Court Opinion

ID: 34653
Source: CourtListenerOpinion
Date Created: 2010-04-25 19:18:48+00
Date Added: 2024-06-11T09:08:29.562500
License: Public Domain

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this opinion should not be published and is not precedent except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.

                                 12