The state court attorney says to his client, “Good news! The judge is going to enter judgment for breach of contract and fraud – $1 million bucks!!” If that is what the judgment says, or the statement of decision, or the findings of fact, the arbitration award, the settlement, whatever you want to call it – your great victory is going to have to be re-litigated in bankruptcy court. Why you say? Because breach of contract is discharged in bankruptcy and fraud is not. We can’t tell what part of the damages are for the breach of K and what part is for fraud. The judgment is good enough, most likely, to establish fraud in bankruptcy court but that doesn’t do anyone much good by itself.
The reality today is actually much worse than the above. Today’s state court litigator loves to allege 17 causes of action, the more the better. Then litigate it until the cows come home. Then, upon your great victory, set out a great proposed statement of decision. Explain why the bad guy outrageously breached the contract, his fiduciary duties, violated ten different state code sections of some sort, three federal code sections, lots of stuff from your law school remedies class – conversion, accounting, resulting trust, aiding and abetting – throw in some unjust enrichment – he must have done that of course. End it all with – “Judgment for good guy – $1 million bucks.” In bankruptcy you have very little that is useful to establish that some part (or maybe all) of that is non-dischargeable. It is going to have to be largely re-litigated.
I have seen several arbitration awards recently. The arbitrator goes off for 57 pages on what scum this defendant is, how he should be shot, how he breached his contract, was negligent, reckless and indifferent, committed fraud and some indecency. Yep, $1 million bucks, thank you. Maybe even throw in some punitive damages. I’m sorry to say you will be re-litigating a substantial portion, if not all, of the case in bankruptcy court.
What is non-dischargeable in bankruptcy court is set forth in section 523(a). Everything else is discharged!! I really have to say that again. Unless you can point to the exact words in 523(a) that make this debt non-dischargeable, the debt is discharged. The words “punitive,” “conversion,” “reckless and indifferent,” “outrageous,” are not in the bankruptcy code. Most breach of fiduciary duties are discharged. Negligence, even gross negligence and almost all non-intentional torts are discharged.