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 ON PLAINTIFF’S MOTION FOR PARTIAL SUMMARY
JUDGMENT
THIS MATTER is before the Court on the Plaintiff’s Motion For Partial Summary
Judgment (the “Motion”),1 Defendant’s response thereto (the “Response”), and Plaintiff’s
supporting reply (“Reply”). 	The gist of the Motion is that the findings and conclusions of the
arbitrator in a pre-bankruptcy arbitration between the parties are entitled to preclusive effect and
are sufficient for a § 523(a)(6) nondischargeability judgment in Plaintiff’s favor. The Court has
1 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. “[A]
party seeking summary judgment always bears the initial 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 (10th Cir. BAP 1997). 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 v.
Beatrice Co., 11 F.3d 1535, 1539 (10th Cir. 1993). 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.
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reviewed the arbitrator’s well-reasoned decision and concludes that his findings of fact are
entitled to preclusive effect. 	However, the arbitrator did not make a finding about Defendant’s
intent to injure Plaintiff, an essential element of § 523(a)(6) nondischargeability. 	Because of
that, the Motion must be denied.
II. 	FACTS
The Court finds that there is no genuine dispute about the following facts, which either
are undisputed or else are the arbitrator’s findings:
1. 	Plaintiff employed Defendant from September 2005 until his termination in
January 2009.
2. 	On or about January 25, 2008, Plaintiff entered into an employment contract
with Defendant (the “Employment Contract”).
3. 	The Employment Contract prohibited Defendant from using any confidential or
proprietary trade secret information obtained during the term of his employment or at any
time thereafter.
4. 	Defendant represented 	when entering into the Employment Contract that he
would not use any confidential or trade secret information obtained during the term of his
employment .
5. 	Plaintiff terminated Defendant in January 2009.
6. 	During 	his 	employment 	Defendant 	had 	access 	to 	Plaintiff’s 	intellectual
property, including confidential, trade secret, and/or 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; and marketing techniques .
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7. 	The Employment Contract prohibited Defendant from competing in “fin fan”
cleaning within a radius of seventy-five miles of San Juan County for at least one year following
any termination from Plaintiff.
8. 	At the time of his termination Defendant was acting as Plaintiff’s Health and
Safety Manager and was classified as one of the company’s professional employees.
9. 	Because of an employment infraction on December 12, 2008, which Defendant
disclosed to Plaintiff on December 15, 2008, Defendant anticipated he would be fired.
10. 	Defendant planned to go into competition with Plaintiff once his covenant not to
compete expired. When he was able to compete legally Defendant formed Fintech, LLC built a
fin fan cleaning trailer, recruited investors and financing, and commenced bidding and servicing
fin fan jobs in the San Juan area.
11. 	Defendant read, understood and negotiated changes to his Employment Contract.
Before signing the contract, Defendant understood what he was agreeing to.
12. 	The 	Employment 	Contract 	prohibits 	removing 	and 	using 	the 	confidential
information of Plaintiff during and after Defendant's employment. 	The prohibitions are broad
and unambiguous. 	Defendant agreed he would not take or use manuals, financial information,
costs, pricing information, clients lists, or other confidential information.
13. 	On November 25, 2008, Defendant e-mailed certain of Plaintiff’s forms to his
personal 	e-mail. 	On December 9, 2008, Respondent e-mailed himself a Process Safety
Management paper.
14. 	On Monday, December 15, 2008, Defendant 	e-mailed Plaintiff’s Health and
Safety Manual, Employee Policy Handbook, Accident Incident Report Forms and some Safety
Inspection Reports to his personal Yahoo account.
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15. 	Defendant eventually used Plaintiff’s Employee Policy Handbook and Health and
Safety Manual to create Fintech’s employee handbook and safety manual.
16. 	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").
17. 	Because of an arbitration clause in the Employment Contract, the matter was
referred to binding arbitration.
18. 	On September 20, 2011, the arbitrator entered an Interim Award (the "Interim
Award'' ) .
