Opinion ID: 6499351
Heading Depth: 3
Heading Rank: 2

Heading: Exceptions to Discharge

Text: Having concluded the bankruptcy court did not err in allowing the Glencove Claim as a valid debt, we turn now to the dischargeability of that debt. See In re Thompson, 555 B.R. 1, 8 (B.A.P. 10th Cir. 2016) (explaining a court must first determine whether the debt is valid then determine whether it is dischargeable). The Bankruptcy Code was enacted to give debtors a fresh start. In re Merrill, 252 B.R. 497, 503 (B.A.P. 10th Cir. 2000). Accordingly, “most debts are dischargeable in bankruptcy.” Id. However, 11 U.S.C. § 523 lists the circumstances in which a debt is not dischargeable. The bankruptcy court held the Glencove Claim was excepted from discharge under § 523(a)(2)(A) and (a)(6). Mr. Bloom argues this was in error. “We review a bankruptcy court’s construction of the Bankruptcy Code de novo.” In re McDaniel, 973 F.3d 1083, 1092 (10th Cir. 2020) (quotation marks omitted). We review factual findings related to the dischargeability of a debt for clear 11 Appellate Case: 22-1005 Document: 010110709338 Date Filed: 07/12/2022 Page: 12 error. In re Young, 91 F.3d 1367, 1370 (10th Cir. 1996). To promote the policy of providing debtors with a fresh start, “exceptions to discharge are to be narrowly construed, and . . . doubt is to be resolved in the debtor’s favor.” In re Kaspar, 125 F.3d 1358, 1361 (10th Cir. 1997).
Section 523(a)(2)(A) excepts from discharge a debt for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by . . . false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor’s or an insider’s financial condition. We have held a claim is not dischargeable pursuant to this subsection when (1) “[t]he debtor made a false representation,” (2) “the debtor made the representation with the intent to deceive the creditor,” (3) “the creditor relied on the representation,” (4) “the creditor’s reliance was reasonable,” and (5) “the debtor’s representation caused the creditor to sustain a loss.” Young, 91 F.3d at 1373. Mr. Bloom contends the language of the statute also requires the debtor to have personally obtained money, property, services, or credit from the false pretenses, false representation, or actual fraud. Mr. Bloom further argues the bankruptcy court’s findings do not satisfy that requirement because the court did not find he personally obtained money from the fraud. We begin by addressing Mr. Bloom’s argument. Courts have identified three views about whether the debtor must have personally obtained the money, property, or services to except the debt from discharge under § 523(a)(2)(A). In re Wade, 43 B.R. 976, 980–82 (Bankr. D. Colo. 1984), abrogated on other grounds by Cohen v. de la Cruz, 523 U.S. 213 (1998), as 12 Appellate Case: 22-1005 Document: 010110709338 Date Filed: 07/12/2022 Page: 13 recognized by In re Denbleyker, 251 B.R. 891 (2000). First, some courts have suggested the debtor must personally receive the money, property, or services for the debt to be excepted from discharge under § 523(a)(2)(A). Id. at 980–81 (citing Rudstrom v. Sheridan, 142 N.W. 313, 314 (Minn. 1913)). However, we have found no courts that applied this narrow interpretation of the statute.4 See In re Ritz, 567 B.R. 715, 763 (Bankr. S.D. Tex. 2017) (“There are no circuit courts that have adopted the first view.”). Second, some courts apply the “receipt of benefits” test which requires the debtor to have received a benefit from the money, property, services, or credit to render the debt nondischargeable. Wade, 43 B.R. at 981 (citing Hyland v. Finch, 178 N.Y.S. 114, 115 (1919)). Third, some courts have held that the debtor need not have personally obtained or benefited from the money or property obtained by fraud. Id. (citing In re Kunkle, 40 F.2d 563, 563–64 (E.D. Mich. 1930)). Mr. Bloom argues we should adopt the first view. Importantly, the Supreme Court has provided some guidance for interpreting § 523(a)(2)(A) in Cohen v. de la Cruz, 523 U.S. 213 (1998). There, the Supreme Court considered whether § 523(a)(2)(A) bars the discharge of treble damages awarded against the debtor for fraud or whether the exception to discharge is limited 4 Courts have determined this view in Rudstrom v. Sheridan, 142 N.W. 313, 314 (Minn. 1913), was merely dicta and was not the holding of the court. See, e.g., In re Bilzerian, 100 F.3d 886, 890 n.3 (11th Cir. 1996); In re Ward, 115 B.R. 532, 538 (W.D. Mich. 1990); In re Wade, 43 B.R. 976, 980–81 (Bankr. D. Colo. 1984), abrogated on other grounds by Cohen v. de la Cruz, 523 U.S. 213 (1998), as recognized by In re Denbleyker, 251 B.R. 891 (2000). 