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Fraudulent Transfers and the Fresh Start in Bankruptcy.

I. INTRODUCTION

As is often stated, the fresh start in bankruptcy is reserved for the honest but unfortunate debtor. (1) The Bankruptcy Code distinguishes the honest from dishonest debtor primarily through the grounds for denial of the discharge of any debts in [section] 727(a) (2) and several of the exceptions to the discharge for particular debts in [section] 523(a). (3) Section 727(a) focuses on debtor misconduct that relates to the bankruptcy process and impacts creditors in general, while [section] 523(a) includes exceptions to the discharge of certain individual debts that arise from culpable misconduct by the debtor. (4) Questions about the scope of an exception to the discharge often raise fundamental questions about the balance between Code policies favoring the discharge and fresh start for the debtor, on the one hand, and the need to sanction dishonesty and misconduct, on the other. (5) The more broadly an exception to discharge is construed, the more limited is the debtors fresh start.

In 2016, the Supreme Court once again tackled a question concerning the scope of one of the exceptions to the discharge, (6) found in [section] 523(a)(2)(A), which covers debts "for money, property, services, or ... credit, to the extent obtained by false pretenses, a false representation, or actual fraud." (7) In Husky International, Inc. v. Ritz, the Court held that "actual fraud" in section 523(a)(2)(A) is broad enough to encompass debts arising from a debtor's participation as a transferee in an intentionally fraudulent transfer. (8) The Court read "actual fraud" according to its long established common law meaning, (9) but gave a strained interpretation to the words "obtained by," (10) which most naturally mean, "obtained from the creditor." The transferee of a fraudulent transfer does not, of course, obtain anything from the transferors creditors.

Whereas the typical case concerning an exception to discharge under [section] 523(a) involves a single creditor and claim, under Husky, a debtor's receipt of an intentionally fraudulent transfer may give rise to debts owed to the entire class of creditors with unsecured claims against the debtor/transferor at the time of the transfer. Thus, the decision in Husky allows [section] 523(a)(2)(A) to operate more like a ground for denial of discharge in toto under [section] 727(a), and potentially narrows the scope of the fresh start to an unusual degree.

Lower courts have also held that the exception to discharge for debts "for willful and malicious injury" in [section] 523(a)(6) applies to debts arising from a debtors knowing receipt of an intentionally fraudulent transfer; (11) and that the exception for debts "for fraud or defalcation while acting in a fiduciary capacity" in [section] 523(a)(4) may cover debts incurred by a debtor who fraudulently transferred property of an insolvent corporation of which he was an insider. (12) These cases likewise hold the potential to significantly diminish the scope of the fresh start by excepting from discharge the entire class of debts owed to creditors with claims against the transferor at the time of the transfer. The basic fact pattern is the same in almost all of the cases in which a creditor objects to the dischargeability of a fraudulent transfer debt under [section] [section] 523(a)(2), (4), or (6). As in Husky, the debtor was an insider (the controlling officer and director) of the transferor (a corporation), and received or was the beneficiary of a transfer made by the transferor with intent to defraud a creditor.

This article offers three primary contributions. First, it argues that the exceptions to discharge in [section] 523(a) must be interpreted within the context of related Code provisions. In Husky, the Court did not fully consider the similar provisions in [section] [section] 727(a) and 523(a)(2)(A) as applied to fraudulent transfers. If it had, it would have found a sound basis for the more natural interpretation of "obtained by" in 523(a)(2)(A) to mean "obtained from the creditor." Second, this article reviews and summarizes court decisions applying [section] [section] 523(a)(2), (4), and (6) to intentionally fraudulent transfers. The lower courts consistently hold that [section] 523(a)(6) may operate to except a fraudulent transfer debt from discharge where the debtor is the transferee, but not where the debtor was the transferor. The decisions applying [section] 523(a)(4) to fraudulent transfer debts are divided, and the reasoning in many of the cases is muddled and unclear. Finally, accepting that Husky now requires courts to apply [section] 523(a)(2)(A) to actually fraudulent transfers, this author explores a basis for limiting the damage awards in such cases to the loss suffered as a result of the transfer. Where other creditors hold the same nondischargeability claim, their collective loss is the value of the assets transferred, and their individual losses would be a pro rata allocation based on the ratio of the total of their claims to the value of the assets transferred.

Part II provides an overview of the scheme of the Bankruptcy Code provisions that affect the fresh start where the debtor has participated in an intentionally fraudulent transfer. Part III discusses the decision in Husky and its impact on nondischargeability determinations under [section] 523(a)(2)(A). It also reviews case law applying [section][section] 523(a)(4) and 523(a)(6) to fraudulent transfer debts. Part IV critically analyzes the reasoning in these cases that apply [section][section] 523(a)(2), (4), and (6) to fraudulent transfer debts. Part V concludes with the author's argument that applying [section][section] 523(a)(2), (4), and (6) to fraudulent transfer debts may overly diminish the scope of the discharge, but that an appropriate balance between the policies favoring the fresh start and sanctioning debtor misconduct may be found in a clear rule limiting damages to the creditor's pro rata loss.

II. THE STATUTORY CONTEXT: OVERVIEW OF THE CODE PROVISIONS LIMITING THE FRESH START WHERE THE DEBTOR PARTICIPATED IN AN ACTUALLY FRAUDULENT TRANSFER

As the Supreme Court recognized in Husky, the statutory limits on the discharge should be construed within the larger scheme of related Code provisions. (13) Thus, exceptions to discharge and a denial of discharge should be interpreted in part based on the extent to which they duplicate each other. The following chart summarizes the several Code provisions that may limit the fresh start of a debtor who participated in an intentionally fraudulent transfer. Each provision is more fully discussed below.

This Part now briefly reviews the grounds for denial of the discharge under [section][section] 727(a)(2) and (a)(7) as a predicate to a close examination of the application of [section][section] 523(a)(2), (4), and (6) to debts arising from a debtor's participation in an intentionally fraudulent transfer. In examining the scope of the latter provisions, it will be necessary to understand how they complement and overlap with the former. The final section of this Part briefly explains [section][section] 522(g) and (o), which mandate for the loss of exemptions in some cases where the debtor has participated in an actually fraudulent transfer.

A. Fraudulent Transfers and Denial of Discharge under Sections 727(a)(2) and (a)(7)

Sections 727(a)(2) and (a)(7), which are applicable to chapter 7 and chapter 11 debtors, (14) but not to chapter 13 debtors, (15) bar the discharge of all debts where the debtor has participated in certain intentionally fraudulent transfers. Section 727(a)(2)(A) applies where "the debtor, with intent to hinder, delay, or defraud a creditor ... has transferred ... property of the debtor, within one year before" bankruptcy. (16) It also applies where the debtor converted non-exempt to exempt assets with the intent to defraud creditors within the year before filing. (17) In such cases, the debtor is considered both the transferor and the transferee of the asset. Section 727(a)(2) applies by virtue of the debtor's role as a transferor. It does not apply where the debtor, acting as an insider of a corporation, caused the corporation to transfer assets with intent to defraud creditors. (18)

Section 727(a)(7) precludes the discharge where the debtor has transferred property with intent to hinder, delay, or defraud a creditor "on or within one year before the date of the filing of the petition, or during the case, in connection with another [bankruptcy] case ... concerning an insider." (19) Most importantly, it covers the situation where the debtor, acting as the officer or director of a corporation that has also filed for bankruptcy, caused the corporation to transfer property with intent to defraud creditors within one year before the debtors bankruptcy. (20)

Groman v. Watman (In re Watman21) illustrates the application of both [section][section] 727(a)(2) and (a)(7). In Watman, the plaintiff sold the debtor stock in a dental practice (Childrens Dental) on credit. When the debtor failed to pay, the plaintiff obtained a state court judgment against him. One week later, the debtor transferred the corporation's assets to himself for no consideration and then shortly afterwards he transferred them again for no consideration to a new corporation. The debtor continued to operate the dental practice with the same patients, employees, and assets of Childrens Dental. When the debtor later filed for chapter 7 relief and Childrens Dental filed under chapter 11, the plaintiff objected to the debtor's discharge under [section][section] 727(a)(2) and (a)(7). (22)

Applying [section] 727(a)(2), the bankruptcy court observed that the statute requires a transfer of property of the debtor. Since the transfer in question was the transfer of the entity's assets, the plaintiff had not stated a cause of action. Under [section] 727(a)(7), the court held that the debtor's conduct in transferring the assets of Childrens Dental were:
   exactly the type of conduct prohibited by section 727(a)(7) in
   conjunction with [section] 727(a)(2). Here, the debtor's conduct
   came within the ambit of 727(a)(7) where he had transferred
   property of an insider (Childrens Dental) with intent to defraud a
   creditor within one year of filing for bankruptcy where Childrens
   Dental was the subject of a separate bankruptcy case. (23)


B. Fraudulent Transfers and Denial of Exemption Rights Under 522(g) and (o)

The debtor's fresh start may also be curtailed by the denial of exemption rights under [section][section] 522(g) and (o), where the debtor acquired "exempt" property through a transfer made with intent to defraud a creditor. Under [section] 522(o), when claiming exemptions under applicable non-bankruptcy law, the debtor's exemption rights in certain (mostly real) property will be reduced to the extent that the value of the property is attributable to "any property that the debtor disposed of in the 10-year period [before bankruptcy] ... with the intent to hinder, delay, or defraud a creditor and that the debtor could not exempt ... if on such date the debtor had held the property so disposed of." (24) In addition, under 522(g), while a debtor normally may exempt property recovered by the trustee under one of the avoidance powers, this right is lost where the debtor voluntarily transferred the property and concealed it. (25) On the other hand, the debtor's right to exempt property is not affected where he or she obtained it through participation in an intentionally fraudulent transfer. (26)

III. FRAUDULENT TRANSFERS AND NONDISCHARGEABILITY OF PARTICULAR DEBTS UNDER CODE SECTIONS 523(A)(2), (4), AND (6)

While [section] 727(a) limits the discharge to honest debtors by barring the dis charge in toto based on misconduct by the debtor relating to the bankruptcy case, [section][section] 523(a)(2), (4), and (6) supplement [section] 727(a) with more targeted and proportional sanctions of culpable misconduct. Courts have been asked to apply [section][section] 523(a)(2), (4), and (6) to debts arising from fraudulent transfers in numerous cases and contexts. These cases are not the paradigmatic cases to which any of these exceptions apply and these decisions are often inconsistent and unclear. Since these exceptions overlap to some extent, a given fraudulent transfer debt may be nondischargeable under more than one of the exceptions.

A. SECTION 523(A)(2)(A)

Section 523(a)(2)(A) excepts from the discharge in bankruptcy "any debt for money, property, services, or ... credit, to the extent obtained by ... false pretenses, a false representation, or actual fraud ... " (27)

1. Husky International Electronics, Inc. v. Ritz

In Husky, the Supreme Court held in a seven-to-one decision, with Justice Sotomayor writing for the majority and Justice Thomas dissenting, that "[t]he term 'actual fraud1 in section 523(a)(2)(A) encompasses forms of fraud, like fraudulent conveyance schemes, that can be effected without a false representation." (28) More specifically, the Court held that the debt incurred by a debtor who has received an intentionally fraudulent transfer may be nondischargeable under 523(a)(2)(A). (29) The legal issues in Husky have been exhaustively litigated, with six published opinions so far. (30)

However, the facts of the case are not complicated. Between November 2006 and May 2007, at a time when Chrysalis Manufacturing Corp. owed Husky International Electronics over $160,000, the debtor, Daniel Lee Ritz, Jr., who was a shareholder and director of Chrysalis, caused Chrysalis to transfer more than $1.1 million to other Ritz-controlled companies with the intent to hinder, delay, or defraud the creditors of Chrysalis. (31) Chrysalis filed a chapter 7 petition in June 2008. In May 2009, Husky filed suit against Ritz in a Texas state court, seeking to hold Ritz personally liable for Chrysalis' debt under the Texas Business Organizations Code's veil piercing provision that permits creditors to hold corporate shareholders responsible for "actual fraud." (32) In December 2009, while the state court action was pending, Ritz also filed for relief under chapter 7. Husky filed an adversary proceeding in the bankruptcy case, seeking to establish the debtor's personal liability for the Chrysalis debt and to determine that debt non-dischargeable because the inter-company transfers constituted "actual fraud" under [section] 523(a)(2). Husky also pled claims for nondischargeability under [section][section] 523(a)(4) and 523(a)(6). (33) The Supreme Court majority in Husky first noted that the predecessor statute to [section] 523(a)(2) in the former Bankruptcy Act referred only to "false pretenses" and "a false representation." (34) When it enacted the Bankruptcy Reform Act of 1978, Congress added "actual fraud" to the statute. Presumably, the Court stated, "Congress did not intend 'actual fraud' to mean the same thing as 'a false misrepresentation.'" (35) Next, the Court observed that it has historically construed the terms of [section] 523(a)(2)(A) according to common law meaning, and that the common law meaning of "actual fraud" dating back to the Statute of Elizabeth in 1571 (36) has encompassed schemes to transfer assets with intent to defraud creditors, even though a misrepresentation is not normally part of such a scheme. In sum, the Court found, "a false representation has never been a required element of 'actual fraud' ... (37)

The Court considered and rejected the debtor's argument that reading "actual fraud" to cover fraudulent conveyances would duplicate the exceptions to discharge in [section][section] 523(a)(4) and 523(a)(6), which respectively exempt debts "for fraud or defalcation while acting in a fiduciary capacity" (38) and debts "for willful and malicious injury by the debtor." (39) The Court reasoned that "overlap [among the three provisions] appears inevitable," but in any event, Ritz's interpretation would not eliminate overlap. The Court observed that there are also "meaningful distinctions" between [section] 523(a)(2) and the other exceptions. While a given debt may be nondischargeable under more than one of the provisions, each provision also reaches debts that the others do not. "Thus, given the clear differences between these provisions, we see no reason to craft an artificial definition of 'actual fraud' merely to avoid narrow redundancies in [section] 523 that appear unavoidable." (40)

The Court further rejected the debtor's contention that reading "actual fraud" to cover fraudulent conveyances duplicates [section] 727(a)(2). (41) The Court explained that [section] 727(a)(2) is both broader in scope but more limited in timing than [section] 523(a)(2)(A) in that it precludes discharge of all debts, but only where the conveyance was made within one year before bankruptcy. (42) Perhaps more to the point, although the Court did not say so explicitly, [section] 727(a)(2) applies where the debtor was a transferor as opposed to a recipient of an intentionally fraudulent transfer, in that the statute requires a transfer of "property of the debtor." (43)

In his dissent, Justice Thomas did not "quibble with the majority's conclusion that the common-law definition of 'actual fraud' included fraudulent transfers." He argued, however, that the term must be read in the context of the entire provision and that "[t]he statutory phrase 'obtained by' is an important limitation on the reach of the provision."
   Section 523(a)(2)(A) applies only when the fraudulent conduct
   occurs at the inception of the debt, i.e., when the debtor commits
   a fraudulent act to induce the creditor to part with his money,
   property, services, or credit. The logical conclusion then is that
   'actual fraud'--as it is used in the statute covers only those
   situations in which some sort of fraudulent conduct caused the
   creditor to enter into a transaction with the debtor.... [T]he
   fraudulent transfer here ... did not trick the creditor into
   selling his goods to the buyer, Chrysalis...." (44)


Relying on Field v. Mans, (45) he elaborated that the plain meaning of "obtained by" requires a "causal nexus between the fraud and the debt," and that "'some degree of reliance is required to satisfy th[is] element of causation." (46) In sum, Justice Thomas contended that [section] 523(a)(2)(A) requires that the debtor have obtained money, property, services or credit by fraud, from the creditor, at the time the debt was originally incurred.

