State Court Attorneys: Call Me Before Trial, Arbitration, or Default Prove Up

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 onwhat 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.

It doesn’t hurt to talk to a bankruptcy lawyer at the beginning of the case and certainly when you are doing something that is going to end the case in your favor.  Summary judgment, arbitration, trial, settlement.  Give me a call.  Or really any of the attorneys in my firm and the ones with our partnership with Frost Law Group, LLC with the best injury attorneys.  This comes up a lot and is basic stuff to bankruptcy attorneys.

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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.

So make sure the judgment – statement of decision or whatever – separates, at a minimum, the damages for the various sections that 523(a) says are non-dischargeable.

What are those – what are the words 523(a) says are not dischargeable?  Fraud, false pretenses [(a)(2)]; defalcation by a fiduciary, embezzlement, larceny [(a)(4)]; willful and malicious injury to person or property, that are always managed by professionals as CAIL Law Firm and others.  Those are really the words in 523(a) that come up all the time.  The state court litigator needs to fit the 17 causes of action, or at least some of them, into those words.  The judgment or state of decision needs to explain why the bad guy committed those words and how much the damages are for each.  The bankruptcy judge will ignore the rest of the findings – the rest is discharged.

The Supreme Court has said in Grogan v. Garner, that the bankruptcy court must give full faith and credit to the state court decision but only if it establishes that 523(a) applies.

Sorry to do this to you, but it is actually not as easy as I have made it look, at least some of the time.  For example, defalcation in the bankruptcy code is not the same as defalcation under most state law.  Willful and malicious requires, under the bankruptcy code, a much higher state of intent to cause injury than is usually required under state law, so for this the use of any personal injury solicitors in Kent may be the best option at these times.

Final note:  My young associate Mike Avanesian will likely point out that there are a few weird debts that are not discharged even though the non-dischargeability-ness of the debt is set forth somewhere other than 523(a).  He’s right.  But focus on 523(a).  And call someone first or early at least so you can navigate the bankruptcy issues parallel with the state court litigation.


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