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11 USC 523

11 USC 523 is entitled “Exceptions to discharge.” It is part of the Bankruptcy Code.

Table of Contents for this topic:

Text of statute

Defined terms

The following defined terms appear in this statute:

Related statutes and rules

Statutes referred to

This statute refers to:

Related rules and regulations

Statutes referring to

The following statutes refer to this statute:

Specific debts (523(a))

Fraud not based on a financial document (523(a)(2)(A))

Elements

Seventh Circuit

Mayer v. Spanel Int'l Ltd., 51 F.3d 670, 673 (7th Cir. 1995) (cause of action when (a) the debtor obtained money (b) through representations that he either knew were false or made with such reckless disregard for the truth as to constitute willful misrepresentation; (c) the debtor made such representations with the intent to deceive the creditor; (d) the creditor actually relied on the false representations; and (e) its reliance was justifiable)

McClellan v. Cantrell, 217 F.3d 890, 894 (7th Cir. Ill. 2000) (cause of action when there is (a) a transfer to a third party (b) without adequate consideration which is (c) made with the deliberate intention of thwarting the plaintiff’s attempt to collect a debt).

Eighth Circuit

In re Freier, 604 F.3d 583 (8th Cir. 2010) (includes, at slip opinion page 6, a list of the five elements that make up a cause of action).

Third party wrongful conduct

"[A]n innocent partner's debt incurred due to the fraud of his partner is not dischargeable pursuant to Section 523(a)(2)(A)." Casablanca Lofts v. Abrham, 436 B.R. 530, 535 - 537 (N.D.Ill. 2010).

Unscheduled debt (523(a)(3))

An unscheduled debt is dischargeable in Chapter 7 under 11 USC 523(a)(3). In re Guseck, 310 B.R. 400 (Bankr. E.D. Wis. 2004).

Embezzlement, larceny, or fiduciary fraud or defalcation (523(a)(4))

Embezzlement or larceny

The difference between embezzlement and larceny is that larceny involves obtaining property unlawfully and embezzlement involves unlawfully converting property that was previously obtained lawfully.

Fiduciary fraud or defalcation

Fiduciary relationship

Whether there is a fiduciary relationship is determined under federal law. See Davis v. Aetna Acceptance Co., 293 U.S. 328, 333, 55 S.Ct. 151, 79 L.Ed. 393 (1934). Birriel v. Odeh (In re Odeh), 431 B.R. 807, 816 (Bankr. N.D. Ill. 2010) tells us:

Section 523(a)(4) of the Bankruptcy Code excepts from discharge any debt arising from "fraud or defalcation while acting in a fiduciary capacity." 11 U.S.C. 523(a)(4). This language has its source in 17(a)(4) of the Bankruptcy Act of 1898, which similarly denied discharge to debts "created by . . . fraud, embezzlement, misappropriation, or defalcation while acting as an officer or in any fiduciary capacity." Bankruptcy Act of 1898, 17(a)(4), 52 Stat. 840, 851, formerly codified at 11 U.S.C. 35(a)(4) (repealed 1978). The Supreme Court interpreted Section 17(a)(4) in Davis v. Aetna Acceptance Co., 293 U.S. 328, 55 S. Ct. 151, 79 L. Ed. 393 (1934), holding that it "'speaks of technical trusts, and not those which the law implies from contract.'" Id. at 333 (quoting Chapman v. Forsyth, 43 U.S. (2 How.) 202, 208, 11 L. Ed. 236 (1844), which dealt with similar language in an earlier bankruptcy law). Following Davis, courts have generally construed "fraud or defalcation while acting in a fiduciary capacity" in 523(a)(4) as applying only in circumstances akin to breach of a formal trust—that is, to debts involving both property that could be the res of a trust and a relationship between the debtor and creditor that establishes a fiduciary relationship encompassing that property. See Follett Higher Educ. Group, Inc. v. Berman, 427 B.R. 432, 436 (N.D. Ill. 2010) (citing In re Marchiando, 13 F.3d 1111, 1116 (7th Cir. 1994) for the rule that "there must be a 'res' in existence before the designated fiduciary relationship arises"), appeal pending, No. 10-1882 (7th Cir.); cf. In re Garver, 116 F.3d 176, 180 (6th Cir. 1997) ("The mere failure to meet an obligation while acting in a fiduciary capacity simply does not rise to the level of defalcation; an express or technical trust must also be present.").

"The Seventh Circuit takes a broader view than other courts of the circumstances that can give rise to fiduciary duties under 523(a)(4) with respect to a res, holding that a fiduciary relationship exists if there is 'a difference in knowledge or power between fiduciary and principal which . . . gives the former a position of ascendancy over the latter.' In re Frain, 230 F.3d 1014, 1017 (7th Cir. 2000) (quoting Marchiando, 13 F.3d at 1116)." Birriel v. Odeh (In re Odeh), 431 B.R. 807, 816 (Bankr. N.D. Ill. 2010).

Defalcation

"[T]he term requires an intentional wrong. We include as intentional not only conduct that the fiduciary knows is improper but also reckless conduct of the kind that the criminal law often treats as the equivalent. Thus, we include reckless conduct of the kind set forth in the Model Penal Code. Where actual knowledge of wrongdoing is lacking, we consider conduct as equivalent if the fiduciary “consciously disregards” (or is willfully blind to) “a substantial and unjustifiable risk” that his conduct will turn out to violate a fiduciary duty.” Bullock v. Bankchampaign, N. A., --- U.S. --- (2013).

Willful and malicious injury (523(a)(6))


  • Compare 11 USC 1328(a)(4) - willful or malicious exception to discharge in Chapter 13
“The word ‘willful’ in (a)(6) modifies the word ‘injury,’ indicating that nondischargeability takes a deliberate or intentional injury, not merely … a deliberate or intentional act that leads to injury.” . Kawaauhau v. Geiger, 523 U.S. 57, 61, 118 S.Ct. 974, 140 L.Ed.2d 90 (1998) (emphasis in original). Thus, debts arising from recklessly or negligently inflicted injuries do not fall within 523(a)(6)). Id., 523 U.S. at 64.

In re Miller,156 F.3d 598 (5th Cir.1998), suggeststhree different meanings of the Supreme Court's "actual intent to cause injury" standard: "The standard might be met by any tort generally classified as an intentional tort, by any tort substantially certain to result in injury, or any tort motivated by a desire to inflict injury." Id. at 603. (The Fifth Circuit went with "substantially certain to cause." Id. at 604.)

"Malicious" means acting in conscious disregard of one's duties or without just cause. In re Thirtyacre, 36 F.3d 697, 700 (7th Cir 1994); Wheeler v. Laudani, 783 F.2d 610, 615 (6th Cir 1986). Self defense is an example of a just cause. Kleman v. Taylor, 322 B.R. 306, 309 (Bankr.N.D.Ohio 2004).

Student loan debt (523(a)(8))

Condo and co-op fees - post-petition (523(a)(16))


Practice pointers

*Act promptly.* The combination of 11 USC 523(c) and Bankruptcy Rule 4007(c) sets a strict deadline for requesting the determination of the dischargeability of debts under 11 USC 523(a)(2) (fraud & false financial statement), (a)(4) (fraud & embezzlement), and (a)(6) (willful and malicious injury).


See also


External links


Footnotes

Embezzlement is the fraudulent appropriation [**22] of property by a person to whom such property has been entrusted, or into whose hands it has lawfully come. It differs from larceny in the fact that the original taking of the property was lawful, or with the consent of the owner, while in larceny the felonious intent must have existed at the time of the taking.
Topic revision: r55 - 01 Oct 2014, UnknownUser
 
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