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Section 523 Exceptions to discharge (Judge Gargotta)

Helvetia Asset Recovery, Inc. v. Kahn (March 27, 2015)

Issue(s): Whether state court judgments against Debtor/Defendant should be given preclusive effect and whether the court should find on the basis of those judgments that the debts are non-dischargeable under 11 U.S.C. § 523(a) (2012).

Holding(s): The doctrine of collateral estoppel is applicable to bankruptcy non-dischargeability proceedings.  Specifically, a party is collaterally estopped from raising an issue under Texas law when: (1) the facts sought to be litigated in the second case were fully and fairly litigated in the first; (2) those facts were essential to the prior judgment; and (3) the parties were cast as adversaries in the first case.  All issues pertinent to non-dischargeability of the Final Judgment in this adversary proceeding under §§ 523(a)(4) and (6) were “actually litigated.” Consequently, the parties are collaterally estopped from relitigating any of the issues as part of this action. Further, Section 523(a)(4) does not discharge a debtor from debt “for fraud or defalcation while acting in a fiduciary capacity, embezzlement or larceny.” Gupta v. E. IdahoTumor Insti., Inc. (In re Gupta), 394 F.3d 347, 350 (5th Cir.2004).  When a corporate officer or director diverts assets of the corporation to his own use or gains a benefit, he breaches his fiduciary duty of loyalty to the corporation, willful and fraudulent acts may be presumed, and the transaction is presumptively fraudulent. In the state court trial, the jury found by clear and convincing evidence that Kahn’s conduct in breaching his fiduciary duty constituted both theft and an intentional misapplication and that Kahn committed his breaches of duty maliciously, fraudulently, or through gross negligence. Finally, sanctions imposed on Kahn in state court are considered non-dischargeable because they constitute willful and malicious injuries to Helvetia caused by Kahn. Section 523(a)(6) provides that an individual debtor will not get a discharge from any debt “for willful and malicious injury by the debtor to another entity or to the property of another entity.”

Zaragoza v. Salizillo (August 26, 2013)
Issue:  Whether Defendant’s allegedly fraudulent assertions that he intended to repay debts rendered those debts nondischargeable under 11 U.S.C. § 523(a)(2)(A).

Holding:  Plaintiffs’ § 523(a)(2)(A) claim failed because Plaintiffs did not prove that Defendant made a false representation with intent to deceive, that Plaintiffs’ reliance on Defendant’s representation was justifiable, or that Plaintiffs suffered damages as a proximate result of their reliance.  Defendant’s promise to repay his debts was a statement of his future intention.  Defendant’s ultimate failure to fulfill that promise did not prove the statement to be false at the time he made it.  Plaintiffs’ reliance on Defendant’s statements was not reasonable because they were aware of his dire financial situation.  Plaintiffs did not pay money, give up any rights, or suffer any damages in reliance on Defendant’s statements, which related to a pre-existing debt.  

Issue:  Whether Defendant’s allegedly fraudulent acts were calculated to willfully and maliciously injure plaintiffs, rendering related debts nondischargeable under 11 U.S.C. § 523(a)(6).

The debts were not nondischargeable under § 523(a)(6).  Defendant’s failure to repay his debt was not alone sufficient to show that he had a subjective intent to harm Plaintiffs.

American National Ins. Co. v. Bossier (July 16, 2012)
Issue: Does Defendant’s violation of a contract provision to reimburse Plaintiff for unearned sales commissions constitute fraud or defalcation while acting in a fiduciary capacity, or embezzlement, rendering the debts owed to plaintiff nondischargeable under § 523(a)(4)?
Holding: Although a fiduciary duty existed between Defendant and Plaintiff, Plaintiff did not meet its burden to prove defalcation or embezzlement under § 523(a)(4). On the embezzlement claim, the Court found that the failure to reimburse Plaintiff was at most a breach of contract. The Court also found that Plaintiff could not show the requisite reckless conduct to support a claim for defalcation.

