UNITED STATES BANKRUPTCY COURT NORTHERN DISTRICT OF ILLINOIS EASTERN DIVISION In re Pramod Patel, Debtor. Bankr. No, 19-08037

Chapter 7

In re Ankit Shah, Debtor. Bank No. 19- 08032 Chapter 7 Judge Jacqueline P. Cox M S International, Inc., Plaintiff, Vv. Adversary Proceeding 19-00740 (Consol. with Adversary Proceeding 19-00741} Pramod Patel and Ankit Shah, Defendants.

Memorandum Opinion on Motion for Summary Judgment (Dkt. 35) I. Jurisdiction Federal district courts have original and exclusive jurisdiction of all cases under title 11, the Bankruptcy Code.

(a). The district courts may refer cases under title 11, and any or all proceedings arising under title 11 or arising in or related to a case under title 11, to the bankruptcy judges for their district.

(a). The District Court for the Northern District of Illinois has referred its bankruptcy cases to the Bankruptcy Court for the Northern

District of Illinois, N.D. Ill. Operating Procedure 15(a). Bankruptcy court have statutory authority to “hear and determine all cases under title 11

and all core proceedings arising under title 11, or arising in a case under title 11, referred under

subsection (a)... and may enter appropriate orders and judgments, subject to review under

section 158 of this title.”

(b)C1). Core proceedings include determinations of the

dischargeability of specific debts. 28 ULS.C. § 157(b)(2)0). Il. Background M § International, Inc. (“MSI”), the Plaintiff in these consolidated adversary proceedings,

seeks an exception to discharge due to the Defendants’ conduct, alleged to be fraudulent and

deceitful. In a lawsuit filed in 2018 in the Central District of California, District Judge James V.

Selna entered a final judgment in the Plaintiff's favor. The Plaintiff is a nationwide distributor of flooring, countertop, wall tile and hardscaping

products. The Defendants, Debtors Pramod Patel and Ankit Shah, were employed by the

Plaintiff in various customer service and sales positions from 2009 to 2017. After being

entrusted with access to its computers and other business materials for purposes of conducting its

business affairs, MSI alleges that the Defendants secured employment with one of its

competitors, taking with them the Plaintiff's computer files and sources.

After certain matters were litigated in the 2018 lawsuit in federal court a default judgment

was entered in the Plaintiff's favor on June 5, 2018, finding that the Defendants were liable to

MSI for misappropriation of trade secrets, violation of California Penal Code section 502,

violation of California Penal Code section 496, fraud and deceit and violation of section 17200,

et seq., of the Unfair Competition Law, the California Business & Professions Code.

MSI argues that the doctrine of collateral estoppel should apply to the California District

Judge’s rulings and judgment to bar relitigation of the factual issues in these dischargeability

matters. This court agrees. Il. Summary Judgment Summary judgment is proper if the pleadings, depositions, answers to interrogatories,

affidavits and admissions on file after discovery show that there is no genuine dispute as to any

material fact and that the movant is entitled to judgment as a matter of law. Sharf vy. Sharf (Un re

Sharf\,

, * 1, (Bankr, N.D. Il, June 20, 2016), Summary judgment is

inappropriate if the evidence is such that a reasonable jury could find in favor of the non-moving

party. Anderson v. Liberty Lobby, Inc.,

,

,

(1986). The moving party has to show that there is no genuine dispute as to any material fact.

Celotex Corp. v. Catrett,

,

, 91 L.Ed2d 265 (1986). Ifthe

moving party successfully meets its burden, the non-moving party has to demonstrate that there is

a genuine dispute as to a material issue of fact. Scott v. Harris,

,

,

(2007). Local Bankruptcy Rule 7056-2 requires that each party opposing a motion for summary

judgment serve and file a memorandum of law and a concise response to the movant’s statement

of facts that contains a response to each numbered paragraph in the moving party’s statement,

including, in the case of any disagreement, specific references to the affidavits, parts of the

record, and other supporting materials relied upon as well as a statement consisting of short

numbered paragraphs of any additional facts that require the denial of summary judgment,

2

including references to the affidavits, parts of the record, and other supporting materials relied

upon. This Rule is fatal to the Defendants’ éfforts herein; they rarely cited to the record or any

facts at all in the joint statement they filed in response to MSI's statement of facts,.

IV. Collateral Estoppel In many adversary proceedings where another court has entered judgment on a tort in

issue res judicata - claim preclusion or collateral estoppel - issue preclusion could apply.

