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NONDISCHARGEABLE DEBTS – SECTIONS 523/727
IMPORTANT: THIS FIRM MAKES NO REPRESENTATIONS AS TO THE ACCURACY OR CURRENT STATUS OF ANY LAW, CASE, ARTICLE OR PUBLICATION CITED HEREIN OR LINKED TO. WARNING – SOME OF THESE REFERENCES ARE PRE-BAPCPA.
Lamar, Archer and Cofrin vs Appling, 16-1215 (Sup. Ct. June 4, 2018) The Supreme Court resolved a split of circuits by holding that a false statement about one asset must be in writing to provide grounds for rendering a debt nondischargeable under Section 523(a)(2). In this case a debtor lied to his attorney about the intended use of his tax refunds – to pay his attorney’s fees.
Supreme Court: The Court holds that a statement about a single asset can be a “statement respecting the debtor’s financial condition” under §523(a)(2) of the Bankruptcy Code. The judgment of the Court of Appeals for the Eleventh Circuit is affirmed. Pp. 4–15.
Lower courts: The Bankruptcy Court found that Appling (the debtor) knowingly made two false representations on which Lamar (the law firm) justifiably relied and that Lamar incurred damages as a result, the court concluded that Appling’s debt to Lamar was nondischargeable under §523(a)(2)(A). The District Court affirmed, but the Eleventh Circuit reversed, holding that a “statement respecting the debtor’s financial condition” may include a statement about a single asset. Because Appling’s statements were not in writing, the court held, §523(a)(2)(B) did not bar him from discharging his debt to Lamar.
The case pitted courts’ aversion to those who lie against the statutory language and its history. This decision is similar to the result in Law v. Siegel, 134 S. Ct. 1188 (2014), where the Supreme Court ruled that the bankruptcy court does not have a “roving commission” to do equity. In Law, the high court barred the imposition of sanctions by invading property made exempt by statute, even though the debtor persistently committed fraud.
While courts may not be favorably inclined toward debtors who lie orally to obtain credit, Congress made a decision in Section 523(a)(2)(B) that a materially false statement “respecting the debtor’s . . . financing condition” must be in writing to provide grounds for nondischargeability of the related debt.
Bartenwerfer v. Buckley, 21-908 (Sup. Ct. Feb. 22, 2023)Buckley (creditor) then filed an adversary complaint in the bankruptcy proceeding, alleging that the debt owed him on the state-court judgment was nondischargeable under the Bankruptcy Code’s exception to discharge of “any debt . . . for money . . . to the extent obtained by . . . false pretenses, a false representation, or actual fraud.” 11 U. S. C. §523(a)(2)(A). The Bankruptcy Court found that David had committed fraud and imputed his fraudulent intent to Kate because the two had formed a legal partnership to renovate and sell the property. The Bankruptcy Appellate Panel disagreed as to Kate’s culpability, holding that §523(a)(2)(A) barred her from discharging the debt only if she knew or had reason to know of David’s fraud. On remand, the Bankruptcy Court determined that Kate lacked such knowledge and could therefore discharge her debt to Buckley. The Bankruptcy Appellate Panel affirmed. The Ninth Circuit reversed in relevant part. Invoking Strang v. Bradner, 114 U. S. 555, the court held that a debtor who is liable for her partner’s fraud cannot discharge that debt in bankruptcy, regardless of her own culpability.
In re Stewart, Stewart v. DeWitt, 18-9007 (1st Cir. 2/3/20) This opinion lays out everything you need to know about the standards for nondischargeability under Section 523(a)(2)(A). In terms of appellate practice, the opinion recommends that cases be remanded for further findings or explanations if the appeals court is tempted to make findings of fact different from those in the trial court.
Can debtor pursue creditor for attorney fees in a non-dischargeable claim – see 523(d)
In re Bartenwerfer, 9th Cir BAP NC-19-1178 (4/23/20) If a creditor requests a determination of dischargeability of a consumer debt under subsection (a)(2) of this section, and such debt is discharged. In earlier cross-appeals, we reviewed a judgment in which the bankruptcy court: (1) determined that appellee Kieran Buckley’s state court judgment and attorneys’ fees award against appellants David and Kate Bartenwerfer (“Debtors”) were excepted from Debtors’ discharge under § 523(a)(2)(A); (2) denied Mr. Buckley attorneys’ fees incurred in his nondischargeability action; and (3) awarded Mr. Buckley interest at the California judgment rate of 10%. We affirmed the bankruptcy court in all but two respects. First, we vacated its judgment as against Mrs. Bartenwerfer and remanded for further findings regarding her intent to defraud And second, as relevant to this appeal, we vacated its judgment and two related orders to the extent that it determined that Mr. Buckley’s state court attorneys’ fees were nondischargeable. The then existing record was inadequate to assess which fees, if any, flowed from Mr. Bartenwerfer’s nondischargeable fraudulent conduct. We therefore remanded the issue for further determination and with instructions to reopen the record.
On remand, the bankruptcy court did a searching analysis of the state court record and found that Mr. Buckley’s state court fraud and non-fraud claims were inextricably intertwined, thus making fee apportionment impossible. It then entered judgment once again determining that his fees were wholly nondischargeable. Debtors appealed. We determine that the judgment is well-supported by the record developed on remand, and we AFFIRM
BAP for 9th Circuit affirmed ruling of bankruptcy court (ND Cal.) entering non-dischargeable judgment against debtor including attorneys’ fees. Start court fraud and non-fraud claims were inextricably intertwined, making fee apportionment impossible. Record supported conclusion that because fees were intertwined, all fees were nondischargeable
Attorney fees awarded prepetition litigation establishing the fraud claim are nondischargeable under Cohen v. De La Cruz. For the § 523 litigation itself, see In re Dinan and the cases cited in Levitt and Burgueno.
