Kalliope Construction LLC v. Hilburn

1 printed pages contain little extracted OCR body text; searchable legal-body completeness has not been established for those pages.

OCR transcription for search; preserved printed pages are authoritative

Entered: October29, 2007 Case 06-01775 Doc 84 Filed 10/29/07 Page 1 of 12

Date signed October 29, 2007

WENDELIN LLIPP
IN THE UNITED STATES BAN] — U.s. BANKRUPTCY JUDGE

POR THE DISTRICT OF MARY LAND

(Greenbelt Division)
Inre: *
MELVIN ASHLEY HILBURN, * Case No. 06-16011-WIL
Chapter 7

Debtor. *
k k k k k k k k k k k k k
KALLIOPE CONSTRUCTION LLC, *

Plaintiff, *
V. * Adv. No. 06-1775-WIL
MELVIN ASHLEY HILBURN, *

Defendant. *
k k k k k k k k k k k k k

MEMORANDUM DECISION IN SUPPORT OF ORDER
GRANTING MOTION [48] OF KALLIOPE CONSTRUCTION LLC
FOR SUMMARY JUDGMENT AND DENYING MOTION [67] OF
MELVIN ASHLEY HILBURN FOR SUMMARY JUDGMENT

The Court has before it the Motion [48] of Kalliope Construction LLC (the “Plaintiff’”)
for Summary Judgment (the “Kalliope Motion”), filed on August 30, 2007, the Line [71]
Regarding Opposition thereto, filed by Melvin Ashley Hillbum (the “Defendant’) on September

18, 2007; the Defendant’ s Motion for Summary Judgment (the “Hilbum Motion”) filed on

-2-
September 17, 2007, and the Plaintiff’s Memorandum in Opposition thereto [77], filed on
September 27, 2007. A hearing was held on this matter on October 2, 2007. The Court has
reviewed all of the pleadings, exhibits and the record in this adversary proceeding, the Arbitrator
Award (discussed below), has considered argument of counsel, and has adopted the findings of
fact found by the Arbitrator (also discussed below). For the reasons set forth herein, the Court
will grant the Kalliope Motion and deny the Hilburn Motion.
Standard for Granting Summary Judgment
Rule 56 of the Federal Rules of Civil Procedure (made applicable to this adversary
proceeding by Rule 7056 of the Federal Rules of Bankruptcy Procedure) provides:
“The judgment sought shall be rendered forthwith if the pleadings,
depositions, answers to interrogatories, and admissions on file, together with
the affidavits, if any, show that there is no genuine issue as to any material
fact and that the moving party is entitled to a judgment as a matter of law.”
Fed. R. Civ. Proc. 56(c).
The Rule further provides:
“When a motion for summary judgment is made and supported as
provided in this rule, an adverse party may not rest upon the mere allegations
or denials of the adverse party’s pleading, but the adverse party’s response,
by affidavits or as otherwise provided in this rule, must set forth specific facts
showing that there is a genuine issue for trial. If the adverse party does not so
respond, summary judgment if appropriate, shall be entered against the adverse
party.”
Fed. R. Civ. Proc. 56(e) (emphasis added).
One of the principal purposes of summary judgment is to isolate and dispose of all
factually unsupported claims or defenses. Celotex v. Catrett, 477 U.S. 317, 323, 106 S. Ct. 2548
(1986). To that end, the Court considers all evidence in a light most favorable to the nonmoving
party. Matsushita Elec. Indus. Co. V. Zenith Radio Corp., 475 U.S. 574, 587-88, 106 S. Ct.
Case 06-01775 Doc 84 Filed 10/29/07 Page 2 of 12

