Horton v. Horton

• Court: Court of Appeals for the Fifth Circuit
• Decided: March 24, 2004
• Docket: 95-10023
• Status: Unpublished

Opinion

UNITED STATES COURT OF APPEALS For the Fifth Circuit

No. 95-10023

IN THE MATTER OF: JACK RICHARD HORTON,

Debtor.

JACK RICHARD HORTON,

Appellant,

VERSUS

GLEN ROBINSON,

Appellee.

Appeal from the United States District Court for the Northern District of Texas (3:91 CV 1248 J) May 3, 1996

Before POLITZ, Chief Judge, HILL1 and DeMOSS, Circuit Judges.

DeMOSS, Circuit Judge:2

Defendant Jack Richard Horton appeals a summary judgment

entered in favor of his ex-business partner Glen Robinson in this

action, which began as an adversary proceeding in bankruptcy. The

1 Circuit Judge of the Eleventh Circuit, sitting by designation. 2 Pursuant to Local Rule 47.5, the Court has determined that this opinion should not be published and is not precedent except under the limited circumstances set forth in Local Rule 47.5.4. bankruptcy court found that a state court judgment Robinson had

against Horton (including actual and punitive damages and

attorneys’ fees) was not dischargeable. We affirm the judgment

finding the actual and punitive damages non-dischargeable.

However, we reverse the judgment that found the attorneys’ fees

non-dischargeable.

I. BACKGROUND

Horton and Robinson were school chums and the best of friends

for over twenty years. In the late 1970's, both men settled in

Dallas. In the early 1980’s, Horton and Robinson decided to take

the relationship one step further by starting a business together,

which they dubbed Seville Financial, Inc. Robinson worked for

Security Pacific, a large financial institution, and was

experienced in the area of lease financing. Horton had no

experience in lease financing, but was an attorney and had

available revenue to invest in the business. Shere Griggs, one of

Robinson's co-workers at Security Pacific, joined Seville Financial

as a full partner and a contract was prepared providing that

Horton, Robinson and Griggs would divide equally the corporate

profits from Seville Financial.

Shortly thereafter, the three owners fell into disagreement

about the distribution and division of profits. Robinson

eventually filed suit against Horton and Griggs in Texas state

court, alleging that Horton and Griggs were secretly diverting

income from the business to themselves (and driving around in

company-furnished Jaguars), thereby violating Robinson's rights in

2 the company. Horton and Griggs claimed that Robinson had likewise

diverted income to himself without dividing the profits and that,

in any event, Robinson generated only a very small portion of

Seville Financial's revenue (preferring instead to read the

newspaper at his desk).

The jury believed Robinson and awarded $160,000 in actual

damages, $175,000 in exemplary damages3, and $50,000 in attorneys’

fees.4 The jury charge submitted three causes of action to the

jury: (1) breach of the profit-sharing contract; (2) breach of

Horton's state-law fiduciary duty to Robinson; and (3) civil

conspiracy between Horton and Griggs. As to each theory, the jury

answered that Horton and Griggs were liable and that Robinson had

sustained damages proximately caused by Horton and Grigg's conduct.

On breach of contract, the jury answered that both Griggs and

Horton had breached the profit sharing agreement, proximately

causing Robinson damages. On breach of fiduciary duty, the jury

answered: (1) that a fiduciary relationship existed between Horton

and Robinson based on personal and business transactions during the

relevant time period; (2) that Horton violated his fiduciary duties

to Robinson, which (3) proximately caused Robinson damages; and (4)

that "such violation [was] done willfully and maliciously or in

3 This amount included the sum of $125,000 awarded against Horton and $50,000 awarded against Griggs. Horton does not dispute that both amounts may be attributed to him for purposes of this appeal. 4 This amount included $30,000 for preparation and filing of the lawsuit, $10,000 for trial, $7,500 for appeal to the Texas Court of Appeals. The jury also awarded $2,500 for appeal to the Texas Supreme Court, but Horton never pressed that appeal.

3 conscious indifference to Robinson's rights, if any, in Seville

Financial." On civil conspiracy, the jury answered: (1) that

Griggs entered into a civil conspiracy with Horton to violate

Horton's fiduciary duties to Robinson; (2) that Griggs acted with

malice in the conspiracy; and (3) that the conspiracy proximately

caused damage to Robinson. The interrogatory for designating the

amount of damages, however, was not specific to any of the three

theories and inquired only "[w]hat sum of money, if any, if paid

now would fairly and reasonably compensate Glen Robinson for

damages, if any?" The state trial court reduced the damages

awarded and entered judgment. The Texas Court of Appeals affirmed

the decision in favor of Robinson and adjusted the damages upward

to conform to the jury verdict. Horton v. Robinson, 776 S.W.2d 260

(Tex. App.--El Paso 1989, no writ). No writ was filed with the

Texas Supreme Court.

