Sierra Chemicals, LLC v. Mosley

UNITED STATES BANKRUPTCY COURT
DISTRICT OF NEW MEXICO
In re:
Case No. 7-11-15299 TS
Mitchell L. Mosley,
Debtor.
Sierra Chemicals, LLC,
Plaintiff,
v. 	Adv. Pro. No. 12-1166 T
Mitchell L. Mosley,
Defendant.
MEMORANDUM OPINION
THIS MATTER is before the Court on the Debtor’s Motion For Summary Judgment to
Dismiss Plaintiff’s First, Second, and Third Causes of Action on the Pleadings (the “Motion”),
Plaintiff’s response thereto (the “Response”), and Defendant’s supporting reply (the “Reply”).
The matter is fully briefed and ready for decision. 	For the reasons set forth below, the Motion
will be denied.
I. 	SUMMARY JUDGMENT STANDARDS
Summary 	judgment 	is 	appropriate 	if 	the 	pleadings, 	depositions, 	answers 	to
interrogatories, and admissions on file, together with the affidavits, if any, show that there is no
genuine issue as to any material fact and that the moving party is entitled to judgment as a matter
of law. 	Fed.R.Civ.P. 56.1 “[A] party seeking summary judgment always bears the initial
1 Fed.R.Civ.P. 56 applies in adversary proceedings. See Bankruptcy Rule 7056.
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responsibility of informing the district court of the basis for its motion, and … [must] demonstrate
the absence of a genuine issue of material fact.” 	Celotex Corp. v. Catrett, 477 U.S. 317, 323
(1986). 	In determining whether summary judgment should be granted, the Court will view the
record in the light most favorable to the party opposing summary judgment. Harris v. Beneficial
Oklahoma, Inc. (In re Harris), 209 B.R. 990, 995 (10 th Cir. BAP 1997).
The party opposing a motion for summary judgment must “set forth specific facts
showing that there is a genuine issue for trial as to those dispositive matters for which it carries
the burden of proof.” 	Applied Genetics Int'l, Inc. v. First Affiliated Sec., Inc., 912 F.2d 1238,
1241 (10th Cir.1990). 	See also Vitkus v. Beatrice Co., 11 F.3d 1535, 1539 (10th Cir.1993)
(“[T]he nonmoving party may not rest on its pleadings but must set forth specific facts showing
that there is a genuine issue for trial as to those dispositive matters for which it carries the burden
of proof.”); Otteson v. United States, 622 F.2d 516, 519 (10th Cir.1980) (once a properly
supported summary judgment motion is made, the opposing party must respond with specific
facts showing the existence of a genuine factual issue to be tried); Lazaron v. Lucas (In re
Lucas), 386 B.R. 332, 335 (Bankr. D.N.M. 2008) (same).
To deny a motion for summary judgment, genuine factual issues must exist that “can be
resolved only by a finder of fact because they may reasonably be resolved in favor of either
party.” 	Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 250 (1986). 	A mere “scintilla” of
evidence will not avoid summary judgment. 	Vitkus, 11 F.3d at 1539. 	Rather, there must be
sufficient evidence on which the fact finder could reasonably find for the nonmoving party. See
Anderson, 477 U.S. at 251; Vitkus, 11 F.3d at 1539. “[T]here is no evidence for trial unless there
is sufficient evidence favoring the nonmoving party for a jury to return a verdict for that party. If
the evidence is merely colorable . . . or is not significantly probative . . . summary judgment may
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be granted.” Anderson, 477 U.S. at 249. Where a rational trier of fact, considering the record as
a whole, could not find for the non-moving party, there is no genuine issue for trial. 	See
Matsushita Elec. Indus. Co. Ltd. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986).
II. 	FACTS
The Court finds that there is no genuine issue about the following facts, based on
Defendant’s admissions in his answer (the “Answer”) to Plaintiff’s Amended Complaint for
Objection to Dischargeability and Discharge Under 11 U.S.C. §§ 523(a)(2)(A), 523(a)(4),
523(a)(6) and 727(a)(2)(A) and (a)(4)(A) (the “Amended Complaint”):2
1. 	Plaintiff is an Arizona limited liability company, owned by Sean Griswold.
2. 	Defendant is a former employee of Plaintiff, having been employed by Plaintiff in
a number of capacities from September 2005 until his termination in January 2009.
