15 F.4th 1208
8th Cir.2021Background
- Baja Sol leased premises from Lariat; Michael Wigley personally guaranteed the lease. Baja Sol was evicted and Lariat obtained summary judgment for over $2 million against Baja Sol and Michael.
- While the lease suit was pending, Michael transferred interests in the couple’s joint checking account and limited partnership interests to his wife, Barbara, in March 2011.
- Minnesota state court found in 2013 that Michael transferred assets to Barbara with actual intent to hinder, delay, or defraud Lariat and entered a joint-and-several fraudulent-transfer judgment against Michael and Barbara for about $780,000.
- Michael filed Chapter 11; Lariat’s claim against him was capped under 11 U.S.C. § 502(b)(6) in that case and partly satisfied. Barbara later filed Chapter 11 and Lariat filed a claim for the fraudulent-transfer judgment (plus interest). The bankruptcy court also applied the landlord cap to limit the allowed claim against Barbara’s estate.
- Lariat then sued in bankruptcy court to except the claim from discharge under 11 U.S.C. § 523(a)(2)(A), arguing the judgment flowed from actual fraud. After trial the bankruptcy court found Barbara participated with actual fraudulent intent; the BAP affirmed and this court affirmed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether §502(b)(6) landlord cap bars a creditor from seeking nondischargeability under §523(a)(2)(A) | Cap limits the amount allowed from the estate but does not preclude pursuing nondischargeability; creditor can seek exception | Cap protects lessors from overreaching and should prevent a later nondischargeability ruling that nullifies the cap | The landlord cap limits allowance from the estate but does not bar a §523(a)(2)(A) nondischargeability action; creditor may seek exception for fraud-obtained debt |
| Whether Barbara’s debt is excepted from discharge as obtained by actual fraud | Barbara participated in and knowingly received fraudulent transfers with intent to hinder creditors | Transfers were for estate planning; Barbara lacked fraudulent intent | Court found sufficient evidence Barbara participated and had wrongful intent; debt is nondischargeable under §523(a)(2)(A) |
| Whether the transferee’s intent can be inferred from badges of fraud and surrounding circumstances | Badges of fraud and contemporaneous evidence support inferring intent to hinder creditors | Badges/circumstances are insufficient to prove actual fraud or moral turpitude | Court permissibly relied on badges and circumstantial evidence; intent properly inferred on this record |
| Whether the bankruptcy court’s factual findings were clearly erroneous | Findings are supported by testimony, documents, and state-court judgment | Challenges to credibility and legal conclusions contend errors were made | Appellate review found no clear error in the bankruptcy court’s factual findings; legal conclusions reviewed de novo and affirmed |
Key Cases Cited
- Husky Int’l Elecs., Inc. v. Ritz, 136 S. Ct. 1581 (2016) (actual fraud under §523(a)(2)(A) encompasses fraudulent conveyances and transferee intent to hinder creditors)
- Grogan v. Garner, 498 U.S. 279 (1991) (Congress balanced creditor interest in recovery against debtor fresh start for fraud exceptions)
- McClellan v. Cantrell, 217 F.3d 890 (7th Cir. 2000) (transfer without reasonably equivalent value is fraud on creditors)
- Neal v. Clark, 95 U.S. 704 (1878) (distinguishes actual fraud requiring intentional wrong from implied fraud)
- Ritchie Capital Mgmt., LLC v. Stoebner, 779 F.3d 857 (8th Cir. 2015) (approving use of badges-of-fraud to infer actual intent)
- In re McAlpin, 254 B.R. 449 (Bankr. D. Minn. 2000) (a bankruptcy cap on allowance does not necessarily bar pursuit of nondischargeability relief)