The federal bankruptcy laws allow for exemptions to discharge. Even for folks who have no assets, some debts are just not dischargeable. The exemption to discharge that is getting a lot of scholarly (and media) attention lately is student loans. They are hard to discharge. Alimony and monies owed pursuant to spousal or child support are not dischargeable in bankruptcy. Monies secured by fraud and fraudulent activity are not dischargeable. Judgments owed to victims of alcohol related personal injury or death cases are not dischargeable.
The law, Section 523(a)(6) of the Bankruptcy Code, also exempts debts that were incurred by “willful and malicious injury by the debtor to another entity or to the property of another entity.” Typically, this means intentional torts; perpetrators of assault and battery, fraud, etc. cannot discharge their debts to their victim. What else does this mean and how are debtors, and creditors affected by it?
In a United States District Court case where damages were found, resulted in an important Bankruptcy Court decision this month. It adds some clarity to this issue of discharges under the “willful and malicious” law. In the case, Malcolm Swasey was sued by Trenwick America Reinsurance claiming that Swasey breached his contract with Trenwick. After trial, the Federal District Court Judge Gertner found that Swasey was responsible for bad faith with respect to the contract and that his conduct amounted to a violation of 93A for unfair and deceptive business tactics. The Court doubled the damages because of the bad faith and 93A violation. Significantly, the judge did not find fraud because the original contract was not made in bad faith, just the conduct following the contract.
After losing his case in Federal District Court, Swasney filed for personal bankruptcy in the Bankruptcy court. Trenwick filed an Adversary Proceeding.
What is an Adversary Proceeding in Bankruptcy Court?
A creditor can file a complaint in Bankruptcy Court which stops the process for discharging that creditor’s debt. That case is called an adversary proceeding. Adversary proceedings are often considered debtor friendly because the burden of proof is on the debtor: they have to prove that the debt is not dischargeable under the bankruptcy law.
In this adversary proceeding in the Bankruptcy court, Trenwick argued that because there was a 93A finding, the debt was not dischargeable under the law because it was “willful and malicious.” The Bankruptcy judge found that a Massachusetts 93A finding of “willful and knowing” may be “intentional or deliberate act that leads to an injury” while the requirement for winning an adversary proceeding under Section 523(a)(6) is “intent to injure.” The Bankruptcy judge said it was not clear that Swasney “intended” to injure Trenwick when he entered into the contract.
