BANKRUPTCY CORNER
A Debtor ’ s Transfer of Assets to Avoid Collection May Not Support Nondischargeability
JASON S . RIGOLI
In a case involving a debtor ’ s fraudulent transfer of property to frustrate the creditor ’ s collection efforts , the Eleventh Circuit narrowly interpreted the Supreme Court ’ s opinion in Husky Int ' l Elecs ., Inc . v .
Ritz , 136 S . Ct . 1581 , 194 L . Ed . 2d 655 ( 2016 ), focusing on the “ to the extent obtained by ” language found in section 523 ( a )( 2 )( A ) of Bankruptcy Code and held such actions by the debtor do not create separate injury to satisfy section 523 ( a )( 6 ). See SE Prop . Holdings , LLC v . Gaddy ( In re Gaddy ), 977 F . 3d 1051 ( 11th Cir 2020 ).
Summary of the Facts in Gaddy
In Gaddy , the debtor had been the principal of certain business entities and guarantor for certain corporate debts . 977 F . 3d at 1054 . The entities began defaulting on their obligations and the bank sent letters to the guarantors , including the debtor , warning of the defaults and their potential liability . Id . About 2 weeks after receiving the warning letter the debtor began transferring assets out of his name and into the names of his wife and daughter or newly formed LLC . Ibid . The debtor continued to transfer assets for five years . Id . In the meantime the creditor called the loans in default and made demand upon the debtor , as guarantor , to repay the loans . Id . The debtor failed to make the payment and creditor filed suit , ultimately obtaining judgment against the entity and debtor for $ 9.1 million , on a breach of contract claim , with no findings of fraud . Id . at 1054 , 1056 . The debtor made two additional transfers the same month the judgment was entered . Id . at 1054 .
The creditor brought suit against the debtor , his wife , daughter , and several business entities to avoid the transfers of assets and the debtor filed for bankruptcy under chapter 7 of the Bankruptcy Code .
Ibid . The creditor then brought the dischargeability adversary proceeding seeking an exception to discharge under 11 U . S . C . § 523 ( a )( 2 )( A ) and ( a )( 6 ). Ibid .
Section 523 ( a )( 2 )( A ) and the Narrow Application
of Husky
In Gaddy the creditor relied heavily upon the Supreme Court ’ s Husky opinion to assert its claim under section 523 ( a )( 2 ) ( A ), which except from discharge “ any debt … for money , property , services , or an extension , renewal , or refinancing of credit , to the extent obtained by … false pretenses , a false representation , or actual fraud [.]” 11 U . S . C . § 523 ( a )( 2 )( A ). Gaddy , at 1056-57 .
The Eleventh Circuit held that Husky stands for the narrow proposition that the “ obtained by … actual fraud ” language does not require a “ false representation to a creditor .” Id . 1057 ( citing Husky at 1585- 86 ). “[ T ] he same conclusion the Seventh Circuit had reached sixteen years earlier in McClellan v . Cantrell , 217 F . 3d 890 ( 7th Cir . 2000 ).” Id . The Eleventh Circuit said the holdings of both Husky and McClellan are narrow and neither “ eliminated the requirement that … the money or property giving rise to the debt must have been obtained by fraud , actual or otherwise .” Id . at 1057 .
At issue in Gaddy were the claims against the debtor . The debt arose from a breach of contract , without any fraud , id . at 1056 , and , the any subsequent actions to avoid the transfers made by the debtor would be against the transferees , not the debtor . Id . at 1059 .
A Debtor ’ s Transfer of Assets After Incurring a Debt Does Not Necessarily Give Rise to an Exception under Section 523 ( a )( 6 )
Again , the debtor indebted himself as a guarantor via contract to the creditor , and ultimately defaulted resulting in the breach of contract judgment . The debtor ’ s transferring of assets that would have otherwise been subject to execution by the creditor does not create a separate injury for the purposes of section 523 ( a ) ( 6 ). Id . at 1058-59 ( distinguishing Maxfield v .. Jennings ( In re Jennings ), 670 F . 3d 1329 ( 11th Cir . 2012 )).
Conclusion
A debtor ’ s transfer of assets to avoid execution by a judgment creditor , in and of itself , may not result in a nondischargeable debt under 523 ( a )( 2 )( A ) or ( a )( 6 ), where the
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underlying debt obligation does not satisfy the necessary elements , and the Eleventh Circuit has adopted a narrow interpretation of Husky . However , the same actions may result in a debtor ’ s discharge being denied under section 727 of the Bankruptcy Code and satisfy the elements of certain bankruptcy crimes under 18 U . S . C . § 157 .
This article submitted by Jason S . Rigoli , Furr and Cohen , P . A ., 2255 Glades Road , Suite 301E , Boca Raton , FL 33431 , jrigoli @ furrcohen . com
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