Guest post by Solomon B. Genet

As Eric’s law partner, from time to time I “guest post” on trade secret issues in the insolvency / bankruptcy context.  One important issue involves the dischargeability of pre-bankruptcy misappropriation claims. The March 31, 2017 In re Mandel decision out of the Eastern District of Texas addresses this issue.  There, claimants filed proofs of claim in Mandel’s bankruptcy case alleging that the debtor violated the Texas Civil Theft Liability Act (“TCTLA”) by misappropriating trade secrets. The debtor objected to these claims. On September 30, 2011, the bankruptcy court tried the matter and found that the debtor violated the TCTLA and awarded the claimants damages and attorney’s fees. Years later, the issue before the bankruptcy court was whether these claims (arising from conduct prior to the bankruptcy filing) could be discharged in the bankruptcy case.

The claimants asserted that the damages for violation of the TCTLA were non-dischargeable on a variety of bases, and the bankruptcy court ruled in favor of the claimants on some theories and against the claimant on others.  To narrow the issues for purposes of this post, the bankruptcy court determined that its previous decision finding (as a matter of fact and law) that the debtor misappropriated trade secrets was sufficient to also prove that the debtor committed: (1) fraud; (2) larceny (fraudulent and wrongful taking of the property of another with intent to convert such property to the taker’s use without the consent of the owner); and (3) embezzlement (fraudulent appropriation of property by a person to whom such property has been entrusted, or into whose hands it has lawfully come).  Each of these bases gave rise to the misappropriation of trade secret claims being non-dischargeable.  Therefore, the bankruptcy court did not require re-litigation of the issues and found in favor of the claimants.

Practice Pointer:    When litigating a claim for misappropriation of trade secrets, make sure your strategy includes collection of the debt arising from that claim.  If there is a possibility that the wrongdoer may file for bankruptcy, consider the elements of a claim for non-dischargeablity when presenting and proving your case.

The case is In re Mandel, No. 12-4128, 2017 WL 1207503 (E.D. Tx. March 31, 2017).