574 B.R. 800
Bankr. N.D. Ga.2017Background
- Debtor (Alton W. Knight) and Paul H. Cook were co-members of AWKPHC, LLC ("Knight and Cook CPAs"); Cook died July 28, 2013 and his widow Barbara Cook (administrator) sued over ownership/disposition of Cook’s client list and LLC assets.
- Parties arbitrated; arbitrator concluded Debtor refused to account, converted Cook’s client base, and violated LLC agreement; awarded $223,006.25 (including $150,000 for client list, $45,000 for Cook’s LLC capital share, $17,000 attorney’s fees, and arbitration costs).
- Plaintiff filed suit to confirm the arbitration award; Debtor filed Chapter 7 on May 18, 2015, staying the state-court confirmation action and prompting this adversary proceeding alleging nondischargeability under 11 U.S.C. §523(a)(4) and (a)(6), denial of discharge under §727, and state-law attorney’s fees under O.C.G.A. §13-6-11.
- Both sides moved for summary judgment: Plaintiff sought judgment on all counts; Debtor sought judgment on Count III (denial of discharge under §727). The bankruptcy court considered whether to give preclusive effect to the arbitration award and whether the awards or alleged conduct were nondischargeable or warranted denial of Debtor’s general discharge.
- Court found the arbitration proceeding procedurally adequate and gave the award preclusive effect for factual findings, but denied Plaintiff summary judgment on §523(a)(4) and (a)(6) claims because the award’s findings did not conclusively establish the specific intent elements required for nondischargeability; granted Debtor summary judgment on §727 claims (both (a)(2) and (a)(4)) and provisionally granted summary judgment for Debtor on the state-law fee claim unless Plaintiff showed cause.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Preclusive effect of arbitration and dischargeability under §523(a)(4) (embezzlement/larceny) | Arbitrator’s factual findings (conversion, withheld funds, bad faith) establish embezzlement/larceny and §523(a)(4) nondischargeability | Arbitration award lacks findings proving Debtor had the fraudulent intent required by §523(a)(4) | Court gave preclusive effect to arbitration findings but denied summary judgment to Plaintiff on §523(a)(4); facts insufficient at summary judgment to establish requisite fraudulent intent |
| Nondischargeability under §523(a)(6) (willful and malicious injury) | Conversion and refusal to account show intentional conduct causing injury to Cook’s estate, so debt is nondischargeable under §523(a)(6) | Conversion findings alone do not prove the deliberate intent to injure required by §523(a)(6) | Denied Plaintiff summary judgment on §523(a)(6); arbitrator’s findings insufficient at summary judgment to prove willful and malicious injury |
| Denial of discharge under §727(a)(2) (prepetition transfers to hinder creditors) | Transfers from LLC accounts to Debtor/family were effectively Debtor’s property (conversion/alter-ego) and thus transfers of debtor property within one year warrant denial of discharge | Transfers were of LLC property, not Debtor’s; reverse veil-piercing to treat LLC assets as Debtor’s is not allowed under Georgia law; converted assets do not become debtor property | Granted summary judgment for Debtor on §727(a)(2); transfers of LLC assets are not transfers of Debtor’s property and reverse veil-piercing rejected under Georgia law |
| Denial of discharge under §727(a)(4) (false oath/omissions in schedules) | Debtor omitted interests (office building, client lists, various corporate interests) knowingly and fraudulently | Many omissions were not Debtor property (defective deed valid inter partes), were disclosed sufficiently (interest in LLC listed), were nonexistent or inadvertent/immaterial (forgotten worthless entity) | Granted summary judgment for Debtor on §727(a)(4); no genuine issue that omissions were knowingly fraudulent and material |
| Attorney’s fees under O.C.G.A. §13-6-11 | Bad-faith conduct justifies state-law fee award as part of damages | Plaintiff seeks only nondischargeability/discharge denial; no underlying Georgia damages award in this proceeding | Court provisionally granted summary judgment for Debtor on the fee claim (will enterunless Plaintiff shows cause within 24 days); fee award under §13-6-11 requires an underlying damage award and bad-faith showing |
Key Cases Cited
- Kawaauhau v. Geiger, 523 U.S. 57 (U.S. 1998) (defines "willful" in §523(a)(6) as deliberate act to cause injury)
- Celotex Corp. v. Catrett, 477 U.S. 317 (U.S. 1986) (summary judgment rule: movant bears initial burden and nonmovant must show genuine issue)
- Anderson v. Liberty Lobby, 477 U.S. 242 (U.S. 1986) (materiality and standard for genuine issue on summary judgment)
- In re Halpern, 810 F.2d 1061 (11th Cir. 1987) (bankruptcy courts may give preclusive effect to factual findings of another tribunal)
- Guerra v. Fernandez-Rocha, 451 F.3d 813 (11th Cir. 2006) (§523(a)(4) fiduciary exception requires an express or technical trust)