Dean v. Clavet

MEMORANDUM OF DECISION ON BANKRUPTCY APPEAL

LANCE E. WALKER, UNITED STATES DISTRICT JUDGE.

Kevin B. Dean, Debtor-Appellant, appeals the May 7, 2021, Summary Judgment order issued by the United States Bankruptcy Court for the District of Maine (Fagone, B.J.). In his order, Judge Fagone entered summary judgment for Clavet, Creditor-Appellee, determining that Dean's debt to Clavet was non-dischargeable as a matter of law. I affirm.

BACKGROUND

1. The Underlying Business Dispute

Dean and Clavet were friends and business partners who co-owned a number of businesses together. One of these businesses, a marina located in Texas, Dean and Clavet owned via two limited liability companies in which they shared equal ownership: Blue Water, LLC, organized under Maine law, and Covered Marina, LLC, organized under Texas law.

Dean, who managed the marina, received an offer from a third party, TCRG Opportunity X LLC, to purchase the marina for $7.5 million. Without fully apprising Clavet of this offer, Dean agreed with Clavet to purchase the latter's membership interest

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in both LLCs. To determine a sale price for the membership interests, Dean and Clavet valued the marina at $2.5 million, less certain business expenses. But shortly after purchasing Clavet's interest in the LLCs, Dean sold the marina for $7.5 million. Dean did not inform Clavet of the sale until several months later, when he was forced to tell Clavet that they had both been named in a lawsuit brought by TCRG regarding the sale of the marina.

Clavet sued Dean, and the Maine and Consumer Business Court (the “Business Court”) entered judgment for Clavet, finding that Dean was liable for fraudulent misrepresentation and had breached his fiduciary duty to Clavet. See Clavet v. Dean, No. BCD-CV-2018-04 (Me. B.C.D. Jan. 8, 2020). The court determined that “Dean was a fiduciary to” Clavet and Blue Water, LLC, ^[1] that he “intentionally omitted material information which he had a duty” to disclose to Clavet, and that he did so “for the purpose of inducing” Clavet to sell his membership interest for less than its apparent worth. Id. at *4-6 (quotations omitted). The court determined that Dean's fraudulent misrepresentation had caused Clavet losses of $2, 516, 181.53 and awarded damages in that amount. Id. at *12-13. The court further found that Dean's scornful attitude toward Clavet and “brazen” scheme to defraud him indicated “actual malice” toward Clavet, and so awarded additional punitive damages of $750, 000. Id. *14-15. On appeal, the Law Court affirmed, finding that Dean “owed Clavet a fiduciary duty to disclose his negotiations for the sale of the

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company to a third party” and that “Dean breached that duty.” Clavet v. Dean, Mem-20-75 (Oct. 13, 2020).

2. Dean's Bankruptcy and This Case

Later that year, Dean filed for bankruptcy and requested that the bankruptcy court declare his debt under the state court judgment to be dischargeable under federal bankruptcy law. Dean specifically argued that the debt fell outside the scope of 11 U.S.C. § 523(a)(2) and § 523(a)(4), which exempt from discharge debts for money obtained by false representations or fraud, though he made clear that his request for a declaratory judgment as to the debt's dischargeability was not limited to § 523(a)(2) and § 523(a)(4). The bankruptcy court, on its own initiative, asked the parties to brief the issue of whether the debt was dischargeable under § 523(a)(6), which exempts from discharge debts “for willful and malicious injury by the debtor.” 11 U.S.C. § 523(a)(6). After permitting the parties to fully brief the issue and determining that there was no dispute of material fact, the court entered summary judgment, concluding that Dean's debt to Clavet was non-dischargeable as a matter of law under § 523(a)(6). The court applied the doctrine of issue preclusion and noted that, as the state court judgment in Clavet v. Dean established all of the elements necessary to render a debt non-dischargeable under § 523(a)(6), Dean was precluded from relitigating the issue in federal bankruptcy court.

Dean appealed the bankruptcy court's decision, arguing that the court's award of summary judgment was both procedurally and substantively incorrect.^[2] On Clavet's

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request, and pursuant to Fed.R.Bankr.P. 8005(a) and 1st Cir. BAP.L.R. 8005-1(b)(2), the case was transferred to this court.

DISCUSSION

This court has jurisdiction to hear appeals from final judgments, orders, and decrees of the bankruptcy court. 28 U.S.C.A. § 158(a)(1). Any “order which disposes of a discrete dispute within a larger [bankruptcy] case will be considered final and appealable, ” In re Am. Colonial Broad. Corp., 758 F.2d 794, 801 (1st Cir. 1985) (citation omitted), including a “bankruptcy court's order determining the dischargeability of a debt, ” O'Sullivan, 630 B.R. 679, 687 (B.A.P. 1st Cir. 2021) (citation omitted).