In re Cooke 318-bk-10014-DPC (BK Court, Arizona 10/30/20) Before the Court is Gina M. Cooke’s (“Defendant” or “Debtor”) motion for an award of attorney’s fees in the amount of $89,675 in connection with her successful defense of the nondischargeability complaint brought against her by Debtor’s former husband, Jon Fiebelkorn (“Plaintiff”). For the reasons stated below, this Court denies Debtor’s Fee Motion and finds that, although Debtor has sustained her burden under 11 U.S.C. § 523(d), Plaintiff has established that his pursuit of his claims in the Adversary Proceeding was substantially justified. No other statute or rule cited by Debtor supports her request for fees.
In re Gilman, 9th Cir BAP, 7/12/19 Millions in attorney fees to collect $8,250 judgment: Appellants, Tammy R. Phillips and Tammy R. Phillips, (jointly, “Creditors”), obtained an $8,250 judgment against debtor, Kevan Gilman, plus (under California law) $100,000 in prepetition fees, plus $1,000,000 for other state court fee requests. In this chapter 7 case, they obtained a determination that Debtor was not entitled to a discharge. They also actively litigated issues in the main case itself. The bankruptcy court determined that they were entitled to an award of reasonable fees in connection with this activity. Creditors
requested approximately $750,000 in fees arising from main case activity and $1,400,000 in fees in the adversary proceeding, plus costs. The bankruptcy court awarded $137,907.66 and $166,453.58, respectively, in fees and costs. This appeal arises from the reduced awards.
CONCLUSION: In sum, we conclude that, when a creditor voluntarily files a CCP § 685.080 motion with the bankruptcy court for an award of postpetition attorneys’ fees, § 108(c) does not toll the two-year limitation in CCP § 685.080. As a result, Creditors have not shown that the bankruptcy court erred when it disallowed fees on this basis. Accordingly, we AFFIRM.
In re Yee, No. 16-11798, 2017 WL 2556933 (Bankr. D. Ariz. June 12, 2017). A bankrupt Arizona woman’s ex-husband is not entitled to an award of attorney fees incurred during his successful effort to prevent her from discharging divorce-related debts through her Chapter 13 case, a Phoenix bankruptcy judge has ruled.
Neither the Bankruptcy Code nor Arizona family law statutes provide for attorney fees to prevailing parties in dischargeability proceedings, U.S. Bankruptcy Judge Daniel P. Collins of the District of Arizona said.
In June and August of 2016 an Arizona state court awarded Martin Yee nearly $60,000 in attorney fees in his divorce from ex-wife Karen Choy Lan Yee. After she sought Chapter 13 protection in October, Martin prevailed in bankruptcy proceedings in which he contended that the fee awards were domestic support obligations and thus nondischargeable under Section 523(a)(5) of the Bankruptcy Code, 11 U.S.C.A. § 523(a)(5).
The Bankruptcy Court also ordered Martin to file an accounting of additional amounts he had claimed were not subject to discharge.
He then filed the accounting as well as an application seeking $34,000 in attorney fees incurred during bankruptcy proceedings, asking the court to recognize these fees as a domestic support obligation.
Debtor objected to the accounting and fee application.
No basis for bankruptcy-related fee award
“Under the ‘American Rule’ a litigant in federal court is not entitled to an award of attorneys’ fees and costs unless an applicable statute or enforceable contract provides for such award,” Judge Collins said, citing Travelers Casualty & Surety Company of America v. Pacific Gas and Electric Co., 549 U.S. 443 (2007).
Nothing in the Bankruptcy Code, including Section 523(a)(5), provides for parties to recover fees, the judge said, citing Heritage Ford v. Baroff (In re Baroff), 105 F.3d 439 (9th Cir. 1997).
The judge rejected Martin’s argument that Arizona family law, Ariz. Rev. Stat. Ann. § 25-324, provided a basis for the fee award.
Section 25-324(A) authorizes “the court” to award costs and expenses incurred “maintaining or defending any proceeding” under Arizona’s divorce and parenting-time statutes, the judge said.
“The court” cannot mean a bankruptcy court because it has no jurisdiction over family law proceedings, he said, also noting that the nondischargeability matter was not a “proceeding” under Arizona law.
Section 25-324(B) authorizes fee awards against a party who filed a petition in bad faith, one that was not factually or legally grounded, or one that was filed for improper purposes.
The fees Martin seeks from the bankruptcy case did not involve a petition under Arizona family law, Judge Collins said.
The judge also rejected Martin’s argument that reasonable fees incurred in dischargeability proceedings are not subject to discharge, which cited In re Carson, 510 B.R. 627 (Bankr. E.D. Cal. 2014), a California case.
“Arizona’s family law statutes are not so broad,” he concluded
In re Pietro Cimino, BAP NV 21-1057-TLG (9th Cir BAP, 10/6/21) Leonard Indelicato1 obtained stay relief in Pietro Cimino’s bankruptcy case and then obtained a state court judgment (the “Judgment”) based on claims of fraud and conversion. The award of actual damages was enhanced under a Nevada statute that allows attorneys’ fee recovery and doubled damages for exploiting the elderly and converting or obtaining control over their assets. Mr. Indelicato then relied on the Judgment and issue preclusion to obtain summary judgment on a non-dischargeability complaint, and the bankruptcy court determined that the Judgment was nondischargeable under § 523(a)(2)(A) and (a)(6).2 We AFFIRM.
Carrillo v. Su, No. 01-55656 (9th Cir. May 20, 2002) In determining nondischargeability of a debt under 11 U.S.C. section 523(a)(6), the proper inquiry is whether the injury underlying the judgment involved either a subjective intent to harm, or a subjective belief that harm was substantially certain.
Link to the National consumer Law Center “NCLC”‘s Clearing a Pat to a New Beginning, a Guide to Discharging Criminal Justice Debt in Bankruptcy, published 10/2020. Very helpful information.