The majority countered that, although a "transferor does not 'obtai[n]' debts in a fraudulent conveyance.... the recipient of the transfer--who, with the requisite intent also commits fraud--can 'obtai[n]' assets 'by' his or her participation in the fraud. If that recipient later files for bankruptcy, any debts 'traceable to' the fraudulent conveyance ... will be nondischargeable under [section] 523(a)(2)(A)." (47) "Such circumstances may be rare because a person who receives fraudulently conveyed assets is not necessarily (or even likely to be) a debtor on the verge of bankruptcy, but they make clear that fraudulent conveyances are not wholly incompatible with the 'obtained by' requirement." (48) The Court remanded the case for a determination whether the debt owed to Husky was "obtained by" the debtor's actual fraud. (49)

The majority further responded that "[n]othing in the text of [section] 523(a)(2)(A) supports [an] additional requirement" that the debtor have obtained money, property, services or credit from the creditor, as long as such was obtained through actual fraud. It explained that Field required reliance under [section] 523(a)(2)(A) "only in setting forth the requirements of the form of fraud alleged in that case--namely fraud perpetrated through a misrepresentation to a creditor. The Court was not establishing a 'reliance' requirement for frauds that are not premised on such a misrepresentation." (50)

2. Neither are "False Representation" and "False Pretenses" Claims Under Section 523(a)(2)(A) Tethered to the Inception of the Creditor's Claim

The Court's reading of "obtained by" in Husky will apply in "false representation" and "false pretenses" cases as well as "actual fraud" cases under [section] 523(a)(2)(A). In any case under [section] 523(a)(2), the creditor's original claim need not be incurred as a result of the debtor's fraud. All that is required is that the debtor have obtained something by fraud. It is not necessary that the debtor have obtained that "something" from the creditor.

Decided by the Tenth Circuit Bankruptcy Appellate Panel (BAP) shortly after Husky, Hatfield v. Thompson (In re Thompson) (51) illustrates the point. In Thompson, the debtor owned a company that operated a nursing home where the plaintiff's wife was a patient. She died as a result of substandard care. The plaintiff obtained a $1 million default judgment against the nursing home for malpractice. The debtor was also a defendant in the action, but filed a chapter 7 petition on the eve of trial. Undeterred, the plaintiff filed an adversary proceeding, alleging that the debtor "was personally liable for the [state court] Judgment under a corporate veil piercing theory and that [the debtor's] alleged personal liability was nondischargeable pursuant to [section] 523(a)(2)." (52)

The fraud alleged by the plaintiff was that the debtor had made false representations to the Oklahoma Department of Health in applying for the nursing home's certificate of need. The debtor represented that he would be actively involved in the nursing home's operations and that he would purchase at least $500,000 in "occurrence based" liability insurance. The plaintiff alleged that: the debtor made these representations with no intention of performing them; the Department of Health relied on them in granting the certificate of need that enabled the nuring home to operate; the debtor collected monthly payments from the nursing home; the debtor drained the nursing home's bank accounts and diverted those funds to other businesses he owned; his wife would not have died had the debtor performed as he represented to the Department of Health and had not drained the nursing home's bank accounts; and his wife's death was a foreseeable result of the debtor's conduct. (53)

The BAP reversed the bankruptcy court's grant of summary judgment for the debtor. It stated that nondischargeability under [section] 523(a)(2)(A) requires the creditor to prove that: "(a) the debtor committed actual fraud; (b) the debtor obtained money, property, services, or credit by the actual fraud; and (c) the debt arises from the actual fraud." The court added that, pursuant to Husky, there is no requirement that a creditor rely on the actual fraud or part with assets or receive credit as a result of the fraud, nor must the debtors actual fraud induce the creditor to part with property or extend credit; and further that there is no requirement that the property or credit be obtained from the creditor. (54)

The BAP held that the plaintiffs allegations regarding the debtors misrepresentations in connection with obtaining the certificate of need, if proven, could establish "actual fraud" under [section] 523(a)(2)(A). It held further that the debtor had obtained property--income from the operation of the nursing home and the certificate of need itself--by the alleged actual fraud. Finally, the court held that the debt the plaintiff sought to except from the discharge "is his fraud-based veil piercing claim," not the judgment for the nursing home's negligent care of his wife. (55)

Thus, Thompson makes the basic but perhaps unexpected point that the Supreme Court's reading of "obtained by" in [section] 523(a)(2)(A) makes the provision applicable even where the debtor has obtained nothing from the creditor at the inception of the creditor's claim in any case under [section] 523(a)(2)(A), not just "actual fraud" cases. Although the BAP several times referred to the plaintiff s claim as a claim for "actual fraud," it makes clear that the plaintiff alleged a material misrepresentation by the debtor, scienter, and actual and justifiable reliance by the Department of Health--the common law elements of the tort of false representation. (56) The debtor in Thompson did not obtain anything from the plaintiff through the fraudulent misrepresentation, and the plaintiff s claim arose after the fraud. The claim was based on a fraudulent misrepresentation (not an intentionally fraudulent transfer) that was made by the debtor to the Department of Health before plaintiff s malpractice claim arose. Further, any other creditor with a claim for malpractice, or with some other claim causally related to the alleged fraud, would likewise have a nondischargeability claim under [section] 523(a)(2)(A).

B. Section 523(a)(4)

Section 523(a)(4) excepts from discharge debts "for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny." (57) A recurring fact pattern involves a debtor who was an insider of a corporation, and who misappropriated or fraudulently transferred property of the corporation at a time when the corporation was insolvent. In most cases, the transfer was to the debtor. The critical issue presented by these facts is whether the debtor owed a fiduciary duty to the creditors of the insolvent corporation within the meaning of [section] 523(a)(4). If so, the debt created by the debtors transfer may be excepted from discharge. Courts have uniformly viewed the transfer of property by a debtor with intent to defraud the corporation's creditors as fraud or defalcation under [section] 523(a)(4). (58) The existence of a debt is not an issue in the [section] 523(a)(4) cases because the debtor has caused the transfer of a corporation's assets, not his or her own property, and a debt arises from the insider's breach of corporate duties. (59)

1. General Principles Governing the Meaning of "Fiduciary Capacity" Under Section 523(a)(4)

The Bankruptcy Code does not define "fiduciary capacity." It is well-settled that the question is a matter of federal law. At the same time, the courts routinely consider state law as an important factor in determining whether the debtor was acting in a fiduciary capacity. (60)

Some states follow the "trust fund doctrine," which holds that officers and directors of a corporation owe a duty of loyalty to creditors of the corporation when the corporation becomes insolvent or nearly insolvent. (61) Other states do not recognize such a duty. (62) In determining whether a corporate officer or director was acting in a fiduciary capacity under [section] 523(a)(4), courts engage in a two-step analysis. The first step is to look to state law to determine whether state law imposes a fiduciary duty. If it does not, the analysis is at an end and the debt will be dischargeable. If state law does recognize a fiduciary duty by officers and directors to creditors of an insolvent corporation, the second step is to determine whether that duty constitutes a fiduciary capacity under federal common law interpreting [section] 523(a)(4). (63)

The Supreme Court has considered the scope of "fiduciary capacity" under [section] 523(a)(4) in seven cases. But the most recent of these cases was decided in 1934. (64) None of the seven cases directly addresses this question, but Chapman v. Forsyth (65) and Davis v. Aetna Acceptance Co. (66) provide the most guidance. They establish the following principles:
   The cases enumerated in the statute, the defalcation of a public
   officer, executor, administrator, guardian, or trustee, are not
   cases of implied but special trusts, and the "other fiduciary
   capacity" mentioned must mean the same class of trusts.

   ... the statute speaks of technical trusts, and not those which
   the law implies from the contract.

   A fiduciary capacity cannot come from the debtor becoming
   chargeable as a fiduciary ex maleficio (meaning, by some wrongdoing
   or malfeasance). The debtor must already be a fiduciary when the
   debt was created. (67)


The Court has never explained what is meant by "special" or "technical" trust, except to contrast them with trusts implied from contract. (68)

Given the limited and antiquated guidance from the Supreme Court, "[c]ircuit and bankruptcy courts throughout the country have struggled to apply a consistent framework for determining whether modern legal relationships amount to a fiduciary capacity." (69) The decisions on whether a corporate insider was "acting in a fiduciary capacity" with regard to creditors upon insolvency of the corporation are no exception. The courts are divided, and the lack of a consistent framework for addressing the question leaves much uncertainty about how to apply the decisions. The sections that follow summarize and evaluate the reasoning of the cases on either side of the question.

2. Cases Holding That Debtor Acted in a Fiduciary Capacity

Decisions holding that a corporate insider was "acting in a fiduciary capacity" under [section] 523(a)(4) when he or she fraudulently transferred the insolvent corporations assets typically rely heavily on a state law "trust fund doctrine." (70) These courts observe that fiduciary obligations of the officers and directors arise upon insolvency and not upon the debtor's malfeasance. (71) The courts have stated that the relationship constitutes a "technical trust,'" (72) as required by Chapman and Davis, (73) or that the requirement of a "technical" trust no longer pertains in light of the evolution in the law of fiduciary relationships since the time of the Supreme Court's decisions. (74) Several older, pre-Code cases simply held, without explanation, that the debtor, acting as an officer of an insolvent corporation, was acting in a fiduciary capacity when he misappropriated assets of the corporation for personal benefit at the expense of creditors. (75)

Berres v. Bruning (In re Bruning) (76) is a leading case holding that the debtors' fiduciary obligation to creditors arising under Colorado law as directors of an insolvent corporation fell within the scope of [section] 523(a)(4). (77) The creditor had been an employee of the corporation. The corporation owed him a very large commission. Instead of paying the commission, the debtors diverted the corporation's monies to themselves. The court stated that, pursuant to Davis, there are "three categories of trust relationships within the meaning of 11 U.S.C. [section] 523(a)(4): express trusts, technical trusts, and constructive trusts. Only the first two satisfy 11 U.S.C. [section] 523(a)(4)." It further noted that, under Davis, the fiduciary relationship must arise independently and predate the debtor's alleged wrongdoing, and that [section] 523(a)(4) does not apply where the fiduciary relationship arose from the act of misconduct itself, as is the case with constructive trusts. The court referred to Colorado common law, which "has long recognized a director's fiduciary obligation to creditors when the corporation becomes insolvent." It found that there was no express trust in this scenario and, therefore, the question was whether a technical trust existed. "The critical inquiry thus becomes whether the fiduciary obligation arose chronologically before the wrongdoing or as a result of the wrongdoing ... the creditors' first amended complaint states a claim for relief ... since it alleges both the fiduciary relationship and that the corporation was insolvent before the debtors' alleged defalcation." But the court further noted that, if the corporation had been solvent and the defalcation rendered it insolvent, the result would have been different in that the fiduciary relationship would not have predated the wrongdoing. (78)

3. Cases Holding That Debtor Did Not Act in a Fiduciary Capacity

On the other hand, there is another body of decisions holding that a corporate insider of an insolvent corporation does not act in a fiduciary capacity within the meaning of [section] 523(a)(4). While the insider may owe a fiduciary obligation to the creditors of an insolvent corporation, it is not one that arises from an express or technical trust. (79) Some courts have reasoned that the fiduciary relationship does not arise apart from the debtor's misconduct and, therefore, it does not satisfy the requirements of Davis. (80) Other courts recognize that the principals owe a fiduciary duty to creditors, but that any claim for the breach of that duty belongs to the corporation and may not be asserted by individual creditors. (81)

Economic Development Growth Enterprises v. McDermott (In re McDermott) (82) is representative of the cases holding that principals of an insolvent debtor do not owe a fiduciary duty to creditors within the meaning of [section] 523(a)(4). The McDermott debtor was the officer of a corporation that borrowed money from the plaintiffs. After the corporation became insolvent, the debtor caused the corporation to make a number of inter-company transfers, removing assets that would otherwise be available to pay the plaintiffs' claims. (83) The court first noted that fiduciary capacity under [section] 523(a)(4) is limited to express and technical trusts, and that the trust must have existed before and independently of the debtor's alleged wrongdoing. The court discussed several Delaware chancery court decisions regarding the trust fund doctrine, including a case holding that individual creditors of an insolvent corporation do not have a direct right of action against the corporate directors. It concluded that:
   the "equity-like interest" created under the "trust fund doctrine"
   is insufficient for purposes of Code [section] 523(a)(4),
   particularly in light of the fact that it has application only to
   derivative claims asserted on behalf of a corporation and not to
   any direct claims ... To hold otherwise would arguably expand
   nondischargeability to any and all creditors with claims against
   the assets of insolvent corporations." (84)


C. Section 523(a)(6)

Section 523(a)(6) excepts from discharge "any debt ... for willful and malicious injury by the debtor to another entity or to the property of another entity." Creditors seeking to except a fraudulent transfer-related debt from discharge typically plead nondischargeability claims under [section] 523(a)(6), in addition to claims under [section][section] 523(a)(2)(A) and 523(a)(4). (85) Except of course in chapter 13 cases, where [section] 523(a)(6) is not applicable. (86) In dictum, the Supreme Court in Husky confirmed that a debt arising from a fraudulent transfer could be excepted from discharge under [section] 523(a)(6). (87) In deciding whether [section] 523(a)(6) covers a debt arising from a fraudulent transfer, the courts face three primary questions: (1) whether there is any debt that may be determined nondichargeable; (2) whether there has been a cognizable injury to the creditor or property of the creditor; and (3) whether the injury was willful and malicious.

