572 B.R. 917
Bankr. S.D. Iowa2017Background
- Rebecca Sterling was employed by Russell Communications, LLC under a contract (salary + commissions) beginning June 8, 2009; she was terminated August 9, 2010 and later sued for unpaid wages under Iowa Code Chapter 91A.
- Jeffrey T. Lanum was added as an individual defendant; the Iowa state court found Sterling an employee and held Russell Communications and Lanum jointly and severally liable under Chapter 91A for unpaid wages, liquidated damages, and attorney fees.
- State-court orders (April 2, May 10, June 4, 2013) awarded Sterling approximately $592,526 (damages and liquidated damages) and awarded Gellerman (Sterling’s lawyer) about $148,132 in attorney fees.
- Sterling and Gellerman filed an adversary proceeding in bankruptcy seeking to except those judgments from Lanum’s discharge under 11 U.S.C. §§ 523(a)(2)(A), 523(a)(4) and 523(a)(6).
- The bankruptcy court heard the matter on stipulated exhibits (the three state court orders and Iowa Code Ch. 91A) and written submissions; no additional evidence was presented.
- The court concluded plaintiffs failed to carry their burden to prove nondischargeability and dismissed the complaint; each party bears its own costs.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether judgment is nondischargeable as a willful and malicious injury (§523(a)(6)) | Lanum intentionally diverted Sterling’s wages (or failed to pay) causing deliberate injury | Payments/issues were business cash-flow/contract disputes, not targeted malice | Denied — §523(a)(6) not met; state finding of intent under Ch.91A does not prove malice (no targeted intent to harm) |
| Whether debt is nondischargeable as obtained by false representation (§523(a)(2)(A)) | Lanum never intended to honor the employment agreement and obtained Sterling’s services by false representation | No evidence of an intent to defraud at contract formation; dispute is breach/interpretation | Denied — no proof Lanum made knowingly false representations or intended never to perform |
| Whether debt is nondischargeable as larceny (§523(a)(4)) | Lanum wrongfully took Sterling’s wages and converted them to pay tax obligations | Funds were business property of Russell or other entities; use of own entity funds is not larceny | Denied — original possession was lawful; no wrongful taking/intent to convert proved |
| Whether attorney fees awarded to Gellerman are nondischargeable | Fees arise from misconduct and should be nondischargeable with the underlying judgment | Fees are statutory awards under Ch.91A tied to the underlying wage claim; if primary debt is dischargeable fees are too | Denied — attorney fees dischargeability follows the underlying debt; primary claims not proven nondischargeable |
Key Cases Cited
- Kawaauhau v. Geiger, 523 U.S. 57 (willful injury requires deliberate or intentional injury)
- Grogan v. Garner, 498 U.S. 279 (plaintiff bears preponderance burden in dischargeability actions)
- R & R Ready Mix v. Freier (In re Freier), 604 F.3d 583 (elements for false pretenses/representation/fraud applied uniformly)
- Johnson v. Miera (In re Miera), 926 F.2d 741 (definition of willful and malicious in the Eighth Circuit)
- Barclays Am./Bus. Credit v. Long, 774 F.2d 875 (analysis of willfulness and malice in dischargeability contexts)
- Jennen v. Hunter (In re Hunter), 771 F.2d 1126 (attorney-fee nondischargeability follows the underlying obligation)