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NONDISCHARGEABILITY – 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.
RECOVERING ATTORNEY FEES AFTER NON-DISCHARGEABILITY ACTION
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.
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.
“Arizona’s family law statutes are not so broad,” he concluded
In re Dougherty – justifiable reliance did not need to be established; Section 523(a)(2)(A) (1998?)
SUBJECTIVE INTENT TO HARM
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.
CRIMINAL RESTITUTION DISCHARGEABLE?
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.
NO REQUIREMENT FOR PRE-PETITION JUDGMENT
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.
WILLFUL AND MALICIOUS INJURY
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).
Peklar v. Ikerd, No 00-55464 (9th Cir. August 09, 2001) 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).
UNTIMELY COMPLAINT OBJECTING TO DISCHARGE
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.
NO NEED TO REOPEN TO FILE NONDISCHARGEABILITY COMPLAINT
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.
DOCTRINE OF LACHES AND NONDISCHARGEABLITY 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.
ISSUES LITIGATED IN STATE COURT
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.
DISCHARGE OVER PAYMENT OF SSA and OTHER
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)
COLLATERAL ESTOPPEL PRINCIPLES
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.
CHAPTER 13 - CREDITOR WITH NONDISCHARGEABLE DEBT and COLLECTING INTEREST
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.
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