Kane v. Stewart Tilghman Fox & Bianchi

Kane, et al. v. Stewart Tilghman Fox & Bianchi, P.A., et al. (In re Kane), No. 13-10560 (11th Cir. Jun. 26, 2014)
The 11th Circuit affirmed the lower courts’ finding that (i) the Stewart Firms’ $2M judgment against the two Kane debtors was excepted from discharge under §523(a)(6) (willful and malicious injury to property) and (ii) one of the debtors, Harley Kane, should be denied his discharge under §727(a)(7) by application of §727(a)(2) (transfer of property with intent to hinder, delay, or defraud a creditor within 1 year of the bankruptcy with respect to an insider). With respect to the §523 issue: The Court agreed that the bankruptcy court did not err in finding that the Kanes committed a “willful” injury against the Stewart Firms. Specifically, they intentionally negotiated in secret a settlement agreement which excluded the Stewart Firms from the allocation of settlement fees. The Court agreed that malice could be implied because the evidence established that, in connection with the concealed negotiation of the settlement agreement, at the exclusion of the Stewart Firms, the Kanes committed acts that were “excessive” and “wrongful and without just cause.” In the process, the Court held that there is no independent tort requirement bundled into §523(a)(6). With respect to the §727 issue: The Court held that debtor Harley Kane violated the bankruptcy court’s orders restricting distributions and, thus, barred his own discharge when he diverted funds from his law firm (also a debtor and an insider) to pay his personal real estate taxes. Specifically, he was an “insider” with respect to his law firm and knew of the bankruptcy court’s order limiting use of the law firm’s funds. And he did so with the intent to hinder, delay, or defraud the Stewart Firms.
Procedural context:
Two Chapter 7 debtors (lawyers) appealed a district court’s affirmance of a bankruptcy court’s findings against them under §523(a)(6) and against one of them under §727(a)(7) and § 727(a)(2). The 11th Circuit reviewed the legal findings, de novo, and the factual findings for clear error.
Charles Kane and Harley Kane (the “Kanes” or “debtors”) worked with a collaboration of attorneys (the “PIP Lawyers”) from 2002 onward to file and litigate thousands of claims in Florida on behalf of healthcare provider clients against the Progressive Insurance Companies under the personal injury protection provisions of policies issued by Progressive. They engaged the law firms of Stewart Tilgham Fox & Bianchi, P.A., William C. Hearon, P.A., and Todd S. Stewart, P.A. (the “Stewart Firms”) to pursue “Bad Faith Litigation” against Progressive. The Stewart Firms vigorously litigated the bad faith litigation claims and entered into negotiations to settle the claims with Progressive in April of 2004. However, in May of 2004, in a secret meeting, the Kanes and other PIP attorneys reached a settlement with Progressive on all claims, including the bad faith litigation claims. They negotiated in secret, allocated no fees to the Stewart Firms, and concealed the settlement from the Stewart Firms. The Stewart Firms filed suit against the Kanes and other PIP Lawyers in Florida in 2008. They obtained a judgment against the Kanes and their law firm for $2M. In November of 2008, the Kanes and their law firm filed Chapter 11s. On the Stewart Firms’ motion, the cases were dismissed as having been filed in bad faith. Additionally, the bankruptcy court entered an order restricting distributions from the Kanes’ law firm to the Kanes until the dismissal was effective. Harley Kane violated that order by diverting law firm funds to pay his personal taxes. Subsequently, the Kanes and their law firm filed Chapter 7s. The Stewart Firms brought adversaries against both Kanes under §523(a)(6) (willful and malicious injury with respect to the secret settlement) and against Harley Kane under §727(a)(7) and §727(a)(2) (on account of the diversion of the insider law firm’s funds with an intent to hinder, delay, or defraud the Stewart Firms).
Marcus, Circuit Judge; Proctor and Evans, District Judges.

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