621 B.R. 529
Bankr. N.D. Ga.2020Background
- Alton Wayne Knight and Paul Cook were co-members of AWKPHC, LLC ("Knight & Cook CPAs"); Cook died July 28, 2013, and Barbara Cook (administrator) succeeded to his estate.
- The LLC operating agreement preserved personal ownership of each member’s client base and required liquidation upon there being only one member.
- After Cook’s death Knight withheld client information, continued to bill/deplete Cook’s capital account, solicited/served Cook’s clients, and resisted liquidation; parties arbitrated.
- Arbitrator awarded Plaintiff $223,006.25 (including $150,000 for the client list and $45,000 for Cook’s LLC interest); Knight then filed Chapter 7.
- Plaintiff sued to except the arbitration award from discharge under 11 U.S.C. § 523(a)(4) (embezzlement/defalcation) and § 523(a)(6) (willful and malicious injury); the court treated the arbitrator’s findings as established.
- Court found, on the totality of the evidence (withholding the list, inconsistent testimony, charging deceased’s capital account), that the $150,000 and $45,000 awards are nondischargeable under both § 523(a)(4) and § 523(a)(6).
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Nondischargeability of $150,000 (client list) under § 523(a)(4) | Knight converted/embezzled Cook’s client list and funds entrusted to him; fraud/defalcation or embezzlement | Knight lawfully possessed clients through the LLC, no intent to defraud, relied on counsel, and disputed ownership | Excepted from discharge under § 523(a)(4) — court found fraudulent intent and embezzlement/defalcation |
| Nondischargeability of $150,000 (client list) under § 523(a)(6) | Withholding and using the client list without permission caused willful and malicious injury; Plaintiff couldn’t sell list | Actions were not willful/malicious; no specific intent to harm | Excepted from discharge under § 523(a)(6) — court found willful and malicious injury |
| Nondischargeability of $45,000 (Cook’s LLC share) under § 523(a)(4) | Knight billed Cook’s capital account for personal/firm expenses and prevented access, exercising control over estate funds | Knight contested characterization of charges and ownership; argued lack of intent to defraud | Excepted from discharge under § 523(a)(4) — court found fraudulent intent and improper appropriation |
| Nondischargeability of $45,000 (Cook’s LLC share) under § 523(a)(6) | Use of Cook’s capital funds without permission was willful and substantially certain to injure the estate | Knight denies willful/malicious conduct | Excepted from discharge under § 523(a)(6) — court found willful and malicious injury |
Key Cases Cited
- Grogan v. Garner, 498 U.S. 279 (creditor bears preponderance burden to prove nondischargeability)
- Kawaauhau v. Geiger, 523 U.S. 57 (§ 523(a)(6) requires a willful injury; negligence insufficient)
- Maxfield v. Jennings (In re Jennings), 670 F.3d 1329 (willful and malicious standard and implied malice)
- In re Mitchell, 633 F.3d 1319 (bankruptcy discharge and exceptions narrowly construed)
- In re Fretz, 244 F.3d 1323 (scope of discharge policy and exceptions)
- Equitable Bank v. Miller (In re Miller), 39 F.3d 301 (construe exceptions to discharge narrowly)
- St. Laurent v. Ambrose (In re St. Laurent), 991 F.2d 672 (narrow construction of discharge exceptions)
- In re Weber, 892 F.2d 534 (fraudulent intent requirement for embezzlement/defalcation)
- In re Robustelli, 430 B.R. 709 (using another’s assets without payment is willful and likely malicious)