IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

 

No. 97-50842

 

In The Matter Of: WILLIAM L MILLER

 Debtor,

WILLIAM L MILLER

Appellant,

versus

J.D. ABRAMS INCORPORATED

Appellee.

 

Appeal from the United States District Court

for the Western District of Texas

 

September 24, 1998

Before REYNALDO G. GARZA, HIGGINBOTHAM, and EMILIO M. GARZA,

Circuit Judges.

HIGGINBOTHAM, Circuit Judge:

Miller appeals the district court’s order holding that the

state court judgment debt Miller owes J.D. Abrams, Inc., is

nondischargeable in bankruptcy. More specifically, Miller contests

the district court’s conclusion that he is precluded under the

doctrine of collateral estoppel from trying in the bankruptcy court

the issue necessary to decide the dischargeability question. We
2

conclude that neither the state court jury nor the state trial

judge in entering judgment on the verdict decided Miller’s intent

in misappropriating or misusing Abrams’s proprietary information.

We REVERSE the district court’s judgment and REMAND for further

proceedings.

I

Abrams, a successful Texas highway and road contractor,

employed Miller from June 1985 until February 28, 1994, when Miller

left his position as vice president and director at Abrams to

become manager and chief operations officer of Belfour Beatty,

Inc.’s highway division. In his position at Abrams, Miller was

privy to proprietary information and trade secrets regarding such

matters as management policies, customer lists, pricing and bidding

strategies, and profit margins and cost projections on specific

projects. Belfour, wanting to start a competing highway division,

started recruiting Miller. During a series of meetings concerning

his prospective employment, Miller disclosed confidential

information and trade secrets of Abrams to Belfour agents. Based

on the information Miller divulged and his twenty years of

experience in the road construction industry, Belfour offered

Miller the COO position. Other employees of Abrams accompanied

Miller in his move to Belfour.

On April 18, 1994, Abrams filed suit in Texas state court

against Miller and Belfour. The case was tried to a jury in
3

November 1995. The jury found that Miller misappropriated

proprietary information or misused trade secrets and awarded Abrams

damages of $1 million. The jury also decided that Miller had not

breached any fiduciary duties owed Abrams and that punitive damages

were not appropriate, since Miller did not act with “malice

mean[ing] ill will, evil motive, or flagrant disregard for the

rights of others.”

Miller filed a voluntary Chapter 7 bankruptcy petition seeking

protection from the state court judgment. Abrams instigated an

adversary proceeding to obtain a determination that the state court

judgment was a nondischargeable debt under 11 U.S.C. §§ 523(a)(4)

and 523(a)(6). Based on the doctrine of collateral estoppel, the

bankruptcy court granted summary judgment in favor of Abrams. The

state court judgment, it found, was nondischargeable under §

523(a)(4) since misappropriation of proprietary information was

larceny per se. The bankruptcy court, however, declined to rest

its summary judgment on § 523(a)(6), because the court believed

that the state court jury had not decided whether Miller had

inflicted a “willful and malicious injury,” the requirement for

nondischargeability under that section. Miller and Abrams both

appealed.

The district court affirmed the judgment that the state court

judgment was nondischargeable based on principles of collateral

estoppel. The district court, after analyzing the § 523(a)(6)

issue, stated that “[t]he bankruptcy judge was correct in finding
4

that the judgment debt was nondischargeable on behalf of Miller by

collateral estoppel.” As we explained, the bankruptcy judge did not

rest its grant of summary judgment upon § 523(a)(6). From context,

though, it is clear that the district court found that the debt was

also nondischargeable under § 523(a)(4). In doing so, the district

court pointed to the jury’s finding that Miller had misappropriated

proprietary information or misused trade secrets for his own

advantage to the detriment of Abrams. The district court believed

that this finding conclusively determined that Miller had inflicted

a “willful and malicious injury” on Abrams for purposes of §

523(a)(6). 

The district court also stated that “[t]he bankruptcy judge

was further correct in failing to find the nondischargeability of

the judgment debt pursuant to 11 U.S.C. § 523(a)(4) and was correct

in overruling all of the contentions with the appellant Miller with

regard to his contentions on finding the judgment debt

dischargeable based upon collateral estoppel.” The efforts to parse

the language of the district court aside, it is clear that the

judgment entered by the district court found the state court

judgment to be a nondischargeable debt.

