IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
No. 97-50842
In The Matter Of: WILLIAM L MILLER
Debtor,
WILLIAM L MILLER
Appellant,
versus
J.D. ABRAMS INCORPORATED
Appellee.
Appeal from the United States District Court
for the Western District of Texas
September 24, 1998
Before REYNALDO G. GARZA, HIGGINBOTHAM, and EMILIO M. GARZA,
Circuit Judges.
HIGGINBOTHAM, Circuit Judge:
Miller appeals the district court’s order holding that the
state court judgment debt Miller owes J.D. Abrams, Inc., is
nondischargeable in bankruptcy. More specifically, Miller contests
the district court’s conclusion that he is precluded under the
doctrine of collateral estoppel from trying in the bankruptcy court
the issue necessary to decide the dischargeability question. We
conclude that neither the state court jury nor the state trial
judge in entering judgment on the verdict decided Miller’s intent
in misappropriating or misusing Abrams’s proprietary information.
We REVERSE the district court’s judgment and REMAND for further
proceedings.
I
Abrams, a successful Texas highway and road contractor,
employed Miller from June 1985 until February 28, 1994, when Miller
left his position as vice president and director at Abrams to
become manager and chief operations officer of Belfour Beatty,
Inc.’s highway division. In his position at Abrams, Miller was
privy to proprietary information and trade secrets regarding such
matters as management policies, customer lists, pricing and bidding
strategies, and profit margins and cost projections on specific
projects. Belfour, wanting to start a competing highway division,
started recruiting Miller. During a series of meetings concerning
his prospective employment, Miller disclosed confidential
information and trade secrets of Abrams to Belfour agents. Based
on the information Miller divulged and his twenty years of
experience in the road construction industry, Belfour offered
Miller the COO position. Other employees of Abrams accompanied
Miller in his move to Belfour.
On April 18, 1994, Abrams filed suit in Texas state court
against Miller and Belfour. The case was tried to a jury in
2
November 1995. The jury found that Miller misappropriated
proprietary information or misused trade secrets and awarded Abrams
damages of $1 million. The jury also decided that Miller had not
breached any fiduciary duties owed Abrams and that punitive damages
were not appropriate, since Miller did not act with “malice
mean[ing] ill will, evil motive, or flagrant disregard for the
rights of others.”
Miller filed a voluntary Chapter 7 bankruptcy petition seeking
protection from the state court judgment. Abrams instigated an
adversary proceeding to obtain a determination that the state court
judgment was a nondischargeable debt under 11 U.S.C. §§ 523(a)(4)
and 523(a)(6). Based on the doctrine of collateral estoppel, the
bankruptcy court granted summary judgment in favor of Abrams. The
state court judgment, it found, was nondischargeable under §
523(a)(4) since misappropriation of proprietary information was
larceny per se. The bankruptcy court, however, declined to rest
its summary judgment on § 523(a)(6), because the court believed
that the state court jury had not decided whether Miller had
inflicted a “willful and malicious injury,” the requirement for
nondischargeability under that section. Miller and Abrams both
appealed.
The district court affirmed the judgment that the state court
judgment was nondischargeable based on principles of collateral
estoppel. The district court, after analyzing the § 523(a)(6)
issue, stated that “[t]he bankruptcy judge was correct in finding
3
that the judgment debt was nondischargeable on behalf of Miller by
collateral estoppel.” As we explained, the bankruptcy judge did not
rest its grant of summary judgment upon § 523(a)(6). From context,
though, it is clear that the district court found that the debt was
also nondischargeable under § 523(a)(4). In doing so, the district
court pointed to the jury’s finding that Miller had misappropriated
proprietary information or misused trade secrets for his own
advantage to the detriment of Abrams. The district court believed
that this finding conclusively determined that Miller had inflicted
a “willful and malicious injury” on Abrams for purposes of §
523(a)(6).
The district court also stated that “[t]he bankruptcy judge
was further correct in failing to find the nondischargeability of
the judgment debt pursuant to 11 U.S.C. § 523(a)(4) and was correct
in overruling all of the contentions with the appellant Miller with
regard to his contentions on finding the judgment debt
dischargeable based upon collateral estoppel.” The efforts to parse
the language of the district court aside, it is clear that the
judgment entered by the district court found the state court
judgment to be a nondischargeable debt.
