The James vs. West case, part ten: Willful and Malicious
As a bankruptcy attorney in Mount Vernon, IL for over 20 years, I read through and analyze court rulings throughout the country. I was lucky to find this wonderful case from the Western District of Missouri (whence lay Kansas City, Independence, Branson, etc.). James v. West, 16-40358.
What a wonderful case this is: an excellently written opinion dealing with fraud, the means test and other topics important in bankruptcy.
This isn’t an opinion, this is a text book. It should be on the curriculum of anyone teaching bankruptcy law. It is that good!
Count III: § 523(a)(6)
The Jameses allege in a cursory manner that certain representations made by the Debtor or her agent were false and fraudulent and that they caused willful and malicious injury to the Jameses or their property. The Jameses rely on the same representations alleged in Count I, with the exception of the alleged representation regarding the possession date. In response to the Debtor’s oral motion for judgment as a matter of law, the Jameses argued that the underlying debt is compensatory, and not sanction-based. In their closing, the Jameses argued that the Debtor’s willfulness and maliciousness were evidenced by her acts of signing the Contract, sending the Letter, and sending the Check when she knew she did not have the funds to purchase the Property. Based on the evidence, the Court disagrees.
Section 523(a)(6) provides in pertinent part that a “discharge under section 727. . . of this title does not discharge an individual debtor from any debt for willful and malicious injury by the debtor to another entity or to the property of another entity.” To prevent discharge of a debt under § 523(a)(6), the movant must show by a preponderance of the evidence both elements: that (1) the debt is for “willful injury,” and (2) the debt is for “malicious injury.” In re Patch, 526 F.3d 1176, 1180 (8th Cir. 2008). “Willful,” as used in the statute, modifies the word “injury,” so that nondischargeability requires a “deliberate or intentional injury, not merely a deliberate or intentional act that leads to injury.” Kawaauhau v. Geiger, 523 U.S. 57, 61 (1998). As with any exception to discharge, nondischargeability under § 523(a)(6) is to be strictly construed in accord with the fresh start aim of the Bankruptcy Code. Geiger v. Kawaauhau (In re Geiger), 113 F.3d 848, 853 (8th Cir. 1997), aff’d sub nom., Kawaauhau v. Geiger, 523 U.S. 57 (1998).
The first requirement, that the injury is “willful,” requires a “deliberate or intentional invasion of the legal rights of another.” Roussel v. Clear Sky Properties, LLC, 829 F.3d 1043, 1047–48 (8th Cir. 2016) (citation omitted). More specifically, the injury must be an intentional tort, which requires that the tortfeasor “desire to cause consequences of his act” or “believes that the consequences are substantially certain to result from it.” Geiger, 113 F.3d at 852 (citing RESTATEMENT (SECOND) OF TORTS § 8A at 15 (1965)); see also Patch, 526 F.3d at 1180.
The second requirement, that the injury is “malicious,” requires conduct that is “targeted at the creditor . . . at least in the sense that the conduct is certain or almost certain to cause financial harm.” Roussel, 829 F.3d at 1047 (citation omitted). “If the debtor’s conduct was inexcusable and resulted in an inevitable injury to the plaintiff, it is malicious.” In re Jeffries, 378 B.R. 248, 256 (Bankr. W.D. Mo. 2007) (citation omitted). As made clear after Geiger, conduct that is merely negligent or reckless is insufficient for nondischargeability under §523(a)(6). Geiger, 523 U.S. at 64.
Section 523(a)(6) “sounds in tort, not breach of contract.” Jeffries, 378 B.R. at 256 (citation omitted); see also 4 COLLIER ON BANKRUPTCY ¶ 523.12 (Alan N. Resnick & Henry J. Sommer eds., 16th ed.) (“Section 523(a)(6) generally relates to torts and not to contracts.”).
In Geiger, the Eighth Circuit was called upon to decide whether § 523(a)(6) requires a willful injury or “an intentional act that results in injury.” The Court chose the former, and cited breach of contract as evidence that the latter approach proves too much. Geiger, 113 F.3d at 852 (“[W]e see no reason that a knowing breach of contract would not result in a judgment that would be exempt from discharge under this legal principle. Surely this proves too much.”). The Supreme Court agreed, and compared a knowing breach of contract to an intentional vehicle maneuver that causes unforeseen injury – both would violate the maxim that exceptions to discharge should be narrowly construed. Geiger, 523 U.S. at 62.
Thus, as a general rule, debts resulting from breach of contract, even debts resulting from intentional breach of contract, are not excepted from discharge under § 523(a)(6). In re Johnson, Adv. No. 07-3115, 2007 WL 5065545, at *3 (Bankr. D. Minn. Nov. 14, 2007) (citing In re Glatt, 315 B.R. 501, 511 (Bankr. D.N.D. 2004)); see also In re McDowell, 299 B.R. 552, 555 (Bankr. N.D. Iowa 2003) (“Simple breach of contract . . . is not included in the limited exceptions to discharge in bankruptcy.”).
The Jameses Failed to Prove Willful Injury
Here, the Jameses have failed to prove willful injury. The Court rejects the Jameses’ allegations that the Debtor caused willful injury by signing the Contract, sending the Letter, and sending the Check knowing that she did not have the funds on hand for either the purchase price or earnest money. As discussed above, there is no evidence the Debtor sent, or caused to be sent, the Letter or the Check. Although the law allows imputation of fraudulent acts or representations under § 523(a)(2), imputation of willful and malicious actions is not authorized by the plain language of § 523(a)(6). See, e.g., In re Nolan, 220 B.R. 727, 731–32 (Bankr. D.D.C. 1998) (“[T]he debtor must have been the one who caused the willful and malicious injury. Imputed liability is insufficient.”) (citation omitted).
