The debtor borrowed money from the creditor to buy and resell goods and executed a “Secured Promissory Note & Security Agreement” (the “Agreement”). In the Agreement, the creditor agreed to fund the loan amount in exchange for the debtor’s promise to repay the principal with an added transaction fee by maturity. The Agreement additionally granted the creditor a security interest in the goods, required the debtor to provide any instruments necessary to perfect the creditor’s security interest in the collateral, and prohibited the debtor from leasing, lending, using, selling, or disposing of the goods without the creditor’s written consent. The debtor also executed an “Unconditional Guaranty,” ensuring “prompt and complete payment and performance … when due.” Without providing the bills of lading to the creditor or obtaining the creditor’s consent, the debtor allowed the transfer of the goods from its warehouse to another entity in Mexico. Further, the debtor did not repay the loan at maturity. The creditor then sued the debtor and the owner under the Agreement in federal court and acquired a default judgment against the debtor and the owner for nonpayment. The judgment held the debtor and owner jointly and severally liable for the loan amount, the transaction fee, pre- and post-judgment interest, and attorneys’ fees. In response to the creditor’s efforts to collect on the judgment, the debtor made a partial payment and filed for Chapter 7 bankruptcy. The creditor filed an adversary complaint against the debtor on the grounds that the judgment was nondischargeable under 11 U.S.C. § 523(a)(2), (a)(4), and (a)(6). After each party filed competing motions for summary judgment, the bankruptcy court dismissed the Bankruptcy Code section 523(a)(4) claim and denied the creditor’s motion. At trial, the bankruptcy court excluded the creditor’s rebuttal expert witness on the value of certain apparel because of the creditor’s failure to timely disclose the rebuttal expert under Bankruptcy Rule 7026 or include the testimony in its case-in-chief. The bankruptcy court held that the judgment was nondischargeable under Bankruptcy Code § 523(a)(2)(A) and ordered the debtor to pay the principal, attorneys’ fees, and prejudgment interest. Because the full amount of the judgment was deemed nondischargeable under section 523(a)(2)(A), the bankruptcy court did not address the creditor’s alternative claim under section 523(a)(6). The debtor appealed the exclusion of the expert witness, the ruling finding the debt to be nondischargeable, and the award of prejudgment interest.
In Islam v. Koral (In re Islam), BAP No. NC-24-1090-FBC, Bk. No. 22-40278-cn, Adv. No. 22-04036-cn, 2025 WL 1079081, 2025 Bankr. LEXIS 912 (B.A.P. 9th Cir. Apr. 10, 2025) (unpublished opinion), the court affirmed the bankruptcy court decision, which ruled the debt was nondischargeable under section 523(a)(2)(A), vacated the award of prejudgment interest, and remanded with instructions to award the amount calculated in the opinion. The court reviewed the finding of intent to defraud, a question of fact, for clear error and found none, with the evidence showing promissory fraud, or a promise made with no intent to perform. First, in reviewing the remainder of the nondischargeability ruling de novo, the court agreed with the bankruptcy court that the trial testimony and evidence supported the conclusions that the creditor had relied on the debtor’s misrepresentations, and that the creditor incurred damages in the amount of the default judgment from that reliance. Second, the court held that the exclusion of expert testimony did not constitute an abuse of discretion. In addition to finding the testimony irrelevant, the court reasoned that the bankruptcy court correctly applied Bankruptcy Rule 7026(a)(2), which required disclosure of the expert testimony, and Bankruptcy Rule 7037(c)(1) to bar the evidence not timely disclosed. Further, the court held that claim preclusion barred the debtor’s defenses to the amount owed because the issue had already been adjudicated. Third, the court held that the bankruptcy court erred in the amount of prejudgment interest awarded and remanded the matter for the bankruptcy court to award the correctly calculated amount. Therefore, the court affirmed in part, and vacated in part and remanded in part.
By Taylor O’Brien, [email protected]
Edited By Olivia Lewis, [email protected]
Edited By Callighan Ard, [email protected]
Edited By Hayden Mariott, [email protected]