3. 	On or about January 25, 2008, Plaintiff entered into an Employment Contract (the
“Contract”) with Defendant.
4. 	The Contract prohibited Defendant from using any confidential or proprietal trade
secret information, obtained during the term of his employment or at any time thereafter.
5. 	Defendant represented when entering into the Contract that he would not use any
confidential or proprietal trade secret information obtained during the term of his employment, or
anytime thereafter.
6. 	Plaintiff terminated Defendant in January 2009.
7. 	On or about March 31, 2011, Defendant executed a Promissory Note (“Note”) in
favor of Brad Griffith and Robert Nelson in the amount of $30,000.00.
8. 	Defendant [mis]represented that he would pay the Note when he executed it.
2 The Amended Complaint and Answer comprise the only record available to the Court. Admissions are
part of the record for summary judgment purposes. See Fed. R. Civ. P. 56(c)(1)(A).
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9. 	On or about July 11, 2011, Griffith and Nelson executed an Assignment of
Promissory Note as part of settlement with Plaintiff, assigning all of their right, title and interest
to and under the Note to Plaintiff.
10. 	The Note was never paid and is in default.
11. 	During his employment with Plaintiff, Defendant [had access to]3 intellectual
property including but not limited to confidential, trade secret, proprietary information on the
equipment, construction and techniques used by Plaintiff to build and use its specialized
equipment, health, safety and operating manuals, report forms, marketing techniques all of which
are owned by Plaintiff (“Intellectual Property”).
12. 	Plaintiff owned the Intellectual Property.
13. 	On or about April 15, 2010, Plaintiff brought suit against Defendant in the United
States District Court, District of New Mexico, commencing Sierra Chemicals, L.C. v. Mitchell
Mosley, et al., Civil No. 10-CV-00362-BB-DJS (“District Court Action”).
14. 	Plaintiff’s complaint in the District Court Action (the “District Court Complaint”)
contains claims for 1) breach of contract, 2) misappropriation of proprietary information and
trade secrets, 3) conspiracy to misappropriate proprietary information and trade secrets, 4) unfair
competition, 5) tortious interference and conspiracy to tortuously interfere, 6) unjust enrichment,
7) accounting; 8) temporary injunction; and 9) attorney fees.
15. 	Because of an arbitration clause in the Contract, the matter was referred to
binding arbitration (the “Arbitration”).
16. 	On September 20, 2011, the arbitrator entered an Interim Award, a copy of which
is attached to the Amended Complaint as Exhibit 5 (the “Interim Award”).
3 Defendant admitted this fact, except that Defendant disputed he was “entrusted” with the Intellectual
Property. The wording has been changed to state that Defendant had access to the Intellectual Property.
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17. 	On December 7, 2011, the United States District Court for the District of New
Mexico entered an Order for Final Judgment in the District Court Action, a copy of which is
attached to the Amended Complaint as Exhibit 7.
III. 	DISCUSSION
A. 	The Motion to Dismiss the First Claim.
Plaintiff’s first cause of action (the “First Claim”) seeks to have a promissory note claim
against Defendant declared nondischargeable under 11 U.SC. § 523(a)(2)(a). Defendant argues
that the claim should be dismissed because the loan was made by third parties (Griffith and
Nelson) and subsequently assigned to Plaintiff, and that Plaintiff cannot assert a § 523(a)(2)(a)
based on an alleged misrepresentation to a third party. Memorandum in support of the Motion,
filed January 18, 2013, doc. 26 (the “Memorandum”), pp. 1-2. The argument is not well taken.
Nondischargeability claims of an original lender are assignable to a loan buyer or other assignee.
See, e.g., Boyajian v. New Falls Corp. (In re Boyajian), 564 F.3d 1088, 1091-93 (9 th Cir. 2009);
FDIC v. Meyer (In re Meyer), 120 F.3d 66, 70-71 (7 th Cir. 1997); First Am. Title Ins. Co. v.
Pazdzierz (In re Pazdzierz), 459 B.R. 254, 261-62 (E.D. Mich. 2011); In re Borshow, 467 B.R.