-3-
1348, 1356 (1986). The movant must establish that there are no material facts at issue and that
he is entitled to judgment as a matter of law. McLean, Koehler, Sparks & Hammond v.
Hildebrand (In re Hildebrand), 230 B.R. 72, 79 (Bankr. D. Md. 1999) (citing Celotex, 477 U.S.
at 322-323). Once a motion for summary judgment is made and supported as provided in the
Rule, the nonmoving party must produce sufficient evidence to show that there is a genuine issue
for trial. In re Hildebrand, 230 B.R. at 79. Summary judgment will be granted if, taking the
record as a whole, a reasonable jury could not possibly return a verdict in favor of the
nonmoving party. Id. at 74 (citing Matsushita, 475 U.S. at 587; Anderson v. Liberty Lobby, Inc.,
477 U.S. 242, 248, 106 S. Ct. 2505 (1986)).
Procedural Posture
On December 2, 2005, the Plaintiff filed a Demand for Arbitration before the Judicial
Arbitration and Mediation Services, Inc., a company that provides national arbitration and
mediation services (the “Arbitrator”). On December 13, 2005, the Defendant filed a Response
and Counterclaim. The Arbitrator issued a Final Award (the “Arbitrator Award”) on September
6, 2006. In the Arbitrator Award, the Plaintiff was awarded the amount of $425,443.38 as
damages for the Defendant’s breach of contract and breach of fiduciary duty, the amount of
$7,388.00 as damages for the value of a vehicle that the Defendant failed to return to the
Plaintiff, and $750.00 as damages for the Defendant’s failure to return a computer.
The Defendant filed his voluntary Chapter 7 petition on September 29, 2006. On
November 13, 2006, the Plaintiff filed a Complaint for Non-Dischargeability (the “Complaint”),
seeking relief under 11 U.S.C. §§ 523(a)(4) and (a)(6). Although not titled as such, the
Complaint also sought denial of discharge under 11 U.S.C. § 727(a)(2). On December 11, 2006,
Case 06-01775 Doc 84 Filed 10/29/07 Page 3 of 12

-4-
the Defendant filed his Answer [3]. A series of discovery disputes followed. On July 16, 2007,
the Court dismissed the Section § 727(a) claim, but granted the Plaintiff leave to amend within
fifteen (15) days after the Defendant responded to discovery, limited to new facts in support of a
§ 727(a) claim discovered in the responses. On September 18, 2007, the Defendant filed a
Certificate [69] of Service of Discovery Responses, as revised on September 19, 2007 [72]. The
Plaintiff has not filed an amended complaint. Trial was originally scheduled for October 1 and
2, 2007. The Court agreed to hear argument in support of both motions for summary judgment
on the second trial date. Trial is now scheduled to begin on December 13, 2007, but will not be
necessary.
Discussion
The Parties are Bound by the Arbitrator Award
Pursuant to the Doctrine of Collateral Estoppel
Both parties agree that principles of collateral estoppel apply and that they are bound by
the Arbitrator Award. Collateral estoppel, or issue preclusion, applies when the following
factors are present: (1) the issue sought to be precluded is identical to one previously litigated;
(2) the issue must have been actually determined in the prior proceeding; (3) the determination
of the issue must have been a critical and necessary part of the decision in the prior proceeding;
(4) the prior judgment must be final and valid; and (5) the party against whom estoppel is
asserted must have had a full and fair opportunity to litigate the issue in the previous forum. If
these conditions are met, the determination is conclusive in a subsequent action between the
parties, whether on
Case 06-01775 Doc 84 Filed 10/29/07 Page 4 of 12

-5-
the same or a different claim. Weatherly v. Great Coastal Express Co., Inc., 164 Md. 354, 369
(2005) (emphasis supplied).
Applying the principles of collateral estoppel to this case, the Court finds that there are
no material facts in dispute. The conflict between the parties can be traced to an Employment
Agreement between the Defendant and Kalliope Hospitality Advisors LLC (“KHA”), signed on
March 12, 2004 (the “Employment Agreement”). Pursuant to the Employment Agreement,
among other provisions, the Defendant agreed to:
“devote substantially all of his time, attention, energy, knowledge,
and skill solely and exclusively to performing all duties in construction
and development as assigned or delegated to him by [KHA]... [he] will
not engage in work within the scope noted herein with any outside entities
without written permission from [KHA]. The Employee acknowledges that
any activities within his field of expertise not approved by the Company may
constitute a conflict of interest and agrees herein not to engage in such.”
See Arbitrator Award, p.6.
In exchange, KHA agreed to pay the Defendant a salary of $100,000 per year, to be
prorated monthly, and an opportunity for performance bonuses based on net operating profit of
KHA’s construction and development revenues. Id. KHA later assigned the Employment
Agreement to the Plaintiff. Id.
In the summer of 2004, a related Kalliope entity, Kalliope Ridge LLC closed on the
purchase of real property located at 4416 Ridge Street, Bethesda, Maryland (the “Ridge
Property”). Id. at 7. The Defendant began renovation on the Ridge Property in late December or
shortly thereafter. Id. About this same time, the Defendant and his wife, Susan Ladani,
purchased real property located at 5404 Harwood Road, Bethesda, Maryland (the “Harwood
Property”). Id. The Defendant renovated the Harwood Property and finished this project in
Case 06-01775 Doc 84 Filed 10/29/07 Page 5 of 12

