Russo v. Thornton (In re Thornton)

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IN RE: BRETT THORNTON, Debtor.

ROBERT D. RUSSO, EXECUTOR OF THE ESTATE OF THOMAS F. THORNTON, Plaintiff, v. BRETT THORNTON, Defendant.

No. 23-50216 (JAM)

ADV. PRO. No. 23-05016

United States Bankruptcy Court, D. Connecticut

February 28, 2024

CHAPTER 7

ECF NO 14

MEMORANDUM OF DECISION AND ORDER GRANTING IN PART MOTION FOR SUMMARY JUDGMENT

Julie A. Manning United States Bankruptcy Judge

I. INTRODUCTION

Robert D. Russo, Executor of the Estate of Thomas F. Thornton (the "Plaintiff") seeks a determination that a debt owed by the debtor Brett Thornton (the "Defendant") is non-dischargeable pursuant to 11 U.S.C. §§ 523(a)(2)(A), (a)(4), and (a)(6). The Plaintiff moves for summary judgment on all counts of the complaint in reliance upon the allegedly preclusive effect of a 2017 jury verdict (the "2017 Jury Verdict") and subsequent judgments awarding damages and attorney's fees. For the reasons stated below, the Motion for Summary Judgment is GRANTED IN PART.

II. JURISDICTION

The United States District Court for the District of Connecticut has jurisdiction over the instant proceeding pursuant to 28 U.S.C. § 1334(b). The Bankruptcy Court derives its authority to hear and determine this matter pursuant to 28 U.S.C. §§ 157(a) and (b)(1) and the District Court's General Order of Reference dated September 21, 1984. This is a "core proceeding" pursuant to 28 U.S.C. § 157(b)(2)(I). There is no constitutional issue precluding the exercise of jurisdiction in this case. Cf. Stern v. Marshall, 564 U.S. 462, 487-99 (2011).

III. PROCEDURAL HISTORY

On April 11, 2023, the Defendant filed a Chapter 7 petition in this Court. On July 11, 2023, the Plaintiff commenced this adversary proceeding by filing a three-count complaint seeking a determination that the debt owed by the Defendant is non-dischargeable (the "Complaint," ECF No. 1). On September 5, 2023, the Defendant filed an Answer and Affirmative Defenses to the Complaint (the "Answer," ECF No. 5). On October 31, 2023, the Plaintiff filed a Motion for Summary Judgment (the "Motion for Summary Judgment," ECF No. 14), a Brief in Support of the Motion for Summary Judgment (ECF No. 15), and a Statement pursuant to D. Conn. L. Civ. R. 56(a)(1) (the "Rule 56(a)(1) Statement," ECF No. 16).

The Defendant did not file a response or objection to the Motion for Summary Judgment. The Defendant also did not file a D. Conn. L. Civ. R. 56(a)(2) Statement. Pursuant to D. Conn. L. Civ. R. 56(a)(1), each material fact set forth in a movant's Statement of Undisputed Material Facts and supported by the evidence "will be deemed to be admitted (solely for the purposes of the motion) unless such fact is controverted by the Local Rule 56(a)(2) Statement required to be filed and served by the opposing party in accordance with this Local Rule." See D. Conn. L. Civ. R. 56(a)(1); see also Parris v. Delaney (In re Delaney), 504 B.R. 738, 745-47 (Bankr. D. Conn. 2014). Therefore, the material facts set forth in the Plaintiff's Rule 56(a)(1) Statement supported by the evidence are deemed admitted. See D. Conn. L. Civ. R. 56(a)(1).

IV. UNDISPUTED FACTS

The following are the undisputed facts relevant to the determination of the Motion for Summary Judgment.

1. Thomas F. Thornton was the founder, president, and sole owner of Thornton International, Inc. ("Thornton") and Home Dental Care, Inc. ("Home Dental"), which companies were involved in the manufacture and distribution of dental floss. (Rule 56(a)(1) Statement, ¶ 25.) Following the death of Thomas F. Thornton, the Plaintiff was appointed as the executor of his estate. (Rule 56(a)(1) Statement, ¶ 26.) On April 29, 2014, the Plaintiff was elected as the sole director, secretary, and treasurer of Thornton and Home Dental. (Rule 56(a)(1) Statement, ¶ 27.) At the direction of the Plaintiff, the Defendant was elected President of Thornton and gained control of Home Dental. (Rule 56(a)(1) Statement, ¶ 27.) As President of Thornton, the Defendant ran Thornton and Home Dental for approximately thirteen months. (Rule 56(a)(1) Statement, ¶ 28.)

2. The Defendant admits he owed a fiduciary duty to the Plaintiff and the related corporations, both as a former employee of the corporations and as President of Thornton and Home Dental until his removal and termination as an employee and as President. (Rule 56(a)(1) Statement, ¶ 29; Answer, ¶ 49; Superior Court Action, Verified Answer to Amended Complaint, ¶ 17 (the "Verified Answer," ECF No. 1, Ex. 2).)

