On May 22, 2023, the U.S. Bankruptcy Court for the District of Minnesota issued a memorandum decision on the dischargeability of a debt in bankruptcy, specifically two exceptions to discharge and the possible application of the doctrine of collateral estoppel.
The issue is whether findings from a state court case can serve as evidence that the debtor committed embezzlement or larceny under Bankruptcy Code § 523(a)(4) or caused willful and malicious injury under § 523(a)(6). In state court, a default judgment was entered, followed by a jury verdict.
The procedural posture of the case involves two motions for summary judgment. After a hearing, the court took the first motion under advisement, while the second motion was partially granted and partially denied. Specifically, the court refused to grant summary judgment for embezzlement or larceny, but the court did grant summary judgment for willful and malicious injury.
The underlying litigation resulted in a default judgment on construction-defect allegations, followed by litigation under the Minnesota Uniform Voidable Transfer Act where the jury found the defendant had intentionally transferred assets to hinder, delay, or defraud the plaintiffs.
The court applied the doctrine of collateral estoppel. With respect to the transfer of assets, the court determined that violation of the Uniform Voidable Transfer Act cannot be categorized as larceny or embezzlement.
The court then scrutinized the plaintiffs’ claim for willful and malicious injury. Three elements need to be satisfied for the exception under § 523(a)(6) to apply: first, the debtor caused an injury to the creditor; second, the injury was willfully inflicted; and third, the debtor acted with malice. The court found that all three elements are satisfied by the underlying default judgment and jury verdict.