1. The Requirement of a Debt

Whether there is a debt that may be nondischargeable under [section] 523(a)(6) turns primarily on whether the debtor was the transferor or the transferee of the intentionally fraudulent transfer. The courts generally agree that no debt arises when the debtor was the transferor, unless the creditor held a security interest in the asset transferred. Conversely, a debt does arise when the debtor is the transferee.

a) Where the Debtor is the Transferor

A debtor's intentionally fraudulent transfer of property does not give rise to a debt that may be nondischargeable, with one exception. (88) When a debtor transfers property in derogation of a secured creditor's lien interest, a claim for conversion may arise. (89) Some acts of conversion may be nondischargeable under [section] 523(a)(6). In the leading case of Quarre v. Saylor (In re Saylor), (90) the plaintiff filed a complaint for breach of a lease agreement against the debtor husband in state court. A few months later, while that case was pending, the debtor husband and wife transferred three parcels of real property to third parties for no consideration, but retained a life estate in one of the parcels. After the state court entered judgment in the plaintiff s original action, he filed a second complaint against the debtors and their transferees to set aside the fraudulent transfers under the California Uniform Fraudulent Transfer Act ("CUFTA"). On the eve of the plaintiffs motion for summary judgment, and nearly three years after the transfers, the debtors filed for relief under chapter 7. Plaintiff sought to except his judgment claim from discharge under [section] 523(a)(6). (91)

In Saylor, the BAP held that the debtor, as the transferor of a fraudulent transfer, owed no monetary obligation to the plaintiff under state fraudulent transfer law. As defined in the Bankruptcy Code, a debt is "liability on a claim," (92) and a "claim" is a "right to payment." (93) The creditors original claim in Saylor was for breach of a lease agreement, not for a willful and malicious injury. Further, its rights against the debtor under CUFTA did not entail any right to payment. (94) Thus, the debtor's alleged conduct in transferring the properties to a third-party purchaser did not create any debt for nondischargeability purposes. (95) The BAP further rejected the creditor's argument that a fraudulent transfer of unencumbered property constitutes the tort of conversion. (96) It noted that there is authority that a transferor of an intentionally fraudulent transfer may be liable in damages for civil conspiracy, but the plaintiff did not plead or prove such a claim. (97)

In fact, there is at least one reported decision in which a court has held that a debtors participation in an intentionally fraudulent transfer, other than as the transferee, gives rise to a debt for civil conspiracy that may be nondischargeable under [section] 523(a)(6). In Maxfield v. Jennings (In re Jennings), the Eleventh Circuit affirmed the district court's holding that the debtor became liable for civil conspiracy when she effectuated the transfer of property to a third person with the purpose of avoiding payment of the plaintiffs claim. The debtor was neither the transferor nor the transferee of the property. (98) There is also some authority that an intentionally fraudulent transfer constitutes a tort by the transferor. (99) The prevailing view, however, is that fraudulent transfer liability is limited to recovery of the property or its value from the transferee. (100)

b) Where the Debtor is the Transferee

However, a debtor who is the transferee of a fraudulent transfer incurs a debt that may be determined nondischargeable under [section] 523. Courts have found a debt based on violation of the Uniform Fraudulent Transfer Act (101) and under state law corporate veil piercing theories. (102) These cases often involve a debtor who caused a corporation under his control to fraudulently convey assets to himself. (103)

2. Injury

Although injury to the creditor or property of the creditor is a separate element of [section] 523(a)(6), it is closely related to the requirement of a debt. Where there is no injury, there is no debt. Thus, the courts have almost uniformly found that there was no cognizable injury to the individual creditor for purposes of [section] 523(a)(6) when the debtor was the transferor of the fraudulent transfer (and the property was not encumbered). (104)

For example, in addition to finding that the creditor had not established a debt, the BAP in Saylor held that the creditor had failed to show injury to himself or to his property. (105) The creditor argued that the debtor's fraudulent transfer was a conversion or a tort of some sort, which the BAP rejected. (106) Regarding injury to his property, the creditor argued that fraudulent transfer law avoidance rights were his property rights that were injured by the debtors wrongful transfer of the three parcels of land. "While this theory has some surface appeal," the court wrote, "it was never presented to the court below, and runs counter to the principle that exceptions to dischargeability be construed narrowly." (107)

On appeal, the Ninth Circuit adopted the BAP's reasoning, explaining:
   Boiled down to its essence, section 523(a)(6)'s "willful and
   malicious" exception to nondischargeability serves to preclude a
   debtor from obtaining a discharge of an obligation based on a claim
   arising out of the debtor's tortious misconduct, when that
   misconduct results in harm to another's person or property....

   [The plaintiff's] claim that he possesses a property interest in
   the fraudulent transfer remedies provided by state law does not fit
   within the definitions of either 'debt1 or 'property' for purposes
   of section 523(a)(6), and runs counter to the principle that
   exceptions to dischargeability are to be narrowly construed....
   [The plaintiffs] claim had not been reduced to judgment at the time
   the three parcels of real estate were transferred, and he had no
   security interest in the property represented thereby. (108)


On the other hand, where the debtor was the transferee of an intentionally fraudulent transfer, the courts have found that the creditor suffered a cognizable injury. (109) A recurring fact pattern involves a debtor who, like the debtors in Husky and in the [section] 523(a)(4) cases discussed above, transferred to himself assets of a corporation under his control with the intention of defrauding the corporation's creditors. Several courts have described this injury as an injury to the creditors property, namely to the receivable owing from the corporation to the creditor. (110) For example, in Master-Halco, Inc. v. Picard (In re Picard), (111) the plaintiff sold fencing materials to Atlas Fence, Inc. on credit. The plaintiff s complaint alleged that the debtor, who had personally guaranteed Atlas's debt to the plaintiff, was in control of Atlas at all relevant times and that he had conveyed personal assets and assets of Atlas with the intent to defraud the plaintiff. The court held that the creditor's claim based the transfer of the debtor's own property did not support a nondischargeability claim under [section] 523(a)(6), but that the transfer of Atlas's assets to the debtor may result in such a claim.
   That is because the liability of the Debtor to the Plaintiff in
   respect of such transfer would not arise from the Guaranty but
   rather, from an "injury" to the Plaintiffs property (i.e., the
   receivable owing from Atlas)....   The Debtor may be liable to the
   Plaintiff for the transfers of Atlas' assets on one or more
   theories. For example, if the Debtor is deemed to be the transferee
   of the Atlas assets (either per se or on a "piercing" theory), he
   may be liable to the Plaintiff in damages as a result. (112)


3. Willful and Malicious Intent

Courts have had little difficulty concluding that a debtor who participated in a fraudulent transfer scheme has caused an injury that was willful and malicious. (113) In general, "willful" means that the debtor acted with actual, subjective intent to cause injury, or with certainty or substantial certainty that injury would result from his conduct. "Malicious" means that the debtors conduct was wrongful and without just cause or excuse. (114)

For example, in Murray v. Bammer (In re Bammer), (115) the Ninth Circuit addressed whether the debtor's participation as transferee in a fraudulent transfer scheme was malicious within the requirement of [section] 523(a)(6). The debtor was the recipient of an intentionally fraudulent transfer from his mother. She had embezzled money from several victims, including the plaintiff. While she was in the process of negotiating a criminal plea agreement that would require restitution, she and the debtor executed a fraudulent transfer scheme whereby she depleted the equity in her house to pay personal expenses and to evade the victims' claims. The plaintiff thereafter obtained civil judgments against the debtor and his mother for the embezzlement and the intentionally fraudulent transfer.

Even though plainitiff did not have any property interest in the fraudulently transferred property at the time of the transfer, the bankruptcy court ruled that the debtor injured "Murray's right to recover money to which he was entitled." (116) But it further held that, while the debt was willful, it was not malicious. On appeal, the Ninth Circuit reversed, holding that the debt was malicious because the debtor did not have "a just cause or excuse' for his injury to Murray's interests," explaining that his compassion for his mother and the fact that he did not himself directly benefit from the scheme did not negate the lack of any just cause or excuse. (117)

IV. FRAUDULENT TRANSFERS AND THE FRESH START IN BANKRUPTCY

A. Summary of the Code Limitations on the Fresh Start Based on a Debtor's Participation in an Intentionally Fraudulent Transfer

Overall, when it comes to actual fraudulent transfers, [section][section] 727(a) and 523(a) present only narrow incursions into what is otherwise a very broad discharge. Section 727(a)(2) is the primary sanction, and it is complemented by [section] 727(a)(7). Section 727(a)(2) does not apply when the debtor was the transferee. Section 727(a)(7) applies only when the debtor caused an insider that has filed for bankruptcy within one year of the debtor's bankruptcy to make an intentionally fraudulent transfer. Further, both statutes only look back to transactions that occurred one year before the bankruptcy filing. (118)

Sections 523(a)(2), (4) and (6) look back well beyond one year. They cover debts not otherwise barred by the applicable non-bankruptcy law statute of limitations. Nevertheless, these statutes only cover a very narrow range of debts. When considering intentional fraudulent conveyances, [section][section] 523(a)(2) and (a)(6) only apply when the debtor was the transferee. A split of authority exists as to whether an insider debtor who causes an insolvent corporation to transfer its assets with intent to defraud a creditor is a "fiduciary" under [section] 523(a)(4).

B. Balancing the Policy of Fostering a Debtor's Fresh Start Against the Policy to Sanction Misconduct

Questions concerning the scope of an exception to discharge, such as the proper application of [section][section] 523(a)(2), (4), and (6) to fraudulent transfer debts, fundamentally concern the balance between the Code's underlying policy favoring the debtor's access to a fresh start through a general discharge, on the one hand, and the policy of sanctioning culpable misconduct by the debtor, on the other. In marginal cases, courts must draw a fine line based in part on the statutory context and the duplication that may occur when applying [section][section] 523(a)(2), (4) or (6) to debts arising from conduct that is also addressed in other Code provisions. (119) The rationale for applying one provision to the exclusion of another is sometimes articulated as applying the more specific provision over the more general. (120)

There is an apparent incongruity in limiting the sanction for debtor misconduct to one year under [section] 727(a)(2) where the debtor was the transferor, but extending the sanctions period to the applicable non-bankruptcy statute of limitations under [section] 523. In general, the debtors culpability as a transferor is no less in degree than as a transferee. However, the applicability of [section][section] 523(a)(2) and (a)(6) only where the debtor was the transferee of an intentionally fraudulent transfer arguably aligns with [section] 727(a)(2), which applies only when the debtor was the transferor. Stated differently, applying [section][section] 523(a)(2)(A) and (a)(6) where the debtor was the transferee may be seen as complementing [section] 727(a)(2), which applies where the debtor was the transferor. Section 727(a)(2) sanctions conduct that harms creditors in general. Thus, where the debtor was the transferor, it bars all debts from discharge, subject to the one-year temporal limitation. Where the debtor is the transferee, the injury is to one or more creditors who were creditors of the transferor, but not to the debtor's creditors generally. These particular creditors' claims thus are potentially nondischargeable under [section][section] 523(a)(2)(A) or (a)(6).

However, applying [section][section] 523(a)(2) and (a)(6) to fraudulent transfers made to a debtor, and [section] 523(a)(4) to transfers made by the debtor as an insider of an insolvent corporation, raises the specter that these provisions may effectively operate like a general denial of the discharge under [section][section] 727(a)(2) or (a)(7), except without the one-year limitation. Unlike the application of the exceptions to discharge in almost any other case, where a single creditor's claim is at issue, the debtor in the fraudulent transfer cases is at least potentially liable to all of the transferor's creditors with claims at the time of the transfer. In future cases, one creditor could organize a class of creditors affected by a fraudulent transfer to the debtor, multiple creditors could individually file objections to dischargeability, or the trustee of a related debtor could file an objection to dischargeability on behalf of the creditors of that debtor's estate. (A trustee does not have standing to file a complaint under [section] 523 in the case in which she is trustee. (121)) However, this concern with duplicative or group nondischargeability actions may be more theoretical than real. It does not appear from any of the reported cases involving a fraudulent transfer debt based on [section][section] 523(a)(2), (4), or (6) that they involved more than one creditor seeking a nondischargeability determination on this basis.

As discussed above, the Court in Husky rejected the debtors argument that applying [section] 523(a)(2)(A) to fraudulent transfers would duplicate [section] 727(a)(2). A closer look at the overlap between [section][section] 523(a)(2), (4), and (6) with [section] 727(a) casts doubt on the Court's reasoning in Husky, where the "obtained by" requirement of the statute was a sound foundation for reading the statute to limit the scope of "actual fraud" in a way that takes account of the related Code provisions. Beyond the overlap of [section] 523(a)(2)(A) with [section] 727(a)(2), there is an overlap with [section] 727(a)(7) that the Supreme Court did not consider. As explained above, (122) [section] 727(a)(7), in conjuction with [section] 727(a)(2), bars the discharge where a debtor transferred assets of an insider with intent to defraud a creditor within a year before the debtor filed for bankruptcy, and the insider also has filed for bankruptcy. Section 727(a)(7) covers almost precisely the usual case in which a creditor seeks a determination that a fraudulent transfer debt is nondischargeable under [section][section] 523(a)(2), (4), and (6). The usual case under all three of the exceptions to discharge involves a debtor who was an insider of the transferor and received or was the beneficiary of a transfer made with intent to defraud a creditor.

