The cap on a so-called landlord claim under Section 502(a)(6) does not prevent the court from barring discharge of the claim under Section 523(a)(2)(A), even if the reduced claim was paid in an individual’s chapter 11 plan, according to an October 18 opinion from the Eighth Circuit.
The Lease and the Fraudulent Transfer
The husband had guaranteed his corporation’s lease of real property. The company breached the lease, and the landlord won a $2 million judgment against the husband on his guaranty in Minnesota state court. The judgment included future rent.
Two years later, the state court held the husband and his wife jointly and severally liable to the landlord for some $800,000 for a fraudulent transfer the husband had made to his wife with actual intent to hinder, delay or defraud creditors.
The next year, the husband filed bankruptcy, confirmed a chapter 11 plan and received a discharge. In the chapter 11 case, he paid the full amount of the landlord’s allowed claim, about $550,000, as capped by Section 502(b)(6).
The wife then asked the state court to vacate the judgment against her, on the theory that the claim had been paid. However, the state court decided that the husband’s bankruptcy had not discharged the judgment against the wife. The wife then filed her own chapter 11 case.
The landlord filed a $1 million claim against the wife, representing principal and interest on the fraudulent transfer judgment. Bankruptcy Judge William J. Fisher of Minneapolis ruled that the owner’s bankruptcy had not discharged the debt. However, Judge Fisher concluded that the claim was capped by Section 502(b)(6).
The Eighth Circuit upheld Judge Fisher in March 2020 by holding that the owner’s bankruptcy had not discharged the debt. The appeals court held that the wife remained liable for about $330,000. Lariat Cos. v. Wigley (In re Wigley), 951 F.3d 967 (8th Cir. March 9, 2020). To read ABI’s report, click here.
Meanwhile, the landlord had filed an adversary proceeding to declare that the fraudulent transfer judgment was nondischargeable under Section 523(a)(2)(A) as an “actual fraud.”
Bankruptcy Judge Fisher ruled that the debt was nondischargeable. The Bankruptcy Appellate Panel affirmed, and the wife appealed.
Retired Judge Kressel Says How to Rule
The wife argued in the circuit that making the debt nondischargeable would nullify the landlord cap in Section 502(b)(6). She argued that the cap protects other creditors by barring a landlord from receiving a windfall based on future rent.
For the appeals court, Circuit Judge Roger L. Wollman held that “the landlord cap does not foreclose [the landlord’s] argument that the claim should be excepted from discharge under § 523(a)(2)(A).” To his way of thinking, the landlord cap only “established the amount allowed to be paid from the bankruptcy estate” but “did not preclude [the landlord] from seeking to except its claim from discharge under § 523(a)(2)(A).”
As authority, Judge Wollman cited an opinion from 2000 by Bankruptcy Judge Robert J. Kressel of Minneapolis, who held that a creditor is not barred from collecting a disallowed claim if it had been disallowed by a bankruptcy principle like Section 502(b)(2) and not on the merits. See In re McAlpin, 254 B.R. 449, 454–56 (Bankr. D. Minn. 2000). Judge Kressel retired this year after almost 39 years on the bankruptcy bench.
Judge Wollman held that the debt would not be discharged to the extent it was obtained by actual fraud under Section 523(a)(2)(A).
To complete the appellate exercise, Judge Wollman decided that the bankruptcy court had not committed clear error in finding that the wife had participated in the fraudulent transfer with the required wrongful intent.
Judge Wollman upheld the judgment of the bankruptcy court excepting the judgment from discharge.
The cap on a so-called landlord claim under Section 502(a)(6) does not prevent the court from barring discharge of the claim under Section 523(a)(2)(A), even if the reduced claim was paid in an individual’s chapter 11 plan, according to an October 18 opinion from the Eighth Circuit.
The Lease and the Fraudulent Transfer
The husband had guaranteed his corporation’s lease of real property. The company breached the lease, and the landlord won a $2 million judgment against the husband on his guaranty in Minnesota state court. The judgment included future rent.
Two years later, the state court held the husband and his wife jointly and severally liable to the landlord for some $800,000 for a fraudulent transfer the husband had made to his wife with actual intent to hinder, delay or defraud creditors.
The next year, the husband filed bankruptcy, confirmed a chapter 11 plan and received a discharge. In the chapter 11 case, he paid the full amount of the landlord’s allowed claim, about $550,000, as capped by Section 502(b)(6).