We have jurisdiction under 28 U.S.C. § 158(d).

II

We review summary judgment rulings de novo applying the same

standards as did the lower courts. See In re Hudson, 107 F.3d 355,
5

356 (5th Cir. 1997). We also review de novo a “‘court’s decision

to give full faith and credit to [a] state court judgment.’” In re

Garner, 56 F.3d 677, 679 (5th Cir. 1995) (quoting Sanders v. City

of Brady, 936 F.2d 212, 217 (5th Cir.), cert. denied, 502 U.S. 1013

(1991)).

Since the judgment against Miller was rendered by a Texas

state court, this court must apply Texas rules of preclusion. See

28 U.S.C. § 1738 (full faith and credit statute); Matsushita Elec.

Indus. Co. v. Epstein, 516 U.S. 367, 373 (1996); In re Garner, 56

F.3d at 679. “Under Texas law, collateral estoppel ‘bars

relitgation of any ultimate issue of fact actually litigated and

essential to the judgment in a prior suit, regardless of whether

the second suit is based upon the same cause of action.’” In re

Garner, 56 F.3d at 679 (quoting Bonniwell v. Beech Aircraft Corp.,

663 S.W.2d 816, 818 (Tex. 1984)).

Further, Texas law requires that:

A party seeking to invoke the doctrine of

collateral estoppel must establish (1) the

facts sought to be litigated in the second

action were fully and fairly litigated in the

prior action; (2) those facts were essential

to the judgment in the first action; and (3)

the parties were cast as adversaries in the

first action.

Id. at 680 (quoting Bonniwell, 663 S.W.2d at 818). Miller and

Abrams agree that requirement (3) is met, but disagree on the

degree to which the issue of Miller’s intent was litigated in and

essential to the state court action.
6

The scope of the collateral estoppel doctrine is circumscribed

by the particularized findings of the jury. See Marine Shale

Processors, Inc. v. EPA, 81 F.3d 1371, 1379 (5th Cir. 1996)

(Higginbotham, J.). In this case, the jury specifically answered

in the affirmative, with respect to Miller, the question: “Did any

of the defendants misappropriate proprietary information or make an

improper use of the trade secrets of J.D. Abrams, Inc.?”

Misappropriation was defined as the “wrongful taking and use of

another’s property.” The jury answered in the negative whether

Miller had acted with “malice mean[ing] ill will, spite, evil

motive, or flagrant disregard for the rights of others.” Based on

these answers, we must decide whether the jury decided whether

Miller acted with the mental state required to satisfy either §

523(a)(4) or § 523(a)(6). We conclude that it made no such

decision.

III

Under 11 U.S.C. § 523(a)(4), a debt “for fraud or defalcation

while acting in a fiduciary capacity, embezzlement, or larceny” may

not be discharged in bankruptcy. In construing this section, this

court has stated that this discharge exception “was intended to

reach those debts incurred through abuses of fiduciary positions

and through active misconduct whereby a debtor has deprived others

of their property by criminal acts; both classes of conduct involve

debts arising from the debtor’s acquisition or use of property that
7

is not the debtor’s.” In re Boyle, 819 F.2d 583, 588 (5th Cir.

1987). 

The jury found that Miller had not breached any fiduciary duty

owed Abrams. While the definition of “fiduciary” under § 523(a)(4)

is controlled by federal common law rather than Texas law, it is

clear that the federal common law definition is even narrower than

the Texas definition. As this court noted recently, “[T]he concept

of fiduciary under § 523(a)(4) is narrower than it is under the

general common law. Under § 523(a)(4), ‘fiduciary’ is limited to

instances involving express or technical trusts.” Texas Lottery

Comm’n v. Tran, No. 97-20383, 1998 WL 480152, at *2 (5th Cir.

1998). The instruction given to the jury in the state case here was

far broader, noting that “implicit in this duty is that an officer

or director may not serve his own personal interest at the expense

of the corporation and its stockholders.” Because the federal

standard will never identify a “fiduciary” where Texas law would

not, the state court judgment is issue preclusive with respect to

whether there was “fraud or defalcation while acting in a fiduciary

capacity.”

