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In re Hamilton

United States Bankruptcy Appellate Panel of the Ninth Circuit

April 17, 2018

In re: CHRISTOPHER JOHN HAMILTON and ELIZABETH LEIGH TESOLIN, Debtors.
v.
ELITE OF LOS ANGELES, INC.; SAN DIEGO TESTING SERVICES, INC.; ELIZABETH LEIGH TESOLIN Appellees. CHRISTOPHER JOHN HAMILTON, Appellant, ELITE OF LOS ANGELES, INC.; SAN DIEGO TESTING SERVICES, INC., Appellants,
v.
CHRISTOPHER JOHN HAMILTON; ELIZABETH LEIGH TESOLIN, Appellees. Adv. Pro. 14-90152-CL

          Argued and Submitted on March 22, 2018 at Pasadena, California

          Appeal from the United States Bankruptcy Court for the Southern District of California Honorable Christopher B. Latham, Bankruptcy Judge, Presiding

          Paul J. Leeds of Higgs Fletcher & Mack LLP argued for appellants/appellees.

          Christopher John Hamilton and Elizabeth Leigh Tesolin; Susan C. Stevenson of Pyle Sums Duncan & Stevenson, APC argued for appellees/appellants.

          Elite of Los Angeles, Inc. and San Diego Testing Services, Inc.

          Before: FARIS, BRAND, and LAFFERTY, Bankruptcy Judges.

          OPINION

          FARIS, BANKRUPTCY JUDGE

         INTRODUCTION

         Appellees Elite of Los Angeles, Inc. ("Elite") and San Diego Testing Services, Inc. ("SDTS") (collectively, "Elite Entities") are in the business of providing educational advising and tutoring services. Christopher John Hamilton was an officer and part-owner of SDTS. With the help of his wife, Elizabeth Leigh Tesolin, and others, he opened a competing business and absconded with the Elite Entities' lesson plans, proprietary information, and teachers. The Elite Entities obtained a $2 million state court judgment against Mr. Hamilton and Ms. Tesolin (collectively "Debtors"), who then sought chapter 11[1] bankruptcy protection. The bankruptcy court determined that the judgment was nondischargeable under § 523(a)(6).

         The Debtors appeal the nondischargeability judgment, arguing that the bankruptcy court ignored Supreme Court precedent and misapplied Ninth Circuit law. We AFFIRM.

         Separately, the Elite Entities appeal from the bankruptcy court's order disallowing some of the postjudgment interest on the state court judgment. The bankruptcy court should have awarded the Elite Entities postjudgment interest at the state rate. We REVERSE and REMAND.

         FACTUAL BACKGROUND

         A. Prelitigation events

         The Elite Entities provide academic counseling, tutoring, and college preparatory and standardized test prep services to high school students. In 1999, Mr. Hamilton joined Elite as a faculty member. In 2006, Elite formed a sister company, SDTS, and Mr. Hamilton became a shareholder, officer, and director of SDTS.

         After a few years, Mr. Hamilton grew discontented with the Elite Entities. In 2011, he retained a law firm to advise him on separating from the Elite Entities and forming his own company.

         In September 2011, while still an officer and director of SDTS, Mr. Hamilton formed Summa Consulting, LLC ("Summa"), an academic counseling and tutoring company. He also began gathering the Elite Entities' proprietary information with the assistance of other SDTS employees and his wife, Ms. Tesolin. For example, he took employee personnel files, student records, teaching materials and lesson plans, curriculum development tools, and a copy of the data on SDTS's server. He also began undermining SDTS's prospective business by discouraging potential students from enrolling at SDTS and diverting them to Summa's programs.

         On October 6, 2011, without any prior notice, Mr. Hamilton resigned from SDTS. That same day, he used the Elite Entities' confidential contact list to send e-mails notifying SDTS's clients of his departure and soliciting business for Summa. Over the next two weeks, several other employees left SDTS to join Mr. Hamilton at Summa, leaving only one employee remaining at SDTS.

         B. State court lawsuit

         Shortly thereafter, the Elite Entities filed suit in state court against the Debtors, Summa, and other former SDTS employees, asserting causes of action for breach of fiduciary duty, breach of duty of loyalty, intentional interference with prospective economic advantage, trade secret misappropriation, unfair competition, aiding and abetting, violation of California Penal Code § 502, and unjust enrichment. The complaint sought damages totaling $7.7 million and punitive damages against Mr. Hamilton.

         Following a trial, the jury returned two special verdicts in the Elite Entities' favor. In relevant part, it found Mr. Hamilton liable for $2, 070, 000 for breach of fiduciary duty, breach of duty of loyalty, intentional interference with prospective economic advantage, trade secret misappropriation, and punitive damages. It also found Ms. Tesolin jointly and severally liable for $1, 855, 000 under an aiding and abetting theory (collectively, "State Court Judgment").

