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Section 523 Exceptions to discharge (Judge Mott)

Turbo Aleae Investments, Inc. v. Borschow et al (April 8, 2011)
Issue: Whether the Debtor-Defendants committed actual fraud under 11 U.S.C. §523(a)(2)(A) by falsely representing that they would (1) use loan proceeds obtained from the Plaintiff to pay off another loan; (2) use loan proceeds obtained from the Plaintiff to only cover only overdrafts in their corporate bank account; (3) use loan proceeds obtained from the Plaintiff to pay off debt to a third party; (4) obtain life insurance naming the Plaintiff the beneficiary; (5) grant the Plaintiff a mortgage on their homestead. Holding: The Court found that a portion of the debt was dischargeable in the Debtor-Defendants’ bankruptcy case and a portion of the debt was non-dischargeable.

Green v. Internal Revenue Service (April 27, 2012)
Issue: Whether Federal income taxes are excepted from discharge under §523(a)(1)(B)(i) or §523(a)(1)(B)(ii) of the Bankruptcy Code. Holding: The Court concluded that: 1) a “return” under §523(a)(*)(i.e the hanging paragraph) for the income taxes was not “filed or given,” and therefore the income taxes are excepted from discharge under §523(a)(1)(B)(i), and 2) that a previous appealable Tax Court Decision was not a “final order of a nonbankruptcy tribunal” that qualified as a “return” under §523(a)(*), because taxpayer did not enter into a “written stipulation” to the Tax Court Decision as required by the statutory language of §523(a)(*), and as a result the income taxes are excepted from discharge under §523(a)(1)(B)(i). Further and as an alternative holding, the Court concluded that if no “written stipulation” to the Tax Court Decision is required to constitute a “return” under §523(a)(*), then the income taxes are still excepted from discharge under §523(a)(1)(B)(ii) because the Tax Court Decision did not become final until two years prior to the bankruptcy filing.

Fernandez v. Internal Revenue Service (October 25, 2012)
Issues: Chapter 7 Debtor filed an adversary proceeding against the IRS to determine whether the Debtor’s 2003 and 2004 federal income tax liabilities were discharged, and the IRS filed a Motion for Summary Judgment. In its opinion granting the IRS’ Motion, the Court addressed: (1) whether the Debtor’s 2003 federal income taxes were excepted from discharge under § 523(a)(1)(B)(i) because the Debtor did not file a “return” within the meaning of the hanging paragraph of § 523(a)(*); and (2) whether the Debtor’s 2004 federal income taxes were excepted from discharge under § 523(a)(1)(B)(ii) because the Debtor filed his 2004 tax return late and less than two years before the Debtor filed bankruptcy. Holdngs:(1) The Debtor argued that by signing a Form 4549 with respect to his 2003 taxes, he filed a tax “return” under § 6020(a) of the Internal Revenue Code (“IRC”) and within the definition of “return” set forth in the hanging paragraph of § 523(a)(*) of the Bankruptcy Code . The Court held the Form 4549 signed by the Debtor did not constitute a “return” under IRC § 6020(a) and § 523(a)(*) of the Bankruptcy Code because it was not a tax return, it was not received by the IRS as a return of the Debtor, and the Form 4596 signed by the Debtor was qualified and conditional. Further, the Debtor did not dispute that the IRS had previously filed an IRC § 6020(b) substitute return on the Debtor’s behalf for the 2003 taxes, and the definition of “return” under the hanging paragraph of § 523(a)(*) excludes a return filed under IRC § 6020(b). The Court also rejected the Debtor’s argument that the filing of a non-priority (general unsecured) proof of claim by the IRS against the Debtor’s bankruptcy estate resulted in the Debtor being discharged from the taxes. Accordingly, the Court concluded that the Debtor’s federal income taxes for the 2003 year were excepted from discharge under § 523(a)(1)(B)(i) because the Debtor did not file a tax return for the 2003 year. (2) With respect to the Debtor’s 2004 taxes, the Debtor argued that he timely “submitted” his 2004 tax return on or before April 15, 2005, and then “re-submitted” his 2004 tax return in September 2008 because the IRS did not have any record of receiving his 2004 return in 2005. The Court held that the Debtor failed to raise a genuine issue of material fact with respect to the timely filing of his 2005 return, due to lack of any specific facts in the Debtor’s statements, the Debtor’s admission that the 2004 return was not filed timely, and because, as a matter of law, a taxpayer’s testimony by itself is not sufficient to establish that a tax return was timely filed when the IRS had no record of receipt of such return. Since the summary judgment evidence demonstrated that the Debtor’s 2004 tax return was not filed until 2008, the Court concluded that the 2004 taxes were excepted from the Debtor’s discharge under § 523(a)(1)(B)(ii) as the 2004 return was filed late and less than two years before the Debtor filed bankruptcy.

