The Eleventh Circuit adopted the holdings of bankruptcy courts in Florida by ruling that the improper disposition of collateral by an individual gives rise to a nondischargeable debt even if the secured creditor’s lien was unperfected, as long as the debtor had knowledge of the lienholder’s claim.
The opinion seems to mean that mishandling collateral almost automatically results in a nondischargeable debt if the debtor knew there was supposed to be a perfected security interest.
A man made a $130,000 loan to an acquaintance for buying the equipment for, building out and operating an internet café. By contract, the loan was to be secured by the equipment. Within weeks, the police shut down the business and confiscated the equipment, alleging it was an illegal gambling operation.
There was no prosecution, and the authorities turned the equipment over to the borrower. Meanwhile, the lender called a default and had demanded liquidation of the equipment to repay the loan. Instead, the borrower moved the equipment to another city to open another business.
After the lender sued in state court and got a judgment for $130,000, the borrower filed a chapter 7 petition. Ultimately, the lender got possession of the equipment, but by then it was worth only $12,500.
The lender persuaded the bankruptcy court to rule that the debt was not discharged under Section 523(a)(6) because it resulted from a willful and malicious injury to property. The debtor appealed, lost in district court, and lost a second time in an unpublished per curiam opinion by the Eleventh Circuit on Nov. 21.
In terms of its own authority, the circuit court followed its 2014 Kane opinion, holding that an “intentional act” gives rise to a nondischargeable debt under Section 523(a)(6) if it was “substantially certain to cause injury.” In turn, the Eleventh Circuit was following the Fifth Circuit’s Williams opinion from 2003.
The debtor argued that failing to turn over the equipment was justifiable because the lien evidently was unperfected since a proper financing statement had not been filed. The debtor nonetheless admitted knowing the loan was intended to be secured by a perfected security interest.
Upholding the finding of nondischargeability, the Eleventh Circuit approvingly cited two Florida bankruptcy court opinions for the proposition that “whether or not a lienholder’s security interest is properly perfected or recorded, where the debtor has knowledge of the lienholder’s claim and subsequently sells or disposes of the property at issue without notice to the lienholder, that act constitutes a willful and malicious injury under Section 523(a)(6).”
The circuit court said that Section 523(a)(6) does not require proof of an intentional tort. “Rather, all that is required is that [the debtor’s] behavior was ‘willful’ and ‘malicious,’” the opinion says.
The opinion avoided taking sides on a circuit split “as to whether the ‘substantially certain’ prong of the standard requires a subjective or objective standard.” The evidence, according to the opinion, supported the bankruptcy court’s finding that the debtor “intentionally committed an act that he knew was substantially certain to injure.”
The case is also a warning to corporate managers. If they mishandle collateral, their misconduct as corporate officers might result in nondischargeability if they are held liable to the lienholders in tort or contract.