410, 418-420 (Bankr. W.D. Tex. 2012); In re Flores, 2010 WL 3811920, at *3 (Bankr. S.D. Tex.
2010); FDIC v. Bombard (In re Bombard), 59 B.R. 952, 955 (Bankr. D. Mass. 1986).
There is a minority view. 	See, e.g., Criimi Mae Services Limited Partnership v. Hurley
(In re Hurley), 285 B.R. 871, 875-76 (Bankr. D.N.J. 2002) (assignee must also show reliance);
Tompkins & McMaster v. Whitenack (In re Whitenack), 235 B.R. 819, 825-27 (Bankr. D.S.C.
1998).
The Court thinks the majority rule, exemplified by Boyajian, is more logical. 	If the
original lender had a valid nondischargeability claim against a debtor, the Court sees no reason
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why the right to assert such a claim should be destroyed by assignment. As the Seventh Circuit
observed, “the very reason that the institution of assignment exists is to enable Creditor to
transfer its rights against Debtor 	. . . to Assignee . . . .” 	Meyer, 120 F.3d at 70. 	The Court
therefore rules that § 523(a)(2)(A) claims are assignable, and there is no requirement that the
alleged misrepresentation be made to the assignee/plaintiff, so long as it is proved at trial that the
misrepresentations were made to the original lender/assignor.
B. 	The Motion to Dismiss the Second Claim.
Plaintiff’s second cause of action (the “Second Claim”) seeks to have a portion of its
claim declared nondischargeable under § 523(a)(4).4 Defendant argues that the Second Claim
should be dismissed under collateral estoppel principles, because key issues were litigated in the
Arbitration, Plaintiff lost, and Plaintiff cannot relitigate the issues. Reply, pp. 2-3.5
1. 	Collateral Estoppel. 	Collateral estoppel (also known as issue preclusion)
applies in adversary proceedings. 	See Goss v. Goss, 722 F.2d 599 (10 th Cir. 1983) (applying
doctrine in a bankruptcy case); Doe v. Martinez (In re Martinez), 2012 WL 1641926, at *5
(Bankr. D.N.M. 2012), citing Grogan v. Garner, 498 U.S. 279, 284, n. 11 (1991).
The collateral estoppel effect to be given a prior federal judgment is a question of federal
law. 	Matosantos Commercial Corp. v. Applebee’s Intern. Inc., 245 F.3d 1203, 1207 (10 th Cir.
2001). 	The Tenth Circuit requirements for collateral estoppel are “(1) the issue previously
decided is identical with the one presented in the action in question, (2) the prior action has been
finally adjudicated on the merits, (3) the party against whom the doctrine is invoked was a party,
4 Plaintiff states that § 523(a)(4)(A) is the basis for the Second Claim. 	Amended Complaint, p. 10.
There is no such Code section. The Court assumes the claim is based on § 523(a)(4), as set forth in the
heading for the Second Claim. Amended Complaint, p. 9.
5 Defendant could not argue that res judicata (claim preclusion) requires dismissal of the Second and
Third Claims, because res judicata requires that the causes of action be the same. 	See e.g. Parkland
Hosiery Co., Inc. v. Shore, 439 U.S. 322, 326, n. 5 (1979)
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or in privity with a party, to the prior adjudication, and (4) the party against whom the doctrine is
raised had a full and fair opportunity to litigate the issue in the prior action.” 	Matosantos, 245
F.3d at 1207, quoting Dodge v. Cotter Corp., 203 F.3d 1190, 1198) (10 th Cir. 2000), cert. denied,
531 U.S. 825 (2000).6
Under Federal law, arbitration awards that become federal court judgments can form the
basis of issue preclusion. See In re Molina, 228 B.R. 248, 250 (9th Cir. BAP 1998); In re Tam,
136 B.R. 281, 287 (Bankr. D. Kan. 1992); In re Selmonosky, 204 B.R. 820, 824 (Bankr. N.D. Ga.
1996); Norrell Health Care, Inc. v. Clayton (In re Clayton), 168 B.R. 700, 704-05 (Bankr. N.D.