Acosta v. Durnal-Farhat (March 22, 2013)
Issue:  Plaintiff filed adversary proceeding requesting that alleged damages sustained by Plaintiff as a result of a dog bite were a non-dischargeable debt of Debtor Defendant under 11 U.S.C. §523(a)(6), which excepts debts from discharge based on “willful and malicious injury” by a debtor. Plaintiff asserted that Debtor Defendant was “grossly negligent” by giving freedom to her dog which resulted in Plaintiff being bitten by the dog. Debtor Defendant moved for summary judgment. Holding: The Court held that gross negligence standard under Texas law is not the same as the “willful and malicious” standard under §523(a)(6) of the Bankruptcy Code, nor are reckless acts sufficient to establish that a resulting injury is “willful and malicious.”  As a result, the Court granted summary judgment in favor of Debtor Defendant.

Marshall v. Urban (December 18, 2013)
Issue: Plaintiff filed adversary proceeding requesting that certain debt be determined to be non-dischargeable as to Debtor Defendant under 11 U.S.C. §523(a)(2)(A).  Plaintiff filed a Motion for Summary Judgment based on res judicata and collateral estoppel due to an uncontested summary judgment rendered by the state court. Holdings: The Court denied Plaintiff’s Motion for Summary Judgment. The Court determined that res judicata (claim preclusion) did not apply to the state court judgment. The Court also determined that collateral estoppel (issue preclusion) did not apply because: (1) it was not possible to ascertain if the fraud issue was fully and fairly litigated based on the state court record provided; (2) the summary judgment order entered by the state court appeared to be based on two indistinguishable claims and could also be read as being based on a breach of contract claim as well as a fraud claim; and (3) the state court summary judgment included only a conclusory finding that “the Defendants” (of which the Debtor was one Defendant) committed a fraud on Plaintiff by making material misrepresentations on which Plaintiff relied; and (4) there were not sufficient specific subsidiary findings and facts in the state court record to establish that the individual Debtor Defendant made a representation to Plaintiff that was knowingly false with the intent to deceive the Plaintiff, which are two necessary elements of a §523(a)(2)(A) non-dischargeability claim.

Rutledge v. Barnes  (July 18, 2013)
Issue:  Plaintiff filed adversary proceeding requesting that certain debt be determined to be non-dischargeable as to Debtor Defendant under 11 U.S.C. §523(a)(2)(A), §523(a)(4), and §523(a)(6) of the Bankruptcy Code. Plaintiff filed a Motion for Sanctions pursuant to Federal Rule of Civil Procedure 37 and Bankruptcy Rule 7037 requesting the Court impose “death penalty” sanctions on Debtor Defendant by striking the Debtor Defendant’s answer and entering a default judgment based on Debtor Defendant’s numerous discovery abuses and violations of discovery orders issued by the Court and the state court. Holding: Under the extreme facts and circumstances presented, the Court granted the Motion for Sanctions filed by Plaintiff, struck Debtor Defendant’s answer and entered a non-dischargeability default judgment against Debtor Defendant as a “death penalty” sanction.  The Court determined that Debtor Defendant willfully and intentionally failed and refused to appear for his deposition on multiple (five) occasions, that the Debtor Defendant had conjured up a doctor’s letter (without the doctor’s knowledge) under false pretenses as an excuse, that Debtor Defendant had ignored and violated multiple discovery orders of the Court and the state court, that Debtor Defendant’s own conduct (not the conduct of his attorney) was repeatedly dilatory and obstructive with respect to Plaintiff’s discovery efforts, that Debtor Defendant had failed to respond to Plaintiff’s written discovery requests, that Debtor Defendant prejudiced Plaintiff in preparation for trial, that Debtor/Defendant personally acted in bad faith, and that under the extreme circumstances presented no lesser sanction would achieve the desired deterrent effect.