19. 	As set forth in the Interim Award, the arbitrator found and/or concluded:
a. 	Defendant lied during the arbitration;
b. 	Defendant intentionally 	breached the Employment Contract 	and 	knew 	it
was wrong when he did it;
c. 	Defendant did not violate the New Mexico Uniform Trade Secrets Act; and
d. 	Plaintiff did not prove 	the 	requisite 	elements of 	its common law 	tort
theories.
20. 	In his final award, the arbitrator awarded Plaintiff a total of $352,997.19, broken
down as follows:
Breach of contract damages: 	$ 10,000.00
Punitive Damages: 	$ 15,000.00
Sanctions (net): 	$ 10,636.00
Attorney fees: 	$244,182.30
Costs: 	$ 18,138.28
Arbitration fees and costs: 	$ 55,040.61
Total: 	$352,997.19
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21. 	On December 7, 2011, the District Court entered an Order for Final Judgment
in the District Court Action, granting Plaintiff a money judgment against Defendant in the
amount of $352,997.19.
III. 	DISCUSSION
A. 	Collateral Estoppel.
Collateral estoppel (also known as issue preclusion) applies in dischargeability litigation.
See Klemens v. Wallace (In re Wallace), 840 F.2d 762, 764 (10 th Cir. 1988); Goss v. Goss, 722
F.2d 599, 603-04 (10 th Cir. 1983) (applying the doctrine in a bankruptcy case); Taylor v. Jasper
(In re Jasper), 356 B.R. 787, at *4 (10 th Cir. BAP 2007), aff’d, 312 Fed. Appx 97 (10 th Cir.
2008) (unpublished table decision) (same).
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), citing Semtek Int’l Inc. v. Lockheed Martin Corp., 531 U.S. 497 (2001). 	The Tenth
Circuit’s 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, 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).2
2 New Mexico issue preclusion rules are very similar. 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.
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Under federal law, arbitration awards confirmed by federal court judgments can form the
basis for issue preclusion. 	See 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”). 	The same rule generally
applies to state court arbitration awards. 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., 288 P.3d 888,
901 (N.M. App.), cert. denied, 296 P.3d 1207 (2012) (citing and following Rex).
Here, the Court is satisfied that the arbitration has been finally adjudicated on the merits,
Defendant was a party, and Defendant had a full and fair opportunity to litigate the issues
addressed in the Interim Award. 	Thus, the arbitrator’s findings of fact can form the basis for
issue preclusion in this adversary proceeding, so long as they are identical to the facts at issue
here.
B. 	Plaintiff’s Motion For Judgment on its § 523(a)(6) Claim.
Plaintiff argues that there is no genuine issue of material fact relating to its § 523(a)(6)
nondischargeability claim. 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 were “willful,”
and (4) defendant’s actions were “malicious.” 	In re Deerman, 482 B.R. 344, 369 (Bankr.
D.N.M. 2012) (collecting cases). 	Nondischargeability under this subsection requires that the
debtor’s actions be both willful and malicious. Panalis v. Moore (In re Moore), 357 F.3d 1125,
1129 (10 th Cir. 2004).
2012), citing Shovelin v. Central New Mexico Elec. Co-op, Inc., 115 N.M. 293, 297, 850 P.2d 996, 1000
(1993).
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To be willful, Defendant must have intended the act and intended the harm. Kawaauhau
v. Geiger, 523 U.S. 57, 61 (1998) (“[t]he word “willful” in (a)(6) modifies the word “injury,”
indicating that nondischargeability takes a deliberate or intentional injury, not merely a
deliberate or intentional act that leads to injury.”). 	See also Deerman, 482 B.R. at 369 (citing
Geiger). 	For Defendant’s actions to be malicious, they have to be intentional, wrongful, and
done without justification or excuse. Deerman, 482 B.R. at 369 (citing Bombardier Capital, Inc.
v. Tinkler, 311 B.R. 869, 880 (Bankr. D. Colo. 2004)).
