Shcolnik v. Rapid Settlements Ltd. (In re Shcolnik)

Summarized by John Jones , J. R. Jones Law PLLC
14 years 2 weeks ago

Citation:

Case No. 10-20800 (5th Cir. February 8, 2012)

Tag(s):

Ruling:

The 5th Circuit reversed and remanded granting of summary judgment in Debtor Shcolnik's favor on issue of willful and malicous injury under 11 U.S.C. 523(a)(6) if Debtor's claims of ownership were made in bad faith as a pretense to extract money from company by threatening to expose illegal activities and falsely claiming ownership. Court also clarified and broaded scope of "willful and malicous injury" test set out in Kawaauhau v. Geiger, 523 U.S. 57, 118 S.Ct. 974 (1988) to cover award of attorneys' fees (only) in arbitration against Debtor because it was foreseeable that Debtor's actions in inflicting expense of meritless legal claim would constitute a malicous and willful injury.

Procedural context:

Rapid Settlement and Capstone Associated Services initiated arbitration seeking declaratory judgment that Debtor did not own an interest in either entity. Arbitrator held in favor of Rapid Settlement and Capstone Asscoiated Services and awarded $50,000 in attorneys fees to them and against Shcolnik. State Court confirmed award and four days later Shcolnik filed a Chapter 7 proceeding. Debtor and Rapid Settlement and Capstone filed competing motions for summary judgment on whether the attorneys' fee award was non-dischargable under 11 U.S.C. 523(a)(4) and (523(a)(6). Bankruptcy Court for Southern District of Texas granted summary judgment and District Court affirmed. The 5th Ciruit upheld grant of summary judgment as to the 523(a)(4) claim, but reversed and remanded on the 523(a)(6) claim.

Facts:

Debtor Shcolnik was a former officer of both Rapid Settlement and Capstone Associated Services. Debtor had been offered an ownership interest in Rapid Settlement but he refused. Despite his refusal, Shcolnik claimed ownership and allegedly absconded with company documents. Debtor threatened to disclose alleged criminal and regulatory violations by Rapid Settlements and Capstone Associated Services unless they "properly compensated" him for his ownership interest in an amount in excess $1,000,000. Debtor Shcolnik sent numerous emails threatening the principal owner with a "doomsday plan" to destroy the principal owner and the companies and threatened other harm as well. As a result of the baseless attacks, Rapid Settlement and Capstone Associated Services initiated arbtration seeking a declaratory judgment that Debtor Shcolnik did not own an interest in the companies. Arbitrator held in favor of Rapid Settlement and Capstone Asscoiated Services and awarded $50,000 in attorneys fees to them and against Shcolnik. State Court confirmed award and four days later Shcolnik filed a Chapter 7 proceeding.

Judge(s):

Chief Judge Jones, Circuit Judges Haynes and Crone

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