3. The Defendant admits that he transferred assets from Thornton and Home Dental to his companies ProxySoft Worldwide, Inc. ("ProxyWorldwide") and ProxySoft Direct ("ProxyDirect"), including all tangible assets, physical assets, personal property and intangible assets, a dental floss machine that has been used in the manufacture of Thornton's and Home Dental's products for over twenty years, all business records including customer ledgers, customer records, customer lists, purchase orders, delivery records and production skills, raw materials, finished inventory, telephone and fax numbers, toll free numbers and related materials. (Rule 56(a)(1) Statement, ¶ 34; Answer, ¶ 17.) At least some of the assets described above were transferred in April 2015, before the Defendant informed the Plaintiff he intended to start his own company. (Rule 56(a)(1) Statement, ¶ 34.)

4. The Defendant also admits he accepted orders on behalf of Thornton and Home Dental that upon his resignation were taken, fulfilled, and paid to his competing corporation, ProxyWorldwide. (Rule 56(a)(1) Statement, ¶ 33; Answer, ¶ 29.) The Defendant also admits he had no right or authorization to direct the payment or the transfer of these orders to ProxyWorldwide, or deposit checks payable to Thornton into any account other than the Thornton account. (Rule 56(a)(1) Statement ¶ 35; Answer, ¶ 31.)

5. The Defendant also admits that he had no authorization to deposit checks payable to Thornton into any other account, to use Thornton corporate credit cards for personal expenses, to increase his salary and compensation, or to borrow money from Thornton or Home Dental for his competing corporation, ProxyWorldwide (Rule 56(a)(1) Statement, ¶35; Answer, ¶¶ 31 and 32.) The Defendant also admits that on May 4, 2015, after diverting funds and business from Thornton to his new corporations, he informed the Plaintiff by correspondence that he intended to start his own company conducting the same business as Thornton and Home Dental, and removed all assets of Thornton and Home Dental to ProxyWorldwide. (Rule 56(a)(1) Statement, ¶ 36; Answer, ¶ 16.)

6. On May 14, 2015, the Plaintiff commenced an action in the Connecticut Superior Court (the "Superior Court") against the Defendant and several entities owned or controlled by the Defendant, including ProxyWorldwide and ProxyDirect. See Robert D, Russo, Executor of the Estate of Thomas F. Thornton et al. v. Brett Thornton et al., Docket No. FST-CV15-6025330-S (the "Superior Court Action.") (Rule 56(a)(1) Statement, ¶ 3.)

7. The Superior Court Action complaint contained eight counts all relating to the Defendant's alleged diversion of corporate opportunities and removal of assets of Thornton and Home Dental, including: (i) breach of fiduciary duty; (ii) statutory theft under Conn. Gen. Stat. § 52-564; (iii) conversion; (iv) breach of the Connecticut Uniform Trade Secrets Act ("CUTSA"); (v) tortious interference with contracts and business expectancies; (vi) violation of the Lanham Act; (vii) seeking various injunctive relief; and (viii) violations of the Connecticut Unfair Trade Practices Act under Conn. Gen. Stat. § 42-110 et seq. (Rule 56(a)(1) Statement, ¶ 4.)

8. The Superior Court Action amended complaint (the "Amended Verified Complaint," ECF No. 1, Ex. 1) alleged, and the Defendant admits in this adversary proceeding, among other things, that (i) at some point after April 4, 2014 and before May 4, 2015, the Defendant, while employed as President of Thornton and Home Dental, established ProxyWorldwide and ProxyDirect to engage in the same business as Thornton and Home Dental. (Rule 56(a)(1) Statement, ¶ 30; Amended Verified Complaint, ¶ 17; Answer, ¶ 9); (ii) in January 2015, the Defendant deposited eleven (11) checks to a bank account of Thornton Oral Care, LLC, a limited liability company solely within the Defendant's control, received as payment for orders placed with, fulfilled by, and made payable to Thornton (Rule 56(a)(1) Statement ¶ 32; Amended Verified Complaint, ¶¶ 17(N) and (D), 20(A)-(D); Answer, ¶ 27); and (iii) the Defendant accepted orders on behalf of Thornton and Home Dental that were, upon his ultimate resignation, taken, fulfilled, and payment received by ProxyWorldwide. (Rule 56(a)(1) Statement, ¶ 33; Amended Verified Complaint, ¶ 17(N)-(R), 20; Answer, ¶ 27.)

9. In 2015, the Superior Court directed that the first five counts of the Amended Verified Complaint be tried to a jury, with the remaining counts to be reserved for a subsequent court trial. (Rule 56(a)(1) Statement, ¶ 5.)

10. On October 31, 2017, the 2017 Jury Verdict was returned against the Defendant as to the claims of breach of fiduciary duty, statutory theft, conversion, breach of CUTSA, and tortious interference with contract and business expectancies, which the court accepted and recorded. (Rule 56(a)(1) Statement, ¶ 7.) The jury awarded a total of $3,592,000.00 in damages as to the claims for breach of fiduciary duty ($1,721,000.00 award), statutory theft ($555,000.00 award), and tortious interference with contract and business expectancies ($1,316,000.00 award). (Rule 56(a)(1) Statement, ¶ 7.)

11. In reaching the 2017 Jury Verdict, the jury found the Defendant owed a fiduciary duty to Thornton and Home Dental, both as a...