Bankruptcy Pre-Filing Debt Discharge Decision by Bankruptcy Court: Was It Bad Faith or Good?

At what point in time does acting in bad faith cause a pre-filing bankruptcy debt to be precluded from discharge? That issue was recently addressed by the U.S. Bankruptcy Court for the Southern District of Florida. In Frost Bank v. Rivera (In re Rivera), 2020 WL 4018986 (Bankr. S.D. Fla. July 16, 2020), Judge Grossman dismissed Frost Bank’s motion to disallow the discharge of its claim ($1.2 million) against Dr. Roberto Rivera, the debtor. The court also dismissed Frost Bank’s claim with prejudice.¹ Frost Bank had asserted that even though the underlying debt was not obtained by fraud, the debtor’s post-judgment actions rendered the debt non-dischargeable under two different subsections of the Bankruptcy Code.

In December 2009, Frost Bank obtained a judgment against the debtor in Texas. That judgment was later recorded in Broward County, Florida, on April 30, 2010. In April 2019, Frost Bank commenced collection actions on the judgment, including several writs of garnishment, and obtained a writ of execution to levy the debtor’s Mercedes-Benz. Frost Bank alleged that the debtor “attempted to thwart its efforts by, among other things, submitting false affidavits, fraudulently converting assets, and asserting an allegedly false claim of exemption.”²

The Bankruptcy Code provides that a debt obtained by false pretenses, representation or fraud is not dischargeable.³ Frost Bank argued that the U.S. Supreme Court’s holding in Husky International Electronics, Inc. v. Ritz⁴ supported the bank’s assertion that its claim was not dischargeable. Judge Grossman noted that the issue in Husky “was whether Section 523(a)(2)(A) required misrepresentation or misleading omission for a debt to be non-dischargeable.”⁵ Judge Grossman did not find Husky to be as broad of a holding as Frost Bank was arguing.

Frost Bank also asserted that the judgment was not dischargeable due to “willful and malicious injury.” Judge Grossman ruled on that issue that section 523(a)(6) requires that, “an injury ‘must be both willful and malicious’; reckless or negligent conduct is not sufficient.”⁶ Again looking to the origin of the debt, Judge Grossman ruled that Frost Bank’s complaint contained no allegations the debt arose from “willful and malicious injury” by the debtor. Therefore, Judge Grossman also dismissed the argument that the debt was non-dischargeable under Section 523(a)(6) – even if the debtor’s actions were willful and malicious post attainment of the debt from Frost Bank.

Widerman Malek Takeaway

Acting in bad faith is never a good strategy or frankly the right thing to do. Under Florida law, a debtor cannot transfer title to a non-exempt asset with the intent to hinder, delay or defraud a present or future creditor.⁷ In re Rivera, although the debtor may have acted in bad faith regarding collections efforts on the judgment, such bad acts happened after the origination of the debt so he was still able to get the debt discharged because he presumably acted in good faith when obtaining the debt from Frost Bank.

 

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