977 F.3d 1051
11th Cir.2020Background
- In 2006 Vision Bank (later SEPH) made two loans to Water’s Edge LLC; Jerry Gaddy personally guaranteed the first loan ($10M, later $12.5M) and part of the second.
- After Water’s Edge missed contributions and defaulted, Gaddy began transferring real and personal property to family-controlled entities (starting soon after a bank warning in 2009 and continuing through 2014).
- SEPH obtained a state-court judgment against Gaddy (over $9.1M) in December 2014 for the guaranties; Gaddy made further transfers that month.
- SEPH sued under Alabama’s Uniform Fraudulent Transfer Act (AUFTA) and, after Gaddy filed bankruptcy, initiated an adversary proceeding seeking a ruling that the Water’s Edge judgment (and any AUFTA-based recovery) was nondischargeable under 11 U.S.C. §523(a)(2)(A) and §523(a)(6).
- The bankruptcy court granted Gaddy’s Rule 12(c) motion and dismissed SEPH’s complaint; the district court affirmed. This appeal followed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the Water’s Edge guaranty judgment is nondischargeable under §523(a)(2)(A) (fraud/actual fraud) | SEPH: Gaddy’s fraudulent post-guaranty conveyances effectively "obtained" or made the debt nondischargeable because they thwarted collection | Gaddy: The loans/guaranties were ordinary contract debts incurred before any transfers and were not obtained by fraud | Held: No. §523(a)(2)(A) requires the debt to have been obtained by fraud; post hoc fraudulent transfers do not convert a preexisting contract judgment into an "obtained by" fraud debt (Husky and McClellan do not compel broader rule) |
| Whether the Water’s Edge judgment is nondischargeable under §523(a)(6) (willful and malicious injury) | SEPH: Gaddy’s fraudulent transfers were willful and malicious and injured SEPH or its property, so the debt is "for" willful and malicious injury | Gaddy: The guaranty debt arose from contract before the transfers; the debt is not "for" an injury caused by the transfers | Held: No. §523(a)(6) covers debts that are "for" willful and malicious injury; here the debt arose from breach of guaranty long before the transfers and is not the result of a willful/malicious tort |
| Whether SEPH could amend to assert a separate AUFTA-based money judgment (a new "fraudulent transfer" debt) that would be nondischargeable | SEPH: AUFTA remedies (including "any other relief") permit a money judgment for the value of fraudulent transfers, which would be nondischargeable under §§523(a)(2)(A) and (a)(6) | Gaddy: Amendment is futile; Alabama law bars duplicative recovery and SEPH already has a judgment for the same harm | Held: Denied as futile. Alabama law bars double recovery; SEPH alleged no independent harm from transfers apart from inability to collect the underlying debt, so an AUFTA money judgment would impermissibly duplicate existing recovery |
Key Cases Cited
- Husky Int'l Elecs., Inc. v. Ritz, 136 S. Ct. 1581 (2016) ("actual fraud" can include fraudulent-conveyance schemes without a misrepresentation)
- Cohen v. de la Cruz, 523 U.S. 213 (1998) ("debt for" language means debt "as a result of" or "by reason of")
- McClellan v. Cantrell, 217 F.3d 890 (7th Cir. 2000) (fraudulent transfers can create nondischargeable debts when the debtor’s fraud produces the debt)
- Maxfield v. Jennings (In re Jennings), 670 F.3d 1329 (11th Cir. 2012) (fraudulent-transfer–related liability can be nondischargeable when the debt arises from the debtor’s participation in the fraud)
- Kane v. Stewart Tilghman Fox & Bianchi, P.A. (In re Kane), 755 F.3d 1285 (11th Cir. 2014) (definition of "willful" and "malicious" in §523(a)(6))
- Braswell v. ConAgra, Inc., 936 F.2d 1169 (11th Cir. 1991) (Alabama law disfavors double recovery)