Welfare fraud – civil judgment a part of criminal conviction is non-dischargeable
Feyijinmi v. Maryland Central Collection Unit, 22-2252 (4th Cir. June 28, 2024) Comparing Section 523(c)(1) to Section 1328(a)(3), The 4th Circuit held that a debt for restitution ordered as part of a criminal conviction is nondischargeable under 11 U.S.C. § 1328(a)(3), even if the conviction was expunged or the restitution was later converted to a civil matter. Additionally, the State’s characterization of the debt on its proof of claim as “court fees” did not change its nondischargeable nature.
Judge Diaz also said it was “clear that restitution debts are nondischargeable without any action by the creditor.” In fact, he said that “a restitution creditor isn’t even required to file a proof of claim to collect on the debt post-discharge.”
Judge Diaz upheld the district court’s affirmance that the remaining restitution was not discharged by the debtor’s chapter 13 plan.
If criminal restitution was ordered, it is not likely dischargeable
In re Reif, 363 B.R. 107 (Bankr. Ariz. 2007); Kelly v. Robinson, 479 U.S. 36, 107 S.Ct. 353, 93 L.Ed.2d 216 (1986).
In re Wilson, __ B.R. __ (E.D.Va. 2003) (E.D.Va 2003) Debtor, who disposed of a motor vehicle that was subject to a lien, was charged with a felony under Virginia law. Prior to debtor’s trial on this charge, he entered into a plea agreement under which he pled guilty to the misdemeanor crime of fraud as an accessory after the fact. The Richmond Circuit Court found debtor guilty and additionally entered an order on April 30, 2002, requiring debtor to pay criminal restitution to plaintiff.
Plaintiff, a secured creditor, objected to discharge. The Court looked at split in authority on this issue, and opted for the plain language of the Bankruptcy Code, which makes restitution “payable to or for the benefit of a governmental unit” is nondischargeable.
Note: while criminal restitution is non-dischargeable under section 523, it is not one of the listed priority debts in section 507 (the same problem as with educational loans). Therefore, any attempt to pay that unsecured debt in full in the plan without the same percentage payback to other unsecured creditors would likely cause the trustee to object. Instead, try to get the agency to whom the restitution is owed to agree to a long term payback of the restitution–longer than the Ch 13 plan’s duration. Then, using section 1322(b)(5), pay the restitution outside the plan as a budget expense.
Banks v. Gill Distribution CTRS., Inc. (08/15/01 – No. 00-55339) (9th Cir. Ct App) A valid state law claim need not be reduced to a pre-petition judgment to be nondischargeable in bankruptcy.
In re Harold W. Dickens, III BAP No. CC-21-1202-FSG (9th Circuit, Aug 17,2022) Not Published The California superior court sanctioned attorney Harold W.
Dickens, III for submitting false declarations on behalf of his clients while defending a defamation lawsuit brought by the appellees. Mr. Dickens filed for chapter 71 bankruptcy protection. The appellees sought to have the debt declared nondischargeable under § 523(a)(6) because it arose from a willful and malicious injury: filing the false declarations with the intent to defeat the defamation lawsuit. The bankruptcy court granted the appellees’ motion for summary judgment based on the issue preclusive effect of the state court’s judgment. The issues that the California superior court had to decide in order to impose sanctions on Mr. Dickens were identical to the issues before the bankruptcy court under § 523(a)(6). Among other things, the superior court necessarily found that Mr. Dickens acted in bad faith under a subjective standard. We AFFIRM.
In the Ninth Circuit, “the willful injury requirement of § 523(a)(6) is met when it is shown either that the debtor had a subjective motive to inflict the injury or that the debtor believed that injury was substantially certain to occur as a result of his conduct.” In re Jercich, 238 F.3d at 1208. “A ‘malicious’ injury involves ‘(1) a wrongful act, (2) done intentionally, (3) which causes injury, and (4) is done without just cause or excuse.’” In re Jercich, 238 F.3d, at 1209 (quoting In re Bammer, 131 F.3d 788, 791 (9th Cir. 1997)).
In re Pietro Cimino, BAP NV 21-1057-TLG (9th Cir BAP, 10/6/21) Leonard Indelicato1 obtained stay relief in Pietro Cimino’s bankruptcy case and then obtained a state court judgment (the “Judgment”) based on claims of fraud and conversion. The award of actual damages was enhanced under a Nevada statute that allows attorneys’ fee recovery and doubled damages for exploiting the elderly and converting or obtaining control over their assets. Mr. Indelicato then relied on the Judgment and issue preclusion to obtain summary judgment on a non-dischargeability complaint, and the bankruptcy court determined that the Judgment was nondischargeable under § 523(a)(2)(A) and (a)(6).2 We AFFIRM.
In re Rodriquez, BAP No. SC-17-1245 (9th Cir. BAP, 2/1/21) State Farm filed an adversary proceeding against the Debtor asserting its debt was nondischargeable under 11 U.S.C. § 523(a)(6), because the Debtor wrongfully took the Ferrari from the woman, State Farm paid the woman for the loss under the insurance police, and State Farm was subrogated to her claims against the Debtor. The bankruptcy court held a three-day trial at which the Debtor testified. The bankruptcy court then issued an order with detailed findings of fact where the Debtor was found to not be credible. The bankruptcy court concluded that the Debtor met all the elements for the state law tort of conversion and separately held State Farm established the prongs of “willful” and “malicious” under § 523(a)(6). The bankruptcy court awarded State Farm damages in the amount of just over $42,000 for the balance after the Ferrari sold at auction plus pre- and post-judgment interest. The Debtor filed a motion for reconsideration, which the bankruptcy court denied. The Debtor appealed. BAP affirmed.
