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In re Bailey

United States District Court, D. Idaho

September 30, 2014



B. LYNN WINMILL, District Judge.


Debtor Barry Todd Bailey appeals from the bankruptcy court's judgment against him. For the reasons explained below, the Court will affirm in part, and reverse and remand in part.


In December 2004, Brian Burks and Todd Bailey formed Emerald Asset Management, Inc., which is a financial-planning and investment firm. The company operated without incident for around five years. In the summer of 2010, however, Bailey told Burks he was insolvent and could no longer afford the necessary business licenses. He asked Burks to buy him out. Burks agreed, and the parties settled on a purchase price of $110, 000 for Bailey's shares in the company, plus an additional $2, 500 for a non-competition covenant.

Among other things, the non-competition covenant prohibited Bailey from (1) soliciting clients for investment advice, life insurance, or any other financial planning services, (2) disrupting the relationship between Emerald Asset Management and its clients, and (3) providing information about the company's clients to any third party for any purpose. At trial, Burks testified that he never would have bought Bailey's shares without the non-competition covenant because Emerald Asset Management's only assets were its clients. Instead, Burks would have started a new company and competed with Bailey for clients. Bailey, who is a lawyer, acknowledged the importance of the non-competition covenant, telling Burks he would risk losing his license to practice law if he violated it.

All the while, however, Bailey had no intention of honoring the covenant. Even as he was negotiating the stock purchase agreement, Bailey was in the process of joining Concierge, [1] another financial-planning and investment firm, as an investment advisor representative. Bailey also solicited numerous clients of Emerald Asset Management, several of whom left the company and went to Concierge. See Aug. 23, 2013 Bankr. Ct. Decision, Dkt. 12-30, at 11 (witness testified that the following EAM clients went to Concierge: Jack Huff; Ken and Jackie Hutchison; Darius and Donna Bailey; Margaret Schuler; and Anne Graham King).

In April 2011, Burks and Emerald Asset Management sued Bailey in Idaho state court, asserting claims for (1) breach of contract; (2) breach of the covenant not to compete; (3) interference with contract; (4) interference with prospective economic advantage; (5) defamation; (6) slander; and (7) civil conspiracy. In January 2012, the state court granted partial summary judgment in Burks' favor, finding that Bailey had breached the covenant not to compete and was liable for damages resulting from that breach. Later, the state court allowed Burks to amend his complaint to seek punitive damages.[2]

After this state court made this ruling, but before damages were determined, Bailey filed a Chapter 7 bankruptcy petition. Burks and Emerald Asset Management filed an adversary proceeding in bankruptcy court, seeking to hold debts owed by Bailey nondischargeable under 11 U.S.C. ยง 523(a)(2)(A) and (a)(6).

In May 2013, the bankruptcy court tried issues that had not been resolved in the state court lawsuit. Burks and Emerald Asset Management prevailed, and the bankruptcy court awarded compensatory damages of $135, 217.65. See Id. at 42. The bankruptcy court concluded that this entire debt was nondischargeable, and it also awarded $135, 217.65 in punitive damages, for a total, nondischargeable judgment of $270, 435.30.


District courts review bankruptcy court decisions in the same manner as would the Ninth Circuit. See In re George, 177 F.3d 885, 887 (9th Cir. 1999). The Court therefore reviews the bankruptcy court's factual findings for clear errors and its conclusions of law de novo. See, e.g., Robertson v. Peters (In re Weisman), 5 F.3d 417, 419 (9th Cir. 1993). The issue of dischargeability of a debt is a mixed question of fact and law, which the Court reviews de novo. See Miller v. United States, 363 F.3d 999, 1004 (9th Cir. 2004). An award of punitive damages is reviewed for an abuse of discretion; the sufficiency of the evidence to support such an award is reviewed for substantial evidence. See Fair Housing of Marin v. Combs, 285 F.3d 899, 906-07 (9th Cir. 2002); Yeti by Molly, Ltd. v. Deckers Outdoor Corp., 259 F.3d 1101, 1111 (9th Cir. 2001).


Bailey contends that the bankruptcy court committed eight separate errors[3] in rendering judgment against him. See Opening Br., Dkt. 11, at 6-7. These errors generally fall into three categories. First, Bailey contends Burks should not have been able to sue him for breaches of the stock purchase agreement because Burks himself breached the agreement. Second, Bailey contends the bankruptcy court erred in determining compensatory damages under Idaho state law. Third, ...

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