Cal. 1994); Arndt v. Hanna (In re Hanna), 163 B.R. 918, 923 (Bankr. E.D.N.Y. 1994)
(“arbitration proceedings can, but do not necessarily, have preclusive effect in subsequent federal
court proceedings”).7 In this adversary proceeding, the Court is satisfied that the Arbitration was
sufficiently thorough and well-conducted, and the arbitrator’s reasoning sufficiently set out in the
Interim Award, for issue preclusion to apply, if the other proper elements were met.
2. 	Does Collateral Estoppel Require Dismissal of the Second Claim? Section
523(a)(4) excepts from the general discharge debts “for fraud or defalcation while acting in a
fiduciary capacity, embezzlement, or larceny.” 	Defendant argues that Plaintiff’s § 523(a)(4)
claim is based on allegations of fraud, Reply, p. 3, and “the Arbitrator did not find fraud.” Id.
6 It does not matter whether Federal or state issue preclusion law applies. If the judgment at issue were
from a state court, the Court would be required to give the judgment the same preclusive effect it would
be given under the laws of the state in which it was rendered. Gonzales v. Hernandez, 175 F.3d 1202,
1204 (10th Cir. 1999); In re Fordu, 201 F.3d 693, 703 (6 th Cir. 1999) (same). Under New Mexico law, a
state court judgment is given preclusive effect if (1) the party to be estopped was a party to the prior
proceeding, (2) the cause of action in the case presently before the court is different from the cause of
action in the prior adjudication, (3) the issue was actually litigated in the prior adjudication, and (4) the
issue was necessarily determined in the prior litigation. See Doe v. Martinez (In re Martinez), 2012 WL
1641926, at *6 (Bankr. D.N.M. 2012), citing Shovelin v. Central New Mexico Elec. Co-op, Inc., 115 N.M.
293, 297, 850 P.2d 996, 1000 (1993).
7 State law is in agreement. See Rex, Inc. v. Manufactured Housing Committee, 119 N.M. 500, 504, 892
P.2d 947, 951 (1995); Clay v. New Mexico Title Loans, Inc., 2012 NMCA 2102, ¶42, 288 P.3d 888, 901
(N.M. App. 2012), cert. denied, 2012 NMCERT 9 (2012) (citing and following Rex); In re Deerman, 482
B.R. 344, 362-63 (Bankr. D.N.M. 2012).
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The table below shows the allegations in Second Claim, the most nearly analogous
allegations in the District Court Action, and the arbitrator’s rulings on the most nearly related
issues:
§ 523(a)(4) allegations 	District Court Action
allegations
Arbitration rulings
Defendant fraudulently
signed the Contract
Defendant made promises
in the Contract, and
intentionally breached the
Contract (District Court
Complaint, p. 8)
Defendant substantially
breached his employment
contract
Defendant fraudulently
appropriated the
Intellectual Property
Defendant intentionally
and wrongfully
misappropriated the
Intellectual Property
(District Court Complaint,
p. 9)
Defendants did not violate
the New Mexico Uniform
Trade Secrets Act
Defendant’s acts were done
with malicious and
felonious intent
No analogous allegations 	Defendant acted with
malice in his purposeful
and clandestine removal of
confidential information
from Plaintiff
Defendant’s debt to
Plaintiff was incurred by
“embezzlement, or larceny,
by false pretenses, a false
representation, and/or
actual fraud”
No analogous allegations 	No applicable ruling
Defendant’s argument fails for two reasons. 	First, it does not appear that fraud was
alleged by Plaintiff in the District Court Action, nor “finally adjudicated” by the arbitrator. The
words “fraud” or “misrepresentation” never appear in the District Court Complaint, and the
arbitrator’s ruling does not mention fraud or misrepresentation.
Second, Plaintiff’s § 523(a)(4) claim, although not clearly plead, alleges more than fraud.
For example, there is an allegation that the debt arose by “embezzlement, or larceny by false
pretenses, a false representation, and/or actual fraud.” Amended Complaint, p. 10. Based on the
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meager record before the Court, it does not appear that nearly enough issues raised in Plaintiff’s
Second Claim were litigated in the Arbitration to warrant summary judgment against Plaintiff
based on collateral estoppel.
Clearly, the issue of alleged fraudulent and/or malicious and/or felonious execution of the
Contract was not plead or litigated, nor was the alleged fraudulent, malicious, and felonious
appropriation of the Intellectual Property, nor was the embezzlement/theft of the Intellectual
Property.8 In short, although the issues litigated appear similar in many respects, the Court does
not think it appropriate to conclude that all of the dispositive issues raised in the Second Claim
were fully and fairly adjudicated in the Arbitration.