The § 523(a)(4) exception to discharge, however, may still

apply here if Miller’s actions constitute “embezzlement” or

“larceny.” Since Miller came into possession of Abrams’s

proprietary information and trade secrets lawfully, embezzlement,

rather than larceny, is the § 523(a)(4) term which applies. See

Great Am. Ins. Co. (In re Graziano), 35 B.R. 589, 594 (E.D.N.Y.
8

1983). Embezzlement is defined for purposes of § 523(a)(4) as the

“‘fraudulent appropriation of property by a person to whom such

property has been entrusted, or into whose hands it has lawfully

come.’” Greyhound Lines Inc. v. Thurston (In re Thurston), 18 B.R.

545, 550 (M.D. Ga. 1982) (quoting 3 Collier on Bankruptcy ¶

523.14(3), 523-106 (15th ed. 1981)). 

The discharge exceptions are to be narrowly construed in favor

of the debtor since the aim of the Bankruptcy Code is to give the

debtor a fresh start. See Tran, 1998 WL 480152, at *2. To meet

the definition of “embezzlement,” there must be proof of the

debtor’s fraudulent intent in taking the property. See Brady v.

McAllister (In re Brady), 101 F.3d 1165, 1173 (6th Cir. 1996) (“A

creditor proves embezzlement by showing that he entrusted his

property to the debtor, the debtor appropriated the property for a

use other than that for which it was entrusted, and the

circumstances indicate fraud.”); In re Sokol, 170 B.R. 556, 560

(Bankr. S.D.N.Y. 1994); cf. Coburn Co. v. Nicholas, 956 F.2d 110,

111 (5th Cir. 1992) (requiring an intent to defraud for a

determination of whether there has been a breach of a fiduciary

relationship under § 523(a)(4)). 

The jury’s finding that Miller acted wrongfully in

misappropriating or misusing Abrams’s proprietary information does

not include a finding of fraudulent intent. One can wrongfully

appropriate a trade secret while acting under an erroneous belief

of entitlement. The question to the jury did not decide intent. Nor
9

did the judgment entered on the verdict since intent was not

essential to the judgement. Without such a finding by the state

courts, there is no preclusion.

IV

Under the Bankruptcy Code, a debtor may not be discharged from

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). Although we will ultimately conclude that under recent

Supreme Court precedent, “willful and malicious injury” is a

unitary concept entailing a single two-pronged test, courts have

previously analyzed “willful” and “malicious” separately. We thus

consider them here in turn.

A.

The Supreme Court recently answered the “pivotal question” of

whether § 523(a)(6) covers “acts, done intentionally, that cause

injury . . . or only acts done with the actual intent to cause

injury.” Kawaauhau v. Geiger, 118 S. Ct. 974, 977 (1998). The

Court’s conclusion was that “[t]he word ‘willful’ in (a)(6)

modifies the word ‘injury,’ indicating that nondischargeability

takes a deliberate or intentional injury, not merely a deliberate

or intentional act that leads to injury.” Id. This conclusion was

similar to one that the Fifth Circuit had reached in analyzing §

523(a)(6). In Corley v. Delaney (In re Delaney), 97 F.3d 800 (5th

Cir. 1996), this court reaffirmed its earlier holding that “for

willfulness and malice to prevent discharge under § 523(a)(6), the
10

debtor must have intended the actual injury that resulted” and not

just performed an intentional act that resulted in injury. Id. at

802.

Before we can determine whether the findings of the jury in

the state court conclusively determine whether Miller inflicted a

“willful . . . injury,” we must grasp the Supreme Court’s

insistence on “actual intent to cause injury.” The Supreme Court’s

disposition in Kawaauhau certainly eliminates the possibility that

“willful” encompasses negligence or recklessness. See Kawaauhau,

118 S. Ct. at 978 (“We hold that debts arising from recklessly or

negligently inflicted injuries do not fall within the compass of §

523(a)(6).”).

