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Landlord Claim Cap Does Not Limit Actual Fraud Exception from Discharge

By Alexander Beeby posted 11-08-2021 17:33

Contributing Editor: David M. Tanabe, Winthrop & Weinstine

In Lariat Companies, Inc. v. Wigley (In re Wigley), 15 F.4th 1208 (8th Cir. Oct. 18, 2021), the Eighth Circuit Court of Appeals affirmed both the Eighth Circuit B.A.P. and bankruptcy court in that the landlord cap of 11 U.S.C. § 502(b)(6) establishes the amount of the allowed claim against the bankruptcy estate, but the cap does not preclude an exception from discharge under 11 U.S.C. § 523(a)(2)(A) for actual fraud.

In the case, a landlord obtained a state court judgment against the husband of the debtor for damages under a lease and a personal guaranty. Further, the state court entered judgment based on voidable transactions for transfers of interests in a checking account and in partnerships. The state court found the transfers from the husband to the debtor were done “with actual intent to hinder, delay, or defraud any creditor of the debtor.” Minn. Stat. § 513.44. The husband and debtor were held jointly and severally liable for the voidable transactions.  

Thereafter, the husband filed a bankruptcy case. The landlord filed a claim in the husband’s bankruptcy for the lease termination. The bankruptcy court applied section 502(b)(6) to cap the landlord’s allowable claim in the husband’s bankruptcy case.

Then, the debtor filed her own bankruptcy case. The landlord filed a claim in the debtor’s bankruptcy for the voidable transaction judgment. The bankruptcy court held the landlord cap as applied in the husband’s case did not extinguish the debtor’s liability to the landlord. Further, the bankruptcy court held that the claim against the debtor was excepted from discharge pursuant to section 523(a)(2)(A). The Eighth Circuit B.A.P. affirmed. Lariat Cos. v. Wigley (In re Wigley), 620 B.R. 87 (B.A.P. 8th Cir. 2020) (Bankruptcy Bulletin Post).

The Eighth Circuit affirmed that the landlord cap of section 502(b)(6) does not preclude an exception from discharge under section 523(a)(2)(A) to the extent it was obtained by actual fraud. Further, the Eighth Circuit determined that the bankruptcy court did not err in its application of the badges of fraud under state law or in its determination that the debtor received voidable transfers. The Eighth Circuit affirmed the bankruptcy court’s findings as to the financial distress surrounding the transfers and requisite wrongful intent. The Eighth Circuit noted that the debtor’s fraudulent transfer scheme was not as egregious as other cases, but nevertheless the evidence supported that the debtor intended to commit actual fraud. Therefore, the Eighth Circuit affirmed the nondischargeability under section 523(a)(2)(A).

Co-Editors in Chief
Alexander J. Beeby, Larkin Hoffman
David M. Tanabe, Winthrop & Weinstine