We have jurisdiction under 28 U.S.C. § 158(d).
II
We review summary judgment rulings de novo applying the same
standards as did the lower courts. See In re Hudson, 107 F.3d 355,
4
356 (5th Cir. 1997). We also review de novo a “‘court’s decision
to give full faith and credit to [a] state court judgment.’” In re
Garner, 56 F.3d 677, 679 (5th Cir. 1995) (quoting Sanders v. City
of Brady, 936 F.2d 212, 217 (5th Cir.), cert. denied, 502 U.S. 1013
(1991)).
Since the judgment against Miller was rendered by a Texas
state court, this court must apply Texas rules of preclusion. See
28 U.S.C. § 1738 (full faith and credit statute); Matsushita Elec.
Indus. Co. v. Epstein, 516 U.S. 367, 373 (1996); In re Garner, 56
F.3d at 679. “Under Texas law, collateral estoppel ‘bars
relitgation of any ultimate issue of fact actually litigated and
essential to the judgment in a prior suit, regardless of whether
the second suit is based upon the same cause of action.’” In re
Garner, 56 F.3d at 679 (quoting Bonniwell v. Beech Aircraft Corp.,
663 S.W.2d 816, 818 (Tex. 1984)).
Further, Texas law requires that:
A party seeking to invoke the doctrine of
collateral estoppel must establish (1) the
facts sought to be litigated in the second
action were fully and fairly litigated in the
prior action; (2) those facts were essential
to the judgment in the first action; and (3)
the parties were cast as adversaries in the
first action.
Id. at 680 (quoting Bonniwell, 663 S.W.2d at 818). Miller and
Abrams agree that requirement (3) is met, but disagree on the
degree to which the issue of Miller’s intent was litigated in and
essential to the state court action.
5
The scope of the collateral estoppel doctrine is circumscribed
by the particularized findings of the jury. See Marine Shale
Processors, Inc. v. EPA, 81 F.3d 1371, 1379 (5th Cir. 1996)
(Higginbotham, J.). In this case, the jury specifically answered
in the affirmative, with respect to Miller, the question: “Did any
of the defendants misappropriate proprietary information or make an
improper use of the trade secrets of J.D. Abrams, Inc.?”
Misappropriation was defined as the “wrongful taking and use of
another’s property.” The jury answered in the negative whether
Miller had acted with “malice mean[ing] ill will, spite, evil
motive, or flagrant disregard for the rights of others.” Based on
these answers, we must decide whether the jury decided whether
Miller acted with the mental state required to satisfy either §
523(a)(4) or § 523(a)(6). We conclude that it made no such
decision.
III
Under 11 U.S.C. § 523(a)(4), a debt “for fraud or defalcation
while acting in a fiduciary capacity, embezzlement, or larceny” may
not be discharged in bankruptcy. In construing this section, this
court has stated that this discharge exception “was intended to
reach those debts incurred through abuses of fiduciary positions
and through active misconduct whereby a debtor has deprived others
of their property by criminal acts; both classes of conduct involve
debts arising from the debtor’s acquisition or use of property that
6
is not the debtor’s.” In re Boyle, 819 F.2d 583, 588 (5th Cir.
1987).
The jury found that Miller had not breached any fiduciary duty
owed Abrams. While the definition of “fiduciary” under § 523(a)(4)
is controlled by federal common law rather than Texas law, it is
clear that the federal common law definition is even narrower than
the Texas definition. As this court noted recently, “[T]he concept
of fiduciary under § 523(a)(4) is narrower than it is under the
general common law. Under § 523(a)(4), ‘fiduciary’ is limited to
instances involving express or technical trusts.” Texas Lottery
Comm’n v. Tran, No. 97-20383, 1998 WL 480152, at *2 (5th Cir.
1998). The instruction given to the jury in the state case here was
far broader, noting that “implicit in this duty is that an officer
or director may not serve his own personal interest at the expense
of the corporation and its stockholders.” Because the federal
standard will never identify a “fiduciary” where Texas law would
not, the state court judgment is issue preclusive with respect to
whether there was “fraud or defalcation while acting in a fiduciary
capacity.”
