Rule: Judgment debts incurred by defalcation of a guardian are non-dischargeable in bankruptcy, as are judgment debts for willful and malicious injury.
At the end of a successful bankruptcy process, your unsecured debts are discharged. This includes credit card and medical debt. There are exceptions, however, such as student loan debt, which is generally non-dischargeable. Another exception is debt due to a judgment against you for willfully injuring another person or his property. That judgment will stick with you through bankruptcy.
The story of In re Pierce, 2013 WL 1867606 (Bankr. S.D. Ind. 2013)
David suffered from a mental disability that made him unable to manage his personal needs or his residence without assistance. Aware that the condition of his home had degraded below acceptable standards, he sought out legal and financial help from Mary. In 2005, the court appointed her as David’s permanent legal guardian. They worked well together for a while, but David became increasingly dissatisfied with Mary’s guardianship and finally petitioned to have her removed as his guardian. The court denied his request and he appealed. In re Guardianship of Stalker, 953 N.E.2d 1094 (Ct. App. Ind. 2011).
Two weeks after David’s petition, Mary filed a complaint against him with the Board of Health. She brought a Health Department inspector to his home and the inspector determined that David’s house was “unfit for human habitation.” The Health Department notified David that had to complete certain repairs within ten days or vacate his home. When Mary received notice of the order, she moved David to an apartment in a town ten miles away, even though his only mode of transportation was a bicycle and it was the middle of winter. Id.
As spring approached, David asked for the keys to his house so that he could begin to clean and repair it. Mary refused. She wouldn’t give him the keys until he had cleaned up the outside. Friends and church members helped him clean the yard and make minor repairs. At the next court hearing over Mary’s guardianship, David presented the court with several photos documenting the progress he had made on his home. Mary admitted that he was “getting close” to a clean exterior and told the court that she would be willing to give the keys to a third party who could supervise David’s cleanup of the interior. Id. at 1099.
One week later (incidentally, the day before David’s birthday), he rode his bicycle into town to mow his lawn and work on his home. When he arrived, a wrecking crew had torn into the back of his home – Mary had ordered it demolished in order to sell the property. Id. at 1100. She told the wrecking crew it was condemned. David “found his framed World War I enlistment photo of his grandfather, which had previously hung in his dining room, lying on the ground in pieces.” Id. David was beside himself; a nearby acquaintance heard him screaming and came running. He helped David enter the house to grab a few personal items and some family photos. Then police escorted David off the property and the wrecking crew did their work. Id.
Mary never told David that she was having his home demolished, so he had no chance to fight the demolition and no chance to retrieve his personal belongings. Mary asked for and received court approval to sell the property over David’s objections, then sold it for $37,000. She spent the proceeds on a prepaid funeral plan and a scooter, both of which David explicitly opposed. Id. at 1101.
David brought suit against Mary for violation of his personal and property rights. The evidence showed that the Health Department had never actually condemned David’s house. Mary claimed that demolition increased the property value by a factor of ten, but according to her testimony, she had only obtained a drive-by appraisal from a realtor friend. Id. at 1104. A local market analysis report indicated that the property, which was centrally located, could have been worth anywhere from $35,000 to $200,000. For something as serious and permanent as demolishing David’s home and selling the property, Mary should have sought court approval. Id. at 1107. The court found her liable to David for destroying his home. Id.
Faced with a judgment against her and other personal financial troubles, Mary filed for chapter 7 bankruptcy before the amount of damages was determined. David filed a complaint to ensure that the judgment in his favor was nondischargeable. In re Pierce, 2013 WL 1867606 (Bankr. S.D. Ind. 2013).
A debt incurred through the defalcation of a guardian is nondischargeable according to 11 U.S.C.A. § 523(a)(4). Defalcation is “something more than negligence or mistake but less than fraud.” Id. at 3, quoting Follett Higher Educ. Grp., Inc. v. Berman (In re Berman), 629 F.3d 761, 766 n. 3 (7th Cir. 2011). Mary worked actively against David, “taking unilateral decisions without keeping [David]’s best interests at heart.” Id. at 4. She caused the loss of almost all of his personal property, including family heirlooms; David was so distraught over the destruction that he fled to Indianapolis and was homeless for a time. Id. Mary’s actions were intentional; the judgment against her was incurred through her defalcation and so was nondischargeable.
Like debt incurred through the defalcation of a guardian, judgment debt resulting from a willful, malicious injury is nondischargeable. § 523(a)(6). A willful and malicious injury is “(1) a tortious injury, (2) committed willfully, and (3) committed maliciously.” Id. at 5, quoting Birriel v. Odeh (In re Odeh), 431 B.R. 807, 817 (Bankr. N.D. Ill. 2010). The court determined that Mary had maliciously and willfully injured David and his property, acting “in conscious disregard of her fiduciary duties to [David] in circumstances in which injury was substantially certain to result from her intentional actions.” Id.
So, under both § 523(a)(4) and § 523(a)(6), Mary’s judgment debt to David was nondischargeable. She treated him badly, destroyed his home and personal property, and then tried to escape paying him what she owed. You can’t escape a punishment for breaking the law by filing for bankruptcy.
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