Whether collateral estoppel principles of issue preclusion are governed by state or federal law

depends on whether the judgment claimed as preclusive was entered by a state court or a federal

court. Federal law on collateral estoppel applies because the 2018 judgment was entered by a

federal court, Under federal law relitigation of an issue may be barred if “(1) the issue previously

decided is identical with the one presented in the action in question, (2) the prior action has been

finally adjudicated on the merits, (3) the party against whom the doctrine is invoked was a party

or in privity with a party to the prior adjudication, and (4) the party against whom the doctrine is

raised had a full and fair opportunity to litigate the issue in the prior action.” McCart vy, Jordana

(In re Jordana),

(10th Cir. B.A.P, 1999), aff'd,

(10th Cir.

2000); Parklane Hosiery Co., Inc. v. Shore,

(1979); Herbstein v Bruetman,

(N.D. Ill. 2001), aff'd

(7th Cir. April 30, 2002).

Due process entitles every party to his “day in court.” However, a “day” in court cannot

be allowed to stretch into an interminable stay in court, In particular, due process does not entitle

a party to litigate until he receives a favorable outcome. Noland, Finding Fault with Default:

New York Courts’ Inconsistent Application of Issue Preclusion to Default Judgments,

(2010).

Although bankruptcy courts determine whether or not a debt is dischargeable under

, the doctrine of collateral estoppel may be invoked to bar relitigation of the factual

issues underlying the determination of dischargeability. Grogan v. Garner,

(1991) (“We now clarify that collateral estoppel principles do indeed apply in discharge

exception proceedings pursuant to § 523(a)).” See Cora v.Jahrling (in re Jahrling),

(Bankr, N.D. Ill. 2014) aff'd,

(N.D. Ill. 2015), aff'd,

(7th

Cir, 2016). See Klingman v. Levinson,

(7th Cir. 1987). The issue of nondischargeability is a matter of federal law governed by the terms of the

Bankruptcy Code, Grogan,

, “A final consideration supporting our

conclusion that the preponderance standard is the proper one is that... application of that

standard will permit exception from discharge of all fraud claims creditors have successfully

reduced to judgment.” /d. at 290. Bankruptcy courts may not employ res judicata, claim preclusion, in dischargeability actions because considerations material to discharge are irrelevant to ordinary collection

proceedings. Dischargeability matters require courts to consider and rule on additional elements

such as whether a debt was incurred following a fraudulent representation. See

(a)(2). State law elements and concepts are likely to differ from those adopted under federal

law. The application of res judicata to dischargeability actions is thought to be improper as state

court proceedings involve only the issue of liability, whether a debt exists. Dischargeability actions have a broader scope. They involve determining, for example whether a debt was

incurred by fraud (section 523(a)(2)), by defalcation by a fiduciary (section 523(a)(4)), whether a

debt was listed or scheduled (section 523(a)(3)) or whether a debt is a domestic support

obligation (sections 523(a)(5) and (a)(15)). However, “the narrower doctrine of collateral

estoppel . .. does apply to bankruptcy cases.” Matter of Bulic,

(7th Cir.

1993). V. The Parties’ Statements of Material Facts Review of MSI’s Statement of Material Facts (Dkt. 37) discloses sufficient information to

justify entering judgment in its favor if the facts are undisputed. The Defendants’ Statement of

Material Facts (Dkt. 43), has been posited jointly in most respects. The Defendants admit most

of MSI’s statements without qualification: Numbers 1, 2, 3, 4, 5, 8, 9, 10, 13, 16, 27, 28, 29, 30,

31, 32, 33, 34, 35, 36, 37, 38, 39, 40, 41, 42, 43, 44, 45 and 46. Following is analysis of the

paragraphs not admitted by the Defendants. The Defendants’ 4 6 Response Statement includes discussion of exhibits and admits

MSI’s statement that it seeks an exception to discharge based on allegations of fraudulent and

deceitful conduct but deny that those allegations have been fully adjudicated in the prior lawsuit

because it was resolved by default, citing Clear Channel Outdoor, Inc. v. Nikitas (In re Nikitas),

(Bankr. N.D. Ill, 2005), That court ruled correctly that default judgments have

no collateral estoppel effect under Illinois law. Many courts have ruled, however, that collateral estoppel lies where in the prior action the default judgment was entered as a sanction for a

debtor’s bad faith conduct in discovery. See Wolstein v. Docteroff Gn re Docteroff),

, 215 Grd Cir. 1997) (“We do not hesitate in holding that a party such as Docteroff, who

deliberately prevents resolution of a lawsuit, should be deemed to have actually litigated an issue

for purposes of collateral estoppel application.”). The Defendants’ legal argument is not a

statement of disputed material fact. They have to posit an issue of disputed material fact to

