On March 25, 2021, the Eleventh Circuit Court of Appeals ruled that a chapter 7 discharge prohibits the holders of a nondischargeable debt from suing the debtor post-discharge to collect a judgment. Specifically, the ruling in Suvicmon Dev. Inc. v. Morrison[1] directs that a fraudulent-transfer action is not synonymous with execution of a judgment, simply because the underlying debt is excepted from discharge. The court reasoned that “fraudulent transfer claims must be based on an underlying claim by a creditor, which the creditor could have sought to satisfy out of the asset that was transferred. However, as a distinct cause of action, a fraudulent transfer claim is a claim distinct from the claim on which it is predicated, in this case the plaintiffs’ securities-fraud claims.”
In Suvicmon, Morrison filed for chapter 7 relief while a state court suit for securities fraud and fraudulent transfers was pending against him. The suit also named his sons as recipients of the alleged transferred property. Northern District of Alabama Bankruptcy Judge Clifton R. Jessup, Jr. granted the creditors relief from stay, allowing that suit to proceed to completion but not to execution of a judgment. The creditors also filed a nondischargeability action in the bankruptcy court, seeking a declaration that the debts arising from the state court suit be held nondischargeable. While the state court and adversary proceedings were pending, the chapter 7 trustee issued a no-asset report, abandoning all estate property including the alleged fraudulent transfer claims. Shortly thereafter, Morrison received his chapter 7 discharge.
In the months that followed, the state court entered a judgment of $1.875 million in favor of the creditors on the securities fraud claim, but found for Morrison and his sons on the fraudulent-transfer claims. Accordingly, Judge Jessup Jr. entered a nondischargeable judgment against Morrison in the adversary proceeding for $1.875 million. The creditors sought leave to appeal the state court judgment on the fraudulent-transfer count, which the bankruptcy court denied. Judge Jessup Jr. ruled “that the discharge injunction barred creditors from proceeding against Morrison in the state courts on the fraudulent transfer claims.” Judge Jessup Jr. reasoned that the Eleventh Circuit’s In re Jet Florida doctrine, asserted by creditors, was inapplicable, because Morrison would be burdened with the expense of defending the state court suit if it were allowed to proceed with him as a party. The Northern District of Alabama affirmed the bankruptcy court determination, and the Eleventh Circuit Court of Appeals similarly found that this decision by the bankruptcy court was not an abuse of discretion.
In denying the creditors an opportunity to pursue a post-discharge appeal of fraudulent-transfer claims against Morrison, the Eleventh Circuit took a further step in the direction of preserving the rights afforded by the chapter 7 discharge. It marks a departure by the Eleventh Circuit from its own longstanding precedent established in Owaski v. Jet Florida Systems Inc. (In re Jet Florida Systems Inc.).[2] The In re Jet doctrine that Judge Jessup Jr. declined to apply in Suvicom previously allowed for post-discharge suits against a former debtor if it was substantially certain that the outcome would not interfere with the debtor’s fresh start. Suvicmon further narrows that stance, with the Eleventh Circuit considering not only the potential outcome, but also the cost of having to defend a post-discharge suit.
Finally, Suvicom provides debtors with an important procedural distinction: Whereas an adversary proceeding in the chapter 13 context must generally be resolved before confirmation can take place, a chapter 7 discharge can be entered at any time, even while an adversary proceeding for nondischargeability is pending. By seeking chapter 7 relief, Morrison likely mitigated additional monetary damages that were thwarted by the timely entry of his chapter 7 discharge.
Individuals defending state or federal causes of action are likely to consider insolvency or reorganization as a possible alternative. Counsel for borrowers and defendants should carefully review all options for seeking bankruptcy relief under chapters 7, 13 or 11 in the context of the claims pending against their clients. Notwithstanding possible debt-limitation issues, this case illustrates that relief obtained by bankruptcy debtors based on the type of case filed is not necessarily created equal. This is particularly so where any given chapter may prove to be more advantageous than the other depending on the circumstances of the case.