An individual debtor’s refusal to sign a document allowing a lender to recover on a guarantee from the Small Business Administration did not give rise to a nondischargeable debt for willful and malicious injury under Section 523(a)(6), according to Bankruptcy Judge Janice D. Loyd of Oklahoma City.
The November 8 opinion by Judge Loyd is built on the idea that a willful breach of contract does not give rise to nondischargeability absent an allegation of an intentional tort.
A husband and wife guaranteed a bank loan to their small business corporation. The corporation defaulted, and the bank foreclosed on the collateral, leaving a deficiency and making the couple liable on their guarantees.
When obtaining the loan, the husband and wife did not sign and deliver several documents required for the bank to obtain the SBA’s guarantee of the loan.
After foreclosure, the husband and wife filed a chapter 7 petition. Subsequently, the debtors refused to sign documents enabling the bank to call the SBA’s guarantee. In turn, the bank commenced an adversary proceeding in the debtors’ chapter 7 case alleging that the failure to execute and deliver the documents required by the SBA was a willful and malicious injury making the debtors’ guarantees nondischargeable under Section 523(a)(6).
Judge Loyd granted the debtors’ motion to dismiss the dischargeability complaint.
Section 523(a)(6) provides that a general discharge does not discharge “an individual debtor from any debt . . . for willful and malicious injury by the debtor to another entity or to the property of another entity.”
In the Tenth Circuit, Judge Loyd said that nondischargeability under the subsection requires an act that is both willful and malicious. Willfulness requires both an intentional act and intended harm, or proof that the debtor intended the consequences of the act or believed that the consequences were substantially certain to result.
For malice, the debtor’s actions must be intentional, wrongful and without justification or excuse, Judge Loyd said.
Since the act must be both willful and malicious, Judge Loyd said that “an intentional tort is required, and debts resulting from recklessness or negligence are not within the scope of § 523(a)(6).” Thus, she said, “[m]any cases” hold that “no breach of contract claim, intentional or otherwise, can come within § 523(a)(6).”
Still, Judge Loyd found cases where an intentional breach of contract led to nondischargeability. However, she said, “even those cases still require that ‘a breach of contract must be accompanied by some form of “tortious conduct” (recognized under applicable state law) that gives rise to “willful and malicious injury.”’ In re Young Jin Yoon, 627 B.R. 905, 914 (Bankr. C.D. Cal. 2021).”
In the case at hand, Judge Loyd said that the “gravamen” of the complaint was based on “the Debtors’ failure or refusal to complete certain contractually required documentation which would assist the Bank in making a claim on the SBA guaranty of the Debtors’ loans.” She found “no allegations in the Complaint of the Debtors’ commission of a separate but related intentional tort.”
In other words, Judge Loyd said that the bank was asking the court “to broaden the reach of § 523(a)(6) beyond injuries from tortious conduct to include damage awards for intentional breaches of contract.”
Although she gave the bank two weeks to file an amended complaint, Judge Loyd granted the debtors’ motion to dismiss the complaint because the allegations in the complaint “only state a claim for breach of contract [and] do not state a claim for ‘willful and malicious’ conduct under § 523(a)(6).”
An individual debtor’s refusal to sign a document allowing a lender to recover on a guarantee from the Small Business Administration did not give rise to a nondischargeable debt for willful and malicious injury under Section 523(a)(6), according to Bankruptcy Judge Janice D. Loyd of Oklahoma City.
The November 8 opinion by Judge Loyd is built on the idea that a willful breach of contract does not give rise to nondischargeability absent an allegation of an intentional tort.
A husband and wife guaranteed a bank loan to their small business corporation. The corporation defaulted, and the bank foreclosed on the collateral, leaving a deficiency and making the couple liable on their guarantees.
When obtaining the loan, the husband and wife did not sign and deliver several documents required for the bank to obtain the SBA’s guarantee of the loan.