In many common nondischargeability claims, the plaintiff creditor must prove the debtor defendant’s intentional misconduct. A default judgment for an underlying breach of contract or tort is insufficient on its own to support nondischargeability. The creditor must put on specific evidence of the debtor’s intent. This constitutes black-letter law under the Bankruptcy Code.
Proving intent can be challenging in its own right, but the problem becomes more complex if the debtor cannot be located. It is not unheard of for a debtor to disappear after the completion of the core matters in a chapter 7 or 13 case. For example, a foreign national may decide to return to his or her home country, but the creditor’s nondischargeability action may still be pending, subject to proof of debtor’s intent in the underlying claim. If the debtor is not around, it may be difficult to prove the intent to support a nondischargeability judgment.
Fortunately for creditor counsel, the court’s procedural rules provide them with protections. The primary protection is under Federal Rule of Bankruptcy Procedure 7037, which provides a range of sanctions for failure to participate in discovery. Although entry of a dispositive order is an extreme sanction, courts recognize it as valid against a nonparticipating party in nondischargeability actions.
A Creditor Must Prove Debtor’s Intentional Conduct
One of the most common claims for nondischargeability arises when a debtor obtained money, services or credit by using a materially false statement of the debtor’s financial conditions. [1] The statute requires the plaintiff prove “that the debtor caused [the statement] to be made or published with [the] intent to deceive.” [2] Courts recognize that a plaintiff must prove the debtor’s intent as a necessary element before entering a nondischargeability judgment. [3]
Similarly, a denial of discharge may require a plaintiff creditor to establish the debtor’s intent. The discharge should be denied if the debtor, “with intent to hinder, delay or defraud a creditor or an officer of the estate,” has transferred, removed, destroyed, mutilated or concealed property of the debtor or the bankruptcy estate. [4] The discharge also should be denied if the debtor “knowingly of fraudulently” engaged in misconduct concerning the debtor’s assets and liabilities. [5] These provisions require a plaintiff to prove the debtor’s intent in order to obtain a denial of discharge. [6] A debt also is nondischargeable if it arises from a “willful and malicious injury by the debtor to another entity or to the property of another entity.” [7] Although the statutory language is not explicit, courts have held that a plaintiff must prove the debtor’s intent to cause an injury. [8]
Read more...American Bankruptcy Institute: Consumer Bankruptcy Committee Newsletter