Summary of a Recent
Judicial Development in
Bankruptcy

Dischargeability of Debt May Be Barred by Willful and Malicious Conduct

Walt McCarter
National AgLaw Center Research Associate

Summary of Decision

In Sanderson Farms, Inc. v. Gasbarro, 299 Fed. App'x 499, 2008 WL 4764118 (6th Cir. 2008), the Sixth Circuit Court of Appeals held that the doctrine of collateral estoppel did not apply to preclude a debtor from defending against a judgment creditor's claim of fraudulent or malicious conduct because there was insufficient evidence of fraud or malice in the lower court's order to draw such a conclusion, but vacated and remanded the case for further findings regarding whether the disputed debt was nondischargeable due to "willful and malicious" conduct pursuant to § 523(a)(6) of the Bankruptcy Code.

Background

Sanderson Farms had won a state court judgment against a Chapter 7 debtor, and sought a declaration that the debt was nondischargeable pursuant to the Bankruptcy Code's exceptions for fraudulent and malicious conduct by the debtor. Id. at *1. The bankruptcy court and district court found in favor of the debtor, and Sanderson appealed. Id.

Arguments

Sanderson argued that the doctrine of collateral estoppel precluded the debtor from arguing that he did not engage in fraudulent conduct, and that the bankruptcy court applied the wrong test for "willful and malicious" conduct; therefore, the judgment debt should have been nondischargeable. Id.

Analysis and Holdings

Under § 523(a)(6) of the Bankruptcy Code, debts arising from a "willful and malicious injury by the debtor to another entity or to the property of another entity" may be excepted from discharge. Id. at *4. The court used the following test for "willful and malicious" conduct: the debtor must (1) will or desire harm, or (2) believe injury is substantially certain to occur as a result of his behavior. Id. The court refused to apply the doctrine of collateral estoppel to preclude the debtor from arguing that his actions were not fraudulent, because it could not find sufficient evidence of fraud or malice in the state trial court order to make the doctrine applicable to the issue at hand. Id. at *6. However, the appellate court vacated the lower court's holding that the § 523(a)(6) exception did not apply because the lower court did not apply the second prong of the "willful and malicious" test-whether the debtor was substantially certain that his actions would harm Sanderson. Id. The court therefore affirmed the trial court's rejection of the doctrine of collateral estoppel, but remanded the case for further findings as to whether the § 523(a)(6) exception applied. Id. at *7.

The case was decided on October 24, 2008.