The debtor owned an LLC that operated a gymnastics school and sought funding from the creditor in exchange for the LLC’s future account receivables and a right to debit a specific amount from the LLC’s bank account each day. The debtor, who had guaranteed the loan to his LLC, represented that he did not anticipate closing his business over the next twelve months, nor did he anticipate the business would be filing for bankruptcy. After a few weeks, the debtor told the bank to stop payments to the creditor. The debtor also transferred a substantial amount of the LLC’s funds to his personal bank account. The creditor filed suit against the debtor and the court granted judgment against the debtor for the full amount due to the creditor, interest, attorney fees, and court costs. Eventually, the debtor filed a voluntary petition for relief under Chapter 7 of the Bankruptcy Code. The creditor filed an adversary complaint in the bankruptcy court requesting that the debt owed to the creditor be deemed nondischargeable under 11 U.S.C. § 523(a)(2)(A), § 523(a)(2)(B), § 523(a)(4), and § 523(a)(6).
In In Re Smith, Bankruptcy No. 20-14400-AMC, Adv. Proc. No. 21-00029-AMC, 2024 WL 4037496, 2024 Bankr. LEXIS 2035 (Bankr. E.D. Pa. Sept. 3, 2024) (unpublished opinion), the bankruptcy court held that the debt was nondischargeable because the debtor “willfully and maliciously converted the [r]eceivables, which belonged to [the creditor].” Debt arising from “willful and malicious injury by the debtor to another entity or the property of another entity” is nondischargeable under § 523(a)(6) of the Bankruptcy Code. The court explained that “conversion can constitute a willful and malicious injury to property for the purpose of § 523(a)(6).” The court further explained that previously, courts have held that debtors willfully and maliciously injured a creditor by denying the creditor funds to which it was entitled. The court found that there was sufficient evidence that the debtor converted the creditor’s property by refusing to pay the receivables and by moving large amounts into his personal bank account. The creditor had a right to the receivables and was deprived of its rights by the debtor’s conduct. Moreover, the court found that refusing to pay the creditor without just cause was a malicious injury and that moving the money to a personal bank account was a willful injury, because it displayed a lack of intent on the debtor’s part to honor the agreement. Finally, the court stated that the debtor seemed to want a “cash advance with no strings” and held that the debt was nondischargeable.
By Pablo Aun: [email protected]
Edited By Nura Elhentaty: [email protected]
Edited By Kristin Meurer: [email protected]
Edited By Hayden Mariott: [email protected]