Thus, [section] 727(a)(7) covers exactly the situation presented in Husty, where Ritz caused Chrysalis, an insider, to make a series of intentionally fraudulent transfers, and Chrysalis also filed for bankruptcy, except that Ritz filed his bankruptcy petition more than one year after the Chrysalis transfers. The Court's reading of [section] 523(a)(2)(A) in Husky precluded the discharge of a debt based on the very same conduct condemned by [section] 727(a)(7), except that it took place more than one year before the debtor filed for bankruptcy. In contrast to the Court's conclusion that [section][section] 523(a)(2) and 727(a)(2) are "meaningfully different," "although the two provisions could cover some of the same conduct," (123) the overlap is much more complete between [section][section] 523(a)(2)(A) and 727(a)(7) with respect to intentionally fraudulent transfers. There is, therefore, a more compelling negative inference that [section] 727(a)(7) covers fraudulent transfers by an insider of the debtor to the exclusion of [section] 523(a)(2)(A). This inference is reinforced by the absence of any limit on a debtor's right to exempt property obtained through a fraudulent transfer scheme. (124)

Section 523(a)(6) duplicates [section] 727(a)(2) and (a)(7) in the same way as [section] 523(a)(2)(A) does. Like [section] 523(a)(2)(A), [section] 523(a)(6) excepts debts arising from an actually fraudulent transfer when the debtor was the transferee. Because the Supreme Court has expressly rejected the argument that [section] 523(a)(2)(A) should not cover fraudulent transfer-related debts because it would duplicate [section] 727(a)(2), it follows that [section] 523(a)(6) may likewise cover fraudulent transfer-related debts notwithstanding the duplication, particularly given that the Court in Husky also indicated that [section] 523(a)(6) may apply in such cases. (125)

C. Measuring the Amount of the Creditor's (or Creditors') Nondischargeable Claim(s)

The case law is unsettled regarding the measure of damages that may be excepted from discharge under [section][section] 523(a)(2), (4), or (6) where the fraud did not occur with the inception of the creditor's debt. In Husky, the Supreme Court briefly touched on the amount of Husky's nondischargeable claim in the event that the bankruptcy court found the claim to be nondischargeable. It stated that "any debts 'traceable to' the fraudulent conveyance ... will be nondischargeable under [section] 523(a)(2)(A)." (126) The amount of the debt "'traceable' to the fraudulent conveyance" should depend at least initially on whether the creditor's original claim is greater or less than the value of the assets that were fraudulently conveyed. As argued below, the amount should also take into account the total amount of claims held by creditors who were harmed by the transfer.

1. The Measure of Damages Where the Amount of the Claim is Less than the Value of the Assets Transferred

On remand, the bankruptcy court in Ritz first held that Husky could pierce the corporate veil and hold Ritz personally liable for the $160,000 debt owed by Chrysalis to Husky, where Ritz had made transfers of Chrysalis' assets that were intentionally fraudulent under the Texas Uniform Fraudulent Transfer Act ("TUFTA") for Ritz's direct personal benefit. (127) The court further held that the $160,000 debt was nondischargeable under [section] 523(a)(2)(A) because Husky had proven that: "(1) money was obtained; (2) obtaining the money was done through the Debtor's actual fraud; and (3) as a result of these circumstances, a personal debt of the Debtor was created." (128) First, "money was obtained" because the debtor effectively transferred to himself over $1.1 million from Chrysalis's account. Second, Ritz had commit' ted actual fraud in making the various transfers, relying on the same analyis underlying the earlier conclusion that the transfers were intentionally fraudulent under TUFTA. Third, a personal debt of the debtor was created by virtue of the Texas Business Organizations Code's veil-piercing statute. Citing to the Supreme Court's opinion, the bankruptcy court explained:
   There is no question that the creation of this personal obligation
   is directly traceable to--i.e., resulted from--the Debtor's
   fraudulent actions in orchestrating the transfers of [$1.1 million]
   out of Chrysalis's account and into the accounts of the
   Debtor-Controlled Entities. Husky Intl. Elees., Inc., 136 S.Ct. at
   1589 ("If that recipient [here, the Debtor] later files for
   bankruptcy, any debt traceable to' the fraudulent conveyance, will
   be nondischargeable under [section] 523(a)(2)(A).")

   The fact that the creation of the [$160,000 debt] itself--i.e.,
   the obligation owed by Chrysalis to Husky--was not due to any
   fraud (but rather due to the fact that Chrysalis failed to pay the
   obligations that it owed to Husky under the Master Credit and Sales
   Agreement) does not change this conclusion. Moreover, the fact that
   Chrysalis--or more precisely, the trustee of Chrysalis's Chapter 7
   estate--may have a non-dischargable claim against the Debtor in
   the amount of [$1.1 million] also does not change this conclusion.
   The personal debt that Husky seeks to collect from the Debtor, and
   to prevent him from discharging, arises by operation of Texas law
   from his actual fraud ... (129)


Thus, where the amount of Husky's veil piercing claim ($160,000) was less than the value of the fraudulently obtained assets ($1.1 million), the court excepted the entirety of the creditor's claim from discharge. The unstated assumption appears to be that if the transfers had not been made, Husky would have been paid in full. However, as the court also noted, the chapter 7 trustee of Chrysalis may have had a claim for $1.1 million on behalf Chrysalis's bankruptcy estate. While the trustee of the Chrysalis estate did not timely file a complaint under [section] 523(a)(2)(A), the potential exists for a debtor to be exposed to double liability under the court's reasoning. Yet, the bankruptcy court apparently viewed this potential as immaterial. In this, it may have gone beyond the Supreme Court's directive that the nondischargeable debt must be "traceable to" the debtor's fraud in that no more than the full value of the assets received could ever be traceable to the fraud.

The Tenth Circuit BAP's decision in Thompson (130) is also less than clear regarding the creditor's proper measure of damages under [section] 523(a)(2)(A) where the fraudulent conduct took place after the inception of the creditor's original claim and multiple creditors were harmed by the fraud. As discussed above, Thompson involved a claim based on fraudulent representations, not fraudulent transfers, but the same questions arise in either case respecting the measure of damages. On the one hand, in discussing whether the debtor ob' tained money, property, services, or credit by actual fraud, the BAP explained that the debtor obtained the certificate of need from the Department of Health and the monthly income from the operation of the nursing home. On the other hand, in discussing whether the debt arose from actual fraud, the court stated that:
   [t]he debt Hatfield seeks to except from discharge is his
   fraud-based corporate veil piercing claim, not [the nursing home's]
   debt based on providing substandard care. The conduct upon which
   Hatfield's state law veil piercing claim is based is substantially
   the same conduct underlying Hatfield's claim of actual fraud under
   [section] 523(a)(2)(A). Similarly, in Husky, the conduct that was
   the basis for the state law fraudulent conveyance claim and the
   claim for actual fraud under [section] 523(a)(2)(A) was
   substantially the same. Although Hatfield may not have a claim for
   fraud under Oklahoma law, Hatfield alleges a fraud-based corporate
   veil piercing claim under Oklahoma law that may arise from actual
   fraud under [section] 523(a)(2)(A). (131)


The quoted language plainly suggests that the $1 million veil piercing claim is the debt that may be determined nondischargeable. Yet, it is the value of the certificate of need and the monthly income that are "traceable to" the fraudulent representations. It should not matter whether the creditor's claim is a veil piercing claim as opposed to a false representation claim.

2. The Measure of Damages Where the Amount of the Claim is Greater than the Value of the Assets Transferred

In Sauer Incorporated v. Lawson (In re Lawson), (132) the First Circuit held that where the creditor's claim is greater than the value of the assets fraudulently transferred, the creditors nondischargeable claim will be the lesser amount of the value of the fraudulently transferred assets. The debtor in Lawson knowingly received a transfer of $80,000 from her father with intent to defraud his creditor Sauer Incorporated, which was owed $168,000. Sauer obtained a judgment for $80,000 in state court against the debtor under the Pennsylvania UFTA, and shortly thereafter the debtor filed for relief under chapter 13. (133)

3. The Impact of Bankruptcy on the Amount of the Claim

Even Lawson's approach may exceed the amount of damages "traceable to" the debtor's fraud. With a bankruptcy filing, all or at least many of the creditors would have a potential fraudulent conveyance claim under [section] 523. Yet if the assets had not been fraudulently transferred, the creditors in a bankruptcy case would have to share those assets on a pro rata basis, absent a priority claim. If those assets would have only paid the creditors ten percent of their claims, then perhaps the damages of a particular creditor should be limited to the loss of that ten percent recovery rather than the total value of the assets. (134)

V. CONCLUSION

Questions relating to the scope of an exception to discharge concern the balance between the Code policies favoring discharge and the need to discourage debtor misconduct. Applying the exceptions to discharge in [section][section] 523(a)(2), (4) and (6) to fraudulent transfer debts is a marked departure from the usual nondischargeability case because multiple claims may be excepted based on a single bad act by the debtor. As discussed above, there is good reason to doubt whether applying these exceptions to discharge to fraudulent transfer debts is consistent with the structure of the Code. In this application, they duplicate to some extent [section] 727(a)(2), and to a very large extent [section] 727(a)(7).

However, the imposition on the discharge will be limited by correctly measuring the extent to which the creditor's claim is traceable to the debtor's fraud. Absent a priority claim, the calculation of the claim should provide the creditor with a fraction of his claim that is equal to the total amount of all unsecured claims against the debtor at the time of the transfer divided by the value of the assets transferred.

Scott F. Norberg *

* Professor of Law, Florida International University College of Law. I am grateful to Jon Byington for his comments on an earlier draft, and to Florida International University College of Law for research support. Special thanks to Gabriel Miranda and Austin Murray, both of the FIU Class of 2018, for their excellent research assistance.

(1) See. e.g., Cohen v. de la Cruz, 523 U.S. 213, 217 (1998) (quoting Grogan v. Garner, 498 U.S. 279, 287 (1991)); Brown v. Felsen, 442 U.S. 127, 128 (1979) (quoting Local Loan Co. v. Hunt, 292 U.S. 234, 244 (1934)).

(2) 11 U.S.C. [section] 727(a) (2012). All references herein to "Code," "section," or "[section]" will refer to Title 11, United States Code, unless expressly stated otherwise.

(3) Id. [section] 523(a). In addition, Code [section][section] 522(o) and (g) limit the debtor's exemption rights in certain cases where the debtor made an intentionally fraudulent transfer. 11 U.S.C. [section][section] 522(o), (g). Also, [section][section] 707(a), 1112(b), and 1307(c), permit dismissal of a case for lack of good faith; and [section] 707(b) permits dismissal for "substantial abuse." 11 U.S.C. [section][section] 707, 1112(b), 1307(c).

(4) In particular, [section][section] 523(a)(2), (4), and (6) account for the vast majority of nondischargeability claims based on misconduct by the debtor. See infra notes 24, 57, and 85 and accompanying text. Sections 523(a)(9) (excepting certain debts "for death or personal injury caused by the debtor's operation of a motor vehicle [while] intoxicated"), (11) (excepting certain debts for "fraud or defalcation while acting in a fiduciary capacity committed with respect to any depository institution or insured credit union"), (12) (excepting certain debts "for malicious or reckless failure to ... maintain the capital of an insured depository institution"), and (19) (excepting certain debts for violation of securities laws) also except from the discharge debts arising from culpable misconduct by the debtor. 11 U.S.C. [section][section] 523 (a)(9), (11), (12), (19).

(5) Scholars have offered numerous theories of the discharge in bankruptcy and the limitations on it. See, e.g., Michael D. Sousa, The Principle of Consumer Utility: A Contemporary Theory of the Bankruptcy Discharge, 55 U. Kan. L. Rev. 553 (2010); Adam Feibelman, Defining the Social Insurance Function of Consumer Bankruptcy, 13 Am. Bankr. Inst. L. Rev. 129 (2005); Charles W. Mooney, Jr., A Normative Theory of Bankruptcy Law: Bankruptcy as (Is) Civil Procedure, 61 Wash. & Lee L. Rev. 931 (2004); Richard M. Hynes, Optimal Bankruptcy in a Non-Optimnal World, 44 B.C. L. Rev. 1 (2002); John M. Czarnetzky, The Individual and Failure: A Theory of the Bankruptcy Discharge, 32 Ariz. St. L. J. 393 (2000); Margaret Howard, A Theory of Discharge in Consumer Bankruptcy, 48 Ohio St. L. J. 1047 (1987); Charles G. Hallinan, The 'Fresh Start' Policy in Consumer Bankruptcy: A Historical Inventory and an Interpretive Theory, 21 U. Rich. L. Rev. 49, 53-54 (1986); Thomas H. Jackson, The Fresh-Start Policy in Bankruptcy Law, 98 Harv. L. Rev. 1393 (1985). See generally Charles Jordan Tabb, The Scope of the Fresh Start in Bankruptcy: Collateral Conversions and the Dischargeability Debate, 59 Geo.Wash. Law Rev. 56, 89-103 (1990) (tracing the evolution of and reviewing a number of the normative justifications for the discharge in bankruptcy). While applying [section][section] 523(a)(2), (4), and (6) to fraudulent transfer debts likely does not offend any of the modern normative justifications for the discharge, it does affect the balance between the policies favoring the debtors fresh start and to sanction debtor misconduct.

(6) The Court previously has considered questions relating to the scope of the discharge under [section][section] 523(a)(2), (4), and (6) in: Bullock v. BankChampaign, NA., 133 S.Ct. 1754 (2013) (holding that mental state required for "defalcation" under [section] 523(a)(4) is "one involving knowledge of, or gross recklessness in respect to, the improper nature of the relevant fiduciary behavior"); Kawaauhau v. Geiger, 528 U.S. 57, 61 (1998) (holding that [section] 523(a)(6) covers debts for "acts done with the actual intent to cause injury," and not intentional acts that result in negligent or reckless injuries); Grogan v. Gamer, 498 U.S. 279 (1991) (holding that preponderance of the evidence standard, rather than clear and convincing standard, applies to proof of exceptions to discharge under [section] 523(a)); Cohen v. De La Cruz, 523 U.S. 213 (1998) (holding that [section] 523(a)(2) bars the discharge of punitive as well as compensatory damages); Field v. Mans, 516 U.S. 59 (1995) (holding that proof of "false representation" under [section] 523(a)(2) requires proof of justifiable not reasonable reliance by the creditor).

(7) 11 U.S.C. [section] 523(a)(2)(A) (emphasis added).

(8) 136 S.Ct. 1581 (2016).

(9) Id. at 1586-1588.

(10) See id. at 1589-1590.

(11) see infra notes 85-117 and accompanying text.

(12) See infra notes 57-84 and accompanying text. "Insider" is defined in [section] 101(31) to include, "if the debtor is an individual--(i) relative of the debtor or of a general partner of the debtor; (ii) partnership in which the debtor is a general partner; (iii) general partner of the debtor; (iv) corporation of which the debtor is a director, officer, or person in control."

(13) U.S.C. [section] 101(31).

(14) 11 U.S.C. [section][section] 727(a)(2), 727(a)(7), 1141(d)(3)(C) (denying chapter 11 discharge to any debtor that would be denied a discharge under 727(a)).

(15) See id. [section] 1328(a).