At least three remaining readings are possible. The standard

might be met by any tort generally classified as an intentional

tort, by any tort substantially certain to result in injury, or any

tort motivated by a desire to inflict injury. We hold that the

label “intentional tort” is too elusive to sort intentional acts

that lead to injury from acts intended to cause injury. Rather,

either objective substantial certainty or subjective motive meets

the Supreme Court’s definition of “willful . . . injury” in §

523(a)(6).

If “actual intent to cause injury” and intentional torts were

parallel terms, issue preclusion with respect to willfulness would

apply in favor of Abrams. This is because misappropriation of

proprietary information and misuse of trade secrets are generally
11

considered to be intentional torts. See, e.g., Micro Data Base

Sys., Inc. v. Drarma Sys., Inc., Nos. 97-2989 & 97-3138, 1998 WL

272761, at *4 (7th Cir. 1998) (Posner, C.J.) (“The misappropriation

of a trade secret is an intentional tort.”); Restatement (Third)

Unfair Competition § 40(b) (defining the scienter requirement for

misuse of trade secrets); see also Hyde Corp. v. Huffines, 314

S.W.2d 763, 769 (Tex. 1958) (relying on a similar predecessor

Restatement definition in defining misuse of trade secrets);

American Derringer Corp. v. Bond, 924 S.W.2d 773, 777 (Tex. Ct.

App.--Waco 1996, no writ) (following Hyde).

The category of intentional torts, however, is broader. The

Supreme Court did specifically refer to intentional torts, noting

that “the (a)(6) formulation triggers in the lawyer’s mind the

category ‘intentional torts,’ as distinguished from negligent or

reckless torts.” Kawaauhau, 118 S. Ct. at 977. This acknowledgment

of a logical association, however, avoids equating § 523(a)(6)

torts and intentional torts, and with good reason. 

Merely because a tort is classified as intentional does not

mean that any injury caused by the tortfeasor is willful. This case

illustrates the distinction, since misappropriation of proprietary

information and misuse of trade secrets are wrongful regardless of

whether injury is substantially certain to occur. See, e.g.,

Restatement (Third) Unfair Competition § 40(b) cmt. c (“[A]ny

exploitation of the trade secret that is likely to result in injury

to the trade secret owner or enrichment to the defendant is a ‘use’
12

under this section.”). Misuse of trade secrets is not precisely

like stealing funds from a till, because the tortfeasor’s gain is

not inevitably a loss to the legal owner of the secret.

Most often, an intentional tort requires either objective

substantial certainty of harm or subjective motive to do harm.

Indeed, the presence of one of these factors is both necessary and

sufficient for a tort to be classified as an “intentional tort”

under the traditional modern definition. See Kenneth J. Vandevelde,

A History of Prima Facie Tort: The Origins of a General Theory of

Intentional Tort, 19 Hofstra L. Rev. 447, 447 (1990) (describing

“intentional torts” as those where “the defendant acted with the

intent to injure the plaintiff or with substantial certainty that

his action would injure the plaintiff”). 

Thus, rather than allow the general classification of a tort

to be a talisman, we hearken back to this original definition of

“intentional tort” to determine whether injury is “willful” for §

523(a)(6) purposes. This test is fully consistent with our

precedent. Delaney, which remains good law because the Supreme

Court in no way contradicted it, equated intending actual injury to

a situation in which “the debtor intentionally took action that

necessarily caused, or was substantially certain to cause, the

injury.” Delaney, 97 F.3d at 802. Although Delaney did not address

whether a subjective motive to injure would alternatively be

sufficient to trigger § 523(a)(6), it would seem peculiar to deem
13

an action causing injury not “willful” when the tortfeasor’s action

was in fact motivated by a desire to cause injury.

Applying this test, we find that willful injury was not

decided in the state court suit. If the subjective standard alone

were the standard, issue preclusion would give Miller victory

because the jury found that he did not act with “malice,” defined

by the court to include “evil motive.” Miller’s conduct, however,

could still be “willful” under the objective standard, if his acts

were substantially certain to result in injury to Abrams. The state

court jury determined only that injury was proximately caused by

Miller’s acts, a less demanding standard than “substantial

certainty.” 

B.