The Tenth Circuit uses a subjective standard in determining whether a defendant desired
to cause injury or believed the injury was substantially certain to occur. 	Via Christi Regional
Medical Ctr. V. Englehart (In re Englehart), 229 F.3d 1163, at *3 (10 th Cir. 2000) (unpublished
table decision) (“the ‘willful and malicious injury’ exception to dischargeability in § 523(a)(6)
turns on the state of mind of the debtor, who must have wished to cause injury or at least
believed it was substantially certain to occur”); In re Militare, 2011 WL 4625024, at *3 (Bankr.
D. Colo. 2011), citing Tinkler, 311 B.R. at 878.
In the Tenth Circuit, damages caused by an intentional breach of contract may be
nondischargeable under § 523(a)(6). See Sanders v. Vaughn (In re Sanders), 210 F.3d 390, at *2
(10th Cir. 2000) (unpublished table decision); In re Militare, 2011 WL 4625024, at *3 (Bankr. D.
Colo. 2011) (a knowing breach of contract is not necessarily excluded from “willful and
malicious” injury). See also Texas v. Walker, 142 F.3d 813, 823-24 (5th Cir. 1998), cert. denied,
525 U.S. 1102 (1999). 	There is a split in the case law on this issue. 	See, e.g., In re Best, 109
Fed. Appx. 1, 8 (6th Cir. 2004) (contract claim insufficient to § 523(a)(6) purposes; some tortious
conduct must be shown); In re Jercich, 238 F.3d 1202, 1206 (9th Cir.), cert. denied, 533 U.S. 930
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(2001) (same); Wish Acquisition, LLC v. Salvino, 2008 WL 182241, *3-4 (N.D. Ill. 2008)
(same).
The arbitrator found against Plaintiff on all asserted tort claims, but ruled in Plaintiff’s
favor on the breach of contract claim. 	Applying Sanders v. Vaughn, the Court holds that the
failure of the tort claims is not per se fatal to a § 523(a)(6) judgment in the Tenth Circuit.
Nevertheless, the Motion must be denied because there is no evidence before the Court,
and no finding by the arbitrator, that when Defendant breached the Employment Contract he
either intended to harm Plaintiff or else believed that harm was substantially certain to occur.
The Arbitrator found that Defendant intended to breach the Employment Contract and knew it
was wrong when he did it. That finding was sufficient to establish the “malicious” element of §
523(a)(6), but not to establish the “willfulness” element. 3 The Court will need to take evidence
at trial on this issue.
In its Reply Plaintiff argues that the “willfulness” element is satisfied because
on the record in this case, no rational trier of fact could find that Defendant’s
actions were not willful—that is, that Defendant had not intended to harm Sierra
by obtaining an unfair competitive advantage over it—when he stole Sierra’s
intellectual property in violation of the employment contract.
Reply, p. 7. This argument lacks merit, because the only record supporting the Motion consists
of the undisputed facts, the arbitrator’s interim and final awards, the district court’s Order for
Final Judgment, and Defendant’s affidavit. 	In the affidavit Defendant avers that he did not
intend to harm Plaintiff. The balance of the record is silent on the issue of intent to harm. There
may have been evidence presented to the arbitrator on this issue, but it is not part of the record
before the Court.
3 The other elements, i.e., an injury suffered by Plaintiff that was caused by Defendant, clearly are
established. 	If Plaintiff prevails at trial, the Court will address Defendant’s argument (Response, p. 4)
that less than the entire amount of the arbitration award is attributable to willful and malicious injury to
Plaintiff.
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IV. 	CONCLUSION
The arbitrator’s findings are entitled to preclusive effect and dispose of most of the fact
issues underpinning a § 523(a)(6) judgment, but do not address Defendant’s alleged willfulness.
The balance of the record before the Court is similarly silent on the issue, or supports
Defendant’s position. The Motion therefore must be denied. Because of that, the Court will not
rule on the amount of any potential nondischargeable judgment. 	The Court will enter an order
consistent with this Memorandum Opinion.
____________________________________________
Hon. David T. Thuma, United States Bankruptcy Judge
Entered on docket: October 15, 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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