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Court Addresses Dischargeability of Debts Resulting from “Willful and Malicious Injury” by the Debtor

Schick from morguefile.comThe Ninth Circuit Court of Appeals upheld decisions from a bankruptcy court and the Bankruptcy Appellate Panel (BAP), which held that a creditor’s default judgment against the debtor was dischargeable in a Chapter 7 bankruptcy case. In re Fanday, No. 12-60017, memorandum (9th Cir., Aug. 16, 2013). The creditor had sought an order finding the default judgment nondischargeable because it resulted from “willful and malicious injury” caused by the debtor. 11 U.S.C. § 523(a)(6). The court’s order reviews Ninth Circuit precedent regarding the dischargeability of debts allegedly resulting from the debtor’s malicious actions. This could apply to many types of civil lawsuit judgments.

The court does not spend much time rehashing the facts of the case, but notes that the default judgment in question resulted from a lawsuit over the breakup of a corporation. The creditor argued that § 523(a)(6) should apply to the default judgment. The bankruptcy court, however, found that the corporation’s breakup resulted from “poor planning and undercapitalization,” not the debtor’s “malicious intent.” Fanday, memo. at 2. The bankruptcy court held that the creditor did not present evidence to support these allegations, and the BAP and Ninth Circuit found no error.

The court cited In re Su, 290 F.3d 1140 (9th Cir. 2002), which addresses the standard for finding a debt nondischargeable under § 523(a)(6). The debtor in Su had been the defendant in a lawsuit arising from an automobile accident, in which a jury found him liable for the plaintiff’s injuries. The jury also found him guilty of “malice,” defined in part as “a willful and conscious disregard for the safety and rights of others.” Id. at 1141. It entered a judgment against him for $530,000.

The debtor in Su then filed for Chapter 7 bankruptcy, and the judgment creditor sought to have the judgment ruled nondischargeable under § 523(a)(6). The bankruptcy court ruled in the creditor’s favor, but the BAP reversed. The appellate court affirmed the BAP, finding the judgment to be dischargeable. It held that § 523(a)(6) applies to willful injuries, not willful acts that lead to an injury. Id. at 1143, citing Kawaauhau v. Geiger, 523 U.S. 57 (1998). The creditor’s injuries were the result of the debtor’s negligence and malice, but the injuries themselves were not intentional. The Su court affirmed the rule that debts are only dischargeable under § 523(a)(6) if they result from the debtor’s “subjective intent to harm” or “subjective belief that harm is substantially certain.” Su, 290 F.3d at 1144-45. The Ninth Circuit in Fanday affirmed the lower courts’ findings that the creditor did not prove these subjective factors by a preponderance of evidence.

People in financial distress may be able to get relief from their debts, and the opportunity for a fresh start, with a bankruptcy filing. Many bankruptcy cases result in a discharge of debts, such as after liquidation of assets in a Chapter 7 case, or completion of a payment plan in a Chapter 13 case. Bankruptcy attorney Devin Sawdayi has represented individuals in Chapter 7 and Chapter 13 bankruptcies in the Los Angeles area since 1997, helping them rebuild their finances with respect and dignity. Please contact us today online or at (310) 475-9399 to schedule a free and confidential consultation about your case.

More Blog Posts:

Child Support and Spousal Maintenance Obligations Are Not Dischargeable in Bankruptcy, Los Angeles Bankruptcy Lawyer Blawg, August 12, 2013

Filing for Bankruptcy After a Prior Discharge Under Chapters 7 and 13, Los Angeles Bankruptcy Lawyer Blawg, August 9, 2013

Supreme Court Rules on Meaning of “Defalcation” in Statutory Provision for Nondischargeable Debts in Bankruptcy, Los Angeles Bankruptcy Lawyer Blawg, July 30, 2013

Photo credit: Schick from morguefile.com.