(16) Id. [section] 727(a)(2)(A).

(17) 6 Collier on Bankruptcy [paragraph] 727.02[3][e], at 727-219 (Alan N. Resnick & Henry R. Somer, eds. 16th ed. 2018); 4 Norton Bankruptcy Law and Practice [section] 86:6, at 86-23 to 86-25 (3rd ed. 2016).

(18) 4 Norton Bankruptcy Law and Practice [section]86:6, at 86-22 (3rd ed. 2016); 11 U.S.C. [section] 727(a)(2) (requiring transfer of "property of the debtor").

(19) Id. [section] 727(a)(7).

(20) See, e.g., Kane v. Stewart Tilghman Fox & Bianchi PA (in re Kane), 755 F.3d 1285 (11th Cir. 2014); Watman v. Groman (In re Watman), 458 F.3d 26 (1st Cir. 2006); Barclays/American Bus. Credit v. Adams (In re Adams), 31 F.3d 389 (6th Cir. 1994); Groman v. Watman (In re Watman), No. MW 99-107, 2000 WL 35916015 (BA.P. 1st Cir. June 30, 2000); Mercantile Bank of Joplin N.A. v. Nicsinger (In re Nicsinger), 136 B.R. 228 (W.D. Mo. 1992); 718 Arch St. Assoc., Ltd. v. Blatstein (In re Main), 213 B.R. 67 (Bankr. E.D. Pa. 1997); Consumers United Capital Corp. v. Greene (In re Greene), 202 B.R. 68 (Bankr. D. Md. 1996); Am. Sav. & Loan Assoc. v. Weber (In re Weber), 99 B.R. 1001 (Bankr. D. Utah 1989); Chicago Title Ins. Co, Inc. v. Mart (In re Mart), 75 B.R. 808 (Bankr. S.D. Fla. 1987).

(21) 2000 WL 35916015 (B.A.P. 1st Cir. June 30, 2000).

(22) Id. at *3.

(23) Id. at *4-5.

(24) See 11 U.S.C. [section] 522(o) (2012).

(25) Id. [section] 522(g).

(26) Goodrich v. Fuentes (In re Fuentes), No. 15-56618, 2017 WL 1371440 (9th Cir. Apr. 17, 2017).

(27) 11 U.S.C. [section] 523(a)(2).

(28) 136 S.Ct. at 1586.

(29) Id. at 1589.

(30) See Husky Int'l Elec, Inc. v. Ritz (In re Ritz), 459 B.R. 623 (Bankr. S.D. Tex. 2011) (stating that the "tests for [actual] fraud under [both the Texas Business Organizations Code (TBOC) veil piercing statute] and ... section 523(a)(2)(A) of the Code are virtually the same," and holding that Ritz had not committed "actual fraud" because the statutes require a fraudulent misrepresentation), aff'd, 513 B.R. 510 (D.S.D. Tex. 2014) (holding that Husky had proven grounds for piercing the corporate veil under the TBOC, but agreeing that [section] 523(a)(2)(A) requires a fraudulent misrepresentation), aff'd, 787 F. 3d 312 (5th Cir. 2015) (holding that [section] 523(a)(2) requires a fraudulent misrepresentation by the debtor that was relied upon by the creditor), rev'd and remanded, 136 S.Ct. 1581 (2016) (holding that "actual fraud" under [section] 523(a)(2)(A) does not require a fraudulent misrepresentation), on remand, 832 F.3d 560 (5th Cir. 2016) (instructing bankruptcy court that Husky can pierce the corporate veil if it demonstrates that Ritz made intentionally fraudulent transfers under the Texas Uniform Fraudulent Transfer Act ("TUFTA"), and that the transfers were a direct personal benefit to him), on remand, 567 B.R. 715 (Bankr. S.D. Tex. 2017) (holding that Husky had proved facts necessary to pierce the corporate veil and that the fraudulent transfer debt was nondischargeable under [section] 523(a)(2)(A)).

(31) Ritz's fraudulent intent was assumed by the Supreme Court, and later proven to the bankruptcy court on the remand of the case. Husky Int'l Elec, Inc. v. Ritz (In re Ritz), 567 B.R. 715 (Bankr. S.D. Tex.). The exact amount and timing of the fraudulent transfers was also subsequently determined by the bankruptcy court. Id. at 729-30.

(32) Tex. Bus. Orgs. Code Ann. [section] 21.223(6) (West 2012). The provision codifies the prevailing common law doctrine of piercing the corporate veil. See Harry G. Henn & John R. Alexander, Law of Corporations [section] 146, at 344-47 (3rd ed. 1983 WestGroup).

(33) In re Ritz, 459 B.R. at 626-627. The bankruptcy court rejected the [section] 523(a)(4) claim on the ground that the debtor did not owe a fiduciary duty to creditors when Chrysalis became insolvent; and the [section] 523(a)(6) claim on the grounds that Husky had not offered any proof that the debtor had caused any williful and malicious injury to Husky or property of Husky, and that Husky had failed to preserve the claim. Husky did not appeal the [section] 523(a)(4) holding, In re Ritz, 513 B.R. at 515, and the district court affirmed the bankruptcy court on the [section] 523(a)(6) issue, id. at 540. The Fifth Circuit likewise affirmed the district court on the [section] 523(a)(6) issue. The Supreme Court granted certiorari on only the [section] 523(a)(2) issue. Husky Int'l Elec., Inc., 136 S.Ct. at 1585.

(34) See 11 U.S.C. [section] 35(a)(2) (1976) (repealed 1978).

(35) Husky Int'l Elec., Inc., 136 S.Ct. at 1586.

(36) Id. at 1587.

(37) Id. at 1588.

(38) 11 U.S.C. [section] 523(a)(4) (2012).

(39) Id. [section] 523(a)(6).

(40) Husky Int'l Elec.. Inc., 136 S.Ct. at 1588-89.

(41) 11 U.S.C. [section] 727(a)(2).

(42) Husky Int'l Elec., Inc., 136 S.Ct. at 1588-89.

(43) 11 U.S.C. [section] 727(a)(2).

(44) Husky Int'l Elec., Inc., 136 S.Ct. at 1590-91.

(45) 516 U.S. 59 (1995).

(46) Husky Int'l Elec., Inc., 136 S.Ct. at 1591.

(47) Id. at 1589.

(48) Id. In DZ Bank AG Deutsche Zentral-Genossenschaft Bank v. Meyer (In re Meyer), No. 15-35086, 2017 WL 2954611 (9th Cir. July 11, 2017), the Ninth Circuit seems to have missed the point that [section] 523(a)(2)(A) as interpreted in Husky does not apply where the debtor was the transferor. In Meyer, the debtors fraudulently transferred property to a corporation they controlled (Cl), and CI fraudulently transferred assets to another coporation (C2). The court focused on whether the transfer by C2 could be considered a transfer by the debtors under applicable state fraudulent transfer law, when it should have focused on whether the debtors were the recipients of the transfer. The court held that the debtors who effectuated the transfer on behalf of C2 should be regarded as transferors, and that the debt was therefor nondischargeable. Fortuitously, the outcome would almost certainly have been the same if the court had focused on whether the debtors were the transferees because they also controlled C2. The case was not selected for publication in West's Federal Reporter.

(49) Husky Int'l Elec., Inc., 136 S.Ct. at 1591 n. 3.

(50) Id. at 1589-90 (citation omitted).

(51) 555 B.R. 1 (B.A.P. 10th Cir. 2016).

(52) Id. at 6.

(53) Id. at 11-12.

(54) Id. at 10-13.

(55) Id. at 12-14.

(56) Id. at 10-12. See Restatement (Second) of Torts [section] 537; Field v. Mans, 516 U.S. 59, 68-69 (1995).

(57) 11 U.S.C. [section] 523(a)(4).

(58) See, e.g., Lawrence T. Lasagna, Inc. v. Foster (In re Foster), 609 F.2d 392 (9th Cir. 1979); John P. Maguire & Co, Inc. v. Herzog, 421 F.2d 419 (5th Cir. 1970); In re Bernard, 87 F.2d 705 (2d Cir. 1937); In re Metz, 6 F.2d 962 (2d Cir. 1925); Nahman v. Jacks (In re Jacks), 266 B.R. 728 (B.A.P. 9th Cir. 2001); Mut. Mgmt. Serv, Inc. v. Fairgrieves (In re Fairgrieves), 426 B.R. 748 (Bankr. N.D. 111. 2010); MasterHalco, Inc. v. Picard (In re Picard), 339 B.R. 542 (Bankr. D. Conn. 2006); United States v. Bagel (In re Bagel), Case No. 92-11440F, Adv. No. 92-0675F, 1992 WL 477052 (Bankr. E.D. Pa. Dec. 17, 1992), aff'd, 22 F.3d 300 (3rd Cir. 1994); Bay 511 Corp. v. Thorsen (In re Thorsen), 98 B.R. 527 (Bankr. D. Colo. 1989); see also Harper v. Rankin, 141 F. 626 (4th Cir. 1905) (not involving the trust fund doctrine, but senior corporate officer of bank used position to loot the bank). Moreover, the holding in Husky that "actual fraud" under [section] 523(a)(2)(A) covers intentionally fraudulent transfers reinforces the conclusion that "fraud" under [section] 523(a)(4) likewise encompasses transfers made with the intent to defraud a creditor.

(59) See cases cited supra note 58. But see Econ. Dev. Growth Enter, v. McDermott (In re McDermott), 434 B.R. 271 (Bankr. N.D.N.Y. 2010) (holding that creditor did not have direct right of action against debtor corporate director, but only a derivative claim on behalf of the corporation). In contast, the [section] 523(a)(2) and (a)(6) cases generally hold that no debt arises where the debtor transfers his or her own property unless the debtor is also the recipient of the transfer. See Husky Int'l Elec., Inc., 136 S.Ct. at 1591 n.3 (holding that debtor transferee may incur debt for actual fraud under [section] 523(a)(2)(A); see also infra notes 88-103 and accompanying text (discussing [section] 523(a)(6) cases).

(60) See, e.g., Follett Higher Educ. Group, Inc. v. Berman (In re Berman), 629 F.3d 761 (7th Cir. 2011); Cal-Micro, Inc. v. Cantrell (In re Cantrell), 329 F.3d 1119 (9th Cir. 2003); In re Frain, 230 F.3d 1014 (7th Cir. 2000); Andy Warhol Found, for Visual Arts, Inc. v. Hayes (In re Hayes), 183 F.3d 162, 166 (2d Cir. 1999); Marchiando v. 111. Dept. of the Lottery, 13 F.3d 1111 (7th Cir. 1994); In re Angelle, 610 F.2d 1335 (5th Cir. 1980); Swimmer v. Moeller (In Re Moeller), 466 B.R. 525 (Bankr. S.D. Cal. 2012); Econ. Dev. Growth Enter, v. McDermott (In re McDermott), 434 B.R. 271 (Bankr. N.D.N.Y. 2010); Berres v. Bruning (In re Bruning), 143 B.R. 253 (Bankr. D. Colo. 1992); United States v. Bagel (In re Bagel), Case No. 92II440F, Adv. No. 92-0675F, 1992 WL 477052 (Bankr. E.D. Pa. Dec. 17, 1992), aff'd, 22 F.3d 300 (3rd Cir. 1994); Bay 511 Corp. v. Thorsen (In re Thorsen), 98 B.R. 527 (Bankr. D. Colo. 1989); see generally Jonathon S. Byington, Fiduciary Capacity and the Bankruptcy Discharge, 24 Am. Bankr. Inst. L. Rev. 1, 15-16 (discussing fiduciary duty as a question of federal law and the relevance of state law).

(61) See, e.g., cases cited infra note 70.

(62) See, e.g., cases cited infra note 81.

(63) See Byington, supra notes 60-61.

(64) See Davis v. Aetna Acceptance Co., 293 U.S. 328 (1934); Crawford v. Burke, 195 U.S. 176 (1904); Upshur v. Briscoe, 11 S.Ct. 313 (1891); Noble v. Hammond, 129 U.S. 65 (1889); Liebke v. Thomas, 116 U.S. 605 (1886); Hennequin v. Clews, 4 S.Ct. 576 (1884); Chapman v. Forsyth, 2 How. 202 (1844).

(65) 2 How. 202 (1844).

(66) 293 U.S. 328 (1934).

(67) Byington, supra note 60, at 12-13 (quoting Chapman, 2 How. at 208, and Davis, 293 U.S. at 333).

(68) Id. at 13. Although the wording of the "fiduciary capacity" exception to discharge has evolved with the enactment of each successive Bankruptcy Act, the Supreme Court (in Davis) and lower courts have consistently applied the Court's decisions as though the wording has remained fixed. The Court's opinions addressing "fiduciary capacity" span three somewhat differently worded provisions of the Bankruptcy Acts of 1841, 1867, and 1898 (and Congress further tweaked the corresponding provisions in the Bankruptcy Act of 1938 and the Bankruptcy Code of 1978). The Bankruptcy Act of 1841 referred to debts "created in consequence of a defalcation as a public officer; or as executor, administrator, guardian, or trustee, or while acting in any other fiduciary capacity." Bankrtuptcy Act of 1841, ch. 9, [section] 1, 5 Stat. 440, 441 (1841). This provision was not actually an exception to discharge, but governed who was eligible for a discharge under the Act. However, the Supreme Court subsequently described it as an exception to discharge. See Neal v. Clark, 95 U.S. 704, 708 (1877) (considering fraud exception to discharge under the Bankruptcy Act of 1867)). The Bankruptcy Act of 1867 excepted debts "created by the fraud or embezzlement of the bankrupt, or by his defalcation as a public officer, or while acting in any fiduciary character." Bankrtupcy Act of 1867, ch. 176, [section] 33, 14 Stat. 517 (1867) (repealed 1878). The Bankruptcy Act of 1898 excepted debts "created by ... fraud, embezzlement, misappropriation, or defalcation while acting in any fiduciary capacity." Bankruptcy Act of 1898, ch. 541, [section] 17, 30 Stat. 544, 550 (1898) (repealed 1938). The Bankuptcy Act of 1938 excepted debts "created by ... misappropriation or defalcation while acting as an officer or in any fiduciary capacity." The current statute, 11 U.S.C. [section] 523(a)(4) applies to "debts for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny." 11 U.S.C. [section] 523(a)(4) (2012). Thus, the first interation listed "public officer," "executor, administrator, guardian, [and] trustee" followed by "any other fiduciary capacity; the second interation refered only to "public officer" followed by "or any fiduciary character;" the third iteration referred simply to "fiduciary capacity;" the fourth iteration referred to "officer" (not "public officer") and "any fiduciary capacity" and the current statute reverts to simply "fiduciary capacity."
   For example, the Court in Davis relied on Chapman without regard to
   the changes in the 1898 statute, which referred only to "fiduciary
   capacity" and omitted the original list of public officer,
   executor, administrator, guardian and trustee. The Court instead
   might have viewed the deletion of the list of specific cases, and
   the substitution of "character" for "capacity," as calling for a
   broader interpretation of the statute, not limited to relationships
   of the same kind listed in the original statute. Likewise, courts
   have not read the deletion of "officers" from the statute to
   signify that officers are excluded from the ambit of the exception.
   Conversely, courts have not read the specific inclusion of
   "officers" in superceded versions of the exception to discharge to
   mean that corporate officers necessarily act in a fiduciary
   capacity within the meaning of the exception. Cf. In re Metz, 6
   F.2d 962 (2d Cir. 1925) (holding that debt was nondischargeable
   under the Bankruptcy Act of 1898 and stating that "[t]he judgment
   obtained [by the creditor] was ... based upon a liability of the
   bankrupt, created by his fraudulent misappropriation of the
   property of the corporation, and while he was acting as such
   officer of the corporation. He was an officer, as provided within
   section 17, for an officer there referred to includes within its
   meaning an officer of a private corporation."); Harper v. Rankin,
   141 F. 626 (4th Cir. 1905) (discussing change in statute from
   "public officer" to "officer," suggesting that change expanded
   scope of the exception to cover officers of private corporations;
   holding that regardless of the meaning of "officer," the debtor was
   acting in a fiduciary capacity where he was an officer--vice
   president--of the bank having control of its affairs).