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In re Lisa Garcia BAP No. CC-19-1214 & 1232 (9/1/20 9th cir) Chapter 7 debtor Lisa Garcia. The state court judgment was based on conversion and constructive fraud. The bankruptcy court granted Fawzy relief under § 523(a)(6) but denied him relief under § 523(a)(2)(A). Garcia appeals from the § 523(a)(6) ruling. Fawzy cross-appeals from the § 523(a)(2)(A) ruling.
Both rulings hinged on whether Garcia’s state of mind, as found by the Arizona jury, was the same as that required for nondischargeability under either §523(a)(6) or § 523(a)(2)(A). The bankruptcy court answered this question in the affirmative for § 523(a)(6) but in the negative for § 523(a)(2)(A). With respect to § 523(a)(6), nothing in the state court record demonstrates that the jury actually found, or needed to find, that Garcia harbored an intent to injure Fawzy or subjectively believed that injury was substantially certain to occur as a result of her conduct.
Conclusion: We AFFIRM the bankruptcy court’s § 523(a)(2)(A) ruling, but we VACATE its § 523(a)(6) ruling and REMAND for further proceedings.
Peklar v. Ikerd (08/09/01 – No. 00-55464) (9th Cir. Ct App) A California state civil court judgment for conversion may be discharged in bankruptcy because it does not involve “willful and malicious injury” under 11 USC 523(a)(6).
Baldwin v. Kilpatrick (05/09/01 – No. 00-15332) Under 11 USC 523(a)(6), a prior state court proceeding that granted default judgment in a battery lawsuit that was previously arbitrated will have preclusive effect on whether judgment is nondischargeable as a “willful and malicious injury”. Default judgment entered in lower court acts as collateral estoppel and granted Movant’s summary judgment in Movant’s nondischargeability action (plaintiff in superior court case).
NOTE: Most Complaints objecting to dischargeability of a debt includes 523(a)(6) include a “catchall” count. Regarding intent and how to prove it, the best advice is to use Kawaauhau v. Geiger, 523 U.S. 57, 140 L.Ed.2d 90, 118 S.Ct. 974 (1998) as your guide. The Supreme Court held that the actor needed to be aware that the conduct was not only wrongful, but also would necessarily cause the injury in question to rise to the “willful and malicious” standard. Since Geiger, most courts have used a subjective approach to determine the intention required for “willfulness.” In re Moore, 357 F.3d 1125 (10th Cir. 2004); In re Su, 290 F.3d 1140 (9th Cir. 2002); In re Markowitz, 190 F.3d 455 (6th Cir. 1999).
Can a debtor discharge a debt arising out of a deliberate or intentional act that causes injury to you?
A recent article addressed the general issue of discharging debts in bankruptcy and various grounds for excepting debts from discharge in Chapter 7. This article focuses on the discharge exception for debts arising out of willful and malicious injuries by the debtor. The United States Court of Appeals for the Fourth Circuit recently reiterated in TKC Aerospace Inc. v. Muhs that such debts may be dischargeable it the debtor did not intend to cause injury.
In re Arno Arutyunyan BAP No. CC-20-1006-GFL (9th Circuit, Feb 26,2021) Ruling : BAP for 9th Cir. affirmed ruling of bankruptcy court (CD Cal.) granting chapter 7 debtor’s motion to dismiss with prejudice as untimely (FRBP 4007(c)) creditor’s 11 USC 523(a)(2), (4), and (6) complaint to except debt from discharge. Creditor filed suit seven days after deadline. Notwithstanding creditor signing and dating complaint on deadline and attempts to file complaint on deadline, creditor failed to file motion to extend by deadline. Bankruptcy court had no discretion to retroactively extend deadline.
Creditor Soroush Janamian (“Janamian”) appeals the bankruptcy court’s order granting chapter 7 debtor Arno Arutyunyan’s (“Debtor”) motion to dismiss Janamian’s adversary complaint pursuant to Civil Rule 12(b)(6), made applicable by Rule 7012. In the adversary proceeding, Janamian sought to except his debt from discharge under §§ 523(a)(2), (4), and (6). However, he failed to file the complaint by the deadline imposed under Rule 4007(c) or seek an extension of the deadline in accordance with that Rule.
The bankruptcy court was right. It could not retroactively extend the deadline. Accordingly, we AFFIRM
In re Emond, BAP NO. NV-19-1157-GLB, BK No. 3:18-bk-51350.BTB. Chapter 7 debtors Christopher Scott Emond and Jessica Lynn Kleinedler (“Debtors”) appeal the bankruptcy court’s order granting creditor Ryan McCarthy Investments, LLC’s (“McCarthy”) motion to extend the deadline to file a nondischargeability complaint. Contrary to Ninth Circuit precedent, the bankruptcy court extended the deadline without a finding or showing of “cause” under Rule 4007(c). Without any
explanation why McCarthy could not file the complaint within the original deadline, the facts in the record do not support a finding of cause. Accordingly, we REVERSE.
Markus v. Gschwend (12/17/02 – No. 01-17279) (9th Cir Ct App) An untimely complaint objecting to discharge of a judgment creditor did not relate-back to a timely motion objecting to debtor’s discharge, and that motion did not comply with the pleading requirements under Bankruptcy Rule 7008(a) or FRCP 8(a). Litigation expenses cannot be shifted when sanctions are imposed under Bankruptcy Rule 9011, on the court’s initiative.
Staffer v. Predovich, No. 01-56093 (9th Cir. September 27, 2002) A separate motion to reopen is not necessary when commencing an action for nondischargeability of a debt under Bankruptcy Rule 4007(b). Moving party may simply file a nondischargeability complaint.
Beaty v. Selinger, No. 01-56576 (9th Cir. September 26, 2002) The doctrine of laches may apply as an affirmative defense to nondischargeability complaints brought under 11 U.S.C. section 523(a)(3)(B), where defendant shows extraordinary circumstances and sets forth a compelling reason why the action should be barred.