Robinson collected about $42,000 on the state court judgment

before Horton filed for bankruptcy. Robinson then filed the

instant adversary proceeding in Horton's bankruptcy, seeking a

judgment excepting the amount of the outstanding state court

judgment ($417,002 with interest) from discharge pursuant to 11

U.S.C. § 523(a). Robinson filed the state court record, including

the record on appeal, in Horton's bankruptcy and then moved for

summary judgment, arguing that the issues controlling

dischargeability under § 523(a) were actually litigated in the

state court proceeding. Robinson claimed that the state court

judgment against Horton was excepted from discharge under §

4 523(a)(2)(A),5 § 523(a)(4)6 or § 523(a)(6).7

The bankruptcy court issued an oral ruling granting Robinson's

summary judgment motion. In the bankruptcy court's view, the state

court judgment that Horton acted "willfully and maliciously or with

conscious indifference" to Robinson's rights in Seville Financial

collaterally estopped Horton from contesting the factual basis for

excepting the judgment debt under § 523(a)(6).8 Looking behind the

judgment and the jury's findings, the bankruptcy court stated that

Horton "knowingly and intentionally" deprived Robinson of his share

of Seville Financial profits "without just cause or excuse."

Subsequently, the bankruptcy court denied Horton's motion for

reconsideration of the summary judgment ruling and entered a

judgment providing that the state court judgment would be excepted

from discharge in Horton's bankruptcy. Horton appealed to the

district court. See 28 U.S.C. § 158(a). The district court

5 Excepting from discharge any debt "for money, property, services, or an extension , renewal, refinancing of credit, to the extent obtained by false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor's or an insider's financial condition." 6 Excepting from discharge any debt "for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny." 7 Excepting from discharge any debt "for willful or malicious injury by the debtor to another entity or to the property of another entity." 8 The bankruptcy court rejected Robinson's § 523(a)(2)(A) claim, finding that the record did "not support a finding that Horton entered the agreement with the intent to deceive Horton." The bankruptcy court also rejected Robinson's § 523(a)(4) claim, holding that notwithstanding the jury's finding that Horton and Robinson had a fiduciary relationship under state law, there was no fiduciary relationship under the more stringent federal standards governing § 523(a)(6).

5 affirmed, and Horton appealed to this court. Jurisdiction is proper

pursuant to 28 U.S.C. § 158(c).

II. STANDARD OF REVIEW

In its summary judgment order, the bankruptcy court ruled that

Horton's judgment-debt was non-dischargeable, pursuant to §

523(a)(6). The bankruptcy court applied the doctrine of collateral

estoppel, or issue preclusion, to estop Horton from relitigating

whether the judgment-debt was the result of Horton's own willful

and malicious conduct, which caused injury to Robinson.9 The

district court affirmed that ruling. The Court's review is de

novo. In re Garner, 56 F.3d 677, 679 (5th Cir. 1995). The

decision will be affirmed if there are no genuine issues of fact as

to the required elements of collateral estoppel, and Robinson is

entitled to judgment as a matter of law.

III. DISCUSSION

Horton argues that the bankruptcy court's application of

collateral estoppel was inappropriate for three reasons. First,

Horton argues that the issue presented in the state court action

was not identical to the issue presented in the adversary

proceeding because § 523(a)(6) provides that willful and malicious

conduct is excepted from discharge, while the state court jury

instructions allowed a finding of liability based upon the lesser

9 Robinson argues briefly that the bankruptcy court made an independent finding that Horton's conduct was willful and malicious, which does not require reliance on the doctrine of collateral estoppel. Robinson's own motion for summary judgment and the relevant orders belie his contention. In addition, such a fact finding would have been inappropriate on summary judgment in the face of conflicting evidence.

