The Fourth Circuit holds that the debt in a settlement agreement based on a claim for willful and malicious conduct is nondischargeable under Section 523(a)(6) and isn’t a dischargeable debt arising from breach of contract.
Of perhaps more significance, the Fourth Circuit also held that the costs of enforcing the settlement agreement and interest from delayed payment are likewise nondischargeable.
Long before bankruptcy, the debtor allegedly assaulted the creditor. In lieu of litigating, they settled. The agreement obliged the debtor to pay $415,000 over time, with interest on late payments.
The debtor made $186,000 in payments before stopping. The debtor filed a bankruptcy petition just after the creditor filed a motion for a default judgment. The creditor filed both a proof of claim and a complaint seeking a declaration that the remaining payments were nondischargeable under Section 523(a)(6) along with interest and the costs of collection.
Over the debtor’s objection, the bankruptcy court sided with the creditor by holding that the remaining debt under the settlement agreement, some $230,000, was nondischargeable as a debt for willful and malicious injury. However, the bankruptcy court ruled that collection costs and interest were dischargeable as new debts.
The district court affirmed the ruling on the $230,000 in principal debt but reversed on interest and collection costs, declaring them also to be nondischargeable.
Settlement Agreements Are Nondischargeable
The debtor appealed but lost across the board in a January 18 opinion by Circuit Judge Pamela Harris.
Section 523(a)(6), the governing statute, provides that “any debt” is nondischargeable “for willful and malicious injury by the debtor to another entity or to the property of another entity.”
On appeal, the debtor conceded that his actions gave rise to a debt for willful and malicious injury, but he contended that the debt under the settlement agreement was a dischargeable debt arising from breach of contract.
In an understatement, Judge Harris said that the Supreme Court had given “important guidance” in Cohen v. de la Cruz, 523 U.S. 213, 223 (1998), and Archer v. Warner, 538 U.S. 314 (2003).
Referring to Cohen, Judge Harris recounted how the Supreme Court had said that the words “any debt . . . for” in Section 523(a) “‘connote broadly any liability arising from the specified’ conduct. See Cohen, 523 U.S. at 220.”
In Archer, Judge Harris said that the Supreme Court rejected an argument that was “nearly identical” to the debtor’s. In Archer, she said that the Supreme Court held that a settlement agreement arising from money obtained by fraud was nondischargeable under Section 523(a)(2)(A).
Judge Harris said that “Archer governs here.” Parroting Archer, she held:
[The debtor’s] non-dischargeable debt for “willful and malicious injury” may have been reduced to a settlement agreement, but that does not “change[] the nature of the debt for dischargeability purposes.”
Archer, supra, 538 U.S. at 320.
Interest and Collection Costs Are Also Nondischargeable
Having ruled that the unpaid principal debt of $230,000 under the settlement agreement was nondischargeable, Judge Harris turned to the dischargeability of interest and collection costs.
The debtor contended that the creditor’s attorneys’ fees in collecting the settlement and in contesting the bankruptcy were dischargeable because they did not arise directly from the assaults but came into being years later. Judge Harris disagreed, saying, “Cohen points toward the opposite result.”
Judge Harris read Cohen as holding “that § 523(a)’s exceptions may reach punitive and other related ancillary debts.” Thus, she concluded that “any debt” arising from the injury is nondischargeable, not just “the part of the debt that makes the victim whole.”
Similarly, Judge Harris said that Archer “makes clear” that “a settlement agreement does not disrupt the causal chain.” Consequently, she said that “collection debts, which ‘flow directly from [the] agreement for the express purpose of enforcing its terms’ . . . remain ‘traceable to’ . . . the injury he inflicted on [the debtor].” [Citations omitted.]
Siding with decisions from the Seventh and Eighth Circuits, Judge Harris held that “interest on late payments and attorney’s fees incurred in enforcing the agreement and contesting [the debtor’s] bankruptcy proceedings” arise from willful and malicious injury and are nondischargeable.
The Fourth Circuit holds that the debt in a settlement agreement based on a claim for willful and malicious conduct is nondischargeable under Section 523(a)(6) and isn’t a dischargeable debt arising from breach of contract.
Of perhaps more significance, the Fourth Circuit also held that the costs of enforcing the settlement agreement and interest from delayed payment are likewise nondischargeable.