614 B.R. 306
Bankr. E.D. Wis.2020Background
- Laurie VandenBush, a former CQM employee, misappropriated funds; CQM and Ambrosious obtained a state-court judgment of about $772,000 against Laurie (stipulation signed by both spouses stating the judgment was a marital obligation and marital assets were subject to execution).
- Laurie pled no contest to criminal counts and was convicted; the civil judgment was entered in early 2016.
- Darrell and Laurie divorced in 2017; the marital settlement agreement (MSA) allocated marital property to Darrell and expressly left Laurie liable for the CQM judgment (the MSA stated Laurie’s debt to CQM was not a marital debt).
- Plaintiffs attempted post-divorce execution against assets now held by Darrell; Darrell filed Chapter 7 on November 30, 2018 and listed the judgment as a disputed unsecured claim.
- Plaintiffs sued in bankruptcy court seeking a determination that the $772,000 judgment is nondischargeable as to Darrell under 11 U.S.C. §§ 523(a)(2)(A) and (a)(15); both parties moved for summary judgment. The court granted Darrell’s motions and denied plaintiffs’.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether §523(a)(2)(A) excepts the state-court judgment from Darrell’s discharge | The judgment arose from fraud; Darrell stipulated it was a marital obligation and thus the debt attaches to his post-divorce assets and should be nondischargeable as to those assets | §523(a)(2)(A) requires the debtor himself to have obtained the money by fraud; Darrell did not commit or know of Laurie’s fraud and her fraud cannot be imputed to him | Denied. The debt was obtained by Laurie’s fraud, not Darrell’s; nondischargeability under §523(a)(2)(A) cannot be based on another’s fraud absent proof Darrell committed or knowingly participated in it. |
| Whether plaintiffs may rely on a post-judgment fraudulent-transfer theory (Husky theory) raised in opposition to summary judgment | Debtor allegedly accepted marital assets then disclaimed liability in the MSA, constituting a post-judgment fraudulent scheme that should make the debt nondischargeable under Husky | The theory was not pleaded and cannot be introduced at summary judgment; even if raised, Husky doesn’t eliminate the §523(a)(2)(A) "obtained by" requirement tied to the original debt | Denied. Court barred new theory at summary judgment and held Husky does not convert a preexisting judgment (obtained by another’s fraud) into a nondischargeable debt against this debtor. |
| Whether plaintiffs can preserve collectability against Darrell’s assets (invoking §524(a)(3) / collectability rather than dischargeability) | Plaintiffs seek to prevent dischargeability as to marital assets Darrell received so they can collect against those assets | Debtor points out exemptions claimed in bankruptcy and that the parties divorced (ending community property); plaintiffs did not timely object to exemptions | Denied. Divorce ended community-protection under §524(a)(3); plaintiffs didn’t object to exemptions and therefore cannot now reach exempt property beyond normal trustee distribution of nonexempt assets. |
| Whether §523(a)(15) (divorce-related obligations) renders the judgment nondischargeable as to Darrell | Plaintiffs argue the MSA is void as to the stipulation and the debt is a divorce-related obligation | The CQM judgment is a preexisting debt to a third party (Laurie), not a debt "to a spouse or former spouse" incurred in the divorce; plaintiffs are not spouse/former-spouse and lack standing to invoke §523(a)(15) | Denied. §523(a)(15) protects debts owed to a (former) spouse; plaintiffs are third parties and the debt was not incurred in the divorce so the provision does not apply. |
Key Cases Cited
- Husky Int'l Elecs., Inc. v. Ritz, 136 S. Ct. 1581 (2016) (actual fraud can include fraudulent-conveyance schemes; does not remove the "obtained by" requirement for the original debt)
- Bullock v. BankChampaign, N.A., 133 S. Ct. 1754 (2013) (definitional guidance on fraud-related exceptions in bankruptcy)
- Reeves v. Davis (In re Davis), 638 F.3d 549 (7th Cir. 2011) (elements for false representation/false pretenses under §523(a)(2)(A))
- Sullivan v. Glenn, 782 F.3d 378 (7th Cir. 2015) (fraud by an agent is not imputed to debtor absent evidence debtor knew or should have known)
- Haig v. Shart (In re Shart), 505 B.R. 13 (Bankr. C.D. Cal. 2014) (imputation of one spouse’s fraud to the other under §523(a)(2)(A) is unwarranted)
- Colbert v. City of Chicago, 851 F.3d 649 (7th Cir. 2017) (a party cannot amend pleadings through arguments opposing summary judgment)
- BRC Rubber & Plastics, Inc. v. Continental Carbon Co., 900 F.3d 529 (7th Cir. 2018) (one cannot change the factual basis of a complaint for summary-judgment purposes)