First Am. Title Ins. Co. v. Smith (In re Smith)

In re: MICHAEL M. SMITH, Debtor.

FIRST AMERICAN TITLE INSURANCE COMPANYand FIRST AMERICAN TITLE COMPANY, LLC, Plaintiffs, v. MICHAEL M. SMITH, Defendant.

Bankruptcy Number: 17-22743

Adversary Proceeding No. 17-02076

UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF UTAH

July 10, 2019

Chapter 7

Hon. Kevin R. Anderson

MEMORANDUM DECISION FINDING THAT DEFENDANT'S DEBT TO PLAINTIFFS IS NON-DISCHARGEABLE UNDER 11 U.S.C. § 523(a)(6)

In this adversary proceeding, the Debtor's former employer is seeking to except a pre-bankruptcy judgment from discharge as a "willful and malicious injury" under 11 U.S.C. § 523(a)(6). The complaint alleges that the Debtor caused injury to the Plaintiffs when he formed a competing title company by taking employees and customers from his former employer.

In December 2016 the United States District Court for the District of Utah held a three-week jury trial and on December 30, 2016 entered a judgment against Michael M. Smith in favor of First American for damages. Michael M. Smith filed a voluntary Chapter 7 bankruptcy petition on April 4, 2017.¹

First American Title Insurance Company and First American Title Company, LLC (collectively "First American") filed a nondischargeability complaint against Michael M. Smith ("Smith" or "Debtor") alleging breach of fiduciary duty under 11 U.S.C. § 523(a)(4) and willful and malicious injury under § 523(a)(6).²

On April 3, 2019 the Court entered a Stipulated Pretrial Order.³ In the Pretrial Order, First American agreed to voluntarily dismiss its first claim for non-dischargeability under § 523(a)(4). On April 16-19, 2019, the Court held a trial on the cause of action for willful and malicious injury under § 523(a)(6). The Court took the matter under advisement on April 19, 2019.

Having carefully considered the parties' oral and written arguments, the evidence and testimony presented at trial, and having conducted its own independent research of the relevant case law, the Court issues the following Memorandum Decision.⁴

I. JURISDICTION, NOTICE, AND VENUE

The Court's jurisdiction over this adversary proceeding is properly invoked under 28 U.S.C. § 1334(b) and § 157(a) and (b)(2).⁵ First American's complaint objects to the discharge ofparticular debts, making this a core proceeding under 28 U.S.C. §§ 157(b)(2)(A) and (I). Venue is appropriately laid in this District under 28 U.S.C. § 1409.

II. FINDINGS OF FACT

A. Summary.

For many years, the Debtor worked as legal counsel for First American and its predecessor, Equity Title. The Debtor became dissatisfied with First American, and took steps to form a new title company - Northwest Title - to directly compete with First American. The Debtor concealed these business formation activities from First American, including leasing new office space in proximity to First American's offices and communicating with First American employees about coming to work with him. Within days of resigning from First American, twenty-six employees left First American and went to work with the Debtor and Northwest Title taking hundreds of customers with them. These actions substantially disrupted First American's business operations and resulted in financial injury.

B. Background.

1. The Debtor is an attorney who practiced real property law from 1987 through 1993. In 1993, he became General Counsel for Realty Title. Courtesy Title acquired Realty Title and the Debtor became General Counsel for Courtesy Title. In 1995, Courtesy Title became Equity Title.⁶

2. In 2004, the Debtor entered into an employment agreement with Equity Title Insurance Agency, Inc. (the "Equity Employment Agreement").⁷

3. In the Equity Employment Agreement, the Debtor agreed to be employed to serve as Chief Operating Officer and General Counsel of Equity Title. As COO of Equity Title, the Debtor supervised all operations of Equity Title throughout Utah.⁸

4. Under the Equity Employment Agreement, the Debtor was entitled to a base salary with yearly cost of living adjustment (COLA) increases for those calendar years in which Equity Title earned a pre-tax net income of 5% or greater.⁹

5. Under the Equity Employment Agreement, the Debtor was entitled to bonuses based on Equity Title's pre-tax net income.¹⁰

6. The Equity Employment Agreement contained a non-compete clause that would apply for one year, but only if the Debtor was terminated for cause.¹¹ The Debtor was aware that if he voluntarily quit, the non-competition clause would not apply.¹² However, the Debtor asserts this was not on his mind when he resigned from First American on March 9, 2015.¹³