6 legal standard of conscious indifference. Next, Horton argues

that, notwithstanding the jury's express finding and the Texas

Court of Appeals discussion in its decision affirming the trial

court judgment, the liability imposed on him in state court was

actually based on breach of contract, rather than breach of a

fiduciary duty owed to Robinson. Therefore, the jury's finding

that he had breached his fiduciary duty and maliciously conspired

with Griggs to do so, which is asserted in this action as

collateral estoppel, was not an essential part of the state court's

judgment. Finally, Horton argues that the state trial court's

submission of only one general damage issue makes it impossible to

determine what percentage of the total damages were attributable to

each theory upon which liability was found.10

Horton also argues that even if the judgment-debt was non-

dischargeable to the extent of actual damages, the state court's

award of punitive damages and attorneys’ fees should not have been

excepted from discharge.

A. Collateral Estoppel

Collateral estoppel may be invoked in § 523(a) discharge

exception proceedings, although the bankruptcy court retains

exclusive jurisdiction to determine the ultimate question of

dischargeability under bankruptcy law, based upon the evidence

10 Horton also argues that the court erred in applying § 523(a)(6), and instead should have used § 523(a)(4), which excepts from discharge debts for “fraud or defalcation while acting in a fiduciary capacity.” Horton’s argument is without merit. As we held in In re Stokes, 995 F.2d 76, 77 (5th Cir. 1993), the same conduct can give rise to causes of action under multiple sections.

7 before the bankruptcy court. Grogan v. Garner, 111 S. Ct. 654, 658

n.11 (1991) ("We now clarify that collateral estoppel principles do

indeed apply in discharge exception proceedings pursuant to §

523(a)"); Garner, 56 F.3d at 681; In re Foreman, 906 F.2d 123, 126

(5th Cir. 1990). Pursuant to the full faith and credit statute, 28

U.S.C. § 1738, we give Robinson's prior state court judgment the

same preclusive effect that it would have in a Texas state court.

Garner, 56 F.3d at 679. Texas' version of collateral estoppel bars

relitigation of (1) identical issues of fact or law; (2) that were

actually litigated; and (3) essential to the judgment in the prior

suit. Van Dyke v. Boswell O'Toole, Davis & Pickering, 697 S.W.2d

381 (Tex. 1985); see also Garner, 56 F.3d at 679-80 (quoting

Bonniwell v. Beech Aircraft Corp., 663 S.W.2d 816, 818 (Tex.

1984)).

1. Identical Issues

Section 523(a)(6) of the Bankruptcy Code excepts from

discharge any debt "for willful and malicious injury by the debtor

to another entity or to the property of another entity." 11 U.S.C.

§ 523(a)(6). "Willful and malicious," under § 523(a), has been

interpreted to mean "intentionally, and without just cause."

Garner, 56 F.3d at 681.

The state jury charge first asked whether Horton violated his

fiduciary duties to Glen Robinson and whether that violation

proximately caused damages to Glen Robinson. Next, in Question 9,

the jury was asked: "Was such violation done willfully and

maliciously or in conscious indifference to Robinson's rights, if

8 any, in Seville Financial, Inc.?" Immediately preceding Question

9, the jury was instructed that "[m]alice means the intentional

doing of a wrongful act without just cause or excuse or acting with

such entire want of care as would raise the belief that the act or

omission complained of was the result of conscious indifference to

the rights or welfare of the person to be affected by it."

Horton argues that because the jury charge allowed a finding

of liability on a showing of conscious indifference, the state

court judgment can not be asserted as collateral estoppel on the

issue of whether he acted "willfully and maliciously" for the

purposes of § 523(a)(6). Horton maintains that, under Texas law,

conscious indifference is functionally equivalent to a finding of

reckless disregard or gross negligence, citing Williams v. Steeves

Indust., Inc., 678 S.W.2d 205, 211 (Tex. App.--Austin 1984), aff’d,

699 S.W.2d 570 (Tex. 1985). Congress expressly rejected the

reckless disregard standard for excepting debt from discharge under

§ 523(a)(6). H.R. Rep. No. 95-595, 95th Cong., 1st Sess. 365

(1977); S. Rep. No. 95-989, 95th Cong., 2d Sess. 79 (1978), 1978

U.S.C.C.A.N. 5787, 6320.

However, the Texas Court of Appeals held that "[a]ll of the

evidence shows that Horton acted willfully and maliciously and in

total disregard for Robinson's rights." Horton v. Robinson, 776

S.W.2d 260, 265-66 (Tex. App.--El Paso 1989, no writ). In

discussing Horton's conduct, the appellate court also stated that

"legal malice exists when wrongful conduct is intentional and

without just cause or excuse," and that, "a person who

9 intentionally misrepresents facts for the purpose of injuring

another is guilty of wanton and malicious conduct". Id. The Court

concluded that the evidence was essentially uncontradicted that

Horton intentionally cut Robinson out for the purpose of obtaining

an additional benefit for himself. Id. at 264 ("the record is

devoid of any proof that the three were paid equally) and id. at

267 ("the one with a fiduciary duty intended to gain an additional

benefit for himself").

