May 25, 2018

Debts that Arise from Personal Disputes are Often Trouble in Bankruptcy Court

bankruptcy litigationWhen I meet with a new client, I am always on alert for certain types of debts that I know will be trouble.  Sometime the trouble factor is so great that I advise my client not to file.

One area that almost always results in expensive, drawn out bankruptcy litigation are cases where a potential bankruptcy debtor has been sued by another person over a debt and the underlying issues are personal and not just about money.

Broken business partnerships where one or both parties feel betrayed and use the courts to beat up on one another are always trouble.  I remember one such case in which I represented the party who had run out of money after several years of litigation and had turned to bankruptcy in what turned out to be a futile attempt to make the entire situation go away.  The former partner, who was objecting to just about everything in my client’s case turned to me at one point and said “I don’t care how much this costs, I just want to see your client and his family homeless.”

Not a good situation if you are the party in bankruptcy who will be writing checks to a bankruptcy lawyer to litigate endlessly in bankruptcy court.

I saw a writeup of another such case on the Clerk of Court’s website.  This case involved a dispute between two neighbors who did not like each other much.   After engaging in a verbal dispute one neighbor went to the police and accused the other neighbor of a variety of crimes.  The police arrested neighbor #2 based on these accusations and neighbor #2 spent 2 weeks in jail before her case was eventually dismissed for lack of probable cause.

As you might imagine, Neighbor #2 was not very happy about spending 2 weeks in jail for no reason and she sued Neighbor #1 for damages arising from malicious prosecution, intentional infliction of emotional distress and defamation.  A jury trial was held in state court and Neighbor #2 was awarded damages totaling $210,500.

After judgment was issued, Neighbor #1 decided to file bankruptcy in an attempt to discharge this jury verdict.   Neighbor #2 filed a motion in bankruptcy court asserting that her damage award was non-dischargeable because Neighbor #1's actions had been wilful and malicious.  Under Bankruptcy Code Section 523(a)(6), debts that arise from wilful and malicious conduct are not dischargeable.

Further, Neighbor #2 argued that she was entitled to summary judgment because the state court had already determined that Neighbor #1's conduct was wilful and malicious.  Under the legal doctrine of collateral estoppal, a court need not relitigate a matter that has already been decided under the same standard of law by another court.

Neighbor #2 was essentially arguing that she should not have to relitigate the issue of Neighbor #1's conduct because that issue had already been considered and ruled upon by the state court.  Neighbor #2 wanted the bankruptcy judge to adopt the findings of the state court judge and rule in her favor as a matter of law.

Bankruptcy Judge Ray Mullins did exactly that.  He found that the question of the maliciousness of Neighbor 1's conduct had already been decided by the state court and he accepted those conclusions as a matter of law.  Therefore, there was no issue before him and he ruled in favor of Neighbor #2 that Neighbor #1 could not discharge the $200,000+ damage award in her bankruptcy.  That damage award will survive the bankruptcy and Neighbor #1 will have to somehow pay it.

I think that several lessons can be drawn from this story and others like it. 

  • First, understand that litigation is a rich man’s game.  You may feel wronged and disrespected but if you take your dispute to court and involve aggressive lawyers, you could end up paying tens of thousands of dollars in legal fees and you may not win.
  • Second, litigation can take on a life of its own.  You may run out of money and decide that you just want to drop the whole matter but if the other side wants to continue with the litigation you will be stuck in it.
  • Third, a litigant with superior financial resources to you has a strategic advantage.  He can force you to spend money you do not have paying lawyers to respond to discovery requests, appear at depositions and appear at motion hearings.
  • Fourth, when money is not the underlying issue, the other side may not act logically.  If someone feels wronged, he may go into debt himself to punish you.

The case I described started when two neighbors got into a screaming match while taking a walk in the neighborhood.  It took on a life of its own when Neighbor #1 decided to involve the police and criminal justice system. 

This neighborhood dispute began in 2005 and the final bankruptcy court ruling was issued in November, 2009.  I suspect that both the winning and losing parties spent most of their energy for this four year period focused and consumed over this dispute.

If you find yourself embroiled in a personal dispute that seems to be spiraling out of control, I would submit that finding a way to extricate yourself from the litigation may be more fruitful than focusing on how you might win the dispute.

About Jonathan

Jonathan Ginsberg represents honest, hardworking men and women in the Atlanta area who need personal bankruptcy protection. In practice for over 25 years, Jonathan teaches bankruptcy law and practice at legal continuing education seminars and he is a founding member of the Bankruptcy Law Network. Jonathan lives with his wife and children in Atlanta.

Comments

  1. Jonathan, you raise a great point about reviewing your creditors before you try to discharge them. Often times, I remind my Debtors that if they are discharging family or friends, expect to see them at the 341 meeting, and in a bad mood. This is just another reason why planning is so critical in bankruptcy cases and to make sure all of your ducks are in a row before you file.

  2. Michael, your comment reminds me of another issue that can arise when debts to family or friends are included. I have been involved in several cases where the unhappy creditor will hire a family lawyer rather than a bankruptcy lawyer to pursue the creditor’s objection. In bankruptcy, of course, the issue is not whether the debt is owed (that is usually a given) but whether the debt is dischargeable. Opposing counsel may pursue a remedy that does not exist, yet the debtor still has to pay me to defend the action. This is yet another reason why that red “caution” button flashes when I see a personal debt associated with hard feelings on my intake forms!

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