Miller’s claim of preclusion might still seem to be vital,

because § 523(a)(6) requires “willful and malicious injury”

(emphasis added). If Miller could establish that the state court

decided that his acts were not “malicious,” § 523(a)(6) would not

bar dischargeability. At first glance, Miller might appear to meet

this burden, since the jury found no act of malice by Miller in

determining whether to assess punitive damages. Unfortunately for

Miller, however, the meaning of “malicious” in § 523(a)(6) is

controlled by federal law rather than state law. To determine

whether the definitions are sufficiently similar that the trial of

one is a trial of the other requires that we define “malicious.”
14

The law outside the Fifth Circuit concerning the meaning of

“malicious” in § 523(a)(6) has long been confused. See generally

Firstmark Fin. Corp. v. Aldrich (In re Aldrich), 37 B.R. 860, 862-

64 (Bankr. N.D. Ohio); Charles Jordan Tabb, The Scope of the Fresh

Start in Bankruptcy: Collateral Conversions and the

Dischargeability Debate, 59 Geo. Wash. L. Rev. 56, 61-89 (1990);

Karen N. Fischer, Comment, The Exception to Discharge for Willful

and Malicious Injury: The Proper Standard for Malice, 7 Bankr. Dev.

J. 245, 248-59 (1990).

Courts have divided roughly into two camps, some requiring

“special malice,” which requires a showing of a motive to harm, and

others requiring merely “implied malice.” Compare, e.g., American

Savings & Loan Ass’n v. Weber (In re Weber), 99 B.R. 1001, 1014-15

(Bankr. D. Utah 1989) (requiring special malice), and Grand Piano

& Furniture Co. v. Hodges (In re Hodges), 4 B.R. 513, 516 (Bankr.

W.D. Va. 1980) (same), with United Bank v. Nelson, 35 B.R. 766, 774

(N.D. Ill. 1983) (requiring “implied malice”), and United Va. Bank

v. Fussell (In re Fussell), 15 B.R. 1016, 1022 (W.D. Va. 1981)

(same). The difference in opinion has been whether § 523(a)(6)

repudiated an implied malice test previously established in Tinker

v. Colwell, 193 U.S. 473 (1904). 

The Fifth Circuit so far has taken a clear path, albeit

without analysis of the confused jurisprudence. Vickers v. Home

Indem. Co., 546 F.2d 1149 (5th Cir. 1977), defined “malicious” as

“‘without just cause or excuse.’” Id. at 1150 (quoting 1A Collier,
15

Bankruptcy ¶ 17.17, at 1650.4 to 1650.6 (1976)); see also Corley v.

Delaney (In re Delaney), 97 F.3d 800, 802 n.6 (5th Cir. 1996);

Seven Elves, Inc. v. Eskenazi, 704 F.2d 241, 245 (5th Cir. 1983);

Petty v. Dardar (In re Dardar), 620 F.2d 39, 40 (5th Cir. 1980). 

This test is thus a species of “implied malice,” because no

bad motive on the part of the debtor is required. See, e.g.,

Black’s Law Dictionary 958 (6th ed. 1990) (defining “implied

malice” for general purposes as "[m]alice inferred by legal

reasoning and necessary deduction from the res gestae or the

conduct of the party."). Other courts, however, have defined

“implied malice” differently. See, e.g., In re Nance, 556 F.2d 602,

611 (1st Cir. 1977) (“There need be no showing of ‘special malice’

toward the injured party, only that the act is done deliberately

and intentionally, in knowing disregard of the rights of another.”)

(internal quotation marks omitted). This definition makes the

“implied malice” inquiry quite close to that of the Kawaauhau

standard for “willful . . . injury.”

Ordinarily, of course, this court would be bound to its

precedent, and thus would retain the “just cause or excuse”

definition. The Supreme Court’s decision in Kawaauhau, however, has

displaced it. The origin of the “just cause or excuse” standard is

Tinker, 193 U.S. at 487, but the Kawaauhau Court, after

specifically quoting the “just cause or excuse” and other language,

criticized that opinion as failing to produce a clear standard. See

118 S. Ct. at 978 (“The exposition in the Tinker opinion is less
16

than crystalline.”). More importantly, the Kawaauhau Court

explicitly confined the holding of Tinker to the collateral

proposition that criminal conversation is an intentional tort. See

id.