Issue of preclusion:
In re Annette Tolley, 9th Cir. BAP OR-21-1129-SLB Judgment creditor Jess Fitzhugh filed a nondischargeability complaint against chapter 71 debtor Annette Irene Tolley under § 523(a)(2)(A). Shortly thereafter, Fitzhugh obtained summary judgment on his nondischargeability claim based on the issue preclusive effect of the $21,000 fraud judgment Fitzhugh had obtained against Tolley in Oregon state court. Tolley argues that the bankruptcy court erred when it applied issue preclusion because it was unfair given the surrounding circumstances. She insists that, at a minimum, the bankruptcy court needed to hold an evidentiary hearing on the fairness issue. We disagree, so we AFFIRM
In re Zuckerman, BAP No. CC-19-1200-TaFS (9th Circ. 4/10/20) Debtor Robert E. Zuckerman appeals from the bankruptcy court’s summary judgment order (“Order”) excepting from discharge under
§ 523(a)(2)(A) a debt for fraud and elder abuse reduced to judgment in state court. We agree with the bankruptcy court’s determination that Appellees were entitled to summary judgment based on the preclusive effect of the state court’s judgment. Therefore, we AFFIRM. This involved lengthy litigation dealing with serious fraudulent actions. The Debtor (Zuckerman) used excessive delay tactics and failed to respond and/or appear in court. Default entered in State court. BAP agreed with BK court that it was bound by state court’s finding of fraud, et al.
- RULING: Ninth Circuit Bankruptcy Appellate Panel affirmed order from bankruptcy court finding debt non dischargeable under § 523(a)(2)(A) and (a)(4). Bankruptcy court did not err when it granted creditors’ motion for summary judgment based on the preclusive effect of the state court judgment, which found the Debtor had committed fraud.
Diamond v. Kolcum, No. 00-16280 (9th Cir. April 04, 2002) Defendants are entitled to a declaration of discharge-ability under 11 U.S.C. section 523(a)(2)(A) and (a)(6) because the state court judgment to which they asked the bankruptcy court to give preclusive effect necessarily implicated issues identical to those implicated in the nondischargeability proceeding, and those issues were therefore actually litigated in the state court proceeding.
Bankruptcy can discharge an overpayment of SSA and other
Filing a bankruptcy can discharge the overpayment of SSA or insurance benefits, unless there is fraud. SSA or the insurance company has the burden to prove that the recipient committed fraud or misrepresentation in obtaining the benefit, but rarely does so.
But – see exceptions: Recoupment – SSA versus Long term disability insurance
However, although the person’s personal liability to the overpayment is discharged, depending on if it is the SSA or insurance and whether or not there is a right to continue to receive such benefits, the ability for “recoupment” may become an option. Recoupment is an “equitable defense” theory that is excluded from the limitations of the bankruptcy laws. As a result the payor has the right to off-set the amount owed from any new benefits received.
The right of recoupment does not apply to overpayments of SSA funds, therefore the recipient will continue to receive the regular payment.
There is a difference result if the overpayment was made by a long-term disability insurance policy. In that case the insurance company has a right to “recoup/off-set” the amount that was overpaid from on-going future payments. End result – the insured is no longer personally liable as a result of the discharge, but the insurance company can off-set the overpayment from future benefits.
Some Case Law:
In re DeLotto, 2015 Bankr. LEXIS 3846 (Bankr. D.R.I. November 9, 2015) Reduction of Social Security disability benefits to reimburse overpayments did not violate the automatic stay. Conclusion: Liberty Life’s post-petition reduction of Mr. DeLotto’s benefits to recover its pre-petition overpayment in accordance with the Policy terms constitutes permissible recoupment that is an exception to the automatic stay.
In re Terry, No. 08-43123, Adv. No. 09-3031 (Bankr. W.D. Mo 2010) (affirming In re Caldwell, theory of recoupment applies to long-term disability)
In re Beaumont, No. 09-7006 (10th Cir. 2009) (Theory of recoupment does apply to VA overpayment)
In re Caldwell, 350 B.R. 182 (Bankr. E.D. Pa. 2006)(distinguishing Lee v. Schweiker, 739 F.2d 870 (3d. Cir. 1984))(SSA is a govern by a “social welfare” statute that is an “entitlement” compared to the case in hand where the benefit is governed by a “contract” between the parties”)) (note – pre-BAPCPA)
Kozlowski v. Michigan Unemployment Insurance Agency Dockets: 16-2680, 16-2383 (US Court of Appeals for the Sixth Circuit, May 29, 2018)
Two individuals obtained unemployment benefits from the Michigan Unemployment Insurance Agency to which they were not entitled because they were being paid wages. Each was ordered to pay restitution and a penalty; each subsequently filed for Chapter 13 bankruptcy. The debtors argued that the penalties assessed were dischargeable in a Chapter 13 bankruptcy. Each district court disagreed. The Sixth Circuit affirmed, finding the penalties nondischargeable under 11 U.S.C. 523(a)(2). That section reflects a congressional decision that those who commit fraud are not to be given the same “fresh start” as “honest but unfortunate debtor[s].” A finding that the debt here arises from fraud perpetrated against the Agency makes section 523(a)(2) applicable, regardless of whether the debt could also fit under section 523(a)(7), which applies to government penalties.
e examination is broad and should be taken advantage of to obtain information.
The Supreme Court held that “collateral estoppel principles do indeed apply in discharge exception proceedings pursuant to §523(a).” Grogan v. Garner, 498 U.S. 279, 285 fn. 11, 111 S.Ct. 654 (1991). In the Ninth Circuit, collateral estoppel principles are applied in nondischargeability litigation to the extent that they would apply were the litigation being held in a court of the state where the original judgment was entered. In re Nourbakhsh, 67 F.3d 798, 800 (9th Cir. 1995), citing, Marrese v. American Academy of Orthopaedic Surgeons, 470 U.S. 373, 380 (1985) This is true, in the Ninth Circuit, even in default cases. Nourbaksh, supra, 67 F.3d at 800.