13 Appellate Case: 22-1005 Document: 010110709338 Date Filed: 07/12/2022 Page: 14 to the value of the money, property, services, or credit the debtor actually obtained through fraud. Id. at 215. In analyzing the statute, the Court explained “the phrase ‘to the extent obtained by’ . . . does not impose any limitation on the extent to which ‘any debt’ arising from fraud is excepted from discharge.” Id. at 218 (quoting 11 U.S.C. § 523(a)(2)(A)). The Cohen Court held § 523(a)(2)(A) prevents the discharge of all liability arising from the fraud, including treble damages which do not represent money the debtor obtained. Id. at 215. Prior to the Cohen decision, the circuit courts that reached the issue required the debtor to have received a benefit from the fraud to render the claim nondischargeable under the subsection. Muegler v. Bening, 413 F.3d 980, 983 (9th Cir. 2005) (collecting pre-Cohen cases applying the receipt-of-benefits requirement from the Ninth, Eleventh, and Fifth Circuits). With the language in Cohen, however, the Supreme Court applied a broader interpretation of § 523(a)(2)(A) such that the “obtained by” language amounts to a causation requirement. Denbleyker, 251 B.R. at 896–97 (concluding the Cohen analysis treated the phrase “obtained by” as if it was referring simply to causation); see also Husky Int’l Elecs., Inc. v. Ritz, 578 U.S. 356, 365 (2016) (holding any debts traceable to a fraudulent conveyance is nondischargeable under § 523(a)(2)(A) even though the debtor did not receive the funds in the fraudulent conveyance). That is, it requires only that the debt be traceable to fraud. Husky Int’l Elecs., 578 U.S. at 365; see also Denbleyker, 251 B.R. at 896–97. 14 Appellate Case: 22-1005 Document: 010110709338 Date Filed: 07/12/2022 Page: 15 Since Cohen, an increasing number of courts have applied the third view—that the debtor need not have personally obtained or benefited from the money or property obtained by fraud. Denbleyker, 251 B.R. at 897–99; Muegler, 413 F.3d at 983–84 (holding the receipt-of-benefits element under § 523(a)(2)(A) no longer applies after Cohen); In re M.M. Winkler & Assocs., 239 F.3d 746, 749–51 (5th Cir. 2001) (considering Supreme Court precedent and clarifying that § 523(a)(2)(A) does not require a “receipt of benefit” to except a debt from discharge); In re Pleasants, 219 F.3d 372, 375 (4th Cir. 2000) (applying Cohen and holding § 523(a)(2)(A) applies even when “no portion of a creditor’s claim was literally transferred to the fraudulent debtor”); In re Speisman, 495 B.R. 398, 403 (Bankr. N.D. Ill. 2013) (collecting cases holding § 523(a)(2)(A) does not require the debtor to have received a benefit); cf. In re Rountree, 330 B.R. 166, 170–75 (E.D. Va. 2004) (holding the creditor must have lost some money, property, or services as a result of the fraud to satisfy the requirements of § 523(a)(2)(A)). We have yet to decide which approach applies. With the broad interpretation in Cohen, the Supreme Court has suggested § 523(a)(2)(A) does not require that the debtor personally obtain money, property, or services to render the debt nondischargeable. This leaves open the question of whether the debtor needs to have received a benefit from the fraud to be excepted from discharge or whether the creditor must show only that the debt arose from the debtor’s fraud. We need not decide this question, however, because even if we apply the receipt-of-benefits requirement, the bankruptcy court’s findings support the nondischargeability of the Glencove Claim under § 523(a)(2)(A). Specifically, the 15 Appellate Case: 22-1005 Document: 010110709338 Date Filed: 07/12/2022 Page: 16 bankruptcy court found Mr. Bloom is the sole member of BBJ and BBJ obtained money from Mr. Bloom’s fraud. Mr. Bloom thus received a benefit from the fraud. See In re Grasso, 497 B.R. 434, 443 (Bankr. E.D. Pa. 2013) (concluding the debtor received a benefit from the alleged fraud because he was a managing member and held an ownership interest in the entity that received the proceeds of the loan); In re Holwerda, 29 B.R. 486, 489 (Bankr. M.D. Fla. 1983) (explaining the defendant received a benefit from the fraud because he was a principal of the corporation that received the loan). Therefore, even if the receipt-of-benefits requirement applies, that requirement has been met. Moreover, the bankruptcy court did not commit clear error by finding the Glencove Claim meets the other elements of § 523(a)(2)(A) because there was evidence in the record supporting those findings. See Young, 91 F.3d at 1373 (listing the elements required for nondischargeability under § 523(a)(2)(A)). Specifically, there was evidence that Mr. Bloom made a false representation with the intent to deceive Glencove when he lied about the negotiations with the seller and the amount of the sale price. There was also evidence that BBJ, through Mr. Bloom, acted as an agent for Glencove pursuant to the Agent Agreement, and Glencove reasonably relied on its agent’s representations about the negotiations. Evidence also supported a finding that Mr. Bloom’s lies caused Glencove to sustain a loss of at least the difference between the seller’s price and the price Glencove agreed to pay as well as the difference between the amount of repairs that Glencove believed would be completed and the amount of repairs that were completed. Thus, Glencove has shown 16 Appellate Case: 22-1005 Document: 010110709338 Date Filed: 07/12/2022 Page: 17 the necessary elements, and the bankruptcy court did not err by holding the Glencove Claim was nondischargeable under § 523(a)(2)(A).