7. The Equity Employment Agreement also provides: "Notwithstanding the foregoing, nothing herein shall restrict Smith's right to practice law subsequent to the termination of his employment with Equity; provided, however, that Smith shall not be employed by any person or entity engaged in the title insurance business."¹⁴

8. Between 2003 and 2006, Equity Title had approximately 150 employees and between 18 and 20 offices throughout Utah.¹⁵

9. In September 2003, First American acquired a 25% ownership interest in Equity Title. First American acquired a further 25% ownership interest in Equity Title in March 2005. In December 2008, First American purchased an additional 45% ownership interest in Equity Title, making it the majority owner. First American acquired the remaining 5% ownership interest in Equity Title in February 2009, making it the sole owner.¹⁶

10. After First American acquired a majority interest in Equity Title in 2008, it began managing Equity Title's back office functions such as payroll, accounting, and title plant operations.¹⁷

11. After 2011, the Debtor was no longer Equity Title's General Counsel; he became State Underwriting and Legal Counsel.¹⁸

12. As State Underwriting and Legal Counsel, the Debtor was to act as a lawyer for First American.¹⁹

13. The Debtor recognized that he was a lawyer for First American and that First American was his client.²⁰ The Debtor also recognized that as its attorney, he owed a fiduciary duty and a duty of undivided loyalty to First American relating to the scope of his representation up until the time he resigned.²¹

14. No one at First American complained to the Debtor about his legal work during the relevant time.²²

15. As a lawyer, the Debtor understood the meaning and obligations of the non-compete and non-solicitation agreements in the Equity Employment Agreement.²³

16. In June of 2011, the Debtor sent an email to Mark Webber, Ray Whitney and Jeff Williams ("Williams") about a conversation he had with employee Mitch Montgomery, who had received an offer to work for another title company.²⁴ In the email, the Debtor states the following:

My response was firm — I told him we were not in a position to offer him any more money, and that we would take him to the mat on the non-compete if he left for another title company. I told him he has done a nice job for us over the years, but I told him we have been more than fair with him. In response he wondered out loud if I thought the non-compete restriction would hold up given, in his words, "Equity is not the same company after First American took over." I responded that I absolutely believe the non-compete would be enforceable and that we would seek to enforce it if he leaves.

17. Mitch Montgomery left First American in December 2011 to work for another title company and took five employees with him, but he was never sued by First American.²⁵

18. The Debtor avers that "[i]n May 2012, Kurt Andrewsen [First American's former Regional Human Resources Manager], told [him] that Equity was gone, that [his] Equity contract no longer existed, and asked [him] to sign an employment agreement with [First American] that contained, among other things, restrictive covenants regarding non-competition, non-solicitation, in favor of [First American]."²⁶

19. Kurt Andrewsen denies having told the Debtor that his Equity Employment Agreement no longer existed.²⁷

20. The Debtor never specifically asked anyone at First American whether he was subject to the non-compete and non-solicitation provisions of the Equity Employment Agreement because he did not believe he needed to.²⁸

21. In May 2012, the Debtor refused to sign a new employment agreement with First American.²⁹

22. On October 12, 2012, Equity Title merged with First American Title Company, LLC.³⁰

23. The Debtor later signed the Utah Legal Counsel Production Bonus Plan, which "supersede[d] and replaced all previous production bonus plans, written or otherwise."³¹

24. After signing the Utah Legal Counsel Production Bonus Plan, the Debtor received bonuses based on that plan.³²

25. By the time the Equity Title offices were rebranded as First American offices at the end of 2011, Equity Title had only seven offices located in Draper, Union Heights, Sugar House, West Jordan, Orem, South Ogden, and St. George.³³

26. In Utah, at the end of 2011, First American had at least 23 offices, located in Union Heights, Orem, South Ogden, Downtown Salt Lake City, Foothill Drive in Salt Lake City, American Fork, Bountiful, two in Union Park, Delta, Ephraim, Fillmore, Heber City, Layton, two in Park City, Richfield, South Jordan, St. George, and Cedar City.³⁴

27. Assuming that each First American office had four or five employees—First American had at least 100 employees in Utah.³⁵

C. First American's Employee Handbook & Code of Ethics.

28. First American employees are frequently required to look at online e-training, consisting of presentations and documents that employees are required to acknowledge online.³⁶

29. Among the documents which First American employees must open and acknowledge are the First American Employee Handbook (Employee Handbook), and the First American Code of Ethics and Conduct (Code of Ethics).³⁷

30. The Employee Handbook sets forth employee privileges and obligations, provides complaint protocol, and outlines consequences for failure to comply with the handbook, specifically...