-6-
August 2005, before he finished the Ridge Property work. Id. at 8. On October 21, 2005, the
Defendant and Ms. Ladani sold the Harwood Property for $1,750,000.00, and realized a profit of
$567,257.84. Id. at 10. At the closing on this sale, the lender charged the Defendant and Ms.
Ladani a penalty because they never occupied the Harwood Property as a their primary residence
as stated on their initial loan application. Id. at 8. On October 28, 2005, the Plaintiff fired the
Defendant, alleging that he worked on a competing development project in violation of the
Employment Agreement. Id. at 9. The Ridge Property was not sold until May 2006. Id.
The Plaintiff and the Defendant made many of the same allegations in the arbitration
proceeding that they now make in this adversary proceeding. In the arbitration proceeding, the
Plaintiff alleged that:
“Melvin Hilburn willfully neglected his duties and acted dishonestly.
In this regard, Kalliope hired Mr. Hilburn to perform construction and
development activities as assigned by Kalliope. Over a year ago, Kalliope
assigned Mr. Hilburn a project to complete rehabilitation at a home located on
Ridge Street in Chevy Chase. Mr. Hilburn had agreed to ‘not engage in work
within the scope noted herein, with any outside entities without written permission
from the company’ and he explicitly acknowledged that ‘any activities within
[his] field of expertise not approved by the Company may constitute a conflict
of interest’ so that he agreed ‘not to engage in such.’”
See Demand for Arbitration, Kalliope Motion, Exhibit 1.
Among other things, the Plaintiff demanded that its share of the profits on the Harwood Property,
a 2001 Ford Crown Victoria and a laptop computer be turned over by the Defendant.
In response, the Defendant alleged that:
“Mr. Hilburn has no contractual obligation to Claimant, Kalliope
Construction, LLC, and... at no time has Mr. Hilburn contracted
with Claimant, Kalliope Construction, LLC to perform any services of any
nature. To the best of Mr. Hilburn’s knowledge and belief, his Employment
Agreement with Claimant, Kalliope Hospitality Advisors, LLC, has never been
Case 06-01775 Doc 84 Filed 10/29/07 Page 6 of 12

-7-
assigned or otherwise transferred to Claimant, Kalliope Construction, LLC.”
See Response and Counterclaim, Kalliope Motion, Exhibit 2.
Likewise, paragraph 3 stated:
“There is no contract between the Claimant, Kalliope Construction, LLC
and the Respondent, Mr, Hilburn. Therefore, Mr. Hilburn cannot be in breach
of any agreement with Kalliope Construction, LLC, nor could he have been
neglectful in his duties under any such agreement.”
Id.
In the Kalliope Motion before this Court, the Plaintiff asserted: 1) that the Defendant was
required by the Employment Agreement to work on development projects exclusively for the
Plaintiff, that he was required to bring to the Plaintiff; 2) that he was required to bring to the
Plaintiff the opportunity to purchase the Harwood Property; 3) that he and his wife purchased
the Harwood Property and did not disclose this information to the Plaintiff; and 4) that they
realized a profit of $657,257.84 when they sold the Harwood Property ten months later. The
Plaintiff further asserted that this conduct was intentional and dishonest, that it was a breach of
the Employment Agreement and also a breach of fiduciary duty.
In the Hilburn Motion, the Defendant asserted that he was a KHA employee and not the
Plaintiff’s employee, that he never consented to the assignment of the Employment Agreement
from KHA to the Plaintiff, his consent was required because the Employment Agreement was a
contract for personal services, and consequently, the assignment was void. The Defendant
asserted that the Plaintiff did not exist at the time of the assignment, and it was not legally
authorized to do business in Maryland at the time he and Ms. Ladani purchased the Harwood
Property; therefore the Plaintiff could not have been injured by the Defendant’s conduct.
Case 06-01775 Doc 84 Filed 10/29/07 Page 7 of 12