The § 523(a)(4) exception to discharge, however, may still
apply here if Miller’s actions constitute “embezzlement” or
“larceny.” Since Miller came into possession of Abrams’s
proprietary information and trade secrets lawfully, embezzlement,
rather than larceny, is the § 523(a)(4) term which applies. See
Great Am. Ins. Co. (In re Graziano), 35 B.R. 589, 594 (E.D.N.Y.
7
1983). Embezzlement is defined for purposes of § 523(a)(4) as the
“‘fraudulent appropriation of property by a person to whom such
property has been entrusted, or into whose hands it has lawfully
come.’” Greyhound Lines Inc. v. Thurston (In re Thurston), 18 B.R.
545, 550 (M.D. Ga. 1982) (quoting 3 Collier on Bankruptcy ¶
523.14(3), 523-106 (15th ed. 1981)).
The discharge exceptions are to be narrowly construed in favor
of the debtor since the aim of the Bankruptcy Code is to give the
debtor a fresh start. See Tran, 1998 WL 480152, at *2. To meet
the definition of “embezzlement,” there must be proof of the
debtor’s fraudulent intent in taking the property. See Brady v.
McAllister (In re Brady), 101 F.3d 1165, 1173 (6th Cir. 1996) (“A
creditor proves embezzlement by showing that he entrusted his
property to the debtor, the debtor appropriated the property for a
use other than that for which it was entrusted, and the
circumstances indicate fraud.”); In re Sokol, 170 B.R. 556, 560
(Bankr. S.D.N.Y. 1994); cf. Coburn Co. v. Nicholas, 956 F.2d 110,
111 (5th Cir. 1992) (requiring an intent to defraud for a
determination of whether there has been a breach of a fiduciary
relationship under § 523(a)(4)).
The jury’s finding that Miller acted wrongfully in
misappropriating or misusing Abrams’s proprietary information does
not include a finding of fraudulent intent. One can wrongfully
appropriate a trade secret while acting under an erroneous belief
of entitlement. The question to the jury did not decide intent. Nor
8
did the judgment entered on the verdict since intent was not
essential to the judgement. Without such a finding by the state
courts, there is no preclusion.
IV
Under the Bankruptcy Code, a debtor may not be discharged from
any debt “for willful and malicious injury by the debtor to another
entity or to the property of another entity.” 11 U.S.C. §
523(a)(6). Although we will ultimately conclude that under recent
Supreme Court precedent, “willful and malicious injury” is a
unitary concept entailing a single two-pronged test, courts have
previously analyzed “willful” and “malicious” separately. We thus
consider them here in turn.
A.
The Supreme Court recently answered the “pivotal question” of
whether § 523(a)(6) covers “acts, done intentionally, that cause
injury . . . or only acts done with the actual intent to cause
injury.” Kawaauhau v. Geiger, 118 S. Ct. 974, 977 (1998). The
Court’s conclusion was that “[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.” Id. This conclusion was
similar to one that the Fifth Circuit had reached in analyzing §
523(a)(6). In Corley v. Delaney (In re Delaney), 97 F.3d 800 (5th
Cir. 1996), this court reaffirmed its earlier holding that “for
willfulness and malice to prevent discharge under § 523(a)(6), the
9
debtor must have intended the actual injury that resulted” and not
just performed an intentional act that resulted in injury. Id. at
802.
Before we can determine whether the findings of the jury in
the state court conclusively determine whether Miller inflicted a
“willful . . . injury,” we must grasp the Supreme Court’s
insistence on “actual intent to cause injury.” The Supreme Court’s
disposition in Kawaauhau certainly eliminates the possibility that
“willful” encompasses negligence or recklessness. See Kawaauhau,
118 S. Ct. at 978 (“We hold that debts arising from recklessly or
negligently inflicted injuries do not fall within the compass of §
523(a)(6).”).
