In re Jerry Dewaye Gaddy

Reading Husky narrowly, the Eleventh Circuit requires that fraud occur before a debt arises to make the debt nondischargeable under Section 523(a)(2)(A).

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Case Type:
Consumer
Case Status:
Affirmed
Citation:
19-11699 (11th Circuit, Sep 29,2020) Published
Tag(s):
Ruling:
The court found that the lenders 523(a)(2)(A) claims failed because there was no showing that the loans guaranteed by the debtor were obtain by false pretenses, a false presentation or actual fraud. There must be a showing that the loans were obtained by fraud. To state a claim under 523(a)(6), there must be a showing that a debt is for willful and malicious injury. The debt in question arose from breach of guaranty and not from a willful and malicious injury.
Procedural context:
Bankruptcy court granted motion for judgment on the pleadings (finding that denial of discharge under 11 U.S.C. section 523 (a)(2)(A) or (a)(6) was not warranted), which was appealed to the district court and subsequently affirmed. Lender then appealed the district court decision.
Facts:
The debtor was an investor in an entity that obtained two business loans to fund a real estate development project in Alabama. The debtor guaranteed full repayment of the first loan and partial repayment of the second loan. After about a year, the development project was in trouble, prompting the lender to warn the guarantors of potential default. Less than two weeks after the lender's warning, the debtor transferred real property to a newly formed LLC. The debtor, his wife, and his daughter were the original members of the LLC. Later, the debtor conveyed his interest in the LLC to his son. These were part of a series of transaction wherein person assets of the debtor were conveyed to family members or entities that he controlled. This continued for 5 years. In 2010, the entity defaulted on the project and the lender sued the entity and the debtor. During this time, the debtor continued to transfer assets to his family and businesses. A judgement was entered against the debtor for more than $9.1 million. In the same month as the judgment, the debtor made two additional transfers of property. After being sued under the Alabama Uniform Fraudulent Transfer Act, the debtor filed for bankruptcy protection. During the bankruptcy case, the lender initiated a 523 action seeking denial of discharge as to the debt owed to it. Specifically, the lender argued discharge should be denied under 523(a)(2)(A) because the debtor fraudulently transferred assets to hinder the lender's collection efforts. Additionally, the lender argued that the debt should not be discharged under 523(a)(6) because the lender was willfully and maliciously injured by the debtor's pre-petition transfers of assets. The debtor filed a motion for judgment on the pleading. The bankruptcy court granted the motion and dismissed the adversary proceeding. In so doing, the bankruptcy court found that the lender's 523(a)(2)(A) claim failed because it did not contend that the debt from the debtor's guaranties was obtained by fraud or was anything other than standard contract debt. Additionally, it rejected the lender's 523(a)(6) claims because it found that the underlying debt was the result of personal guaranties and not of any willful and malicious injury by the debtor. The district court affirmed.
Judge(s):
William Pryor, Grant and Antoon

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