G&

succeed in opposing summary judgment; their Statement 6 does not do so,

The Defendants’ 11 statement denies MSI’s statement that in the course of its business

it developed and maintained trade secrets, etc. The Defendants deny this statement of material

fact and state that they are accused of secretly accessing MSI’s computers and other resources to

copy and steal MSI’s computer files. They go on to state that Judge Selna’s order granting a

default judgment was not based on testimony or documents adduced at a trial and found only that

MSI adequately alleges that the information Defendants acquired falls within the definition of

secrets under the DISA. The Defendants’ legal argument is not a statement of disputed material

fact. They have to come forward with a statement of disputed material fact; they have not done

80. The Defendants’ { 12 statement denies MSI’s statement that it maintains a proprictary

database. They go on to say that they are accused of secretly accessing MSI’s computers to copy

and steal its files and trade secrets. They posit that Judge Selna’s order granting default

judgment was not based on testimonial or documentary evidence adduced at a trial and found

only that MSI adequately alleged that it maintains proprietary databases. The Defendants have

not cited to a statement of dispute material fact; this legal argument fails to adequately oppose

the entry of summary judgment for MSL The Defendants’ 4 14 statement admits what MSI stated about taking steps to protect its

trade secrets but adds that the policies in issue were not uniformly enforced. They refer to their

answers. Shah’s answer at Docket 15, p. 6 says what he states herein. He does not cite to facts

in the record that show an issue of disputed material fact. Patel’s answer can not be found on the

docket; the statement says that it can be found at Docket 18; it is not there.

Like the Defendants’ statement 14 response, their {| 15 response falls short. It admits

that MSI had policies for the protection of its alleged trade secrets and that they agreed to comply

with a similar policy but deny that those policies were uniformly enforced, referring to their

answers; only Shah’s answer can be found. They have not cited to facts in the record that show a

dispute as to issues of material fact, As to {f 17 and 18, Shah admits that he was employed at MSI during a certain period in

response to MSI’s statement but left out MSI’s language that he resigned without notice. Patel

states that he resigned without notice to go to work for Century Marble and Granite but ignores

MSI’s statement that he had said he was resigning to move back to India. The Defendants have

not cited to facts in the record that show that an issue of material fact is in dispute.

At 4 19, the Defendants admit that they secured employment with Century Marble and

Granite prior to departing from MSI but deny concealing any information or misleading MSI.

They point to their answers, only one of which can be found. Shah’s answer does not put

forward facts that point to an issue of dispute as to material facts.

As to | 20, the Defendants deny MSI’s statement that they concealed their plans to leave

so that they could secretly access MSI’s computers to copy and steal its computer files and trade

secrets for their own and Century’s benefit. They also state that Judge Selna did not find they

concealed their plans to secretly access the trade secrets but only that MSI alleged they did so

wrongfully and without permission. They again raise the legal argument that the default

judgment was not based on evidence and that MSI satisfied procedural requirements for default

judgment. This statement is not a citation to facts in the record that show a dispute as to a

material fact.

As to | 21, the Defendants admit that during their employment on at least one occasion

they may have inadvertently forwarded customer lists, historical date (sic) or price lists to their

personal email addresses but deny that any of that information was proprietary information or

trade secrets, referring to their answers, only one of which could be found on the docket. The

Defendants have not put forward facts, with a citation to such in the record, that show a dispute

as to any issue of material fact, As to { 22, the Defendants deny MSI’s statement that the copied and stolen files include

spreadsheets and other files, that Patel, on July 22, 2017, accessed and used confidential

information and that he used MSI”’s computer system to send that information to his personal

email account. They also deny that they did not have permission to do what was done. Again,

the Defendants failed to cite to facts in the record to establish a dispute as to an issue of material

fact. At J 23, the Defendants deny MSI’ statement that on August 17, 2017, Shah copied and

stolen (sic) files containing customer and pricing information, The deny that they stole any

information belonging to MSI and to the extent that they may have copied any information, they

deny that they did not have permission to do so. The Defendants have not come forward with

facts in the record that show a dispute as to an issue of material fact.

At § 24, Defendant Shah admits that he accessed MSI’s Quartz price information, but that

he did not do so in any manner inconsistent with the terms of his employment. The inconsistency

issue was injected by Shah. In any event, he has admitted the core of MSI’s statement at { 24.

