Contract Breach Amounting to Intentional Tort Excepted from Discharge

By Alexander Beeby posted 8 days ago

  
BANKRUPTCY BULLETIN
Contributing Editor: Kenneth Edstrom, Sapientia Law Group

In Luebbert v. Global Control Sys., Inc. (In re Luebbert), 987 F.3d 771 (8th Cir. Feb. 9, 2021), the Eighth Circuit held that a breach of contract debt could be excepted from discharge, under the “willful and malicious injury” provision of 11 U.S.C. § 523(a)(6), if “the debtor’s conduct accompanying the breach of contract amounted to an intentional tort against the creditor.” Id. at 782 (emphasis added).

The debtor engaged in significant acts of deception in connection with his employment by hiding the fact that he had started a new company bidding on the same contracts as his employer. When caught, and in settlement of threatened litigation by his employer, he struck a deal to share revenue from his new business with his former employer (the settlement agreement also not surprisingly involved the debtor’s termination). However, the debtor then proceeded to violate that agreement by hiding revenue that should have been shared under the term of his agreement with his employer. The employer sued for breach of contract an won a judgment under Missouri law. When the debtor filed Chapter 7, the employer sought nondischargeability of the judgment debt under the “intentional acts” exception of 11 USC § 523(a)(6).

The Bankruptcy Court held a hearing where evidence was introduced that the acts of Luebbert amounted to conversion and upheld the objection to discharge. Global Control Systems, Inc. v. Luebbert (In re Luebbert), 595 B.R. 314, 331 (Bankr. W.D. Mo. 2018). The District Court affirmed. 18-0945-CV-W-BP, (W.D. Mo. July 15, 2019). The Debtor again appealed to the Eighth Circuit.

The Eighth Circuit opinion attempts to trace the history of Section 523(a)(6) law in the Eighth Circuit. Judge Kobes quotes from the Patch decision for the initial three-prong “willful and malicious” standard used in the Eighth Circuit. 987 F.3d at 778 (quoting Blocker v. Patch (In re Patch), 526 F.3d 1176, 1180–81 (8th Cir. 2008)). The Eighth Circuit then declares that it is extending the law in this area by holding that breach of contract, while not actually an intentional tort, may still be excepted from discharge, under § 523(a)(6) where “the debtor's conduct accompanying the breach of contract amounted to an intentional tort against the creditor.” 987 F.3d at 782 (emphasis added).

The holding seems unremarkable in that the debtor didn’t seem to argue that, even if the bankruptcy court issued findings after a hearing that the debtor not only breached a contract (which was what the state court found) but that the breach was willful and malicious, the court couldn’t find that the debtor violated Section 523(a)(6). Other Eighth Circuit opinions had certainly held that an independent determination of “willful and malicious” by the bankruptcy court was proper. If nothing else, the Luebbert opinion strengthened the Eighth Circuit’s use of the “subjective test” for determining “willful and malicious.”

Co-Editors in Chief
Alexander J. Beeby, Larkin Hoffman Daly & Lindgren Ltd.
Kesha Tanabe, Tanabe Law

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