565 B.R. 820
Bankr. E.D. Ky.2017Background
- HIJ Industries sold assets to EMS in 2009; EMS issued two promissory notes to HIJ. Debtor Jeremey Roy was a 65% member of EMS and personally guaranteed EMS’s SBA loan and both notes.
- EMS lost its largest customer soon after the sale, suffered cash-flow problems, and defaulted on the SBA loan and the notes in 2011; HNB foreclosed and sold EMS assets to Autumnwood/Elite Machining in 2012.
- HIJ obtained a state-court summary judgment (2015) against Roy on his personal guaranties for the two notes. HIJ then sued in bankruptcy to (1) except the debt from discharge under 11 U.S.C. § 523(a)(6) (willful and malicious injury) and (2) deny Roy’s Chapter 7 discharge under § 727(a)(2)(A) (transfer to hinder collection).
- In April–May 2015, before the state-court judgment, Roy and his wife retitled two vehicles (including a 1970 GMC Sierra) jointly so his wife could cosign a loan; those titles were recorded and the vehicles later secured a loan used in part to finance litigation.
- Trial was held Oct. 4, 2016. HIJ sought to reopen proof after trial to add bank records and additional expert testimony; the court denied that motion. The court found HIJ failed to meet its burdens on both claims and entered judgment for Debtor.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether debt is nondischargeable under § 523(a)(6) (willful & malicious injury) | Roy intentionally caused EMS to fail and moved/managed assets to prevent EMS from paying the notes, injuring HIJ’s property rights | EMS’s failure resulted from loss of customers, partner illness, business decisions and efforts by Roy to save the business—not an intentional scheme to injure HIJ | Denied: HIJ failed to prove Roy acted with actual intent to cause injury; losses were business failures, not intentional torts |
| Whether Roy’s state-court judgment constitutes a § 523(a)(6) claim | Judgment reflects injury from Roy’s conduct and should be nondischargeable | The judgment enforces contractual guaranties, not an intentional tort giving rise to § 523(a)(6) relief | Denied: The state-court judgment was for contractual guaranties—preexisting obligations not arising from a willful and malicious tort |
| Whether to deny discharge under § 727(a)(2)(A) for transfer of GMC Sierra into joint title | Roy transferred sole-owned truck into joint title with his wife within one year of bankruptcy to hinder/delay HIJ’s collection after litigation began | Transfer was to permit wife to cosign a loan (vehicles pledged as collateral) and was done with counsel’s advice before judgment; no intent to hinder creditors | Denied: HIJ did not prove Roy’s subjective intent to hinder, delay, or defraud; credible testimony explained the transfers |
| Whether trial should be reopened for additional bank records and expert testimony | HIJ argued Debtor withheld records and newly obtained bank records are necessary; requested reopening to introduce records through expert as they become available | Roy objected; trial had closed and discovery had been available earlier; reopening would be burdensome and indefinite | Denied: Court exercised discretion—records were not shown to be newly discovered, HIJ delayed during discovery, and reopening would prejudice parties and frustrate judicial economy |
Key Cases Cited
- Markowitz v. Campbell (In re Markowitz), 190 F.3d 455 (6th Cir. 1999) (defines "willful and malicious" standard for § 523(a)(6))
- Kawaauhau v. Geiger, 523 U.S. 57 (1998) (§ 523(a)(6) requires intentional, not negligent or reckless, tort)
- Grogan v. Garner, 498 U.S. 279 (1991) (preponderance standard for nondischargeability claims)
- Wheeler v. Laudani, 783 F.2d 610 (6th Cir. 1986) (definition of "malicious" in discharge-exception context)
- In re Zwosta, 395 B.R. 378 (6th Cir. BAP 2008) (exceptions to discharge construed narrowly in debtor’s favor)