Hutton v. Ferguson, et al. (September 1, 2011)
Issue: When Plaintiffs have shown that Debtor used business loan proceeds for personal purposes, commingled funds, wiped business computer hard drives, and failed to meet terms of promissory notes, have the plaintiffs met their burden of establishing by a preponderance of the evidence that the debt is: non-dischargeable under 11 U.S.C. § 727(a)(2), (3), (4) or (5), or under 523(a)(4) or (6)?
Holding: Plaintiffs met their burden and the Court found the debt to be non-dischargeable under § 727(a)(2)&(5) and § 523(a)(4)&(6). Plaintiffs did not meet their burden under § 727(a)(3)&(4) or § 523(a)(2).
Issue: Does res judiciata bar the bankruptcy court or is the Court collaterally estopped from considering the dischargeability of the claims if a state district court has already determined the issue?
Holding: Because the state court did not make any specific factual findings on the dischargeability issue, the bankruptcy court is not barred under res judicata or collateral estoppel.

Randall v. Atkins (Nov. 30, 2011)
Issue: On motion for summary judgment, whether judgment of attorney’s fees entered against Debtor in favor of Debtor’s ex-wife in a state court custody proceeding were non-dischargeable under § 523.
Holding: The attorney’s fees were not dischargeable because they constituted domestic support obligations under § 523(a)(5) in that they were owed to or recoverable by Hutton’s former spouse and were in the nature of support. The Court also rejected Debtor’s argument that the attorney’s fees were dischargeable under the Tenth Circuit’s “unusual circumstances” exception.

Century 21 v. Gharbi (March 3, 2011)
Issue: Whether the Defendant Mohammad Gharbi (“Defendant”) violated the Anticybersquatting Consumer Protection Act, 15 U.S.C. §1125(d), when he continued to use domain names which contained the Century 21 marks after his franchise agreements with Century 21 had been terminated? If so, what is the amount of damages to be awarded under § 1117(d), and will that award be held nondischargeable under 11 U.S.C. § 523(a)(6)?
Holding: The Court finds (1) that the Defendant had a bad faith intent to profit from the use of the domain names and therefore violated 15 U.S.C. § 1125(d). The Court further finds that (2) Plaintiff should be awarded $25,000 per violation, or $75,000 total, plus attorneys’ fees as determined under Federal Rule of Bankruptcy Procedure 7054; and (3) that this award will be held nondischargeable under 11 U.S.C. § 523(a)(6) because Defendant caused Plaintiff a willful and malicious injury. The relief requested by the Plaintiff should be GRANTED.

Lange v. Lange (November 3, 2010)
Issue: Is Plaintiff, Debtor’s ex-husband, entitled to indemnification for payment on debts when a Divorce Decree executed prior to the Debtor’s filing of Chapter 7 bankruptcy provided that Plaintiff would be indemnified and held harmless for Debtor’s failure to pay specific debts?
Holding: The Court finds that those debts listed in Debtor’s Schedule “F,” in which she listed Plaintiff as a co-debtor on Schedule “H” and were also listed in the Divorce Decree, are all non-dischargeable only to the extent that the creditor/claimant obtains payment and/or a money judgment against Plaintiff. Plaintiff would then, under 11 U.S.C. § 523(a)(15), have a right of indemnification against Defendant that would not be discharged by Defendant’s Chapter 7 discharge. Plaintiff failed to provide a sufficient evidentiary basis to show that he was entitled to indemnification for a debt not listed in Debtor’s schedules and for any debt relating to a lease on an automobile. The Court finds that the debts are therefore not subject to a right of indemnification under 523(a)(15) and are completely discharged.

Materials Products v. Ortiz (Aug. 27, 2010)
Issue: If a Complaint is filed under Section 523(a)(2), does that encompass both Section 523(a)(2)(A) and (B)?
Holding: The Court finds unpersuasive Plaintiff’s assertion that in filing its Complaint under Section 523(a)(2), the Plaintiff incorporated sections (A) and (B). Plaintiff refers and cites to § 523(a)(2)(A), but never mentions § 523(a)(2)(B). Dismissal, not leave to amend, is appropriate because the Plaintiff failed to plead facts supporting non-dischargeability on the grounds it cites, Section 523(a)(2)(A).

