BANKRUPTCY BULLETIN
In Garven v. Paczkowski (In re Paczkowski), 2023 WL 3588404 (Bankr. D. Minn. May 22, 2023), the bankruptcy court excepted from discharge the claim against the debtor in the debtor’s Chapter 7 bankruptcy case pursuant to 11 U.S.C. § 523(a)(6) for willful and malicious injury.
Casey and Gina Garven (the “Garvens”), together with DRMP Concrete, LLC (collectively, the “plaintiffs”) commenced an adversary proceeding to except from discharge their claim in the debtor’s bankruptcy case pursuant to 11 U.S.C. § 523(a)(4) for embezzlement or larceny, as well as § 523(a)(6) for willful and malicious injury. The plaintiffs moved for summary judgment on the claim. Further, the plaintiffs sought the application of the doctrine of collateral estoppel to preclude the re-litigation of issues decided by a jury in a state court action for claims against the debtor pursuant to the Minnesota Uniform Voidable Transactions Act (“MUVTA”).
As applicable here for MUVTA, “[a] transfer made or obligation incurred by a debtor is voidable as to a creditor, whether the creditor’s claim arose before or after the transfer was made or the obligation was incurred, if the debtor made the transfer or incurred the obligation . . . with actual intent to hinder, delay, or defraud any creditor of the debtor.” Minn. Stat. § 513.44(a)(1).
In the trial on the MUVTA claim, the jury answered questions in the affirmative that the debtor, in his capacity as the sole member of a certain limited liability company (the “company’) transferred assets of the company with the intent to hinder, delay, or defraud the Garvens and the Garvens were damaged as a result. The state court adopted the jury answers in its findings of fact.
The bankruptcy court in the decision on the summary judgment motion indicated that embezzlement under § 523(a)(4) “is the fraudulent appropriation of property of another by a person to whom such property has been entrusted or into whose hand it has lawfully come.” For the element that requires “property of another,” the bankruptcy court noted the state court findings support the conclusion the debtor, as the sole member of the company, transferred assets he either directly or indirectly owned. As a result, the bankruptcy court concluded the transfers did not constitute embezzlement for § 523(a)(4).
For larceny under § 523(a)(4), the bankruptcy court noted the larceny exception does not apply if the initial possession of the property at issue was lawful. Because the debtor was the sole owner of the company at the time it transferred the assets, the bankruptcy court concluded the debtor’s possession of the assets was lawful. Thus, the bankruptcy court concluded that the transfers did not constitute larceny for § 523(a)(4).
For willful and malicious injury under § 523(a)(6), the bankruptcy court explained the following three elements must be satisfied: “(1) the debtor caused an injury to the creditor; (2) the injury was willfully inflicted; and (3) the debtor’s action was malicious.”
For the injury element, the bankruptcy court noted the jury found the Garvens were damaged by the transfers, and the jury answered that the Garvens were entitled to damages as a result. Thus, the bankruptcy court concluded the injury element was satisfied.
Further, the bankruptcy court noted the jury found the debtor made the transfers with the intent to hinder, delay, or defraud. As such, the bankruptcy court concluded that the injury was willfully inflicted, and the debtor’s action was malicious.
Therefore, the bankruptcy court granted the plaintiffs’ motion for summary judgment for willful and malicious injury under § 523(a)(6) and excepted from discharge the plaintiffs’ claim against the debtor in his bankruptcy case.
To read the bankruptcy court’s decision, click here.
Editors-in-Chief:
C.J. Harayda, Stinson LLP
David M. Tanabe, Winthrop & Weinstine, P.A.