At least three remaining readings are possible. The standard
might be met by any tort generally classified as an intentional
tort, by any tort substantially certain to result in injury, or any
tort motivated by a desire to inflict injury. We hold that the
label “intentional tort” is too elusive to sort intentional acts
that lead to injury from acts intended to cause injury. Rather,
either objective substantial certainty or subjective motive meets
the Supreme Court’s definition of “willful . . . injury” in §
523(a)(6).
If “actual intent to cause injury” and intentional torts were
parallel terms, issue preclusion with respect to willfulness would
apply in favor of Abrams. This is because misappropriation of
proprietary information and misuse of trade secrets are generally
10
considered to be intentional torts. See, e.g., Micro Data Base
Sys., Inc. v. Drarma Sys., Inc., Nos. 97-2989 & 97-3138, 1998 WL
272761, at *4 (7th Cir. 1998) (Posner, C.J.) (“The misappropriation
of a trade secret is an intentional tort.”); Restatement (Third)
Unfair Competition § 40(b) (defining the scienter requirement for
misuse of trade secrets); see also Hyde Corp. v. Huffines, 314
S.W.2d 763, 769 (Tex. 1958) (relying on a similar predecessor
Restatement definition in defining misuse of trade secrets);
American Derringer Corp. v. Bond, 924 S.W.2d 773, 777 (Tex. Ct.
App.--Waco 1996, no writ) (following Hyde).
The category of intentional torts, however, is broader. The
Supreme Court did specifically refer to intentional torts, noting
that “the (a)(6) formulation triggers in the lawyer’s mind the
category ‘intentional torts,’ as distinguished from negligent or
reckless torts.” Kawaauhau, 118 S. Ct. at 977. This acknowledgment
of a logical association, however, avoids equating § 523(a)(6)
torts and intentional torts, and with good reason.
Merely because a tort is classified as intentional does not
mean that any injury caused by the tortfeasor is willful. This case
illustrates the distinction, since misappropriation of proprietary
information and misuse of trade secrets are wrongful regardless of
whether injury is substantially certain to occur. See, e.g.,
Restatement (Third) Unfair Competition § 40(b) cmt. c (“[A]ny
exploitation of the trade secret that is likely to result in injury
to the trade secret owner or enrichment to the defendant is a ‘use’
11
under this section.”). Misuse of trade secrets is not precisely
like stealing funds from a till, because the tortfeasor’s gain is
not inevitably a loss to the legal owner of the secret.
Most often, an intentional tort requires either objective
substantial certainty of harm or subjective motive to do harm.
Indeed, the presence of one of these factors is both necessary and
sufficient for a tort to be classified as an “intentional tort”
under the traditional modern definition. See Kenneth J. Vandevelde,
A History of Prima Facie Tort: The Origins of a General Theory of
Intentional Tort, 19 Hofstra L. Rev. 447, 447 (1990) (describing
“intentional torts” as those where “the defendant acted with the
intent to injure the plaintiff or with substantial certainty that
his action would injure the plaintiff”).
Thus, rather than allow the general classification of a tort
to be a talisman, we hearken back to this original definition of
“intentional tort” to determine whether injury is “willful” for §
523(a)(6) purposes. This test is fully consistent with our
precedent. Delaney, which remains good law because the Supreme
Court in no way contradicted it, equated intending actual injury to
a situation in which “the debtor intentionally took action that
necessarily caused, or was substantially certain to cause, the
injury.” Delaney, 97 F.3d at 802. Although Delaney did not address
whether a subjective motive to injure would alternatively be
sufficient to trigger § 523(a)(6), it would seem peculiar to deem
12
an action causing injury not “willful” when the tortfeasor’s action
was in fact motivated by a desire to cause injury.
Applying this test, we find that willful injury was not
decided in the state court suit. If the subjective standard alone
were the standard, issue preclusion would give Miller victory
because the jury found that he did not act with “malice,” defined
by the court to include “evil motive.” Miller’s conduct, however,
could still be “willful” under the objective standard, if his acts
were substantially certain to result in injury to Abrams. The state
court jury determined only that injury was proximately caused by
Miller’s acts, a less demanding standard than “substantial
certainty.”
B.