Kesselring v. Doyal et al (March 4, 2010)
Issue: Are debts dischargeable under 11 U.S.C. § 523(a)(2)(A) that were incurred through a state court finding Debtor liable for fraud when the jury instructions used a definition of “fraud” broader than that used to find “actual fraud” to be used to find a debt nondischargable?
Holding: The Court looked to determine whether or not omitting a material fact, as opposed to making a material representation, is enough to find a debt nondischargable under § 523(a)(2)(A), and held that because a party’s material omission may be considered to constitute a false representation the Debtor is liable for the fraud committed, and the debt owed is nondischargable.

Corn v. Corn (July 11, 2008)
Issue: At issue is the dischargeability of three debts incurred during the marriage of Channing and Elizabeth Corn. Plaintiff asserts that Defendant should remain liable to Plaintiff for certain marital debts pursuant to 11 U.S.C. § 523(a)(15), an exception to discharge for debts arising out of a divorce. Defendant contends in her motion for summary judgment that the Court must determine whether these obligations constitute spousal support under § 523(a)(5) (which she claims they are not), and therefore such debts are dischargeable.
Holding: The Court grants the Plaintiff’s Motion for Summary Judgment and will deny the Defendant’s Motion for Summary Judgment. Plaintiff is entitled to judgment as a matter of law because the debts were not in the nature of a domestic support obligation but were incurred in the course of the dissolution of the parties’ marital relationship.

Material Products Int'l v. Ortiz (August 24, 2012)
Issue: Did movant meet the summary judgment standard to grant nondischargeability of debt obtained by false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor’s financial condition under § 523(a)(2)(A)?
Holding: Debtors represented to secured lender that collateral was unencumbered when it in fact was subject to two prior security interests covering the collateral. Because Debtors knew the representation was false, they made the representation with intent to deceive the movant, the movant actually and justifiably relied on the representation, and the movant sustained a loss as a result of the false representation, summary judgment granted and the debt determined nondischargeable under § 523(a)(2)(A).

Lowry v. Croft, et al. (October 22, 2013)

Issue: Whether an award of damages in favor of the Plaintiff pursuant to a violation of the Fair Credit Reporting Act (“FCRA”), 15 U.S.C. §§1681 and a state court award of sanctions for the filing of frivolous lawsuits against the Plaintiff is non-dischargeable as a “willful and malicious injury by the debtor” under 11 U.S.C. §523(a)(6).

Holding: The Court found that the violation of the FCRA was willful and malicious in this instance where the Debtor obtained the Plaintiff’s credit report and posted it to a website in an attempt to harm her reputation, credibility and business.  The Court also found the filing of frivolous state court lawsuits was willful and malicious in this instance where the Debtor had filed four lawsuits with substantially similar allegations that were intended to harass the Plaintiff and her business.

Pappas v. Texas Higher Education Coordinating Board (In re Pappas) (Sept. 8, 2014)
Issue: At issue is the dischargeability of Plaintiff's guaranty of a student loan debt. Plaintiff filed bankruptcy in 1997 and listed the College Access Loan ("CAL") debt as a Creditor Holding Nonpriority Claim. The Texas Higher Education Coordinating Board (THECB) filed an unsecured nonpriority proof of claim pertaining to the CAL debt requesting the Plaintiff to determine the dischargeability of the debt. No complaint was ever filed by the Plaintiff or the THECB and subsequently Plaintiff received his Chapter 7 discharge. In 2011 the THECB attempted to collect on the CAL debt against the Plaintiff; Plaintiff asserts the debt was discharged. Under 11 U.S.C. § 523(a)(8) "educational loans made, insured or guaranteed by a governmental unit or nonprofit institution" are not dischargeable.
Holding: Section 523(a)(8), as it existed in 1997, does not only cover federally funded student loans as asserted by the Plaintiff. Bankruptcy courts have found that Section 523(a)(8) applies to state-funded student loans as well. Additionally, the Court held that Debtor's status as a non-relative guarantor did not affect the dischargeability of the student loan debt.  Accordingly, the Court finds that the CAL debt was not discharged under the Plaintiff's prior Chapter 7 bankruptcy and that the debt is a nondischargeable debt under 11 U.S.C. §523(a)(8).