It appears that most states find collateral estoppel should be applied where (1) there is indentity of the parties, (2) the issues are identical, and (3) the matter has been litigated to final conclusion. See, e.g., Trucking Employees of North Jersey Welfare Fund, Inc. v. Romano, 450 So.2d 843, 845 (Fla. 1984); Mobil Oil Corp. v. Shevin, 354 So.2d 372, 374 (Fla. 1977). Other states sometimes add that the issue must be “necessarily” decided in the prior litigation, and also be “decisive.” See, e.g., Buechel v. Bain, 97 N.Y.2d 295, 303, 740 N.Y.S.2d 252, 766 N.E.2d 914 (2001).
Griffin v. Wardrobe, No. 07-16635 U.S. 9th Circuit Court of Appeals, March 16, 2009
In an action to declare a state judgment for fraud non-dischargeable in bankruptcy, summary judgment for Plaintiff is reversed, where the state court improperly allowed Plaintiff to amend her complaint in violation of the automatic stay under the Bankruptcy Code. The stay had been lifted for the sole purpose of the Movant pursuing the Debtor’s bond.
Lockerby v. Sierra, No. 06-15928 U.S. 9th Circuit Court of Appeals, August 07, 2008
In the bankruptcy context, an intentional breach of contract cannot give rise to nondischargeability under 11 U.S.C. section 523(a)(6) unless it is accompanied by conduct that constitutes a tort under state law.
In re Foster, ___ F.3d ___ (9th Cir. 2003) – Feb. 8, 2003 Debtor’s chapter 13 plan provided for full payment of delinquent non-dischargeable child support. Debtor completed the plan and was granted a discharge. Subsequently, Ventura County District Attorney went after debtor for the accumulated interest that was not paid through the plan. Held, plan could not provide for payment of interest, and creditor could collect unpaid interest following discharge. This is the majority rule.
A claim for post-petition interest on a debt not dischargeable in Chapter 13 under 11 U.S.C. § 1328(a) is not part of the bankruptcy estate because such unmatured interest was not part of the debt as of the date of filing the petition. Thus, a creditor cannot insist on interest being paid through the plan. And, the Code does not explicitly prohibit collection of post-petition interest after a debtor completes a confirmed chapter 13 plan.
Question: If a creditor files a non-dischargeability complaint against a debtor couple under 523(a)(2),(4),(6), but only the husband-debtor’s alleged wrongful conduct is at issue (the wife-debtor had nothing to do with the debt), can you dismiss the non-dischargeability complaint with respect to the wife? Or does the wife still inherit liability from the husband’s potential fraud because of community property laws?
Answers: “The Arizona rule is that the community is liable for the intentional torts of either spouse if the tortious act was committed with the intent to benefit the community, regardless of whether in fact the community receives any benefit” Selby v. Savard, 134 Ariz. 222, 655 P.2d (1982). Cited by J. Nielsen in In re LeSueur, 53 B.R. 414 (1985) and J. Case In re Oliphant, 221 B.R. 506 (1998). See also In re Rollinson, 322 B.R. 879 (2004) issued by Judge Haines.
Fraud cannot be imputed to an individual spouse based on a theory of community liability. See In re LeSueur, 53 B.R. 414 (1985). Rather, fraudulent conduct must be shown from an individual’s actions for the debt to be rendered non-dischargeable as to that individual. Id. In LeSueur, the court stated:
Fraud for purposes of a bankruptcy dischargeability complaint cannot be imputed to a spouse based on a theory of Arizona community property law. In re Norton, 34 B.R. 666, 668 (Bankr.Ariz.1983); In re Bursh, 14 B.R. 702, 705-06 (Bankr.Ariz.1981) (dismissing complaint and cause of action as to spouse).
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“(F)raud, which is never presumed, was not shown as to her.” Id, citing Matter of Benedict, 15 B.R. 671, 675 (Bankr.W.D.Mo.1981) (finding fraud as to husband, dismissing as to wife); Matter of Curry, 12 B.R. 421, 424-25 (Bankr. M.D. Fla.1981).
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In re LeSueur, 53 B.R. at 415.
A nondischargeability judgment should only be entered against a marital community’s community property where the evidence presented proves that both the husband and wife were involved in the transactions or occurences which lead to the nondischargeability judgment. See In re Clark, 179 B.R. 898, 902 (Bankr.D.Ariz. 1995); see also In re Bursh, 14 B.R. 702 (Bankr.D.Ariz 1981) (granting summary judgment where there was no evidence that wife participated in or had knowledge of husband’s fraud); In re Norton, 34 B.R. 666 (Bankr.D.Ariz. 1983) (dismissing nondischargeability complaint as to wife in absence of showing that she made misrepresentations to plaintiff).
In Clark, the court found that no evidence was presented to demonstrate that the wife took part in the acts which gave rise to the nondischargeability complaint. In re Clark, 179 B.R. at 902. Accordingly, the court found that the wife was an innocent spouse and that the debtors’ community property was not liable for the nondischargeabilty judgment entered against the husband. Id.
The Ninth Circuit has held that the proper test is a partnership or business relationship, not a spousal relationship. See In re Tsurukawa I, 258 B.R. 192, 198 (9th Cir. BAP 2001) (“we hold that a marital union alone, without a finding of a partnership or other agency relationship between spouses, cannot serve as a basis for imputing fraud from one spouse to the other.”); see also In re Carbray, 2006 WL 2559849 (Bankr.D.Ariz. 2006) (“Where no agency relationship exists, courts do not generally impute the wrongdoing of one spouse to an ‘innocent’ spouse in holding a debt nondischargeable. The marital status alone does not create an agency relationship.”).