(69) Byington, supra note 60, at 12-13.

(70) See Mut. Mgmt. Serv, Inc. v. Fairgrieves (In re Fairgrieves), 426 B.R. 748 (Bankr. N.D. Ill 2010); Master-Halco, Inc. v. Picard (In re Picard), 339 B.R. 542 (Bankr. D. Conn. 2006); United States v. Bagel (In re Bagel), Case No. 92-11440F, Adv. No. 92-0675F, 1992 WL 477052 (Bankr. E.D. Pa. Dec. 17, 1992), aff'd, 22 F.3d 300 (3rd Cir. 1994); Berres v. Bruning (In re Bruning), 143 B.R. 253 (Bankr. D. Colo. 1992); Bay 511 Corp. v. Thorsen (In re Thorsen), 98 B.R. 527 (Bankr. D. Colo. 1989).

(71) See Master-Halco, Inc. v. Picard (In re Picard), 339 B.R. 542 (Bankr. D. Conn. 2006); United States v. Bagel (In re Bagel), Case No. 92-11440F, Adv. No. 92-0675F, 1992 WL 477052 (Bankr. E.D. Pa. Dec. 17, 1992), affd, 22 F.3d 300 (3rd Cir. 1994) (denying plaintiffs motion for summary judgment because state court judgment on which it relied to collaterally estop the debtor did not indicate whether the alleged fraudulent transfers occurred when the corporation was insolvent or instead rendered the corporation insolvent; "[i]t is possible that the transfer of corporate assets to [the debtor] rendered the corporation insolvent; if so, then that particular trust relationship did not exist independent of the transfer which created the liability." Berres v. Bruning (In re Bruning), 143 B.R. 253 (Bankr. D. Colo. 1992); Bay 511 Corp. v. Thorsen (In re Thorsen), 98 B.R. 527 (Bankr. D. Colo. 1989); see also In re Frain, 230 F.3d 1014 (7th Cir. 2000) (holding that debtor who was controlling shareholder of corporation had a fiduciary obligation to other shareholders that pre-existed the alleged breaches of shareholder agreement; "[t]his is not a case where a fiduciary relationship was implied from a contract.... A contract was necessary to the existence of a fiduciary relationship, but the obligations of the contract were not the source of the fiduciary relationship. The source of the fiduciary relationship was [the debtor's] substantial ascendancy over [the other two shareholders]").

(72) See United States v. Bagel (In re Bagel), Case No. 92-11440F, Adv. No. 92-0675F, 1992 WL 477052 (Bankr. E.D. Pa. Dec. 17, 1992), aff'd, 22 F.3d 300 (3rd Cir. 1994) (stating that "the 'technical' or 'express' trust requirement is not limited to trusts that arise by virtue of a formal trust agreement, but includes relationships in which trust-type obligations are imposed pursuant to statute or common law"); Berres v. Bruning (In re Bruning), 143 B.R. 253 (Bankr. D. Colo. 1992); Bay 511 Corp. v. Thorsen (In re Thorsen), 98 B.R. 527 (Bankr. D. Colo. 1989).

(73) See supra notes 65-67 and accompanying text.

(74) Master-Halco, Inc. v. Picard (In re Picard), 339 B.R. 542 (Bankr. D. Conn. 2006).

(75) See Lawrence T. Lasagna, Inc. v. Foster (In re Foster), 609 F.2d 392 (9th Cir. 1979); In re Bernard, 87 F.2d 705 (2d Cir. 1937); In re Metz, 6 F.2d 962 (2d Cir. 1925).

(76) 143 B.R. 253 (Bankr. D. Colo. 1992).

(77) Accord, Bay 511 Corp. v. Thorsen (In re Thorsen), 98 B.R. 527 (Bankr. D. Colo. 1989).

(78) Bruning, 143 B.R. at 256; accord, United States v. Bagel (In re Bagel), Case No. 92-11440F, Adv. No. 92-0675F, 1992 WL 477052 (Bankr. E.D. Pa. Dec. 17, 1992), aff'd, 22 F.3d 300 (3rd Cir. 1994) (stating that "the 'technical' or 'express' trust requirement is not limited to trusts that arise by virtue of a formal trust agreement, but includes relationships in which trust-type obligations are imposed pursuant to statute or common law" denying plaintiff s motion for summary judgment because the state court judgment on which it relied to collaterally estop the debtor did not indicate whether the alleged fraudulent transfers occurred when the corporation was insolvent or instead rendered the corporation insolvent; "[i]t is possible that the transfer of corporate assets to [the debtor] rendered the corporation insolvent; if so, then that particular trust relationship did not exist independent of the transfer which created the liability").

(79) See Swimmer v. Moeller (In re Moeller), 466 B.R. 525 (Bankr. S.D. Cal. 2012); Econ. Dev. Growth Enter, v. McDermott (In re McDermott), 434 B.R. 271 (Bankr. N.D.N.Y. 2010); cf. Cal-Micro, Inc. v. Cantrell (In re Cantrell), 329 F.3d 1119 (9th Cir. 2003) (holding that an officer and director of insolvent corporation did not stand in a fiduciary capacity with respect to the corporation and concluding that California "cases merely specify that officers owe fiduciary duties in their capacity as agents of a corpora tion [and do not] hold that officers are trustees of a statutory trust with respect to corporate assets."); First Options of Chicago, Inc. v. Kaplan (In re Kaplan), 162 B.R. 684 (Bankr. E.D.Pa. 1993); Roots v. Bangerter (In re Bangerter), 106 B.R. 649 (Bankr. C.D.Cal. 1989) (holding that majority shareholder did not have a fiduciary relationship with other shareholders within the meaning of [section] 523(a)(4) and explaining that "California law does not hold that a majority shareholder is a trustee of the corporate assets or any interests that shareholders may have in the corporate res.").

(80) See Follett Higher Educ. Group, Inc. v. Berman (In re Berman), 629 F.3d 761 (7th Cir. 2011); cf. Murphy & Robinson Inv. Co. v. Cross (In re Cross), 666 F.2d 873 (5th Cir. 1982) (involving debtor principal of a construction firm who certified that payments had been made to subcontractors, but in fact had diverted some draws to other purposes and applying [section] 17(a)(4) of the Bankruptcy Act of 1938; court viewed the debtor as owing a duty to the corporation and not to individual creditors of the corporation).

(81) See Murphy & Robinson Investment Co. v. Cross (In re Cross), 666 F.2d 873 (5th Cir. 1982) ("permitting a single corporate creditor to have his debt declared nondischargeable in the officer's individual bankruptcy could possibly interfere with the recovery sought by the corporation itself against the [debtor], and thus would be unfair to the corporation and other corporate creditors. The preferable approach would be to allow the corporation (or its trustee in bankruptcy) to assert a claim based on the defalcation that would inure to the benefit of all the corporation's creditors."); Husky Int'l Elec, Inc. v. Ritz (In re Ritz), 459 B.R. 623, 633-35 (Bankr. S.D. Tex. 2011) (holding that creditor had only derivative action against corporation for director's breach of fiduciary duty, relying on Fifth Circuit precedent that directors of insolvent corporation do not have fiduciary duties to creditors under Texas law in case not involving the exception to discharge), rev'd on other grounds, 136 S.Ct. 1581.

(82) 434 B.R. 271 (Bankr. N.D.N.Y. 2010).

(83) Id. at 277-78.

(84) Id. at 281. The court also held that even if the debtor was acting with the requisite fiduciary capacity under [section] 523(a)(4), there was no evidence that the debtor was acting with the intent to defraud the plaintiffs. Id. at 282.

(85) For example, the creditors in Husky International Electronics, Inc., 459 B.R. at 626-627, and McClellan v. Cantrell, 217 F.3d 890, 896 (7th Cir. 2000) sought nondischargeability determinations under [section] 523(a)(6) in addition to [section] 523(a)(2)(A). In Husky, the bankruptcy court rejected the claim because the creditor did not offer any proof that the debtor acted willfully and maliciously, and the Fifth Circuit affirmed, finding that the bankruptcy court's conclusion was not incompatible with its findings that the debtor had depleted Chrysalis' assets by making transfers for less than reasonably equivalent value. Husky International Electronics, Inc. v. Ritz (In re Ritz), 787 F.3d 312, 321-322 (5th Cir. 2015). In McClellan, the concurring judge on the Seventh Circuit panel would have found the creditor's claim nondischargeable under [section] 523(a)(6) instead of [section] 523(a)(2)(A). McClellan, 217 F.3d at 896-899.

(86) While [section] 523(a)(6) is not applicable in chapter 13 cases, the chaper 13 "super discharge" has a modified and narrower version of [section] 523(a)(6) found in [section] 1328(a)(4).

(87) Husky Int'l Elec., Inc. v. Ritz, 136 S.Ct. 1581, 1588 (2016) ("The debtors who make fraudulent conveyances and the debtors who make false representations under [section] 523(a)(2)(A) could likewise also inflict 'willful and malicious injury' under [section] 523(a)(6)."); see also McClellan, 217 F.3d at 896 (holding debt arising from fraudulent transfer nondischargeable under [section] 523(a)(2)(A), and indicating that the debt could also be excepted from discharge under [section] 523(a)(6), "[b]ut why shoehorn?").

(88) See, e.g., Steier v. Best (In re Best), 109 Fed. App'x 1 (6th Cir. 2004) (holding that disposal and concealment of assets in order to prevent collection of creditor's claim did not cause or give rise to the creditor's claim); Quarre v. Saylor (In re Saylor), 178 B.R. 209 (B.A.P. 9th Cir. 1995), affd, 108 F.3d 219 (1997); Cordeiro v. Kirwan (In re Kirwan), 558 B.R. 9 (Bankr. D. Mass. 2016) (holding that plaintiffs had not alleged debt arising from willful and malicious injury where they sought to determine judgment debt nondischargeable because the debtor had transferred assets with intent to avoid payment of the judgment; plaintiffs based their claim on debtor's transfer of assets and did not allege any debt arising from the transfer); Jou v. Adalian (In re Adalian), 474 B.R. 150 (Bankr. M.D. Pa. 2012); Rockstone Capital, LLC v. Walker-Thomas Furniture Co, Inc. (In re Smith), Case No. 04-10457, Adv. No. 04-1581, 2007 WL 2071626 (Bankr. D.C. July 17, 2007); Master-Halco, Inc. v. Picard (In re Picard), 339 BR. 542 (Bankr. D. Conn. 2006) (holding that "the Debtor's transfer of his own property does not result in a Section 523(a)(6) nondischargeability claim," but that "the Debtor may be liable ... for the transfers of [his corporation's assets ... if the Debtor is deemed to be the transferee of the [corporation's] assets (either per se or on a 'piercing' theory)"); accord Groman v. Watman (In re Watman), No. MW 99-107, 2000 WL 35916015 (B.A.P. 1st Cir. June 30, 2000) (holding that there was no debt to except from the discharge under [section] 523(a)(6) because there was no link between the creditor's original contract claim against the debtor's corporation and the injury suffered by the creditor when the debtor caused the corporation to transfer its assets without consideration; however, creditor based its claim on debtor's transfers, and apparently did not contend that the debtor's receipt of fraudulently transferred assets gave rise to a new debt under state fraudulent transfer law). But cf. Estate of Cora v. Jahrling (In re Jahrling), 510 B.R. 820 (Bankr. N.D. 111. 2014) (debtor agreed that [section] 523(a)(6) may apply where he allegedly transferred property with intent to defraud creditor, and court did not examine the point except to cite an inapposite case, Mutual Management Svcs., Inc. v. Fairgrieves (In re Fairgrieves), 426 B.R. 748 (Bankr. N.D.I11. 2010), in which the debtor was the transferee and the creditor had obtained a fraudulent transfer judgment against the debtor in state court before the bankruptcy case).

(89) See, e.g., Quarre v. Saylor (In re Saylor), 178 B.R. 209, 214 (B.A.P. 9th Cir. 1995), affd, 108 F.3d 219 (9th Cir. 1997) ("Implicit in [the creditor's argument] is the premise that fraudulent transfer is a conversion ... [the creditor] did not own and was not entitled to possession of the transferred property, nor did he even have a judgment lien, at the time of transfer: he could not show conversion."). Where the debtor transferred property subject to the creditor's lien, the legal issue is typically framed as whether the injury to the creditor was willful and malicious, and not as whether the debtor made the transfer with the intent to hinder, delay or defraud the creditor per se. See, e.g., Maxfield v. Jennings (In re Jennings), 670 F.3d 1329, 1334 (11th Cir. 2012) (fraudulent transfer caused willful and malicious injury where debtor knew of the creditor's claims and that the purpose of the transfer was to avoid payment of creditor's claim; "[t]his evidence illustrates that [the debtor] acted willfully in preventing [the creditor] from reaching [the property] to satisfy part of his personal injury judgment. And she had no just cause to effect the transfer: she knew that [the transferee] had no claim to [the property].") There are scores of decisions on the dischargeability of debts under [section] 523(a)(6) where the debtor has transferred property in derogation of a secured creditor's lien. See generally Charles Jordan Tabb, The Scope of the Fresh Start in Bankruptcy: Collateral Conversions and the Dischargeability Debate, 59 Geo. Wash. L. Rev. 56 (1990).

