625 B.R. 641
Bankr. N.D.W. Va.2021Background
- Alliance Coal employed Gregory Savage; Savage received Social Security benefits (Sept 2010–July 2012) and failed to reimburse Alliance, producing a Maryland state-court judgment on Sept. 17, 2014 for $48,315.74.
- Alliance sued in West Virginia under the WV Uniform Fraudulent Transfers Act; the West Virginia court found the Debtors fraudulently conveyed a camper, real property (70 Aleea Lane), and a truck to defeat collection and entered an avoided-transfer judgment with a judgment lien against the real property for $14,720.17.
- The Debtors paid $3,242.12 to satisfy liens on the camper and truck; only the real-property lien remained.
- Debtors filed Chapter 7 on Feb. 27, 2020, successfully moved to avoid Alliance’s judgment lien, and Alliance then filed this adversary (seeking nondischargeability of the $14,720.17 under 11 U.S.C. § 523(a)(2)(A)).
- Alliance relied on Husky to argue that the West Virginia court’s finding of actual fraud renders the judgment lien — and the secured amount — nondischargeable; Debtors argued the underlying debt preexisted the fraudulent transfers and that a judicial lien is not a separate ‘‘debt obtained by’’ fraud.
- The bankruptcy court denied Alliance’s Rule 12(c) motion and dismissed the adversary, holding the debt did not arise from the Debtors’ fraud and distinguishing Husky (the lien is not a new debt obtained by fraud).
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the judgment lien/secured amount can be excepted from discharge under § 523(a)(2)(A) | West Virginia court found actual fraudulent transfers; under Husky, fraudulent-conveyance schemes constitute "actual fraud," so the $14,720.17 secured by the lien is nondischargeable | The Maryland debt preexisted the transfers; the West Virginia judgment only created a lien (not a new debt) after the debt arose, so the debt was not "obtained by" fraud | Denied; lien is distinct from a debt and Alliance failed to show the debt was obtained by or arose from actual fraud |
| Whether Husky controls here | Husky holds that actual fraud includes fraudulent conveyances and debts traceable to such fraud are nondischargeable | Husky is factually different; it does not convert a preexisting liability secured later by a lien into a nondischargeable debt | Distinguished Husky; facts do not show the underlying debt was obtained by fraud |
| Pleading/sufficiency under Rule 12(c) | Alliance moved for judgment on the pleadings relying on undisputed facts and state-court fraud finding | Debtors (pro se) admitted facts but argued legal insufficiency — no debt created by fraud; no cross-motion | Court dismissed sua sponte and denied Alliance’s motion for failure to plead a plausible nondischargeability claim |
Key Cases Cited
- Husky Int’l Elecs., Inc. v. Ritz, 136 S. Ct. 1581 (2016) (holds "actual fraud" in § 523(a)(2)(A) encompasses fraudulent-conveyance schemes and debts traceable to them)
- Cohen v. De La Cruz, 523 U.S. 213 (1998) (establishes that debts for money or property obtained by fraud are excepted from discharge)
- Grogan v. Garner, 498 U.S. 279 (1991) (burden of proof for nondischargeability is preponderance of the evidence)
- Lamar, Archer & Cofrin, LLP v. Appling, 138 S. Ct. 1752 (2018) (bankruptcy-discharge exceptions are construed narrowly in favor of the debtor)