A co-conspirator’s intent to commit larceny is enough render a debt nondischargeable even if the debtor did not show the requisite intent, the Fifth Circuit held in a case that also made important law about harmless violations of the automatic stay.
Appealing a judgment that a debt for larceny was nondischargeable under Section 523(a)(4), the debtor argued that the creditor failed to show that he possessed the requisite larcenous intent. However, the debtor admitted that his co-conspirators had shown the necessary intent.
Based on the language of the statute, Circuit Judge Stephen A. Higginson held in a July 18 opinion that a “debtor cannot discharge a debt that arises from larceny so long as the debtor is liable to the creditor for the larceny.” He went on to say, “It is the character of the debt rather than the character of the debtor that determines whether the debt is nondischargeable under Section 523(a)(4),” which bars discharge of “any debt” for “fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny.”
Judge Higginson rested his decision in large part on Deodati v. M.M. Winkler & Assocs. (In re M.M. Winkler & Assocs.), 239 F.3d 746 (5th Cir. 2001), where the state court had held a partnership liable for the fraud of one partner. Reversing the bankruptcy court under Section 523(a)(2) in the ensuing bankruptcy of a partner, the Fifth Circuit held that the plain meaning of the statute barred the partners from discharging the debt “so long as they are liable to the creditor for fraud.” Id. at 748. The court said that the “statute focuses on the character of the debt, not the culpability of the debtor.” Id. at 751-52.
Importing the Deodati decision under subsection (a)(2) to (a)(4), Judge Higginson said that (a)(4) similarly bars discharge of “any debt . . . for . . . larceny.” The text, he said, “adds no further criteria or qualifications.”
Therefore, Judge Higginson said that “the intent and actions of [the debtor’s] co-conspirators is sufficient to support nondischargeability under Section 523(a)(4).”
Judge Higginson stopped short of saying the result would be the same under Section 523(a)(6), because that subsection refers to “willful and malicious injury by the debtor . . . .” The additional words “by the debtor,” he said, have led “several courts” to “require that the debtor have acted personally” to inflict the injury.
The appeal also presented an issue of first impression regarding the automatic stay.
The dischargeability litigation arose in the debtor’s prior chapter 11 case. Although the bankruptcy court had dismissed the chapter 11 case, the parties agreed that the bankruptcy court could retain jurisdiction to complete the adversary proceeding.
After the bankruptcy court issued its opinion but before the entry of the judgment of nondischargeability, the debtor filed a chapter 7 petition in the same bankruptcy court. Although the debtor filed a suggestion of bankruptcy, the bankruptcy judge went ahead and entered the judgment of nondischargeability.
In the Fifth Circuit, the debtor argued that entry of judgment violated the automatic stay in his newly commenced chapter 7 case.
Without holding, Judge Higginson intimated there was no stay violation because the “automatic stay does not bar actions that are expressly allowed under the Bankruptcy Code.” He also said, again without holding, that the stay does not bar actions in the same bankruptcy court.
Even if there were a stay violation, it was harmless error, Judge Higginson held. He examined “everything in the record” to conclude that the bankruptcy judge would have modified the automatic stay to allow the entry of judgment.
If the bankruptcy court had modified the stay, “the outcome would have been the same.” Any error was harmless because the debtor would be “in the same position as he is in now.”