.00 breach of contract award is dischargeable. There is ambiguity regarding whether part of a $58,800.00 award to Deere relates to property damage; however, the Plaintiffs did not raise this argument, and the court found it impossible to ascertain the specifics from the record, leading to the conclusion that the debt is dischargeable.
