8th Circuit Panel Finds Willful, Malicious Acts Warrant Attorney Fees

Mealey's (July 28, 2016, 10:44 AM EDT) -- ST.LOUIS — A former franchise partner acted willfully and maliciously in violation of U.S. Code Section 523(a)(6) of the Bankruptcy Code; therefore, an award of attorney fees is nondischargeable, an Eighth Circuit U.S. Court of Appeals panel ruled July 25 (Blake Roussel v. Clear Sky Properties LLC, et al., No. 15-3048, 8th Cir.; 2016 U.S. App. LEXIS 13466). (Opinion available. Document #98-160809-013Z.) The panel affirmed an Aug. 14, 2015, ruling by U.S. Judge Susan Webber Wright of the Eastern District of Arkansas applying collateral estoppel to find malice for Section 523(a)(6) purposes against Blake Roussel as jury instructions on punitive damages required. Roussel and LuAnne Deere formed Clear Sky LLC, d/b/a Exit First Choice Realty, an Exit Realty brokerage franchise in Conway, Ark. Clear Sky purchased the right to operate its franchise in half of Conway. The operating agreement provided that members had the right to veto a proposed sale of another member’s interest; it also included a provision allowing attorney fees. Fiduciary Duty Claims About a year after forming Clear Sky, Roussel wanted to sell his 50 percent interest, but Deere refused. Roussel later proposed to sell two-thirds of his 50 percent interest, and Deere agreed. Three months later, Roussel and two Clear Sky real estate agents filed articles of organization for Select Group Investments d/b/a Exit Realty Select, an Exit Realty brokerage franchise in Conway. Select Group Investments purchased the right to operate its franchise in the other half of Conway. Twelve Clear Sky agents soon joined Select Group Investments. Deere and Clear Sky sued Roussel in the Faulkner County, Ark., Circuit Court for breach of fiduciary duty, fraud, breach of contract and violations of the Arkansas Franchise Practices Act. A jury found that Roussel breached his fiduciary duty to Clear Sky and Deere. To Clear Sky, the jury awarded $184,683.60 for lost revenue, $1,480 for damage to property and $113,836.40 in punitive damages. To Deere, the jury awarded $58,800 for breach of fiduciary duty and $40,000 for breach of contract and ordered Roussel to pay attorney fees. Roussel filed for Chapter 7 bankruptcy. Clear Sky and Deere filed an adversary proceeding against Roussel, requesting that the U.S. Bankruptcy Court for the Eastern District of Arkansas declare the entire state court judgment nondischargeable under 11 U.S. Code Sections 523(a)(4) and 523(a)(6). They argued, under the doctrine of collateral estoppel, that the state court judgment bound the Bankruptcy Court to find the debt nondischargeable. Roussel countered that the Sections 523(a)(4) and 523(a)(6) issues were not actually litigated in state court. The Bankruptcy Court agreed with Roussel, finding the entire judgment debt dischargeable except for the property damage award. Clear Sky and Deere appealed to the District Court, which reversed and found the entire judgment debt nondischargeable. It remanded the attorney fees issue to the Bankruptcy Court, which found the attorney fees award nondischargeable. Judge Wright affirmed, and Roussel appealed. Collateral Estoppel In an opinion written by Circuit Judge Duane Benton, the panel said Roussel argued that the District Court erred in finding the judgment debt nondischargeable under Section 523(a)(6), which prevents discharge of debts “for willful and malicious injury by the debtor to another entity or to the property of another entity.” Roussel argued that Judge Wright erred in applying collateral estoppel to find that he acted maliciously under Section 523(a)(6). “The state court’s jury instruction allowed punitive damages if the jury found Roussel knew or ought to have known in light of the surrounding circumstances, his conduct would naturally and probably result in damages and that he continued such conduct in reckless disregard of the consequences from which malice may be inferred; or second, that Blake Roussel intentionally pursued a course of conduct for the purpose of causing damage, or both,” Judge Benton wrote. “Roussel insists this instruction is not a basis for applying collateral estoppel to find he acted with malice. . . . “Collateral estoppel applies in bankruptcy court. If the same issue was actually litigated and determined by a final judgment, and was essential to that final judgment, it cannot be relitigated in bankruptcy court.” Malice Roussel questioned whether the “reckless disregard” or “intentionally” prongs were the reason for the punitive damages. Second, he asserted that the “reckless disregard” prong does not rise to the level of malice necessary for Section 523(a)(6). “While a Clear Sky managing member, Roussel opened a brokerage firm under the same franchise as Clear Sky, in the same town as Clear Sky and with Clear Sky agents,” Judge Benton wrote. “He testified that after Deere rejected his first offer to sell his 50% interest, he met with two Clear Sky agents to discuss opening a competing franchise. He did not tell Deere about this. “He further testified he knew Clear Sky intended to expand its operations in Conway to prevent the opening of a competing Exit Realty franchise, and Roussel in fact purchased the area of Conway that Clear Sky intended to purchase ‘as soon as [Clear Sky] could afford it.’ These facts show Roussel acted willfully, that he knew that the consequences [were] certain or substantially certain, to result from his conduct,’” the judge wrote, quoting In re Patch (526 F.3d 1176, 1180-81 [8th Cir. 2008]). Attorney Fees In the bankruptcy proceeding, the parties stipulated that the $40,000 breach of contract award to Deere is dischargeable but disputed whether the attorney fees were linked solely to the breach of contract claim. Roussel argued that because the breach of contract award to Deere is dischargeable, attorney fees attached to this debt are also dischargeable. “However, apportionment is inappropriate here because [] Deere’s breach-of-contract claim is deeply intertwined with the breach-of-fiduciary-duties claim by Deere and Clear Sky,” Judge Benton wrote. Circuit Judges Lavenski R. Smith and Raymond W. Gruender concurred. Roussel is represented by Kevin P. Keech and Rachel V. Hampton of Keech Law Firm in North Little Rock, Ark. Clear Sky and Deere are represented by H. Wayne Young Jr. and Daniel Herrington of Friday, Eldredge & Clark in Little Rock, Ark. (Additional documents available:  Appellant brief.  Document #98-160809-014B.  Appellee brief.  Document #98-160809-015B.)...

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