Miller’s claim of preclusion might still seem to be vital,
because § 523(a)(6) requires “willful and malicious injury”
(emphasis added). If Miller could establish that the state court
decided that his acts were not “malicious,” § 523(a)(6) would not
bar dischargeability. At first glance, Miller might appear to meet
this burden, since the jury found no act of malice by Miller in
determining whether to assess punitive damages. Unfortunately for
Miller, however, the meaning of “malicious” in § 523(a)(6) is
controlled by federal law rather than state law. To determine
whether the definitions are sufficiently similar that the trial of
one is a trial of the other requires that we define “malicious.”
13
The law outside the Fifth Circuit concerning the meaning of
“malicious” in § 523(a)(6) has long been confused. See generally
Firstmark Fin. Corp. v. Aldrich (In re Aldrich), 37 B.R. 860, 862-
64 (Bankr. N.D. Ohio); Charles Jordan Tabb, The Scope of the Fresh
Start in Bankruptcy: Collateral Conversions and the
Dischargeability Debate, 59 Geo. Wash. L. Rev. 56, 61-89 (1990);
Karen N. Fischer, Comment, The Exception to Discharge for Willful
and Malicious Injury: The Proper Standard for Malice, 7 Bankr. Dev.
J. 245, 248-59 (1990).
Courts have divided roughly into two camps, some requiring
“special malice,” which requires a showing of a motive to harm, and
others requiring merely “implied malice.” Compare, e.g., American
Savings & Loan Ass’n v. Weber (In re Weber), 99 B.R. 1001, 1014-15
(Bankr. D. Utah 1989) (requiring special malice), and Grand Piano
& Furniture Co. v. Hodges (In re Hodges), 4 B.R. 513, 516 (Bankr.
W.D. Va. 1980) (same), with United Bank v. Nelson, 35 B.R. 766, 774
(N.D. Ill. 1983) (requiring “implied malice”), and United Va. Bank
v. Fussell (In re Fussell), 15 B.R. 1016, 1022 (W.D. Va. 1981)
(same). The difference in opinion has been whether § 523(a)(6)
repudiated an implied malice test previously established in Tinker
v. Colwell, 193 U.S. 473 (1904).
The Fifth Circuit so far has taken a clear path, albeit
without analysis of the confused jurisprudence. Vickers v. Home
Indem. Co., 546 F.2d 1149 (5th Cir. 1977), defined “malicious” as
“‘without just cause or excuse.’” Id. at 1150 (quoting 1A Collier,
14
Bankruptcy ¶ 17.17, at 1650.4 to 1650.6 (1976)); see also Corley v.
Delaney (In re Delaney), 97 F.3d 800, 802 n.6 (5th Cir. 1996);
Seven Elves, Inc. v. Eskenazi, 704 F.2d 241, 245 (5th Cir. 1983);
Petty v. Dardar (In re Dardar), 620 F.2d 39, 40 (5th Cir. 1980).
This test is thus a species of “implied malice,” because no
bad motive on the part of the debtor is required. See, e.g.,
Black’s Law Dictionary 958 (6th ed. 1990) (defining “implied
malice” for general purposes as "[m]alice inferred by legal
reasoning and necessary deduction from the res gestae or the
conduct of the party."). Other courts, however, have defined
“implied malice” differently. See, e.g., In re Nance, 556 F.2d 602,
611 (1st Cir. 1977) (“There need be no showing of ‘special malice’
toward the injured party, only that the act is done deliberately
and intentionally, in knowing disregard of the rights of another.”)
(internal quotation marks omitted). This definition makes the
“implied malice” inquiry quite close to that of the Kawaauhau
standard for “willful . . . injury.”
Ordinarily, of course, this court would be bound to its
precedent, and thus would retain the “just cause or excuse”
definition. The Supreme Court’s decision in Kawaauhau, however, has
displaced it. The origin of the “just cause or excuse” standard is
Tinker, 193 U.S. at 487, but the Kawaauhau Court, after
specifically quoting the “just cause or excuse” and other language,
criticized that opinion as failing to produce a clear standard. See
118 S. Ct. at 978 (“The exposition in the Tinker opinion is less
15
than crystalline.”). More importantly, the Kawaauhau Court
explicitly confined the holding of Tinker to the collateral
proposition that criminal conversation is an intentional tort. See
id.