C. 	The Motion to Dismiss the Third Claim.
Plaintiff’s Third Cause of Action (the “Third Claim”) seeks to declare a portion of
Plaintiff’s claim nondischargeable under § 523(a)(6) 	The elements of a § 523(a)(6) claim are:
(1) an injury to the plaintiff or his property; (2) the injury was caused by defendant; (3)
defendant’s actions causing the injury were intentional, and defendant intended to harm plaintiff
and his property; and (4) defendant’s actions were intentional and wrongful, done without
justification or excuse. In re Deerman, 482 B.R. at 369 (collecting cases).
Defendant argues that the Third Claim should be dismissed because the arbitrator ruled
that Defendant’s actions were not willful or malicious. Reply pp. 1, 3-4. The table below shows
8 The arbitrator ruled Defendant did not violate Plaintiff’s trade secrets rights under New Mexico
statutory law when Defendant assembled his own “Fin Fan” cleaning trailer. 	Interim Award, p. 2. 	At
trial of this adversary proceeding, Plaintiff will be precluded from re-litigating the issue. Preclusion of
this issue, however, does not warrant dismissal of the Second Claim. In this regard, it should be noted
that while the arbitrator ruled Defendant did not violate the New Mexico Trade Secrets Act, Plaintiff’s
claim was based on Defendant’s alleged common law duties to Plaintiff. 	The Court may need to take
evidence on the apparent difference between the trade secret claim plead and the arbitrator’s ruling.
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the allegations in Third Claim, the most nearly analogous allegations in the District Court
Action, and the arbitrator’s rulings on the most nearly related issues:
§ 523(a)(6) allegations 	District Court Action
allegations
Arbitration rulings
Defendant’s violations of
the Contract were willful
and done with felonious
intent
Defendant made promises
in the Contract, and
intentionally breached the
Contract (District Court
Complaint, p. 8)
Defendant substantially
breached his employment
contract
Defendant 	unlawfully 	and
fraudulently 	appropriated
the Intellectual Property
Defendant intentionally
and wrongfully
misappropriated the
Intellectual Property
(District Court Complaint,
p. 9)
Defendants did not violate
the New Mexico Uniform
Trade Secrets Act
Plaintiff 	justifiably 	relied
on the representation in the
Contract
See above 	See above
Defendants violations of the
Contract 	were 	done 	with
the 	intent 	of 	harming
Plaintiff
See above 	Defendant acted with
malice in his purposeful
and clandestine removal of
confidential information
from Sierra
Plaintiff 	has 	suffered
malicious injuries
See above 	Award of $15,000 in
punitive damages is
appropriate
While, as noted above, some of the issues raised in the Amended Complaint may be
precluded by the arbitrator’s decision (i.e. whether the New Mexico trade secrets statute
prohibited Defendant from building and using his Fin Fan trailer), the Court does not believe
Plaintiff’s §523(a)(6) claim should be dismissed on issue preclusion grounds. If anything, issue
preclusion may work against Defendant in the Third Claim, since the arbitrator found that
Defendant’s actions were taken with malice.
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IV. 	CONCLUSION
Due to a combination of factors, including the meager record before the Court; the
somewhat vague and confusing allegations in the Amended Complaint; the general nature of
some of the arbitrator’s ruling; the undisputed fact that certain issues raised in the adversary
proceeding were not litigated or determined in the Arbitration, or were determined in Plaintiff’s
favor; and the fact that at least portions of Plaintiff’s nondischargeability claims must be tried in
any event; the Court concludes that the Motion should be denied. 	This ruling should not be
construed as a ruling on the merits of any claim or defense, nor that relitigation of any particular
issue will or will not be allowed at trial.
The Court will enter an order consistent with this Memorandum Opinion.
____________________________________________
Hon. David T. Thuma, United States Bankruptcy Judge
Entered on docket: March 19, 2013.
Copy to:
Jason Bousliman
201 Third Street NW, Suite 1950
Albuquerque, NM 87103
Robert L. Finch
555 E. Main Street
Farmington, NM 87401
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