At § 25, MSI states that Patel accessed confidential payroll information of one of □□□□□

employees and emailed that information from his MSI email account to his personal email

9g

account. Patel denies this, but does not come forward with citations to facts in the record that

show an issue of disputed material fact. At { 26, the Defendants deny that they retained possession of any of MSI's alleged

valuable business information because the information was in electronic or digital format, which

they destroyed rather than return to MSI. Again, the Defendants do not cite to facts in the record

to show that there is an issue of disputed material fact regarding this matter.

At {4 47, 48 and 49, the Defendants admit MSI’s version of what Judge Selna’s order

granting default judgment says, pointing out, however, that Judge Selna was careful to qualify the

default order by stating that MSI adequately alleged requirements based on a sealed declaration,

that MSI satisfied the procedural requirements for default judgment and that the Defendants

failed to meaningfully participate in the litigation before him. The Defendants have failed,

however, to come forward with facts that show a disputed issue of material fact.

The adversary complaints filed in 19 ap00740 and 19 ap00741 each seek to except from

discharge the judgment debt owed MSI by Pramod Patel and Ankit Shah under

(a)(2)(A) which excepts from discharge any debt “for money, property, services, or an

extension, renewal, or refinancing of credit, to the extent obtained by false pretenses, a false

representation, or actual fraud, other than a statement respecting the debtor’s or an insider's

financial condition.” This section describes three separate grounds for holding a debt

nondischargeable: false pretenses, false representation and actual fraud. Schatz v. Livermore (in

re Livermore),

, *4 (Bankr. N.D. Ill, April 3, 2013). Judge Selna granted MSI’s request for a default judgment on November 26, 2018, finding, that the Defendants’ conduct was culpable for the purposes of a motion to set aside entry

of default. He ruled that they did not act in good faith while they participated in the case before

him. They did not comply with deadlines; did not file a notice of interested parties, an answer or

serve discovery responses. In addition, they filed their initial disclosures three months late. He

found that the Defendants had been aware of the case against them from the beginning as

evidenced by their denied motion to dismiss/or transfer venue filed in March 2018. They were

aware of the entry of default since June 10, 2018 when their lawyer emailed MSI’s lawyer to

request that MSI set aside the default, Still, they delayed filing their motion to set aside default

for three months, only after learning of MSI’s motion for default judgment. Judge Selna also

noted that the Defendants’ lawyer first stated that he represented Century Marble and Granite but

when asked if he would accept service of a subpoena on behalf of Century Marble and Granite,

he said “I do not represent Century Marble and. Granite. Never have.”

Judge Selna ruled that the Defendants did not present a “credible, good faith explanation

negating any intention to take advantage of the opposing party” in reliance on 7 CI Grp. Life Ins.

Plan v. Knoebber,

, 696 (9th Cir. 2001). The Judge also pointed out that the

Defendants did not oppose MSI’s application to enter default judgment and that the more the

California case got delayed, the more time the Defendants would have to use MSI’s trade secrets

to unfairly compete. Judge Selna’s Civil Minutes (“Minutes”), Adversary Proceeding 19-00740,

Dkt. 47, Exhibit 4, p. 39. The Defendants argued that they had a meritorious defense. Judge Selna noted that their

assertion that they had permission to do what they did was insufficient to establish a meritorious

defense as they did not indicate the source or extent of their permission, He even said that even

if they had permission to access and retrieve information, that would not constitute a defense to

11

the receipt of stolen property, fraud or Unfair Competition Law claims.

In considering entry of default judgment, Judge Selna examined whether there was a

likelihood of a dispute of material facts, as required by federal law. Eifel v. McCool,

(9th Cir. 1986). He accepted all well-plead factual allegations in the complaint as

true in examining whether to grant the default judgment. Televideo Systems, Inc, v Heidenthal,

(9 Cir. 1987) (“The general rule of law is that upon default the factual

allegations of the complaint, except those relating to the amount of damages, will be taken as

true.”). Judge Selna discussed the strong policy of deciding cases on their merits “whenever

reasonably possible.” Eifel,

. He noted that a defendant’s failure to appear or to

meaningfully participate in litigation makes it impractical, if not impossible, to make a decision

on the merits. Minutes, Docket 47, Exhibit 4, p. 54. Assessing damages was difficult because the Defendants failed to participate in

discovery. Minutes, Exhibit 4, p. 61. This is a strong reason to apply collateral estoppel. Their

discovery failure was strategic; they should not be allowed to manipulate the justice system by

getting a second chance to litigate the issues in this matter when their prior refusal to litigate was

intentional. Judge Selna’s careful analysis is evident. He invited MSI to provide supplemental

evidence of a causal link between the Defendants’ conduct and the lost profits it sought to

recover. MSI also submitted evidence from its customers that Shah reached out to them on

Century Marble and Granite’s behalf. Minutes, Exhibit 4, p. 59. He also discussed MSI’s 43%

drop in business following the Defendants’ conduct. Minutes, Exhibit 4, p. 60.

