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In re: Muhs “Willful and Malicious” Does Not Mean “Willful and Malicious”

May 30, 2019 | William L. Hallam, Creditors’ Rights

In In re Muhs, the United States Court of Appeals for the Fourth Circuit was called upon to decide whether “the meaning of ‘willful and malicious’ under Alaska law is identical to the meaning of ‘willful and malicious’ under the Bankruptcy Code.”  In its May 8, 2019 opinion, the Court decided that the answer was no.

Charles Muhs was a Vice President of Business Development for TKC Aerospace, Inc. (“TKCA”).  In that capacity, Muhs had access to TKCA’s proprietary information.  His employment contract with TKCA prohibited him from disclosing that information to third parties and from competing with TKCA for a period of six months after leaving TKCA.  TKCA specialized in aircraft procurement, logistics, and support.  While Muhs worked tor TKCA, the company, with Muhs’ assistance, obtained multiple contracts with the Department of State to provide modified Dash 8 aircraft.  

Muhs left TKCA and began working with Phoenix Heliparts, Inc. (“PHI”), a TKCA competitor.  The Department of State awarded a contract to provide additional Dash 8 aircraft to PHI.

TKCA sued Muhs in U.S. District Court in Alaska for, among other things, breach of Alaska’s Uniform Trade Secrets Act.  TKCA also sued PHI in Arizona state court for, among other things breach of Arizona’s Uniform Trade Secrets Act.  Muhs was not a defendant in the Arizona action.

Muhs asked the Alaska District Court to stay the case against him until after the Arizona action was resolved.  Muhs’ attorney in the Alaska action, who was also PHI’s attorney in the Arizona action, argued that the two actions involved the same factual and legal issues and that, if TKCA prevailed in Arizona, Muhs “would be collaterally estopped to argue differently in this court.”

Although the Alaska court did not stay the case against Muhs, the Arizona action proceeded to trial first.  TKCA prevailed and was awarded a $20,295,782.58 judgment against PHI.  The judgment included punitive damages of $13,530.521.72 under the Arizona Uniform Trade Secrets Act based on a finding that PHI had “willfully and maliciously misappropriated TKCA’s trade secrets.”  The Arizona court also found that PHI “acted with an evil mind, intending to injure TKCA.”  However, the Arizona court made no findings as to Muhs’ conduct, other than that Muhs was PHI’s agent. 

TKCA then moved for summary judgment against Muhs in the Alaska action based on the judgment it had obtained against PHI in Arizona.  The Alaska court granted that motion.  Although Muhs had not been a party to the Arizona case, the Alaska court said that Muhs was in privity with PHI and had agreed to be bound by the judgment in the Arizona action.  The Alaska court based its $13,530,521.72 punitive damages judgment against Muhs on the Alaska Uniform Trade Secrets Act which provides for such and award if “willful and malicious misappropriation exists.”

Muhs filed for bankruptcy in an effort to discharge his debt to TKCA.  TKCA filed a complaint to have Muhs’ debt to it determined to be non-dischargeable under Section 523(a)(6) of the Bankruptcy Code.  That section provides that a debt for “willful and malicious injury by the debtor to another entity or to the property of another entity” is not dischargeable.  TKCA moved for summary judgment based upon the judgment that TKCA had obtained against Muhs in the Alaska action.  TKCA argued that since the Alaska court had determined that there had been a willful and malicious misappropriation of its trade secrets by Muhs, he was collaterally estopped to contest whether his debt to TKCA resulted from willful and malicious injury to TKCA or its property.  The Bankruptcy Court initially denied TKCA’s motion, but granted it after an intervening appeal to the United States District Court for the Eastern District of Virginia.  Muhs appealed the Bankruptcy Court’s judgment, first to the District Court and then to the Fourth Circuit.

The Fourth Circuit began its analysis by discussing the elements of collateral estoppel.  Collateral estoppel is appropriate when: “(1) the party against whom the preclusion is employed was a party to or in privity with a party to the first action; (2) the issue precluded from relitigation is identical to the issue decided in the first action; (3) the issue was resolved in the first action by a final judgment on the merits; and (4) the determination of the issue was essential to the final judgment.”  As Muhs was a party to both the Alaska action and the proceedings in the Bankruptcy Court and the Alaska court’s judgment against him was final, the Fourth Circuit examined the second and fourth elements.

The Fourth Circuit determined that the issue that had been decided by the Alaska court was not identical to the issue that the Bankruptcy Court needed to decide to determine whether Muhs could discharge his debt to KTCA.  While it acknowledged that both the Alaska Uniform Trade Secrets Act and the Bankruptcy Code made whether Muhs had engaged in willful and malicious conduct the key issue, the Fourth Circuit said “We cannot conclude that just because the words are the same, the meaning is also the same.” 

Citing both Supreme Court and its own precedent, the Fourth Circuit said that willful and malicious injury under the Bankruptcy Code “takes a deliberate or intentional injury, not merely a deliberate and intentional act that leads to injury.”  In contrast, a willful and malicious misappropriation under the Uniform Trade Secrets Act requires only “[s]uch intentional acts or gross neglect of duty as to evince a reckless indifference to the rights of others on the part of the wrongdoer, and an entire want of care so as to raise the presumption that the person at fault is conscious of the consequences or his carelessness.”  Because the standard under the Bankruptcy Code and the Uniform Trade Secrets Act are not the same, the Fourth Circuit concluded that the issue in the Alaska action was not identical to the issue in Muhs’ bankruptcy case.

Moreover, the Fourth Circuit went on the say that even if “willful and malicious” meant the same thing under the two statutes, the Alaska court had neither needed to determine whether Muhs intended to injure TKCA nor decided that he had so intended.  The Fourth Circuit said that “the only critical determination the Alaska court made was that [Muhs] was in privity with PHI based on equitable and quasi-estoppel, and therefore, … collaterally estopped from ‘relitigating TKCA’s claims against him’ in Alaska.”    As the Arizona court, on whose judgment against PHI the Alaska judgment of TKCA against Muhs was based, only needed to decide that there had been an intentional act to misappropriate TKCA’s trade secrets and not whether PHI intended to injure TKCA, a determination as to whether Muhs intended to injure TKCA was not essential to the Alaska court’s judgment against him.  Accordingly, the Fourth Circuit reversed TKCA’s judgment against Muhs and sent the case back to Bankruptcy Court for trial.

Courts, including the United States Supreme Court, often recite the need to interpret statutes in accordance with the “plain meaning” of the words used in them.  The fact that the Fourth Circuit construed the identical words to mean different things in different statutes demonstrates how plain meaning may not be all that plain. 

For more information, contact William Hallam at 410-727-6600 or email whallam@rosenbergmartin.com.