Tag Archives: Bankruptcy

Can Filing for Bankruptcy Invalidate a Noncompete?

August 9, 2018 By in Noncompete Tags: , , , , Leave a comment

Guest post by Solomon B. Genet.

Debtors and their lawyers sometimes use a bankruptcy filing as an offensive tool. In a recent case, a debtor tried to use his prior bankruptcy to shed his non-compete obligations. While this attempt was not successful, non-compete practitioners should be aware of this effort.

In In re Capps, a July 26, 2018 decision from the District of Kansas Bankruptcy Court, the individual debtor sold his company and signed an employment agreement with the buyer, agreeing to a series of non-compete, non-solicit and confidentiality obligations. The debtor later filed for bankruptcy, and the buyer fired him soon thereafter.  The buyer then discovered that the debtor was breaching his restrictive covenants and brought an action for declaratory relief in the bankruptcy court seeking a finding that the bankruptcy process and discharge did not relieve him of these obligations.

Bankruptcy Judge Nugent agreed with the plaintiff-buyer and rejected the debtor’s arguments, reasoning that: (1) the debtor’s breaches of the restrictive covenants occurred post-bankruptcy, and gave rise to “equitable” (i.e., injunctive) relief and not “a right to payment,” so the debtor did not discharge any debts arising from the agreements; and (2) the restrictive covenants were not “executory” contracts (material obligations on both sides), and therefore could not be rejected through the bankruptcy process.

The Capps debtor was unsuccessful in shedding his obligations.  But—hypothetically—a strategic legal counselor could use the Capps debtor’s arguments in a case with more favorable facts (and perhaps different applicable law) to assist a person subject to a non-compete to obtain relief long before his contracted time-period for his non-compete obligations expired.

A copy of the opinion can be downloaded here.

Damages for Misappropriation of Trade Secrets Found Non-Dischargeable In Bankruptcy

May 1, 2017 By in Case Summary, Trade secrets Tags: , Leave a comment

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).

 

 

Guest Post: Proving Damages in Trade-Secrets Cases

December 23, 2014 By in Advice, Case Summary, Trade secrets Tags: , , , , , , Leave a comment

By Solomon Genet

Proving damages can be difficult in a wide range of cases, often especially so in a trade-secrets case. In a recent Federal appellate decision, the 5th Circuit (painfully for the plaintiffs) identified some of the risks involved. A link to the decision, In re Mandel, 2014 WL 3973479 (5th Cir. Aug. 15, 2014), is below.

Here, two individuals, an IP lawyer and a database expert, came together through a joint-venture entity to develop what they conceived to be a new type of search-engine. This JV hired personnel, retained a development team, and searched for investors.  The relationship then went sour, with misrepresentations made, one partner forming a competing company without disclosing it to the other partner, and that new company raising investor funds.  Suits, counter-suits, and a bankruptcy petition followed.

Later, the bankruptcy court presided over a trial as to whether the chapter 11 debtor (before filing for bankruptcy) misappropriated trade secrets under Texas law.  While finding that the debtor-defendant was liable, the court rejected each of the plaintiffs’ damages theories (they proposed a number of them).  But then, the bankruptcy court awarded damages—$1 Million to one plaintiff and $400k to another—“without explaining the damages theory on which it relied or identifying the evidence that supported these awards.”

Although the Fifth Circuit stated that in trade-secret misappropriation cases: (1) damages need not be proved with great specificity; (2) a flexible damages approach is appropriate; (3) uncertainty as to damages does not preclude recovery; and (4) only an approximation is needed, as long as there is a just and reasonable inference in support; it held that since the trial / bankruptcy court neither identified the theory of damages nor explained the evidentiary support for the amounts awarded, even this relaxed standard was not satisfied. The Fifth Circuit remanded back to the bankruptcy court to clarify the damages issue.

Accordingly, as a practice pointer, a plaintiff harmed by trade-secret misappropriation should ensure that the court identifies how it arrived to the amount of damage suffered, and not just identify the amount of monetary damage.

Note: this decision applied Texas common law, which has since been superseded by Texas’ adoption of the Uniform Trade Secrets Act.

Solomon Genet is a partner at Meland Russin & Budwick, P.A. in Miami, FL. He specializes in complex commercial litigation, business insolvency, and financial-fraud-related matters in the State and Federal courts.

In re: Mandel

Dealing With Bankruptcy After a Trade-Secrets Judgment

October 9, 2013 By in Advice, Case Summary, Trade secrets Tags: , , Leave a comment

What happens if you obtain a judgment for misappropriation of trade secrets, and the defendant files for bankruptcy? A recent case from the E.D. Va. bankruptcy court could offer some assistance, as it held that judgments for willful and malicious misappropriation are not dischargeable in bankruptcy.

In re: Erika Brooke Harton, 2013 WL 5461832 (Bankr. E.D. Va. Oct. 1. 2013) (linked below) has a particularly egregious story of trade-secret misappropriation. While still working at the plaintiff’s med-spa/salon, the defendant/debtor opened her own competing salon. After the plaintiff’s salon had closed for the day, the debtor entered the salon, accessed the plaintiff’s computer, and printed out the plaintiff’s client’s appointment schedule for the next three months. The debtor also looked up and copied all of the plaintiff’s clients’ contact information.

The debtor then mailed over 2,000 postcards to the plaintiff’s clients that said “We’ve moved—same faces—new location,” and directed them to the debtor’s business. Many of the clients changed their appointments to the debtor’s salon.

Not surprisingly, the plaintiff sued in Virginia state court and obtained a judgment for misappropriation of trade secrets under the Virginia Trade Secrets Act. The court concluded that the defendant’s misappropriation was willful and malicious. After that, the debtor filed for Chapter 13 bankruptcy relief.

In the bankruptcy court, the plaintiff filed an adversary proceeding claiming that the judgment was nondischargeable under 11 U.S.C. 523(a)(4). This statute provides that debts based on, among other things, embezzlement or larceny are not dischargeable.

The bankruptcy court first determined that the debtor was collaterally estopped from relitigating the state court’s finding that her misappropriation was willful and malicious. The bankruptcy court then found that willful and malicious misappropriation falls under Section 523(a)(4), noting that it involves taking another’s property for one’s benefit.

Takeaway: There is always a risk that a judgment debtor will file for bankruptcy protection. In a trade-secrets action seeking damages, try to argue and establish (when possible) that the defendant’s misappropriation was willful and malicious. Armed with such a finding, a judgment creditor can argue that its judgment cannot be discharged in bankruptcy.

In re Erika Brooke Harton, Memorandum Opinion

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