Ken Edstrom, contributing editor on a case published by the Bankruptcy Section of the MSBA

KEN EDSTROM’S CASE COMMENTARY PUBLISHED BY THE MSBA’s BANKRUPTCY SECTION: IN RE LUEBBERT, 987 F.3D 771 (8TH CIR. 2021) FEBRUARY 9, 2021

Ken Edstrom was a contributing editor on a case commentary that was published by the Minnesota State Bar Association’s Bankruptcy Section. The full commentary is below. A version of this case commentary is also available here (A membership to MSBA is required to view the article).

In re Luebbert, 987 F.3d 771 (8th Cir. 2021) February 9, 2021

 

Debtor Luebbert engaged in significant acts of deception in connection with his employment by hiding the fact that he had started a new company bidding on the same contracts as his employer. When caught, and in settlement of threatened litigation by his employer, he struck a deal to share revenue from his new business with his former employer (the settlement agreement also not surprising involved termination of Luebbert).  However, Luebbert then proceeded to violate that agreement by hiding revenue that should have been shared under the term of his agreement with his employer.  The employer then sued for breach of contract an won a judgment under Missouri law.  Luebbert then filed Chapter 7. The Employer objected to the discharge of Luebbert’s debt under the “intentional acts” exception of 11 USC § 523(a)(6). The Bankruptcy court held a hearing where evidence was introduced that the acts of Luebbert amounted to conversion and upheld the objection to discharge.

 

First, it is true that, as a general rule, debts resulting from breach of contract, even debts resulting from intentional breach of contract such as Mr. Luebbert’s, are not excepted from discharge under § 523(a)(6). See, e.g., In re Iberg, 395 B.R. 83 (Bankr. E.D. Ark. 2008); In re [Steven and Jill] Johnson, Adv. No. 07–3115, 2007 WL 5065545, at *3 (Bankr. D. Minn. Nov. 14, 2007) (citing In re Glatt, 315 B.R. 501, 511 (Bankr. D.N.D. 2004) ); In re McDowell, 299 B.R. 552, 555 (Bankr. N.D. Iowa 2003) (“Simple breach of contract … is not included in the limited exceptions to discharge in bankruptcy.”). Otherwise, the vast majority of debts would be nondischargeable.  But Mr. Luebbert’s “empty head–pure heart” legal defense is not supported by law under the facts and circumstances here. As the Eighth Circuit said in Patch, the scope of “willful injury” is not limited to the circumstances in which the debtor desires to bring about the consequences of the conduct. It includes conduct in which “the debtor knows that the consequences are certain, or substantially certain, to result from his conduct” because in those cases, “the debtor is treated as if he had, in fact, desired to produce those consequences.” Patch, 526 F.3d at 1180–81, citing Geiger, 113 F.3d at 852.

 

In re Luebbert, 595 B.R. 314, 331 (Bankr. W.D. Mo. 2018). The Debtor appealed and the District court affirmed, Global Control Systems, Inc. v. Luebbert (In re Luebbert), 18–0945-CV-W-BP, July 15, 2019. The Debtor again appealed to the 8th Circuit.

 

The 8th Circuit opinion attempts to trace the history of Section 523(a)(6) law in the 8th Circuit. Like the District Court, Judge Kobes quotes from the Patch decision for the “willful and malicious” standard used in the 8th Circuit.

 

A nondischargeability action under § 523(a)(6) has three elements: (1) the debtor caused an injury to the creditor; (2) the injury must have been willfully inflicted—that is, the debtor must have desired the injury or must have been substantially certain that his conduct would result in the injury; and (3) the debtor’s actions must have been malicious. See In re Patch, 526 F.3d 1176, 1180–81 (8th Cir. 2008).

In re Luebbert, 987 F.3d 771, 778 (8th Cir. 2021)

 

The Court then declares that it is extending the law in this area.

 

Analyzing the willfulness element in In re Geiger, we held that “for a judgment debt to be nondischargeable under [§ 523(a)(6)], it is necessary that it be based on the commission of an intentional tort.” 113 F.3d at 853 (emphasis added). We expressed “no view … on the question whether it is sufficient for nondischargeability that the judgment be for an intentional tort.” Id. at 853–54 (emphasis added). We now take this opportunity to clarify our jurisprudence about exceptions to discharge under § 523(a)(6) and conclude that a judgment for an intentional tort is not necessary to find judgment debt for a breach of contract nondischargeable. The willfulness requirement is met when the bankruptcy court finds facts showing that the debtor’s conduct accompanying the breach of contract amounted to an intentional tort against the creditor. We perceive that this aligns with the core of the analyses performed by the Ninth and Fifth Circuits.

In re Luebbert, 987 F.3d 771, 782 (8th Cir. 2021).

 

The holding seems unremarkable in that the Debtor didn’t seem to argue that even if the bankruptcy court issued findings after a hearing that the Debtor not only breached a contract (which was what the state court found) but that the breach was willful and malicious, that the court couldn’t find that the Debtor violated Section 523(a)(6). Other 8th Circuit opinions had certainly held that an independent determination of “willful and malicious” by the bankruptcy court was proper. If nothing else, the Luebbert opinion strengthened the 8th Circuit’s use of the “subjective test” for determining “willful and malicious.”

 

The seminal case on § 523(a)(6) in the 8th Circuit is the case of Barclays Am./Bus. Credit, Inc. v. Long (In re Long), 774 F.2d 875 (8th Cir. 1985). Although In re Long preceded the Supreme Court’s Geiger opinion on the meaning of “willful and malicious” (Kawaauhau v. Geiger, 523 U.S. 57, 118 S. Ct. 974 (1998)), the 8th Circuit has, post-Geiger, referred to the Long opinion for assistance in determining the test to be used in § 523(a)(6) cases.  Unfortunately, In re Long seemed to provide both an objective test for determining “willful and malicious” (that the injury was certain to occur, (774 F.2d at 881)) and a subjective test (“that the Debtor intended the injury to occur,” 774 F.2d at 882).  The Patch decision, which was originally a case out of the court of Dennis O’Brien in the District of Minnesota, clarified the language of In re Long in holding that only when the court finds that the Debtor knew that the injury was certain to occur OR that the Debtor intended that the injury occur can a bankruptcy court hold that an objecting party has proven an exception to discharge under § 523(a)(6).

 

Judge Kobes, in Luebbert, as well as the District court, quoted Patch which provides further evidence that in the 8th Circuit the “subjective” test is the only way to prove a §523(a)(6) violation in this circuit.

Ken Edstrom has been a bankruptcy practitioner in Minneapolis for over 38 years and has been involved in most of the largest bankruptcy cases filed in Minnesota during that time, representing debtors, DIP lenders, secured creditors, committees of unsecured creditors, and other interest holders. He is also involved in state insolvency proceedings including receiverships and assignments for the benefit of creditors. Ken is one of only six lawyers in Minnesota who is Board Certified in business bankruptcy by the American Board of Certification and is a perennial holder of “Superlawyer” status. Click here to learn more about Ken and how to contact him.