Daily v. Garrett EC-16-1265-HKuB (9th Circuit, Aug 24,2018)
FACTS: Chapter 71 debtor Garrett agreed to build a new home for Plaintiffs Daily, and executed a written agreement with Garrett who began building Dailys’ home but did not complete the home, and Dailys sued for breach of contract, negligence and fraud. Dailys filed an adversary under § 523(a)(2)(A), alleging that Garrett induced them to enter the agreement with a series of false and fraudulent representations. RULING:Ninth Circuit BAP affirmed order from bankruptcy court finding Plaintiffs did not prove a claim under § 523(a)(2)(A) when they failed to provide evidence supporting allegations that the Debtor made a misrepresentation, fraudulent omission, or engaged in deceptive conduct. Evidence only showed Plaintiffs may have had a breach of contract action, but nothing more.
Kassas v. State Bar of California, September 26, 2022. The Ninth Circuit held that indebtedness arising from an attorney’s obligation to reimburse the State Bar for the payments made to victims of his misconduct was not excepted from discharge under 11 U.S.C. § 523(a)(7), which provides that a debtor is not discharged from any debt that “is for a fine, penalty, or forfeiture payable to and for the benefit of a governmental unit and is not compensation for actual pecuniary loss.” Considering the totality of the Client Security Fund program, the Circuit concluded that any reimbursement to the Fund was payable to and for the benefit of the State Bar and was compensation for the Fund’s actual pecuniary loss in compensating the victims for their actual pecuniary losses.
In re Albert-Sheridan BAP No. CC-18-1222-LSF (9th Circuit, Apr 11, 2019) Not Published
Ruling : Debtor’s sanctions and costs ordered paid by the California Supreme Court as a condition of reinstatement of her law license were nondischargeable.
Discovery sanctions to be paid as part of state bar disciplinary proceedings are nondischargeable under Section 523(a)(7), even though the debtor-attorney was directed to pay the sanctions to the adversary, according to the Ninth Circuit Bankruptcy Appellate Panel.
The BAP also ruled that costs incurred by the state bar are similarly nondischargeable.
Licup v. Jefferson Ave. Temecula, LLC (In re Licup) BAP SC-22-1111, BK 14-00809 (2/21/23) The Ninth Circuit’s Bankruptcy Appellate Panel affirmed a summary judgment excepting a debt from the debtors’ discharge under 11 U.S.C. § 523(a)(3)(A) in the full amount of the creditor’s state court judgment, rather than in the amount of the distribution the creditor would have received from the chapter 7 estate had it received notice in time to file a proof of claim. Further, the bankruptcy court did not err in limiting its ruling to the dischargeability issue as the state court could address the debtors’ arguments about the judgment’s enforceability.
In re Wlodarczyk, 19 cv-00062 (District Court, S.D. Cal 7/7/19) Stipulated state court judgment, including not dischargeable in bankruptcy. Default, then debtor filed chapter 7. Creditor filed adversary alleging not dischargeable under Section 523(a)(2)(A) – ‘false pretenses, false representation or actual fraud’. Bankruptcy court denied creditor’s motion, appealed and lost again in 9th Cir. District court.
Case sets out a step by step analysis of facts and factors for non-dischargeability.
ISSUE PRECLUSION:
“Issue preclusion `bars successive litigation of an issue of fact or law actually litigated and resolved in a valid court determination essential to the prior judgment, even if the issue recurs in the context of a different claim.’” ReadyLink Healthcare, Inc. v. State Compensation Ins. Fund, 754 F.3d 754, 760 (9th Cir. 2014) (quoting Taylor v. Sturgell, 553 U.S. 880, 892 (2008)). A federal court applies the forum state’s law of issue preclusion. Harmon v. Kobrin (In re Harmon), 250 F.3d 1240, 1245 (9th Cir. 2001). California’s test for issue preclusion has five threshold requirements:
First, the issue sought to be precluded from relitigation must be identical to that decided in a former proceeding. Second, this issue must have been actually litigated in the former proceeding. Third, it must have been necessarily decided in the former proceeding. Fourth, the decision in the former proceeding must be final and on the merits. Finally, the party against whom preclusion is sought must be the same as, or in privity with, the party to the former proceeding.
Section 523(a)(2)(A)
The record shows that the guarantee itself does not include any representation of Appellee’s financial condition. The bankruptcy court concluded that Appellee intended to perform on the guarantee. On the second element for § 523(a)(2)(A), the bankruptcy court concluded that there was no falsity with respect to Appellee’s agreement to the guarantee and even assuming any falsity, there was no evidence that Appellee knew of such falsity. On review of the record, the Court concludes that the bankruptcy court’s factual findings in support of its conclusion that Appellee had no intent to deceive with respect to agreeing to the guarantee are logical, plausible, and supported by the record.
Attorney fees owed by ex-spouse – dischargeable or not?
Cozart v. Wilson (In re Wilson), 4:18-ap-00495-BMW (Bankr. D. Ariz. Nov. 13, 2019) – 11 U.S.C. § 523(a)(5) and (15): Denying the debtor-defendant’s motion for summary judgment, the court held that even though the debt is not payable to the debtor’s ex-spouse, its benefit flowed to the ex-spouse and therefore falls within the scope of §523(a)(5) and 523(a)(15). Here, the Court cannot find that the debt owed to Mr. Cozart does not fall within the scope of § 523(a)(15) merely because it is owed to Mr. Wilson’s ex-spouse’s family law attorney, who is not an enumerated payee, rather than to his ex-spouse, who is an enumerated payee, given that the benefit of the debt flowed to Mr. Wilson’s ex-spouse.
