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WISH Acquisition, LLC v. Salvino

January 18, 2008

WISH ACQUISITION, LLC, PLAINTIFF,
v.
CHRISTOPHER SALVINO, DEFENDANT.



The opinion of the court was delivered by: Judge James B. Zagel

MEMORANDUM OPINION AND ORDER

The parties here cross-appeal from a final order of the United States Bankruptcy Court for the Northern District of Illinois. Plaintiff-Appellant WISH Acquisition, LLC ("WISH") appeals the Bankruptcy Court's holding that debt owed by Defendant-Appellee Christopher Salvino ("Salvino") was not subject to the non-dischargeability provisions of 11 U.S.C. § 523(a)(6). Salvino cross-appeals (1) the Bankruptcy Court's admission into evidence of WISH's liquidated damages, and (2) the Bankruptcy Court's holding that the liquidated damages penalty in his employment agreement was an enforceable contract provision. For the foregoing reasons, all of the Bankruptcy Court's findings before me on appeal are affirmed.

I. Procedural and Factual Background*fn1

In 1992, three doctors, including Dr. Salvino, the debtor in this case, formed a company to perform bariatric (weight reduction) surgeries. By 2002, the number of surgeries the doctors were performing increased dramatically. In response to the increased demand, the doctors formed WISH Holding, LLC ("Old Wish"), through which they opened new surgical centers around the country. To finance the expansion, Old Wish relied on a $2.5 million term loan and $4 million line of credit from American Chartered Bank. These loans were secured in part by personal guarantees from Salvino and the other doctors.

In January 2005, Old Wish defaulted on its loans. In an effort to pay back the debt and avoid liquidation, Old Wish contacted two potential investors, Com Vest Partners ("Com Vest") and Incubator Investments ("Incubator"). Stephen Winslett, a partner at Com Vest, performed due diligence on Old Wish for the investors. In February 2005, after initial due diligence, Com Vest and Incubator purchased a $500,000 participation in Old Wish's debt. Throughout the due diligence and after its completion, Salvino told Com Vest that he would stay with the company for 3 to 5 years. The investors made it clear that they would not invest in Old Wish without Salvino's promise to stay with the company.

After completing his due diligence, Winslett concluded that Com Vest should not invest in Old Wish, noting significant problems with billing, overstated accounts receivables, and poor management. Despite these findings, Com Vest and Incubator formed a new company, WISH Acquisition, LLC (Plaintiff-Appellant here), in order to purchase Old Wish's debts and assets. WISH closed on the purchase of Old Wish's debts on April 22, 2005. That same day, Old Wish filed Chapter 11 bankruptcy to facilitate the purchase. In conjunction with the debt purchase, WISH executed an employment agreement with Salvino that included a five-year commitment to stay with the company. WISH agreed to forgive all but $1.5 million of Salvino's personal guaranty of the bank loan.

Before Old Wish filed bankruptcy, Salvino began seeking alternative employment with other companies. On April 11, 2005 he entered into an employment contract with iVOW, a WISH competitor, but withdrew his signed contract a few days before the Old Wish bankruptcy filing. Salvino did not disclose his search for alternative employment to WISH.

In August 2005, after the bankruptcy court approved of the sale of Old Wish's assets to WISH, WISH agreed to amend Salvino's employment contract. The amended employment contract released Salvino from his $1.5 million personal guaranty, but retained the five-year employment commitment. The new contract also inserted a liquidated damages clause according to which damages were fixed at $1.5 million if Salvino terminated the contract without breach by WISH during the first year, at $1,125,000 during the second year, at $750,000 during the third year, and at $375,000 during the fourth year.

WISH completed the purchase of Old Wish's assets on September 7, 2005. Within seven days of the completed purchase, Salvino sought employment as a Trauma Director at John C. Lincoln Hospital and did not disclose this search to WISH. Meanwhile, WISH was unable to stabilize the business and by March 2006, WISH decided to stop funding the company. The parties do not dispute that WISH lost more than $9.1 million on its investment.

On October 14, 2005, Salvino and his wife filed for Chapter 7 bankruptcy, seeking discharge of their personal debts, including Salvino's liability under the liquidated damages provision of his employment with WISH. On February 4, 2006, Salvino accepted part-time employment as Trauma Director at John C. Lincoln. By March 1, 2006 - within the first year of his employment contract with WISH - Salvino was working at John C. Lincoln full-time.

In May 2006, WISH filed a complaint in Bankruptcy Court seeking to determine the nondischargeability of Salvino's debt pursuant to 11 U.S.C. §§ 523(a)(2) and 523(a)(6) and requesting a declaratory judgment that Salvino's duties and obligations under his covenant not to compete were non-dischargeable.*fn2 Following trial, the Bankruptcy Court entered judgment for Salvino, holding that WISH did not establish any debts owed by Salvino were non-dischargeable. In re Salvino, 373 B.R. at 581. The Bankruptcy Court found that (1) the only false representations that WISH proved were not shown to have resulted in a debt, and (2) the only debt that WISH did prove at trial - the $1.5 million arising from breach of an employment contract - was not shown to have arisen from willful and malicious injury. Id. WISH appeals only the part of the Bankruptcy Court's decision that § 523(a)(6) does not bar the discharge of Salvino's debt for willful and malicious injury. Salvino's cross-appeal challenges the Bankruptcy Court's admission into evidence of WISH's liquidated damages and the Bankruptcy Court's finding that the liquidated damages provision in the employment contract was enforceable.

II. DISCUSSION

A. Standard of Review

A federal district court has jurisdiction, pursuant to 28 U.S.C. § 158 (2006), to hear appeals from the bankruptcy court. On appeal, I review the bankruptcy court's findings of fact for clear error and review its conclusions of law de novo. In re Midway Airlines, Inc., 383 F.3d 663, 668 (7th Cir. 2004); see also FED. R. BANKR. P. 8013. I review the Bankruptcy Court's ...


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