There was never any question whether Horton’s and Grigg’s

conduct was intentional. There are no allegations that they merely

forgot to pay Robinson or were unaware of his claims. Therefore,

Horton’s argument on this point is unavailing.

2. State Court Finding Essential to Judgment

Horton maintains that the state court's finding that Horton

willfully and maliciously breached his fiduciary duties to Robinson

was not essential to the state court judgment because the jury's

separate finding of liability on breach of contract could have

independently supported the judgment.11 Citing the Restatement

(Second) of Judgments § 27, Comment i (1981), Horton argues that

decisions based on multiple findings that are independently

sufficient to support the judgment should not be used to preclude

relitigation in a subsequent case which involves only one of the

11 Actually, Horton frames the issue as whether the finding was a "critical and necessary" part of the state court's judgment. "Critical and necessary" has been used primarily when applying the federal court formulation of the doctrine of collateral estoppel. As discussed above, the preclusive effect of the prior judgment is measured by Texas law. The Texas formulation usually employs the term "essential,” rather than "critical or necessary."

10 independently sufficient grounds.

Horton’s reliance on comment i is misplaced, however, because

it concerns only judgments that are not appealed. Comment o makes

clear that:

If the judgment of the court of first instance was based on a determination of two issues, either of which standing independently would be sufficient to support the result, and the appellate court upholds both of these determinations as sufficient, and accordingly affirms the judgment, the judgment is conclusive as to both determinations. In contrast to the case discussed in Comment I, the losing party has here obtained an appellate decision on the issue, and thus the balance weighs in favor of preclusion.

RESTATEMENT (SECOND) OF JUDGMENTS § 27, Comment o (1981).12 Horton's

liability for breach of fiduciary duty was discussed at length in

the Texas Court of Appeals decision. Therefore, collateral

estoppel applies.

3. Single Damage Issue

Horton argues that the state court's submission of a single

damage issue makes it impossible to allocate damages between the

different theories of liability submitted to the jury. Horton's

liability for each theory was premised upon exactly the same

conduct, as well as the same injury. Therefore, the full amount of

damages could be attributed to both theories and no allocation is

possible or required. Thus, collateral estoppel applies.

B. Punitive Damages and Attorneys’ Fees

Horton contends that the district court erred in finding the

12 Texas follows § 27 of the Restatement (Second) of Judgments. Eagle Properties, Ltd. v. Scharbauer, 807 S.W.2d 714, 722 (Tex. 1990).

11 punitive damages non-dischargeable. He argues that punitives are

dischargeable. We disagree. Punitive damages based on willful and

malicious injury are non-dischargeable under § 523(a)(6). In re

Stokes, 150 B.R. 388, 391 (W.D. Tex. 1992), aff’d. 995 F.2d 76, 77

(5th Cir. 1993) (“We affirm, essentially for the reason stated, and

the analysis made, by the district court.”).

Attorneys’ fees are non-dischargeable under § 523 when they

"stem from the same basis" as the non-dischargeable debt. The

attorneys’ fees do not stem from the same basis as the debt in this

case because the exception to dischargeability is sought on the

basis of Horton's liability on the breach of fiduciary duty claim,

while the Texas Court of Appeals affirmed the award of attorneys’

fees on the basis of TEX. CIV. PRAC. & REM. CODE 38.001, which allows

attorneys’ fees on a claim for breach of contract. Under Texas

law, attorneys’ fees are not recoverable in tort or contract,

unless provided for by contract or statute. Melson v. Stemma

Exploration & Prod. Co., 801 S.W.2d 601, 603 (Tex. App.--Dallas

1990, no writ). Because the state court could not have awarded

attorneys’ fees on the basis of the breach of fiduciary duty claim,

the damages are dischargeable.

IV. CONCLUSION

For the foregoing reasons, the judgment is affirmed in part

and reversed in part. The judgment finding non-dischargeable the

actual and punitive damages is AFFIRMED. The judgment finding the

attorneys’ fees non-dischargeable is REVERSED and the case is

REMANDED for further proceedings consistent with this opinion.