Thus, the roots of the “just cause or excuse” standard that
this court has adopted have now been cut off. The most obvious
candidates are the “special malice” and the “implied malice”
standards on which most courts have focused. The “special malice”
standard has been criticized for “appear[ing] to abolish section
523(a)(6) of the Code as a meaningful ground of
nondischargeability.” Citizens Bank & Trust Co. v. Lewis (In re
Lewis), 17 B.R. 46, 48 (Bankr. W.D. Ark. 1981). While a special
malice standard might still have bite for judgments involving torts
like battery, it would make nondischargeability unnecessarily rare,
as judgments for torts substantially certain or certain to result
in injury would be discharged when a tortfeasor was merely
indifferent to the injury and not acting with the end goal of
causing that injury.
The implied malice standard is thus preferable. This still
leaves the question of which variant of the implied malice
definition is appropriate. “Without just cause or excuse” might
serve as a useful general definition of implied malice, and it
might have been an appropriate definition when it appeared that
“willful . . . injury” might include negligent acts or acts based
on mistakes of fact. This is because when a tort does not involve
16
intentional injury to another, then it might in some circumstances
be justified or excused. See, e.g., Davis v. Aetna Acceptance Co.,
293 U.S. 328, 332 (1934) (“There may be an honest, but mistaken
belief engendered by a course of dealing, that powers have been
enlarged or incapacities removed. In these and like cases, what is
done is a tort, but not a willful and malicious one.”).
The “just cause or excuse” approach is peculiarly
inappropriate, however, given the Supreme Court’s definition of
“willful . . . injury” in Kawaauhau. Where injury is intentional,
as it now must be under Kawaauhau, it cannot be justified or
excused. Eliminating the “just cause or excuse” exception would not
ensnare those who have acted under “an honest, but mistaken
belief.” Such an individual cannot be said to have intentionally
caused injury, since legally cognizable injury would not meet the
test of “not substantially certain to result,” in the absence of
the fact about which there has been mistake.
Thus, we adopt the alternative definition of “implied malice.”
Because this standard is synonymous to the Kawaauhau standard for
“willful injury,” “acts done with the actual intent to cause
injury,” id. at 975, we hold that this is the test for “willful and
malicious injury” under § 523(a)(6). Thus, we hold that an injury
is “willful and malicious” where there is either an objective
substantial certainty of harm or a subjective motive to cause harm.
Kawaauhau does not foreclose, even encourages, this approach.
That case never makes explicit whether it is analyzing solely the
17
“willful” prong or the “willful and malicious” standard as a unit.
Aggregating “willful and malicious” into a unitary concept might be
inappropriate if the word they modified were “act,” but treatment
of the phrase as a collective concept is sensible given the Supreme
Court’s emphasis on the fact that the word they modify is “injury.”
It is worth noting that this interpretation of § 523(a)(6)
comes quite close to that recommended by commentators who, pre-
Kawaauhau, have considered the definition of “malicious.” See Tabb,
supra, at 104 (propounding a “knowing violation” test, wherein the
debtor must have been aware that its act violated the legal rights
of the creditor); Fischer, supra, at 258-59 (“The critical inquiry
under this standard is whether the debtor knew, or should have
known, that his actions would cause harm to the creditor.”).
Applying this analysis to the instant case is straightforward.
The word “malicious” does not change the conclusion. Thus, on the
§ 523(a)(6) claim, we find that issue preclusion does not apply in
favor of either party. If Miller’s actions were at least
substantially certain to result in injury to Abrams, then the debt
is nondischargeable under § 523(a)(6). Otherwise, neither the
objective nor the subjective standard is met, and the debt is
dischargeable.
V
Since the jury’s findings in the state court did not speak to
whether Miller acted with fraudulent intent or the objective
probability of injury from Miller’s tortious acts, the parties are
18
free to try this issue for the first time. Accordingly, we REVERSE
the district court’s judgment and REMAND for proceedings consistent
with this opinion, including entry of summary judgment on the facts
if appropriate.
19