(90) 178 B.R. 209 (B.A.P. 9th Cir. 1995), affd, 108 F.3d 219 (1997).

(91) Id. at 211-212.

(92) 11 U.S.C. [section] 101 (2012).

(93) Id. [section] 101(4).

(94) Saylor, 178 B.R. at 213-214. Rather, under the California UFT A, a creditor's remedies against the transferor are for avoidance of the transfer, attachment of the asset transferred, an injunction against further transfer of the property, or the appointment of a receiver, but do not include any right to payment from the transferor. Id. at n. 7 (quoting California UFTA [section] 7, Cal. Civ. Code [section] 3439.07 (West 1994)). The Uniform Fraudulent Transfer Act ("UFTA") [section] 8 provides for monetary remedies only against the transferee.

(95) On appeal, the Ninth Circuit Court of Appeals affirmed the BAP. It expressed agreement with "the reasons set forth in the BAP's opinion," however, it did not specifically review the BAP's holding that there was no debt. Saylor, 108 F.3d at 221; see also Rockstone Capital, LLC v. Walker-Thomas Furniture Co., Inc. (In re Smith), Case No. 04-10457, Adv. No. 04-1581, 2007 WL 2071626 at "2 (Bankr. D.C.July 17, 2007) (dismissing plaintiffs complaint under [section] 523(a)(6), stating that the creditor "has failed to identify any nonbankruptcy law that imposes an independent and seprate obligation on a debtor for frustrating collection of a debt she already owes when the debtor's acts do not entail an injury to existing property rights of the creditor. If the debtor engaged in a transfer that is fraudulent as to an unsecured creditor, the remedy under nonbankruptcy law is to set aside the fraudulent conveyance and then to proceed against the property, or to proceed against the transferee for the value of the transfer if the property has been transferred to a bona fide purchaser. As the party whose debt to the creditor makes the transfer fraudulent, the transferor is already indebted to the creditor for the amount owed. Here, the judgment debt is the debt the debtor [owes the creditor], not a debt to be found owing by the debtor based on her having made the transfer")

(96) Saylor, 178 B.R. at 214. Courts have agreed with the BAP and Ninth Circuit in Saylor that unsecured creditors have no interest in a debtor's property based on state fraudulent transfer law, and therefore that there is no debt based on conversion. See Master-Halco, Inc. v. Picard (In re Picard), 339 BR. 542, 554-55 (Bankr. D. Conn. 2006); Groman v. Watman (In re Watman), No. MW 99-107, 2000 WL 35916015, at *3 (B.A.P. 1st Cir. June 30, 2000); Shigezo Hawaii, Inc. v. Soy to the World (In re Yamada), Case No. 11-90075, Adv. No. 11-02112, 2012 WL 3224118, at *6 (Bankr. D. Haw. 2012).

(97) Saylor, 178 B.R. at 214 & n.9.

(98) 670 F.3d 1329 (11th Cir. 2012). Contra Paradigm BioDevices, Inc. v. Viscogliosi, LLC, 842 F. Supp. 2d 661 (S.D.N.Y. 2012).

(99) See J.P. Morgan Chase Bank, N.A. v. Barrocco (In re Barrocco), 506 B.R. 482 (E.D. Mich. 2014).

(100) See, e.g., GATX Corp. v. Addington, 879 F. Supp. 2d 633 (E.D. Ky. 2012); Paradigm BioDevices, 842 F. Supp. 2d 661 (S.D.N.Y. 2012). These decisions are consistent with the UFT A, which provides for remedies against the transferee of a fraudulent transfer, and not the transferor. See, e.g., CUFTA [section] 7, Cal. Civ. Code [section] 3439.07.

(101) See Sauer Inc. v. Lawson (in re Lawson) (1st Cir. 2015), 791 F.3d 214 (applying [section] 523(a)(2) and discussed infra notes 132-133 and accompanying text); McCain Foods USA Inc. v. Shore (In re Shore), 317 B.R. 536 (B.A.P. 10th Cir. 2004) (holding that debt based on state court UFTA judgment against debtor transferee of intentionally fraudulent transfers was nondischargeable under [section] 523(a)(6)); see also Murray v. Bammer (In re Bammer) 131 F.3d 788 (9th Cir. 1997) (holding that debtor's participation as transferee in a fraudulent transfer scheme was malicious within the requirement of [section] 523(a)(6); creditor had obtained a judgment against the debtor in state court under the California UFTA before debtor filed for bankruptcy; court did not expressly address the question of injury, but in holding that the debtor acted maliciously and that the debt was therefore nondischargeable, necessarily assumed that the receipt of a fraudulent transfer gives rise to a debt and constitutes an injury under [section] 523(a)(6)); Eldridge v. Waugh (In re Waugh), 95 F.3d 706, 711 (8th Cir. 1996) (affirming district court judgment excepting debt from discharge under [section] 523(a)(6) where the debtor had engaged in transactions as a corporate principal for the benefit of himself and preventing payment of the creditor's judgment); Shapiro v. Clark (In re Clark), 400 B.R. 321 (Bankr. M.D. Fla. 2009) (giving collateral estoppel effect to state court judgment against debtor based on her receipt of funds with the intention to prevent collection of her husband's debt to the plaintiff).

(102) Husky Int'l Elec, Inc. v. Ritz (In re Ritz), 832 F.3d 560 (5th Cir. 2016); Hatfield v. Thompson (In re Thompson), 555 B.R. 1 (B.A.P. 10th Cir. 2016); cf. Groman v. Watman (In re Watman), No. MW 99-107, 2000 WL 35916015 (B.A.P. 1st Cir. June 30, 2000) (holding that there was no debt to except from the discharge under [section] 523(a)(6) because there was no link between the creditor's original contract claim against the debtor's corporation and the injury suffered by the creditor when the debtor caused the corporation to transfer its assets without consideration; however, creditor based its claim on debtor's transfers, and apparently did not contend that the debtor's receipt of fraudulently transferred assets gave rise to a new debt under state fraudulent transfer law); Cordeiro v. Kirwan (In re Kirwan), 558 B.R. 9 (Bankr. D. Mass. 2016) (holding that plaintiffs had not alleged debt arising from willful and malicious injury where they sought to determine judgment debt nondischargeable because the debtor had transferred assets with intent to avoid payment of the judgment; although the complaint indicated that debtor had been the recipient of the transfer, plaintiffs based their claim on the debtor's transfer of assets but did not allege any debt arising from the transfer); Shigezo Hawaii, Inc. v. Soy to the World (In re Yamada), Case No. 1190075, Adv. No. 11-02112, 2012 WL 3224118, at *2, *6 & n.l (Bankr. D. Haw. 2012) (stating that under Say/or, intentionally fraudulent transfers of assets in which the creditor does not have a lien are not nondischargeable under [section] 523(a)(6); however, the debtor in Yamada may have been the transferee of allegedly fraudulent transfers, and the court did not recognize that in Saylor the debtor was the transferor (and therefore regarded hammer as in conflict with Saylor)).

In some cases, the courts have held that a debt arising from the debtor's receipt of a fraudulent transfer was nondischargeable under [section] 523(a)(6) without stating the nature of the claim. See McClellan v. Cantrell, 217 F-3d 890 (7th Cir. 2000) (holding that debtor transferee incurred debt by participating in actually fraudulent transfer scheme, but not specifying the legal basis for the claim); Fabian v. Guttman (In re Fabian), 475 B.R. 463 (D. Md. 2012) (debtor fraudulently transferred assets of corporation that he controlled to himself); see also Rockstone Capital, LLC v. Walker-Thomas Furniture Co., Inc. (In re Smith), Case No. 04-10457, Adv. No. 04-1581, 2007 WL 2071626 at *2 (Bankr. D.C.July 17, 2007) (holding that there is no debt that may be excepted from discharge where the debtor is the transferor of a fraudulent transfer, and also noting that "[n]onbankruptcy law may, however, impose liability on the transferee, whose debt might be nondischargeable if the transferee obtained a bankruptcy discharge").

(103) See, e.g., Eldridge v. Waugh (In re Waugh), 95 F.3d 706, 711 (8th Cir. 1996) (affirming district court judgment excepting debt from discharge under [section] 523(a)(6) where the debtor had engaged in transactions as a corporate principal for the benefit of himself and preventing payment of the creditor's judgment); McCain Foods USA Inc. v. Shore (In re Shore), 317 B.R. 536 (B.A.P. 10th Cir. 2004); Master-Halco, Inc. v. Picard (In re Picard), 339 BR. 542 (Bankr. D. Conn. 2006).

In a couple of cases, however, the courts have overlooked the existence of a creditor's claim under state fraudulent transfer law or misapplied binding authority. In Croman v. Watman (In re Watman), No. MW 99-107, 2000 WL 35916015 (B.A.P. 1st Cir. June 30, 2000), the First Circuit BAP held that there was no debt to except from the discharge under [section] 523(a)(6) where the individual debtor allegedly fraudulently transferred assets of his corporation to himself. It appears that the creditor did not argue that the debtor's receipt of the fraudulently transferred property gave rise to a debt, but contended only that the debtor's act of transferring corporate assets caused injury. Id. at *3 & n.3. Thus, the court did not consider that the creditor had possible claims under state fraudulent transfer and corporate veil piercing law that arose later and apart from its original claim for sale of the stock in the dental practice.

In Shigezo Hawaii, Inc. v. Soy to the World (In re Tamada), Case No. 11-90075, Adv. No. 11-02112, 2012 WL 3224118, (Bankr. D. Haw. 2012), the bankruptcy court misapplied applicable ninth circuit precedent (Saylor and Bammer), and as a result likewise overlooked a possible UFTA claim. In Yamada, the debtor was the principal of a tofu business, Soy to the World, Incorporated. Shigezo Hawaii, Inc. advanced funds to the business, and when the funds were not repaid, filed a collection suit in state court. Thereafter, the debtor transferred assets of the business with the intention to defeat payment of the creditor's debt. The facts are not clear on the point, but it appears that the Soy to the World may have effectively transferred its tofu machine to the debtor. In ruling for the debtor, the court cited Saylor for the proposition that "intentional efforts to ... prevent the enforcement of an unsecured creditor's claim or judgment do not give rise to a nondischargeable claim under section [section] 523(a)(6)." Id. at *6. The court reasoned that the creditor did not have a security interest in assets of the tofu business, and that the debtor's conduct did not injure any property interests of the creditor or otherwise injure the creditor because there was no proof that the business had any value at the time of the creditor's collection efforts. The court failed to recognize, however, that in contrast to Saylor, the present case may have involved a debtor who had received a fraudulent transfer. The mistake is revealed where the court viewed Saylor and Bammer as in conflict. As discussed above, the different outcomes in the two cases is because the former involved a debtor who was the tranferor, while the latter involved a debtor who was the transferee of an allegedly fraudulent transfer.

(104) See Quarre v. Saylor (In re Saylor), 178 B.R. 209 (B.A.P. 9th Cir. 1995), aff'd, 108 F.3d 219 (9th Cir. 1997); Picard, 339 BR. at 544 (stating that a "Debtor's transfer of his own property does not result in a Section [section] 523(a)(6) nondischargeability claim."); Jou v. Adalian (In re Adalian), 474 B.R. 150 (Bankr. M.D. Pa. 2012) ("Jou essentially claims that Adalian injured him through a series of transfers of property which placed his assets out of Jou's reach. The allegations primarily refer to transfers of Adalian's own property. While these transfers may have made Adalian incapable of repaying Jou, and thus injuring him in some sense, they do not rise to a [section] 523(a)(6) claim").

(105) In re Saylor, 178 B.R. at 214-15

(106) Id. at 213-214.

(107) Id. at 214; accord Cordeiro v. Kirwan (In re Kirwan), 558 B.R. 9, 14-15 (Bankr. D. Mass. 2016) (citing Saylor, 108 F.3d 219, 221 (9th Cir. 1997) for the proposition that plaintiffs' state fraudulent transfer rights did not meet the definitions of "property" or "debt," and distinguishing cases in which the debtor was the transferee of a fraudulent transfer).

(108) Accord Master-Halco, Inc. v. Picard (In re Picard), 339 B.R. 542 (Bankr. D. Conn. 2006) (holding that debtor's transfer of personal assets with the intent to defraud the creditor did not inflict any injury on an unsecured creditor that is cognizable under [section] 523(a)(6)); Shigezo Hawaii, Inc. v. Soy to the World (In re Yamada), Case No. 11-90075, Adv. No. 11-02112, 2012 WL 3224118 (Bankr. D. Haw. 2012) (holding that creditor's claim was dischargeable under [section] 523(a)(6) where the debtor had transferred assets of a corporation of which he was the principal with the intention to defeat the corporation's creditors; reasoning that the creditor did not have a security interest in assets of the corporation, and that the debtor's conduct did not injure any property interests of the creditor or otherwise injure the creditor because there was no proof that the business had any value at the time of the creditor's collection efforts).