The bankruptcy court also concluded the Glencove Claim was not dischargeable under 11 U.S.C. § 523(a)(6). Section 523(a)(6) excepts from discharge a debt “for willful and malicious injury by the debtor to another entity or to the property of another entity.” Mr. Bloom argues this subsection does not apply because (1) § 523(a)(6) cannot apply when the more specific exception to discharge in § 523(a)(2)(A) applies and (2) the Glencove Claim does not meet the willful-injury or malicious-injury requirements for nondischargeability under § 523(a)(6). While there are meaningful distinctions between § 523(a)(2)(A) and § 523(a)(6), a debt that is nondischargeable under one subsection may also be nondischargeable under the other so long as all the requirements are met under both subsections. Husky Int’l Elecs., 578 U.S. at 363–64. Thus, to determine nondischargeability under § 523(a)(6) we must review whether Mr. Bloom caused both a willful and malicious injury. See In re Moore, 357 F.3d 1125, 1129 (10th Cir. 2004) (noting nondischargeability under § 523(a)(6) requires both willful injury and malicious injury). “Willful injury may be established by direct evidence of specific intent to harm a creditor or the creditor’s property.” In re Longley, 235 B.R. 651, 657 (B.A.P. 10th Cir. 1999). The Supreme Court suggested the willfulness requirement is more akin to intentional torts than negligent or reckless torts or a “knowing breach of 17 Appellate Case: 22-1005 Document: 010110709338 Date Filed: 07/12/2022 Page: 18 contract.” Kawaauhau v. Geiger, 523 U.S. 57, 61–62 (1998). Mr. Bloom, therefore, argues the willful-injury requirement cannot be met because Colorado’s economic loss rule bars any tort claims against him arising out of the Agent Agreement. We already concluded Colorado’s economic loss rule does not apply, so Mr. Bloom’s argument against the willful-injury finding cannot succeed. Moreover, the bankruptcy court did not clearly err by finding a willful injury because there is evidence that Mr. Bloom deceived Glencove with the intent to make Glencove pay an extra $250,000 for the private jet. Next, malicious injury requires “evidence of the debtor’s motives.” In re Smith, 618 B.R. 901, 919 (B.A.P. 10th Cir. 2020) (quotation marks omitted). To be malicious, the debtor must have “acted with a culpable state of mind vis-à-vis the actual injury caused the creditor.” Id. (quotation marks omitted). The malicious element requires that the action be “wrongful and without just cause or excuse.” Id. Mr. Bloom, however, argues there is no malicious injury here because there is no evidence that he had personal animus against Glencove or the Pierces. This argument was not raised before the bankruptcy court or the BAP, so the argument is forfeited, and we would normally decline to address it. In re Williams, 49 F. App’x 845, 849 (10th Cir. 2002) (unpublished) (applying the preservation rule to a bankruptcy appeal); see also United States v. Leffler, 942 F.3d 1192, 1196 (10th Cir. 2019) (describing the principles of forfeiture and waiver). Even considering it on appeal, however, Mr. Bloom cannot succeed because personal animus is not a requirement for malicious injury. Smith, 618 B.R. at 919 (describing the requirements for 18 Appellate Case: 22-1005 Document: 010110709338 Date Filed: 07/12/2022 Page: 19 malicious injury); see also Ball v. A.O. Smith Corp., 451 F.3d 66, 69 (2d Cir. 2006) (explaining malicious injury means “wrongful and without just cause or excuse, even in the absence of personal hatred, spite, or ill-will” (quoting In re Stelluti, 94 F.3d 84, 87 (2d Cir. 1996))). The bankruptcy court did not commit clear error in finding malicious injury because evidence in the record suggests Mr. Bloom deceived Glencove in order to benefit himself and his colleagues through BBJ. This does not constitute a just cause or excuse and supports a finding that Mr. Bloom “acted with a culpable state of mind vis-à-vis the actual injury caused” to Glencove. Smith, 618 B.R. at 919. Therefore, the bankruptcy court did not err by concluding the Glencove Claim was nondischargeable under § 523(a)(6).