Pendergraft v. Network of Neighbors, Inc.

Case Type:
Case Status:
18-20045 (5th Circuit, Aug 08,2018) Published
The mental culpability to make a debt non-dischargeable under 11 U.S.C. § 523(a)(4) can be established with evidence that the debtor failed to comply with corporate formalities (at least when the debtor has a duty of loyalty to the corporation) and profited from such rule-breaking. Further, a motion for recusal based on facts known before the commencement of trial "is almost 'per se untime[ly].'"
Procedural context:
The debtor/appellants appealed the order of the district court that affirmed the bankruptcy court's denial of the debtor/appellants' motions for a new trial and recusal.
Another case of fraud. The debtors befriended two people they met on vacation on Martha's Vineyard. The debtors then moved to Edgartown on Martha's Vineyard. The debtors' vacation friends subsequently asked the debtors to join the board of directors of a non-profit charitable corporation. The male debtor, Scott, also became the non-profit's treasurer. The female debtor, Danielle, became more involved in the non-profit due to her experience in event planning and public relations. Danielle suggested that the non-profit enter into a contract with a company owned by Danielle and Scott. The non-profit entered into a contract with the company, which gave limited authority to the debtors to incur obligations for which the non-profit was liable. Despite these limitations, the debtors' company submitted invoices in excess of the contractual limitation. Scott, as the treasurer of the non-profit, approved and paid the invoices. Approximately 80% of the payments from the non-profit were used by the debtors to pay for their lifestyle. The debtors filed a bankruptcy case in Texas, and the non-profit sued to have the debt deemed non-dischargeable under 11 U.S.C. § 523(a)(4), The bankruptcy court conducted a trial and held that the money that the debtors had funneled to themselves was non-dischargeable due to the debtors' defalcation.

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