After the debtor filed for Chapter 7 bankruptcy relief, the creditor filed an adversary proceeding against the debtor. The debtor, as CEO of two companies, an American company and a Hong Kong company, directed the companies to partner on the manufacture and distribution of drones and helicopters. Later, the debtor restructured the American company to create an international group as a parent company to multiple subsidiaries. In 2015, the debtor memorialized the relationships between his various companies and conveyed business assets of the American company to the parent company and a services subsidiary through two agency agreements. The first agency agreement contracted the Hong Kong drone manufacturer as an agent of the parent company. In the second agency agreement, the service subsidiary enlisted the American subsidiary as an agent for North American sales. The agreements required the agent subsidiaries to remit funds to the parent company and the service subsidiary. In 2016, the Walt Disney Company contracted with the debtor’s Hong Kong subsidiary to manufacture drones. The creditor extended financing to the parent company for the drones under two loan agreements. The debtor personally guaranteed both financing agreements for the subsidiary. Among other things, the creditor placed a lien on cash deposited into the Hong Kong subsidiary’s bank accounts (the “charged accounts”). Additionally, the American subsidiary, pursuant to the loan agreement, transferred its sales proceeds to the charged accounts. During the financing, the creditor also required amendments to the two agency agreements to strengthen the agent-parent relationship, the creditor’s perfected lien on the collateral, and payment and transfer practices for the charged accounts. Moreover, the creditor required several side letter agreements, which included progressively “more onerous” financing terms. To obtain faster cash flow, the debtor entered into an additional agreement with another creditor (the “factoring creditor”). Under the factoring agreement, the parent company assigned purchase orders to the factoring creditor in exchange for credit, and the original creditor agreed to subordinate its liens on factored purchase orders. At the maturity date of the loan with the creditor, the debtor emailed the creditor a notice of inability to make its payment. The creditor extended an emergency loan to the debtor, agreed to forbear from declaring default, and extended the maturity date. At that time, the debtor offered all receivables and purchase orders as collateral and reaffirmed its commitment to deposit proceeds into the charged accounts. After the missed payment at the extended maturity date, the creditor sent a formal notice of default to the debtor. The debtor emailed the creditor regarding funds transferred from the charged account to a U.S. account, out of concern that the creditor would freeze the charged account to pay business expenses. The creditors sent a cease and desist notice alongside a notice of breach of contract. When the debtor’s companies could no longer pay manufacturers, the debtor entered into a trademark license agreement with another Hong Kong industrial company to manufacture and sell the parent company’s goods in exchange for hiring the parent company’s employees and paying royalties. The parent company then filed for Chapter 11 bankruptcy, and its subsidiaries soon joined by entering Chapter 7 bankruptcy. The creditor sued the debtor personally in Singapore based on his personal guarantee of the loan, and the court entered judgment against the debtor, causing him to subsequently file for Chapter 7 bankruptcy. The creditor then filed an adversary complaint in the debtor’s bankruptcy case, citing sections 523 and 727 of the United States Bankruptcy Code for its claim that the debtor’s debt was nondischargeable. At trial, the bankruptcy court initially denied all the creditor’s claims. The creditor appealed the holding to the district court and then to the Fifth Circuit on four issues related to statutory exceptions to discharge: (1) that 11 U.S.C. § 727(a)(2)(A) precluded discharge of the debts because the debtor acted with “intent to hinder, delay, or defraud” a creditor when he transferred property within one year before the filing of the bankruptcy petition; (2) that 11 U.S.C. § 727(a)(3) & (a)(7) excluded all of the debt from discharge because the debtor concealed or destroyed information from which the debtor’s financial condition might be ascertained; (3) that under 11 U.S.C. § 523(a)(2)(A) the debt was non-dischargeable because the debtor obtained the debt by false representations; and (4) that under 11 U.S.C § 523(a)(6), any debt “for willful and malicious injury by the debtor to another entity” is precluded from discharge.
In Triumphant Gold Ltd. v. Matloff (In re Matloff), No. 24-10439, 2025 WL 2848990, 2025 U.S. App. LEXIS 26219 (5th Cir. Oct. 8, 2025) (opinion not yet released for publication), the court affirmed the district court holdings on all claims except for the § 523(a)(6) claim, which it vacated and remanded for additional proceedings. The court first held that under 11 U.S.C. § 727(a)(2)(A), the debtor lacked actual intent to defraud. The court held constructive intent was insufficient to support a § 727(a)(2)(A) challenge to a bankruptcy discharge, because the debtor felt he “had no other choice” but to transfer the funds to avoid a freeze. Regarding the § 727(a)(2)(A) claim, the court further explained that only very serious dishonesty generally warrants denial of discharge. The court explained that one of the purposes of the bankruptcy code is to relieve honest debtors from business misfortunes and that, in business, debtors can take reasonable steps to keep a business afloat. Second, the court held that under 11 U.S.C. § 727(a)(3), the creditor did not establish that the debtor failed to keep records because of the delegation to accountants and the creditor’s access to the debtor’s financials via the account access permissions. Third, the court held that under 11 U.S.C. § 523(a)(2)(A) the debtor did not use false representations to obtain financing. The court found insufficient evidence to support either that the debtor received a bonus or that the creditor reasonably relied on the bonus to repay part of the debts. However, the court did find sufficient uncertainty on the 11 U.S.C § 523(a)(6) claim regarding whether the debtor’s actions deprived the creditor of collateral. The court explained that it could not determine whether the debtor willfully converted the creditor's collateral by transferring the funds. Therefore, the court remanded the § 523(a)(6) claim for further proceedings to determine if the debtor acted willfully and maliciously.
By Will Strum [email protected]
Edited By Taylor O’Brien [email protected]
Edited By Callighan Ard [email protected]
Edited By Hayden Mariott [email protected]