-8-
However, the Defendant asserted that the Arbitrator did not make findings with respect to
the assignment or the interrelationship between the various Kalliope entities, and therefore,
collateral estoppel does not apply to these issues. The Court disagrees. The Arbitrator clearly
stated in the Arbitrator Award that:
“This Award sets forth findings of fact and conclusions of law only
with respect to the principal grounds for decision. However, both sides
should be assured that all of their factual and legal contentions have been
carefully considered. Findings of fact set forth herein are based on the
testimony of the witnesses, my evaluation of their credibility, the received
exhibits... the weight to be accorded various items of evidence, and the
reasonable inferences to be drawn from the record as a whole. In arriving
at these findings, I have determined, based on their demeanor, the
improbability of parts of their testimony, and the conflict between such
testimony and other, more credible evidence in the case, that significant
portions of the testimony of Melvin Hilburn and Susan Ladani are neither
credible, nor reliable.
See Arbitrator Award, at 2.
He further found that as “the highest paid employee of Kalliope, responsible for
management and supervision of its construction and development business, Hilburn was plainly
subject to [the corporate opportunity doctrine] and liable to Kalliope for any loss of profit it
suffered on account of his usurpation of a corporate opportunity.” Id. at 11. The Arbitrator also
found that “as a ‘high level’ employee of Kalliope, the law of Maryland also prohibited Hilburn
from usurping corporate opportunities for Kalliope. A breach of either the contractual or
common law duty would entitle Kalliope to recover from Hilburn the profit he thus diverted
from Kalliope to another (be it himself or some other ‘outside entity’).” Id. at 17.
Case 06-01775 Doc 84 Filed 10/29/07 Page 8 of 12

-9-
Importantly, the Arbitrator rejected the Defendant’s argument that he and his wife
purchased the Harwood Property with the intent of renovating and occupying the house as their
primary residence (and thus he could not have usurped a corporate opportunity):
“It is not necessary to determine what Hilburn and Ladani had in
mind when they purchased Harwood and began the renovation because,
by their own admission, they never occupied the property and listed it for
sale within a few months of beginning the renovation. (The building permit
for Harwood was obtained in March 2005 and the property was sold in
August 2005, approximately five months later.) Thus, whether or not
Harwood began as a for-profit (rather than for-personal-use) venture, it
soon became one. At that point, both his employment Agreement and the
corporate opportunity doctrine required that Hilburn offer the project to
Kalliope (upon reimbursement of his costs) so that Kalliope could derive
the profit from this construction job (less Hilburn’s 25% bonus). Hilburn’s
failure to do so was a clear breach of his Agreement and Maryland common
law and entitles Kalliope to an award in the amount it would have received
had Hilburn faithfully discharged his legal duties to Kalliope.”
Id. at 18.
Based on the foregoing, the Arbitrator determined that the Defendant breached the
Employment Agreement and also breached Maryland common law, and these breaches “entitled
Kalliope to an award in the amount it would have received had Hilburn faithfully discharged is
legal duties to Kalliope.” See Arbitrator Award, at 18. The Arbitrator determined that amount to
be $425,443.38. He also awarded the Plaintiff the amount of $7,388.00 for the value of the
vehicle and $750.00 for the computer. Id. at 25.
The Arbitrator’s findings necessarily considered the Defendant’s arguments that there
was no relationship between him and the Plaintiff, and that KHA did not assign the Employment
Agreement to the Plaintiff. Although the Arbitrator referred to the Kalliope entities as a whole
in his decision, the Defendant’s argument that he is not barred by the doctrine of collateral
estoppel on this point is without merit. The judgment was in favor of the Plaintiff and the issues
Case 06-01775 Doc 84 Filed 10/29/07 Page 9 of 12