Classic Bank v. Herring (October 30, 2013)
Issue: Plaintiff bank filed an adversary proceeding requesting that certain debt be non-dischargeable as to Debtor Defendant under 11 U.S.C. §523(a)(2)(A). The Court addressed whether debt guaranteed by Debtor Defendant to Plaintiff was a debt obtained by Debtor Defendant by actual fraud, false pretenses or false representations.  Debtor Defendant owned companies that engaged in the business of constructing swimming pools and financing such construction for homeowners. Debtor Defendant was alleged to have “double-pledged” certain swimming pool construction loans and notes as collateral to Plaintiff bank, when Debtor Defendant and his companies had allegedly already pledged the same loans and notes as collateral to another lender. Holding: The Court held that the debt guaranteed by Debtor Defendant to Plaintiff was dischargeable because two necessary elements under 11 U.S.C. §523(a)(2)(A) had not been proven: (1) intent to deceive by Debtor Defendant had not been established; and (2) justifiable reliance by Plaintiff bank on any misrepresentation had not been established.  The Court’s ruling is set forth in a written transcript. In sum, the Court determined that there was no intent to deceive by Debtor Defendant when he offered certain loans and notes as collateral to Plaintiff bank for many reasons, including that the evidence demonstrated that his other lender had voluntarily released possession of those notes to Debtor Defendant and his corporation for restructuring due to their default status and Defendant Debtor was ordered by a state court to later turnover possession of the restructured notes to his other lender.  Second, the Court determined that there was no justifiable reliance by Plaintiff bank that the loans and notes were not subject to a prior security interest as represented in the security agreement executed between Debtor Defendant’s corporation and Plaintiff bank, as Plaintiff bank knew at the time of the loan that another lender had a prior UCC-1 financing statement on file asserting a security interest in the assets of Debtor Defendant’s corporation, and the warehousing agreement executed by Debtor Defendant’s corporation in favor of Plaintiff bank stated that Plaintiff bank had a “second” priority security interest and lien on the collateral.

Lilley v. Laviolette (October 7, 2014)
Issues: Plaintiff filed an adversary proceeding requesting that his debt be non-dischargeable as to Debtor Defendant under 11 U.S.C. §523(a)(2)(A), §523(a)(2)(B), §523(a)(4) and §523(a)(6) of the Bankruptcy Code.  In general, Plaintiff asserted that the debt arose from a fraud committed by Debtor Defendant due to representations made in a written investment agreement entered into by Plaintiff and Debtor Defendant on behalf of his real estate company. Debtor Defendant, as the managing member of the real estate company, signed the written investment agreement. Plaintiff also asserted that certain fraudulent oral representations were made to Plaintiff by Debtor Defendant in his individual capacity.  The issues addressed by the Court included: (1) whether Debtor Defendant could be held personally liable for a written misrepresentation by his corporate entity; (2) whether the debt should be excepted from discharge under 11 U.S.C. §523(a)(2)(B) as a debt for money obtained by use of a statement in writing that was materially false concerning the debtor’s or insider’s financial condition; and (3) whether Debtor Defendant committed actual fraud under 11 U.S.C. §523(a)(2)(A). Holdings:  The Court held that the debt owing to Plaintiff by Defendant Debtor was non-dischargeable under 11 U.S.C §523(a)(2)(A). The Court’s oral ruling is set forth in an audio file attached to the docket sheet. First, the Court concluded that if Debtor Defendant, while acting on behalf of his corporate entity, committed a fraudulent act against Plaintiff, then Debtor Defendant could be held personally liable for such acts. Second, the Court determined that the written investment agreement was not a “statement of a debtor or insider’s financial condition” within the meaning of §523(a)(2)(B), as the agreement did not contain any detailed statements regarding the corporate entity’s overall financial condition or health—only that the corporate entity owned a certain tract of land appraised at a certain value.  Third, the Court determined that Debtor Defendant was personally liable to Plaintiff for his fraudulent actions and the debt was non-dischargeable as all the elements of §523(a)(2)(A) had been satisfied.  Debtor Defendant, individually, as well as acting through a corporate entity, made material misrepresentations (both oral and written) as to the value and status of certain real property, thereby inducing Plaintiff to invest $200,000.  Debtor Defendant knew those representations were false when they were made and intended for Plaintiff to rely on those representations.  Plaintiff, an unsophisticated investor, actually and justifiably relied upon the representations and sustained a loss as a proximate result of such reliance. Since the Court determined the debt was non-dischargeable under §523(a)(2)(A), it was not necessary for the Court to address the alternative grounds for non-dischargeability sought by Plaintiff under §523(a)(4) or §523(a)(6).