I review the bankruptcy court's legal conclusions de novo, and its factual findings for clear error. Wheeling & Lake Erie Ry. Co. v. Keach, 606 B.R. 1, 5 (D. Me. 2019), aff'd sub nom. In re Montreal, Maine & Atl. Ry., Ltd., 956 F.3d 1 (1st Cir. 2020). The issuance of summary judgment is a legal conclusion subject to de novo review. Lawless v. Steward Health Care Sys., LLC, 894 F.3d 9, 17 (1st Cir. 2018).

1. Dean's Substantive Argument Against Summary Judgment

First, I agree with the bankruptcy court's conclusion that Dean's debt to Clavet was non-dischargeable under § 523(a)(6) as a matter of law. Section 523(a)(6) of the Bankruptcy Code prevents a debtor from discharging debts “for willful and malicious

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injury by the debtor to another entity or to the property of another entity.” 11 U.S.C. § 523(a)(6). As the Supreme Court recognized, this “formulation triggers in the lawyer's mind the category [of] ‘intentional torts, '” Kawaauhau v. Geiger, 523 U.S. 57, 61 (1998). Courts have interpreted § 523(a)(6) as creating a two-prong test for non-dischargeability, with a “willfulness” prong and a “malice” prong, each of which must be satisfied for a debt to be exempt from discharge. See In re Levasseur, 737 F.3d 814, 818 (1st Cir. 2013).^[3]

Summary judgment is appropriate when “there is no genuine dispute as to any material fact and the [prevailing party] is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(a). “[T]he mere existence of some alleged factual dispute between the parties will not defeat an otherwise properly supported motion for summary judgment; the requirement is that there be no genuine issue of material fact.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-48 (1986). A material fact is one that has the potential to determine the outcome of the litigation. Id. at 248; Oahn Nguyen Chung v. StudentCity.com, Inc., 854 F.3d 97, 101 (1st Cir. 2017). To raise a genuine issue of material fact, the party opposing the summary judgment motion must demonstrate that the record contains evidence that would permit the finder of fact to resolve a material issue in his favor. Triangle Trading Co. v. Robroy Indus., Inc., 200 F.3d 1, 2 (1st Cir. 1999). Though case law generally speaks in terms of the moving and non-moving parties, where, as here, the court grants summary judgment to a non-moving party on its own initiative, it must view the evidence in the light

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most favorable to the original movant-here, Dean. See Albino v. Baca, 747 F.3d 1162, 1176 (9th Cir. 2014).

The bankruptcy court found that the Business Court's decision in Clavet v. Dean established both the willfulness and malice prongs of § 523(a)(6) and thus precluded Dean from litigating (or relitigating, as it were) those issues in bankruptcy court. A “judgment rendered in a state court is entitled to the same preclusive effect in federal court as it would be given within the state in which it was rendered.” In re Sonus Networks, Inc, S'holder Derivative Litig., 499 F.3d 47, 56 (1st Cir. 2007) (citing Migra v. Warren City Sch. Dist. Bd. of Educ., 465 U.S. 75, 81 (1984)). Thus, Maine law determines the preclusive effect of the Business Court's judgment. In Maine, the doctrine of issue preclusion “prevents the relitigation of factual issues already decided if the identical issue was determined by a prior final judgment, and the party estopped had a fair opportunity and incentive to litigate the issue in a prior proceeding.”^[4] Doane v. Dep't of Health & Hum. Servs., 250 A.3d 1101, 1111 (Me. 2021) (quotation omitted). Here, there is no doubt that the state court judgment in Clavet v. Dean was a final judgement, nor that Dean had the opportunity and incentive to fully litigate the issues. Dean only argues that the non-dischargeability determination under § 523(a)(6) raises different issues than those raised in the state court proceeding.

A. Willful

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I agree with the bankruptcy court that the Business Court's factual findings in Clavet v. Dean are identical to the facts needed to establish willfulness, and so are sufficient to preclude Dean from relitigating that prong. For an injury to be willful, a debtor must “inten[d] to do an act which [he] is substantially certain will lead to the injury in question, ” though he need not “inten[d] to injure.” In re Stewart, 948 F.3d 509, 528 (1st Cir. 2020) (quoting In re Levasseur, 737 F.3d at 818). The Business Court concluded that Dean “intentionally” shielded material information from Clavet “for the purpose of inducing” Clavet to sell his membership interests in the LLCs for less than they were worth once the sale of the marina went through. Clavet, at *4-6. This finding makes clear that Dean was not only aware that his actions were substantially certain to cause Clavet to lose money, but actually intended to bring about that result. Dean's injury to Clavet...