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Debtor’s “Tortious Conduct” May Prevent Discharge of Debt in Chapter 7 Bankruptcy

By Southern Foodways Alliance (originally posted to Flickr as Cabernet Franc) [CC BY 2.0 (http://creativecommons.org/licenses/by/2.0)], via Wikimedia CommonsA creditor objected to the discharge of a judgment for damages against the debtor in a Chapter 7 bankruptcy case under 11 U.S.C. § 523(a)(6), which prohibits discharge of debts resulting from “willful and malicious injury by the debtor.” The bankruptcy court granted partial summary judgment for the creditor, finding part of the damage award nondischargeable. The creditor appealed to the Bankruptcy Appellate Panel (BAP), arguing that the entire damage award should be excepted from discharge. The BAP vacated the bankruptcy court’s order and remanded the matter for further proceedings regarding how much of the judgment involved tortious action. In re Lawson, No. NC-14-1153, memorandum (B.A.P. 9th Cir., Mar. 23, 2015).

The debtor operates a winery in California’s Napa Valley under an assumed business name. He entered into a two-year master distribution agreement (MDA) with the creditor in May 2011, which gave the creditor the exclusive right to distribute the debtor’s wine in China. The BAP states that “signs of strain in the business relationship” soon became apparent. Lawson, mem. at 3. In May 2012, the creditor placed an order for Merlot and paid in full. It also placed an order for Cabernet, but the debtor canceled this order and, according to the BAP, refused to release the Merlot to the creditor unless it paid additional money for expenses related to the cancelled Cabernet order and underpayment for earlier orders.

The creditor filed suit against the debtor in California state court after it lost two major contracts in China. An arbitrator found that the debtor was liable for conversion of the Merlot order, breach of the MDA, and breach of the covenant of good faith and fair dealing. The court confirmed the arbitrator’s award of over $222,000 in compensatory and punitive damages, attorney’s fees, and costs.

In April 2013, the debtor filed for Chapter 7 bankruptcy. The creditor filed an adversary proceeding asking the court to find that the arbitration award was nondischargeable under several provisions of § 523(a). It moved for summary judgment as to the entire award under § 523(a)(6). The debtor argued that the portion of the award covering damages for breach of contract should not be excepted from discharge. The bankruptcy court agreed, finding that only the conversion claim met the “willful and malicious” element of § 523(a)(6). It granted summary judgment as to that part of the award, which accounted for about $52,000 of the total.

The creditor appealed to the BAP, claiming that the entire award, which included about $100,000 in damages for breach of contract and almost $73,000 in attorney’s fees and costs, was nondischargeable. Lawson, mem. at 8. It argued that the debtor’s actions in breaching the MDA necessarily involved tortious conduct within the meaning of § 523(a)(6).

The BAP noted that the arbitrator “specifically awarded damages for conversion only to the extent they were additional to the breach of contract damages,” id. at 11, but also that breach of contract claims under California and federal law are only “tortious,” and therefore nondischargeable, under narrow circumstances. It vacated the partial summary judgment order and remanded the case with instructions to “re-evaluate the quantum of the § 523(a)(6) judgment.” Id. at 13.

Bankruptcy attorney Devin Sawdayi has represented clients in Chapter 7 and Chapter 13 cases in the Los Angeles area since 1997. To schedule a free and confidential consultation with an experienced and skilled advocate, contact us today online or at (310) 475-9399.

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Photo credit: By Southern Foodways Alliance (originally posted to Flickr as Cabernet Franc) [CC BY 2.0], via Wikimedia Commons.