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The Defendants’ statement mentions several times that Judge Selna noted that several

matters had been adequately alleged in MSI's complaint. Recall, however, that all well-plead

allegations in a complaint are accepted as true for purposes of entering default judgment.

VI. Application of Collateral Estoppel The four elements of collateral estoppel have been established. ‘The issue previously

decided by Judge Selna, fraud and deceit, is identical with the one presented in this

dischargeability action. The prior action has been finally adjudicated on the merits. The parties

against whom the doctrine is invoked, the Defendants, were parties in the ptior action. The

Defendants had a full and fair opportunity to litigate the issues in the prior action. This court

finds that collateral estoappel applies. It could be superficially argued that the prior action was

not adjudicated on its merits since it did not proceed to trial. However, in reality the Defendants

intentionally forfeited their right to litigate the issues by abandoning the cause. Docteroff,

. VII. Judge Selna’s Fraud or Deceit Finding The Seventh Circuit has defined actual fraud broadly, as “any deceit, artifice, trick, or

design involving direct and active operation of the mind, used to circumvent and cheat another.”

McClellan v. Cantrell,

(7th Cir. 2000) (internal citations omitted). That court

also noted that “[fjraud is a generic term, which embraces all the multifarious means which

human ingenuity can devise and which are resorted to by one individual to gain an advantage

over another by false suggestions or by the suppression of truth. No definite and invariable rule

can be laid down as a general proposition defining fraud, and it includes all surprise, trick,

cunning, dissembling, and any unfair way by which another is cheated. /d.

12

The Supreme Court has broadly defined actual fraud as used in the discharge exception to

include fraudulent conveyances. Husky International v, Ritz,

, 1586 (2016). Judge Selna’s description of MSI’s claims and his liability rulings establish that the

Defendants’ debts are not dischargeable. He found the Defendants liable on five grounds: (1) Misappropriation of trade secrets for acquisition of a trade secret by a person who

knows or should know the secret was improperly acquired. (2) Violation of California Penal Code 502 because the Defendants did not have

permission to obtain and use MSI’s information. Liability was for logging into database

with a valid password and subsequently taking, copying or using the information in the

database improperly. (3) Violation of California Penal Code 496 finding the documents on the computers may be deemed property subject to theft under section 496, (4) Fraud and deceit because the Defendants’ conduct included concealment.

(5) Violation of Uniform Competition Law, California Business & Professions Code,

sections 17200, et seq., for their violations of California Penal Code sections 496 and

502. That law treats violations of other federal, state and court-made law as unlawful.

Nat'l Rural Telecom y. DIRECTY, Inc.,

.

The elements of actual fraud under section 523(a)(2)(A) are satisfied according to

McClellan standards by the fraud and deceit finding. VIL. Conclusion Plaintiff MSI has met its burden to show that there are no disputed issues of material fact

and that it is entitled to the entry of judgment in its favor as a matter of law.

1A

The Defendants admitted many of MSI’s statements of material fact. The Defendants denied and challenged other statements but did not cite to facts in the record to support those denials and challenges. Local Rule 7056-2 provides that [a]!i material facts set forth in the statement required of the moving party will be deemed to be admitted unless controverted by the statement of the opposing party. The Defendants have not properly controverted MSI’s statements. See Hinterberger v. City of Indiannpolis,

, *3 (7th Cir. July 15, 2020) (Summary judgment awarded to a defendant where the plaintiffs statement of undisputed facts consisted of improper arguments rather than materially disputed facts; the plaintiff's statement was stricken). Based on their fraudulent and deceitful conduct, this court finds that the Defendants committed fraud and deceit by taking their employer’s information and trade secrets without permission to benefit themselves and their former employer’s competitor. Summary judgment is entered in favor of Plaintiff M S International, Inc. and against Defendants Pramod Patel and Ankit Shah. Ankit Shah’s debt owed to M S§ International, Inc. will not be discharged. Pramod Patel’s debt owed to M S International, Inc. will not be discharged. This Memorandum Opinion constitutes the court’s findings of fact and conclusions of law in accordance with Federal Rule of Bankruptcy Procedure 7052. Separate orders will be entered herein.

Judge: P Cod y Date: July 23, 2020