Stelmokas v. Kodzius

Summarized by George Spathis , Horwood Marcus & Berk Chartered
13 years 12 months ago

Citation:

Non-precedential Disposition: United States Circuit Court of Appeals for the Seventh Circuit, 11-3193

Tag(s):

Ruling:

The Seventh Circuit held that debts are not except from discharge by 11 USC §523(a)(2)(A) unless the alleged fraud relates to something other a false statement regarding the Debtor's overall financial health. In so holding, the Court seemingly endorsed the narrow view espoused by a number of other Circuits, as well as a majority of the bankruptcy courts within the Circuit. The Court also held that even if the action challenging the discharge under § 523 was not "substantially justified," fees cannot be awarded to the Debtor under §523(d), which only applied to "consumer debts." Finally, the Court held that Plaintiff had not waived his right to challenge the improper fee award by not raising it in his response in opposition to Debtor's motion for fees. In the absence of an order requiring a formal response, an argument raised during oral argument was not waived. Similarly, although the argument in the appellate brief to the District Court was was short and straightforward, it was enough to preserve the argument.

Procedural context:

Following a bench trial of an adversary complaint alleging that a $14,000 debt to Plaintiff was non-dischargable under 11 USC §523(a)(2)(A), the bankruptcy court entered judgment in favor of Debtor, and awarded Plaintiff $5,000 in attorneys fees under §523(d), finding that Plaintiff's action challenging the discharge was not "substantially justified." The Plaintiff appealed to the District Court, which affirmed the judgment and fee award, holding that the arguments raised on appeal challenging the fee award had been waived and insufficiently developed. The Appellant submitted a brief and the Appellee did not. Eschewing oral argument, upon examination of the Appellant's brief and the record, the Seventh Circuit affirmed the District Court's ruling that Plaintiff had failed to establish that the $14,000 debt was exempt from discharge under §523(a)(2)(A), but reversed the Court's decision upholding the fee award.

Facts:

Plaintiff operated a business making payday loans and cashing third-party checks for a fee. Debtor, a shareholder of V&V Construction, and was a long time customer who, along with his fellow shareholder, cashed more than $500,000 of checks payable to the construction company with Plaintiff over a two year period. Debtor requested and received a $11,650 short term loan from Plaintiff, at an interest rate of 1% per week. Unable to pay the loan when it initially came due, the terms were renegotiated to make the sum of $14,000 payable within six months. In the intervening time, Debtor and his fellow shareholder continued cashing checks made payable to the construction company with the Plaintiff. Both Debtor and his fellow shareholder filed separate personal bankruptcies listing their interest in the construction company as an asset worth only $600. Plaintiff brought actions against both Debtor and his fellow sharerholder seeking orders that the $14,000 debt was non-dischargable by §523(a)(2)(A), based upon alleged misstatements made by and the Debtor that the business would have no difficulty repaying the loan when it came due, and the conduct of both shareholders who continued to cash company checks with the Plaintiff to create a mistaken impression regarding the health of the business. Plaintiff dismissed the action against the other shareholder, but went to trial on his claim against the Debtor. Following a bench trial, the bankruptcy judge ruled in favor of the Debtor, and granted Debtor's motion for attorneys fees under §523(d), noting that the Plaintiff had made similar failed §523 challenges, and thus concluding that the challenge of Debtor's discharge on the same flawed grounds was not "substantially justified." Plaintiff had filed a written opposition to the Debtor's motion for fees, and at the hearing at which the bankruptcy court was to rule on the motion, Plaintiff argued for the first time that any fee award was improper under §523(d) because the subject debt was not a consumer debt, as defined by the Code. The bankruptcy court deemed the argument waived, and awarded awarded Debtor $5000 in attorney's fees. Appeals followed, first to the to the District Court which affirmed both the judgment and fee award, and then to the Seventh Circuit which affirmed, in part, and reversed, in part.

Judge(s):

Hon. Frank H. Easterbrook, Chief Judge, Hon. William J. Bauer, Hon. Dianee P. Wood

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