United States Bankruptcy Appellate Panel of the Ninth Circuit
In re: CHRISTOPHER JOHN HAMILTON and ELIZABETH LEIGH TESOLIN, Debtors.
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,
CHRISTOPHER JOHN HAMILTON; ELIZABETH LEIGH TESOLIN, Appellees. Adv. Pro. 14-90152-CL
and Submitted on March 22, 2018 at Pasadena, California
from the United States Bankruptcy Court for the Southern
District of California Honorable Christopher B. Latham,
Bankruptcy Judge, Presiding
J. Leeds of Higgs Fletcher & Mack LLP argued for
Christopher John Hamilton and Elizabeth Leigh Tesolin; Susan
C. Stevenson of Pyle Sums Duncan & Stevenson, APC argued
of Los Angeles, Inc. and San Diego Testing Services, Inc.
Before: FARIS, BRAND, and LAFFERTY, Bankruptcy Judges.
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
bankruptcy protection. The bankruptcy court determined that
the judgment was nondischargeable under § 523(a)(6).
Debtors appeal the nondischargeability judgment, arguing that
the bankruptcy court ignored Supreme Court precedent and
misapplied Ninth Circuit law. We AFFIRM.
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.
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
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
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
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.
State court lawsuit
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.
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
Bankruptcy case and adversary proceeding
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.
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.
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
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.
Trial and nondischargeability judgment
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).
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.
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.
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.
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 ...