Southeastern Shelter Corporation et al v. Gilfillan

UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF NORTH CAROLINA
RALEIGH DIVISION
IN RE:
WILLIAM MARC GILFILLAN
REBECCA M. GILFILLAN
DEBTORS
CASE NO.
05-00910-5-ATS
SOUTHEASTERN SHELTER CORPORATION
and JERRY CHESSON
Plaintiffs
v.
WILLIAM MARC GILFILLAN
Defendant.
ADVERSARY PROCEEDING NO.
S-05-00112-5-AP
MEMORANDUM OPINION
The trial of this adversary proceeding pursuant to 11 U.S.C.
§ 523(a)(6) to determine the dischargeability of a debt owed by the
chapter 7 debtor, William Marc Gilfillan, to the plaintiffs,
Southeastern Shelter Corporation and Jerry Chesson, was held in
Raleigh, North Carolina on March 16, 2006. For the reasons that
follow, judgment will be entered in favor of the debtor.
William Marc Gilfillan and Rebecca M. Gilfillan filed a petition
for relief under chapter 7 of the Bankruptcy Code on March 12, 2005,
and their discharge was entered on July 20, 2005. On June 13, 2005,
Southeastern Shelter Corporation and Jerry Chesson filed this adversary
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proceeding, alleging that a debt arising out of a judgment in their
favor against Mr. Gilfillan is nondischargeable pursuant to §
523(a)(6).
This bankruptcy court has jurisdiction over the parties and the
subject matter of this proceeding pursuant to 28 U.S.C. §§ 151, 157,
and 1334, and the General Order of Reference entered by the United
States District Court for the Eastern District of North Carolina on
August 3, 1984. This is a "core proceeding" within the meaning of 28
U.S.C. § 157(b)(2)(I), which this court may hear and determine.
The parties stipulated that Southeastern Shelter Corporation and
Jerry Chesson sued BTU, Inc., Paul Silcox and Marc Gilfillan in the
Superior Court of North Carolina, Durham County. On March 31, 2004,
the jury answered the following issues in favor of the plaintiffs:
1. Did the Defendants convert proprietary intangible
information, including customer lists, contact lists,
records or historical data or certain tangible personal
property, including a photocopier, paint sprayer or air
compressor, the personal property of the Plaintiffs?
ANSWER: Yes
2. What amount are the Plaintiffs entitled to recover for
damages for the conversion of the property of the
Plaintiffs?
ANSWER: $225,000
3. Are the Defendants liable to the Plaintiffs for
punitive damages?
ANSWER: Yes
4. What amount of punitive damages, if any, does the jury
in its discretion award the Plaintiffs?
ANSWER: $112,500
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1 The debtor concedes that he is collaterally estopped from
relitigating the jury's finding of conversion.
3
Pl. Ex. 1. At the trial, the plaintiffs submitted the judgment to the
court and presented no further evidence. The plaintiffs contend that
an award of punitive damages by the jury necessarily encompasses a
finding that the debt was for willful and malicious injury by the
debtor to the plaintiffs or the property of the plaintiffs, and that
the judgment itself meets the plaintiffs' burden of proof. The debtor
contends that the court cannot determine from the jury's award whether
it was based on fraud, willfulness, or malice, and that without more,
the plaintiffs failed to meet their burden.1 Accordingly, the debtor
moved for judgment pursuant to Rule 52(c) of the Federal Rules of Civil
Procedure, made applicable in this proceeding by Rule 7052 of the
Federal Rules of Bankruptcy Procedure.
Section 523(a)(6) provides that a discharge does not discharge an
individual debtor 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). "Willful and malicious are two distinct
requirements that [the plaintiff], as the party seeking to avoid the
discharge of the debt, must prove by the preponderance of the evidence
before the § 523(a)(6) exception to discharge applies." In re
Scarborough, 171 F.3d 638, 641 (8th Cir. 1999). "The absence of either
of these elements means that the debt is dischargeable." Community
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2 The plaintiffs maintain that because conversion was the only
cause of action submitted to the jury (fraud claims were dismissed
prior to trial, see Southeastern Shelter Corp. v. BTU, Inc., 154 N.C.
App. 321, 572 S.E.2d 200 (2002), the jury could not have based its
punitive damages award on fraud. However, the jury instructions were
not provided to this court, and it is possible that the instruction
included all three aggravating factors identified in the statute.
Accordingly, it is impossible to know whether the jury may have
considered fraud to be the aggravating factor supporting the punitive
award.
4
Savings Bank, Inc. v. Rountree (In re Rountree), Adv. Pro. No. 01-2003
at p. 15 (Bankr. M.D.N.C. May 1, 2002) (unpublished) (citing In re
Markowitz, 190 F.3d 455, 464 (6th Cir. 1999).
The North Carolina punitive damages statute provides the standard
for awarding punitive damages:
Punitive damages may be awarded only if the claimant proves
that the defendant is liable for compensatory damages and
that one of the following aggravating factors was present
and was related to the injury for which compensatory damages
were awarded:
(1) Fraud.
(2) Malice.
(3) Willful or wanton conduct.
N.C. Gen. Stat. § 1D-15(a). The Durham County jury found simply that
punitive damages were appropriate, but there is no evidence on what
basis the finding was made. Without more, the court would only be
speculating that the jury found both factors (2) malice and (3) willful
or wanton conduct, rather than malice or willful conduct or, for that
matter, only fraud.2
The plaintiffs rely on Judge Carruthers' opinion in Thompson v.
Brookshire (In re Brookshire), Adv. Pro. No. 05-6022 (Bankr. M.D.N.C.
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Jan. 10, 2006) (unpublished), to support their contention that a
punitive damage award based on an underlying conversion claim is
sufficient to support their claim under § 523(a)(6). In Brookshire,
Judge Carruthers entered summary judgment in favor of the plaintiffs
where the state court judgment established conversion and awarded
punitive damages. The court noted, however, that "the findings of fact
and conclusions of law in the State Court Judgment easily support a
finding that the Debtor acted with the requisite willfulness and malice
to deny dischargeability . . . ." Brookshire at 9. The Brookshire
court also noted some of the specific findings of the state court
leading to those conclusions. It is clear that the state court in
Brookshire made detailed findings that simply are absent in this case,
and this court cannot conclude that the jury found the requisite
willfulness and malice based on the only evidence presented at trial.
Rule 52(c) of the Federal Rules of Civil Procedure provides that
[i]f during a trial without a jury a party has been fully
heard on an issue and the court finds against the party on
that issue, the court may enter judgment as a matter of law
against that party with respect to a claim or defense that
cannot under the controlling law be maintained or defeated
without a favorable finding on that issue[.]
Fed. R. Civ. P. 52(c). The plaintiffs chose to close their evidence
after having submitted only the state court judgment. Because the
court cannot determine that the jury award included a finding of
willful and malicious injury, the court finds that the plaintiffs
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failed to carry their burden of proof. Accordingly, judgment will be
entered in favor of the debtor.
Based on the foregoing, the debt owed by the debtor, William Marc
Gilfillan, to the plaintiffs, Southeastern Shelter Corporation and
Jerry Chesson, is NOT NONDISCHARGEABLE pursuant to 11 U.S.C.
§ 523(a)(6). A separate judgment will be entered.
DATED: March 20, 2006
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