The Existence of a Debt is a Threshold Issue for an Action Under § 523

By Alexander Beeby posted 07-30-2021 15:10

Contributing Editor: Karl J. Johnson, Taft

In Lund-Ross Constructors, Inc. v. Buchanan (In re Buchanan), 626 B.R. 520 (B.A.P. 8th Cir. Apr. 2, 2021), the Bankruptcy Appellate Panel for the Eighth Circuit affirmed the bankruptcy court’s grant of summary judgment in an adversary proceeding for exception to discharge on the basis that the plaintiff failed to establish that the debtors owed a debt to the plaintiff. One judge on the panel dissented.

In their schedule F, the debtors listed the plaintiff as asserting a disputed claim based on obligations of the debtors’ company. The plaintiff had obtained default judgment in state court against the company for failure to pay subcontractors for materials and labor on a construction project. After the plaintiff filed its proof of claim, the chapter 7 trustee objected based on lack of a personal guaranty, and the court sustained the objection.   

In the adversary proceeding under § 523(a)(2), the plaintiff acknowledged that it did not have a personal guaranty, but “alluded to personal ‘warranties.’” The plaintiff also argued that the principals’ false statements on lien waivers created personal liability. The bankruptcy court noted that the precedents cited by the plaintiff all involved judgments under state statutes that imposed personal liability and the plaintiff did not identify any non-bankruptcy law that would make the debtors personally liable. Two members of the BAP agreed with the bankruptcy court and affirmed.

The third member of the BAP would have found sufficient basis that a debt exists, even if disputed, to avoid summary judgment. Reviewing the five elements of actual fraud, the third panel judge asserted that the fifth element—“the creditor sustained loss and damage as a proximate result of the misrepresentation”—is the element that “represents the debt resulting from an enforceable claim of actual fraud.” Thus, the third member of the BAP would have found a possible debt if the plaintiff could prove all the elements for actual fraud. 

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