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Lecann v. Cobham (In re Cobham)

Lecann v. Cobham (In re Cobham), No. 16-1010, 2016 WL 5956692 (4th Cir. Oct. 14, 2016) (per curiam)
Fourth Circuit affirmed the determination that the judgment debt at issue is nondischargeable under section 523(a)(6) as the bankruptcy court had found and declined to reach the district court's alternative holding that 523(a)(4) applied. Specifically, the Court applied Rule 8013 of the Federal Rules of Bankruptcy Procedure (which provides that factual findings are reviewed for clear error) to determine that LeCann had proved by a preponderance of the evidence that the debt at issue is nondischargeable under 523(a)(6).
Procedural context:
In October 2013, Cobham filed a Chapter 7 petition. LeCann filed the underlying complaint seeking a determination that Cobham’s debt is nondischargeable under sections 523(a)(4) and (6). The bankruptcy court determined that collateral estoppel applied and that the state court judgment is nondischargeable because it resulted from Cobham’s “willful and malicious injury,” within the meaning of section 523(a)(6). As such, the bankruptcy court found it unnecessary to rule on the applicability of section 523(a)(4). Specifically, the bankruptcy court determined that collateral estoppel applied due to the award of punitive damages and because the state court had made the following findings: (i) Cobham knowingly and purposefully engaged in repeated self-dealing and conflict-of-interest actions that caused material injury to LeCann and the businesses; (ii) Cobham injured the LeCann and the businesses by causing wrongful transfers of funds, which resulted in material economic detriment and devastating cash flow problems; (iii) Cobham was well aware of the probable consequences of her wrongful conduct. On appeal, the district court found that the bankruptcy court erred in determining that the debt arose out of a willful and malicious injury and, thus, section 523(a)(6) did not apply. Nevertheless, the district court determined that the debt was incurred as the result of a defalcation while Cobham was acting in a fiduciary capacity and held that the debt is nondischargeable under section 523(a)(4). Cobham appealed.
Cobham and LeCann are dentists practicing in North Carolina and were business partners. Together, they owned, inter alia, five dental practices — all professional corporations. Cobham served as president of the dental practices. Eventually, LeCann learned that Cobham had been taking funds from the businesses, either in the form of unauthorized loans or payments for personal expenses, and sued her in North Carolina state court. The state court awarded judgment in favor of LeCann and the businesses, finding that “Cobham wrongfully and repeatedly transferred money out of [the businesses] by making loans to [her own practice] or herself, receiving unauthorized expense reimbursements and providing unjustified reimbursements to herself.” The court also found that punitive damages should be entered against Cobham based on her “willful or wanton conduct and intentional constructive fraud.”
Robert B. King, Allyson K. Duncan, and Henry F. Floyd

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