(109) See Fabian v. Guttman (In re Fabian), 475 B.R. 463 (D. Md. 2012) (debtor fraudulently transferred assets of corporation that he controlled to himself); HIJ Industries, Inc. v. Roy (In re Roy), 547 B.R. 760 (Bankr. E.D. Ky. 2016) (holding that plaintiff stated a claim to except debt from discharge under [section] 523(a)(6) where the debtor's LLC was indebted to the plaintiff, and the complaint alleged that "the Debtor engaged in a series of complex transactions as a subterfuge to avoid payment of the Notes while retaining constructive ownership of assets," resulting in "intentional injury to the plaintiff--i.e., the account receivable owed" by the LLC); Shapiro v. Clark (In re Clark),

400 B.R. 321 (Bankr. M.D. Fla. 2009); In re Picard, 339 B.R. 542; McCain Foods USA Inc. v. Shore (In re Shore), 317 B.R. 536 (B.A.P. 10th Cir. 2004); Mutual Mgmt. Svcs., Inc. v. Fairgrieves (In re Fairgrieves), 426 B.R. 748 (Bankr. N.D. 111. 2010) (stating that "a fradulent transfer based on actual intent to hinder, delay, or defraud a creditor can support a Section 523(a)(6) claim" where debtor was the transferee and creditor had obtained fraudulent transfer judgment against debtor in state court before the bankruptcy case, but holding that the creditor had not sufficiently alleged fraud in its complaint); accord Murray v. Bammer (In re Bammer) 131 F.3d 788 (9th Cir. 1997); Eldridge v. Waugh (In re Waugh), 95 F.3d 706, 711 (8th Cir. 1996) (affirming district court judgment excepting debt from discharge under [section] 523(a)(6) where the debtor had engaged in transactions as a corporate principal for the benefit of himself and preventing payment of the creditor's judgment). But cf. Groman v. Watman (In re Watman), No. MW 99-107, 2000 WL 35916015 (BA.P. 1st Cir. June 30, 2000). In Watman, the court held that the creditor had not shown any injury to his property. In dictum, the court stated that the creditor may have shown an injury to himself (as opposed to his property) where he had alleged that the debtor had transferred assets of the debtor's corporation with the intention of injuring the creditor. The court did not explain the dicta or cite any authority in support. As discussed above, it appears that the creditor did not argue that he or his property suffered injury by virtue of the debtor's receiving fraudulently transferred property. The court held that in any event, the creditor's original claim was not linked to the injury. Id. at *3.

(110) See Master-Halco, Inc. v. Picard (In re Picard), 339 B.R. 542 (Bankr. D. Conn. 2006); In re Roy, 547 B.R. at 765.

(111) 339 B.R. 542 (Bankr. D. Conn. 2006).

(112) Id. at 555 (footnote omitted); see also McCain Foods USA, Inc. v. Shore (In re Shore), 317 B.R. 536 (B.A.P. 10th Cir. 2004) (affirming bankruptcy court determination that creditor had suffered a cognizable injury under [section] 523(a)(6) where the debtor and a related entity were the recipients of actually fraudulent transfers from a corporation of which the debtor was an officer and director); accord Lawrence T. Lasagna, Inc. v. Foster (In re Foster), 609 F.2d 392 (9th Cir. 1979).

(113) See, e.g., Maxfield v. Jennings (In re Jennings), 670 F.3d 1329 (11th Cir. 2012); McClellan v. Cantrell, 217 F.3d 890, 898-899 (7th Cir. 2000) (Ripple, J, concurring); Murray v. Bammer (In re Bammer), 131 F.3d 788 (9th Cir. 1997); Fabian v. Guttman (In re Fabian), 475 B.R. 463 (D. Md. 2012) (debtor fraudulently transferred assets of corporation that he controlled to himself); Shapiro v. Clark (In re Clark), 400 B.R. 321 (Bankr. M.D. Fla. 2009) (holding that a debt owed by the debtor as the recipient of an intentionally fraudulent transfer was nondischargeable under [section] 523(a)(6); court gave collateral estoppel effect to a state court judgment finding that the debtor had accepted fraudulently transferred funds, and that in doing so she "acted intentionally ... and demonstrated a subjective motive to inflict injury or believed that injury was substantially certain to occur" to the plaintiff, a creditor of the transferors, who were the debtor's husband and his corporate alter ego).

(114) See Scott F. Norberg, Contract Claims and the "Willful and Malicious Injury" Exception to the Discharge in Bankruptcy, 88 Am. Bankr. L. J. 175, 182-185 (2014). In Kawaahau v. Geiger, the Supreme Court held that [section] 523(a)(6) covers "acts done with the actual intent to cause injury," and not intentional acts that cause injury. 523 U.S. 57, 61 (1998). "[A]ll of the [post-Kawaahau] circuit courts of appeal and bankruptcy appellate panel decision to address the question have held that 'willfulness' encompasses conduct that is substantially certain to cause injury." Norberg, supra at 182 & n.40.

(115) 131 F.3d 788 (9th Cir. 1997).

(116) Id. at 790.

(117) Id. at 792-793.

(118) Further, some courts hold that if the debtor retransfers to property before bankruptcy, no transfer has been made within the meaning of [section] 727(a)(2). See, e.g., First Beverly Bank v. Adeeb (In re Adeeb), 787 F.2d 1339 (9th Cir. 1986). Contra Davis v. Davis (In re Davis), 911 F.2d 560 (11th Cir. 1990).

(119) See Husky Int'l Elec, Inc. v. Ritz, 136 S.Ct. 1581, 1588-89 (2016) (considering but rejecting debtor's arguments that applying [section] 523(a)(2)(A) to fraudulent transfer debts duplicates [section][section] 523(a)(4), 523(a)(6), and 727(a)(2)); Cohen v. De La Cruz, 523 U.S. 213 (1998) (indicating that [section] 523(a)(2) and [section] 523(a)(6) are mutually exclusive with respect to fraud claims); Grogan v. Garner, 498 U.S. 279 (1991) (noting the possibility that both [section] 523(a)(2) and [section] 523(a)(6) might be applied to the same claim, barring the discharge of damages under (a)(6) that would be dischargeable under (a)(2)).

(120) For example, courts are in general agreement that a creditor may not except a debt for fraud from discharge under [section] 523(a)(6) when the elements for nondischargeability under [section] 523(a)(2)(A) or (B) cannot be satisfied. See, e.g., Berkson v. Gulevsky (In re Gulevsky), 362 F.3d 961 (7th Cir. 2004); McCrary v. Barrack (In re Barrack), 217 B.R. 598 (B.A.P. 9th Cir. 1998); Branch Banking & Trust v. Adam (In re Adam), 406 B.R. 717 (Bankr. E.D. Va. 2009) ("Section 523(a)(6) is a broad provision of the Bankruptcy Code. Section 523(a)(2)(B) is narrow and specifically deals with false financial statements. If the bank's argument were correct--that the debtor is guilty of willful and malicious injury to the bank by submitting a false financial statement--then the bank avoids the necessity of proving that it reasonably relied upon the false financial statement. No creditor would proceed under [section] 523(a)(2)(B) where it must prove reasonable reliance when by proceeding under [section] 523a6 it would prevail merely be showing falsity.... The more general statute would consume the more specific rendering the more specific of no purpose."); Spencer v. Bogdanovich (In re Bogdanovich), 301 B.R. 129 (Bankr. S.D.N.Y. 2003) (imposition of nondischargeability would frustrate the protections Congress put in place in section [section] 523(a)(2), and effectively make them a nullity), off d, 292 F.3d 104 (2d Cir. 2002); Weiss v. Alicea (In re Alicea), 230 B.R. 492 (Bankr. S.D.N.Y. 1999) ("[w]hatever [section] 523(a)(2XB) means, it was intended to protect debtors by restricting certain kinds of dischargeability claims based on fraud. A creditor armed only with an oral statement of financial condition should not be able to circumvent these protections by charging that the same conduct produced a 'willful and malicious' injury"); Jeffrey M. Goldberg & Assoes., Ltd. v. Holstein (In re Holstein), 272 B.R. 463, 480-81 (Bankr. N.D. 111. 2001) ("plaintiffs whose claims are based solely on oral representations of financial condition should not be allowed to side-step the writing requirement of [section] 523(a)(2)(B) by attempting to bring the same cause of action as a willful and malicious injury claim under [section] 523(a)(6)"); see also Old Kent Bank-Chicago v. Price (In re Price), 123 B.R. 42 (Bankr. N.D. 111. 1991) (stating that [section][section] 523(a)(2) and (a)(6) are mutually exclusive).

(121) See Fed. R. Bankr. P. 4007(a) ("[a] debtor or any creditor may file a complaint to obtain a determination of the dischargeability."); 9 Collier on Bankruptcy [paragraph] 4007.02, at 4007-4 (Alan N. Resnick & Henry R. Somer, eds. 16th ed. 2018) ("the trustee is not a party entitled to seek a determination of the nondischargeability of a debt, nor is the United States trustee").

(122) See supra notes 14-23 and accompanying text.

(123) Husky, 136 S.Ct. at 1588-1589.

(124) See supra note 26 and accompanying text.

(125) Husky, 136 S.Ct. at 1588.

(126) Id. at 1589; see also Reed v. Zak (In re Zak), 573 B.R. 13 (Bankr. D. Mass. 2017) (holding that creditor had established that fraudulent transfer debt was nondischargeable for "actual fraud" under [section] 523(a)(2)(A), but failed to prove how much of the debt was "attributable to a debt for actual fraud").

(127) As noted above, the Texas Business Organizations Code [section] 21.223(b) provides that a creditor may pierce the corporate veil and hold a shareholder personally liable where the shareholder "caused the corporation to be used for the purpose of perpetrating and did perpetrate an actual fraud on the creditor primarily for the direct personal benefit of the shareholder." Tex. Bus. Orgs. Act [section] 21.223(b) (West 2012). Further, the Fifth Circuit had made it clear in its opinion on the remand of Husky from the Supreme Court that "establishing that a transfer is fraudulent under the actual fraud prong of TUFTA is sufficient to satisfy the actual fraud requirement of veil-piercing." Husky Int'l Elec. Inc. v. Ritz (In re Ritz), 832 F.3d 560, 567 (5th Cir. 2016).

(128) The bankruptcy court's three-step analysis parallels the Tenth Circuit BAP's three-step analysis in Thompson. See supra note 54 and accompanying text.

(129) Husky Int'l Elec. Inc. v. Ritz (In re Ritz), 567 B.R. 715, 762-63 (Bankr. S.D. Tex. 2017).

(130) Hatfield v. Thompson (In re Thompson), 555 B.R. 1 (B.A.P. 10th Cir. 2016).

(131) Id. at 14.

(132) 791 F. 3d 214 (1st Cir. 2015). See also UFTA [section] 8(b)(1) ("the creditor may recover judgment for the value of the asset [fraudulently] transferred ... or the amount necessary to satisfy the creditor's claim, whichever is less. The judgment may be entered against ... the first transferee of the asset ..."). Likwise, in Cantrell, the Seventh Circuit explicitly stated that the extent of the liability is be the lesser of the original claim and the value of the fraudulently transferred assets. In dictum considering a hypothetical involving a debtor who had made (as opposed to received) a fraudulent transfer, the Seventh Circuit wrote that if the debtor
   had rendered the debt uncollectible by making an actually
   fraudulent conveyance of the property that secured it, his actual
   fraud would give rise to a new debt, nondischargeable because
   created by fraud ... But it would be a new debt only to the extent
   of the value of the security that he conveyed, for that would be
   the only debt created by the fraud. For example, if he owed [the
   creditor] $100,000 and defaulted after having transferred to his
   sister property securing the debt worth $10,000, he would be
   entitled to discharge $90,000 of the debt, for only the $10,000 was
   a debt created by fraud.


McClellan v. Cantrell, 217 F.3d 890, 895 (7th Cir. 2000). The Supreme Court decision in Husky disagrees with this dictum insofar as it states that "actual fraud" under [section] 523(a)(2)(A) encompasses the making of an intentionally fraudulent transfer.

(133) In re Lawson, 791 F.3d at 217. The central holding in the case was that the UFTA judgment was nondischargeable under [section][section] 1328(a)(2) and 523(a)(2)(A) because "actual fraud" in [section] 523(a)(2)(A) includes debts arising from knowing receipt of a transfer made with intent to defraud the transferor's creditors. Like the Supreme Court in Husky, the First Circuit gave substantial weight to the well-established common law understanding of "actual fraud" as not limited to fraudulent misrepresentations. It also relied extensively on the legislative histories of [section] 523(a)(2) and [section] 523(a)(6).
   The Legislative Statement concerning [section] 523(a)(2)(A) is
   express that the addition [of "actual fraud" to the statute] 'is
   intended to codify current case law, [like] Neal v. Clark  ...
   [which] presumed that the Bankruptcy Code exempted from discharge
   as a 'debt created by ... fraud' at least some debts incurred
   through receipt of a fraudulent conveyance. See Neal ...  (holding
   that debt created through receipt of a fraudulent conveyance must
   be actual fraud, not merely constructive fraud, to bar from
   discharge in bankruptcy).


Id. at 220-221. The court further observed that the predecessor provisions of [section] 523(a)(2) continuously covered frauds beyond false pretenses or false representations. Id. at 221-222. The Supreme Court in Husky did not discuss the legislative history of [section] 523(a)(2) other than to note that "actual fraud was added to the exception with the enactment of the Code in 1978. Husky Int'l Elec, Inc. v. Ritz, 136 S.Ct. 1581, 1588 (2016).

(134) This analysis would not apply where the transfer constituted actual fraud but was not made and received with intent to defraud a creditor. Thus, in Rodriguez v. Siverio (In re Siverio), 253 F. Supp. 3d 418 (D.P.R. 2017), the court properly held that the creditor could except from discharge the full value of the property transferred where the transferor did not have title to the property.
Code Provisions Limiting the Fresh Start Where Debtor
Participated in an Actually Fraudulent Transfer

Code Section   Applies       Legal Requirements    Impact on
               Where                               Debtor's Discharge
               Debtor is:
727(a)(2)      Transferor    Actually fraudulent   No discharge of any
                             transfer              debts

727(a)(7)      Insider of    Actually fraudulent   No discharge of any
               transferor    transfer              debts
               that also
               filed for
               bankruptcy

523(a)(2)(A)   Transferee    Actually fraudulent   Objecting
                             transfer              Creditor's Claim
                                                   Excepted; Other
                                                   Similarly Situated
                                                   Creditors?

523(a)(4)      Principal     1) Debt 2)Actually    Objecting
               of            fraudulent transfer   Creditor's Claim
               Corporation   3)Fiduciary           Excepted; Other
               that is       Capacity              Similarly Situated
               Transferor                          Creditors?
               (courts
               are
               divided)

523(a)(6)      Transferee    1) Debt 2) Willful    Objecting
                             and Malicious         Creditor's Claim
                             Conduct 3) Injury     Excepted; Other
                                                   Similarly Situated
                                                   Creditors?

522(g), (o)    Transferor    Actually fraudulent   Loss of exemption
                             transfer of certain
                             property

Code Section   Look-Back Period

727(a)(2)      One year before filing

727(a)(7)      One year before filing

523(a)(2)(A)   Statute of limitations on debt

523(a)(4)      Statute of limitations on debt

523(a)(6)      Statute of limitations on debt

522(g), (o)    Ten years
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Author:Norberg, Scott F.
Publication:American Bankruptcy Law Journal
Date:Jan 1, 2019
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