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Fourth Circuit: Debt Incurred As a Result of Willful and Malicious Injury May Be Dischargeable
The U.S. Court of Appeals for the Fourth Circuit recently held that a debt incurred as a result of a willful and malicious injury may nevertheless be dischargeable notwithstanding the provisions of 11 U.S.C. Section 523(a)(6). TKC Aerospace v. Muhs (In re Muhs), 923 F.3d 377 (4th Cir. 2019). The court found it to be of no consequence that a debtor's conduct giving rise to the injury, without more, was shown to be intentional; rather, the debtor must also have intended to cause injury to the creditor. In so holding, the TKC court has issued guidance to creditors seeking recovery of high-dollar lawsuits; proceedings that oftentimes precipitate bankruptcy filings.
Background
Charles Taylor Muhs was employed by TKC Aerospace, Inc. (TKCA) as a vice president of business development. In that role, Muhs had access to proprietary information: Muhs' employment contract prohibited him from disclosing confidential information or competing with TKCA for a period of six months after the termination of his employment. During his tenure with TKCA, Muhs assisted TKCA to compete for, and win, contracts with the Department of State for the modification of certain aircraft.
Muhs left his employment with TKCA, and began working with a competitor. Shortly thereafter, the competitor (with the help of Muhs) competed for, and was ultimately awarded, certain contracts with the Department of State for the modification of the same aircraft in connection with which TKCA had provided services. In response, TKCA initiated parallel lawsuits — the first being brought in Alaska against Muhs individually — alleging various causes of action, including Muhs' breach of Alaska's Uniform Trade Secrets Act. The second was commenced by TKCA against Muhs' new employer in Arizona, similarly alleging various causes of action including breach of Arizona's Uniform Trade Secrets Act. Muhs was a witness, but not a defendant, in the Arizona action, which proceeded to trial first.
In January 2015, the Arizona state court awarded TKCA approximately $6.5 million in actual damages and over $13 million in exemplary damages for what it characterized as "outrageous conduct" by the competitor, and specifically noted that the competitor "acted with an evil mind intending to injure" TKCA through such conduct. The Arizona court did not, however, make a specific finding as to whether Muhs intended to similarly injure TKCA.
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