         C. Bankruptcy case and adversary proceeding

         On the day of a scheduled sheriff's sale of Mr. Hamilton's stock in SDTS, the Debtors filed their chapter 11 petition. The Elite Entities filed proofs of claim based on the debt arising from the State Court Judgment.

         The Elite Entities also filed an adversary complaint against the Debtors, seeking a determination that the State Court Judgment was nondischargeable under § 523(a)(6). They asserted that each of the causes of action for which the Debtors were found liable constituted a willful and malicious injury that was nondischargeable.

         The Debtors and the Elite Entities filed cross-motions for summary judgment. The Elite Entities argued that the bankruptcy court should apply issue preclusion to the State Court Judgment and hold that the entire debt was nondischargeable. In response, the Debtors agreed that the jury's factual findings had preclusive effect, but contended that the unintentional torts lacked the requisite element of intent and the corresponding damages were dischargeable debts.

         The bankruptcy court granted the Elite Entities summary judgment on the intentional interference with prospective economic advantage claim because the Debtors conceded that the State Court Judgment necessarily established willful and injurious intent. It thus held that the corresponding $160, 000 award was nondischargeable as to the Debtors jointly and severally. It initially held that the jury's special verdict satisfied the issue of malice on all causes of action. However, the bankruptcy court later reconsidered its ruling and held that the jury did not allocate punitive damages to any particular cause of action, so it was improper to infer that Mr. Hamilton acted with requisite malice. It also denied the Elite Entities' request concerning postjudgment interest and directed them to file a separate motion.

         D. Trial and nondischargeability judgment

         The bankruptcy court conducted a four-day trial to determine whether the remaining debt was nondischargeable. Following trial, the bankruptcy court issued its memorandum decision holding that the State Court Judgment was nondischargeable under § 523(a)(6). It considered whether the Elite Entities had satisfied § 523(a)(6)'s "willful and malicious injury" test laid out in Kawaauhau v. Geiger, 523 U.S. 57 (1998), and Petralia v. Jercich (In re Jercich), 238 F.3d 1202 (9th Cir. 2001).

         First, it ruled that Mr. Hamilton had acted willfully. It noted that, under Jercich, willfulness is satisfied if the defendant either (1) had a subjective motive to inflict injury upon them, or (2) believed that injury was substantially certain to result from his conduct. It found that the Elite Entities had not shown that Mr. Hamilton had a subjective motive to injure them.

         Rather, the court ruled that the Elite Entities successfully established that Mr. Hamilton believed that injury was substantially certain to result from his conduct. It found that "it is readily apparent that Mr. Hamilton's conduct caused substantial harm. He was a central, executive-level employee and departed without notice. And he took several key employees with him." Mr. Hamilton also carefully orchestrated his departure with his wife and other SDTS employees and took the Elite Entities' best teachers, proprietary information (including e-mail contact list and client database), tangible property, and SDTS's hard drive. Moreover, due to Mr. Hamilton's "significant premeditation, " the Elite Entities' "ability to conduct business was markedly impeded. And Mr. Hamilton's conduct badly disrupted Elite's business. There was immediate disorder . . . . Plaintiffs' upper management did not know who had the keys to the building." The court concluded that Mr. Hamilton

knew with substantial certainty that his conduct would result in harm to Plaintiffs. Aside from inference, the court's conclusion is based on reason: What he was doing simply had to be harmful. For example, in his September 26, 2011 e-mail to his father, Mr. Hamilton described his impending resignation as his "own personal D-Day" and that he would be "pull[ing] the pin" on October 1, 2011. . . . This conjures up images of massive damage being inflicted. Further, there was evidence concerning a "coup" - presumably against Plaintiffs' leadership to harm it or deprive it of control. And Mr. Hamilton's October 8, 2011 e-mail discusses an upcoming meeting with attorneys in Los Angeles to discuss "fold[ing] up the old entity." . . . This suggests that Mr. Hamilton expected Elite or SDTS would cease to exist, or at least to function, as a business entity. Mr. Hamilton's efforts in testimony to convince the court that this was just meant to resolve his ownership in SDTS, i.e., that he would buy out Mr. Park and Mr. Sung or vice versa, is not credible and the court rejects it.

(Emphasis in original.) Accordingly, the Elite Entities established that Mr. Hamilton acted willfully.

         Second, the court ruled that Mr. Hamilton acted with malice. It rejected Mr. Hamilton's argument that he established "just cause or excuse" because he had sought and relied on the advice of counsel in good faith to ...


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