Willfulness Allegation, Failure to Appear Lead to Nondischargeable Judgment

By on May 19, 2020
Posted In Trade Secrets

The US Court of Appeals for the Sixth Circuit affirmed that a state court’s finding of “willful and malicious injury” in connection with the misappropriation of trade secrets entitled the plaintiff, in the defendant’s subsequent bankruptcy proceeding, to summary judgment of nondischargeability on collateral estoppel grounds. In re Hill, Case No. 19-5861 (6th Cir. May 4, 2020) (Donald, J.).

Aaron Hill and the other principals of First Meridian Mortgage Corporation agreed to sell First Meridian to CMCO Mortgage, where the former principals would build and manage an internet division. After the sale, Hill accepted an offer to work for CMCO’s competitor, Peoples Bank. CMCO later terminated Hill, alleging that he had breached his contract, provided trade secrets to Peoples and unlawfully recruited CMCO employees to Peoples. CMCO sued Peoples and Hill in Kentucky state court on a variety of theories, including misappropriation of trade secrets and tortious interference. Peoples originally funded Hill’s defense, but it stopped after it settled with CMCO. Hill then proceeded pro se.

After Hill failed to attend a pretrial conference, the state court entered default judgment against him, including a finding that Hill had “caused a willful and malicious injury” to CMCO. Hill then failed to appear for the damages trial, and the state court entered a money judgment of almost $3.5 million against him.

Between the damages trial and the entry of final judgment, Hill filed for bankruptcy. CMCO filed a proof of claim in the bankruptcy court, which lifted the automatic stay with respect to the money judgment. CMCO then filed an adversary proceeding against Hill and sought summary judgment that the judgment was nondischargeable in Hill’s Chapter 7 bankruptcy proceeding because it arose from “willful and malicious injury by the debtor.” The bankruptcy court granted the motion on collateral estoppel grounds. Hill appealed to the district court, which affirmed, and then to the Sixth Circuit.

On appeal, Hill contended that collateral estoppel did not apply because he had been denied an opportunity to be heard and the elements of collateral estoppel were not satisfied. The Sixth Circuit held that the state court had satisfied any procedural requirements. The Court then reviewed each of the four elements of collateral estoppel under Kentucky law, finding:

  • There was an identity of issues because “willful and malicious injury” is the key element of nondischargeability.
  • The issue had been actually litigated because default judgments are considered “on the merits” under Kentucky law.
  • The issue had been actually decided, as it had been explicitly included in the state court’s factual findings.
  • That the court’s ruling was necessary to the judgment, at least with respect to CMCO’s tortious interference claim, because lack of a legitimate motive is an element of tortious interference under Kentucky law.

Practice Note: Only after the entry of judgment against him, Hill expended enormous resources appealing the state court judgment all the way to the Kentucky Supreme Court and the bankruptcy judgment to the Sixth Circuit. All of that—and the adverse result—might have been avoided had he appeared in the state court action. To paraphrase Benjamin Franklin, sometimes an ounce of prevention can be worth much more than a pound of cure.

Paul Devinsky
Paul Devinsky advises clients on patent, trademark and trademark litigation and counseling, as well as copyright counseling. He is also active in intellectual property (IP) licensing, transactions and due diligence, as well as post-issuance US Patent and Trademark Office (USPTO) proceedings such as reissues and inter partes review, covered business method patent review and post grant review, and appellate (Federal Circuit) advocacy. Read Paul Devinsky's full bio.