With respect to the Debtor’s signing the Contract without having the funds on hand, the Court finds the Debtor credible in her assertion that she believed Knowles had the funding to consummate the transaction. In addition, the Court believes it was the Debtor’s intention to purchase the property to open a B&B, however dubious a business decision that may have been at the time. There is no evidence to support the Jameses’ argument that the Debtor devised a scheme to get a free house, hoping the title company would somehow transfer the deed before receiving the funds. That theory is not supported by common sense, let alone the plain terms of the Contract.
The failed transaction was not a “deliberate or intentional invasion of the legal rights” of the Jameses. Roussel, 829 F.3d at 1047–48. Nor was it an intentional tort, where the Debtor “desire[d] to cause consequences of [her] act” or “believe[d] that the consequences [were] substantially certain to result from it.” Geiger, 113 F.3d at 852. The Jameses failed to produce any evidence of the Debtor’s intent to cause willful injury. To the contrary, the Debtor displayed genuine remorse for the transaction falling through. For these reasons, the Court finds the Jameses have failed to prove willful injury.
The Jameses Failed to Prove Malicious Injury
The Jameses have also failed to prove malicious injury. The Court rejects the Jameses’ allegations that not producing the money and sending the fake Letter and Check amount to malicious injury. Again, there is no evidence that the Debtor sent, or caused to be sent, the Letter or the Check.
The Court finds the Debtor credible in that she believed the funding was in place to purchase the Property. While the Debtor was naïve in her belief that Knowles had the funding to purchase the Property, conduct that is merely negligent or reckless is insufficient for nondischargeability under § 523(a)(6). Geiger, 523 U.S. at 64. Moreover, the Debtor did not target the Jameses “in the sense that [her] conduct [was] certain or almost certain to cause financial harm” to them. There is no evidence that the Debtor intentionally set out to cause the Jameses financial harm.
Conclusion as to Count II
For these reasons, the Court finds the Jameses have failed to prove willful and malicious injury. Judgment against the Jameses should be entered on Count III.
The Debtor’s Oral Motion Regarding Rule 7054 and § 523(d)
In her closing argument, the Debtor for the first time requested that the Court reserve jurisdiction after any judgment under Fed. R. Civ. P. 54 as incorporated by Rule 7054 to allow her to request attorney fees and other costs under § 523(d). The Court denies the oral motion.
First, Fed. R. Civ. P. 54 does not create an independent basis to impose fees. Under the American Rule, each party bears its own attorney fees. Fed. R. Civ. P. 54(d)(2), however, allows the prevailing party to recover attorney fees where it is authorized by some independent basis.
Here, the only independent basis the Debtor raised is § 523(d), which provides:
If a creditor requests a determination of dischargeability of a consumer debt under subsection (a)(2) of this section, and such debt is discharged, the court shall grant judgment in favor of the debtor for the costs of, and a reasonable attorney’s fee for, the proceeding if the court finds that the position of the creditor was not substantially justified, except that the court shall not award such costs and fees if special circumstances would make the award unjust.
The Court denies the Debtor’s request for fees under this section, for several reasons.
First, the Debtor argues that § 523(d) applies when a creditor argues that a debt is consumer debt but loses on that argument. The Debtor’s interpretation of § 523(d) is not supported by the plain language of the statute, which applies only when “a creditor requests a determination of dischargeability of a consumer debt.” Since the debt here is not a consumer debt, § 523(d) does not apply.
Second, even if the Court is incorrect in its interpretation of § 523(d) (and the Debtor cited no authority one way or the other and the Court found none), the Court would nonetheless find that the Debtor is judicially estopped from arguing that the debt is a consumer debt; her consistent position throughout this case has been that the Jameses’ debt was not a consumer debt, and to change her position now would prejudice the Jameses.
Third, the Court finds that the Jameses’ complaint was substantially justified, as evidenced by the length of this opinion and the number and complexity of the legal and factual issues.
Fourth and finally, even if the debt is a consumer debt and the complaint was not substantially justified, this Court may still refuse to award attorney fees where special circumstances would make the award unjust. Courts are to make this determination by referencing equitable principles. In re Dizinno, 559 B.R. 400, 412 (Bankr. M.D. Pa. 2016). Here, the Debtor did not request fees in her answer, at any of the many status conferences, in her brief, or even in her opening statement. The first time she indicated she would be requesting reimbursement of her fees from the Jameses was in her motion for judgment and closing arguments. To allow her to request fees at this late juncture prejudices the Jameses and would make an award of fees unjust.
In conclusion, judgment on each count of the adversary complaint and motion to dismiss or convert in the alternative is entered in favor of the Debtor and against the Jameses. The parties are to bear their own costs and attorney fees. A separate judgment will issue.
Dated: February 24, 2017
/s/ Cynthia A. Norton
United States Bankruptcy Judge
Bravo, Judge Norton, on an excellent opinion!
About the blogger:
Michael Curry of Curry Law Office in Mount Vernon, Illinois (http://michaelcurrylawoffice.com/) has helped thousands of individuals, family and small businesses in southern Illinois find protection under the Bankruptcy Code for almost twenty-five years. He is also available to help individuals and families with their estate planning (wills, power-of-attorney) and real estate and other sales transactions.
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