Thus, the roots of the “just cause or excuse” standard that

this court has adopted have now been cut off. The most obvious

candidates are the “special malice” and the “implied malice”

standards on which most courts have focused. The “special malice”

standard has been criticized for “appear[ing] to abolish section

523(a)(6) of the Code as a meaningful ground of

nondischargeability.” Citizens Bank & Trust Co. v. Lewis (In re

Lewis), 17 B.R. 46, 48 (Bankr. W.D. Ark. 1981). While a special

malice standard might still have bite for judgments involving torts

like battery, it would make nondischargeability unnecessarily rare,

as judgments for torts substantially certain or certain to result

in injury would be discharged when a tortfeasor was merely

indifferent to the injury and not acting with the end goal of

causing that injury.

The implied malice standard is thus preferable. This still

leaves the question of which variant of the implied malice

definition is appropriate. “Without just cause or excuse” might

serve as a useful general definition of implied malice, and it

might have been an appropriate definition when it appeared that

“willful . . . injury” might include negligent acts or acts based

on mistakes of fact. This is because when a tort does not involve
17

intentional injury to another, then it might in some circumstances

be justified or excused. See, e.g., Davis v. Aetna Acceptance Co.,

293 U.S. 328, 332 (1934) (“There may be an honest, but mistaken

belief engendered by a course of dealing, that powers have been

enlarged or incapacities removed. In these and like cases, what is

done is a tort, but not a willful and malicious one.”). 

The “just cause or excuse” approach is peculiarly

inappropriate, however, given the Supreme Court’s definition of

“willful . . . injury” in Kawaauhau. Where injury is intentional,

as it now must be under Kawaauhau, it cannot be justified or

excused. Eliminating the “just cause or excuse” exception would not

ensnare those who have acted under “an honest, but mistaken

belief.” Such an individual cannot be said to have intentionally

caused injury, since legally cognizable injury would not meet the

test of “not substantially certain to result,” in the absence of

the fact about which there has been mistake.

Thus, we adopt the alternative definition of “implied malice.”

Because this standard is synonymous to the Kawaauhau standard for

“willful injury,” “acts done with the actual intent to cause

injury,” id. at 975, we hold that this is the test for “willful and

malicious injury” under § 523(a)(6). Thus, we hold that an injury

is “willful and malicious” where there is either an objective

substantial certainty of harm or a subjective motive to cause harm.

Kawaauhau does not foreclose, even encourages, this approach.

That case never makes explicit whether it is analyzing solely the
18

“willful” prong or the “willful and malicious” standard as a unit.

Aggregating “willful and malicious” into a unitary concept might be

inappropriate if the word they modified were “act,” but treatment

of the phrase as a collective concept is sensible given the Supreme

Court’s emphasis on the fact that the word they modify is “injury.”

It is worth noting that this interpretation of § 523(a)(6)

comes quite close to that recommended by commentators who, preKawaauhau, have considered the definition of “malicious.” See Tabb,

supra, at 104 (propounding a “knowing violation” test, wherein the

debtor must have been aware that its act violated the legal rights

of the creditor); Fischer, supra, at 258-59 (“The critical inquiry

under this standard is whether the debtor knew, or should have

known, that his actions would cause harm to the creditor.”).

Applying this analysis to the instant case is straightforward.

The word “malicious” does not change the conclusion. Thus, on the

§ 523(a)(6) claim, we find that issue preclusion does not apply in

favor of either party. If Miller’s actions were at least

substantially certain to result in injury to Abrams, then the debt

is nondischargeable under § 523(a)(6). Otherwise, neither the

objective nor the subjective standard is met, and the debt is

dischargeable.

V

Since the jury’s findings in the state court did not speak to

whether Miller acted with fraudulent intent or the objective

probability of injury from Miller’s tortious acts, the parties are
19

free to try this issue for the first time. Accordingly, we REVERSE

the district court’s judgment and REMAND for proceedings consistent

with this opinion, including entry of summary judgment on the facts

if appropriate.