On November 21, 2016, in a case entitled In re Monson,1 the Eleventh Circuit Court of Appeals affirmed the Bankruptcy Court's decision,2 which held that a debtor's conduct constituted a willful and malicious injury to a creditor within the meaning of 11 U.S.C. 523(a)(6), because the debtor injured the creditor's right to recover its loan, the injury was intended, and the debtor was conscious of his wrongdoing. Thus, the debt was nondischargeable under 523(a)(6).

Exceptions to the Dischargeability of Debt under Section 523 of the Bankruptcy Code

A Chapter 7 debtor is generally entitled to the discharge of all debts that arose prior to his bankruptcy filing. This is because the "fundamental purpose of the Bankruptcy Code is to afford financial relief to honest but unfortunate debtors." 3 However, the benefit of discharge is limited by certain exceptions, which are listed in Section 523 of the Bankruptcy Code. These exceptions are designed to prevent a debtor from using bankruptcy to avoid the consequences of his wrongful conduct.4 For example, a debtor is not entitled to discharge debt for a tax or customs duty,5 for debts obtained under false pretenses,6 for fraud, embezzlement or larceny, 7 or for a domestic support obligation. 8

The Exception for "Willful and Malicious Injury"

Neither is a debtor entitled to discharge debt "for willful and malicious injury by the debtor to another entity or to the property of another entity," 9 which is the provision on which this new case turns.

The Eleventh Circuit has defined "willful injury" to mean a debtor's intentional act, the purpose of which is to cause injury or which is substantially certain to cause injury.10 The debtor must have intent to injure.11 This is distinct from an intentional tort -- all that is required by 523(a)(6) is that the behavior be willful, which is a lesser standard than establishing the occurrence of an intentional tort.12

"Malicious" in this context has been defined by the Eleventh Circuit to mean "wrongful and without just cause or excessive even in the absence of personal hatred, spite or ill-will." 13 Malice can be implied from the behavior or the act itself. 14 Again, an intentional tort is not required, just that the behavior be malicious.15

As an example of such behavior, the Fifth Circuit held that a "knowing breach of a clear contractual obligation that is certain to cause injury" would fit the description of willful and malicious behavior under 523(a)(6).16 In the Eleventh Circuit, Bankruptcy Courts have held that the sale of collateral without notice to a lienholder also fits the description of a willful and malicious injury under 11 U.S.C. 523(a)(6).17 This is the case whether or not the security interest is properly perfected or recorded.18 The crux of the analysis is whether the debtor has knowledge of the lienholder's claim and nevertheless disposes of the collateral without notice to the lienholder. 19

Factual Background

In Monson v. Galaz, debtor Monson ("Monson") and creditor Segundo ("Segundo") entered into a contract which provided that Segundo would loan Monson $130,000 to open and manage an internet caf in Hillsborough County, Florida.20 The parties formed a limited liability company called "Internet Depot, LLC" and all of the equipment purchased by the newly formed company was to bear a label stating that it was owned by Creditor Segundo, on lease to Internet Depot, LLC. 21 Debtor Monson used the loan funds to buy computers, telephones and other equipment (the "Collateral"). The internet caf was open for only a few weeks when law enforcement raided the business and seized the assets, alleging that the business was engaged in illegal online gaming. 22

After the equipment had been confiscated, Creditor Segundo gave Debtor Monson notice that it wished to terminate the agreement and demanded liquidation of the Collateral to repay the loan.23 Subsequently, Debtor Monson entered into a deal with law enforcement by agreeing to remove the equipment from Hillsborough County and refrain from any type of gambling activities or computer gaming activities in Hillsborough County. He retrieved the Collateral from law enforcement, formed a new entity called Southern Investments of Jacksonville, LLC and essentially moved the business to Jacksonville, Florida with a new business partner, excluding Creditor Segundo. 24 Although there was some dispute over what Creditor Segundo knew about Monson's new venture in Jacksonville, "it is undisputed that Monson knew Segundo was asserting its right to repayment of the loan and that Segundo never sanctioned the new internet center in Jacksonville."25

Creditor Segundo brought an action against Debtor Monson, where it obtained a judgment in the amount of $130,000 and was entitled to turnover of the Collateral. 26 An appraisal revealed that the Collateral's value was $12,050. 27 Debtor Monson then filed for Chapter 7 bankruptcy, and Creditor Segundo filed an adversary proceeding in Monson's bankruptcy case alleging that the debt owed to it was nondischargeable under various provisions of Section 523 of the Bankruptcy Code. 28 In calculating the amount of dischargeable debt, the Bankruptcy Court used the original loan amount of $130,000, less the value of the equipment that was recovered, for a total of $117,950 which was held to be nondischargeable.

The Court's Analysis and Conclusion

The Bankruptcy Court found that the debt should not be discharged under 11 U.S.C. 523(a)(6) because it resulted from Debtor Segundo's willful and malicious injury, and this position was affirmed by the Eleventh Circuit. In reaching this conclusion, the Bankruptcy Court found that Debtor Monson knew that he damaged Segundo's right to recover the Collateral when he moved the assets from Hillsborough County to Jacksonville, Florida, and used the Collateral in a new business without Segundo's permission.29 The Bankruptcy Court found this conduct to be willful and malicious.30 The Eleventh Circuit described his behavior as "wrongful, without just cause, and excessive... the very nature of Monson's actions implies a malefic intent."31

Notably, in affirming the Bankruptcy Court's position, the Eleventh Circuit did not address the circuit split as to whether the "substantially certain" prong of the standard requires a subjective or objective standard.32 Additionally, the Eleventh Circuit distinguished the facts in Monson from other instances that did not rise to the level of willful and malicious conduct, such as a debtor who failed to obtain workers' compensation insurance,33 or a car accident in which the judgment debtor did not intend to cause the accident or resulting injury.34

Ultimately, this case should provide comfort to creditors who find themselves pursuing a debtor guilty of wrongdoing. If a debtor has deliberately tried to avoid its obligations by absconding with or misusing the collateral, this case provides an example of behavior considered to be a "willful and malicious injury," and provides helpful analysis of a provision of the Bankruptcy Code, which can be useful to creditors seeking recovery of a debt.