If It’s Consensual, a Plan Can Discharge a Nondischargeable Debt
Dragnea v. Dragnea (In re Dragnea), 17-02248 (Bankr. E.D. Cal. Oct. 29, 2019) By consent, a chapter 11 plan can discharge an individual’s nondischargeable debt, even a matrimonial debt that is excepted from discharge under Section 523(a)(15). The husband contended that parties may not override Section 523(a)(15). Judge Klein responded by saying that chapter 11 can be used “as a vehicle contractually to modify otherwise nondischargeable debt.” He said, “Nothing is remarkable about an agreement compromising nondischargeable debt.” Likewise, he said, there is nothing “untoward about including a settlement in a chapter 11 plan.”
Attorney fees award dischargeable in chapter 13
In re Henry Voss III, BAP No. ID-20-1053-SGF Chapter 13 case Ms. Voss filed a proof of claim based on the attorney fees judgment, stating that the claim qualified as a priority domestic support obligation under § 507(a)(1). Mr. Voss objected to the claim, arguing that it was not a domestic support obligation under either § 507(a)(1) or § 523(a)(5). Ms. Voss responded that the attorney fees judgment was a nondischargeable priority domestic support obligation. The bankruptcy court then considered the relevantstate law regarding fee awards and examined the state court’s findings and concluded that the fee award was in the nature of spousal support as the state court based it on Ms. Voss’s financial need. It, therefore, ruled that the attorney fees judgment was a nondischargeable domestic support obligation under § 523(a)(5). Affirmed by 9th Cir. BAP.
Does a false financial statement make it impossible for a borrower to discharge debt under Section 523(a)(2)(B)(iii)?
Not according to In re Brown, 17-21719, E.D. CA, Bankr Court). “A bank’s blind reliance on financial ratios does not qualify as “reasonable reliance” on a false financial statement for purposes of excepting a debt from discharge under 11 U.S.C. § 523(a) (2) (B) (iii) when it has information inconsistent with the credit application presented through an automobile dealer.”
Oregon v. Mcharo (In re Mcharo), 19-1010 (B.A.P. 9th Cir. Feb. 7, 2020) A husband and wife applied for public assistance cash benefits in Oregon. They signed an agreement under oath stating that they would report changes in income. Later husband became employed, but failed to report the income. In the Ninth Circuit, a fraudulent omission in the face of a duty to disclose may constitute a false representation, thus potentially bringing the husband’s nondisclosure within the rubric of Section 523(a)(2)(A). But the question remained whether silence was a “statement.”
Judge Lafferty adopted the ordinary, common meaning of “statement” because the Bankruptcy Code does not define the term. He turned to the dictionary, where, he said, the definition of “statement” “does not contemplate silence or even nonverbal communication.”
Judge Lafferty cited bankruptcy courts in Idaho and Arkansas for holding in 2015 that “a debt incurred by overpayment of government benefits because a debtor failed to disclose a change in employment status was nondischargeable under § 523(a)(2)(A).”
– Keyword Rockstar Inc. v. Schultz, 19-60031 (9th Cir. June 25, 2020).
– Schultz v. Keyword Rockstar Inc. (In re Schultz), 18-1269 (B.A.P. 9th Cir. June 4, 2019).
The debtor went into a chapter 7, at roughly the same time putting his company chapter 7. The debtor valued the customer lists lower than he advertised the list value before bankruptcy. The bankruptcy court found the debtor grossly undervalued the lists. The BAP reversed, finding the trustee abandoned the list, for reasons other than value. The 9th Circuit reversed the BAP finding the bankruptcy court’s valuation “finds support in the record and is not illogical or implausible”
In re Hayley Marie Robinson WW-21-1042-TLB (9th Circuit BAP, Aug 12,2021) Not Published
The Ninth Circuit Bankruptcy Appellate Panel upheld the bankruptcy court’s findings that the debtor had defamed creditor and that the defamation constituted willful and malicious injury under section 523(a)(6) such that the debt was non-dischargeable in the debtor’s bankruptcy.
Model Hayley Robinson1 posted a Facebook video wherein she accused appellee Oscar Lee Olive, IV, 2 a photographer, of sexually Assaulting another model. Mr. Olive sued her in federal court for defamation and intentional infliction of emotional distress. Ms. Robinson then filed a chapter 73 bankruptcy case, and Mr. Olive responded with an adversary proceeding seeking to have his claims adjudicated and the resulting judgment declared nondischargeable.
After a trial, the bankruptcy court found that Mr. Olive had established the elements of a defamation claim under Washington law and
the elements for excepting the resulting debt from discharge under § 523(a)(6). The bankruptcy court’s key findings were based on its credibility determinations and are adequately supported by the record. Accordingly, we AFFIRM.
Failure to maintain books and records of sole proprietorship
In re Devine, Bk No 8-18-bk-10905, BAP CC-21-1238 (9th Cir BAP, 6/30/22) The Ninth Circuit Bankruptcy Appellate Panel upheld the bankruptcy court’s denial of a discharge under sections 727(a)(2)(A) and (a)(3) to an individual debtor for his failure to maintain books and records for his sole proprietorship and for his deposit of a check into a new bank account to avoid the creditors’ bank levies.
In re Kresock, BAP No. 20-1270-BSL (9th Cir, 12/22/21) Appellant, chapter 71 debtor Dr. Frank Daniel Kresock, appeals an order granting the United States Trustee (“UST”) summary judgment and denying Dr. Kresock’s discharge under § 727(a)(3) and (a)(4)(A). Given the amount of uncontroverted evidence that Dr. Kresock failed to keep or maintain financial records, falsified a court order, and made false oaths in connection with his bankruptcy case, the bankruptcy court did not err in granting the UST summary judgment and denying Dr. Kresock’s discharge. 9th Circuit BAP affirms Bankruptcy Court decision.
