755 F.3d 1285
11th Cir.2014Background
- Charles and Harley Kane, Florida attorneys and partners in Kane & Kane, collaborated with other lawyers (the PIP Lawyers) and Stewart Firms in large PIP and parallel Bad Faith litigation against Progressive.
- The Stewart Firms were originally retained to pursue bad-faith claims and were to receive a large contingent share tied to bad-faith recoveries; the PIP Lawyers handled PIP claims with a different fee split.
- In May 2004 the PIP Lawyers (including the Kanes) secretly negotiated a settlement with Progressive (~$14.5M) that either excluded or dramatically reduced allocation for bad-faith claims, leaving the Stewart Firms with little or no fees (the “Secret Settlement”/MOU and later AMOU).
- The Stewart Firms sued; after a bench trial a Florida state court awarded them $2 million on quantum meruit/unjust enrichment; that judgment was affirmed on appeal.
- The Kanes’ Chapter 11 cases were dismissed as filed in bad faith; they filed Chapter 7. The Stewart Firms sued in adversary proceedings seeking (a) nondischargeability under 11 U.S.C. §523(a)(6) and (b) denial of Harley’s discharge under 11 U.S.C. §§727(a)(7) and 727(a)(2) for insider transfers.
- Bankruptcy and district courts found (1) the state-court judgment arose from a willful and malicious injury under §523(a)(6) and (2) Harley intentionally caused Kane Firm to pay his personal real estate taxes contrary to court orders, barring his discharge under §727(a)(7) read with §727(a)(2). Appeals affirmed.
Issues
| Issue | Stewart Firms' Argument | Kanes' Argument | Held |
|---|---|---|---|
| Whether the state-court $2M judgment is nondischargeable under §523(a)(6) ("willful and malicious") | Kanes intentionally structured and concealed the Secret Settlement, excluded Stewart Firms, and knew injury to Stewart Firms was substantially certain | Settlement allocation was approved by clients; Kanes lacked sole control over allocations | Affirmed: evidence (including intent and concealment) supports willful and malicious injury; §523(a)(6) exception applies |
| Whether §523(a)(6) requires an independent tort under state law | Stewart Firms: no separate tort-element requirement beyond willful and malicious conduct causing injury | Kanes: §523(a)(6) requires an independent, tortious act | Rejected: Court declines to impose separate state-law tort requirement; focus is on intent to cause consequences (per Kawaauhau) |
| Whether Harley’s discharge should be denied under §§727(a)(7) + 727(a)(2) for transfers of insider property with intent to hinder/delay/defraud | Harley caused Kane Firm to pay his personal real estate taxes in violation of bankruptcy orders, anticipating garnishment — intent inferred from timing and conduct | Harley: payment was inadvertent or reversible; contested intent | Affirmed: Kane Firm is an insider; transfer occurred within one year; bankruptcy court reasonably inferred intent to hinder/delay/defraud; discharge denied |
| Whether collateral estoppel or other preclusions improperly decided the Chapter 7 adversary | Stewart Firms relied on state-court and Chapter 11 facts to bolster trial evidence | Kanes argued improper collateral estoppel usage | Court declined to reach or reverse on preclusion; found Chapter 7 evidence independently sufficient |
Key Cases Cited
- Kawaauhau v. Geiger, 523 U.S. 57 (Sup. Ct. 1998) (§523(a)(6) requires intent to cause the harmful consequences or belief that consequences are substantially certain)
- Grogan v. Garner, 498 U.S. 279 (Sup. Ct. 1991) (creditor must prove nondischargeability exceptions by a preponderance of the evidence)
- In re Jennings, 670 F.3d 1329 (11th Cir. 2012) (defining malice and willfulness standards in §523(a)(6) context)
- In re Walker, 48 F.3d 1161 (11th Cir. 1995) (framework for willful injury under §523(a)(6))
- In re Piazza, 719 F.3d 1253 (11th Cir. 2013) (standard of clear-error review for bankruptcy factual findings)