-10-
were raised by the Defendant in the arbitration proceeding and were necessary to the Arbitrator’s
determination.
The Debt Owed to the Plaintiff is not
Dischargeable under 11 U.S.C. § 523(a)(6)
The Plaintiff argued in the Hilburn Motion that the amounts awarded in the Arbitrator
Award are not dischargeable under 11 U.S.C. § 523(a)(6). A debtor’s misconduct under Section
523(a) need only be shown by a preponderance of the evidence. First Nat’l. Bank v. Stanley (In
re Stanley), 66 F. 3d 664, 667 (4th Cir. 1995) (citing Grogan v. Garner, 498 U.S. 279, 111 S. Ct.
654 (1991). Section 523(a)(6) 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 means deliberate and intentional. Kawaauhau v. Geiger, 523 U.S. 57, 118 S. Ct. 974
(1998). A malicious act is an act causing injury without just cause or excuse and can be implied
by the debtor’s conduct in context of the circumstances. Miller v. CIGNA Ins. Co., 311 B.R. 57,
62 (D. Md. 2004) (citing Hagan v. McNallen (In re McNallen), 62 F. 3d 619, 625 (4th Cir.
1995).
An unauthorized exercise of control over an owner’s property that seriously interferes with that
owner’s rights may give rise to a debt that is not dischargeable under Section 523(a)(6). Id.
Unauthorized control over property of another in breach of a fiduciary duty may also give rise to
a nondischargeable debt. Id.
In this case, the Arbitrator found that the Defendant breached his fiduciary duty to the
Plaintiff, both under the Employment Agreement and under Maryland common law, by usurping
a corporate opportunity that belonged to the Plaintiff, and by failing to return the Plaintiff’s
vehicle. The Defendant bought the Harwood Property, renovated it, doing substantially the same
Case 06-01775 Doc 84 Filed 10/29/07 Page 10 of 12

-11-
work as he did on the Ridge Property, at the same time as he was working on the Ridge Property,
in direct conflict with the Plaintiff. He sold the Harwood Property and made a profit of
$567,257.84. This profit (minus the 25% bonus the Defendant was entitled to receive pursuant
to the Employment Agreement) was property of the Plaintiff. When the Plaintiff terminated
Debtor’s employment and demanded that its property be turned over, the Defendant crossed out
the relevant portion of his Employment Agreement and called the transaction a residential
purchase with his wife. The Defendant lost that argument in the arbitration proceeding. Further,
the Arbitrator found that the 2001 Crown Victoria was a company car which had not been
returned to Kalliope after termination of Debtor’s employment. The Arbitrator awarded the
Plaintiff $7,388 against the Debtor for his failure to return the vehicle.
This Court finds that collateral estoppel applies to the Arbitrator Award and that the
issues raised by the Defendant were actually determined by the Arbitrator or were necessarily
considered in his determination . The Arbitrator clearly rendered his decision on both contract
law by enforcement of the Employment Agreement and under Maryland common law.
The Court finds that the Plaintiff is entitled to judgment as a matter of law. The debt owed to the
Plaintiff with regard to the breach of contract and fiduciary duty, as well as damages for
conversion of the vehicle, is not dischargeable in the Defendant’s bankruptcy case. At the
hearing on October 2, 2007, the Plaintiff stated that it would not pursue the value of the
computer. A separate order will issue.
cc: 	Plaintiff
Counsel for Plaintiff - Edward J. Tolchin, Esq.
Defendant
Counsel for Defendant - Jeffrey M. Orenstein, Esq.
Chapter 7 Trustee
U.S. Trustee
Case 06-01775 Doc 84 Filed 10/29/07 Page 11 of 12

Case 06-01775 Doc 84 Filed 10/29/07 Page 12 of 12

-12-