This matter presents what would appear to be a relatively simple question—i.e., what qualifies as a “consumer debt” under the U.S. Bankruptcy Code. But appearances can be deceiving. The Code defines a consumer debt as one incurred for a personal, family, or household purpose. 11 U.S.C. § 101(8). The purpose of the debt is the critical inquiry. The debt at issue in this matter is multi-faceted and, as such, has potentially more than one purpose. It arises both from use of certain specified funds by one of the above-captioned Debtors, as well as from a state court judgment imposing actual damages, non-economic damages, and punitive damages.
The Debtors filed this chapter 7 case on July 28, 2017. The Debtors list approximately $452,146.00 in debt on the schedules to their chapter 7 petition. The overwhelming majority of this debt relates to a single judgment entered against the Debtor by the Circuit Court (the “State Court Judgment”). The State Court Judgment is based on the Debtor’s conduct with respect to certain inheritance funds in the amount of $75,803.83 (the “Inheritance Funds”) belonging to the Debtor’s son (the “Creditor”).
The Creditor’s late grandmother left him the Inheritance Funds in her Last Will and Testament (the “Will”). Under the terms of the Will, the Debtor was given custody of the Inheritance Funds because the Creditor was still a minor at the time. When the Creditor turned 21 years old, the Debtor gave him $100.00. According to the Creditor, the Debtor told him that the remainder of the Inheritance Funds was gone and that he should do whatever he needed to do.
The Creditor initiated litigation against the Debtor in the Circuit Court (the “State Court”) on January 16, 2015. The Creditor’s complaint against the Debtor contained four counts sounding in fraud/intentional theft, breach of fiduciary duties, conversion, and unjust enrichment. The complaint sought actual damages, attorneys’ fees, and other appropriate relief. The State Court’s docket indicates that the Writ of Summons was served on the Debtor on March 19, 2015, but that no Answer or other response was filed by the Debtor. Accordingly, the State Court entered a default judgment against the Debtor on September 29, 2015.
The State Court then held an evidentiary hearing on damages relating to the default judgment. Only the Creditor and his counsel appeared at the damages hearing. The State Court proceeded to hear evidence on the damages request, including the Creditor’s testimony. The Creditor testified that the Debtor would not allow him to use any of the Inheritance Funds until he turned 21 years old, but then when he requested the money, the Debtor told him that all of the money was gone. Although the Creditor testified that he did not know what happened to the money, he observed certain changes in the Debtor’s spending habits, including the purchase of a motorcycle shortly after the Debtor received the Inheritance Funds, and various vacations that the Debtor and his wife took after that time. The State Court made several findings and observations in connection with that matter, including:
• “[The Debtor] has failed to appear having been given notice of today’s hearing, having failed to respond to any process or notices from this Court.” Id. at 37.
• “I’ve looked at the conduct of [the Debtor] and I find it to be, as I said at the outset, aside from being heartbreaking to hear that somebody’s been treated like this, it’s reprehensible.” Id. at 39.
• “The fact that [the Debtor] made repeated statements to [the Creditor] knowing full well that they were false, that he couldn’t touch the money while he was spending it on himself, to me, clearly shows, by clear and convincing evidence, that there was actual malice, that [the Debtor] knew exactly what he was doing.” Id.
After a full review of the record, the State Court entered the State Court Judgment, awarding the Creditor $75,804.83 in actual damages (“Actual Damages”), $70,000.00 in non-economic damages (“Non-Economic Damages”), and $227,414.49 in punitive damages (“Punitive Damages”).
The United States Trustee (“U.S. Trustee”) filed a Motion to Dismiss Case (“Motion to Dismiss”) on November 6, 2017. The Motion to Dismiss asserts various grounds for dismissal of the Debtors’ chapter 7 case under section 707(b) of the Code. The Creditor has joined the U.S. Trustee’s Motion to Dismiss. The Debtors then filed an amended chapter 7 petition, changing the designation of their debt to primarily “non-consumer” debt, and a response to the Motion to Dismiss.
The matter before the Court is the U.S. Trustee’s Motion for Partial Summary Judgment that Debtor, Damon Durant’s Debts are “Primarily Consumer Debt” (“Motion for Partial Summary Judgment”). The Motion for Partial Summary Judgment relates to the Motion to Dismiss. The U.S. Trustee filed a Memorandum in Support of the Motion to Dismiss, as well as a Request for Admissions of Fact (the “Requests for Admissions”), which the Court granted. The Debtor filed a response to the Motion for Partial Summary Judgment, and the Court held a hearing on the Motion for Partial Summary Judgment and the related pleadings on April 26, 2018 (the “Hearing”).
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